U.S. Securities and Exchange Commission
Washington, DC 20549
FORM 10-Q
( 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
( ) Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
for the transition period from to
Commission File Number:
Net Lnnx, Inc.
...................................................................
(Exact Name of Registrant as specified in its charter)
Pennsylvania 23-1726390
...................................................................
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2240 Woolbright Rd., Suite 336, Boynton Beach, Florida 33426
...................................................................
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, (407) 739-9151
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. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS;
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 1,075,000 as of March 31,
1996.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
NET LNNX, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Mar. 31 Dec. 31
1996 1995
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current Assets
Cash in Bank $ - $ 2,164
-
Subscriptions Receivable 170,000 -
-
Total Current Assets 170,000 2,164
Property and Equipment (net of Depreciation of
$ 180 at 3/31/96) 10,618 -
Investment in Subsidiary 1,880,219 -
Total Assets $ 2,060,837 $ 2,164
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Payable to Subsidiary 71,463 -
Total Current Liabilities 71,463 -
Total Liabilities 71,463 -
Shareholders' Equity:
Preferred Stock, no par, 5,000,000 shares -
authorized, 17,000 shares issued and outstanding
as of March 31, 1996 170,000
Common Stock, no par, 20,000,000 shares auth.
1,075,000 and 165,000 issued and outstanding at
March 31, 1996 and December 31, 1995 - -
Additional Paid-in Capital 1,967,167 1,000
Retained Earnings(Deficit) (147,793) 1,164
Total Shareholders' Equity 1,989,374 2,164
Total Liabilities and Shareholders' Equity $ 2,060,837 $ 2,164
</TABLE>
<PAGE>
ITEM 1- FINANCIAL STATEMENTS- CONTINUED
NET LNNX, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
For the Three Months Ended
Mar. 31 Mar 31.
1996 1995
<S> <C> <C>
Revenues $ - $ 12
Cost of Revenues 11,172 -
Gross Margin (11,172) 12
Expenses General and Administrative 66,657 336
Income (Loss) from Operations (77,829) (324)
Depreciation 180 -
Loss on Subsidiary Equity 70,948 -
71,128 -
Net Income (Loss) $ (148,957) $ (324)
Retained Earnings-beginning of Period 1,164 2,350
Retained Earnings-End of Period $ (147,793) $ 2,026
Income (Loss) per common shares $ (.15) $ -
Weighted Average number of common shares
outstanding 966,868 165,000
</TABLE>
<PAGE>
ITEM 1-FINANCIAL STATEMENTS-CONTINUED
NET LNNX, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended
Mar. 31 Mar. 31
1996 1995
<S> <C> <C>
Cash Flows from Operations:
Net Income (Loss) $ (148,957) $ (324)
Adjustments to reconcile net loss
to net cash:
Depreciation 180
Expenses paid through stock issuance 15,000
Loss on Subsidiary equity 70,948
Change in assets and Liabilities:
Payable to Subsidiary 71,463
Subscription Receivable (170,000)
Net cash (used) by operations (161,366) (324)
Cash Flows from Investing Activities:
Acquisition of Property (10,798)
Cash Flows from Financing Activities:
Proceeds from sale of Preferred Stock 170,000
Net change in cash (2,164) (324)
Cash at beginning of Period 2,164 2,350
Cash at end of Period $ - $ 2,026
</TABLE>
<PAGE>
ITEM I- FINANCIAL INFORMATION-CONTINUED
NET LNNX, INC.
FOOTNOTES TO FINANCIAL STATEMENTS
Note 1- Summary of Significant Accounting Policies:
Organization and Purpose: The company was a wholly owned subsidiary of
Corporate Investment on December 31, 1988. On May 5, 1989 Corporate
Investment Company distributed all of the outstanding stock of the Company to
the shareholders of Corporate Investment Company as a one share stock for stock
dividend.
On December 29, 1995, the company entered into an agreement to exchange 85% of
its no par value common stock for approximately 55% ownership in
Communications/USA, Inc. The actual transfer took place in January, 1996, and
the Company filed a Form 8K dated January 8, 1996 detailing the transaction.
The Company's new Board of Directors and shareholders authorized a name change
from Chester County Security Fund, Inc., to NET LNNX, Inc., as well as one for
twenty reverse stock split of its common stock.
The Company's purpose is to develop and invest in high-tech companys primarily
engaged in the information super highway industry. Besides the above named
investment, the Company has also formed a wholly owned subsdiary, TrueNet, Inc.
to develop and market products to be used in the Internet.
