<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 1997
REGISTRATION NO. 333-17547
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
SA TELECOMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2258519
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification
organization) No.)
</TABLE>
1600 PROMENADE CENTER, 15TH FLOOR, RICHARDSON, TEXAS 75080
(972) 690-5888
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
<TABLE>
<S> <C>
LYNN H. JOHNSON, ESQ. COPY TO:
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY MARK S. SOLOMON, ESQ.
SA TELECOMMUNICATIONS, INC. ARTER & HADDEN
1600 PROMENADE CENTER, 15TH FLOOR 1717 MAIN STREET, SUITE
RICHARDSON, TEXAS 75080 4100
(972) 690-5888 DALLAS, TEXAS 75201-4605
(Name, address, including zip code, and telephone (214) 761-4365
number,
including area code, of agent for service)
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. /X/
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is filed is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED FEBRUARY 7, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SA TELECOMMUNICATIONS, INC.
10% CONVERTIBLE NOTES DUE 2006
AND COMMON STOCK
---------------------
The $27,200,000 aggregate principal amount of 10% Convertible Notes Due 2006
(the "Notes") of SA Telecommunications, Inc., a Delaware corporation (the
"Company") are being offered hereby on behalf of and for the account of the
holders of the Notes named in an applicable Prospectus Supplement (as defined
herein). The Notes were originally issued and sold (the "Original Offering") by
the Company on August 12, 1996 (the "Original Offering Date") to Furman Selz LLC
and Rauscher Pierce Refsnes, Inc. (the "Initial Purchasers"), and were
simultaneously sold by the Initial Purchasers in transactions exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), in the United States to persons reasonably believed by the
Initial Purchasers to be "qualified institutional buyers" (as defined in Rule
144A under the Securities Act) and to institutional "accredited investors" (as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act). These
purchasers, or their respective transferees, pledgees, donees or successors (the
"Selling Noteholders") may from time to time offer and sell pursuant to this
Prospectus any or all of the Notes or the Conversion Shares (as defined herein).
The Notes mature on August 15, 2006. The Notes are currently convertible at any
time prior to maturity, unless previously redeemed, into shares of Common Stock,
par value $.0001 per share (the "Common Stock") of the Company at an initial
conversion price of $2.55 per share (currently 10,666,667 shares of Common
Stock), subject to adjustment in certain circumstances (the "Conversion
Shares"). The Common Stock is traded on the Nasdaq Stock Market's SmallCap
Market (the "SmallCap Market") under the trading symbol "STEL" and the last
reported sale price of the Common Stock on the SmallCap Market on February 6,
1997 was $1.50 per share. The Notes are currently traded in the Private
Offerings, Resales and Trading through Automated Linkages ("PORTAL") market.
However, Notes resold pursuant to this Prospectus will no longer be eligible for
trading in such PORTAL market. The Company does not currently intend to list the
Notes resold pursuant to this Prospectus on any securities exchange or to seek
approval for quotation through any automated quotation system. Accordingly,
there can be no assurance as to the development or liquidity of any market for
the Notes resold under this Prospectus.
In addition to the Notes and the Conversion Shares, 859,022 shares (the
"Shares") of Common Stock of the Company are being offered hereby on behalf of
and for the account of certain holders (the "Selling Stockholders") of Common
Stock and warrants exercisable into Common Stock of the Company. The Shares
consist of: (1) an aggregate of 750,000 shares of Common Stock issuable upon
exercise of certain warrants to purchase Common Stock ("Finder's Warrants")
issued to certain finders in connection with the sale by the Company during 1996
of certain of its 9% Convertible Subordinated Debentures Due in 1997, (2) 26,316
shares of Common Stock issued to Economy Communications, Inc. ("Economy") in
connection with the acquisition of assets of Economy by the Company, (3) an
aggregate of 32,706 shares of Common Stock ("March Debenture Shares") issued to
purchasers of the Company's 9% Convertible Subordinated Debentures Due March 18,
1997 (the "March 18 Debentures"), and (4) 50,000 shares of Common Stock issued
to Jesup & Lamont Capital Markets, Inc. ("JLCM"). SEE "SELLING NOTEHOLDERS AND
SELLING STOCKHOLDERS."
The Notes and the Conversion Shares may be offered and sold from time to
time by the Selling Noteholders, and the Shares may be offered and sold from
time to time by the Selling Stockholders, to purchasers or through agents,
underwriters, brokers or dealers. SEE "PLAN OF DISTRIBUTION" AND "SELLING
NOTEHOLDERS AND SELLING STOCKHOLDERS." If required, the names of any such agents
or underwriters involved in the sale of the Notes, Conversion Shares and Shares
(collectively, the "Offered Securities") and the applicable agent's commission,
dealer's purchaser price or underwriter's discount, if any, will be set forth in
a supplement to this Prospectus ("Prospectus Supplement").
The Company anticipates that the Notes and Conversion Shares will be offered
for sale by the Selling Noteholders until the earlier to occur of (1) August 12,
1999 or (2) the sale of all the Notes and Conversion Shares (the "Note
Registration Period"). In contrast, the Company's obligations to keep the
registration statement to which this Prospectus relates (the "Registration
Statement") effective for the Shares to be sold by each of the Selling
Stockholders under separately negotiated piggy-back registration rights may
expire earlier than the Note Registration Period, and in such event, the Company
has the right to amend the Registration Statement to deregister the shares of
Common Stock to which such registration obligations no longer exist. Therefore,
although the Company anticipates that the Shares will be offered for sale by
each Selling Stockholder until the earlier to occur of (1) the sale of the
Shares held by such Selling Stockholder or (2) the expiration of the Note
Registration Period, the Company has the right to amend the Registration
Statement (a) 120 days after the effective date of the Registration Statement to
deregister such shares held by JLCM, (b) nine months after the effective date of
this Registration Statement to deregister the March Debenture Shares, and (c)
three months after the effective date of the Registration Statement to
deregister the Shares held by Economy and the holder's of the Finder's Warrants.
