<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) - October 8, 1996
PHOENIX NETWORK, INC.
-------------------------------------------------------------------
(Exact Name of Registrant as specified in its Charter)
Delaware 0-17909 84-0881154
- ------------------ ----------------------- ----------------
(State or other (Commission File (IRS Employer
Jurisdiction of Number) Identification
Incorporation) Number)
1687 Cole Boulevard, Golden, Colorado 80401
--------------------------------------------
(Address of Principal Executive Offices)
(303) 205-3500
------------------------
(Registrant's Telephone Number, including area code)
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
Item 7. (a) Financial statements of business acquired. See enclosed
Exhibit 1. for the financial statements of AmeriConnect, Inc.
Item 7. (b) Pro forma financial information.
<PAGE> 3
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma condensed consolidated balance sheet of
Phoenix Network, Inc. ("Phoenix") and AmeriConnect, Inc. ("AmeriConnect") as of
June 30, 1996 reflects the historical consolidated balance sheets as of June 30,
1996 adjusted to give effect to the merger of the two companies, which will be
accounted for using the pooling of interests method. Following are unaudited pro
forma condensed consolidated statements of operations for the years ended
December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and
1996. The unaudited pro forma statements of operations for the years ended
December 31, 1993 and 1994 and the six months ended June 30, 1996 adjust the
historical consolidated statements of operations for the periods then ended to
give effect to the merger. The unaudited pro forma statements of operations for
the year ended December 31, 1995 and the six months ended June 30, 1995 adjust
the historical consolidated statement of operations for the merger as well as
for the August 1995 acquisition of the assets of Tele-Trend Communications, LLC
(see Phoenix Form 8-K/A dated November 9, 1995) and for the January 1, 1996
acquisition of Automated Communications, Inc. (see Phoenix Form 8-K/A dated
January 16, 1996) by Phoenix. The pro forma condensed consolidated data should
be read in conjunction with the historical consolidated financial statements of
Phoenix, Tele-Trend Communications, LLC (see Phoenix Form 8-K dated November 9,
1995), Automated Communications, Inc. (see Phoenix Form 8-K/A dated January 16,
1996) and AmeriConnect and are not necessarily indicative of the results of
operations that might have occurred if the proposed merger had taken place at
January 1, 1993 and the Tele-Trend Communications, LLC and Automated
Communications, Inc. acquisitions had taken place at January 1, 1995, or of the
results of operations for any future period.
<PAGE> 4
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
PHOENIX(1) AMERICONNECT(2) ADJUSTMENTS(3) PRO FORMA
---------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents........ $ 1,346,840 $ 207,959 $ 1,554,799
Restricted cash.................. 225,356 225,356
Accounts receivable, net......... 16,139,757 2,456,625 18,596,382
Deferred commissions............. 1,400,863 91,057 1,491,920
Other current assets............. 693,494 93,942 787,436
------------ ----------- -------- ------------
Total current assets..... 19,806,310 2,849,583 22,655,893
Furniture, equipment and data
processing systems, net.......... 2,703,034 118,527 2,821,561
Deferred commissions............... 1,068,608 1,068,608
Customer acquisition costs, less
accumulated amortization......... 3,720,676 3,720,676
Goodwill, less accumulated
amortization..................... 18,791,729 18,791,729
Other assets....................... 886,584 18,027 904,611
------------ ----------- -------- ------------
$ 46,976,941 $ 2,986,137 $ 49,963,078
============ =========== ======== ============
Current Liabilities
Notes payable.................... $ 2,671,315 $ 2,671,315
Accounts payable................. 16,065,416 $ 3,130,993 19,196,409
------------ ----------- -------- ------------
Total current
liabilities............ 18,736,731 3,130,993 21,867,724
Notes payable...................... 1,182,650 1,182,650
Stockholders' equity
Preferred stock.................. 2,725 2,725
Class A common stock............. 66 $ (66) --
Common stock..................... 17,699 65,216 (65,216) 20,198
2,499
Additional paid-in capital....... 39,628,718 3,647,154 60,920 43,336,792
Treasury stock -- class A........ (60) 60 --
Treasury stock................... (2,522) (1,803) 1,803 (2,522)
Accumulated deficit.............. (12,589,060) (3,855,429) (16,444,489)
------------ ----------- -------- ------------
Total stockholders' equity......... $ 27,057,560 $ (144,856) $ -- $ 26,912,704
------------ ----------- -------- ------------
$ 46,976,941 $ 2,986,137 $ -- $ 49,963,078
============ =========== ======== ============
</TABLE>
See Notes to Pro Forma Unaudited Condensed Consolidated Financial Statements
<PAGE> 5
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
<TABLE>
<CAPTION>
1993 1994
------------------------------------------- -------------------------------------------
PHOENIX(4) AMERICONNECT(5) PRO FORMA PHOENIX(4) AMERICONNECT(5) PRO FORMA
----------- --------------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues......................... $40,349,599 $13,555,729 $53,905,328 $57,420,484 $16,984,324 $74,404,808
Cost of revenues................. 29,260,515 10,120,141 39,380,656 40,007,052 12,642,307 52,649,359
----------- ----------- ----------- ----------- ----------- -----------
Gross profit..................... 11,089,084 3,435,588 14,524,672 17,413,432 4,342,017 21,755,449
Selling, general and
administrative expenses........ 13,736,937 2,652,897 16,389,834 17,796,208 3,956,772 21,752,980
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations.... (2,647,853 ) 782,691 (1,865,162) (382,776) 385,245 2,469
Other income (expense) net....... (147,853 ) (28,984) (176,837) (398,944) 52,740 (346,204)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes
and cumulative effect of
accounting change.............. (2,795,706 ) 753,707 (2,041,999) (781,720) 437,985 (343,735)
Income taxes..................... -- 493,900 493,900 (16,405) (16,405)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before cumulative
effect of accounting change.... (2,795,706 ) 1,247,607 (1,548,099) (781,720) 421,580 (360,140)
Cumulative effect of change in
amortization of deferred
commissions.................... -- -- (123,224) (123,224)
----------- ----------- ----------- ----------- ----------- -----------
Net Income (loss)................ (2,795,706 ) 1,247,607 (1,548,099) (904,944) 421,580 (483,364)
Preferred dividends.............. (267,419 ) (267,419) (231,255) (231,255)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) attributable to
common shares.................. $(3,063,125) $ 1,247,607 $(1,815,518) $(1,136,199) $ 421,580 $ (714,619)
=========== =========== =========== =========== =========== ===========
