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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 24, 1997
MIDCOM Communications Inc.
(Exact name of registrant as specified in its charter)
Washington
(State or other jurisdiction of incorporation or organization)
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000-26118 91-1438806
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(Commission File Number) (I.R.S Employer Identification No.)
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26899 Northwestern Highway
Suite 120
Southfield, Michigan 48034
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(Address of principal executive offices)
(248) 304-1780
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(Registrant's telephone number, including area code)
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Item 5. Other Events
On August 13, 1997 MIDCOM Communications Inc. (the "Company") issued a
press release announcing that it has signed a definitive merger agreement with
Phoenix Network, Inc. The text of that press release is included with this
report as Exhibit 99.1.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits
99.1 Press release dated August 13, 1997.
SIGNATURES
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 hereunto duly authorized.
MIDCOM COMMUNICATIONS INC.
Dated: September 24, 1997 By: /s/ Steven P. Goldman
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Steven P. Goldman
Vice President and General Counsel
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MIDCOM COMMUNICATIONS INC.
EXHIBIT INDEX
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<S> <C>
99.1 Press release dated August 13, 1997.
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Exhibit 99.1
[MIDCOM LOGO]
FOR IMMEDIATE RELEASE
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Contact: Teresa C. Stackpole
Director, Corporate Communications
206/628-6115
MIDCOM ANNOUNCES MERGER AGREEMENT
WITH PHOENIX NETWORK
SECOND QUARTER RESULTS SHOW SEQUENTIAL IMPROVEMENT
IN REVENUE AND GROSS MARGIN
SOUTHFIELD, MI (August 13, 1997) - MIDCOM Communications Inc. (NASDAQ: MCCI)
today announced that it has signed a definitive agreement with Phoenix Network,
Inc. (AMEX: PHX) to merge the two companies. The merger is expected to close by
year-end, subject to the approvals of the shareholders of MIDCOM and Phoenix
Network, the receipt of governmental approvals and subject to MIDCOM raising at
least $20.0 million in financing prior to closing. Concurrently, MIDCOM also
reported financial results for the quarter ended June 30, 1997.
On August 13, 1997 the companies executed a definitive agreement to
merge Phoenix Network into MIDCOM. Like MIDCOM, Phoenix Network offers core
long distance service as well as a variety of other telecommunications services
to the small to medium-sized commercial market.
"We believe this merger will create a number of synergies which should
result in significant savings and thereby enable us to reach profitability
earlier than previously projected," said MIDCOM president and chief executive
officer, William H. Oberlin. "We expect this merger to be accretive to earnings
in both the short and long term. The addition of Phoenix Network's minutes will
result in lower unit costs on our network and provide a broader base of support
for our overhead, as well as a larger pool of customers to cross-sell."
For the six months ended June 30, 1997, Phoenix Network reported
revenues of $41.3 million and MIDCOM reported revenue of $49.4 million,
resulting in an annualized revenue run rate of over $180.0 million for the
combined company.
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"We are very pleased about the merger and believe we have joined forces
with an innovative, fast-growing company," said Wallace M. Hammond, president
and chief executive officer for Phoenix Network. "From our perspective, the
merger also provides us with an impressive national switched network and a more
diverse sales strategy."
Phoenix Network currently has three DMS 250 long distance switches
located in Minneapolis, Colorado Springs and Phoenix, adding three new
facilities-supported markets for MIDCOM. Phoenix also announced on August 13,
1997 that it has reached an agreement to purchase Trans National
Communications, (TNC), a leading provider of long distance affinity marketing
programs with $22.2 million in revenue for the six months ended June 30, 1997.
The TNC acquisition is subject to MIDCOM's due diligence.
In delivering its results for the quarter ended June 30, 1997, MIDCOM
reported net revenue of $25.1 million, down from $40.8 million for the same
quarter of 1996, but up sequentially from $24.3 million for the first quarter
of 1997. Gross margin for the quarter was 27.3 percent, up sequentially from
26.0 percent in the prior quarter.