The Company will not receive any of the proceeds from the sale of the Offered
Securities other than minimal proceeds upon the exercise of the Finder's
Warrants, but has agreed to pay substantially all of the fees and expenses of
registration in connection with this offering (other than commissions,
concessions or discounts to broker-dealers, and the fees and expenses of counsel
to certain of the Selling Stockholders). All brokerage commissions and other
similar expenses incurred by the Selling Noteholders or the Selling Stockholders
will be borne by such persons. (CONTINUED ON NEXT PAGE)
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE OFFERED
SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
NOR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
THE DATE OF THIS PROSPECTUS IS FEBRUARY , 1997
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
This offering is not currently being underwritten. However, the Selling
Noteholders, Selling Stockholders, brokers, dealers or underwriters that
participate with the Selling Noteholders or Selling Stockholders in the
distribution of the Offered Securities may be deemed "underwriters" as that term
is defined in the Securities Act and any commissions received by broker-dealers,
agents or underwriters and any profit on the resale of the Offered Securities by
them may be deemed to be underwriting commissions or discounts under the
Securities Act. It is anticipated that all Offered Securities being offered
hereby, when sales are ever made, will be made in one or more transactions
(which may involve one or more block transactions) through customary brokerage
channels, either through brokers acting as brokers or agents for the sellers, or
through dealers or underwriters acting as principals who may resell the Shares
in the SmallCap Market (relating to the Conversion Shares and Shares only) or in
privately negotiated sales, or otherwise, or by a combination of such methods of
offering. Each sale may be made either at market prices prevailing at the time
of the sales or at negotiated prices. SEE "PLAN OF DISTRIBUTION." To the extent
required, the specific number of Offered Securities to be sold, the names of the
Selling Noteholders and the Selling Stockholders, the purchase price, the public
offering price, names of any agents, dealers or underwriters and any applicable
commissions or discounts with respect to a particular offering will be set forth
in an accompanying Prospectus Supplement. The aggregate proceeds to the Selling
Noteholders from the sale of the Notes and the Conversion Shares will be the
purchase price of the Notes or Conversion Shares sold less the aggregate
brokerage commissions and underwriter's discounts, if any, and other expenses of
such sale not borne by the Company. The aggregate proceeds to the Selling
Stockholders from the sale of the Shares will be the purchase price of the
Shares (less any exercise price of the Finder's Warrants for the Shares
resulting therefrom by the holders thereof), less the aggregate brokerage
commissions and other expenses of such sale not borne by the Company. SEE "USE
OF PROCEEDS," "PLAN OF DISTRIBUTION" AND "SELLING NOTEHOLDERS AND SELLING
STOCKHOLDERS."
Interest on the Notes is payable semi-annually on February 15 and August 15
of each year, commencing February 15, 1997 at the rate of 10% per annum,
accruing from the Original Offering Date. The Notes are redeemable at the option
of the Company in whole or in part at any time on or after August 15, 1999 at
the redemption prices set forth herein, plus accrued interest to the redemption
date. Upon a Fundamental Change (as defined herein), each holder of Notes will
have the right to require the Company to repurchase all or a portion of such
holder's Notes at a price equal to 100% of the principal amount thereof, plus
accrued interest to the date of repurchase. Additionally, each holder of the
Notes will have the right to require the Company to repurchase all or a portion
of such holder's Notes at a price equal to 100% of their principal amount, plus
accrued interest to the date of such repurchase, if any, in the event that all
three of the following events occur: (1) the Company or any of its subsidiaries
incurs certain indebtedness, (2) the Pro Forma Interest Coverage (as defined
herein) is less than 2.0:1, and (3) the average closing sale price of the Common
Stock is less than $2.00 per share for the twenty trading days prior to the
incurrence of such indebtedness (the "$2 Minimum Threshold"). The Company does
not currently meet the Pro Forma Interest Coverage test and since January 10,
1997 has not met the $2 Minimum Threshold. The Company does not anticipate
meeting the Pro Forma Interest Coverage test in the foreseeable future. There
can be no assurances that the price of the Company's Common Stock will increase
to equal or exceed the $2 Minimum Threshold permitting the Company to incur
additional indebtedness, or that if the price equals or exceeds such threshold,
the price will not again fail to meet such $2 Minimum Threshold. SEE "RISK
FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "DESCRIPTION OF NOTES--REPURCHASE AT OPTION OF HOLDER
UPON AN INCURRENCE EVENT." The Notes do not have the benefit of any sinking fund
obligations. The Notes are senior unsecured obligations of the Company, and rank
PARI PASSU in right of payment with all existing and future senior obligations
of the Company and senior in right of payment to any future subordinated
obligations of the Company. The Notes are effectively subordinated in right of
payment to all existing and future liabilities, including trade payables, of the
Company's subsidiaries. In addition, the Notes are effectively subordinated to
secured debt of the Company. As of December 31, 1996, the total outstanding
consolidated liabilities of the Company and the Company's subsidiaries
(including trade payables) was approximately $35.0 million (exclusive of the
Notes and liabilities of Addtel), substantially all of which were liabilities of
the Company's subsidiaries. An aggregate of approximately $177,000 of the total
outstanding consolidated liabilities of the Company and its subsidiaries on
December 31, 1996 represents secured debt of the Company and an aggregate of
$34.8 million consists of liabilities of the Company's subsidiaries (excluding
Addtel). Addtel's liabilities at January 14, 1997 were approximately $5.0
million. The foregoing does not include $1.6 million of indebtedness incurred on
January 9, 1997 under the Greyrock Facility (as defined herein). SEE
"BUSINESS--GREYROCK FACILITY" AND "DESCRIPTION OF NOTES."
