<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X Quarterly Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
______ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from ___________ to ____________
COMMISSION FILE NO. 0-17909
PHOENIX NETWORK, INC.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 84-0881154
- ------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
550 California Street, 11th Floor, San Francisco, California 94104
------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 399-3300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) YES X (2) NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<S> <C>
Shares outstanding at
Class May 1, 1996
- ----------------------------- ---------------------
Common Stock, $.001 par value 17,344,873
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PHOENIX NETWORK, INC.
I N D E X
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<CAPTION>
Page No.
--------
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated
Balance Sheets 3
Condensed Consolidated
Statements of Operations 5
Condensed Consolidated
Statements of Cash Flow 6
Notes to Condensed Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
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2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHOENIX NETWORK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, 1995 March 31, 1996
----------------- --------------
Current assets:
Cash and cash equivalents ($225,356
restricted at December 31, 1995 and
March 31, 1996) $ 8,004,511 $ 2,262,132
Accounts receivable, net of
allowance for doubtful accounts
of $1,287,753 at December 31, 1995
and $1,414,568 at March 31, 1996 11,763,520 16,596,873
Deferred commissions 1,522,738 1,507,918
Other current assets 304,920 605,872
----------- -----------
Total current assets 21,595,689 20,972,795
Furniture, equipment and data processing
systems, at cost less accumulated
depreciation 743,463 2,913,808
Deferred commissions 1,454,483 1,220,901
Customer acquisition costs,
less accumulated amortization 2,447,619 4,278,864
Goodwill, less accumulated amortization 3,903,109 18,986,201
Other assets 223,520 977,126
----------- -----------
$30,367,883 $49,349,695
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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PHOENIX NETWORK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
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<CAPTION>
<S> <C> <C>
December 31, 1995 March 31, 1996
----------------- --------------
Current liabilities:
Note payable to finance company $ 41,468 $ 10,768
Note payable to stockholder -- 131,406
Note payable to vendor -- 3,013,125
Accounts payable and accrued liabilities 10,901,725 16,383,247
----------- -----------
Total current liabilities 10,943,193 19,538,546
Note payable to stockholder - long term -- 1,182,650
Stockholders' equity:
Preferred stock, $.001 par value;
authorized, 5,000,000 shares;
issued and outstanding, 2,737,389 shares
at December 31, 1995 and 2,727,389
shares at March 31, 1996 2,737 2,727
Common stock, $.001 par value
authorized, 20,000,000 shares;
issued and outstanding, 14,459,658 share
at December 31, 1995 and 17,344,873
shares at March 31, 1996 14,460 17,345
Additional paid-in capital 28,443,144 38,967,204
Treasury stock - 1,300
shares at cost (2,522) (2,522)
Accumulated deficit
from May 1, 1989 (9,033,129) (10,356,255)
----------- -----------
Total stockholders' equity 19,424,690 28,628,499
----------- -----------
$30,367,883 $49,349,695
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
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PHOENIX NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Revenues $14,194,221 $ 23,071,710
Cost of revenues 9,708,228 16,616,602
---------- ----------
Gross profit 4,485,993 6,455,108
Selling, general & administrative expenses 4,123,799 6,631,122
Depreciation and amortization 145,212 1,083,973
---------- ----------
4,269,011 7,715,095
---------- ----------
Income (loss) from operations 216,982 (1,259,987)
Interest expense - net (88,979) (37,467)
---------- ----------
Net income (loss) 128,003 (1,297,454)
Preferred stock dividends (63,190) (312,803)
---------- ----------
Net income (loss) attributable to common shares $64,813 $(1,610,257)
========== ==========
Net income (loss) per common share $0.01 $(0.09)
========== ==========
Weighted average number of shares outstanding 12,545,702 17,342,928
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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PHOENIX NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $13,359,391 $21,112,470
Interest received 2,371 12,603
Cash paid to suppliers and employees (12,930,328) (22,311,331)
Interest paid (91,350) 50,070
----------- -----------
Net cash provided by (used in) operating activities 340,084 (1,236,328)
Cash flows from investing activities:
Purchases of furniture and equipment (132,511) (161,852)
Purchase of other assets -- (229,669)
Business acquisitions, net of cash acquired -- (4,085,093)
----------- -----------
Net cash used in investing activities (132,511) (4,476,614)
Cash flows from financing activities:
Proceeds from note payable to finance company 6,523 (30,700)
Proceeds from exercise of common stock options 60,275 1,263
----------- -----------
Net cash provided by (used in) financing activities 66,798 (29,437)
----------- -----------
Net increase (decrease) in cash 274,371 (5,742,379)
Cash at beginning of period 1,209,999 8,004,511
----------- -----------
Cash at end of period $ 1,484,370 $2,262,132
=========== ===========
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities:
Net income (loss) $ 128,003 $(1,297,454)
Adjustments
Provision for doubtful accounts 320,729 512,898
Depreciation and amortization 145,212 1,083,973
Changes in assets and liabilities
Accounts receivable (834,820) (2,472,138)
Deferred commissions 63,281 248,402
Other assets (106,271) (359,872)
Accounts payable and accrued expenses 623,950 1,047,863
----------- -----------
Net cash provided by (used in) operating activities $ 340,084 $(1,236,328)
=========== ===========
Schedule of noncash financing activity
Noncash components of consideration issued in
connection with business combination:
Common stock $ -- $10,500,000
Note payable to stockholder -- 1,314,056
Assumption of net liabilities -- 1,606,976
Conversion of preferred stock into common stock 7,221 25,672
</TABLE>
The accompanying notes are an integral part of these statements.
