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 September 30, 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 48-1056927
(State or other jurisdiction of incorporation or organization) (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 October 7, 1996, the Issuer had outstanding 6,342,361 shares of Common
Stock and 592,033 shares of Class A Common Stock.
Transitional Small Business Disclosure Format (check one):
Yes No X
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICONNECT, INC.
Consolidated
Balance Sheets
ASSETS
<TABLE>
<S> <C> <C>
September 30, 1996 December 31, 1995
Unaudited
CURRENT ASSETS
Cash
$ 287,412 $ 293,492
Accounts receivable,
net of allowance of
$380,060 at 1996 and
$361,260 at 1995
(Note 2) 2,144,140 1,961,815
Accounts receivable
- - -trade, with affiliates 8,062 6,065
Accounts receivable-
agents, including
accrued interest 32,140 1,492
Notes receivable-
director/shareholder -- 14,500
Prepaid commissions 54,567 126,042
Other current assets 87,105 94,251
Total current assets 2,613,426 2,497,657
NON-CURRENT ASSETS
Equipment and software,
net of accumulated
depreciation and
amortization of $292,881
at 1996 and $230,868
at 1995 100,234 143,202
Deposits 18,027 19,528
TOTAL ASSETS $2,731,687 $2,660,387
See accompanying notes to financial statements
AMERICONNECT, INC.
Consolidated
Balance Sheets
September 30, 1996 December 31, 1995
Unaudited
LIABILITIES AND
STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable (Note 2) $3,034,462 $2,782,432
Sales taxes payable 101,534 97,460
Accrued office closing
costs -- 8,539
Other accrued liabilities 513 733
Total current liabilities 3,136,509 2,889,164
NON-CURRENT LIABILITIES
Customer deposits 3,000 8,264
Total liabilities 3,139,509 2,897,428
COMMITMENTS AND
CONTINGENCIES
(Notes 2 and 4) -- --
STOCKHOLDERS'
DEFICIT (Note 4)
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
6,522,611 shares 65,226 65,050
Additional paid-in capital 3,647,174 3,642,731
Accumulated deficit (4,118,425) (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 (407,822) (237,041)
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $2,731,687 $2,660,387
</TABLE>
See accompanying notes to financial statements
AMERICONNECT, INC.
Consolidated
Statements of Operations
(Unaudited)
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
<TABLE>
<S> <C> <C> <C> <C>
1996 1995 1996 1995
REVENUES
Sales $4,175,148 $4,177,064 $12,740,335 $13,067,791
Sales to
affiliates 21,967 21,435 63,477 62,969
Total revenues 4,197,115 4,198,499 12,803,812 13,130,760
COSTS AND EXPENSES
Direct operating
costs 3,237,198 3,487,873 9,609,495 10,293,096
Selling,
administrative and
general expenses 1,207,711 1,215,695 3,304,589 3,297,760
Depreciation and
amortization 22,010 18,810 62,012 53,386
Total costs and
expenses 4,466,919 4,722,378 12,976,096 13,644,242
Operating loss (269,804) (523,879) (172,284) (513,482)
OTHER INCOME
(EXPENSE)
Interest income 2,410 4,215 6,888 16,786
Interest expense (6,503) (3,106) (23,794) (6,346)
Loan fees -- -- -- (1,251)
Miscellaneous 10,901 377 13,790 377
Total other income
(expense) 6,808 1,486 (3,116) 9,566
NET LOSS BEFORE
INCOME TAXES (262,996) (522,393) (175,400) (503,916)
Income tax benefit
(expense) (Note 3) -- -- -- --
NET LOSS ($262,996) ($522,393) ($175,400) ($503,916)
Net loss per common
and common
equivalent share ($.038) ($.076) ($.025) ($.074)
Weighted average
common and common
equivalent shares
outstanding (Note 4) 6,921,189 6,841,499 6,921,189 6,841,499
</TABLE>
See accompanying notes to financial statements
AMERICONNECT, INC.