2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information filed by the Company can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511 and Seven World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material can be obtained at prescribed rates from the Public
Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission maintains a Web site that contains reports, proxy
statements and other information regarding registrants like the Company which
file electronically at http://www.sec.gov. The Common Stock is traded on the
SmallCap Market, and reports and other information concerning the Company may be
inspected and copied at the offices of the SmallCap Market at 1735 K Street,
N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-2 under the Securities Act with respect to the Offered Securities. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain portions of which are omitted as permitted by the rules and
regulations of the Commission. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed or incorporated by reference as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference and the
exhibits and schedules thereto. For further information pertaining to the
Company or the Offered Securities, reference is made to the Registration
Statement and such exhibits and schedules thereto, which may be inspected
without charge at, and copies thereof may be obtained at prescribed rates from,
the Public Reference Branch of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
In the event that the Company ceases to be subject to the information
reporting requirements of the Exchange Act, the Company has agreed that, so long
as the Notes remain outstanding, it will file with the Commission and distribute
to holders of the Notes, copies of the financial information that would have
been contained in annual reports and quarterly reports, including the
management's discussion and analysis of financial condition and results of
operations, that the Company would have been required to file with the
Commission pursuant to the Exchange Act. Such financial information shall
include annual reports containing consolidated financial statements and notes
thereto, together with an opinion thereon expressed by an independent public
accounting firm, as well as quarterly reports containing unaudited condensed
consolidated financial statements for the first three quarters of each fiscal
year. The Company will also make such reports available to prospective
purchasers of the Notes, as applicable, securities analysts and broker-dealers
upon their request. In addition, the Company has agreed that for so long as any
of the Notes remain outstanding it will make available to any prospective
purchaser of the Notes or beneficial owner of the Notes in connection with any
sale thereof the information required by Rule 144A(d)(4) under the Securities
Act, until such time as the holders thereof have disposed of such Notes pursuant
to an effective registration statement filed by the Company.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Prospectus incorporates by reference certain documents filed by the
Company with the Commission which are not presented herein or delivered
herewith, as indicated below. The Company will provide without charge to each
person to whom a copy of this Prospectus has been delivered, including any
beneficial owner, on the written or oral request of such person, a copy of any
or all of the documents referred to below which are incorporated in this
Prospectus by reference (other than exhibits to such documents unless they are
specifically incorporated by reference into such documents). Requests for
3
<PAGE>
copies should be directed to SA Telecommunications, Inc., 1600 Promenade Center,
15th Floor, Richardson, Texas 75080, Attention: Director of Corporate
Communications, telephone number (972) 690-5888.
The following documents filed by the Company with the Commission pursuant to
the Exchange Act under File No. 0-18048 hereby are incorporated by reference
into this Prospectus: (1) the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995; (2) the Company's Definitive Proxy
Statement dated April 26, 1996; (3) the Company's Quarterly Reports as filed
with the Commission on Form 10-QSB for the quarters ended March 31, 1996, June
30, 1996 (as amended by Form 10-QSB/A filed with the Commission on August 29,
1996), and September 30, 1996; (4) the Company's Current Report on Form 8-K
dated February 29, 1996 and filed with the Commission on March 12, 1996; (5) the
Company's Current Report on Form 8-K dated May 23, 1996 and filed with the
Commission on May 28, 1996; (6) the Company's Current Report on Form 8-K dated
June 24, 1996 and filed on July 3, 1996; (7) the Company's Current Report on
Form 8-K dated July 29, 1996 filed on July 30, 1996, (8) the Company's Current
Report on Form 8-K dated November 27, 1996 filed on December 11, 1996 and (9)
the Company's Current Report on Form 8-K dated January 10, 1997 filed on January
22, 1997 (as amended by Form 8-K/A filed with the Commission on February 7,
1997).
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed under "PROSPECTUS SUMMARY--THE COMPANY,"
"RISK FACTORS," "BUSINESS," and elsewhere in this Prospectus or in the
information incorporated by reference herein may constitute or include
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), and as such involve known and
unknown risks and uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Some of the factors that may cause such
material differences are set forth herein under "RISK FACTORS." Readers are
cautioned not to place undue reliance on the forward-looking statements made in
this Prospectus, which speak only as of the date hereof.
4
<PAGE>
SA TELECOMMUNICATIONS, INC. NETWORK
[Map of United States, indicating switch sites, points of presence and current
network]
THE COMPANY'S NETWORK IS COMPRISED OF SWITCHING EQUIPMENT IN AMARILLO, DALLAS
AND LUBBOCK, TEXAS AND PHOENIX, ARIZONA, AN OPERATOR SWITCH IN LEVELLAND, TEXAS
AND LOCAL ACCESS CIRCUITS AND LONG DISTANCE TRANSMISSION FACILITIES, WHICH ARE
LEASED FROM VARIOUS PROVIDERS. SEE "RISK FACTORS--DEPENDENCE ON THIRD-PARTY
TRANSMISSION LINES AND CIRCUITS," "OVERVIEW OF THE TELECOMMUNICATIONS
INDUSTRY--PROCESSING OF A LONG DISTANCE TELEPHONE CALL" AND "BUSINESS--THE
COMPANY'S NETWORK."
5
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND RELATED
NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS OR INCORPORATED BY REFERENCE
HEREIN. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE, INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN
"RISK FACTORS." SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS." AS USED
HEREIN, THE TERM "COMPANY" REFERS TO SA TELECOMMUNICATIONS, INC. AND ITS
SUBSIDIARIES, UNLESS THE CONTEXT INDICATES OTHERWISE.