6
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PHOENIX NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. These
statements should be read in conjunction with the financial statements and notes
thereto included in the Registrant's Form 10-K for year ended December 31, 1995.
NOTE B - In January 1996, the Company acquired Automated Communications, Inc.
("ACI"), a Golden, Colorado facilities-based long distance phone service carrier
operating state-of-the-art switching centers in Colorado Springs, Minneapolis
and Phoenix. Consideration for the acquisition was in the form of $4,086,693 in
cash, 2,800,000 shares of the company's common stock valued at $10,500,000, a
long term note of $1,314,056 bearing interest at 9%, and the assumption of net
liabilities of $1,606,976. The Company's consolidated results of operations for
the first quarter include those of ACI from January 1, 1996, the effective date
of the purchase transaction. The excess of the purchase price over the fair
market value of the assets and liabilities acquired has been allocated to
customer acquisition costs, ($1,950,000) and to goodwill ($15,557,725). Customer
acquisition costs are amortized over 4 years using the sum-of-the-years-digits
method and goodwill is amortized on a straight line basis over 20 years.
The following condensed pro forma information presents the results of operation
of the Company as if the acquisition of ACI, and certain other acquisitions
completed in 1995, had occurred on January 1, 1995.
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<CAPTION>
Three months ended
March 31, 1995
------------------
<S> <C>
Revenue $23,437,408
Net Income (loss) (45,928)
Net Income (loss) attributable to
common shares (109,118)
Earnings (loss) per share (0.01)
</TABLE>
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
For the quarter ended March 31, 1996 revenues increased to $23,071,710 compared
with revenues of $14,194,221 for the comparable period of the prior year. The
increase of 62.5% was due to acquisitions completed by the Company in late 1995
and the quarter ended March 31, 1996. Billed minutes to customers increased 84%
between periods while the average revenue per minute declined by 11.8% between
periods. The average rate decline was due to the combination of the Company's
customers utilizing more competitively priced services offered by the Company
over the past year and the effect of the acquired companies' rate structures
which generally were lower than those offered by the Company.
Cost of revenues in the first quarter increased to $16,616,602 from $9,708,228
in the prior year's period which, as a percentage of revenue, was 72.0% compared
to 68.4% for the prior year's period. While the average price per minute the
Company pays for service has decreased by 7.2% between periods, the decrease was
not sufficient to offset the decline in the average revenue rate per minute
discussed above, and accordingly, the gross profit declined from 31.6% in the
quarter ended March 31, 1995 to 28.0% in the current year's quarter. The Company
has taken steps to improve its profit margin through increased utilization of
its switching facilities in Minneapolis, Colorado Springs and Phoenix, and
through continuing renegotiation of its current carrier contracts.
Selling, general and administrative (SG&A) expenses decreased slightly as a
percentage of revenue from 29.1% for the quarter ended March 31, 1995 to 28.7%
for the quarter ended March 31, 1996. As a result of the acquisition of ACI in
January 1996, the Company has been operating headquarters facilities in Golden,
Colorado in addition to its San Francisco location for the quarter ending March
31, 1996. The Company is in the process of relocating its offices to the Golden
facilities and anticipates the completion of this process by July 1, 1996. The
cost of the relocation is estimated to be approximately $1,000,000 which will be
incurred and expensed in the quarter ending June 30, 1996.
