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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995
( ) 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 0-17158
AMNEX, INC.
(Exact name of registrant as specified in its charter)
New York 11-2790221
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
101 Park Avenue, New York, New York 10178
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (212) 867-0166
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of class)
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 .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.( )
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days: $52,735,213 as of March 27, 1996
(APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 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 REGISTRANTS)
Indicate the number of shares outstanding of the registrant's common
stock, as of the latest practicable date: 19,532,270 shares outstanding as of
February 29, 1996
DOCUMENTS INCORPORATED BY REFERENCE
None
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Except for those paragraphs which are indicated as revisions, all
disclosures herein are as of the original filing date of the Annual Report on
Form 10-K.
PART I
Item 1. BUSINESS
(a) General Development of Business.
AMNEX, Inc. (the "Company"), through its wholly-owned
subsidiaries, American Network Exchange, Inc. ("AMNEX"), Crescent Public
Communications Inc. ("Crescent"), American Hotel Exchange, Inc. ("AHE"), and
Hospital TeleServices, Inc. ("Hospital TeleServices"), provides a variety of
telecommunications services for operator-assisted ("0+") and direct-dialed long
distance ("1+") telephone calls transmitted throughout the Unites States and to
international points.
In October 1995, the Company acquired Crescent Communications,
Inc., a New York-based private pay telephone route operator and customer of
AMNEX (see Items 1(c) and 13(a) hereof).
In December 1995, the Company underwent an internal
reorganization designed to enable it to more efficiently focus on its different
lines of business. The new business units reflect the Company's plan to shift
its focus from its core operator services business to higher margin
telecommunications service transactions and integrated (hardware and
telecommunications) services. The reorganization is also intended to enable the
Company to exploit market niches created by the passage of telecommunications
reform legislation in early 1996 (see Item 1(c) hereof). The Company intends to
continue to seek consolidation opportunities for its core business.
Reference is made to Item 7 hereof for a discussion of a
certain Preferred Share financing consummated by the Company during 1995.
The Company is a New York corporation which was organized on
March 15, 1985. Its principal executive offices are located at 101 Park Avenue,
New York, New York 10178 (telephone number (212) 867-0166) (see Item 2 hereof).
(b) Financial Information About Industry Segments.
Not applicable.
(c) Narrative Description of Business.
Industry Background
The long distance transmission and operator service provider
industries evolved principally as a result of the new competitive opportunities
created by the divestiture of American Telephone and Telegraph's ("AT&T") Bell
Operating Companies ("BOCs"). As discussed under "Government Regulation-Recent
Federal Legislation," the Telecommunications Act of 1996 (the "1996 Act") has
further substantially accelerated the development of local and long distance
competition.
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In 1981, AT&T removed tariff restrictions that prohibited
resale and sharing of Message Telecommunications Service ("MTS") and Wide Area
Telephone Service ("WATS"). This led to an explosion of new entrants into the
long distance business primarily as resellers. In 1982, the Department of
Justice ("DOJ") and AT&T agreed to the terms of the Modification of Final
Judgment ("MFJ") under which AT&T divested itself of all its BOCs. The BOCs were
organized into seven separate regions and seven Regional Holding Companies
("RBOCs") were created. The BOCs, and other independent companies which provide
local telephone service, are characterized as local exchange carriers ("LECs").
At divestiture, the United States was divided into 197 Local
Access Transport Areas ("LATAs"). AT&T was given the right to handle interLATA
long distance service and was permitted to handle intraLATA long distance
service where allowed by the applicable state regulatory authority. Conversely,
the BOCs were given the right to handle intraLATA service, but were prohibited
from the interLATA market. Such differentiation was substantially modified by
the 1996 Act (see "Government Regulation-Recent Federal Legislation").
The MFJ also required the BOCs to provide all interexchange or
long distance carriers ("IXCs") with access to their local telephone exchange
facilities which is "equal in type, quality and price" to that provided to AT&T.
This was accomplished through the filing of access tariffs at the Federal
Communications Commission (the "FCC") and at state public utilities commissions.
Under these access tariffs, all IXCs, including AT&T, pay charges to the LECs
for access to local telephone lines at both the originating and terminating ends
of all long distance calls. Access charges represent the single largest
component of most IXCs' cost of service. The BOCs, and subsequently all other
LECs, also were required to conduct a presubscription process allowing business
and residential consumers to select their long distance carrier. The 1996 Act
continues these equal access obligations.
A June 1984 decision of the FCC permitted the sale and
installation of privately owned and operated pay telephones, known as COCOTs.
Such decision ended the 100 year monopoly of the LECs in this area, and paved
the way for the development of the independent payphone industry. LECs were
required to provide dial tone connections for the COCOT phones and,
subsequently, blocking and screening services intended to deter fraudulent usage
of such phones. As a result of the passage of the 1996 Act and its
nondiscrimination provisions, the independent payphone industry is expected to
achieve parity in cost structure with LEC-owned payphones (see "Government
Regulation-Recent Federal Legislation").
An October 1988 federal district court (the "Court") ruling
required the BOCs, and subsequently the GTE Operating Companies ("GTOCs"), to
conduct another presubscription process for the public pay telephones they
owned. Since such phones are owned by BOCs and GTOCs, the Court determined that
the owner of the premises on which the public pay telephone was located (the
"Site Owner") should select the long distance service provider. Several non-BOC
LECs have introduced similar programs, including Site Owner selection of the
long distance service provider.
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The 1996 Act provides for the continued participation of the Site Owner in the
selection process and allows for the Company to continue its efforts in this
current core business.
The Court also ordered that, commencing January 1, 1989, the
BOCs provide all IXCs, including operator service companies, with the same
calling card validation data which they furnish to AT&T, on the same terms and
conditions as the BOCs furnish that data to AT&T. The FCC subsequently imposed
similar obligations on LECs other than the BOCs, thus permitting competitive
operator service providers to offer a full range of operator services. Various
provisions of the 1996 Act continue these obligations.
In May 1990, the Court required the BOCs to provide, by May
1991, equal access for long distance calls which are paid for by coins deposited
in their public pay telephones ("1+ Coin"). To this end, the BOCs were directed
to file equal access plans with the DOJ and the 1984 waiver under which such
calls were being routed automatically to AT&T was to be terminated within one
year. Under the terms of the equal access plans, AT&T was permitted to continue
to accept 1+ Coin service directly from the public pay telephones presubscribed
to other interexchange carriers, but only until such time as the presubscribed
carrier designated either itself or another carrier to handle the traffic. Based
on this ruling, AMNEX is entitled to receive the 1+ Coin sent paid traffic from
all public pay telephones for which it provides "0+" services and any other IXC
may designate AMNEX (instead of AT&T) to carry the 1+ Coin traffic originating
at public telephones for which it is the presubscribed carrier. This market
niche, which is currently being exploited by AMNEX as it deploy its 1+ Coin
service nationally, will continue to be available under the 1996 Act.
