U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _________________
Commission file number 0-18654
AMERICONNECT, INC.
(Exact name of small business issuer as specified in its charter)
Delaware
(State of other jurisdiction of incorporation or organization)
48-1056927
(I.R.S. Employer Identification No.)
6750 West 93rd Street, Suite 110, Overland Park, KS 66212
(Address of principal executive offices) (Zip Code)
(913) 341-8888
(Issuers's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
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 ____
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
As of March 31, 1996, the Issuer had outstanding 6,338,361
shares of Common Stock and 592,033 shares of Class A Common
Stock.
Transitional Small Business Disclosure Format (check one):
Yes No X
<PAGE>
PART 1. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
AMERICONNECT, INC.
CONSOLIDATED
BALANCE SHEETS
<CAPTION>
ASSETS MARCH 31, DECEMBER 31,
1996 1995
UNAUDITED
<S> <C> <C>
CURRENT ASSETS
Cash $ 147,202 $ 293,492
Accounts receivable, net of
allowance of $378,317 at 1996 and
$361,260 at 1995 (Note 3) 2,183,099 1,961,815
Accounts receivable-trade,
with affiliates 7,301 6,065
Accounts receivable-agents,
including accrued interest (Note 6) -- 1,492
Notes receivable-director/
shareholder (Note 2) -- 14,500
Prepaid commissions 109,142 126,042
Other current assets 119,724 94,251
Total current assets 2,566,468 2,497,657
NON-CURRENT ASSETS
Equipment and software, net of
accumulated depreciation and
amortization of $251,073 at
1996 and $230,868 at 1995 133,625 143,202
Deposits 19,528 19,528
TOTAL ASSETS $2,719,621 $2,660,387
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
AMERICONNECT, INC.
CONSOLIDATED
BALANCE SHEETS
<CAPTION>
MARCH 31, 1996 DECEMBER 31,
UNAUDITED 1995
LIABILITIES AND STOCKHOLDERS'
DEFICIT
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable (Note 3) $2,993,718 $2,782,432
Sales taxes payable 102,328 97,460
Accrued office closing costs 3,798 8,539
Other accrued liabilities -- 733
Total current liabilities 3,099,844 2,889,164
NON-CURRENT LIABILITIES
Customer deposits 9,264 8,264
Total liabilities 3,109,108 2,897,428
COMMITMENTS AND CONTINGENCIES
(Notes 3 and 5) -- --
STOCKHOLDERS' DEFICIT (Note 5)
Class A common stock, par value
$.00001 per share; 10,000,000
shares authorized; issued
6,562,033 shares 66 66
Common stock, par value $.01
per share; 20,000,000 shares
authorized; issued 6,518,611 shares 65,186 65,050
Additional paid-in capital 3,647,094 3,642,731
Accumulated deficit (4,099,970) (3,943,025)
Treasury stock - class A common,
at cost; 5,970,000 shares (60) (60)
Treasury stock - common, at cost;
180,250 shares (1,803) (1,803)
Total stockholders' deficit (389,487) (237,041)
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $2,719,621 $2,660,387
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
AMERICONNECT, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
For The Three Months
Ended March 31,
1996 1995
<S> <C> <C>
REVENUES
Sales $4,242,911 $4,511,849
Sales to affiliates 21,691 15,124
Total revenues 4,264,602 4,526,973
COSTS AND EXPENSES
Direct operating costs 3,202,346 3,444,446
Selling, administrative and
general expenses 1,188,574 1,026,971
Depreciation and amortization 20,205 15,799
Total costs and expenses 4,411,125 4,487,216
Operating income (loss) (146,523) 39,757
OTHER INCOME (EXPENSE)
Interest income 2,004 7,013
Interest expense (12,426) (742)
Loan Fees -- (1,251)
Total other income (expense) (10,422) 5,020
NET INCOME (LOSS) BEFORE INCOME TAXES (156,945) 44,777
Income Tax Expense (Note 4) -- --
NET INCOME (LOSS) $(156,945) $44,777
Net income(loss) per common and common
equivalent share $(0.02) $0.01
Weighted average common and common
equivalent shares outstanding (Note 5) 7,433,676 6,370,650
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
AMERICONNECT, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
For the Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(156,945) $44,777
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities:
Depreciation and amortization 20,205 15,799
Provision for doubtful accounts 63,830 113,175
(Increase) decrease in assets:
Accounts receivable (285,114) (433,876)
Accounts receivable-trade
from affiliates (1,236) 1,936
Prepaid commissions 16,899 --
Other current assets (25,473) (35,747)
Deposits -- (1,500)
Increase (decrease) in liabilities:
Accounts payable 211,286 180,338
Sales tax payable 4,868 15,291
Accrued office closing costs (4,741) (3,242)
Deferred income -- (13,384)
Customer Deposits 1,000 --
Other accrued liabilities (731) 6,175
Net cash used in operating
activities (156,152) (110,258)
Cash flows from investing activities:
