UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT No. 1
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-17158
AMNEX, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
New York 11-2790221
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (I.R.S Employer Identification No.)
of Incorporation or Organization)
6 Nevada Drive, Lake Success, New York 11042
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(516) 326-2540
- -------------------------------------------------------------------------------
Registrant's Telephone Number, Including Area Code
101 Park Avenue, Suite 2507, New York, New York 10178
- -------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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. (X) Yes ( ) No
APPLICABLE ONLY TO ISSUERS 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 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: Common Stock, $.001 par
value: 30,629,924 shares at June 30, 1997.
<PAGE>
AMNEX, INC.
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30,
1997 December 31,
(unaudited) 1996
Assets
Current assets:
<S> <C> <C>
Cash $ 1,204 $ 4,947
Trade receivables, less allowance for doubtful accounts of $2,375
as of June 30, 1997 and $2,757 as of December 31, 1996 24,700 19,311
Parts inventory 883 739
Deferred income taxes 1,791 1,791
Customer advances 2,716 2,414
Deposits and other current assets 1,083 861
--------------------------------------
Total current assets 32,377 30,063
Investment in unconsolidated subsidiary 5,091 ---
Property and equipment, net 24,649 23,851
Deposits and other 2,303 1,543
Intangible assets, net 9,027 5,947
Goodwill, net 29,697 29,955
Total assets $ 103,144 $ 91,359
======================================
</TABLE>
F-1
<PAGE>
AMNEX, INC.
Consolidated Balance Sheets (continued)
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30,
1997 December 31,
(unaudited) 1996
Liabilities and shareholders' equity
----------------------- -----------------------
Current liabilities:
<S> <C> <C>
Short-term debt $ 13,561 $ 11,498
Accounts payable 6,489 3,651
Accrued expenses 9,159 7,733
Accrued network expenses 2,842 1,975
Accrued commissions 3,815 3,169
Accrued taxes payable 691 1,406
Due to related party 1,198 1,198
Current portion of capital lease obligations 1,849 2,179
Current portion of long-term debt 2,285 2,248
----------------------- -----------------------
Total current liabilities 41,889 35,057
Capital lease obligations 1,901 2,668
Long-term debt 13,284 13,530
Minority interest 431 10
Compensation payable 805 894
Obligations under renewal and modification agreement 1,125 ---
Obligations under non-compete agreement 1,314 2,630
Common stock subject to redemption 3,250 3,250
Commitments and contingencies
Shareholders' equity:
Voting Preferred Stock, $.001 par; authorized 5,000,000 shares: Series B
Preferred Stock, authorized 356,000 shares, issued and
outstanding 72,450 shares at June 30, 1997 and December 31,
1996 (liquidation preference $362) 362 362
Series D Preferred Stock, authorized 1,413,337 shares, issued and
outstanding 1,413,337 shares at June 30, 1997 and December
31, 1996 (liquidation preference $3,533) 3,533 3,533
Series E Preferred Stock, authorized 1,085,000 shares, issued and
outstanding 1,035,000 shares at June 30, 1997 and December
31, 1996 (liquidation preference $2,911) 2,911 2,911
Series F Preferred Stock, authorized 415,250 shares, issued and
outstanding 415,250 shares at June 30, 1997 and December 31,
1996 (liquidation preference $2,076) 2,076 2,076
Series G Preferred Stock, authorized 145,000 shares, issued and
outstanding zero shares at June 30, 1997 and 78,750 shares at December
31, 1996 (liquidation preference $1,575 at December
31, 1996) --- 1,179
Common stock, $.001 par; authorized 70,000,000, issued 30,648,174
at June 30, 1997 and 26,897,892 shares at December 31, 1996 31 27
Capital in excess of par value 64,670 56,093
Accumulated deficit (33,962) (32,385)
----------------------- -----------------------
39,621 33,796
Less 18,250 common shares held in treasury, at cost (476) (476)
----------------------- -----------------------
Total shareholders' equity 39,145 33,320
Total liabilities and shareholders' equity $ 103,144 $ 91,359
======================= =======================
See accompanying notes.
</TABLE>
F-2
<PAGE>
AMNEX INC.