Accounting for Results of Operations in Unconsolidated Subsidiary. - The
Company's management has opted for accounting for the results of operations of
unconsolidated subsidiaries under the Equity Method. This means that the
Company records only its portion (approximately 55%) of income or losses of
the subsidiary. For the quarter ended March 31, 1996 this amounted to a loss
of $70,948.
Property and Equipment. - Property and Equipment are recorded at cost. The
equipment is depreciated over its useful life. There are no differences
between book and tax depreciation. Repairs and maintenance are expensed as
incurred.
Note 2- Subscription Receivable
The Company entered into an agreement whereby 17,000 shares of the Company's
no par value Preferred Stock was exchanged for 12% Exchangeable Debenture of a
<PAGE>
non-U.S. person. The value assigned to each share of Preferred Stock was $10,
for a total of $170,000. As of March 31, 1996 the Company has not yet
exchanged the Debenture.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
After several years of having no operations the Company entered into
an agreement to purchase a majority interest in Communications/USA, Inc.
(CUSA). Through CUSA's wholly owned subsidiary CommTel/USA, Inc., ("CommTel")
it owns and operates Voice-Tel franchises which comprises the West Coast of
Florida from Tampa Bay to Naples, and the East Coast of Florida from Cocoa to
Stuart.
Voice-Tel is in the interactive voice messaging industry and sells
its products to local customers as well as National Accounts. CommTel expects
to provide in excess of $1,000,000 in interactive voice messaging services to
these accounts.
The national accounts comprise approximately 60% of the Company's
revenues. A typical account in this category is a multi-level marketing
company. The largest national account, Amway, purchases a block of telephone
numbers from the Company and then re-sells them to its independent
distributors. All the incidentals of billing and collections are handled by
Amway, with the Company receiving its revenues on a monthly basis. Service
issues are handled by the Company. The other national accounts are handled
in the same manner as the Company's corporate/retail accounts.
The corporate/retail accounts are typically comprised of corporations
or individuals who desire interactive voice messaging. An example would be a
local real estate broker who desires to be able to communicate with his/her
agents through this medium. The other major target market is for companies with
a field sales and service force.
The Company has also formed a wholly owned subsidiary to provide
Internet services such as consulting and WEB site preparation to businesses and
individuals. To date no revenue has been generated from this segment, since it
is still in its formative stage.
Liquidity:
The Company's liquidity is based on the cash flow of its subsidiaries,
plus any funds that may be raised from time to time through the selling of its
securities. Management feels that its cash flow is adequate to meet its
operating needs for the next fiscal year.
Management expects that its wholly owned Internet Service Provider(ISP)
will become self sufficient and generate a positive cash flow during the third
and fourth quarter of the fiscal year.
In February 1996, CommTel obtained a rate adjustment from its local
telephone provider to more closely match the rates enjoyed by paging companies.
Due to this favorable rate adjustment, the Company will experience a
substantial reduction in telecommunications costs for 1996, as well as improved
cash flow. Currently this company has approximate cash flow of $1,000,000
per annum.
<PAGE>
Capital Commitment
Presently, the Company does not expect to make any significant capital
expenditures, although some are necessary to take full advantage of the
expected reduced telecommunications costs. At this time, however, no final
plans have been made for these expenditures.
In order to accomplish its sales goals, the Company may be required to
add sales employees. Management anticipates approximately two new sales
positions to be created during the next fiscal year.
Results of Operations:
The Company experienced a loss of $148,957 for the first quarter of
1996. Management expected this loss, since it was primarily due to start up
costs associated with the formartion of its ISP. These expenses which will not
re-occur amounted to approximately $ 79,000. The Company also recorded a
non-cash loss on the results of operations of an un-consolidated subsidiary.
The company accounts for this investment under the Equity Method of Accounting.
This loss was approximately $71,000 and was as a result of amortization of
intangible assets as well as depreciation of equipment.
Management does not feel that this trend will continue in the future.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in securities.
There were no changes in securities other than the creation of a new class of
stock for the Company. On January 26, 1996, the shareholders approved the
filing of Articles of Amendment to the Articles of Incorporation, adding a
provision as follows:
"The Corporation shall also be authorized to issue and have outstanding at any
one time five million (5,000,000) shares of Preferred Stock, no par value. The
Preferred Stock may be issued from time to time with such designations, face
values, dividends, voting preferences, conversion rights, cumulative, relative,
participating, optional or other rights, qualifications, limitations or
restrictions thereof as shall be stated and expressed in the resolutions or
resolutions providing for the issuance of such Preferred Stock as adopted by
the Board of Directors pursuant to the authority given in this paragraph."