Purchase of equipment and software (10,628) (64,381)
Payments on notes receivable -
director/shareholder 14,500 --
Payments on agents notes receivable 1,492 61,740
Net cash provided by (used in)
investing activities 5,364 (2,641)
Cash flows from financing activities:
Proceeds from bank loan 3,610,000 550,000
Payments on bank loan (3,610,000) (550,000)
Sale of stock to employees 4,498 2,250
Net cash provided by
financing activities 4,498 2,250
Net decrease in cash (146,290) (110,649)
Cash at beginning of period 293,492 405,942
Cash at end of period $147,202 $295,293
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 11,074 $ 563
Income taxes 1,765 1,608
</TABLE>
See accompanying notes to financial statements
<PAGE>
AMERICONNECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY: AmeriConnect, Inc. and its wholly owned
subsidiary, AmeriConnect, Inc. of New Hampshire (collectively,
the "Company") resell long distance telecommunications services
primarily to individuals and small to medium-sized businesses.
AmeriConnect, Inc. of New Hampshire was formed June 28, 1993, in
order to do business in the state of New Hampshire.
The consolidated balance sheets as of March 31, 1996, the
consolidated statements of operations for the three months ended
March 31, 1996 and 1995, and the consolidated statements of cash
flows for the three months ended March 31, 1996 and 1995 have
been prepared by the Company, without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position,
results of operations, and cash flows at March 31, 1996, and for
all periods presented have been made.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. It is suggested that these condensed consolidated
financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December
31, 1995 annual report to shareholders. The results of
operations for the periods ended March 31, 1996, and March 31,
1995, are not necessarily indicative of the operating results for
the full year.
NOTE 2 - NOTE RECEIVABLE - DIRECTOR/SHAREHOLDER
During 1994 and early 1995, the Company made loans totaling
$14,500 to a director/shareholder. They were secured by 19,000
shares of the Company's common stock and bore interest at 2 1/2%
over the published prime rate found in The Wall Street Journal.
The loans were paid in full on January 24, 1996.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
The Company has a contract with a firm to provide subscriber
statement processing and billing services. The contract is for a
period of three (3) years and expires in September 1996. Terms
of the contract provide for a monthly base charge with additional
per unit processing charges. Termination of this contract for
cause requires a 90-day period during which any breach of the
contract can be cured, plus a requirement for a subsequent
written 30-day notice. Termination for cause requires the
payment of all amounts owed. Termination of the contract for the
convenience of the Company requires a written 180-day notice and
a termination fee equal to one year's charges. The Company is
required to make minimum payments of $5,000 per month.
The Company has a contract with Sprint to provide
telecommunications services for the Company's customers. The
agreement covers the pricing of the services for a term of two
years beginning September 1995. The Company has an annual
minimum usage commitment of $12,000,000 through August 1996 and
$14,400,000 from September 1996 to August 1997. In the event the
Company's customers use less than the minimum commitment, the
difference is due and payable by the Company to Sprint. Assuming
a monthly average requirement of $1,000,000 under the Sprint
contract, for the period from September 1995 through March 1996,
the Company has accumulated a shortfall of $1,076,875. The
Company anticipates additional shortfall amounts to accumulate
during 1996. In the event the proposed merger with Phoenix
Network, Inc. occurs (See Note 9), the Company currently
anticipates that all accumulated shortfall amounts will be
addressed in a new contract between Sprint and the surviving
corporation. In the event the proposed merger does not occur,
the Company has begun negotiations with Sprint to address the
accumulated shortfall. While the Company believes the
accumulated shortfall at March 31, 1996, and any additional
shortfall amounts, will be resolved in a manner which will not
have a material adverse effect on the business or financial
condition of the Company in the event the proposed merger does
not occur, there can be no assurance of such a result. If the
Company were required to pay the full amount of accumulated
shortfalls, this would have a material adverse effect on the
Company's financial condition.