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 1997 and 1996
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $31,023 $26,426 $62,349 $50,758
Costs and expenses:
Cost of sales and service 24,757 21,369 50,546 40,780
Selling, general and administrative 3,432 2,938 5,988 5,514
Depreciation and amortization 2,180 1,222 4,191 2,366
Restructuring charge - - 1,400 -
------------------------------------- ------------------------------------
30,369 25,529 62,125 48,660
Operating income 654 897 224 2,098
Interest expense 857 559 1,692 1,104
------------------------------------- ------------------------------------
Income (loss) before income taxes
and minority interest (203) 338 (1,467) 994
Minority interest in (loss)
of subsidiaries (14) - (10) -
------------------------------------- ------------------------------------
Income (loss) before income taxes (217) 338 (1,477) 994
Provision for income taxes 50 61 100 196
------------------------------------- ------------------------------------
Net income (loss) $ (267) $ 277 $ (1,577) $ 798
===================================== ====================================
Preferred share dividend $ 154 $ 154 $ 308 $ 308
------------------------------------- ------------------------------------
Net income (loss) available
for common shares $ (421) $ 123 $ (1,885) $ 490
===================================== ====================================
Net income (loss) per common share $ ( .01) $ .01 $ ( .07) $ .02
===================================== ====================================
Weighted average number of shares
outstanding used in computing net
income (loss) per common share: 29,120 21,371 28,549 20,923
</TABLE>
See accompanying notes.
F-3
<PAGE>
AMNEX, INC.
Consolidated Statement of Shareholders' Equity
December 31, 1996 through June 30,1997
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Preferred Preferred Preferred Preferred Preferred
$.001 par value Stock Stock Stock Stock Stock
Shares Amount Series B Series D Series E Series F Series G
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 26,897,892 $27.0 $ 362 $ 3,533 $2,911 $2,076 $1,179
Issuance of common shares 1,244,537 1.0
Exercise of stock options 15,448
Issuance of preferred shares and
warrant for investment
Vesting of stock grants 24,500
Issuance of warrants
Exercise of warrants 155,000 1.0
Conversion of preferred shares 2,310,797 2.0 (1,179)
Net loss
Balance, June 30, 1997 30,648,174 $31.0 $ 362 $ 3,533 $2,911 $2,076 -
==================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Preferred Capital in Total
Stock Excess of Accumulated Treasury Shareholders'
Series L Par Value Deficit Stock Equity
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $56,093 ($32,385) ($476) $33,320
Issuance of common shares 1,705 1,706
Exercise of stock options 45 45
Issuance of preferred shares and
warrant for investment $ 3,636 1,455 5,091
Vesting of stock grants 57 57
Issuance of warrants 400 400
Exercise of warrants 102 103
Conversion of preferred shares (3,636) 4,813 --
Net loss (1,577) (1,577)
Balance, June 30, 1997 $ - $64,670 ($33,962) ($476) $39,145
=======================================================================================
</TABLE>
F-4
<PAGE>
AMNEX, INC.
Consolidated Statements of Cash Flows
Six months ended June 30, 1997 and 1996
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
Cash flows from operating activities
<S> <C> <C>
Net income (loss) $ (1,577) $ 798
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 4,191 2,366
Minority interest (14)
Provision for losses on receivables (382) (72)
Changes in operating assets and liabilities:
Trade receivables (5,143) (3,034)
Parts inventory (119) (44)
Note receivable - 753
Customer advances, deposits and other current assets (1,239) 475
Deposits and other assets (552) (2,244)
Accounts payable and accrued expenses 3,736 785
Net cash used in operating activities (1,099) (217)
Cash flows from investing activities
Purchase of businesses, net of cash acquired (881) 476
Purchase of phones (475) -
Expenditures for property and equipment (1,290) (965)
Proceeds on sale of assets - 2,375
Net cash provided by (used in) investing activities (2,646) 1,886
Cash flows from financing activities
Proceeds from the exercise of common stock options 37 133
Proceeds from the sale of common stock 2 -
Borrowings under revolving credit, net 2,159 1,550
Payments on long-term debt (1,099) (364)
Principal payments under capital lease obligations (1,097) (416)
Net cash provided by financing activities 2 903
-----------------------------------------------
Net increase (decrease) in cash (3,743) 2,572
Cash at beginning of period 4,947 94
Cash at end of period $ 1,204 $ 2,666
================================================
See accompanying notes.