Item 3. Defaults Upon Senior Securities.
None
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
A special meeting of the shareholders of the Registrant was held on
Friday, January 26, 1996, at 1:00 P. M., for the following purposes:
1. To ratify a one-for-twenty reverse stock split adopted by the Board of
Directors, so that each twenty shares of Common Stock outstanding prior to such
date ("Old Stock") were converted into one share of fully-paid and non-
assessable Common Stock ("New Stock"). No fractional shares were issued as a
result of the reverse stock split. Fractional shares representing .4 or greater
of New Stock were rounded up to the nearest whole share, and fractional shares
representing less than .4 of New Stock were rounded down to the nearest whole
share. From and after the date the reverse stock split became effective,
certificates representing shares of Old Stock were deemed to represent shares
of New Stock as adjusted. Shareholders were not be required to deliver the
certificates representing their shares of the Old Stock for certificates
representing such shareholder's shares of New Stock to which an individual
shareholder was entitled. No adjustment of the capital accounts shall be made
as a result of the reverse stock split. The record date for the reverse split
was January 25, 1996.
2. To approve the creation of a class of preferred stock for the Corporation.
The Corporation acting through its authorized officers caused to be filed
Articles of Amendment to the Articles of Incorporation, adding a provision as
follows:
"The Corporation shall also be authorized to issue and have outstanding at any
one time five million (5,000,000) shares of Preferred Stock, no par value. The
Preferred Stock may be issued from time to time with such designations, face
values, dividends, voting preferences, conversion rights, cumulative, relative,
participating, optional or other rights, qualifications, limitations or
restrictions thereof as shall be stated and expressed in the resolutions or
resolutions providing for the issuance of such Preferred Stock as adopted by
the Board of Directors pursuant to the authority given in this paragraph."
3. To adopt and approve the Net Lnnx, Inc. 1996 Stock Plan and to ratify the
authorization of the filing of a Registration Statement on Form S-8 with the
Securities and Exchange Commission relating to the securities to be issued
pursuant to the Net Lnnx, Inc. 1996 Stock Plan.
The number of votes cast in favor of all three items was 16,700,000,
with no abstentions and no votes cast in opposition.
Item 5. Other Information
(a) Business Development.
Net Lnnx, Inc. formerly known as Chester County Security Fund, Inc. a
Pennsylvania corporation, was formed on April 15, 1968. On December 28, 1995,
to be effective January 1, 1996, the Company closed on a formal agreement for
the acquisition of an approximate 60% interest in Communications/USA, Inc.,
a privately-held Florida corporation, in exchange for 83.5% of the shares of
its common stock. The transaction was accomplished via a Share Exchange
Agreement whereby the majority owners of Communications/USA, Inc. exchanged
their stock in Communications/USA, Inc. for controlling interest in Chester
County Security Fund, Inc.
The Company changed its name to Net Lnnx, Inc. and effected a 1 for 20
reverse split on January 26, 1996.
<PAGE>
The Company is active in the telecommunications industry, with its
primary focus on two segments of the industry: 1) The ownership and operation
of Internet Service Providers and other Internet related companies; and 2) The
ownership and operation of Interactive Voice Messaging companies which also
provide ancillary telecommunications services such as paging and prepaid long
distance telephone cards.
Internet Subsidiary: TrueNet Corporation
The Company recently formed a wholly owned subsidiary, TrueNet
Corporation, to take advantage of opportunities in the Internet marketplace.
TrueNet operates in the areas of Web Presence Development, Datacomm
Consulting, Internet Commerce, and acts as an Internet Service Provider.
TrueNet offers a multi-server, multiple Operating System (OS) Internet service.
The Company believes that TrueNet is unusual in its ability to offer both the
historical strength of UNIX with the emerging advantage of Windows NT.
The Internet and Internet Service Providers
Internet Service Providers are access providers who control the
"gateways" for users to gain access to the Internet.
The Internet is a vast, worldwide network of networks that are both
commercial and publicly owned, that offers its users access to tremendous
academic, business and general resources. It allows a user to log on to a local
computer system and access a system in another location, permitting a variety
of different types of computer systems to communicate with each other.
The Internet has no beginning and no end; as networks of computers are
added or removed, or failures occur in parts of the system, the rest of the
Internet continues to operate. According to industry sources, growth in
connections to the Internet, (known as hosts) is doubling annually, a rate that
should continue for at least the next five years.
According to Hambrecht & Quist, a major brokerage firm, there are
approximately 35 million users of the Internet now, and this number is
anticipated to increase to 300 million by the year 2000. H & Q estimates that
revenues from the access companies will jump to $5 billion by 2000, up from
$300 million this year.