Loss per common share:
Income (loss) before cumulative
effect of accounting
change....................... $ (0.33 ) $ 0.20 $ (0.15) $ (0.09) $ 0.06 $ (0.04)
Cumulative effect of accounting
change....................... -- (0.01) (0.01)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) per common
share.......................... $ (0.33 ) $ 0.20 $ (0.15) $ (0.10) $ 0.06 $ (0.05)
=========== =========== =========== =========== =========== ===========
Weighted average common
shares (000's)............... 9,423 6,355 11,714 11,101 6,868 13,576
=========== =========== =========== =========== =========== ===========
</TABLE>
See Notes to Pro Forma Unaudited Condensed Consolidated Financial Statements
<PAGE> 6
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
AUTOMATED TELE-TREND
PRO FORMA COMMUNICATIONS, COMMUNICATIONS,
PHOENIX(4) AMERICONNECT(5) POOLED INC.(6) INC.(7)
----------- --------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues..................... $58,755,334 $17,099,635 $75,854,969 $24,004,326 $ 4,869,273
Cost of revenues............. 40,376,589 13,399,190 53,775,779 17,280,906 3,958,251
----------- ----------- ----------- ----------- -----------
Gross profit................. 18,378,745 3,700,445 22,079,190 6,723,420 911,022
Selling, general and
administrative
expenses................... 18,524,824 4,923,941 23,448,765 8,354,841 948,905
----------- ----------- ----------- ----------- -----------
Operating loss.... (146,079) (1,223,496) (1,369,575) (1,631,421) (37,883)
Other income (expense)....... (169,267) 4,986 (164,281) (53,893) (27,061)
Loss on amandonment of
fixed assets............... (1,019,648) (1,019,648)
----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes............... (1,334,994) (1,218,510) (2,553,504) (1,685,314) (64,944)
Income taxes................. -- (500,000) (500,000) -- 3,217
----------- ----------- ----------- ----------- -----------
Net loss..................... (1,334,994) (1,718,510) (3,053,504) (1,685,314) (61,727)
Preferred dividends.......... (594,381) (594,381)
----------- ----------- ----------- ----------- -----------
Net loss attributable to
common shares.............. $(1,929,375) $(1,718,510) $(3,647,885) $(1,685,314) $ (61,727)
=========== =========== =========== =========== ===========
Net loss per common share.... $ (0.15) $ (0.25) $ (0.24)
=========== =========== ===========
Weighted average common
shares (000's)............. 12,614 6,913 15,105
=========== =========== ===========
<CAPTION>
PRO FORMA
ADJUSTMENTS(8) PRO FORMA
-------------- ------------
<S> <C> <C>
Revenues..................... $104,728,568
Cost of revenues............. $ (115,545) 74,899,391
---------- ------------
Gross profit................. 115,545 29,829,177
Selling, general and
administrative
expenses................... 93,428 32,845,939
---------- ------------
Operating loss.... 22,117 (3,016,762)
Other income (expense)....... 354,074 108,839
Loss on amandonment of
fixed assets............... (1,019,648)
---------- ------------
Income (loss) before
income taxes............... 376,191 (3,927,571)
Income taxes................. (3,217) (500,000)
---------- ------------
Net loss..................... 372,974 (4,427,571)
Preferred dividends.......... (581,184) (1,175,565)
---------- ------------
Net loss attributable to
common shares.............. $ (208,210) $ (5,603,136)
========== ============
Net loss per common share.... $ (0.31)
============
Weighted average common
shares (000's)............. 2,800 17,905
========== ============
</TABLE>
See Notes to Pro Forma Unaudited Condensed Consolidated Financial Statements
<PAGE> 7
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
JUNE 30, 1995
-------------------------------------------------------------------------------------------------
AUTOMATED TELE-TREND
PRO FORMA COMMUNICATIONS, COMMUNICATIONS, PRO FORMA
PHOENIX(9) AMERICONNECT(10) POOLED INC.(11) INC.(12) ADJUSTMENTS(8)
----------- ---------------- ----------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $27,683,463 $8,932,261 $36,615,724 $13,265,353 $ 4,230,113
Cost of revenues.............. 19,060,850 6,805,223 25,866,073 8,865,586 3,437,858 $ (99,038)
----------- ---------- ----------- ----------- ----------- ----------
Gross profit.................. 8,622,613 2,127,038 10,749,651 4,399,767 792,255 99,038
Selling, general and
administrative
expenses.................... 8,189,725 2,116,641 10,306,366 3,825,984 734,410 82,383
----------- ---------- ----------- ----------- ----------- ----------
Operating income (loss)....... 432,888 10,397 443,285 573,783 57,845 16,655
Other income (expense)........ (158,181) 8,080 (150,101) (16,332) (24,864) 260,015
----------- ---------- ----------- ----------- ----------- ----------
Net income (loss)............. 274,707 18,477 293,184 556,951 32,981 276,670
Preferred dividends........... (126,891) (126,891) (498,157)
----------- ---------- ----------- ----------- ----------- ----------
$ 147,816 $ 18,477 $ 166,293 $ 556,951 $ 32,981 $ (221,487)
=========== ========== =========== =========== =========== ==========
Net income (loss) per common
share....................... $ 0.01 $ 0.00 $ 0.01
=========== ========== ===========
Weighted average common
shares (000's).............. 12,788 6,690 15,199 2,800
=========== ========== =========== =========
<CAPTION>
JUNE 30, 1995 JUNE 30, 1996
------------- --------------------------------------------
PRO FORMA PHOENIX(9) AMERICONNECT(10) PRO FORMA
------------- ----------- ---------------- -----------
<S> <C> <C> <C> <C>
Revenues...................... $54,111,190 $44,995,365 $8,606,697 $53,602,062
Cost of revenues.............. 38,070,479 32,531,107 6,372,297 38,903,404
----------- ----------- ---------- -----------
Gross profit.................. 16,040,711 12,464,258 2,234,400 14,698,658
Selling, general and
administrative
expenses.................... 14,949,143 15,824,674 2,136,881 17,961,555
----------- ----------- ---------- -----------
Operating income (loss)....... 1,091,568 (3,360,416) 97,519 (3,262,897)
Other income (expense)........ 68,218 (163,185) (9,923) (173,108)
----------- ----------- ---------- -----------
Net income (loss)............. 1,159,786 (3,523,601) 87,596 (3,436,005)
Preferred dividends........... (625,048) (625,073) (625,073)
----------- ----------- ---------- -----------
$ 534,738 $(4,148,674) $ 87,596 $(4,061,078)
=========== =========== ========== ===========
Net income (loss) per common
share....................... $ 0.03 $ (0.24) $ 0.01 $ (0.20)
=========== =========== ========== ===========
Weighted average common
shares (000's).............. 17,999 17,456 6,797 19,906
=========== =========== ========== ===========
</TABLE>
See Notes to Pro Forma Unaudited Condensed Consolidated Financial Statements
<PAGE> 8
NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(1) Derived from the historical consolidated balance sheet of Phoenix as
included in Form 10-Q for the quarter ended June 30, 1996.