</TABLE>
F-5
<PAGE>
Supplemental disclosure of cash flow information:
(In thousands, except share data)
Six months ended June 30, 1997:
1. The Company issued 100,000 Series L Preferred Shares convertible into
1,500,000 Common Shares.
2. The Company issued 810,797 Common Shares pursuant to the conversion of
78,750 Series G Preferred Shares.
3. The Company issued 1,500,000 Common Shares pursuant to the conversion of
100,000 Series L Preferred Shares.
4. The Company issued 94,369 Common Shares for the acquisition of pay
telephones.
5. The Company issued 526,168 Common Shares pursuant to agreement with
Teleplus, Inc.
6. The Company issued 624,000 Common Shares pursuant to the conversion of $96
of debt plus accrued interest thereon.
7. The Company issued 155,000 Common Shares pursuant to the exercise of
155,000 warrants.
8. The Company issued 24,500 Common Shares pursuant to the 1996 Restricted
Stock Grant.
9. Interest of approximately $1,748 was paid.
10. Income taxes of approximately $321 were paid.
Six months ended June 30, 1996:
1. The holder of an aggregate of 50,000 shares of the Company's Series E
Preferred Stock elected to convert such shares into 50,000 shares of the
Company's Common Stock.
2. Interest of approximately $930 was paid.
3. Income taxes of approximately $108 were paid.
4. Capital lease obligations incurred to acquire property and equipment was
approximately $1,405.
5. The Company issued 4,099,086 Common Shares upon acquisition of Capital
Network System, Inc.
F-6
<PAGE>
AMNEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information in response to the requirements of Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the financial position as of June 30, 1997; results of operations
for the three and six months ended June 30, 1997 and 1996; cash flows for
the six months ended June 30, 1997 and 1996; and changes in shareholders'
equity for the six months ended June 30, 1997. For further information,
refer to AMNEX's financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 1996. The December 31,
1996 balance sheet has been derived from AMNEX's audited financial
statements as of that date. Certain prior year amounts were reclassified to
conform with the current period presentation.
2 Recently Issued Accounting Standards
In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share," which
is effective for financial statements issued for periods ending after
December 15, 1997. This pronouncement establishes standards for computing
and presenting earnings per share ("EPS") for entities with publicly-held
common stock or potential common stock. SFAS 128 simplifies the standards
for computing EPS and makes them comparable to international EPS standards.
Early application of this statement is not permitted.
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure, which is applicable to all companies. Capital
structure disclosures required by SFAS 129 include liquidation preferences
of preferred stock, information about the pertinent rights and privileges
of the outstanding equity securities, and the redemption amounts for all
issues of capital stock that are redeemable at fixed or determinable prices
on fixed or determinable dates. SFAS 129 is effective for financial
statements for periods ending after December 15, 1997.
In June, 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information, which significantly changes the way
public companies report segment information in annual financial statements
and also requires those companies to report selected segment information in
interim financial reports to shareholders. SFAS No. 131 is effective for
periods beginning after December 15, 1997.
The Company intends to adopt the provisions of these standards in 1998 and
does not expect their application to have a material impact on the
financial statements of the Company.
3. Preferred Stock
During the six months ended June 30, 1997, the holder of an aggregate of
78,750 shares of the Company's Series G Preferred Stock elected to convert
such shares into 810,797 shares of the Company's Common Stock.
F-7
<PAGE>
Pursuant to a Stock Exchange Agreement, dated as of January 7, 1997,
between the Company and Francesco Galesi, a Director of the Company, the
Company acquired from Mr. Galesi 10% of the outstanding capital stock of
Elektra Communication, Inc. ("ECI"), a telecommunications company
controlled by him. Pursuant to the terms of the Stock Exchange Agreement,
(i) Mr. Galesi was issued 100,000 Series L Preferred Shares of the Company
which automatically converted in May 1997 into an aggregate of 1,500,000
Common Shares (the "Conversion Shares") upon the filing of a Certificate of
Amendment to the Certificate of Incorporation of the Company pursuant to
which the number of Common Shares authorized for issuance was increased
from 40,000,000 to 70,000,000; (ii) Mr. Galesi was issued a warrant which
entitles him to purchase 1,500,000 Common Shares (the "Warrant Shares") at
an exercise price of $3.03 per share (subject to reduction to zero in the
event, during any continuous six month period commencing with January 1,
1997 and ending on December 31, 1999, the consolidated revenues from
operations of ECI are at least $12,500,000); (iii) Mr. Galesi was granted
certain registration rights under the Securities Act with regard to the
Conversion Shares and Warrant Shares; (iv) Peter M. Izzo, Jr., then Chief
Executive Officer of the Company, was elected a Director of ECI; (v) Mr.