The Company has a contract with WilTel to provide
telecommunications services at discounted rates which will vary
based upon the amount of usage by the Company. The term of this
usage commitment is thirty-nine (39) months. The Company's
agreement with WilTel calls for a minimum monthly usage
commitment of $50,000 through January 1998. In the event the
Company's customers use less than the minimum commitment in any
month, the difference is due <PAGE> and payable by the Company to WilTel
in the following month. The Company was in compliance with the
contractual requirements of the agreement throughout the quarter
ended March 31, 1996.
On June 8, 1995, the Company entered into a revolving credit
facility which expires June 1, 1996, and allows for maximum
borrowings by the Company of the lesser of $1,000,000 or 50% of
eligible (less than 61 days old) receivables. Interest is
payable monthly at the bank's prime rate (8.25% at March 31,
1996) plus 1%. Under the terms of the credit facility, the
Company is required to meet certain financial covenants. The
line is secured by all of the Company's accounts receivable.
During the first quarter of 1996, the Company had used this
facility for short term borrowings, but had no outstanding
borrowings at quarter end. At March 31, 1996, the Company was in
default of certain of these financial covenants, which defaults
are continuing. While the Company currently does not expect
these defaults to impair its ability to utilize this facility
during the remainder of the existing term, it may negatively
impact the Company's ability to renew the credit facility. In
the event the credit facility cannot be renewed or the Company is
unable to utilize the existing facility, the Company would
attempt to obtain a comparable credit facility from an
alternative financing source. While the Company has been able to
obtain such facilities in the past, there can be no assurance
that the Company will be able to obtain a credit facility with
comparable terms or at all. The inability to obtain a credit
facility would have a material adverse effect on the Company's
financial condition and business.
In accordance with the terms of the credit facility, the
Company purchased a term life insurance policy on a key
employee with a face amount of $1,750,000 during the year ended
December 31, 1994. Annual premiums are approximately $3,500.
NOTE 4 - INCOME TAXES
A valuation allowance was established to reduce the deferred
tax asset to the amount that will more likely than not be
realized.
The valuation allowance was adjusted for three month period
ended March 31, 1996, and the year ended December 31, 1995, as
follows:
March 31, 1996 December 31, 1995
Valuation allowance,
beginning of period $1,667,882 $591,512
Valuation adjustment 39,340 576,370
Adjustment in allowance
due to change in estimate -- 500,000
Valuation allowance,
end of period $1,707,222 $1,667,882
NOTE 5 - COMMON STOCK, WARRANTS AND OPTIONS
PUBLIC OFFERING: In its initial public offering in 1989,
the Company issued 828,000 units each of which consisted of five
shares of previously unissued common stock, par value $.01 per
share, and five redeemable Class A Warrants at a price per unit
of $5.00. Each of the Class A Warrants, which was transferable
separately immediately upon issuance, entitled the holder to
purchase for $1.00 one share of common stock and one redeemable
Class B common stock purchase warrant ("Class B Warrant"). The
Class A Warrants expired on May 29, 1994. Each Class B Warrant
entitled the holder to purchase one share of common stock at
$1.50 until May 29, 1994. The warrants are not common stock
equivalents for the purposes of the earnings per share
computations. (See Note 1.) In addition, the Company granted
the underwriter and finder options to purchase 57,600 and 14,400
units, respectively, at $6.00 per unit exercisable over a period
of four years commencing one year from the date of the
prospectus.