THE COMPANY
The Company is a regional interexchange carrier ("IXC") providing a wide
range of domestic telecommunications services through its network of owned and
leased facilities. The Company's customer base is primarily composed of small
and medium sized commercial accounts and residential customers which, prior to
the Company's acquisition of AddTel Communications, Inc. ("Addtel"), were
concentrated in secondary and rural markets in the southwestern and south
central United States. In addition to providing "1+" domestic long distance
services, the Company also offers international long distance, wholesale long
distance, operator, and wireless services, and other products, such as voice and
data private lines, "800/888" services, Internet access and travel cards. In
addition, the Company recently began test marketing the resale of local exchange
services of Southwestern Bell Telephone ("Southwestern Bell") in portions of
Texas through the grant of a Service Provider Certificate of Authority ("SPCOA")
from the Public Utility Commission of Texas ("Texas PUC").
Effective November 1, 1996, the Company purchased all of the issued and
outstanding capital stock of Addtel, a switchless reseller of long distance
services based in Glendale, California. The acquisition was consummated for an
aggregate purchase price of $9.5 million (including $2 million allocated to
nonsolicitation agreements) subject to potential downward adjustment. Addtel's
audited revenues for its fiscal year ended May 31, 1996 were approximately $16.4
million (consisting primarily of retail revenues) and its unaudited revenues for
the seven months ended December 31, 1996 were approximately $18.3 million,
consisting of approximately $8.1 million of retail revenues and $10.2 million of
wholesale revenues. Presently, Addtel's revenue is primarily derived from the
provision of wholesale long distance services while its retail customer base
primarily consists of small and medium sized commercial accounts and residential
customers concentrated in the greater Los Angeles metropolitan area. The Company
intends to continue to provide long distance services through Addtel in addition
to its other operating telecommunications subsidiaries.
The Company entered the telecommunications business in 1991 through the
acquisition of North American Telecommunications Corporation ("NATC"), a
telecommunications provider offering international long distance
telecommunications services to foreign customers. In 1994 and 1995, the Company
acquired two Texas-based switchless resellers, Long Distance Network, Inc.
("LDN") of Dallas, Texas, and U.S. Communications, Inc. ("USC") of Levelland,
Texas. During 1996, the Company purchased substantially all of the assets of
First Choice Long Distance, Inc. ("FCLD"), a switched reseller of long distance
telephone services located in Amarillo, Texas. Additionally, effective in 1996,
the Company acquired Economy, a switchless reseller located in McKinney, Texas,
acquired Uniquest Communications, Inc., ("Uniquest") a corporation engaged in
third party customer verification services and outbound telemarketing and
purchased all of the stock of Addtel. The growth in the Company's initial
customer base has been largely the result of these acquisitions. Also during
late 1995 and early 1996, the Company purchased and installed switches in
Dallas, Texas and Phoenix, Arizona and added leased transmission facilities
between these switches and the operator switch the Company acquired in the USC
acquisition. The Company expanded its network through the acquisition of
switching equipment in Amarillo and Lubbock in connection with the FCLD
acquisition. The Company markets its services in areas in the southwestern and
south central United States served by its network primarily under the trade
names
6
<PAGE>
"USC," "USI," "First Choice Long Distance" and "Southwest Long Distance
Network." The Company markets its services in the Addtel service area under the
trade name "Addtel." The Company anticipates future growth will primarily result
from sales and marketing efforts of its sales force and from continued
acquisitions of telecommunications companies within its market area or adjacent
thereto. See "BUSINESS-- ADDTEL ACQUISITION."
The Company utilizes a sales staff of employees and agents to market its
services directly to customers in secondary and rural markets where national
IXCs, regional long distance carriers and Regional Bell Operating Companies
("RBOCs") typically do not maintain sales personnel and utilizes agents to
market its services in the Addtel service area. The Company maintains 27 sales
offices within its contiguous primary nine state region. In the marketing of its
services, the Company emphasizes its local presence, complete service offerings,
and customized billing statements for its larger customers as well as its
competitive pricing. The Company believes that emphasizing a local presence
helps to build customer loyalty which minimizes attrition in a competitive
marketplace.
The Company strives to achieve network efficiency and maximum profitability
by increasing the number of calls originating and terminating on its network.
The Company seeks to achieve this goal, where call patterns dictate, by
increasing the geographic scope of its network. Since 1995, the Company has
transformed from a switchless reseller to an interexchange carrier with switched
network facilities.
BUSINESS STRATEGY
The Company's objective is to become a leading regional provider of domestic
telecommunications services by expanding its customer base and increasing the
utilization of its network. The Company plans to achieve this goal through (i)
acquisitions; (ii) internal growth; (iii) network expansion; and (iv) strategic
alliances. See "RISK FACTORS--AVAILABILITY OF GROWTH OPPORTUNITIES," "RISK
FACTORS--ACQUISITION INTEGRATION; MANAGEMENT OF GROWTH" and "RISK FACTORS--RISKS
RELATING TO DEVELOPMENT OF A LONG DISTANCE NETWORK."
ACQUISITIONS. An important part of the Company's growth strategy is to
continue to acquire and integrate telecommunications companies whose customer
base is located in areas contiguous to or overlapping with the Company's
existing service area. The Company will seek to achieve operating efficiencies
as a regional consolidator by increasing customers and benefiting from
compatible call traffic patterns within its current targeted expansion areas of
Arizona, Arkansas, California, Colorado, Idaho, Illinois, Kansas, Louisiana,
Mississippi, Missouri, Nevada, New Mexico, Oklahoma, Oregon, Tennessee, Texas,
Utah and Washington. In considering acquisitions, the Company will evaluate
customer profiles, operating efficiencies, network and equipment compatibility,
managerial and personnel resources and ease of integration on a timely basis.