MIDCOM also reported a net loss of $26.2 million ($1.71 per share) for
the quarter as compared to a net loss of $44.7 million ($2.89 per share) in the
year ago quarter. The loss in the current quarter included a non-recurring
charge of $2.5 million related to relocation of the company's headquarter's
from Seattle, Washington to Southfield, Michigan. Without this charge, MIDCOM's
loss for the quarter would have been $23.8 million ($2.55 per share). Results
in the year-ago quarter included a one-time charge of $18.8 million related to
loss on impairment of assets.
"We're obviously pleased to report continued revenue growth and margin
improvement," said Oberlin. "We had targeted even stronger results in both
areas, and we would have achieved them but for the impact of errors discovered
in the integration of one of the company's earlier acquisitions. These errors
have now been corrected and we continue to expect our revenue growth rate to
accelerate going forward," he added.
The reported sequential increase in gross margin to 27.3 percent in the
current quarter from 26.0 percent in the prior quarter, and 25.1 percent in the
fourth quarter of 1996, is attributable to several factors, including
successful renegotiation of supply contracts with underlying carriers. Going
forward, the company expects gross margin to continue to improve as a result of
the installation of its nationwide switched network.
Direct sales for the quarter again established an all-time high, with
new orders for service totaling over $2.7 million, up 17.4 percent from the
prior quarter. "We're very
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encouraged by the rate at which internal sales continue to ramp up and, with
the added benefit of having a switched network in place, we expect more
improvement as we go forward," said Oberlin. "Beyond that, having our own
network should enable us to accelerate improvements to our provisioning
capabilities."
The merger of MIDCOM and Phoenix is structured as a pooling of
interests, while the Phoenix acquisition of TNC will be accounted for as a
purchase. Under terms of the agreement, MIDCOM will acquire all outstanding
shares of Phoenix common stock for 9.1 million shares of MIDCOM common stock.
The agreement also specifies that, if the TNC acquisition is completed, MIDCOM
will provide approximately 1.5 million additional shares of its common stock to
Phoenix as well as assume approximately $15.7 million of debt. In addition,
Wallace Hammond and Phoenix board member Charles C. McGettigan will be
appointed to MIDCOM's board of directors. Hammond will also join the MIDCOM
management team.
Forward-looking Statements
Statements in this news release concerning future results or
expectations, including growth in sales, improving margins, cost savings and
other benefits resulting from the merger with Phoenix Network, completion of
the merger and return to profitability are forward-looking statements. Actual
results, performance, cost-savings, or developments could differ materially
from those expressed or implied by such forward-looking statements as a result
of known and unknown risks, uncertainties and other factors including those
identified in the company's Annual Report on Form 10-K and those described from
time to time in the company's other filings with the Securities and Exchange
Commission, press releases and other communications.
Founded in 1989, MIDCOM Communications Inc. provides a broad range of
telecommunications services to small and medium-sized businesses nationwide.
The company has regional offices located throughout the nation and currently
invoices approximately 100,000 customer locations per month.
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MIDCOM COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three months ended Six months ended
June 30, June 30,
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(In thousands, except per share data) 1997 1996 1997 1996
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Revenue $ 25,113 $ 40,805 $ 49,419 $ 93,860
Cost of revenue 18,246 29,589 36,223 67,536
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Gross profit 6,867 11,216 13,196 26,324
Operating expenses:
Selling, general and administrative 22,522 15,843 40,835 32,314
Depreciation 1,379 1,323 2,785 2,674
Amortization 4,283 7,858 8,600 16,536
Settlement of contract dispute - 8,800 - 8,800
Restructuring charge 2,451 600 2,451 2,220
Loss on impairment of assets - 18,765 - 18,765
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30,635 53,189 54,671 81,309
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Operating loss (23,768) (41,973) (41,475) (54,985)
Other expense (income):
Interest expense, net 2,430 2,544 4,737 3,910
Other expense (income), net 31 144 (252) 266
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Loss before provision for income taxes (26,229) (44,661) (45,960) (59,161)
Provision for income taxes - - - -
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Net loss $(26,229) $(44,661) $(45,960) $(59,161)
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Net loss per share $(1.71) $(2.89) $(2.95) $(3.86)
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Weighted average common
shares outstanding 15,340 15,445 15,596 15,321
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