MISSING STOCK CERTIFICATES: Prior to the Company's initial
public offering, the stockholders of record as of March 29, 1989,
executed escrow agreements which required the placement in escrow
of 150,000 shares of <PAGE> outstanding common stock and 5,970,000
shares of outstanding Class A common stock pending the
achievement of certain earnings objectives. These earnings
objectives were not met and, consequently, all of the shares
subject to the escrow agreement were retired and have been
accounted for as treasury stock since December 31, 1992. In
addition, in connection with the execution of a voting trust
agreement in 1989, certificates representing 3,014,751 shares of
Class A common stock were issued in the name of a voting trust in
substitution for the certificates held by some of the
stockholder-parties to the voting trust agreement. This voting
trust expired in June of 1992. During the first quarter of 1992,
however, the Company learned that the escrow agent associated
with the escrow agreements asserts that it has never received the
stock certificates representing the shares subject to the escrow
agreements. During the same period, the Company discovered that
the certificates representing 2,975,751 of the shares transferred
to the voting trust were never delivered to the Company for
cancellation. The Company has been unable to locate neither the
original share certificates nor the certificates issued to the
voting trust. As a result, if a stockholder attempted to
transfer any of the shares subject to the escrow agreements or
the voting trust agreement in violation of such agreements, there
can be no assurance that an innocent transferee could not
successfully claim the right to the shares purportedly
transferred to him or her. The Company believes, however, that
the legends affixed to each of the missing certificates, which
state that the shares are subject to the restrictions of the
voting trust agreement and the escrow agreements, respectively,
are sufficient to prevent a transferee from acquiring a valid
claim with respect to the shares represented by the missing
certificates. In addition, the Company has obtained affidavits
from each holder of the missing certificates that no such
purported transfers have been made.
STOCK RIGHTS: The rights and preferences of common stock
and Class A common stock are substantially identical except that
each share of common stock entitles the holder to one vote
whereas, each share of Class A common stock entitles the holder
to five votes. Class A common stock automatically converts into
common stock on a one-for-one basis upon sale or transfer to an
entity or individual who was not a holder of Class A common stock
before such sale or transfer, or at any time at the option of the
holder. During each of 1994 and 1995, 113,400 shares of Class A
stock were converted to common stock through private
transactions.
STOCK OPTION PLANS: On July 29, 1988, the Company adopted a
stock option plan allowing 300,000 shares of unissued but
authorized common stock for issuance of incentive and/or non-
qualified stock options. At March 31, 1996, all options had been
granted under the plan, and 23,000 options had been returned to
the Company by employees who resigned prior to vesting. Such
returned options are again available for use under the plan.
On May 27, 1994, the Company adopted a second stock option
plan allowing for 500,000 shares of unissued but authorized
common stock for issuance of incentive and/or non-qualified stock
options. As of March 31, 1996, 487,000 options under this plan
had been granted and 162,356 options had been returned to the
Company by employees who resigned prior to vesting. Such
returned options are again available for use under the plan.
Stock option transactions for the period ended March 31, 1996,
are summarized below:
1988 Plan 1994 Plan Total
Outstanding,
beginning of
quarter 169,000 345,000 514,000
Granted -- -- --
Exercised (3,000) (10,644) (13,644)
Canceled -- (20,356) (20,356)
Outstanding,
end of period 166,000 314,000 480,000
Option price per
share exercised $0.03-$0.50 $0.37 $0.03-$0.50
Price for
outstanding
options $0.03-$0.50 $0.26-$0.75 $0.03-$0.75
The expiration dates for the options issued under the 1988
Plan range from May 1998 to December 2003. At March 31, 1996,
23,000 shares were available for future grants under the 1988
Plan.
<PAGE>
The expiration dates for the options issued under the 1994
Plan range from August 2004 to December 2005. At March 31, 1996,
175,356 shares were available for future grants under the 1994
Plan.
NOTE 6 - NOTES RECEIVABLE
The Company conducts a portion of its business through
agents. Some of these agents have borrowed from the Company in
order to obtain necessary capital to expand their operations.
These borrowings are represented by short term promissory notes.
The terms of the notes permit the Company to withhold the monthly
payments from commissions due the agents, if necessary. The
interest rate for all the notes is 2 1/2% over the prime rate
published by The Wall Street Journal. At December 31, 1994, a
reserve of $100,000 was established against amounts due from a
specific agent whose receivable, including unpaid charges,
aggregated $498,061. During 1995, the Company and this agent
became involved in litigation, and it was determined that no
recovery on the amounts would be made. As a result, the
remaining receivable of $398,061 was written off. The Company
has negotiated a mutual release of all claims with this specific
agent.
NOTE 7 - PROFIT SHARING PLAN
The Company adopted a 401(k) savings plan effective January
1, 1994, covering nearly all eligible employees with at least six
months of service. Under the terms of the plan, employees may
contribute up to 15% of their gross wages. The Company matches
100% of the first 3% contributed by each employee. The Company's
contribution to the plan was $5,129 in the first quarter of 1996.