Consolidated
Statements of Cash Flows
(Unaudited)
For the Nine
Months Ended
September 30,
<TABLE>
<S> <C> <C>
1996 1995
Cash flows from operating
activities:
Net loss ($175,400) ($503,916)
Adjustments to reconcile
net income to cash provided by
(used in) operating activities:
Depreciation and amortization 62,012 53,386
Provision for doubtful accounts 191,650 376,555
(Increase) decrease in assets:
Accounts receivable-trade (373,975) (156,457)
Accounts receivable - trade
from related parties (1,997) (2,782)
Prepaid commissions 71,475 --
Other current assets 7,146 35,496
Deposits 1,501 (3,683)
Increase (decrease) in
liabilities:
Accounts payable - trade 252,030 102,265
Sales tax payable 4,074 10,528
Accrued office closing costs (8,539) (13,349)
Other accrued liabilities (220) (23,482)
Customer deposits (5,264) (7,500)
Deferred income -- (13,384)
Net cash provided by (used in)
operating activities 24,493 (146,323)
Cash flows from investing
activities:
Purchase of equipment and
software (19,044) (82,593)
Notes receivable -
director/shareholder -- (3,000)
Payments on note receivable
- - - director/shareholder 14,500 --
Notes receivable - agents (20,000) (20,000)
Notes receivable - employees (11,400) --
Payment on agents notes
receivable 752 74,864
Net cash used in investing
activities (35,192) (30,729)
Cash flows from financing
activities:
Proceeds from bank loan 8,785,000 4,130,000
Payments on bank loan (8,785,000) (3,786,683)
Sale of stock to employees 4,619 2,250
Net cash provided by
financing activities 4,619 345,567
Net increase (decrease) in cash (6,080) 168,515
Cash at beginning of period 293,492 405,942
Cash at end of period $ 287,412 $ 574,457
Supplemental disclosures of
cash flow information
Cash paid during the period for:
Interest paid $27,792 $5,370
Income taxes 2,245 3,340
</TABLE>
See accompanying notes to financial statements
AMERICONNECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY: AmeriConnect, Inc. and its wholly owned subsidiary, AmeriConnect,
Hampshire (collectively, the "Company") resell long distance
telecommunications services primarily to individualsand 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 September 30, 1996, the consolidated
statements of operations for the nine months ended September 30, 1996 and
1995, and the consolidated statements of cash flows for the nine months ended
September 30, 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 September 30, 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 September 30, 1996, and September 30, 1995, are not
necessarily indicative of the operating results for the full year.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
The Company had a contract with a firm to provide subscriber statement
processing and billing services. The contract was for a period of three
(3) years and expired in September 1996. The Company has negotiated a month-
to-month arrangement that began in October 1996. Terms of the month-to-month
arrangement provide for a monthly base charge with additional per unit
processing charges.
The Company has a contract with Sprint to provide telecommunications services
for the Company's customers. The Company has negotiated an amendment to
the contract that was retroactive to January 1, 1996. The amendment
covers the pricing of the services for a term of two years beginning
January 1, 1996. The Company has a monthly minimum usage commitment of
$500,000 for each of the months covered by the agreement with a total minimum
commitment of $12,000,000. In the event the Company's customers use less
than the minimum commitment, the difference is due and payable by the
Company to Sprint. Prior to the amendment, the Company had a minimum
monthly commitment of $1,000,000. For the period September 1, 1995,
through December 1, 1995, the Company had an accumulated shortfall of
approximately $719,549 which will be offset by the amount by which the
Company's actual monthly billed usage for the period beginning on January
1, 1996 exceeds the $500,000 minimum commitment. As a result of this
offset, at September 30, 1996, there was no accumulated shortfall and the
Company was in compliance with the contractual requirements of the
agreement. Due to the fact the merger with Phoenix Network, Inc. was
consummated on October 8, 1996 (See Note 7), the Company's amendment to
the Sprint contract terminated on the closing date.
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 and payable by the Company to WilTel in the following
month. On June 21, 1996, the Company executed an amendment to the contract.