(2) Derived from the historical balance sheet of AmeriConnect as included in
Form 10-QSB for the quarter ended June 30, 1996.
(3) The pro forma adjustments to the historical balance sheets at June 30,1996
reflect the merger between Phoenix and AmeriConnect. The merger is being
accounted for using the pooling of interests method. The adjustments
reflect the issuance of .3064 shares of Phoenix common stock valued at
$5.25 per share in exchange for each share of the outstanding stock of
AmeriConnect outstanding as of that date. In connection with this
transaction, the shares held in treasury by AmeriConnect were canceled
and retired. At October 8, 1996, the actual date of the merger, 2,663,811
Phoenix common shares were issued in exchange for 7,387,894 outstanding
shares of AmeriConnect, Inc.
(4) Derived from the historical consolidated statement of operations of Phoenix
as included in Form 10-K.
(5) Derived from the historical consolidated statement of operations of
AmeriConnect as included in Form 10-KSB.
(6) Derived from the historical consolidated statement of operations of
Automated Communications, Inc. for the year ended December 31, 1995.
(7) Derived from the historical consolidated statement of operations of
Tele-Trend Communications, LLC for the seven months ended July 31, 1995.
(8) The adjustments to the historical statements of operations reflect the
following:
The amortization of the customer bases acquired and goodwill in both
acquisitions. The customer bases are being amortized over a four year life
using the sum-of-the-years digits method. Goodwill is being amortized over
20 years using the straight line method. Pro forma additional amortization
is $1,006,783 for the six months ended June 30, 1995, and $1,821,893 for
the year ended December 31, 1995.
In connection with the acquisition of Automated Communications, Inc., a
$4,000,000, 6% note to the sole shareholder was retired and a 9% note for
$1,310,056 will be issued. Interest expense has been reduced by $60,687 for
the six months ended June 30, 1995, and $121,735 for the year ended
December 31, 1995.
As a result of the acquisition of Automated Communications, Inc., the
Company relocated its headquarters and most of its operations to Automated
Communications, Inc.'s facilities in Golden, Colorado. The relocation will
result in substantial reductions in rental and other facilities costs.
General and administrative costs have been reduced by $240,000 for the six
months ended June 30, 1995, and $480,000 for the year ended December 31,
1995, to reflect the savings.
Phoenix reduced selling, general and administrative expenses by $540,000
for the six months ended June 30, 1995, and $1,080,000 for the year ended
December 31, 1995 due to the elimination of certain positions as a direct
result of the acquisition of Automated Communications, Inc.
The Tele-Trend Communications, LLC acquisition was financed by Phoenix
through the short-term issuance of 1,106,700 shares of 9% Convertible
Series F preferred shares at $10 per share. Phoenix also used the net
proceeds to retire all of the outstanding debt and the balance was
invested. Interest has been adjusted by $199,148 for the six months ended
June 30, 1995, and $232,339 for the year ended December 31, 1995 and
preferred dividends by $498,157 for the six months ended June 30, 1995, and
$581,184 for the year ended December 31, 1995.
The adjustments also reflect the additional carrier discounts in the amount
of $99,038 for the six months ended June 30, 1995, and $115,545 for the
year ended December 31, 1995, available under Phoenix's agreements which
reduces the cost of revenues acquired from Tele-Trend Communications, LLC.
Phoenix also reduced selling, general and administrative expenses by
$144,399 for the six months ended
<PAGE> 9
NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
June 30, 1995, and $168,465 for the year ended December 31, 1995, due to
the elimination of certain positions at Tele-Trend Communications LLC as a
direct result of the acquisition.
(9) Derived from the historical condensed consolidated statement of operations
of Phoenix as included in June 30, 1996 Form 10-Q.
(10) Derived from the historical consolidated statement of operations of
AmeriConnect as included in June 30, 1996 Form 10-QSB.
(11) Derived from the historical statement of operations of Automated
Communications, Inc. for the six months ended June 30, 1995.
(12) Derived from the historical statement of operations of Tele-Trend
Communications, LLC, for the six months ended June 30, 1995.
<PAGE> 10
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 hereunto duly authorized.
Date: December 6, 1996 PHOENIX NETWORK, INC.
-----------------
By: /s/ Jeffrey L. Bailey
-------------------------------
Jeffrey L. Bailey
Senior Vice President and
Chief Financial Officer
<PAGE> 11
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
1 Financial statements of AmeriConnect, Inc.
</TABLE>
<PAGE> 1
EXHIBIT 1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
AmeriConnect, Inc.