With users doubling every year since 1988, the Internet is the fastest
growing communications medium in history. The explosive growth of the Internet
in the last few years is largely due to the World Wide Web (WWW or just "the
Web"). The Web has been successful because it provides a powerful, easy to
use, point and click interface. The Web is simply a distributed, hypertext,
multi-media database that is based on a set of protocols called HTTP (HyperText
Transfer Protocol). Through the use of software such as Netscape, a new
Internet user can navigate with little more than point and click skills. This
"user friendliness" is anticipated to continue to fuel the explosive growth of
the Internet, since even new users can see pictures, read text, hear music and
even view animation. This removal of the complexities associated with the
Internet has enabled literally a whole world of nontechnical people to have
easy access to the wealth of information resources, commercial services and
online shopping that are available around the globe.
<PAGE>
According to Morgan Stanley & Co. Incorporated, new businesses that are
created by or for the Internet market place will grow very rapidly, at an
estimated Compound Annual Growth Rate of 38% from 1995 to 2000. Morgan Stanley
puts the size of the Internet market at about $5 billion for new markets plus
another roughly $11 billion related indirectly to existing infrastructure
companies, and that the "new businesses" market may grow to $36 billion in the
year 2000, and the indirectly related existing markets will grow to $43
billion. Accordingly, the market for Internet-related products and services
appears to be growing more rapidly than the early emerging markets for print
publishing, telephony, film, radio, recorded music, television and personal
computers.
Voice Messaging Subsidiary: Communications/USA, Inc.
Communications/USA, Inc. ("Comm/USA"), a Florida corporation, was
incorporated in December, 1992. In May, 1995, Comm/USA executed a contract to
acquire all of the issued and outstanding shares of Gulf Coast Communications,
Inc. ("Gulf Coast") d/b/a Voice-Tel of West Florida, a Florida corporation.
The transaction closed on November 28, 1995. In October, 1995, Comm/USA
assigned all of its right, title and interest in the Gulf Coast contract to
CommTel/USA, Inc. ("Comm/Tel"), a Florida corporation, Comm/USA's wholly owned
subsidiary. Gulf Coast was organized in June, 1989 and Comm/Tel was organized
in August, 1995. In October, 1995, Comm/Tel executed an agreement to acquire
all of the assets of Feiman & Holliday, Inc., a Florida corporation d/b/a
Voice-Tel of Southwest Florida ("Voice-Tel SWF") and closed on the transaction
on November 28, 1995. Additionally, in October, 1995, Comm/Tel executed a
contract with the owner of forty-five percent (45%) of the common shares of
Holt & Feiman, Inc., d/b/a Voice-Tel of Tallahassee, Inc. ("Voice-Tel TAL"),
a Florida corporation, to purchase forty-five percent (45%) of Voice-Tel TAL.
Comm/USA acquired 100% of the issued and outstanding shares of common
stock of Gulf Coast on November 28, 1995, pursuant to a stock purchase
agreement dated May 24, 1995, between Comm/USA and the two stockholders of
record of Gulf Coast. In October 1995, Comm/USA assigned all of its rights,
title and interest in the Gulf Coast stock purchase agreement to Comm/Tel. The
agreement, as amended, provides for a purchase price of $550,000, with (i)
$325,000 in cash payable on or before November 29, 1995; (ii) a $75,000
promissory note payable on or before February 27, 1996; and (iii) a $150,000
promissory note payable on February 27, 2001, with a holder's option for a
balloon payment of the entire amount on February 27, 1998. The $325,000 cash
payment was made at Closing and the $75,000 note was paid on February 27, 1996.
In addition to the above-mentioned promissory notes, the former Gulf Coast
Stockholders have the right to receive an aggregate of 125,000 shares of
Comm/USA's common stock, par value $.01 ("Common Stock") or 2.5% of Comm/USA's
then issued and outstanding shares of Common Stock, whichever is greater, upon
completion of their first year of employment, and an additional 125,000 shares
of Common Stock or 2.5% of Comm/USA's then issued and outstanding Common Stock,
whichever is greater, upon completion of their second year of employment.
Comm/Tel acquired the assets of Voice-Tel SWF pursuant to an asset
purchase agreement dated October 23, 1995, between Comm/Tel and Voice-Tel SWF.