The amendment provides for additional discounts to the Company for the
usage months of June, July, August and September of 1996. The Company was
in compliance with the contractual requirements of the agreement throughout
the quarter ended September 30, 1996.
On June 1, 1996, the Company entered into a revolving credit facility which
expired October 1, 1996, and allowed for maximum borrowings by the Company
of the lesser of $1,000,000 or 50% of eligible (less than 61 days old)
receivables. This facility was renewed on October 1, 1996, and will expire
on November 1, 1996. Interest is payable monthly at the bank's prime rate
(8.25% at September 30, 1996) plus 2%. 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
third quarter of 1996, the Company had used this facility for short term
borrowings, but had no outstanding borrowings at quarter end. At September
30, 1996, the Company was in default of certain of these financial covenants,
which defaults are continuing.
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 3 - 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 the nine month period ended September
30, 1996, and the year ended December 31, 1995, as follows:
<TABLE>
<S> <C> <C>
September 30, 1996 December 31, 1995
Valuation allowance,
beginning of period $1,667,882 $591,512
Valuation adjustment 47,419 576,370
Adjustment in allowance
due to change in estimate -- 500,000
Valuation allowance, end
of period $1,715,301 $1,667,882
</TABLE>
NOTE 4 - 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 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 September 30,
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 September 30, 1996,
487,000 options under this plan had been granted and 182,856 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 September 30, 1996, are
summarized below:
<TABLE>
<S> <C> <C> <C>
1988 Plan 1994 Plan Total
Outstanding, beginning
of quarter 163,000 302,000 465,000
Granted -- -- --
Exercised (1,000) -- (1,000)
Cancelled -- (8,500) (8,500)
Outstanding, end
of period 162,000 293,500 455,500
Option price per share
exercised $0.03 -- $0.03
Price for outstanding
options $0.03 - $0.50 $0.26 - $0.75 $0.03 - $0.75
</TABLE>
The expiration dates for the options issued under the 1988 Plan range from
May 1998 to December 2003. At September 30, 1996, 23,000 shares were
available for future grants under the 1988 Plan.
The expiration dates for the options issued under the 1994 Plan range from
August 2004 to December 2005. At September 30, 1996, 195,856 shares were
available for future grants under the 1994 Plan.
NOTE 5 - 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 $14,907 in the first
nine months of 1996.
NOTE 6 - ONGOING OPERATIONS
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles. The Company reported a net loss of
$175,400 for the nine month period ended September 30, 1996. At this time,
liabilities exceed assets by $407,822.
NOTE 7 - SUBSEQUENT EVENT
On January 15, 1996, the Company and Phoenix Network, Inc. ("Phoenix"), a
Golden, Colorado-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 executed a
definitive merger agreement on June 14, 1996. In connection with the
merger, Phoenix issued approximately 2.6 million shares of its common stock
in exchange for all of the outstanding shares of the Company. The merger
was consummated on October 8, 1996.
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 increasing competition which contributes to lower
profit margins and increasing costs for new sales.
Competition. Intense competition in the long distance telecommunications
industry continues in 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 continue to emerge 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 8% from the third quarter 1995 to the third quarter
1996, the average revenue per minute dropped approximately 11%.
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.
Third Quarter Results 1996 Compared to Third Quarter Results 1995
Total Revenues. Total revenues decreased from $4,198,499 in the third quarter
1995 to $4,197,115 in the third quarter 1996, a decrease of $1,384. The
decrease is attributable to the decrease in average revenue per minute as
previously discussed.
Direct Operating Costs. Direct operating costs decreased from $3,487,873 in
the third quarter 1995 to $3,237,198 in the third quarter 1996, a decrease
of $250,675 or approximately 7%. As a percentage of revenues, direct
operating costs decreased from approximately 83% in the third quarter of
1995 to approximately 77% in the third quarter of 1996. The decrease is
due in large part to the fact that approximately $200,000 in credits due
from a supplier were written-off in the third quarter of 1995. Excluding
the effects of the write-off, direct operating costs as a percentage of
revenues for the third quarter of 1995 would have been approximately 78%.