We have audited the accompanying consolidated balance sheet of
AmeriConnect, Inc. (a Delaware corporation) and subsidiary as of December 31,
1995, and the related consolidated statements of operations, stockholders'
deficit, and cash flows for each of the two years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of AmeriConnect,
Inc. and subsidiary as of December 31, 1995, and the consolidated results of
their operations and their consolidated cash flows for each of the two years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ GRANT THORNTON LLP
---------------------------------
GRANT THORNTON LLP
Kansas City, Missouri
February 16, 1996
<PAGE> 2
AMERICONNECT, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
CURRENT ASSETS
Cash.......................................................................... $ 293,492
Accounts receivable, net of allowance of $361,260 (Notes 1, 2 and 6).......... 1,961,815
Accounts receivable -- trade, with affiliates (Note 3)........................ 6,065
Accounts receivable -- agents, including accrued interest (Note 11)........... 1,492
Notes receivable -- director/shareholder (Note 3)............................. 14,500
Prepaid commissions........................................................... 126,042
Other current assets.......................................................... 94,251
----------
Total current assets.................................................. 2,497,657
NON-CURRENT ASSETS
Equipment and software, net of accumulated depreciation and
amortization of $230,868 (Note 1).......................................... 143,202
Deposits...................................................................... 19,528
----------
TOTAL ASSETS.......................................................... $2,660,387
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable (Notes 1, 2 and 6)........................................... $2,782,432
Sales taxes payable........................................................... 97,460
Accrued office closing costs (Note 9)......................................... 8,539
Other accrued liabilities..................................................... 733
----------
Total current liabilities............................................. 2,889,164
NON-CURRENT LIABILITIES
Customer deposits............................................................. 8,264
----------
Total liabilities..................................................... 2,897,428
COMMITMENTS AND CONTINGENCIES (Notes 5, 6, 8 and 10)............................ --
STOCKHOLDERS' DEFICIT (Note 8)
Class A common stock, par value $.00001 per share; 10,000,000 shares
authorized;
issued 6,562,033 shares.................................................... 66
Common stock, par value $.01 per share; 20,000,000 shares authorized;
issued 6,504,967 shares.................................................... 65,050
Additional paid-in capital.................................................... 3,642,731
Accumulated deficit........................................................... (3,943,025)
Treasury stock -- class A common, at cost; 5,970,000 shares................... (60)
Treasury stock -- common, at cost; 180,250 shares............................. (1,803)
----------
Total stockholders' deficit........................................... (237,041)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT..................................... $2,660,387
==========
</TABLE>
See accompanying notes to financial statements
<PAGE> 3
AMERICONNECT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1995 1994
----------- -----------
<S> <C> <C>
REVENUES (Notes 1, 2, 3 and 6)
Sales......................................................... $17,022,095 $16,923,025
Sales to affiliates........................................... 77,540 61,299
----------- -----------
Total revenues........................................ 17,099,635 16,984,324
COSTS AND EXPENSES
Direct operating costs........................................ 13,399,190 12,642,307
Selling, administrative and general expenses.................. 4,847,248 3,912,979
Depreciation and amortization (Note 1)........................ 76,693 43,793
----------- -----------
Total costs and expenses.............................. 18,323,131 16,599,079
----------- -----------
Operating income (loss)............................... (1,223,496) 385,245
OTHER INCOME (EXPENSE)
Interest income............................................... 19,898 28,000
Interest expense.............................................. (6,558) (18,157)
Interest expense to director/shareholder (Note 3)............. (1,587) --
Loan fees..................................................... (1,250) (3,332)
Miscellaneous................................................. (5,517) 46,229
----------- -----------
Total other income.................................... 4,986 52,740
----------- -----------
INCOME (LOSS) BEFORE INCOME TAX................................. (1,218,510) 437,985
INCOME TAX EXPENSE (NOTES 1 AND 8)
Currently payable............................................. -- 16,405
Deferred...................................................... 500,000 --
----------- -----------
Total income tax expense.............................. 500,000 16,405
----------- -----------
NET INCOME (LOSS)............................................... $(1,718,510) $ 421,580
=========== ===========
Net income (loss) per common and common equivalent share
(Note 1)................................................... $ (0.25) $ 0.06
=========== ===========
Weighted average common and common equivalent shares
outstanding (000's) (Note 1)............................... 6,913 6,868
=========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE> 4
AMERICONNECT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK COMMON STOCK ADDITIONAL
---------------- ------------------- PAID-IN ACCUMULATED
DESCRIPTION SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ---- --------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1994.................... 6,788,833 $ 68 5,251,167 $52,512 $3,350,479 $(2,646,095)
--------- ---- --------- ------- ---------- -----------
Conversion of Class A
to Common................ (113,400) (1) 113,400 1,134 (1,133)
Issuance of Common
to directors............. 19,000 190 3,888
Net income for the
year.................... 421,580
Stock options
exercised............... 933,000 9,330 289,130
--------- ---- --------- ------- ---------- -----------
Balance, December 31,
1994.................... 6,675,433 $ 67 6,316,567 $63,166 $3,642,364 $(2,224,515)
Net loss for the year..... (1,718,510)
Stock options
exercised............... 75,000 750 1,500
Conversion of Class A
to Common................ (113,400) (1) 113,400 1,134 (1,133)
--------- ---- --------- ------- ---------- -----------
Balance, December 31,
1995.................... 6,562,033 $ 66 6,504,967 $65,050 $3,642,731 $(3,943,025)
========= ==== ========= ======= ========== ===========
</TABLE>
<TABLE>
<CAPTION>
TREASURY STOCK
CLASS A TREASURY
COMMON STOCK COMMON STOCK
------------------- ------------------
DESCRIPTION SHARES AMOUNT SHARES AMOUNT TOTAL
---------- ---- -------- ------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1994.................... (5,970,000) $(60) (180,250) $(1,803) 755,101
---------- ---- -------- ------- -----------
Conversion of Class A
to Common................