NOTE 8 - ONGOING OPERATIONS
The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles. The
Company reported a net loss of $156,945 in the first quarter of
1996. As a result, liabilities exceeded assets by $389,487.
Non-cash items such as depreciation and amortization and
provision for doubtful accounts collectively contributed $84,035
of the loss. The remaining $72,910, along with a $285,114
increase in accounts receivable and a $211,286 increase in
accounts payable, contributed to cash used in operations of
$156,152. In light of the foregoing, in order to become
profitable, the Company must achieve sufficient volume levels to
obtain additional discounts under its existing carrier contracts
or negotiate new contracts with its carriers to obtain favorable
pricing at existing volume levels and reduce other costs. In
addition, the Company may explore financing and other strategic
transactions, such as the proposed merger (discussed in Note 9
below).
The proposed merger would reduce the Company's direct
operating costs through volume discounts on long-distance pricing
from its carriers and would provide certain economics of scale
which management believes would allow its operations to become
profitable and allow it to compete for new and existing
customers. If, for any reason, the proposed merger is not
consummated, the Company plans to increase sales and reduce its
costs and will continue to explore other strategic alternatives
(which may include financings, mergers, acquisitions, joint
ventures or other strategic transactions).
NOTE 9 - SUBSEQUENT EVENT
On January 15, 1996, the Company and Phoenix Network,
Inc. ("Phoenix"), a San Francisco, California-based long distance
reseller and provider of value-added telecommunications services,
signed a letter of intent to merge the two companies in a stock-
for-stock transaction. The parties currently are negotiating a
definitive merger agreement. In connection with the proposed
merger, Phoenix expects to issue approximately 4 million new
shares of common stock in exchange for all of the outstanding
shares of the Company. It is currently anticipated that the
closing will take place on or about August 15, 1996, pending the
obtaining of all necessary regulatory approvals and approval of
the shareholders of both companies. There can be no assurance
that the ongoing negotiations between the Company and Phoenix
will in fact result in the execution of a definitive merger
agreement or that the terms of any such agreement would be as
described above.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS
REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THE SECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN
THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
GENERAL
The Company's financial condition and results of operations
continue to be negatively affected by severe competition, high
direct operating costs and increasing costs for new sales. In
addition, fees for professional services in conjunction with the
proposed merger with Phoenix Network were approximately $62,000
which negatively affected first quarter results. There is no
assurance that the proposed merger will be consummated.
Competition. Intense competition in the long distance
telecommunications industry continued into 1996. Major long
distance companies like AT&T and Sprint are continuing to market
directly to the Company's primary market - small to medium-sized
businesses. Other existing competitors are aggressively reducing
rates to maintain and build customer base and expand minute
volume. In addition, new competitors emerged targeting the
Company's primary market. Many of these competitors sought to
build volume quickly and, in order to accomplish this goal, sold
their long distance services at rates that, in the Company's
opinion, do not reflect the full costs of doing business.
Accordingly, while the Company reduced its rates and undertook
efforts to maintain and build its customer base (as described
below), the Company was unable to match the rates and/or services
offered by many of its competitors, thereby increasing the number
of customers lost to competitors. While the Company continued to
acquire new customers, lost business and rate reductions to
existing accounts more than offset new business. While total
minutes billed increased approximately 5% from the first quarter
1995 to the first quarter 1996, the average revenue per minute
dropped approximately 10%.
Direct Operating Costs. The Company was able to obtain a
new contract with its major underlying carrier in September 1995.
While the new contract reduces the Company's costs at certain
increased volume targets, which would result in significant cost
reductions for the Company, to date the Company has been unable
to achieve the volume targets necessary to realize the reduced
carrier pricing. As a result, the Company has been unable to
significantly increase margins.
Sales Costs. The Company sought to increase its volume by
offering services at rates that were competitive in the market.
In addition, the Company hired Area Sales Directors and other
personnel to support its sales agent program, increased
commissions to sales agents to maintain its relationship with key
agents, hired a Kansas City area direct sales force and promoted
aggressive marketing campaigns designed to increase sales. While
the Company believes these actions to be necessary to respond to
the competitive environment, they have the effect of increasing
selling, general and administrative expenses.