Selling, Administrative and General Expenses. The Company's selling,
administrative and general expenses decreased from $1,215,695 in the third
quarter 1995 to $1,207,711 in the third quarter 1996, a decrease of $7,984 or
approximately 11%. As a percentage of revenue, selling, administrative and
general expenses remained constant at approximately 29%.
Compensation expenses increased from $609,856 in the third quarter 1995 to
$680,225 in the third quarter 1996, an increase of $70,369 or approximately
12%. Salaries for sales related positions increased from $82,479 to $108,311,
an increase of $25,832 or approximately 31%, which resulted from the
addition of several sales positions throughout 1996. In-house commissions
increased from $9,434 to $27,698, an increase of $18,264 or approximately
194%. Agent commissions increased from $358,422 to $377,503, an increase of
$19,081 or approximately 5% due to the introduction in late 1995 of a
commission plan designed to attract high volume agents.
Fees for professional services increased from $51,043 in the third quarter
1995 to $117,843 in the third quarter 1996, an increase of $66,800 or
approximately 131%. This increase resulted primarily from increases in the
costs of legal and accounting services associated with the merger.
Nine Month Results 1996 Compared to Nine Month Results 1995
Total Revenues. Total revenues decreased from $13,130,760 for the first
nine months of 1995 to $12,803,812 for the first nine months of 1996, a
decrease of $326,948 or approximately 2%. This decrease in revenues is
attributable to the decrease in average revenue per minute.
Direct Operating Costs. Direct operating costs decreased from $10,293,096
for the first nine months of 1995 to $9,609,495 for the first nine months
of 1996, a decrease of $683,601 or approximately 7%. As a percentage of
revenues, direct operating costs decreased from approximately 78% in 1995
to 75% in 1996. The decrease was the result of the execution of a new
carrier contract that was effective September 1, 1995 and an amendment to
the new contract that was effective January 1, 1996. (See Third Quarter
Results above.)
Selling, Administrative and General Expenses. The Company's selling,
administrative and general expenses increased from $3,297,760 for the first
nine months of 1995 to $3,304,589 for the first nine months of 1996, an
increase of $6,829 or approximately 1%. As a percentage of revenue,
selling, administrative and general expenses increased from 25% in 1995 to
26% in 1996. The increase in selling, administrative and general expenses
was insignificant due in large part to the recovery of a bad debt previously
written off. The Company received a credit in the amount of $300,000
related to the bad debt previously written off. Without the effect of the
$300,000 credit, selling, administrative and general expenses would have
increased from $3,297,760 for the first nine months of 1995 to $3,604,589
for the first nine months of 1996, an increase of $306,829 or approximately
29%. The biggest single increase in this expense category in dollars was in
compensation expense.
Compensation expenses increased from $1,746,672 for the first nine months of
1995 to $2,004,804 for the first nine months of 1996, an increase of
$258,132 or approximately 15%. Salaries for sales related positions
increased from $217,752 to $329,625, an increase of $111,873 or
approximately 57%, which resulted from the addition of several sales
positions throughout 1996. In-house commissions increased from $29,208 to
$79,437, an increase of $50,229 or approximately 172%. Agent commissions
increased from $1,030,526 to $1,104,613, an increase of $74,087 or
approximately 7% due to the introduction in late 1995 of a commission plan
designed to attract high volume agents.
Fees for professional services increased from $145,146 for the first nine
months of 1995 to $333,557 for the first nine months of 1996, an increase of
$173,411 or approximately 119%. This increase resulted primarily from
increases in the costs of legal and accounting services associated with the
merger.
Liquidity and Capital Resources
On December 31, 1995 and September 30, 1996, the Company had a stockholders'
deficit of $237,041 and $407,822, respectively. During the first nine
months of 1995, the Company used $146,323 cash from operations. During
the first nine months of 1996, the Company provided $24,493 cash from
operations.