The asset purchase agreement provides for Comm/Tel's acquisition of certain
assets of Voice-Tel SWF, including Voice-Tel SWF's rights under its franchise
agreement with Voice-Tel Enterprises, Inc. ("Voice-Tel"), telecommunications
equipment, and a rebate of certain telecommunications cost from Voice-Tel in
the amount of $6,000. In exchange, Comm/Tel (i) assumed approximately
$235,000 of Voice-Tel SWF's liabilities, (ii) transferred $30,000 in cash to
<PAGE>
certain stockholders of Voice-Tel SWF, and (iii) transferred 312,500 shares
of Common Stock to the shareholders of Voice-Tel SWF.
On October 22, 1995, Comm/Tel entered into a stock purchase agreement
with Robert Feiman, a forty-five percent (45%) owner of Voice-Tel TAL, to
acquire forty-five percent (45%) of the issued and outstanding shares of common
stock of Voice-Tel TAL in exchange for (i) a one time payment by Comm/Tel to
Robert Feiman of $15,000 in cash; and (ii) for Comm/Tel's best efforts to repay
approximately $50,000 in loans made to Voice-Tel TAL by Robert and Roberta
Feiman. The transaction is contingent upon approval of the transaction by the
majority shareholder of Voice-Tel TAL, and as of the date of this
registration statement, such approval has not yet been obtained.
The term "the Company" that is used throughout this section includes
Comm/USA, Comm/Tel, Gulf Coast, and Voice-Tel SWF.
Business of the Company
The Company owns and operates interactive voice messaging franchises in
the Voice-Tel system. Voice-Tel is the most widespread interactive voice
messaging company in the United States, operating a digital telecommunications
network through independently owned franchisees. The network covers the
greatest geographic area in the industry, and includes approximately 3,500
cities. The system operates on proprietary software which was created by
Centigram Communications Corporation.
The Company operates in the following sales territories: (i) the cities
of Tampa, St. Petersburg, Clearwater, Largo, Bradenton, and Sarasota; and
(ii) the Metropolitan Statistical Areas of Lakeland-Winter Haven, Melbourne-
Titusville-Palm Bay, Fort Pierce, Fort Myers-Cape Coral, and Naples. The
Company is also negotiating various contracts to acquire additional territories
in Florida.
Products, Services and Markets
Interactive Voice Messaging
Interactive voice messaging is a service which allows users to talk
back and forth to each other and to send messages to one or hundreds of people
with just one telephone call. The messages can be saved and/or forwarded to
other users. Voice messaging services are accessed world-wide, wherever touch-
tone telephone service is available. The service has flexible interactive
answering and broadcast capabilities that management believes makes the system
more accessible than e-mail, more personal and powerful than voice mail
machines, and more detailed and informative than pagers. As a result, the
Company believes that the system is more practical and user-friendly for the
increasingly mobile executive who relies more and more on voice messaging
services.
Approximately 60% of the Company's revenue is derived from Voice-Tel's
national accounts. One of the largest user groups of Voice-Tel services is
the Amway Corporation ("Amway") through its independent distributors. Voice-
Tel messaging service is marketed under the name "Amvox" to Amway distributors.
In addition, more than one million Amway distributors are authorized to resell
Voice-Tel services to their customer bases. Voice-Tel also has a national
account agreement with Century 21 Real Estate to provide voice messaging
services to real estate brokers across the nation that are affiliated with
Century 21. Additionally, Voice-Tel has national account agreements with other
large companies including Mailboxes, Etc., Primerica Financial Services,
<PAGE>
Discovery Toys, Norwest Mortgage, Centigram Communications Corporation, Val
Pak, Inc., National Safety Associates ("NSA"), Traveler's Insurance Company,
and Excel Telecommunications, Inc.
Approximately 39% of the Company's revenue is derived from corporate/
retail accounts. The corporate accounts are corporations or individuals who
desire interactive messaging. Typically, these accounts consist of local
business persons such as real estate brokers or other professionals who desire
to communicate with their agents through this medium. Primary targets for the
service include companies with field sales and service forces.
The Company believes that in certain areas various industries tend to
become interdependent on the Voice-Tel system, which causes related parties to
join the system. For example, many Realtors use the system. The addition of
local mortgage brokers, banks, real estate lawyers, title companies, surveyors
and local zoning agencies could enhance the business of all of these customers.
The Voice-Tel System
The Company owns franchises granted by Voice-Tel Enterprises, Inc.
("Voice-Tel or VTE"). VTE is a privately-owned company and was incorporated in
1986. VTE started operations as a franchise organization in the Ohio area. The
franchisees, using Centigram platforms, operated local area voice mail service
bureaus selling mailboxes to business accounts. The organization grew in the
eastern states, reaching about 30 locations by 1990.