Galesi was elected a Director of the Company; (vi) Mr. Galesi agreed that
he would utilize ECI as his sole vehicle with regard to the conduct of
international telecommunications business; (vii) Mr. Galesi agreed to a two
year lock-up with regard to any securities acquired from the Company
pursuant to the transaction; and (viii) Mr. Galesi granted the Company
certain "tag along" rights with regard to the sale of the ECI capital stock
acquired.
The Company's 10% investment in ECI is accounted for on the cost method and
the value of the investment has been based on a preliminary estimate of the
fair value of the Series L Preferred Shares and warrant issued, based upon
the market prices of AMNEX's stock at the date of issuance, less a
discount, and using the Black- Scholes model to value the warrant.
F-8
<PAGE>
The information set forth below is as of August 11, 1997, the date of
filing by the Company of its Form 10-Q for the period ended June 30, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1997 Compared With
Three and Six Months Ended June 30, 1996
Results of Operations
For the three months ended June 30, 1997, the Company had operating income
of $654,000 as compared to operating income of $897,000 for the three months
ended June 30, 1996. For the six months ended June 30, 1997 and before one-time
items discussed below, operating profit was $1,624,000 as compared to $598,000
for the same period last year. The 1997 six month period results include a
restructuring charge of $1,400,000 representing the impact of the decision by
Company's management to embark on a restructuring plan including the closure of
certain of the Company's facilities, the elimination of certain redundant
functions and the payment of employee termination benefits. The Company believes
that the plan, which was substantially completed in May 1997, will result in a
significant reduction in selling, general and administrative expenses. During
the six months ended June 30, 1996, the Company sold certain assets related to
the validation and fraud management of its operator services revenue base. This
sale was part of the Company's plan of providing wholesale, rather than retail,
services to a certain group of domestic operator services customers and
generated a gain on sale of $1,500,000 in the first quarter of 1996.
Total revenues for the six months ended June 30, 1997 and 1996 were
$62,349,000 and $50,758,000 (including the $1,500,000 gain on sale discussed
above), respectively. The table below sets forth the Company's revenues by
product line.
For the six months ended
June 30,
1997 1996
(in thousands)
Domestic operator services $32,640 $41,707
International operator services 13,555 ---
Long distance services 3,933 3,844
1+ Coin services 3,451 1,335
Payphone ownership and
operation 7,313 2,329
PBX program services 153 43
Billing services 1,304 ---
Consistent with management's plan of strategically positioning the Company
in new businesses which it believes offer the potential for increased earnings
as well as synergies with its existing businesses, both the volume of business
and revenue mix have continued to change from the first six months of 1996.
Domestic operator services constituted 50.7% and 52.4% of total revenues for the
three and six months ended June 30, 1997, respectively, as compared to 84.2% and
82.2% for the same periods last year. In addition, international
F-9
<PAGE>
telecommunications services resulting from the acquisition of Capital Network
System, Inc. ("CNSI") in June 1996 and billing services resulting from the
acquisition of National Billing Exchange, Inc. in September 1996, provided a
total of $14,859,000 of revenues in 1997. Revenues from payphone operations for
the three and six months ended June 30, 1997 increased by 255.4% and 214.0%,
respectively, as compared to the same 1996 periods and revenues from 1+ Coin
services increased by 74.2% and 158.5% as compared to the same 1996 periods. The
increased payphone operation revenues were primarily the result of the
acquisition by the Company of an aggregate of 5,561 payphones during 1996 and
the first quarter of 1997 and the increase in dial around compensation payable
to payphone owners effective November 6, 1996. See "Regulatory Developments".