RESULTS OF OPERATIONS
Total Revenues. Total revenues decreased from $4,526,973 in
the first quarter 1995 to $4,264,602 in the first quarter 1996, a
decrease of $262,371 or approximately 6%. This decrease in
revenues is attributable to the decrease in average revenue per
minute.
Direct Operating Costs. Direct operating costs decreased
from $3,444,446 in the first quarter 1995 to $3,202,346 in the
first quarter 1996, a decrease of $242,100 or approximately 7%.
As a percentage of revenues, direct operating costs decreased
from approximately 76% in 1995 to 75% in 1996. The decrease is
consistent with the decrease in revenues noted above.
<PAGE>
Selling, Administrative and General Expenses. The Company's
selling, administrative and general expenses increased from
$1,026,971 in the first quarter 1995 to $1,188,574 in the first
quarter 1996, an increase of $161,603 or approximately 16%. As a
percentage of revenue, selling, administrative and general
expenses increased from 23% in 1995 to 28% in 1996. The biggest
single increase in this expense category in dollars was in
compensation expense.
Compensation expenses increased from $534,829 in the first
quarter 1995 to $650,571 in the first quarter 1996, an increase
of $115,742 or approximately 22%. Salaries for sales related
positions increased from $55,646 to $105,594, an increase of
$49,948 or approximately 90%, which increase resulted from the
addition of several sales positions throughout 1995 and early
1996. Agent commissions increased from $310,893 to $353,969, an
increase of $43,076 or approximately 14% due to the introduction
in late 1995 of a commission plan designed to attract high volume
agents.
Fees for professional services increased from $44,689 in the
first quarter 1995 to $106,519 in the first quarter 1996, an
increase of $61,830 or approximately 138%. This increase
resulted primarily from increases in the costs of legal and
accounting services associated with the potential merger
previously mentioned.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 1995 and March 31, 1996, the Company had a
stockholders' deficit of $237,041 and $389,487, respectively. In
the first quarter 1995, the Company used $110,258 cash from
operations. In the first quarter 1996, the Company used $156,152
cash in operations. While the Company reported a net loss of
$156,945 for the first quarter 1996, non-cash items such as
depreciation and amortization and provision for doubtful accounts
collectively contributed $84,035 of the total loss. The
remaining portion of the total loss, $72,910, along with a
$285,114 increase in accounts receivable and a $211,286 increase
in accounts payable, contributed to the cash used in operating
activities.
On June 8, 1995, the Company entered into a revolving credit
facility which expires June 1, 1996, and allows for maximum
borrowings by the Company of the lesser of $1,000,000 or 50% of
eligible (less than 61 days old) receivables. Interest is
payable monthly at the bank's prime rate (8.25% at March 31,
1996) plus 1%. Under the terms of the credit facility, the
Company is required to meet certain financial covenants. The
line is secured by all of the Company's accounts receivable.
During the first quarter of 1996, the Company had used this
facility for short terms borrowings, but had no outstanding
borrowings at quarter end. At March 31, 1996, the Company was in
default of certain of these financial covenants, which defaults
are continuing. While the Company currently does not expect
these defaults to impair its ability to utilize this facility
during the remainder of the existing term, it may negatively
impact the Company's ability to renew the credit facility. In
the event the credit facility cannot be renewed or the Company is
unable to utilize the existing facility, the Company would
attempt to obtain a comparable credit facility from an
alternative financing source. While the Company has been able to
obtain such facilities in the past, there can be no assurance
that the Company will be able to obtain a credit facility with
comparable terms or at all. The inability to obtain a credit
facility would have a material adverse effect on the Company's
financial condition and business.