Equally significant, the 1996 Act, as well as recent actions
on both the federal and state levels, will eventually open up the local exchange
(intraLATA) market to full competition, both in the provision of originating and
terminating access for competitive IXCs such as AMNEX and in the provision of
local exchange services in competition with the LECs. Although these initiatives
are still in progress, the FCC has already ordered expanded interconnection to
LEC interstate switched and special access services. More than 18 states already
allow facilities-based local service providers to offer some form of both
intraLATA toll and local exchange services, including basic local switched
services in some cases. As a result of the 1996 Act, all states will be required
to adopt rules establishing local competition and the LECs will be required to
open their networks to competitors, including the implementation of intraLATA
presubscription (1+ intraLATA equal access) (see "Government Regulation-Recent
Federal Legislation").
Organization and Structure; Business Direction
The Company, through its operating subsidiaries, is a provider
of telecommunications services for "0+" and "1+" calls transmitted throughout
the United States and to international points. Approximately 90% of the
Company's revenues for the fiscal year ended December 31, 1995 were derived from
its provision of operator services at public and private pay telephones and 10%
of revenues was derived from its provision of other services.
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During 1995, the Company took certain steps to shift the focus
of its future direction away from its core operator services business. The
Company determined that, due to the increasing incidence of "dial around"
activity (see "Competition - AMNEX"), it should begin to provide its various
services on a wholesale basis with a reduced dependence on an outside sales
force. The Company believes that such strategy eventually will result in it
being viewed as a transaction provider, as opposed to an operator services
company, and, although its revenue growth may be adversely affected, profit
margins should improve.
In addition, during 1995, the Company determined to focus its
efforts to a greater degree in other markets, such as 1+ Coin, which generate
lower revenue per call than operator services, but have higher profit margins.
To better manage this transition, in December 1995, the
Company reorganized its operations into three business units to carry out its
plans for 1996: Telecom Services, Integrated Services, and Network Services.
Each of the units, which are discussed below, has profit and loss responsibility
for specific business operations of the Company. The Telecom Services Unit,
through AMNEX, provides operator services, long distance transmission services
and travel card services to telephone users. In addition, through Hospital
TeleServices, the unit provides billing services to hospitals. The Integrated
Services Unit, through Crescent and AHE, owns and operates private pay
telephones and provides telecommunications products and management services to
the hospitality industry. The Network Services Unit, through AMNEX, provides the
Telecom Services and Integrated Services Units with cost effective network
components and also sells transmission services to other IXCs. Through the
Network Services Unit, AMNEX also provides 1+ Coin services and seeks to exploit
certain wireless technology.
Business Units
Telecom Services Unit
Operator Services
AMNEX, in fulfilling its Telecom Services Unit function,
provides 24 hour, seven- day-a-week live and automated operator services for
telephone calls placed over its transmission facilities. These services allow
transient users at pay telephones and at locations such as hotels, motels,
condominium developments, health care institutions, educational institutions and
correctional facilities to complete calls on a collect, third party or
person-to-person basis, or to charge such calls to a commercial credit card or
telephone company calling card.
AMNEX's switching system receives all "0" dialed calls from
phones subscribed to its network and completes the calls over a state-of-the-art
leased communications network (see "Network Services-Switching Equipment and
Network"). AMNEX's equipment and personnel at its switch and operator center
sites furnish all operator functions, both live and automated, necessary to
complete and bill a particular call. In providing such services, AMNEX utilizes
Signaling System
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Seven ("SS7") which speeds call processing for its customers. AMNEX's ability to
offer customized greetings, such as through its bilingual operator staff,
further enhances its service offerings. AMNEX historically has provided operator
services through its own employees; however, it currently also routes some of
its "0+" calls to a Bell Atlantic operator center as a means of improving
operating efficiencies. AMNEX has retained an unaffiliated third-party to
validate billing numbers prior to call completion (see "Revenues; Billing
Arrangements").
Direct Dial
As a long distance provider, AMNEX solicits small to
medium-sized businesses, pay phone owners, hotels and hospitals and competes
with providers such as AT&T, MCI, U.S. Sprint and a number of regional carriers.
AMNEX's product offerings are competitively priced, with higher volume and
long-term contract customers receiving greater discounts.
AMNEX's MTS services include both flat rated and mileage
sensitive rate plans and can be accessed on a "1+" basis, or by dialing 10XXX,
950 or 800 numbers. In lieu of call by call dialing, 950 and 800 access can also
be achieved through either the installation of a high speed dialer or the
programming of other customer premise equipment. Such process allows calls to
access the AMNEX network via its 10XXX, 950 or 800 numbers. The customer's
multi-digit security code is then passed on to a local AMNEX switch for call
clearance. AMNEX's 800 service allows AMNEX customers to offer inbound toll free
calling to their own customers.
Telephone Travel Card
AMNEX offers an enhanced travel card service marketed as the
AMNEX Edge(R), which has been designed to meet the needs of the business and
non-business traveler. The card allows the customer to access the features and
functionality of the AMNEX network from any touch tone phone by dialing an 800
number. Once the authorization code associated with the travel card has passed
validation, the customer can select from a menu of basic and enhanced calling
features, including direct dialed calling, conference calling, message delivery
service and an array of informational services. Live operator assistance is also
available, if required by the caller. Various levels of fraud protection and
management summary reports are also offered to enable the user to maintain cost
control of calling card expenses. AMNEX has recently signed co-marketing
agreements with a regional American Automobile Association (AAA) and a heart
association pursuant to which Edge(R) cards will be distributed to the
associations' members.
Hospital TeleServices
During 1995, Hospital TeleServices began to market a billing
service specifically for the hospital market. The service provides a cost
effective and reliable way for the hospital to bill patients for daily telephone
and television rental charges, which has a high bad debt history. AMNEX, through
its existing billing agreements, has arranged to bill and collect these charges
from the LECs by having them place the transactions on the patient's home
telephone bill. Such billing
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process has resulted in substantially higher rental charge collection for
Hospital TeleServices customers. Although Hospital TeleServices has marketed
this service on a limited basis, due to anticipated high profit margins, it
expects to substantially increase its efforts in this regard during 1996.
Revenues; Billing Arrangements
AMNEX's revenues consist of flat fees for the use of its
operator services and per minute of usage charges for the use of its network
services. AMNEX's operating expenses include the commissions payable to its
agents, dealers and Site Owners, the transmission charges of the LECs and IXCs,
validation, billing and collection charges and operator costs.
AMNEX contracts with two unaffiliated third party billing
agents, OAN Services, Inc. ("OAN"), and Zero Plus Dialing, Inc. ("ZPDI"), to
perform billing on its behalf. AMNEX rates calls carried over its network and
forwards the rated call records to the billing agents. The records are then
processed and forwarded to the appropriate billing LEC. The billing LECs collect
the amount due from the end user and remit payment to the billing agents, which,
in turn, remit payment to AMNEX. Such payment to AMNEX is net of a billing and
collection fee charged by the LECs, as well as a provision for uncollectible
accounts and a per transaction fee for the billing agent's services.
AMNEX primarily uses its own in-house billing system and
personnel to bill and collect calls made by its 800, travel card and direct dial
customers. Such system is designed to bill customers with recurring monthly
services provided by AMNEX for direct dial and travel card services and is not
transferable to the transient users of AMNEX's operator-assisted services.