Once the Company consummates an acquisition, it intends to integrate the
target's customer base into its own network and billing system and to eliminate
duplicative costs. The Company currently anticipates that switchless long
distance resellers and switched long distance resellers are most likely to meet
its acquisition criteria, although the Company may also consider other regional
IXCs, local exchange carriers ("LECs") and other telecommunications and related
service providers. See "RISK FACTORS--AVAILABILITY OF GROWTH OPPORTUNITIES" and
"BUSINESS--ADDTEL ACQUISITION."
INTERNAL GROWTH. The Company will seek to increase its revenues through the
use of its direct sales force, telemarketing sales, agents and other marketing
techniques such as direct mail and mass marketing to achieve internal growth.
The Company's strategy also includes increasing its customers' utilization of
its network by promoting the sale of additional or "bundled" services, such as
Internet access, local access and wireless services, and enhanced services such
as voice mail, broadcast fax, and conference calling.
NETWORK EXPANSION. The Company believes that expanding its network will
enable the Company to control the flow of its telecommunications traffic and to
increase its overall profit margin as well as to improve the quality of its
network transmission. The Company monitors traffic patterns on its network,
allowing it to replace variable long distance transport costs with fixed
transport costs when call volumes to
7
<PAGE>
particular geographic areas dictate. The Company's switches utilize software to
reduce long distance transport costs of individual calls. Management of the
Company anticipates that acquisitions will provide opportunities to increase the
call volume on existing network facilities and to increase the geographic
coverage of the network.
STRATEGIC ALLIANCES. The Company's growth strategy includes the exploration
of strategic alliances with product and service providers in the
telecommunications industry primarily inside its present geographic area. The
Company believes that such strategic relationships may enable it to penetrate
new markets, enhance its product offerings or more efficiently utilize its
network. Among other things, the Company's network offers potential alliance
partners in the Company's market area the opportunity to offer additional
products and services to the Company's customer base. Potential partners could
include existing and potential telecommunications providers as well as companies
offering paging, cellular telephone and personal communications services,
Internet access and voice and data transmission services, electric and gas
utilities, railroads, competitive local exchange carriers ("CLECs"), competitive
access providers, and LECs.
In May 1996, the Company was issued an SPCOA by the Texas PUC to provide
local exchange service as a reseller of Southwestern Bell's local exchange
services. This will enable the Company to offer its customers within
Southwestern Bell's territory in Texas an integrated package of services. The
Company is currently test marketing the sale of such local exchange services in
Texas while evaluating the operational factors involved in such sales. The
Company has also filed applications to offer local exchange services in seven of
the other states in its primary service area. The Company has also entered into
contractual arrangements with PageMart Wireless, Inc. to provide paging services
to its customer base, Conference Pros International, Inc. to provide conference
call capabilites to its customers, and Leapfrog Technologies, LLC to provide
Internet access through its "Bitstreet" software product.
The Company's Common Stock is traded on the SmallCap Market under the symbol
"STEL." The executive offices of the Company are located at 1600 Promenade
Center, 15th Floor, Richardson, Texas 75080, and the telephone number of the
executive offices is (972) 690-5888.
THE NOTE OFFERING
<TABLE>
<S> <C>
The Notes and Conversion Shares
Offered hereby.................. $27,200,000 aggregate principal amount of 10%
Convertible Notes Due 2006 together with an
indeterminable number of Conversion Shares issuable upon
conversion of such Notes.
Selling Noteholders............... The Notes were originally issued by the Company and sold
by the Initial Purchasers in transactions exempt from
registration under the Securities Act to (i) "qualified
institutional buyers" pursuant to Rule 144A under the
Securities Act or (ii) institutional "accredited
investors" pursuant to Rule 501(a)(1), (2), (3) or (7).
These purchasers or their transferees, pledgees, donees
or successors may from time to time offer and sell the
Notes and the Conversion Shares pursuant to this
Prospectus. Prior to the resale of the Notes pursuant to
this Prospectus, each of the Notes was eligible for
trading in the PORTAL market. Notes resold pursuant to
this Prospectus will no longer be eligible for trading
in the PORTAL market.
Maturity Date..................... August 15, 2006.
Interest.......................... Interest on the Notes has accrued since the Original
Offering Date at the rate of 10% per annum and is
payable semi-annually
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
on each February 15 and August 15, commencing February
15, 1997.
Optional Redemption............... The Notes are not redeemable prior to August 15, 1999.
On and after such date, the Notes may be redeemed at the
option of the Company, in whole or in part, at the
prices set forth herein, plus accrued interest to the
date of redemption. See "DESCRIPTION OF
NOTES--REDEMPTION AT THE COMPANY'S OPTION."
Ranking........................... The Notes are senior unsecured obligations of the
Company and rank PARI PASSU in right of payment with all
existing and future senior obligations of the Company
and senior in right of payment to any future
subordinated obligations of the Company. Holders of
secured obligations of the Company, however, have claims
that are prior to the claims of the holders of the Notes
with respect to the assets securing such obligations.
Additionally, the Notes are effectively subordinated to
all existing and future indebtedness and other
liabilities and commitments (including trade payables)
of the Company's subsidiaries. As of December 31, 1996,
the total outstanding consolidated liabilities of the
Company and the Company's subsidiaries (including trade
payables) were approximately $35.0 million (exclusive of
the Notes and liabilities of Addtel), substantially all
of which were liabilities of the Company's subsidiaries.