The Company has a contract with Sprint to provide
telecommunications services for the Company's customers. The
agreement covers the pricing of the services for a term of two
years beginning September 1995. The Company has an annual
minimum usage commitment of $12,000,000 through August 1996 and
$14,400,000 from September 1996 to August 1997. In the event the
Company's customers use less than the minimum commitment, the
difference is due and payable by the Company to Sprint. Assuming
a monthly average requirement of $1,000,000 under the Sprint
contract, for the period from September 1995 through March 1996,
the Company has accumulated a shortfall of $1,076,875. The
Company anticipates additional shortfall amounts to accumulate
during 1996. In the event the proposed merger with Phoenix
Network, Inc. occurs (See Note 9), the Company currently
anticipates that all accumulated shortfall amounts will be
addressed in a new contract between Sprint and the surviving
corporation. In the event the proposed merger does not occur,
the Company has begun negotiations with Sprint to address the
accumulated shortfall. While the Company believes the
accumulated shortfall at March 31, 1996, and any additional
shortfall amounts, will be resolved in a manner which will not
have a material adverse effect on the business or financial
condition of the Company in the event the proposed merger does
not occur, there can be no assurance of such a result. If the
Company were required to pay the full amount of accumulated
shortfalls, this would have a material adverse effect on the
Company's financial condition.
The Company has a contract with WilTel to provide
telecommunications services at discounted rates which will vary
based upon the amount of usage by the Company. The term of this
usage commitment is thirty-nine (39) months. The Company's
agreement with WilTel calls for a minimum monthly usage
commitment of $50,000 through January <PAGE> 1998. In the event the
Company's customers use less than the minimum commitment in any
month, the difference is due and payable by the Company to WilTel
in the following month. The Company was in compliance with the
contractual requirements of the agreement throughout the quarter
ended March 31, 1996.
At March 31, 1996, the Company had a ratio of current assets
to current liabilities of 0.83. Working capital deficit at March
31, 1996 was $533,376.
The Company's business as a non-facilities based reseller of
long distance telecommunications services is generally not a
capital intensive business, and at March 31, 1996, the Company
had no material commitments for capital expenditures. The
Company anticipates any additional capital expenditures in the
future will be confined to minimal purchases of office fixtures
and equipment.
Currently none of the Company's customers represents more
than 2% of the monthly revenues.
The proposed merger would reduce the Company's direct
operating costs through volume discounts on long-distance pricing
from its carriers and would provide certain economies of scale
that together management believes would allow its operations to
become profitable and allow it to compete for new and existing
customers. If for any reason the proposed merger is not
consummated, the Company plans to increase its sales and reduce
its costs and will continue to explore other strategic
alternatives (which may include financings, mergers,
acquisitions, joint ventures or other strategic transactions).
In addition, if the proposed merger is not consummated, the
Company intends to negotiate new contracts with its carriers
which would allow its operations to become profitable.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Dependence on Service Providers. The Company depends on a
continuing and reliable supply of telecommunications services
from facilities-based, interexchange carriers. Because the
Company does not own or lease switching or transmission
facilities, it depends on these providers for the
telecommunications services used by its customers and to provide
the Company with the detailed information on which it bases its
customer billings. The Company's ability to expand its business
depends both upon its ability to select and retain reliable
providers and on the willingness of such providers to continue to
make telecommunications services and billing information
available to the Company for its customers on favorable terms and
in a timely manner.
Potential Adverse Effects of Rate Changes. The Company
bills its customers for the costs of the various
telecommunications services procured on their behalf. The total
billing to each customer is generally less than telephone charges
for the same service provided by the major carriers. The Company
believes its lower customer bills are an important factor in its
ability to attract and retain customers. To the extent the
differential between the telephone rates offered by the major
carriers directly to their customers and the cost of the bulk-rate
telecommunications services procured by the Company from its
underlying carriers decreases, the savings the Company is able to
obtain for its customers could decrease and the Company could
lose customers or face increased difficulty in attracting new
customers. If the Company elected to offset the effect of any
such decrease by lowering its rates, the Company's operating
results would also be adversely affected.
Competition. An existing or potential customer of the
Company has numerous other choices available for its
telecommunications service needs, including obtaining services
directly from the same carriers whose services the Company
offers. From time to time, the Company's competitors may be able
to provide a range of services comparable to or more extensive
than those available to the Company's customers at rates
competitive with, or lower than, the Company's rates. In
addition, most prospective customers of the Company are already
receiving service directly from at least one long distance
carrier, and thus the Company must convince prospective customers
to alter these relationships to generate new business. The
Company competes with three major interexchange carriers, AT&T,
MCI and Sprint, other large carriers, including Frontier and
WorldCom, and several hundred smaller carriers. Additionally, as
a result of legislation enacted by the federal government in
February of 1996, the RBOCs and GTOCs will have, upon compliance
with certain regulatory requirements, the right to provide long
distance service. Many of the RBOCs and GTOCs have already
announced their intention to enter the business of providing long
distance service. As a consequence, the telecommunications
industry will remain highly competitive and be subject to rapid
technological and regulatory change. <PAGE> Because the tariffs offered
by the major carriers for telecommunications services are not
proprietary in nature, there are no effective barriers to entry
into the Company's line of business. Because of the considerably
greater resources of competitors of the Company, there can be no
assurance that the Company will be able to become or remain
competitive in the current telecommunications environment.