Marketing and Customers
AMNEX's operator services are being marketed to private
payphone owners and Site Owners, as well as to hotels, motels, condominium
developments, health care institutions, educational institutions and
correctional facilities, primarily in areas where it has established network
facilities. AMNEX currently has originating access available in part or all of
30 of the 48 contiguous states plus the District of Columbia, Hawaii and Puerto
Rico. The Company has arrangements in place to provide its services on a
nationwide basis, by using other carriers, such as MCI, to originate calls in
areas where AMNEX does not have its own facilities. Such standard practice in
the "1+" industry allows AMNEX to provide its own services where technologically
and economically feasible and to otherwise resell the facilities of other IXCs.
AMNEX markets its services through a nationwide network of
independent sales agents and dealers with whom it has entered into contractual
arrangements as well as through its own small direct sales force. Such
arrangements with agents and dealers afford them the opportunity to receive
commissions based on a percentage of revenues generated by the calls routed over
AMNEX's network by the agent or dealer's subscribers. Due to intense competitive
pressures, the amount of
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commissions paid by AMNEX, as a function of revenue, had been increasing. As
indicated above, in order to improve profit margins, in 1995, AMNEX began to
reduce its dependence on independent sales agents and dealers. Accordingly,
operator services are increasingly being marketed by AMNEX directly to premise
owners and/or businesses under compensation arrangements that are less costly
than those offered to agents and dealers.
Since a majority of AMNEX's subscribers are private payphone
owners and Site Owners, revenues are affected by seasonal variations to
different degrees. Many of the payphones serviced by AMNEX in the Southeast
produce substantially higher call volumes in winter months than at other times
during the year, while the payphones located in the Northeast and Midwest
produce their highest call volumes during the summer months. In an effort to
reduce the effects of seasonality and properly utilize network capacity, AMNEX
has focused its marketing efforts on obtaining a better geographic balance for
its payphone business, and increasing its hospitality and condominium customer
bases, which locations are less affected by seasonality.
AMNEX also markets its services through participation in trade
shows and advertisements in trade publications.
During the fiscal year ended December 31, 1995, AMNEX's
customer, National Telecom U.S.A., Inc., and its affiliate, The Keystone
Corporation, collectively accounted for 41% of the Company's revenues.
Integrated Services Unit
The Integrated Services Unit is developing the Company's
premise equipment and services business. The unit seeks to integrate the
delivery of the hardware, local dial tone, telecommunications management and
calling services required to service the needs of specific vertical markets.
Currently, the Integrated Services Unit is pursuing two markets: the hospitality
business (through AHE) and private pay telephones (through Crescent).
American Hotel Exchange, Inc.
Started in 1994, the Company's AHE subsidiary has shown steady
growth. AHE was the first attempt by the Company to secure long term control of
telecommunications services at hotel and other hospitality properties. AHE
supplies the equipment, telecommunications management and calling services for
all of the hotel property's needs on an exclusive basis. By controlling the dial
tone, AHE can secure the telecommunications revenue from its customer's
locations for various business units of the Company. Additional services,
including payphones and debit cards, also can be deployed at these hotels, if
desirable.
AHE has primarily marketed its services to small to
medium-sized hotels. Based upon AHE's success to date, it intends to expand its
marketing efforts nationally over the next two years, and target additional
related market segments. Possible new markets could include hospitals,
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universities and military bases. AHE purchases some of the services it sells
from the Network Services Unit, and receives commissions from the Telecom
Services Unit, on a competitive basis. No governmental regulation is currently
applicable to AHE's operations.
Crescent Public Communications Inc.
In 1995, the Company established Crescent in order to acquire
private pay telephone routes and thus gain control of the location's
telecommunications services and reduce the costs associated with paying
additional commissions to the route operator. In October 1995, the Company,
through Crescent, acquired Crescent Communications, Inc., a New York-based COCOT
route operator and customer of AMNEX. The acquisition included approximately
1,850 COCOT telephones in the New York metropolitan area. Crescent is actively
seeking to acquire additional COCOT routes (see Item 13(a) hereof).
In addition to growth through acquisitions, Crescent regularly
identifies and evaluates new sites for COCOTs. Typical locations for COCOTs
include hotels, motels, health care institutions, airports, educational
institutions, dining establishments, office and government buildings, and retail
stores and shopping malls. Crescent seeks to enter into a long-term location
agreement (generally 5 to 10 years) with the business owner or site manager
pursuant to which the location owner would supply the space and electricity for
the COCOT and would be entitled to receive a commission based upon phone
utilization. Crescent installs, maintains and repairs the equipment, collects
the coins from the phone coin vaults and pays phone line charges. Substantially
all of the COCOTs serviced by Crescent are owned or leased by it with the
balance being owned by various non-affiliated entities.
As a COCOT owner, Crescent derives commission revenues from
the long distance and operator-assisted, non-coin calls made from its phones.
AMNEX provides its operator-assisted and interexchange services at Crescent's
phones. Crescent's services are marketed through an internal sales force as well
as through independent representatives.
Network Services Unit
The Network Services Unit provides both the Integrated
Services and Telecom Services Units with the cost effective network components
they each need to provide their individual products. Additionally, the Network
Services Unit sells its products to other IXCs.
Switching Equipment and Network
AMNEX is a switched reseller, whose network includes
Stromberg-Carlson Digital Central Office switches located in Orlando, Florida
and New York, New York. The interconnectivity of the network's switches, coupled
with AMNEX's advanced SS7 operating technology, ensure uniformity and a high
grade of service. AMNEX has back-up systems which, in the event of a power
outage or equipment malfunction, provide several layers of redundancy and
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route diversity to continue call processing. These systems include back-up
battery power at both switch locations and a back-up generator system at the
operator center. AMNEX believes that its network flexibility, and the low
incremental cost to expand capacity, allow it to adequately service its
customers throughout the country. The maintenance and repair of the AMNEX
network is handled by highly trained and experienced technicians at each AMNEX
switch site. The technicians on site are coordinated and supported by AMNEX's
Network Control Center ("NCC") personnel in Orlando, six days a week between 6AM
and midnight, and are on call 24 hours a day, seven days a week, to handle
transmission, equipment, and switching problems. The NCC is also capable of
contacting AMNEX's underlying carriers for trouble resolution at any time.
AMNEX's switching facilities are engineered for an effective
grade of service of P.01, which means that 99.9% of all calls are completed in
the busy hour. AMNEX's operator center complies with all industry standard
answer time requirements, i.e., 90% of all operator-assisted calls answered
within 10 seconds during the busy hour, or an average answer time of 2.5
seconds. AMNEX also utilizes a Bell Atlantic operator center located in
Pennsylvania pursuant to the terms of an effective Bell Atlantic tariff. This
arrangement gives AMNEX yet another level of redundancy and reduced operating
costs.
AMNEX's ability to provide its service in a cost-efficient
manner also depends upon its ability to purchase digital fiber optic and other
state-of-the-art network facilities from other common carriers, either on a bulk
or per minute basis. AMNEX connects with these carriers via dedicated digital
facilities and retains the flexibility to re-route traffic to obtain the least
costly and most efficient path available. Multiple connections and redundancy of
facilities ensure continuing service in the case of a major facility outage or
the failure of one underlying carrier's network.