By early 1990, Voice-Tel wanted to expand its coverage to include the
western states. Voice-Tel acquired Amvox in 1990. At that time, Amvox had a
presence in over 50 major metropolitan cities; over 100 cities including
suburban coverage. Amvox had begun construction on a digital network and had
about 15 cities linked together, allowing customers to exchange messages from
one city to another.
Management believes that the acquisition of Amvox was attractive to
Voice-Tel for many reasons including (i) Amvox used Centigram platforms
exclusively; (ii) Amvox had significant coverage in the western two thirds of
the country; (iii) Amvox locations tripled VoiceTel's city coverage; and
(iv) Amvox had a business alliance with Amway Corporation. The Company
believes that the business alliance with Amway was significant for three
reasons: (i) Amway had a significant investment in Amvox; (ii) Amway
distributors bought Amvox mailboxes for their own use; and (iii) Amway
distributors sold Amvox mailboxes.
The Amway affiliation has continued with Voice-Tel. Amway distributors
represent more than a third of Voice-Tel's total customer base; Amway
Corporation also has a minority interest ownership in Voice-Tel. Management
believes that one of the major advantages of the relationship is the 'built-in"
customer base when a new location is opened. The Amway distributors are given
advance knowledge of the new service and are ready to sign-up. Amway
distributors communicate with their superior and subordinate distributors
(multi-level marketing) via voice messaging. Originally, Amway distributors
exchanged messages locally (on the same platform), and as the digital network
gradually expanded, messaging became nationwide. Amway distributors have a
greater presence in suburban and rural areas than in most major metropolitan
cities. Amway distributors are also encouraged to sell Amvox voice mailboxes.
<PAGE>
The digital network was completed in 1991, allowing nationwide
messaging on the Centigram platforms.
Unlike Voice-Tel, the other two major competitors in the industry,
Octel Network Services and VoiceCom, market principally to large, multi-
location corporate accounts. To highlight some of the differences, Voice-Tel
service offers: (i) Simplicity; (ii) Inexpensive and competitive services in
comparison with RBOC services; (iii) Direct inward dial (DID); (iv) Local
access - no need for 800 usage charges; Toll savers; (v) Local sales and
local customer support; (vi) Nationwide and international messaging with
local access available; and (vii) Many individual accounts. Options include:
Pager activation; Outdial message notification; 800 service for customers who
feel they need it for their customers; and Revert to operator.
From the beginning, Voice-Tel has marketed a service that the Company
believes is simple to learn and use, and is free of complicated and expensive
"bells and whistles." Voice-Tel, (and Amway/Amvox) mailboxes are DID numbers.
The customer is assigned a seven-digit local DID telephone number. The
customer can have a white page listing in their name even though Voice-Tel is
the customer of record for a DID number. This is possible under the provisions
of the RBOC joint user group tariffs.
The mailboxes can provide: (i) Voice messaging; (ii) Call answering;
(iii) Alternate telephone numbers; (iii) Menu boxes (directing callers to
appropriate mailbox); (iv) Broadcasting; and (v) Audiotex.
Unlike users of the RBOCs' voice mail services, Voice-Tel customers are
classified neither as residential nor business accounts because the DID
mailboxes are not associated with the customers' existing telephone numbers.
The Amway distributors can be considered hybrid customers in that they
typically work from their homes on residential lines. The Voice-Tel corporate
accounts more closely resemble RBOC business customers, except that Voice-Tel
customers need to receive and send messages to other locations.
Historically, the Voice-Tel franchisees have had the greatest success
selling to small and medium-size service accounts, such as real estate offices,
and financial services. The sales emphasis is on network-based messaging rather
than simple call answering.
The Voice-Tel franchisees have targeted small to mid-size accounts
because of the need to sell within their territory. At year-end 1994, Voice-
Tel had local access in 3,485 cities in the US (46 states), and 15 cities in
Puerto Rico, Canada, Australia and New Zealand.
Voice-Tel currently has local access in approximately 3,500 domestic
cities. In these terms, Voice-Tel is the closest to having a ubiquitous
network. However, by using Centigram platforms exclusively, a caller using a
different platform cannot now message with a Voice-Tel customer, or vice versa.
A universal network, with ubiquitous access and inter-machine
operability, would offer a powerful asset for securing national accounts and
augmenting the Amway individual mailbox sales and messaging revenues. Voice-Tel
has concentrated on expansion for the past several years both domestically and
internationally. It is unknown whether or not Voice-Tel will invest in the
research and development of the necessary software to implement inter-machine
functionality.