The Company has a contract with Sprint to provide telecommunications
services for the Company's customers. The Company has negotiated an
amendment to the contract that was retroactive to January 1, 1996. The
amendment covers the pricing of the services for a term of two years
beginning January 1, 1996. The Company has a monthly minimum usage
commitment of $500,000 for each of the months covered by the agreement with
a total minimum commitment of $12,000,000. In the event the Company's
customers use less than the minimum commitment, the difference is due and
payable by the Company to Sprint. Prior to the amendment, the Company had a
minimum monthly commitment of $1,000,000. For the period September 1, 1995,
through December 1, 1995, the Company had an accumulated shortfall of
approximately $719,549 which will be offset by the amount by which the
Company's actual monthly billed usage for the period beginning on January
1, 1996 exceeds the $500,000 minimum commitment. As a result of this
offset, at September 30, 1996, there was no accumulated shortfall and the
Company was in compliance with the contractual requirements of the agreement.
Due to the fact the merger with Phoenix Network, Inc. was consummated
on October 8, 1996 (See Note 7), the Company's amendment to the Sprint
contract terminated on the closing date.
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 and payable by the Company to WilTel in the following month. On June
21, 1996, the Company executed an amendment to the contract. The amendment
provides for additional discounts to the Company for the usage months of
June, July, August and September of 1996. The Company was in compliance
with the contractual requirements of the agreement throughout the quarter
ended September 30, 1996.
On June 1, 1996, the Company entered into a revolving credit facility which
expired October 1, 1996, and allowed for maximum borrowings by the Company
of the lesser of $1,000,000 or 50% of eligible (less than 61 days old)
receivables. This facility was renewed on October 1, 1996, and will expire
on November 1, 1996. Interest is payable monthly at the bank's prime rate
(8.25% at September 30, 1996) plus 2%. 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
third quarter of 1996, the Company had used this facility for short term
borrowings, but had no outstanding borrowings at quarter end. At September
30, 1996, the Company was in default of certain of these financial covenants,
which defaults are continuing.
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.
At September 30, 1996, the Company had a ratio of current assets to current
liabilities of 0.83. Working capital deficit at September 30, 1996 was
$523,083.
The Company's business as a non-facilities based reseller of long distance
telecommunications services is generally not a capital intensive business,
and at September 30, 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.
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. 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 September 30, 1996, the Company's
executive officers and directors beneficially owned or controlled
approximately 46.5% 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
1. Financial Data Schedule
(b) Reports on Form 8-K
On September 3, 1996, the Company filed a report on Form 8-K - Events
regarding a press release issued by the Company that they have established
the close of business on September 3, 1996, as the record date for
determining the stockholders entitled to notice of and to vote at a special
meeting of stockholders to be held to consider and approve the proposed
merger with a wholly owned subisidary of Phoenix Network, Inc.
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: November 14, 1996
/s/ Robert R. Kaemmer
Robert R. Kaemmer
President
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] 12-31-96
[PERIOD-END] 09-30-96
[CASH] 287,412
[SECURITIES] 0
<RECEIVABLE> 2,564,402
[ALLOWANCES] 380,060
[INVENTORY] 0
[CURRENT-ASSETS] 2,613,426
[PP&E] 393,115
[DEPRECIATION] 292,881
[TOTAL-ASSETS] 2,731,687
[CURRENT-LIABILITIES] 3,136,509
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 65,292
[OTHER-SE] (473,114)
[TOTAL-LIABILITY-AND-EQUITY] 2,731,687
[SALES] 12,803,812
[TOTAL-REVENUES] 12,803,812
[CGS] 9,609,495
[TOTAL-COSTS] 12,976,096
[OTHER-EXPENSES] (20,678)
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 23,794
[INCOME-PRETAX] (175,400)
[INCOME-TAX] 0
[INCOME-CONTINUING] (175,400)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (75,400)
[EPS-PRIMARY] (.025)
[EPS-DILUTED] (.025)
</TABLE>