1+ Coin Service
In 1995, AMNEX entered into agreements with several RBOCs
which allow AMNEX to process interexchange coin calls placed from any LEC
payphone at which AMNEX is the presubscribed interLATA carrier. The agreements
allow AMNEX to provide these same services at phones served by other IXCs who
designate AMNEX as their "1+" coin carrier. AMNEX expects to have similar
agreements in place with the other RBOCs by the end of 1996.
In the second quarter of 1995, AMNEX began to deploy its 1+
Coin service for interLATA calls, a service which previously only AT&T provided.
AMNEX's strategy in this market niche has been to offer this service to those
IXCs that currently control the site where LEC pay telephones are located. The
Company has already signed definitive agreements with the two largest operator
service providers in the LEC pay phone market. Agreements are currently being
negotiated with the other providers in this market, with the goal that AMNEX's
1+ Coin service will be used by substantially all IXCs, other than AT&T, by the
end of 1996.
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Wireless Technology
In late 1994, the Company obtained the exclusive right to
market a new wireless communications technology throughout Florida, parts of the
Caribbean and the Metropolitan New York area referred to as LATA 132 (New York
City, Long Island, and parts of Westchester). This technology could dramatically
improve the throughput of existing telephone facilities and is being developed
to operate at line speeds from 64 Kb/s to 45 Mb/s over wire or wireless
facilities (i.e., at the DSO, DS1 and DS3 levels). The technology uses a noise
sustain approach to transmit signals over frequencies that are unusable by
conventional transmission systems and is virtually immune to noise, weather
conditions and other interference. In addition to its uses as an overlay to
existing wire infrastructures, the technology can be used on a wireless basis in
many of the same applications. It is expected that this technology will have
applications in both the interexchange and local exchange markets for
transmission of voice and data to the home/office, and the delivery of enhanced
voice, data and video services over twisted pair wire. In the event of
successful completion of testing, AMNEX expects to utilize this technology to
reduce certain of its fixed transmission costs and to enter new
telecommunications markets. No assurances can be given as to the efficacy or
commercial viability of the technology and AMNEX does not expect that the
license it holds will generate any revenues in 1996. AMNEX has no ongoing
financial obligations related to the development of this technology.
Competition
AMNEX
AMNEX experiences formidable competition from AT&T, which
dominates the long distance and operator service businesses, as well as from
MCI, U.S. Sprint, LDDS and various other third tier carriers providing "0+"
services either as an adjunct to their "1+" business or as their primary
business.
In 1995, after several intermediate steps, the FCC finally
declared AT&T to be a non- dominant carrier, thereby granting it a wide range of
pricing, tariff and operational flexibility. However, AT&T still does not have
as much flexibility as is granted to non-dominant resale carriers such as AMNEX
(see "Government Regulation - Federal Regulation").
AT&T and others currently provide long distance operator
services on calls from BOC and GTOC-owned pay phones and have, and can be
expected to retain, a significant share of this market, notwithstanding the
ability of the Site Owners to select a new operator service provider as
described previously and the introduction of intraLATA competition. Carriers
other than AMNEX and AT&T are also free to enter the 1+ Coin market, although
AMNEX does not anticipate that they will expend the capital and strategic
resources necessary to enter this market niche.
In addition to AT&T, the LECs have significantly greater
resources and experience than AMNEX and may find opportunities in the operator
services business that would adversely
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affect AMNEX's growth potential. Several RBOCs have filed tariffs for and begun
offering their operator services on a wholesale basis to other operator service
providers. The 1996 Act allows them to enter the interLATA marketplace over time
(see "Government Regulation-Recent Federal Legislation") and, subject to FCC
review, to participate in the selection of the interLATA and intraLATA carrier
at their own payphones. The BOCs can be expected to aggressively market their
operator services in competition with AMNEX and other providers. In addition,
most major IXCs, including MCI and U.S. Sprint, and certain major non-BOC LECs
have entered the operator services business. Further, AMNEX is aware of numerous
other companies engaged in the operator services business, either directly or
through other entities, some of which have significantly greater resources than
AMNEX.
Finally, some IXCs, notably MCI and AT&T, have introduced
specialized operator service products such as 1-800-COLLECT and 1-800-CALL ATT
which compete with a portion of AMNEX's operator services offerings. AMNEX
believes that these "dial around" services have had an adverse impact on its
revenues; however, the payphone operator is entitled to receive "dial around"
compensation from the long distance service provider on certain types of calls,
thus ensuring the operator a revenue stream from its telephones (see "Government
Regulation-Federal Regulation"). This "dial around" compensation will be
expanded in the future to include more types of calls (see "Government
Regulation-Recent Federal Legislation").
AMNEX believes that the primary area of competition with AT&T
and others relates to the commissions and surcharges paid to Site Owners or
lessors of telephone locations for interstate calls, the enhanced services
available to users at such locations, the quality of service provided and the
rates charged to end-users (see "Government Regulation").
Crescent
Crescent competes primarily with NYNEX in the identification
of new sites for COCOTs. However, a number of other companies also market
competitive services in Crescent's current market area. Crescent believes that
the primary area of competition relates to the commissions paid to the business
owners and the quality of service provided.
Government Regulation
Federal Regulation
AMNEX
As discussed under "Recent Federal Legislation," the 1996 Act
will require the FCC to implement no less than 50 different rulemaking
proceedings. Together with the required state proceedings, these initiatives
will define the regulatory structure of the industry for the future, shifting
the focus of regulators from regulation of monopolies to the creation of the
predicates for
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full and fair competition in all markets, local and long distance. For the most
part, these initiatives continue rather than reverse the direction already set
by the FCC and many state commissions.
Long distance and operator service companies, such as AMNEX,
are considered interstate common carriers by the FCC and are, therefore, subject
to the jurisdiction of the FCC under the Communications Act of 1934 (the
"Communications Act"), as amended by the 1996 Act. Under the Communications Act,
long distance and operator service companies must charge just and reasonable
rates and cannot engage in unreasonable practices or unreasonable
discrimination. Commencing in 1983, the FCC substantially deregulated the
interstate activities of non-dominant interexchange resellers, such as AMNEX.
Under this FCC regulatory scheme, no tariff filing requirements were in effect
for domestic "1+" services. However, a November 1992 appeals court ruling
invalidated the FCC's prior policy and re-instituted the requirement that the
"1+" services of all carriers be tariffed. This decision was affirmed by the
United States Supreme Court in 1994. At its March 21, 1996 meeting, the FCC
proposed to utilize its new forbearance authority (see "Recent Federal
Legislation") to reinstate the prior policy. The FCC has always required the
filing of tariffs for international service but has recently proposed to
streamline such requirements by, among other things, allowing tariffs to become
effective on one day's notice. While AMNEX has the requisite tariffs on file and
is in compliance with the pertinent tariff requirements, the proposed FCC
actions will have a positive effect on AMNEX by reducing the regulatory
requirements with which it must comply.
On October 17, 1990, the Telephone Operator Consumer Services
Improvement Act of 1990 ("TOCSIA") was signed into law. TOCSIA amended the
Communications Act by imposing a number of requirements on all carriers
providing interstate operator services, including AMNEX, AT&T and the LECs.
These requirements include, among other matters, the identification of the
operator service provider and the end user's right to access other carriers. The
legislation further required the filing of an informational tariff at the FCC.