<PAGE>
Long Distance Telephone Service
Debit cards enable a caller to make long distance toll charge calls
from any touch tone telephone at lower rates than many alternatives, and
assists users in budgeting their telephone usage. Additionally, debit cards
have instructions in various languages, and loss or theft amount is limited
to the value remaining on the debit card.
Traditional users of debit cards include military personnel, college
students and their parents, foreign exchange students, foreign visitors,
tourists, Inner-city residents, Ship employees-crew members, sales personnel,
hospital employees and patients, migrant workers, truck drivers, nursing home
patients, and business travelers.
In the United States, this segment of the industry is in its infancy
and is growing rapidly. Industry sources estimate that more than 500 companies
are making and selling debit cards, including companies such as MCI and Sprint.
Sales of the cards was approximately $65 million in 1993 and $325 million in
1994. By the first quarter of 1996, industry experts expect sales to reach
the annual rate of at least $1 billion. In 1994, the international debit card
business was estimated at $4 billion. The Japanese telephone debit card
business was estimated to be $2.5 billion in 1994. The Company anticipates
entering this market in 1996.
Other Services
Presently, the Company offers paging services of third party vendors
that it resells to its customers. The pagers are connected to the customer's
voice mailbox, so that when messages are deposited in a customer's box, they
are routed to the pager and their pager alerts them to call their voice
mailbox.
Competition
General
The voice messaging market, which includes voice mail and other voice
processing services, and the debit card market is fragmented, but highly
competitive due principally to the number of providers of telecommunications
services, certain of which have greater financial resources and more experience
than the Company. The costs and features of voice processing equipment vary
widely and the Company believes that the primary factor governing the
acceptance of a system is the ease of use or "user friendliness" of the
system.
Competition among National Network-Based Voice Message Service Providers
The Company views the voice processing industry as presently divided
into two segments. The first segment consists of companies that are voice
processing service providers of national and international network based voice
messaging services. The second segment consists of the Regional Bell Operating
Companies voice mail (call coverage) services. The first segment is considered
by the Company as its primary competition at the present time.
The Company views three entities as the national voice messaging
service providers, Octel (ONS), VoiceCom, and Voice-Tel Enterprises, Inc.
(VTE). ONS and VoiceCom have historically targeted multi-location business
accounts. Many, if not most, of their customers have a CPE voice mail
platform (or a CPE PBX with a voice mail option) at their headquarters. These
size companies use their CPE voice mail for call answering, intra-office
messaging and, perhaps, use automated attendant features. VTE's customer base
<PAGE>
does not fit the above description in that it has many single mailbox customers
in addition to corporate accounts. Voice-Tel has not historically targeted
the very large, multi-location accounts as have the other nationals.
The nationals' typical business customer has branch offices and/or
field personnel. The cost to purchase a voice mail platform can not easily be
cost justified for small branch offices. Cost aside, local branch voice mail
systems do not permit voice messaging with the home office. The nationals have
sold to large users as well as smaller to mid-size accounts. A smaller
account may not have branch offices but, rather field personnel dispersed
around the country. Some or many of the field personnel may work from their
homes.
The convenience of 800 access is apparent to field sales, service and
work-at-home personnel, and traveling executives. Local access (with telco
local calling charges) is generally less expensive than 800 usage, but requires
change at public pay phones, calling cards and/or increased charges on phone
bills in areas that do not offer flat charge calling programs. The
disadvantage of 800 access is additional cost and variable monthly usage
charges.
The Company believes that the power of the network-based message
services is the ability to message and exchange information from one location
to another regardless of time zones and other field conditions. Sales personnel
can determine inventory availability, report sales, or inquire if an order has
been shipped. Service personnel can report service problems, or request
replacement parts. Executives can receive and dispense important and timely
information with a single call.
The nationals' service offerings can be used as call answering by
forwarding callers on "busy" or "no answer" conditions from small offices or
home numbers. As for the alternative, local RBOC voice mail can be used for
simple call answering. The shortcoming of using RBOC call answering for the
mid-size to large customer is the inability to pass an important message to
headquarters for follow-up; a simple task on a network-based message service.
The ability to create a message and have it delivered to many people at
several locations, and to answer a message (perhaps attaching additional
comments to it and passing it on to other users on the network) are not
possible on today's RBOC call answering voice mail services. Prior to the new
Telecom law, the RBOCs were prohibited from message transport outside of their
local service area.
The recently passed telecom legislation in Congress will allow the
RBOCs into long-distance services. The Company expects the RBOCs, either
through the landline networks or through their wireless ventures to initiate
nationwide messaging services.