Depreciation and amortization expense increased from $145,212, or 1.0% of
revenue, in the March 1995 quarter to $1,083,973, or 4.7% of revenue, in the
quarter ended March 1996. The increase resulted primarily from the amortization
of the ACI acquisition and the Tele-Trend acquisition completed in August 1995.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations for the three months ended March 31, 1996 resulted in
a net negative cash flow of $1,236,328 compared to a positive cash flow of
$340,084 for the prior year. Accounts receivable, net of the allowance for
doubtful accounts, and accounts payable, each increased at March 31, 1996
compared to March 31, 1995, as a result of the acquisitions described in Note B
to the financial statements and as a result of increased billings of the Company
for the period. In January 1996, the Company expended $4,085,093 as the cash
component of the consideration paid for ACI (see Note B to the Condensed
Consolidated Financial Statements). The Company has a line of credit available
through a finance company allowing for borrowings of up to $10,000,000 based on
the Company's trade receivable. There was $10,768 outstanding under the line at
March 31, 1996.
As discussed above, management has decided to relocate the Company's San
Francisco facilities to ACI's offices in Golden in the first half of 1996.
Management estimates the cost of the relocation to be approximately $1,000,000.
9
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
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(a) 11 Statement of Computation of Per Share Earnings
(b) A Form 8-K/A containing the required financial statements related
to the acquisition by the Company of Automated Communications,
Inc., a Golden, Colorado facilities-based reseller of long distance
service was filed on March 30, 1996.
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10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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<S> <C>
PHOENIX NETWORK, INC.
(Registrant)
Date 5/14/96 /s/ Wallace M. Hammond
---------------------------
Wallace M. Hammond
Chief Executive Officer
Date 5/14/96 /s/ Jeffrey L. Bailey
---------------------------
Jeffrey L. Bailey
Chief Financial Officer
(Chief Accounting Officer)
</TABLE>
11
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PHOENIX NETWORK, INC.
INDEX TO EXHIBITS
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<C> <S>
11 Statement of Computation of Per Share Earnings
27 Financial Data Summary
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12
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EXHIBIT 11
PHOENIX NETWORK, INC.
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended
3/31/95 3/31/96
---------- -----------
<S> <C> <C>
Primary
Net income (loss) $ 128,003 $(1,297,454)
Preferred stock dividend (63,190) (312,803)
---------- -----------
Adjusted net income (loss) $ 64,813 $(1,610,257)
========== ===========
Weighted average number of common shares outstanding 11,409,001 17,342,928
Dilution from assumed exercise of options and warrants using the
treasury stock method 1,136,701 --
---------- -----------
Total weighted average shares 12,545,702 17,342,928
========== ===========
Net income (loss) per common share $ 0.01 $ (0.09)
Fully Diluted
Net income (loss) $ 128,003 $(1,297,454)
========== ===========
Weighted average number of shares outstanding:
Primary 12,545,702 17,342,928
Convertible preferred stock conversion 1,593,701 6,232,988
Dilution from assumed exercise of options and warrants using the
treasury stock method -- 1,631,235
---------- -----------
Total 14,139,403 25,207,151
========== ===========
Net income (loss) per common and common equivalent share $ 0.01 $ (0.05)
====== =======
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 2,262,132
<SECURITIES> 0
<RECEIVABLES> 18,011,441
<ALLOWANCES> 1,414,568
<INVENTORY> 0
<CURRENT-ASSETS> 20,972,795
<PP&E> 4,291,122
<DEPRECIATION> 1,377,314
<TOTAL-ASSETS> 49,349,695
<CURRENT-LIABILITIES> 19,538,546
<BONDS> 0
<COMMON> 17,345
0
2,727
<OTHER-SE> 28,608,427
<TOTAL-LIABILITY-AND-EQUITY> 49,349,695
<SALES> 23,071,710
<TOTAL-REVENUES> 23,071,710
<CGS> 0
<TOTAL-COSTS> 16,616,602
<OTHER-EXPENSES> 7,202,197
<LOSS-PROVISION> 512,898
<INTEREST-EXPENSE> 37,467
<INCOME-PRETAX> (1,297,454)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,297,454)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,297,454)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