In November 1992, the FCC advised Congress of its determination that no further
regulation of the operator service industry, including rate regulation, was
necessary at this time. In March, 1996 the FCC adopted some additional rules and
clarified others with regard to the provision of interstate operator services.
AMNEX was already in compliance with such requirements and expects the new rules
to have no material affect on its operations. AMNEX believes that it is in full
compliance with both TOCSIA and the FCC's rules.
In 1991, the FCC also initiated a proceeding to determine the
obligations of LECs (other than the BOCs and GTOCs) to provide billing and
validation data to carriers other than AT&T. In April 1992, the FCC concluded
that such information, including the information associated with some calling
cards previously claimed to be proprietary to AT&T, should be made available to
competitive carriers, including AMNEX. As they relate to validation, such
services are further required to be provided on a tariffed basis. The FCC also
determined that all LECs must stand ready to enter into mutual card honoring
agreements with all requesting IXCs if they enter into such agreements with one
IXC. LECs must also provide certain billing name and address information (but
not necessarily billing and collection) for their calling cards.
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The FCC has also concluded a proceeding investigating the
status of the proprietary AT&T Card Issuer Identifier ("CIID") calling cards.
These cards contain an account number that cannot be validated or billed by
carriers other than AT&T. However, since customers can use this card by dialing
"0+", carriers other than AT&T receive such calls from phones on which they are
the presubscribed carrier. In November 1992, the FCC decided not to require AT&T
to permit validation and billing of such cards. Instead, it required AT&T to
take certain remedial steps and proposed that operator service providers such as
AMNEX be compensated for the costs they incur in handling "0+" dialed CIID card
calls which reach their networks in error. This compensation has had a positive
effect on AMNEX's operations to the extent it has allowed AMNEX to recover
previously unrecoverable operating expenses.
Consideration of the terms and conditions under which the
above billing and validation obligations are to be fulfilled and how they will
apply to new entrants in the local market is expected to be included in one or
more proceedings initiated by the FCC as a result of the 1996 Act.
As discussed under "Industry Background," in October 1988, the
Court held that Site Owners should be permitted to select the presubscribed IXCs
for all calls originated by dialing "0" from such telephones. However, some
industry members are supporting adoption of a new system of billed party
preference whereby all calls of the type handled by AMNEX would be routed
directly to the IXC of the billed party, and not through operator service
companies. In 1992, 1994 and again in 1995, the FCC proposed to adopt a system
of billed party preference for both BOC and non-BOC phones and sought public
comments on a variety of issues related to its implementation and costs. The
majority of parties filing comments opposed the implementation of billed party
preference, citing its high costs, long (2-3 year) implementation time,
technical drawbacks, consumer inconvenience and potential network disruptions as
factors which outweighed any perceived benefits. Although the matter is still
pending before the FCC, given the age of the proceeding, the record before it
and the new mandate of the 1996 Act, the FCC is not expected to adopt billed
party preference. However, there can be no assurances in this regard and such
proposal, if adopted, would have a material adverse effect on AMNEX's operator
service business.
In 1995, the FCC began several new proceedings relating to the
provision of operator services. In February 1995, the National Association of
Attorney Generals filed a Petition for Rule Making with the FCC, proposing
additional branding disclosures by some operator service providers. This
disclosure would inform the consumer that the call may not be carried by their
regular phone company and to provide a number they could call to find out how to
access their carrier of choice. The FCC has sought comment on this petition but
has not proposed any rules adopting its suggestions. Comments on this petition
have been consolidated with comments sought on an ex parte filing made by a
broad industry coalition proposing that the FCC adopt a rate ceiling on operator
assisted calls. The proposal would adopt a benchmark rate on a simple per minute
basis, without regard to time of day, distance or whether the call was handled
on an automated or live basis, or made with a calling card or collect. The
petitioners propose this ceiling as an alternative
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to billed party preference, contending that it could be implemented more quickly
and much less expensively.
AMNEX believes that adoption of the rate ceilings proposed by
the coalition would not have an adverse impact on the overall profitability of
its operator services business. However, there can be no assurances that the FCC
will not adopt rate cap levels different from those proposed by the coalition
which would adversely affect the profitability of AMNEX's interstate operator
services. Similarly, there can be no assurances that the FCC will not adopt
additional disclosure requirements which would adversely affect the volume
and/or profitability of AMNEX's interstate operator services.
The FCC is also engaged in a comprehensive review of the rate
structure for, and pricing of, interstate access services. In September 1992,
the FCC adopted an interim plan, which plan is still in effect. While this
structure has resulted in an increase in AMNEX's access costs, AMNEX believes
that it has been able to minimize these increases through network
reconfigurations designed to optimize network efficiencies and take advantage of
available volume discounts. AMNEX believes that the overall impact this
structure on its access costs is within the third tier average percentage impact
estimated by the FCC and that this structure has not had a material adverse
impact on its operations, network costs or profitability. However, there can be
no assurances that the FCC will not adopt a permanent rate structure which is
different than the interim structure and which will result in a substantial
increase in the access costs paid by AMNEX and other competitive carriers. The
FCC has indicated it expects to conclude its review of the access rate structure
in tandem with its other proceedings under the 1996 Act.
In 1991, the FCC initiated a proceeding to adopt rules
governing competitive carrier interconnection to LEC interstate special and
switched access services. In 1992, the FCC mandated special access
interconnection for competitive access providers, including physical co-location
with LEC facilities. The requirement for physical co-location was overruled by
an appeals court in 1994, but the requirement for virtual interconnection
remains. In August 1993, the FCC adopted rules opening LEC switched transport
services for competition. These rules mirror the rules adopted for special
access services. The FCC is also considering a proposal to allow competitive
tandem switched transport services. These FCC actions have enabled competitive
carriers to connect to the BOCs' local networks to provide originating and
terminating interstate access services in competition with the BOCs, and local
exchange service where authorized by the relevant state commission. This
development has had a positive impact on AMNEX's operations. Proceedings
required by the 1996 Act, as well as the market entry requirements contained
therein, are expected to hasten the creation of such interconnection
arrangements.
Crescent
Current federal regulations require that COCOT owners offer
unrestricted access from their phones by unblocking all major forms of access to
other operator service providers (10XXX, 950-XXXX and 1-800-NXX-XXXX).
Additional regulatory requirements include provisions which
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require the posting of certain consumer information and the prompt routing of
emergency calls, and prohibit the payment of commissions by operator service
providers at locations which block unrestricted access. The FCC has also adopted
rules pursuant to which COCOT owners are entitled to receive compensation for
"dial around" calls that are made to other operator or long distance service
providers through the dialing of an access code. This decision has had a
positive effect on Crescent. Moreover, the provisions of the 1996 Act regarding
pay telephone services (see "Recent Federal Legislation") should have a positive
impact on Crescent's operations by reducing access and local line costs,
increasing the number of calls for which compensation is available and, to the
extent the LECs increase their coin rates as a result of the implementation of
the new requirements, allowing Crescent to charge higher rates for its services.
Recent Federal Legislation
The 1996 Act, signed into law on February 8, 1996, represents
the most significant reform of the Communications Act undertaken by Congress
since the original law was adopted in 1934.