The Company's 1+ Coin revenues increased primarily due to an increase in the
number of local exchange carrier-owned payphones under contract with the Company
from approximately 350,000 on December 31, 1995 to approximately 600,000 on
December 31, 1996. Although profit margins for the domestic operator services
line of business continued the anticipated decline in the second quarter of
1997, the Company believes that, as a result of its new ten year agreement to be
the exclusive provider of operator services for phones owned or controlled by
National Telecom USA, Inc. (the "National Agreement"), profit margins for this
line of business may improve. See "Claims and Contingencies" below.
As a percentage of revenues, cost of sales and service decreased to 79.8%
for the three months ended June 30, 1997, as compared to 80.9% for the same
period last year, and increased to 81.1% for the six months ended June 30, 1997
as compared to 80.3% for the first half of 1996. There were significant changes
in certain of the components of cost of sales and service between the periods.
Network expenses increased to 20.9% and 20.5% of revenues for the three and six
months ended June 30, 1997 from 16.3% and 15.6% for the corresponding three and
six month periods of 1996 primarily due to the significant costs of transmission
of traffic out of Mexico for international telecommunications services. In
addition, origination and termination costs were higher due to increased direct
dial long distance traffic. Approximately 90% of the cost of delivering direct
dial long distance traffic are network costs. Commission expense decreased from
56.0% and 53.0% of total revenues for the three and six months ended June 30,
1996, respectively, to 40.4% and 39.4% for the three and six months ended June
30, 1997, respectively. This expense, as a percentage of revenues from
international telecommunications services, billing services, payphone operations
and 1+ Coin services, is considerably less than that for domestic operator
services.
Selling, general and administrative expenses, as a percentage of revenues,
did not materially change for the three months ended June 30, 1997 as compared
to the three months ended June 30, 1996 and decreased from 10.9% for the six
months ended June 30, 1996 to 9.6% for the same period of 1997. The six month
decrease was primarily the result of the Company's implementation of its
restructuring plan discussed above offset by significant legal expenses incurred
in 1997. The Company believes that, as a result of the restructuring, these
expenses, as well as costs of sales and service, will continue to decline as a
percentage of revenues.
Interest expense increased from $559,000 in the second quarter of 1996 to
$857,000 for the current quarter and from $1,104,000 to $1,692,000 for the year
to date, primarily reflecting the cost of financing for payphones purchased by
the Company's PubCom Division during the last quarter of 1996. In addition,
during the second quarter of 1997, the Company incurred interest charges related
to debt assumed in the CNSI acquisition in June 1996.
Liquidity and Capital Resources
The Company had a working capital deficiency of approximately $9,512,000 as
of June 30, 1997 as compared to a working capital deficiency of approximately
$4,994,000 as of December 31, 1996. This change was due to, among other things,
the acquisition of payphones and related assets for an aggregate purchase price
of $1,356,000, obligations of $1,925,000 incurred in connection with the
National Agreement, expenditures for property, plant and equipment of
$1,290,000, the incurrence of restructuring charges of $1,400,000.
Trade receivables at June 30, 1997 were $24,700,000 as compared to
$19,311,000 at December 31, 1996. 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 interexchange
F-10
<PAGE>
carriers. Trade receivables increased between December 31, 1996 and June 30,
1997 primarily due to seasonality factors, particularly in the international
telecommunications services line of business. In addition, trade receivables
associated with the 1+ Coin and other payphone-related receivables have
increased as this service grows.
The Company currently has in place a lending agreement with one of its
billing and collection agents pursuant to which it is provided advances of up to
$21,000,000 at any one time outstanding based upon eligible receivables. Such
eligible receivables are purchased by the billing and collection agent, with
recourse, at the approximate rate of 76% of the gross amount thereof. The
Company generally pays interest for such advances at an effective rate equal to
the prime rate plus 1.5% per annum. At June 30, 1997, the approximate amount due
to the billing and collection agent under the agreement was $11,156,000. The
lending agreement extends through February 2000.
On June 3, 1997, the Company borrowed $2,000,000 for working capital
purposes from an irrevocable trust established by Mr. Galesi. The promissory
note evidencing the loan provides for interest at the rate of 10% per annum and
the payment of the principal amount thereof within 15 days following receipt of
demand for payment. The Company's repayment obligation is secured by a security
interest in certain accounts receivable of certain of its subsidiaries.