Issuance of Common
to directors............. 4,078
Net income for the
year.................... 421,580
Stock options
exercised............... 298,460
---------- ---- -------- ------- -----------
Balance, December 31,
1994.................... (5,970,000) $(60) (180,250) $(1,803) $ 1,479,219
Net loss for the year..... (1,718,510)
Stock options
exercised............... 2,250
Conversion of Class A
to Common................
---------- ---- -------- ------- -----------
Balance, December 31,
1995.................... (5,970,000) $(60) (180,250) $(1,803) $ (237,041)
========== ==== ======== ======= ===========
</TABLE>
See accompanying notes to financial statements
<PAGE> 5
AMERICONNECT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................... $(1,718,510) $ 421,580
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................ 76,693 43,793
Provision for doubtful accounts.............................. 739,374 537,640
Deferred income taxes........................................ 500,000 --
(Increase) decrease in assets:
Accounts receivable........................................ (118,481) (517,299)
Accounts receivable -- trade from affiliates............... 3,804 (6,055)
Prepaid commissions........................................ (88,764) 7,641
Other current assets....................................... (57,041) (36,569)
Deposits................................................... 511 (11,494)
Increase (decrease) in liabilities:
Accounts payable........................................... 691,755 (97,881)
Accrued office closing costs............................... (10,153) (54,521)
Sales taxes payable........................................ (34,193) 50,187
Other accrued liabilities.................................. (29,832) (28,840)
Deferred income............................................ (13,384) (14,219)
Customer deposits.......................................... (6,001) 7,500
----------- -----------
Net cash provided by (used in) operating activities........ (64,222) 301,463
----------- -----------
Cash flows from investing activities:
Purchase of equipment and software.............................. (95,263) (108,001)
Note receivable -- director/shareholder......................... (3,000) (11,500)
Notes receivable -- agents...................................... (23,115) (206,995)
Payments on agents notes receivable............................. 70,900 5,838
----------- -----------
Net cash used in investing activities...................... (50,478) (320,658)
----------- -----------
Cash flows from financing activities:
Proceeds from bank loan......................................... 6,143,950 3,450,000
Payments on bank loan........................................... (6,143,950) (3,450,000)
Sale of stock to officer........................................ -- 297,000
Distribution of stock to director............................... -- 4,078
Sale of stock to employees...................................... 2,250 1,460
----------- -----------
Net cash provided by financing activities.................. 2,250 302,538
----------- -----------
Net increase (decrease) in cash................................... (112,450) 283,343
Cash at beginning of year......................................... 405,942 122,599
----------- -----------
Cash at end of year............................................... $ 293,492 $ 405,942
=========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE> 6
AMERICONNECT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Supplemental disclosure of cash flow information:
CASH PAID DURING THE YEAR FOR:
<TABLE>
<CAPTION>
1995 1994
------ -------
<S> <C> <C>
Interest.......................................................... $7,854 $18,072
Income Taxes...................................................... $3,340 $20,105
</TABLE>
Supplemental disclosure of non-cash financing activities:
During the third quarter of 1994 and the fourth quarter of 1995, separate
private transactions took place in which, in each case, 113,400 shares of Class
A Common Stock were converted to Common Stock. The effect of this was to reduce
the Class A Common Stock account by $1.00 and to increase the Common Stock
account by $1,134 for each transaction. This occurs because the par value of the
Class A is $.00001 per share and the par value of the Common is $.01 per share.
See accompanying notes to financial statements
<PAGE> 7
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.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of AmeriConnect, Inc. and its wholly-owned subsidiary,
AmeriConnect, Inc. of New Hampshire. All material intercompany accounts and
transactions have been eliminated.
RECOGNITION OF REVENUE: The Company purchases network services primarily at
bulk rates and resells the services to its customers at marginally higher rates.
Revenue and its associated costs are recognized on an accrual basis in the
period during which the usage occurs.
EQUIPMENT AND SOFTWARE: Equipment and purchased software are recorded at
cost. Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated service
lives. The straight-line method of depreciation is used for all assets for
financial reporting purposes, but accelerated methods are used for tax purposes.
INCOME PER COMMON AND COMMON EQUIVALENT SHARE: Income per share is based
upon the weighted average of common and common equivalent shares outstanding
during the period.
COMMON STOCK EQUIVALENTS: Common stock equivalents considered in the
calculation of income per common and common equivalent share include options
outstanding under the Company's 1988 and 1994 stock option plans.
INCOME TAXES: Deferred income taxes result from timing differences between
pretax accounting income and taxable income. Deferred tax assets in 1994 arose
primarily from net operating loss carryforwards. (See Note 7.)
USE OF ESTIMATES: In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 2 -- ECONOMIC DEPENDENCY AND CONCENTRATION OF CREDIT RISK
ECONOMIC DEPENDENCY: The Company operates as a non-facilities-based
reseller of long distance telecommunications services to individuals and small
to medium-sized businesses. The Company acquires its network services by
contracting with two underlying interexchange carriers (Sprint Communications,
L.P. ("Sprint") and WilTel, Inc. ("WilTel")). As of December 31, 1995, the
Company was indebted to Sprint and WilTel for normal monthly services in the
amount of $2,266,170 and $296,661, respectively, which are included in accounts
payable on the accompanying consolidated balance sheet.
CONCENTRATION OF CREDIT RISK: The Company grants credit to its customers,
who include individuals and small to medium-sized businesses.
NOTE 3 -- TRANSACTIONS WITH RELATED PARTIES
SALES TO RELATED ENTITIES: Sales of long distance service to entities
related to shareholders aggregated $77,540 and $61,299 for the years ended
December 31, 1995 and 1994, respectively. Such sales were consummated on terms
similar to those prevailing with unrelated customers.
<PAGE> 8
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 4 -- SIGNIFICANT SALES TO MAJOR CUSTOMERS
During 1995 and 1994, no customer accounted for 2% or more of the Company's
gross revenue.