First and foremost, the 1996 Act provides for the opening of
the intraLATA market to full competition. The new law prohibits state or local
requirements that may have the effect of prohibiting or precluding competitive
entry of a telecommunications service provider into the local market. The states
may continue to regulate service providers in a competitively-neutral manner
(consistent with the 1996 Act's provisions) to protect public safety and
welfare, and to manage public rights of way. The FCC is given specific authority
to preempt any state or local action not in conformity with this requirement.
The FCC has six months from enactment to promulgate the
interconnection and access rules necessary to open the local market to
competition. Each state may continue to adopt and enforce its own local
interconnection and access rules, so long as the rules are not inconsistent with
the 1996 Act. The statute relies on negotiated interconnection and access
agreements between incumbent LECs and new entrants, but maintains a role for the
states to approve interconnection agreements and arbitrate settlements if so
requested.
The 1996 Act imposes several specific requirements on all LECs
in order to achieve fair and equitable interconnection and access for all
competitors. These requirements include: (1) restrictions on resale prohibition;
(2) a duty to provide number portability (i.e., the ability of users to retain
their current telephone numbers when changing local service providers if they
continue to be served by the same exchange); (3) dialing parity between
providers so that all entities may have non-discriminatory access to, among
other things, telephone numbers, directory assistance, operator services, and
911 emergency services, with no unreasonable dialing delays; (4) unrestricted
access to poles, ducts and rights-of-way; and (5) reciprocal compensation
arrangements for the transport and termination of traffic.
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In addition to the above obligations, the incumbent LECs are
further required to: (1) negotiate interconnection agreements in good faith; (2)
provide interconnection at any technically feasible point that is equal in
quality to that provided to the LEC itself and at rates, terms and conditions
that are cost-based and non-discriminatory; (3) provide non-discriminatory
access to network elements on an unbundled basis in a manner that enables the
requesting provider to combine network elements to provide telecommunications
services (network elements are to be priced in accordance with state commission
approved rates which are cost-based, non-discriminatory, and which may include a
reasonable profit); (4) resell local services to telecommunications service
providers at wholesale rates which reflect the LECs "avoided" costs of
marketing, billing, collection and other related LEC expenses; (5) provide
reasonable public notice of changes in information necessary for the routing and
transmission of services over its facilities; and (6) offer co-location of
equipment necessary for interconnection or access, at just, reasonable and
non-discriminatory rates.
The 1996 Act also now enables RBOCs to enter interLATA
markets, within and outside of their existing service regions, as discussed
below.
The RBOCs were authorized to begin providing interLATA
services in markets outside of their current regions upon enactment of the law.
The RBOCs must still obtain state authority to provide intrastate, interLATA
services in the same way as any other prospective competitors, including AMNEX,
must.
Before providing in-region services, the RBOCs must first
overcome a number of legal and regulatory hurdles. At a minimum, an RBOC must
fulfill the requirements of a competitive checklist for interconnection, which
list includes, among other things, interconnection, non-discriminatory access to
network elements, non-discriminatory access to rights-of-way, local loop
transmission and transport, local switching, 911 access, directory assistance,
operator services, white pages directory listings, signaling, number assignment
and portability and local dialing parity. Additionally, the RBOC must
demonstrate to the FCC that, in each state where it seeks to provide interLATA
service, it has entered into one or more binding agreements, approved by the
state, to provide interconnection to a competing facilities-based service
provider serving both commercial and residential subscribers. The FCC is
required to make a determination that RBOC interLATA market entry is in the
public interest. In reaching its determination, the FCC must consult with the
DOJ whose input will have "substantial" though not "preclusive" effect, and with
the relevant state. Upon receipt of interLATA authority, the RBOC must provide
interLATA services through a structurally separate affiliate for a period of at
least three years from the time authority is granted.
The 1996 Act also gives the private payphone industry the
parity it has long sought with the payphones provided by the BOCs. In response
to the private payphone owners' concerns, the statute prohibits a BOC from (1)
subsidizing its own payphone services with revenues from its local exchange
services, and (2) discriminating between BOC-provided and independently-provided
payphones. Furthermore, the 1996 Act requires the FCC to complete a rulemaking
proceeding addressing payphone issues within nine months from the date of
enactment, including any reconsideration period. Such rulemaking must address a
variety of issues including compensation
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for payphone providers. The legislation broadens the scope of previous
compensation proceedings in two respects: first, compensation must apply to all
payphone providers, not just to private payphone providers as before; second,
the FCC must address all types of calls (except emergency and Telecommunications
Relay Service calls) to ensure payphone providers are "fairly compensated for
each and every completed intrastate and interstate call." Previously, the FCC
had ordered compensation only for "access code" calls (1-800, 10XXX, etc.).
Another significant issue the FCC must address is the right of
the BOCs to solicit their payphone customers to select the long distance carrier
that will provide interLATA services from the payphone if the user does not
select such a carrier. Prior to the 1996 Act, this issue was irrelevant because
the BOCs were prohibited from offering interLATA services. Now, with the
possibility of BOC entry into the interLATA market, whether and how a BOC may
provide service at its own payphones is an issue. The 1996 Act grants the BOCs
"the same right that independent payphone providers have" to negotiate with the
Site Owner, but enables the FCC to eliminate this right if it is not in the
public interest. The statute makes it clear, however, that the Site Owner is the
ultimate decision-maker. Nothing in the 1996 Act, however, impairs existing
contracts relating to payphone services.
Other issues that will be addressed in the rule making include
the elimination of payphone service elements from interstate and intrastate
access charges, non-structural safeguards for BOC payphone services, the ability
of location owners to select intraLATA carriers, and the provision of "public
interest payphones" in low income, rural, and other areas where there would not
otherwise be a payphone.
Finally, the 1996 Act makes several other significant changes
which affect all long distance carriers. First, it prohibits long distance
carriers serving more than 5% of the nation's presubscribed lines from jointly
marketing local and long distance services until the BOCs are permitted to enter
the interLATA market. While this provision restricts the marketing activities of
AT&T, MCI and Sprint, it presents an opportunity for carriers such as AMNEX to
get a head start on the return of "one-stop shopping" to the telecommunications
market.
Second, it allows the FCC to forebear from applying certain
regulations to some classes of telecommunications carriers. As described above
under "Federal Regulation", the FCC's forbearance policies recently suffered a
series of setbacks as the Federal courts concluded on several occasions that the
FCC's policy exceeded its Communications Act authority. Therefore, the 1996 Act
is a significant step forward for the FCC because it not only permits the FCC to
forbear, but mandates forbearance under certain circumstances.
While the passage of the legislation allowing BOC entry into
the long distance market will create new and well financed competitors for
AMNEX's markets, AMNEX believes that the final legislation contains the
regulatory safeguards necessary to ensure that the existing competitive
environment is preserved. In addition, AMNEX does not believe that such BOC
entry into the long distance market will significantly affect its core markets.
Moreover, AMNEX's management
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believes that it has adopted a business plan, including the various services
described above, which will enable it to compete successfully with the BOCs. In
particular, AMNEX believes that the introduction of local competition will have
a positive effect on its current operations because it should result in a choice
of access vendors and a reduction in access costs. In addition, the creation of
a level playing field for its payphone operations should increase the value of
its integration strategy.