On July 30, 1997, the Company obtained a loan commitment for additional
working capital funds in the form of a $5,000,000 revolving line of credit,
secured by certain trade receivables. The commitment provides for interest at a
rate equal to the prime rate plus 1% per annum. It is anticipated that, upon
closing of the financing, approximately $3,500,000 will be drawn down against
the line of credit. The loan commitment is subject to certain conditions to
closing and no assurance can be given that the line of credit will be obtained.
The Company is presently contemplating an offering of convertible
subordinated debt securities (the "Convertible Debt Securities") in the
approximate principal amount of $20,000,000 to certain institutional and
qualified investors in the United States and certain investors outside the
United States (the "Offering"). It is contemplated that, if the Offering is
undertaken, the securities offered will not be registered under the Securities
Act of 1933, as amended (the "Securities Act"), and neither the Convertible Debt
Securities nor the common shares of the Company (the "Common Shares") issuable
upon the conversion of the Convertible Debt Securities (the "Underlying Offering
Shares") may be offered or sold in the United States absent registration under
the Securities Act or an exemption from the registration requirements thereof.
It is contemplated further that, in connection with the Offering, the Company
will agree to file a shelf registration statement under the Securities Act with
respect to the Convertible Debt Securities and Underlying Offering Shares within
a short period of time after completion of the Offering so as to permit the
purchasers of the Convertible Debt Securities to resell such Convertible Debt
Securities and the Underlying Offering Shares pursuant to an effective
registration statement. Any such resale may only be made by means of a
prospectus satisfying the requirements of the Securities Act.
The exact aggregate principal amount of the Convertible Debt Securities,
interest rate on the Convertible Debt Securities, price and other provisions
relating to conversion of the Convertible Debt Securities into Common Shares and
the other terms of the Convertible Debt Securities and the terms of such
registration will be determined in light of market conditions at the time of the
Offering.
The Company has no firm commitment for the purchase of any of the
Convertible Debt Securities. No assurance can be given that the Company will
undertake the Offering or, if the Offering is undertaken, that the Company will
consummate the Offering in the amount or on the other terms anticipated or
otherwise.
F-11
<PAGE>
The proceeds of any such Offering are intended to be used primarily to
repurchase certain outstanding convertible promissory notes and preferred shares
of the Company ("Preferred Shares"), and prepay certain other outstanding
promissory notes of the Company, held by clients of Friedli Corporate Finance AG
("Friedli AG") as discussed below. The Company intends to use the balance of the
proceeds to repay certain other indebtedness of the Company and pay certain
other obligations, each as discussed below, as well as for general corporate
purposes.
On June 18, 1997, the Company entered into agreements (the "Company
Agreements") that provide for, among other things, the repurchase of certain
outstanding convertible Preferred Shares, and the redemption of certain
outstanding convertible promissory notes of the Company, held by clients of
Friedli AG ("Friedli Clients"), as discussed below.
The Preferred Shares to be repurchased are as follows: (i) 1,413,337 Series
D Preferred Shares at a repurchase price of $2.50 per share; (ii) 1,035,000
Series E Preferred Shares at a repurchase price of $2.8125 per share; and (iii)
415,250 Series F Preferred Shares at a repurchase price of $5.00 per share. The
repurchase prices for the Preferred Shares are equal to the per share
liquidation values of the respective series. In the case of the Series D and
Series E Preferred Shares, in addition to the above amounts, the repurchase
price includes an amount equal to accrued but unpaid dividends ($1,688,000 as of
June 30, 1997). The Series F Preferred Shares do not have any dividend
preference. All of the Preferred Shares carry voting rights equal to the number
of Common Shares into which they are convertible, except that the Series D
Preferred Shares have six-for-one voting rights. The aggregate repurchase
obligation of the Company (based upon a repurchase date of June 30, 1997 and
including the payment of accrued and unpaid dividends) is approximately
$10,208,000.