An aggregate of approximately $177,000 of the total
outstanding consolidated liabilities of the Company and
its subsidiaries on December 31, 1996 represents secured
debt of the Company and an aggregate of $34.8 million
consists of liabilities of the Company's subsidiaries
(excluding Addtel). Addtel's liabilities at January 14,
1997 were approximately $5.0 million. The foregoing does
not include $1.6 million of indebtedness incurred on
January 9, 1997 under the Greyrock Facility. See
"BUSINESS--GREYROCK FACILITY" AND "DESCRIPTION OF
NOTES--RANKING."
Repurchase on Fundamental
Change.......................... Upon the occurrence of a Fundamental Change (as defined
herein), each holder of Notes has the right, at the
holder's option, to require the Company to repurchase
all or a portion of such holder's Notes, at a purchase
price equal to 100% of the principal amount thereof,
plus accrued interest to the date of repurchase, if any.
As described with greater specificity herein, a
Fundamental Change occurs upon (i) any person or group
acquiring (or having the right to acquire) in excess of
50% of the total voting power of the Company, (ii) a
specified change in the composition of the Board of
Directors of the Company and (iii) certain
consolidations or mergers of the Company or sales of all
or substantially all of the assets of the Company;
provided, however, that a Fundamental Change shall not
occur in connection with any such consolidation, merger
or sale if (1) the market value for the Common Stock
preceding public announcement of such transaction
exceeds a specified threshold, (2) the consideration to
be received by the holders of Common Stock as a result
of such transaction exceeds a specified threshold or (3)
in the
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
case of a merger or consolidation, the stockholders of
the Company prior to the transaction continue to own a
majority of the voting stock of the surviving entity.
See "DESCRIPTION OF NOTES-- REPURCHASE AT OPTION OF
HOLDER UPON A FUNDAMENTAL CHANGE."
Within 30 days after the occurrence of a Fundamental
Change, the Company is obligated to (i) mail to all
holders of record of the Notes a notice describing,
among other things, the occurrence of such Fundamental
Change and of the resulting repurchase right, and (ii)
deliver a copy of such notice to the Trustee and to the
Dow Jones News Service or similar business service in
the United States. To exercise the repurchase right, a
holder of Notes must surrender, on or before the date
which is 60 days after the date of mailing of the
Company's notice to such holder, irrevocable written
notice to the Company and the Trustee of the holder's
exercise of such right together with the Notes (if such
Notes are represented by a Global Note (as defined
herein), by book-entry transfer to the conversion agent
through the facilities of the Depository Trust Company)
with respect to which the right is being exercised, duly
endorsed for transfer to the Company. The submission of
such notice together with such Notes pursuant to the
exercise of a repurchase right is irrevocable on the
part of the holder (unless the Company fails to
repurchase the Notes on the date specified by the
Company for such repurchase) and the right to convert
the Notes expires upon such submission.
A merger of the Company pursuant to which the Company is
not the surviving corporation or the sale of
substantially all of the assets of the Company, both of
which are included within the definition of a
"Fundamental Change," as well as the incurrence of
additional indebtedness could result in an event of
default under certain existing indebtedness of the
Company if the holder of such indebtedness does not
consent in advance to such actions. Such indebtedness
would include the Company's Line of Credit arrangement
(the "Greyrock Facility") with Greyrock Business Credit
a division of NationsCredit Commercial Corporation
("Greyrock"), the outstanding principal amount of which
was $1.6 million on January 9, 1997, and the Company's
subsidiary's capital leases with Telecommunications
Finance Group, the outstanding principal amount of which
was approximately $1.5 million on January 9, 1997. If
the Company failed to pay the repurchase price on the
due date after triggering a Fundamental Change, such
failure would result in an event of default under the
Greyrock Facility. SEE "BUSINESS--GREYROCK FACILITY."
Repurchase on Incurrence Event.... In the event (an "Incurrence Event") that (i) the
Company or any of its subsidiaries incurs indebtedness
(other than Additional Permitted Indebtedness (as
defined herein) or indebtedness under the Notes), (ii)
the Pro Forma Interest Coverage (as defined herein) of
the Company and its subsidiaries on a consolidated
basis, is less than 2.0:1 and (iii) the average closing
sale price of the Common Stock is less than $2.00
(adjusted for stock
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
splits, combinations, reclassifications or similar
events) for the twenty trading days prior to the
incurrence of such indebtedness (the "$2 Minimum
Threshold"), each holder of Notes has the right to
require the Company to repurchase all or a portion of
the holder's Notes at a price equal to 100% of the
principal amount thereof, plus accrued interest to the
date of repurchase, if any. Within 30 days after the
occurrence of an Incurrence Event, the Company is
obligated to (i) mail to all holders of record of the
Notes a notice describing, among other things, the
occurrence of such an Incurrence Event and of the
resulting repurchase right, and (ii) deliver a copy of
such notice to the Trustee and to the Dow Jones News
Service or similar business service in the United
States. To exercise the repurchase right, a holder of
Notes must surrender, on or before the date which is 60
days after the date of mailing of the Company's notice
to such holder, irrevocable written notice to the
Company (or an agent designated by the Company for such
purpose) and the Trustee of the holder's exercise of
such right together with the Notes (if such Notes are
represented by a Global Note, by book-entry transfer to
the conversion agent through the facilities of the
Depository Trust Company) with respect to which the
right is being exercised, duly endorsed for transfer to
the Company. The submission of such notice together with
such Notes pursuant to the exercise of a repurchase
right will be irrevocable on the part of the holder
(unless the Company fails to repurchase the Notes on the
date specified by the Company for such repurchase) and
the right to convert the Notes will expire upon such
submission.