State Regulation
AMNEX
AMNEX is currently authorized to provide intrastate
interexchange telecommunications services on a resale basis in 37 states
pursuant to certificates of public convenience and necessity obtained from
various state public utility commissions, or commerce departments, or because no
such certificate is required. AMNEX may provide interstate service nationwide.
In many states in which AMNEX provides services, rate caps are in effect and/or
the provision of intraLATA operator assisted calling is prohibited or
restricted. A few states have found the provision of competitive operator
services not to be in the public interest. Several states have held or are
holding generic hearings on competitive operator service providers. In addition,
virtually all of the states that regulate the provision of operator services
have their own set of guidelines, similar to those required on the federal
level, with which providers must comply. To the extent that states prohibit or
limit the provision of operator services, the 1996 Act is expected to result in
the eventual opening of such markets, which should have a positive effect on
AMNEX.
In addition, several states have lessened, or are considering
proposals to lessen, their regulation of AT&T and/or the LECs. As on the federal
level, the adoption of rules which significantly free AT&T or the LECs from
regulatory scrutiny could have a material adverse effect on AMNEX's ability to
build a nationwide market. All states will now have to consider the introduction
of competition for the provision of local exchange services. At least 18 states
allow facilities-based competitive local service providers to offer some form of
both intraLATA toll and local exchange services, including basic local switched
services in some cases. In addition, states are moving to order the
implementation of intraLATA presubscription (1+ intraLATA equal access). More
than a dozen states have already ordered the implementation of this technology.
These initiatives are grandfathered by the 1996 Act even though intraLATA
presubscription in other states is prohibited until the RBOCs are allowed into
the interLATA market. States approving intraLATA presubscription include Florida
and New York where AMNEX has a large portion of its operations.
This should have a positive impact on AMNEX's business.
Further, from time to time, various state legislatures may
consider a variety of regulatory measures which could affect the manner, terms
and conditions under which AMNEX could provide service in such states. While no
major initiatives are currently underway, there can be no assurances that such
proposals will not be considered or adopted in the future. If implemented
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in particular states, such proposals could have a materially adverse impact on
the profitability of AMNEX's service in such states.
Crescent
New York currently regulates the provision of telephone
service from COCOTs. Such regulation includes quality of service standards,
reporting requirements and caps on rates for local and long distance calls made
by depositing coins. COCOT owners are also subject to certain posting
requirements relating to the provision of consumer information, including a
number which can be called to obtain a refund for lost coins and to report an
out of service condition. While Crescent is in compliance with all such rules
and believes that compliance with any requirements adopted by the state
commission will have no material adverse impact on its operations, there can be
no assurances that the regulatory agencies will not adopt additional regulations
which will adversely affect the profitability of its services.
In late 1995, the City of New York adopted legislation
relating to the registry, permitting and franchising of public pay telephones
installed on the city streets. Implementing regulations were adopted by the New
York Department of Information Technology and Telecommunications in March 1996
to take effect March 31, 1996. The rules require that all payphones installed on
the city streets, including payphones owned by NYNEX, comply with certain
siting, maintenance and operational requirements. These include provisions
relating to the physical locations at which payphones may be installed,
proximity to other structures or street furniture, cleaning and service
restoration standards, a requirement that free access to 911 be available and
that "0-" calls be directed to an operator service provider certified to handle
emergency calls (such as AMNEX). The rules also require that landlord consent be
obtained for certain types of installations, that all phones be registered, and
that the owner apply for a city franchise and permit and pay a yearly permit
fee. The rules contain monetary penalties in the event of certain classes of
violations and provide for removal of the phone under certain circumstances.
Most significantly, however, the rules contain a grandfather provision relating
to the siting requirements for already installed phones.
Crescent has already made the requisite interim permit and
registry filings and paid all applicable fees for the approximately 1,680 phones
it has on the city streets. The majority of Crescent's phones qualified for the
grandfather provisions and no additional work is expected to be needed to bring
them into compliance with the new rules. Crescent believes that any deficiencies
relating to phones whose installations were not grandfathered can be cured by
rerunning wires or obtaining landlord approval. While Crescent believes that all
its phones are or will be in compliance with the new regulations and that it
will be issued a franchise, there can be no assurances in this regard and
failure to obtain the necessary franchise and permits for a large number of
Crescent's phones would have a material adverse effect on its operations.
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Employees
As of March 22, 1996, the Company had 356 full-time employees
and 65 part-time employees, including 252 telephone operators. None of the
Company's employees is subject to a collective bargaining agreement.
PART II
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Year Ended December 31, 1995 compared with Year Ended December 31, 1994
Revenues declined by 3% from 1994 to 1995 primarily due to the
current trends impacting the operator services industry, including (i) increases
in the number of consumers who dial access numbers to reach their carrier of
choice, rather than dialing "0+" and utilizing the services of the operator
services company who services the telephone ("Dial Around") and (ii) the
continued efforts by governmental regulatory agencies to establish maximum rates
which may be charged for "0+" calls ("Rate Caps"). During 1995, the Company also
implemented stricter fraud control measures which resulted in reduced revenues.
Such measures, however, resulted in increased profits through the reduction of
bad debt and related costs. The total number of calls processed increased by 11%
in 1995 to 26.3 million while the minutes billed increased by 1.5% to 125
million in 1995. Revenues did not increase correspondingly since the increase in
calls and minutes related to "1+" calls which have lower rates than "0+" calls.
In order to combat the effects of Dial Around and Rate Caps,
as well as the high commission expenses associated with operator services,
during 1995, the Company's management established goals to strategically
position the Company in markets which will lower its cost of sales, improve
profit margins and secure its customer base. As a result, the Company began to
shift its selling focus to new higher profit margin services while it converts
its current operator services offering to the provision of transaction-based,
wholesale services in the COCOT and presubscription business (i.e., the business
which relates to a consumer's preselection of its long-distance service
provider). These new services, which were offered initially during 1995, include
hospital services, network management services, and 1+ Coin services. Although
growth in the number of COCOT and presubscription phones providing operator
services leveled out during 1995 as a result of this process, the Company's
income before taxes increased to $1,760,114 for 1995, a 44% increase over 1994.
In addition, the Company's return on revenues (income before taxes divided by
revenues) increased to 1.7% in 1995 from 1.1% in 1994.
Cost of sales, as a percentage of revenues, decreased by
approximately 1% (from 84% to 83%) between 1994 and 1995. Such decrease was due
primarily to a reduction in commission
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expense which, as a percentage of revenues, decreased from 50.2% to 47.5%.
Network costs increased, as a percentage of revenues, from 13.0% to 14.5%
between 1994 and 1995. Commission expense decreased as a result of the
Company's shifting into new higher profit margin services for which
commissions, as a percentage of revenue, are lower, as well as due to the
renegotiation of unprofitable customer commission agreements. Network expense
increased due to an increase in fixed network costs resulting from a slight
increase in fixed network cost rates and the expansion of the 1+ Coin fixed
network.
Selling, general and administrative costs decreased $490,209
between 1994 and 1995 due to the change of business activities and management's
cost reduction initiatives, and remained consistent as a percentage of revenues
at 11.6% and 11.5%, respectively.