NOTE 5 -- OPERATING LEASES
The Company leases office space at 6750 W. 93rd St., Suite 110, Overland
Park, Kansas, under a lease calling for payments of $2,653 per month through
August 31, 1998. An amendment to that lease, executed on February 1, 1994, for
additional office space calls for payments of $2,243 per month from February 1,
1994 through August 31, 1998. A second amendment to the lease for additional
office space calls for payments of $2,362 per month from January 1, 1995 through
December 31, 1999. Rental expense for the years ended December 31, 1995 and
1994, was $87,967 and $56,358, respectively.
The Company also leases office equipment and furniture under various
operating leases. As of December 31, 1995, remaining minimum annual rental
commitments under noncancelable operating leases for office space, office
equipment and furniture are as follows:
<TABLE>
<CAPTION>
TOTAL RENT
FISCAL YEARS COMMITMENTS
- ------------ -----------
<S> <C>
1996............................................... $143,602
1997............................................... 103,945
1998............................................... 67,517
1999............................................... 28,350
--------
$343,414
========
</TABLE>
Total expenses recognized for all operating leases including leases for
office space for the years ended December 31, 1995 and 1994 were $156,366 and
$106,489, respectively.
NOTE 6 -- 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 December 1995 the Company accumulated a shortfall of $719,545. The
Company anticipates additional shortfall amounts to accumulate during 1996. In
the event the proposed merger with Phoenix Network, Inc. occurs, 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
<PAGE> 9
believes the accumulated shortfall at December 31, 1995, 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 year ended December 31,
1995.
On June 8, 1995, the Company entered into a revolving credit facility which
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 (8.5% at December 31, 1995) 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 1995, the Company had used this facility for short terms borrowings, but
had no outstanding borrowings at year end. At December 31, 1995, 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 this key employee with a face amount of
$1,750,000 during the year ended December 31, 1994. Annual premiums are
approximately $3,500.
NOTE 7 -- INCOME TAXES
The valuation of the deferred tax asset includes the following amounts:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Deferred tax asset......................................... $ 1,667,882 $1,091,512
Valuation allowance........................................ (1,667,882) (591,512)
----------- ----------
Deferred tax asset......................................... $ 0 $ 500,000
=========== ==========
</TABLE>
The approximate tax effect caused by the net operating loss carryforward,
and the difference in treatment for book and tax for allowance for doubtful
accounts and prepaid commissions gives rise to the deferred tax asset at
December 31, 1995 and 1994 of $1,667,882 and $1,091,512, respectively. In 1994,
the valuation allowance was established to reduce the deferred tax asset to the
amount that will more likely than not be realized. In 1995, the Company
increased the valuation on its deferred tax asset by $1,076,370, reducing the
deferred asset to zero. Because of the operating loss in 1995, the Company is no
longer able to determine that it would more likely than not realize the deferred
tax asset. As a result of this change in estimate, the valuation allowance was
increased by $500,000, which related to the deferred tax asset as of December
31, 1994, and an additional valuation allowance of $576,370 was recorded to
offset the additional deferred tax asset created by the net operating loss in
1995.
<PAGE> 10
In 1994, management believed that it would realize the deferred tax asset
of $500,000. The deferred tax asset was classified in the accompanying
consolidated balance sheet as a $250,000 current and a $250,000 long-term asset.
The valuation allowance was adjusted for the years ended December 31, 1995
and 1994, as follows:
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Valuation allowance, beginning of year....................... $ 591,512 $688,200
Valuation adjustment......................................... 576,370 (96,688)
Adjustment in allowance due to change in estimate............ 500,000 --
---------- --------
Valuation allowance, end of year................... $1,667,882 $591,512
========== ========
</TABLE>
The income tax expense reflected in the consolidated statements of
operations differs from the amount computed at federal statutory income tax
rates. The principal differences are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Federal income tax expense computed at statutory rate........ $(389,436) $ 139,980
State income tax rate effect................................. (73,111) 26,280
Net operating loss carryforward.............................. 462,547 (158,564)
Alternative minimum tax effect............................... -- 8,709
Valuation adjustment due to change in estimate............... 500,000 --
--------- ---------
Income tax expense................................. $ 500,000 $ 16,405
========= =========
</TABLE>
The components of income tax expense related to continuing operations are
as follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Current......................................................... $ -- $16,405
Deferred........................................................ 500,000 --
-------- -------
$500,000 $16,405
======== =======
</TABLE>
The Company has available for income tax purposes the following net
operating loss carryforwards at December 31, 1995:
<TABLE>
<CAPTION>
YEAR OF EXPIRATION AMOUNT
----------------------------------------------- ----------
<S> <C>
2005...................................... $ 363,712
2006...................................... 1,671,205
2007...................................... 185
2008...................................... 185
2010...................................... 1,687,506
----------
$3,722,793
==========
</TABLE>
NOTE 8 -- 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
<PAGE> 11
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 December 31, 1995,
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 December 31, 1995, 487,000
options under this plan had been granted and 142,000 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.
<PAGE> 12
Stock option plan transactions for the year ended December 31, 1995, are
summarized below:
<TABLE>
<CAPTION>
1988 PLAN 1994 PLAN TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
Outstanding, beginning of year.......... 260,000 247,500 507,500
Granted............................... 0 234,500 234,500
Exercised............................. (75,000) 0 (75,000)
Cancelled............................. (16,000) (137,000) (153,000)
------------- ------------- -------------
Outstanding, end of year................ 169,000 345,000 514,000
============= ============= =============
Option price per share exercised........ $0.03 - $0.50 -- $0.03 - $0.50
Price for outstanding options........... $0.03 - $0.50 $0.26 - $0.75 $0.03 - $0.75
============= ============= =============
</TABLE>
The expiration dates for the options issued under the 1988 Plan range from
May 1998 to December 2003. At December 31, 1995, 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 December 31, 1995, 155,000 shares were
available for future grants under the 1994 Plan.
STOCK ISSUED WITH RESPECT TO SERVICE ON BOARD OF DIRECTORS: In October
1992, the Board approved the issuance of stock as compensation to directors not
receiving any other form of compensation from the Company. Each qualifying
director received 5,000 shares of common stock for each quarter of service.
During 1994, 19,000 shares of common stock were issued pursuant to the Board
action, but no shares were issued pursuant thereto in 1995.