The Company Agreements also provide for the following: (i) the conversion
of 72,450 Series B Preferred Shares into 724,500 Common Shares; (ii) the payment
of accrued and unpaid dividends with respect to the Series B Preferred Shares
(approximately $90,000 as of June 30, 1997); (iii) the payment of the principal
amount of, and accrued interest on, a certain $325,000 principal amount
promissory note of the Company that was due on May 1, 1997; (iv) the payment by
the Company of approximately $1,470,000 in connection with the prepayment of
certain outstanding promissory notes due in October 1999; (v) the payment by the
Company to Peter Friedli and Friedli AG (collectively with Friedli Corporate
Finance Inc., the "Friedli Group") of an aggregate of $360,000 representing the
settlement of any and all claims for past due consulting, advisory, investment
banking or similar or related fees and expenses, as well as financial consulting
fees for a two year period following the closing of the Company Agreements; and
(vi) the delivery of certain general releases (the Company release to include,
among others, the holders of the Preferred Shares).
Prior to the execution of the Company Agreements, the holder of a certain
$450,000 principal amount promissory note (the "$450,000 Note") elected to
convert, as of June 30, 1997, $96,000 of the principal amount thereof, together
with accrued and unpaid interest thereon, into 624,000 Common Shares at a
conversion price of $0.20 per share. Contemporaneously with the execution of the
Company Agreements, Mr. Galesi entered into a Note Purchase Agreement with the
holder of the $450,000 Note, as well as with the holder of a $50,000 principal
amount promissory note of the Company (the "$50,000 Note") (also convertible at
a price of $0.20 per share), to purchase the unconverted portion of the $450,000
Note, as well as the $50,000 Note (including all rights with regard to accrued
and unpaid interest), for an aggregate purchase price of $3,863,000. Mr. Galesi
has agreed with the Company that, immediately following his acquisition of the
notes, he will convert the principal amount thereof, together with accrued and
unpaid interest thereon, into Common Shares (approximately 2,650,000 based upon
a conversion date of June 30, 1997). Both the Company Agreements and the Note
Purchase Agreement are subject to the satisfaction of certain conditions to
closing. The conditions to the Company's obligations under the Company
Agreements and Mr. Galesi's obligations under the Note Purchase Agreement, which
may be waived, include the consummation by the Company of an equity or
convertible debt offering pursuant to which the Company shall have received
gross proceeds of at least $50,000,000.
Contemporaneously with the execution of the Company Agreements, the Company
and the Friedli Group agreed to terminate a certain January 13, 1997 agreement
between them which contemplated, among other things, the open market sale by
certain Friedli Clients of an aggregate of 9,000,000 Common Shares. The Company
Agreements, the Note Purchase Agreement and the related documents were executed
by Peter Friedli on behalf of, or as representative of, the various Friedli
Clients.
F-12
<PAGE>
Regulatory Developments
On September 20, 1996, the Federal Communications Commission (the "FCC")
adopted new rules pursuant to the Telecommunications Act that require providers
of long distance services to pay to payphone owners, including the Company,
compensation for "dial around" calls. Dial around is a term used to describe
calls placed from payphones that bypass the IXC presubscribed to that payphone.
Examples are 1-800-CALL-ATT, 1-800-COLLECT and 10-ATT. The FCC's rules called
for a substantial increase in dial around compensation from the $6.00 per month
per payphone flat fee in place since May 1992 to $45.85 per payphone per month
during the period November 6, 1996 to October 6, 1997. Beginning October 7,
1997, the monthly fee will be replaced by per call compensation which the FCC
set at $0.35 per call. The FCC determined further that, for periods after
October 6, 1998, compensation should be set at the cost of a local coin call,
which cost the FCC concluded should be determined by the marketplace and not by
regulation. A number of parties brought an action challenging the FCC's
decisions regarding dial around compensation in the United States Court of
Appeals for the D.C. Circuit, including the FCC's determination that (i) the
flat fee per payphone per month for the initial period should be $45.85; (ii)
the per call compensation beginning October 7, 1997 should be set at $0.35; and
(iii) compensation beginning October 6, 1998 should be set at the cost of a
local coin call. On July 1, 1997, the court remanded the case to the FCC to
further evaluate and justify the $45.85 and $0.35 rate levels it adopted as well
as its determination that compensation should be set at the cost of a local coin
call. The right to receive dial around compensation, the timing of the
introduction of per call compensation and the deregulation of the local coin
rate were not affected by the court's decision. On August 5, 1997, the FCC
issued a Public Notice clarifying the status of the requirements of its dial
around compensation rules and establishing a pleading cycle for comment on the
remanded issues. The FCC stated that all of the requirements of its order which
were remanded remain in effect pending further action, including the requirement
to pay dial around compensation. The FCC also stated that any adjustment in dial
around compensation may be applied retroactively. The FCC has indicated it
intends to resolve this matter expeditiously, but there can be no assurances as
to what the new rate levels will be, when they will go into effect or whether
the revised rate structure will be applied retroactively.