Interest expense for 1995 was $2,043,722, as compared to
$1,793,317 for 1994. Such increase was due primarily to financing of equipment
procured for AHE and the acquisition of CCI in the fourth quarter.
Year Ended December 31, 1994 compared with Year Ended December 31, 1993
Revenues for the year ended December 31, 1994 of $108,737,115
were 96% greater than the revenues of $55,519,029 for the year ended December
31, 1993. Such increase resulted from both an increase in the number of calls
processed (98%) and the number of pay phones on the Company's network (64%).
Costs of sales, as a percentage of revenues, increased 6% as
compared to the year ended December 31, 1993. The increase was due primarily to
an increase in commission expense paid to customers which, as a percentage of
revenues, increased by approximately 8% as compared to the year ended December
31, 1993.
Selling, general and administrative expenses increased by
$3,140,138 or 33% during 1994. Approximately 55% of this increase was due to the
need for overhead to accommodate the Company's revenue growth. Such expenses, as
a percentage of revenues, decreased from 17.1% for 1993 to 11.6% for 1994.
Interest expense for the year ended December 31, 1994 was
$1,793,317 as compared to $1,185,125 for the year ended December 31, 1993. The
increase was due primarily to the increased lending availability based upon the
Company's increased revenues.
Liquidity and Capital Resources
The Company has a net working capital surplus of $530,848 as
of December 31, 1995 as compared to a working capital deficiency of $3,114,062
as of December 31, 1994. Such change was primarily the result of the Company's
net income for 1995 of $1,431,114 and the sale and
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issuance of Preferred Shares (as discussed below) during such year which
resulted in gross proceeds to the Company of approximately $3,052,000.
Trade receivables at December 31, 1995 were $17,079,718 as
compared to $20,710,945 at December 31, 1994. Receivables consist of uncollected
revenues and surcharges which the Company bills and collects on behalf of itself
and its customers and uncollected revenues for services provided to other IXCs.
The Company improved the average collection period for its receivables by 16%
from 70 days in 1994 to 59 days in 1995. Such improvement was due to improved
collection efforts by the Company and its billing and collection agents.
The Company currently has in place lending agreements with its
billing and collection agents pursuant to which it is currently provided
advances of up to $22,600,000 at any one time based upon eligible receivables.
Such eligible receivables are purchased by the lenders, with recourse, at the
approximate rate of 76% of the gross amount thereof. AMNEX generally pays
interest for such advances at an effective rate equal to the prime rate plus 2%.
At December 31, 1995, the amount due to the lenders was $11,365,024. The lending
agreements expire in February 2000.
Between April 1995 and May 1995, the Company obtained gross
proceeds of approximately $3,052,000 through the sale of an aggregate of
1,085,000 Series E Preferred Shares at a purchase price of $2.8125 per share.
Such proceeds were used for working capital purposes. The Series E Preferred
Shares have the following rights and preferences, among others: (i) 8% dividend
payable in cash or, at the option of the Board of Directors of the Company and
subject to the requirements of applicable law, in Common Shares of the Company;
(ii) voting rights of one vote per share; (iii) the right to convert each share
into one Common Share of the Company at a conversion price of $2.8125 per share,
subject to certain antidilution adjustments and an adjustment downward on June
30, 1996, if the market price, as defined, of the Company's Common Shares is
less than $2.8125 per share on the five trading days prior to such date; and
(iv) a liquidation preference in the amount of $2.8125 per share.
In October 1995, AHE obtained approximately $2,300,000 in
financing through a sale and leaseback agreement for equivalent value of fixed
assets. Lease payments are to be made in 48 equal monthly installments,
including effective interest at 12% per annum.
In November 1995, the Company entered into a settlement
agreement with a customer in order to satisfy outstanding claims for the
recovery of advances of approximately $2,400,000. Advances made to customers
represent cash provided to develop business opportunities for the Company and
are generally repaid by the withholding of commissions otherwise due to the
customer. In consideration for the Company compromising its claims, the customer
agreed to place into escrow certain warrants to purchase 725,000 Common Shares
and delivered a note in the principal amount of approximately $1,400,000. The
Company has the right to cause the sale of such warrants and is entitled to
receive the initial $800,000 of the sale proceeds.
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The Company maintains various office, operations and computer
facilities under operating and capital leases. As of December 31, 1995, the
Company's minimum commitments for the following 12 months under non-cancelable
leases was approximately $814,000. The Company anticipates that such commitments
will be met through operating revenue.
The Company expects that normal recurring capital expenditures
will be approximately $2,500,000 for 1996 and anticipates that cash flow from
operations and asset-based financing will provide the funding required. No
assurances can be given in this regard.
Acquisition
As part of the Company's plan to continue to diversify into
higher margin business, gain a tighter control of the revenue producing asset
and reduce its cost of sales, effective October 4, 1995, the Company purchased
all of the outstanding stock of CCI, a private pay telephone operator with its
primary business operations located in the greater New York City area. Such
acquisition had the following effects on the Company's balance sheet at the date
of acquisition: working capital decreased by $302,921; property, plant and
equipment increased by $3,578,951; and intangibles and goodwill increased by
$4,050,000. The total purchase price of $5,883,750 was paid as follows: (i)
$1,550,000 four-year promissory note, subject to acceleration under certain
circumstances; (ii) 415,250 Series F Preferred Shares (valued at $2,076,250);
and (iii) $2,257,500 in cash obtained through financing with an independent
financial institution (see Item 13(a) hereof).
The Series F Preferred Shares have the following rights and
preferences, among others: (1) dividends on a pari passu basis with the holders
of the Common Shares; (ii) voting rights of one vote per share; (iii) the right
to convert each share into one Common Share of the Company at a conversion price
of $5.00 per share, subject to certain antidilution adjustments and an
adjustment downward on October 10, 1997 if the average market price, as defined,
of the Company's Common Shares is less than $5.00 during the ten days prior to
such date (but the conversion price reduction will not be to a price less than
$3.50 per share); and (iv) a liquidation preference of $5.00 per share. At any
time, the Company has the right to redeem the outstanding Series F Preferred
Shares on thirty days notice at a redemption price of $5.00 per share (subject
to the conversion rights of the holders of the Series F Preferred Shares).
The principal amount of, and accrued interest on, the note is
convertible into Common Shares of the Company at a conversion price of $5.00 per
share.
Recent Federal Legislation
As discussed in Item 1(c) hereof, in February 1996, the
Telecommunications Act of 1996 was signed into law. The new statute is intended
to promote competition in both the local and long distance markets. Prior to
enactment, the RBOCs could not sell long distance service or manufacture
equipment. Although such activities will now be permitted, before RBOCs may
enter the long distance market, they must comply with a number of requirements
that are designed to
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prevent them from unfairly using their market power to compete against the
smaller industry participants. The law also calls for the FCC to further define,
implement and oversee the new rules. The Company believes that its current
activities are no more or less at risk, as a result of the new law, than they
were before the law was passed. The Company additionally believes that it is
well positioned to take advantage of some of the provisions in the new law and
is currently considering which of the potential opportunities will offer the
best results to the Company in the future.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
AMNEX, INC.
November 6, 1996 By: /s/ Peter M. Izzo, Jr.
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Peter M. Izzo, Jr., President
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