STOCK ISSUABLE WITH RESPECT TO REVOLVING CREDIT FACILITY: In connection
with a revolving credit agreement with Robert R. Kaemmer, President of the
Company, Mr. Kaemmer had the option to purchase up to 900,000 shares of common
stock at $0.33 per share. Mr. Kaemmer exercised this option by purchasing
900,000 shares of common stock on April 27, 1994.
NOTE 9 -- OFFICE CLOSING COSTS
After reviewing the costs of maintaining its Washington, D.C. sales office,
the projected sales from that location, and the general financial condition of
the Company, the Board decided to close the office effective December 31, 1991.
All estimated costs and expenses directly associated with the closing of the
office were accrued as of December 31, 1991, and recognized in the financial
statements. Subsequent payments of the accrued costs were charged to the
liability account, accrued office closing costs.
NOTE 10 -- KEY EMPLOYEE INCENTIVE COMPENSATION PLAN
The Company has an incentive compensation plan which provides for incentive
payments to a key employee based on 5% of net earnings before depreciation and
amortization and income taxes. Expenses under the plan amount to $-0- and
$27,726 for the years ended 1995 and 1994, respectively.
In addition, during the year ended December 31, 1994, the board of
directors authorized a one-time performance bonus of $45,000 to this key
employee. The payment was made during the second quarter of 1994.
NOTE 11 -- 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 has been determined
<PAGE> 13
that no recovery on the amounts will be made. As a result, the remaining
receivable of $398,061 was written off. The Company is currently negotiating a
mutual release of all claims with this agent and does not expect to incur any
additional liability as a result of the litigation.
NOTE 12 -- ONGOING OPERATIONS
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles. The Company reported a net loss of
$1,718,510 in 1995. As a result, liabilities exceeded assets by $237,041.
Non-cash items such as depreciation and amortization, provision for doubtful
accounts and deferred income taxes collectively contributed $1,316,067 of the
loss. The remaining $402,443, along with a $118,481 increase in accounts
receivable and a $691,755 increase in accounts payable, contributed to cash used
in operations of $64,222. 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
13 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 13 -- 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.
NOTE 14 -- FOURTH QUARTER ADJUSTMENTS
During the fourth quarter 1995, the Company recorded adjustments of
approximately $940,000 relating primarily to receivables and the deferred tax
asset.
<PAGE> 14
EXHIBIT 1
(continued)
AMERICONNECT, INC.
CONSOLIDATED
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31,
UNAUDITED 1995
------------- ------------
<S> <C> <C>
Current Assets
Cash........................................................... $ 207,959 $ 293,492
Accounts receivable, net of allowance of $396,472 at 1996 and
$361,260 at 1995 (Note 3)................................... 2,414,849 1,961,815
Accounts receivable-trade, with affiliates..................... 11,421 6,065
Accounts receivable-agents, including accrued interest (Note
6).......................................................... 30,355 1,492
Notes receivable-director/shareholder (Note 2)................. -- 14,500
Prepaid commissions............................................ 91,057 126,042
Other current assets........................................... 93,942 94,251
---------- ----------
Total current assets................................... 2,849,583 2,497,657
Non-Current Assets
Equipment and software, net of accumulated depreciation and
amortization of $270,871 at 1996 and $230,868 at 1995....... 118,527 143,202
Deposits....................................................... 18,027 19,528
---------- ----------
TOTAL ASSETS..................................................... $2,986,137 $2,660,387
========== ==========
</TABLE>
See accompanying notes to financial statements
<PAGE> 15
AMERICONNECT, INC.
CONSOLIDATED
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31,
UNAUDITED 1995
------------- ------------
<S> <C> <C>
Current Liabilities
Accounts payable (Note 3)..................................... $ 3,005,814 $ 2,782,432
Sales taxes payable........................................... 113,667 97,460
Accrued office closing costs.................................. -- 8,539
Other accrued liabilities..................................... 1,247 733
----------- -----------
Total current liabilities............................. 3,120,728 2,889,164
Non-Current Liabilities
Customer deposits............................................. 10,265 8,264
----------- -----------
Total liabilities..................................... 3,130,993 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 6,521,611 shares........................ 65,216 65,050
Additional paid-in capital.................................... 3,647,154 3,642,731
Accumulated deficit........................................... (3,855,429) (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........................... (144,856) (237,041)
----------- -----------
Total Liabilities and Stockholders' Deficit..................... $ 2,986,137 $ 2,660,387
=========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE> 16
AMERICONNECT, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ---------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Sales......................................... $4,322,276 $4,378,878 $8,565,187 $8,890,727
Sales to affiliates........................... 19,819 26,410 41,510 41,534
---------- ---------- ---------- ----------
Total revenues........................ 4,342,095 4,405,288 8,606,697 8,932,261
Costs and Expenses
Direct operating costs........................ 3,169,951 3,360,777 6,372,297 6,805,223
Selling, administrative and general
expenses................................... 908,305 1,055,094 2,096,879 2,082,065
Depreciation and amortization................. 19,797 18,777 40,002 34,576
---------- ---------- ---------- ----------
Total costs and expenses.............. 4,098,053 4,434,648 8,509,178 8,921,864
---------- ---------- ---------- ----------
Operating income (loss)............... 244,042 (29,360) 97,519 10,397
Other Income (Expense)
Interest income............................... 2,475 5,558 4,479 12,571
Interest expense.............................. (4,866) (2,498) (17,292) (3,240)
Other income.................................. 2,890 -- 2,890 --
Loan fees..................................... -- -- -- (1,251)
---------- ---------- ---------- ----------
Total other income (expense).......... 499 3,060 (9,923) 8,080
---------- ---------- ---------- ----------
Net Income (Loss) Before Income Taxes........... 244,541 (26,300) 87,596 18,477
Income Tax Expense (Note 4)................... -- -- -- --
---------- ---------- ---------- ----------
Net Income (Loss)............................... $ 244,541 $ (26,300) $ 87,596 $ 18,477
========== ========== ========== ==========
Net income (loss) per common and common
equivalent share........................... $ 0.03 $ 0.00 $ 0.01 $ 0.00
========== ========== ========== ==========
Weighted average common and common equivalent
shares outstanding (000's) (Note 5)........ 6,797 6,690 6,797 6,690
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements
<PAGE> 17
AMERICONNECT, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
---------------------------------
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................... $ 87,596 $ 18,477
Adjustments to reconcile net income to cash provided by/(used
in) operating activities:
Depreciation and amortization.............................. 40,002 34,576