ONS, (previously Tigon), and VoiceCom have added many features and
capabilities to enhance the value of the basic voice mail services offered to
businesses. Voice-Tel has taken a different approach by offering a no frills,
easy to use, voice mail network with local access in all major metropolitan
areas throughout the contiguous United States. Voice-Tel is also the
exception to the other nationals in that the company has many single mailbox
customers. In RBOC terms, these single mailbox customers would be called
residential customers. A large percentage of Voice-Tel's customers are Amway
distributors who commonly work from their homes. Amway distributors can sell
a voice mail product called Amvox through a distribution agreement between
Voice-Tel and Amway. Voice-Tel also has many multi-location business accounts
sold by the local franchisees such as the Company.
<PAGE>
Limitations on Today's Voice Messaging Systems
The existing voice mail message networks all have limited access.
Voice-Tel currently has the greatest local access coverage with approximately
3,500 cities in the United States. However, what remains to be developed is a
truly ubiquitous network. This would include two key elements, as is the case
with fax machines: (1) Local access from any telephone number (to avoid costly
800 usage); and (2) The ability to exchange messages from one voice mail
platform to any other voice mail platform.
Directors, Executive Officers, Promoters, and Control Persons.
The following is a brief account of the business experience and the
educational background of the officers and director of the Company:
Robert C. Hackney, 45, has been a director of Net Lnnx, Inc. since
January 1, 1996 and has served as Chief Executive Officer of Communications/
USA, Inc. since inception. For nearly two decades his corporate and securities
law practice has included public and private securities offerings, mergers and
acquisitions, tender offers, and complex corporate transactions. From 1988
until 1995, Mr. Hackney was a partner in the law firm of DeSantis, Gaskill &
Hunston P. A., in North Palm Beach, Florida. He is a former securities fraud
prosecutor and state securities regulator. He also serves on the Board of
Directors of Micro Typing Systems, Inc., a company in the medical products
industry. Mr. Hackney is a member of The Florida Bar, the United States
District Court, Southern District of Florida, the United States District Court,
Middle District of Florida, the United States Court of Appeals for the Fifth
Circuit, and the United States Court of Appeals for the Eleventh Circuit. He
has lectured and authored several books in the area of corporate and securities
law, including "The Complete Guide to Mergers & Acquisitions," (1989), "An
Insider's Guide to Non-Bank Business Financing" (1990), and "Firesale! Advice
on Buying Financially Distressed Companies" (1991). Mr. Hackney is a member of
United States Senator Connie Mack's Senate Roundtable and is listed in the
Who's Who Registry.
Raul E. Balsera, 47, has been the Chief Financial Officer of Net Lnnx,
Inc. since January 1, 1996 and of Communications/USA, Inc. since April, 1995.
Mr. Balsera has been a Certified Public Accountant since 1973, starting his
career with the big eight accounting firm of Arthur Andersen & Co. From 1980
until 1984 he was the Manager of General Accounting and Contract
Administration at Sensormatic Electronics Corporation, a Florida based public
company. For two years he served as Chief Financial Officer of Bio-Analytic
Laboratories, another publicly held Florida company. Mr. Balsera spent three
additional years at Sensormatic as Director of Marketing Administration, where
he was responsible for the administrative and financial functions of the Sales
and Marketing departments. Since 1991 he has been practicing public accounting,
concentrating on corporate taxation and Securities & Exchange Commission
financial regulatory consulting. Mr. Balsera is a member of the National
Association of Tax Professionals, the Florida Institute of Certified Public
Accountants and the American Institute of Certified Public Accountants. Mr.
Balsera obtained his Bachelor of Business Administration degree in Accounting
and Management from Florida Atlantic University.
Item 6. Exhibits and Reports on Form 8-K.
Form 8-K reporting the acquisition of Communications/USA, Inc. stock
(without financial statements), was filed on January 12, 1996, and is
incorporated by reference herein.
<PAGE>
Form 8-KA reporting the acquisition of Communications/USA, Inc. stock
(with financial statements), was filed on January 19, 1996, and is incorporated
by reference herein.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
NET LNNX, INC.
..............................................................................
(Registrant)
Date: May 14, 1996
By: /s/Robert C. Hackney
(Signature)
Robert C. Hackney
President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Balance
Sheets, Statement of Operations & Retained Earnings, Statement of Cash Flows and
Notes thereto incorporated in Part I., Item 1. of this Form 10-Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
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0
0
<COMMON> 170,000
<OTHER-SE> 1,989,374
<TOTAL-LIABILITY-AND-EQUITY> 2,060,837
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<CGS> 11,172
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<OTHER-EXPENSES> 137,795
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</TABLE>