Possible Volatility of Stock Price. The market price of the
Company's Common Stock has, in the past, fluctuated substantially
over time and may in the future be highly volatile. Factors such
as the announcements of potential mergers, acquisitions, joint
ventures or other strategic combinations involving the Company.
The announcement of the inability to consummate the proposed
merger, rate changes for various carriers, technological
innovation or new products or service offerings by the Company or
its competitors, as well as market conditions in the
telecommunications industry generally and variations in the
Company's operating results, could cause the market price of the
Common Stock to fluctuate substantially. Because the public
float for the Company's Common Stock is small, additional
volatility may be experienced.
Control by Officers and Directors. As of March 31, 1996,
the Company's executive officers and directors beneficially owned
or controlled approximately 52.9% of the total voting power
represented by the Company's outstanding capital stock, taking
into account that holders of the Company's Class A Common Stock
are entitled to five votes per share of such stock and assuming
the exercise of all outstanding options for the Company's capital
stock which are exercisable within sixty (60) days. The votes
represented by the shares beneficially owned or controlled by the
Company's executive officers and directors would, if they were
cast together, control the election of a majority of the
Company's directors and the outcome of most corporate actions
requiring stockholder approval.
Investors who purchase Common Stock of the Company may be
subject to certain risks due to the concentrated ownership of the
capital stock of the Company. Such risks include: (i) the shares
beneficially owned or controlled by the Company's executive
officers and directors could, if they were cast together, delay,
defer or prevent a change in control of the Company, such as an
unsolicited takeover, which might be beneficial to the
stockholders, and (ii) due to the substantial ownership or
control of outstanding shares by the Company's executive officers
and directors and the potential adverse impact of such
substantial ownership or control on a change in control of the
Company, it is less likely that the prevailing market price of
the outstanding shares of the Company's Common Stock will reflect
a "premium for control" than would be the case if ownership of
the outstanding shares were less concentrated.
Governmental Regulation. As a reseller of long distance
telecommunications services, the Company is subject to many of
the same regulatory requirements as facilities-based
interexchange carriers. The intrastate long distance
telecommunications operations of the Company are also subject to
various state laws and regulations, including certification
requirements. Generally, the Company must obtain and maintain
certificates of public convenience and necessity from regulatory
authorities in most states where it offers service, and in some
of these jurisdictions it must also file and obtain prior
regulatory approval of tariffs for intrastate offerings. There
can be no assurance that the regulatory authorities in one or
more states or the FCC will not take action having an adverse
effect on the business or financial condition of the Company.
PART 2. - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized (the
undersigned being its President).
AMERICONNECT, INC.
Date: May 15, 1996
/s/ Robert R. Kaemmer
Robert R. Kaemmer
President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMERICONNECT, INC. CONTAINED IN ITS QUARTERLY REPORT ON
FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 147,202
<SECURITIES> 0
<RECEIVABLES> 2,561,416
<ALLOWANCES> 378,317
<INVENTORY> 0
<CURRENT-ASSETS> 2,566,468
<PP&E> 384,698
<DEPRECIATION> 251,073
<TOTAL-ASSETS> 2,719,621
<CURRENT-LIABILITIES> 3,099,844
<BONDS> 0
0
0
<COMMON> 65,252
<OTHER-SE> (454,739)
<TOTAL-LIABILITY-AND-EQUITY> 2,719,621
<SALES> 4,264,602
<TOTAL-REVENUES> 4,264,602
<CGS> 3,202,346
<TOTAL-COSTS> 4,411,125
<OTHER-EXPENSES> (2,004)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,426
<INCOME-PRETAX> (156,945)
<INCOME-TAX> 0
<INCOME-CONTINUING> (156,945)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (156,945)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