Claims and Contingencies
On July 2, 1997, D. Faye Manghir, the holder of a 50% equity interest in
the joint venture company formed by Community Network Services, Inc., MicroTel
Communications Corp. and the Company (which holds the remaining 50% equity
interest), filed suit against the Company in the Supreme Court of the State of
New York (the "Suit"). The Suit alleges, among other things, that the Company
made certain misrepresentations and committed certain breaches under the joint
venture agreement among the parties, and seeks rescission of such agreement,
compensatory damages in the sum of $10,000,000, punitive damages in the sum of
$25,000,000, and attorneys' fees. The Company has engaged outside litigation
counsel to handle the matter and has filed a motion to dismiss or in the
alternative to stay. The Company believes that the claims of D. Faye Manghir are
meritless and that it will ultimately prevail, resulting in dismissal of the
Suit and/or referral to arbitration.
Pursuant to the terms of the National Agreement, as of June 30, 1997,
approximately $1,500,000 was due and owing to National. The parties are
currently negotiating the long-term payout of such amount. No assurance can be
given that any such agreement will be entered into between the parties. It is
intended that a portion of the net proceeds of the Offering will be used to pay
to National the $1,500,000 due.
In connection with the Company's June 1996 CNSI acquisition, CNSI issued a
promissory note in favor of Robert A. Rowland (the "Rowland Note"), a principal
shareholder of the Company, in the principal amount of $1,197,691.82 payable on
July 31, 1997, with interest due on the unpaid principal balance at a rate of
10.5% per annum. On July 11, 1997, Mr. Rowland filed suit against the Company
and CNSI in the District Court of Travis County, Texas. Mr. Rowland asserts
several causes of action against the Company and seeks damages in the amount of
the principal and interest due under the Rowland Note, attorneys' fees and
F-13
<PAGE>
exemplary damages in an unstated amount. The causes of action asserted by Mr.
Rowland against CNSI relate to monies allegedly due under a consulting
agreement, and damages claimed include attorneys' fees. It is anticipated that a
portion of the net proceeds of the Offering will be used to pay the amounts due
under the Rowland Note.
Risks and Uncertainties
Except for historical information contained herein, this Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that are subject to risks and uncertainties,
including seasonal variations in revenues, shifts in Company's business focus
from core domestic operator services, regulatory and legislative uncertainty,
technological change and new service, competition, risks associated with
international operations, service interruptions and equipment failures, change
in economic conditions of the various markets the Company serves, as well as the
other risks detailed in the Company's Form 10-K for the year ended December 31,
1996 filed with the Securities and Exchange Commission on April 15, 1997.
F-14
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Restated Certificate of Incorporation, as amended*
3.2 By-Laws, as amended
10.1 Form of Agreement, dated as of June 10, 1997, between the Company
and the holders of certain Preferred Shares and promissory notes
of the Company.
10.2 Secured Demand Promissory Note, dated June 3, 1997, in the
principal amount of $2,000,000 issued by the Company and certain
subsidiaries thereof to Francesco Galesi Irrevocable Grantor
Trust dated October 18, 1991 (the "Galesi Trust").
10.3 Warranted, dated June 3, 1997, for the purchase of up to 500,000
Common Shares issued by the Company to the Galesi Trust.
27 Financial Data Schedule.
- --------------
* Filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1997 (File No. 0-17158) and incorporated herein by
reference.
(b) Reports on Form 8-K.
During the quarter ended June 30, 1997, two Current Reports on Form
8-K were filed by the Company as follows:
(i) Date of Report: May 3, 1997 Item Reported: 5
(ii) Date of Report: May 28, 1997 Item Reported: 5
F-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to its report to be signed on its
behalf by the undersigned thereunto duly authorized.
AMNEX, INC.
October 1, 1997 By: /s/ Richard L. Stoun
--------------------
Richard L. Stoun
Vice President - Finance
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