Provision for doubtful accounts............................ 128,680 162,835
(Increase) decrease in assets:
Accounts receivable........................................ (581,714) (443,037)
Accounts receivable -- trade with affiliates............... (5,356) (2,803)
Prepaid commissions........................................ 34,985 --
Other current assets....................................... 309 10,269
Deposits................................................... 1,501 637
Increase (decrease) in liabilities:
Accounts payable -- trade.................................. 223,382 654
Sales tax payable.......................................... 16,207 31,705
Accrued office closing costs............................... (8,539) (9,307)
Deferred Income............................................ -- (13,384)
Customer deposits.......................................... 2,001 --
Other accrued liabilities.................................. 515 (24,730)
----------- -----------
Net cash used in operating activities................. (60,431) (234,108)
----------- -----------
Cash flows from investing activities:
Purchase of equipment and software............................ (15,327) (72,791)
Notes receivable -- director/shareholder...................... -- (3,000)
Payments on notes receivable -- director/shareholder.......... 14,500 --
Notes receivable -- employees................................. (10,000) --
Notes receivable -- agents.................................... (20,000) (20,000)
Payments on agents notes receivable........................... 1,137 16,762
----------- -----------
Net cash used in investing activities................. (29,690) (79,029)
----------- -----------
Cash flows from financing activities:
Proceeds from bank loan....................................... 5,895,000 1,745,000
Payments on bank loan......................................... (5,895,000) (1,703,198)
Sale of stock to employees.................................... 4,588 2,250
----------- -----------
Net cash provided by financing activities............. 4,588 44,052
----------- -----------
Net decrease in cash............................................ (85,533) (269,085)
Cash at beginning of period..................................... 293,492 405,942
----------- -----------
Cash at end of period........................................... $ 207,959 $ 136,857
=========== ===========
Supplemental disclosures of cash flow information Cash paid
during the period for:
Interest................................................... $ 16,560 $ 2,461
Income taxes............................................... $ 2,245 $ 3,320
</TABLE>
See accompanying notes to financial statements
<PAGE> 18
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 June 30, 1996, the consolidated
statements of operations for the six months ended June 30, 1996 and 1995, and
the consolidated statements of cash flows for the six months ended June 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 June 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 June 30,
1996, and June 30, 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. The Company has negotiated a month-to-month
arrangement that will begin in October 1996 and continue until shortly after the
merger is consummated. If the merger is not consummated, the Company intends to
negotiate a long term contract. Terms of the contract 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
June 30, 1996, there was no accumulated shortfall and the Company was in
compliance with the contractual requirements of the agreement. In the event the
proposed merger with Phoenix Network, Inc. occurs (See Note 9), the Company's
amendment to the Sprint contract will terminate 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
<PAGE> 19
AMERICONNECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. In the event the
proposed merger with Phoenix Network, Inc. does not occur (See Note 9), the
Company's monthly commitment would increase to $250,000 beginning with October
1996 usage and continue for the remainder of the existing term. The Company was
in compliance with the contractual requirements of the agreement throughout the
quarter ended June 30, 1996.
On June 1, 1996, the Company entered into a revolving credit facility which
expires October 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 June 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 second quarter of 1996, the Company had used
this facility for short term borrowings, but had no outstanding borrowings at
quarter end. At June 30, 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 June 30,
1996, and the year ended December 31, 1995, as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
Valuation allowance, beginning of period............. $1,667,882 $ 591,512
Valuation adjustment................................. (51,214) 576,370
Adjustment in allowance due to change in estimate.... -- 500,000
---------- ----------
Valuation allowance, end of period................... $1,616,668 $1,667,882
========== ==========
</TABLE>
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
<PAGE> 20
AMERICONNECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 June 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 June 30, 1996, 487,000
options under this plan had been granted and 174,356 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.
<PAGE> 21
AMERICONNECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option transactions for the period ended June 30, 1996, are
summarized below:
<TABLE>
<CAPTION>
1988 PLAN 1994 PLAN TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Outstanding, beginning of quarter............... 166,000 314,000 480,000
Granted....................................... -- -- --
Exercised..................................... (3,000) -- (3,000)
Cancelled..................................... -- (12,000) (12,000)
----------- ----------- -----------
Outstanding, end of period...................... 163,000 302,000 465,000
=========== =========== ===========
Option price per share exercised................ $0.03-$0.50 -- $0.03-$0.50
Price for outstanding options................... $0.03-$0.50 $0.26-$0.75 $0.03-$0.75
=========== =========== ===========
</TABLE>
The expiration dates for the options issued under the 1988 Plan range from
May 1998 to December 2003. At June 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 June 30, 1996, 187,356 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. The Company received a credit in the amount of $300,000 in the
second quarter of 1996 as a partial recovery of the amounts previously written
off.
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 $9,639 in the first six months 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 income of
$87,596 for the six month period ended June 30, 1996. At this time, liabilities
exceed assets by $144,856. Excluding the $300,000 credit, the Company would have
reported a net loss of $212,404. In order to be profitable on an operating
basis, the Company must achieve sufficient volume levels to obtain additional
discounts under its existing carrier contracts or 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 economies of scale which management believes would allow its
operations to become profitable and allow it to compete for new and existing
<PAGE> 22
AMERICONNECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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 proposed merger,
Phoenix will issue shares of its common stock in exchange for all of the
outstanding shares of the Company. It is currently anticipated that the closing
will take place in October 1996, pending the obtaining of all necessary
regulatory approvals and approval of the Company's shareholders. There can be no
assurance the Company's shareholders will approve the merger or that the other
conditions to the merger will be satisfied.