The Company is not prohibited from incurring additional
indebtedness outside the ordinary course of business
under the terms of the Greyrock Facility unless such
incurrence would have a material adverse effect on the
Company or on the prospect of the repayment of all
obligations under the Greyrock Facility. The principal
amount outstanding under the Greyrock Facility on
January 9, 1997 was $1.6 million. If the Company failed
to pay the repurchase price on the due date after
triggering an Incurrence Event, such failure would
result in an event of default under the Greyrock
Facility. SEE "BUSINESS--GREYROCK FACILITY" AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
The Company does not currently meet the Pro Forma
Interest Coverage test and since January 10, 1997 has
not met the $2 Minimum Threshold. The Company does not
anticipate meeting the Pro Forma Interest Coverage test
in the forseeable future. There can be no assurance that
the price of the Company's Common Stock will increase to
equal or exceed the $2 Minimum Threshold permitting the
Company to incur additional indebtedness, or that if the
price equals or exceeds such threshold, the price will
not again fail to meet such $2 Minimum Threshold. See
"RISK FACTORS--SUBSTANTIAL LEVERAGE," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
OF OPERATIONS" and "DESCRIPTION OF NOTES--REPURCHASE AT
OPTION OF HOLDER UPON AN INCURRENCE EVENT."
Certain Covenants................. The Indenture imposes certain restrictions on the
ability of the Company and its subsidiaries to (i) incur
certain liens and indebtedness, (ii) pay dividends or
make distributions in respect of the Company's capital
stock or make certain other restricted payments, (iii)
enter into certain transactions with affiliates, (iv)
conduct certain businesses or (v) make certain
acquisitions. The restrictive covenants are subject to
certain exceptions and qualifications. See "DESCRIPTION
OF NOTES--CERTAIN COVENANTS."
Conversion........................ Each Note is currently convertible at the option of the
holder at any time prior to maturity, unless previously
redeemed, into shares of Common Stock at an initial
conversion price of $2.55 per share, subject to
adjustment under certain circumstances. See "DESCRIPTION
OF NOTES--CONVERSION RIGHTS."
Number of Conversion Shares....... The Notes are currently convertible into an aggregate of
10,666,667 shares of Common Stock, representing approxi-
mately 40.5% of the Company's Common Stock outstanding
as of December 31, 1996, including such shares issuable
upon conversion of the Notes. As of such date, there
were 15,660,535 shares of Common Stock issued and
outstanding and 33,079,750 shares of Common Stock
outstanding on a fully-diluted basis. See "--THE COMMON
STOCK OFFERING--TRADING" below.
Trading........................... Prior to the resale of the Notes pursuant to this
Prospectus, each of the Notes was eligible for trading
in the PORTAL market. Notes resold pursuant to this
Prospectus will no longer be eligible for trading in the
PORTAL market. The Company does not intend to list the
Notes resold pursuant to this Prospectus on any
securities exchange or to seek approval for quotation
through any automated quotation system. Accordingly,
there can be no assurance as to the development or
liquidity of any market for the Notes resold under this
Prospectus.
Use of Proceeds................... The Selling Noteholders will receive all of the proceeds
from the sale of the Notes and the underlying Conversion
Shares. The Company will not receive any proceeds from
the sale of the Notes or the Conversion Shares offered
hereby. See "USE OF PROCEEDS."
For additional information regarding the Notes, see "DESCRIPTION OF NOTES."
THE COMMON STOCK OFFERING
Common Stock Offered hereby....... 859,022 shares of Common Stock, including 750,000 shares
of Common Stock issuable upon exercise of Finder's
Warrants.
Selling Stockholders.............. The Shares to be sold by the Selling Stockholders
include: (1) an aggregate of 750,000 shares of Common
Stock issuable upon exercise of the Finder's Warrants
issued to certain finders in connection with the sale by
the Company during 1996 of certain of its 9% Convertible
Subordinated Debentures Due in 1997, (2) 26,316 shares
of Common Stock issued to Economy in
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
connection with the acquisition of assets of Economy by
the Company, (3) an aggregate of 32,706 shares of Common
Stock issued to purchasers of the Company's 9%
Convertible Subordinated Debentures Due March 18, 1997,
and (4) 50,000 shares of Common Stock issued to JLCM.
Percentage of Outstanding Common
Stock Offered by the Selling
Stockholders.................... 5.2% (1)
Trading........................... The Company's Common Stock is listed on the SmallCap
Market under the symbol "STEL." The Conversion Shares
and Shares resold pursuant to this Prospectus will
continue to be eligible for trading on the SmallCap
Market.
Use of Proceeds................... The Selling Stockholders will receive all of the
proceeds from the sale of the Shares offered hereby. The
Company will not receive any proceeds of the sale of the
Shares offered hereby except for minimal proceeds upon
exercise of the Finder's Warrants. See "USE OF
PROCEEDS."
For additional information regarding the Shares, see "DESCRIPTION OF CAPITAL STOCK."
</TABLE>
- ------------------------
(1) Percentage indicated is based upon 15,660,535 shares of Common Stock issued
and outstanding as of December 31, 1996 and assumes the exercise of the
Finder's Warrants, but excludes the Conversion Shares and the other shares
of Common Stock issued or issuable by the Company after such date.
RISK FACTORS
Prospective purchasers of the Offered Securities should carefully consider
all of the information set forth in this Prospectus and, in particular, should
evaluate the matters set forth under "RISK FACTORS" for risks involved with an
investment in the Offered Securities. Certain statements set forth below under
this caption constitute forward-looking statements within the meaning of the
Reform Act. See "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" on page 4
for additional information relating to such statements.
13
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER OPERATING
INFORMATION
The following table sets forth summary historical and pro forma consolidated
financial and other operating information for the Company. The summary
historical consolidated financial information presented below (other than the
unaudited information as of and for the nine months ended September 30, 1995 and
1996 and the pro forma information) are derived from the audited Consolidated
Financial Statements of the Company. The summary unaudited pro forma
consolidated financial information gives effect to the consummation of the USC
acquisition as if it was completed on January 1, 1995. The summary unaudited
consolidated financial information as of and for the nine months ended September
30, 1995 and 1996, in the opinion of management, reflects all adjustments,
consisting only of a normal recurring nature, necessary for a fair presentation
of the consolidated financial position and consolidated results of operations
for interim periods. The consolidated operating results for the nine months
ended September 30, 1996 are not necessarily indicative of the results which
ultimately will be reported for the full fiscal year ending December 31, 1996.
All of the following information should be read in conjunction with the
financial statements as set forth in the index on page F-1, "SELECTED HISTORICAL
AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER OPERATING INFORMATION" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" contained elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA NINE MONTHS ENDED
YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
------------------------------------------ ------------- --------------------
1992 1993 1994(1) 1995(1) 1995(2) 1995(1) 1996(1)
--------- --------- --------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Telecommunications revenues............... $ 546 $ 2,592 $ 9,755 $ 20,748 $ 28,695 $ 13,773 $ 22,200
Gross profit (loss)....................... (27) 197 1,457 6,632 9,941 4,198 9,141
Income (loss) from continuing operations
before other income (expense) and
extraordinary item...................... (1,265) (1,042) (1,810) (1,276) (1,393) (1,384) 126
Interest expense.......................... (12) (12) (30) (683) (1,184) (364) (1,352)
Loss from continuing operations before
extraordinary item...................... (1,258) (970) (1,819) (1,935) (2,553) (1,738) (1,180)
-------------
-------------
Loss from discontinued operations......... (104) (106) (628) (4,531) (475) --
Extraordinary item-gain on extinguishment
of debt................................. -- -- -- -- -- 1,817
Net income (loss)......................... (1,362) (1,076) (2,447) (6,466) (2,213) 637
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Income (loss) per weighted average common
share outstanding
Continuing operations................. $ (0.34) $ (0.18) $ (0.20) $ (0.17) $ (0.22) $ (0.16) $ (0.07)
-------------
-------------
Discontinued operations............... (0.03) (0.02) (0.07) (0.39) (0.04) --
Extraordinary item.................... -- -- -- -- -- 0.11
--------- --------- --------- --------- --------- ---------
Net income (loss) per share........... $ (0.37) $ (0.20) $ (0.27) $ (0.56) $ (0.20) $ 0.04
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Weighted average number of common
shares outstanding.................. 3,684 5,480 9,200 11,639 11,639 11,129 16,962
--------- --------- --------- --------- ------------- --------- ---------
--------- --------- --------- --------- ------------- --------- ---------
Ratio of earnings to fixed charges(3)..... -- -- -- -- -- --
OTHER DATA:
Gross profit margin....................... -- 8% 15% 32% 35% 30% 41%
Net cash used in operating activities..... $ (1,219) $ (1,069) $ (2,289) $ (1,224) $ (1,505) $ (1,860)
Net cash used in investing activities..... $ (245) $ (373) $ (1,744) $ (7,142) $ (6,974) $ (2,547)
Net cash provided by financing
activities.............................. $ 1,503 $ 2,615 $ 3,166 $ 8,859 $ 8,419 $ 16,274
EBITDA (loss), as defined herein(4)....... $ (1,161) $ (899) $ (1,397) $ 154 $ (331) $ 1,732
</TABLE>
14
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<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $ 331 $ 824 $ 271 $ 12,691
Total assets........................................................... 11,777 26,041 29,801 48,243
10% Convertible Notes.................................................. -- -- -- 27,200
Total debt(5).......................................................... 650 11,669 10,791 29,158
Total liabilities...................................................... 1,793 15,933 14,755 35,864
Series A Cumulative Convertible Preferred Stock........................ -- 1,129 1,239 1,310
Shareholders' equity................................................... 9,984 8,979 13,807 11,069
OPERATING DATA:
Employees.............................................................. 58 165 199 263
Sales offices.......................................................... 2 20 20 25
Customers.............................................................. 1,282 23,145 22,380 25,719
Switches............................................................... 1 2 2 3
</TABLE>
- --------------------------
(1) The summary historical consolidated financial and other information includes
the acquisitions of LDN effective March 1, 1994, USC effective June 1, 1995,
and FCLD effective September 1, 1996.
(2) The unaudited pro forma consolidated financial information for the Company
assumes that the acquisition of USC was completed on January 1, 1995. The
pro forma amounts represent the historical operating results of USC combined
with those of the Company with appropriate adjustments which give effect to
interest expense, amortization and utilization of consolidated net operating
loss carryforwards. These pro forma amounts are not necessarily indicative
of consolidated operating results which would have occurred had USC been
included in the operations of the Company during all of 1995, or which may
result in the future, because these amounts do not reflect full transmission
and switched service cost optimization, and the synergistic effect on
operating, selling, general and administrative expenses nor do the amounts
reflect any higher costs associated with unanticipated integration or other
organizational activities the Company may be forced to undertake as a result
of the acquisition.
(3) For purposes of calculating the ratio of earnings to fixed charges: (i)
earnings consist of loss from continuing operations before taxes, plus fixed
charges excluding capitalized interest and (ii) fixed charges consist of
interest expensed and capitalized, and the interest portion of rent expense.
For the years ended December 31, 1992, 1993, 1994, and 1995, the Company's
earnings were insufficient to cover fixed charges by $1,258,000, $970,000,
$1,819,000, and $1,935,000, respectively. For the nine months ended
September 30, 1995 and 1996, the Company's earnings were insufficient to
cover fixed charges by $1,738,000 and $1,180,000, respectively.
(4) Earnings (loss) before interest, taxes, depreciation, amortization,
nonrecurring charges, and other income (expense), or "EBITDA" (as defined
herein), is a commonly used measure of performance in the telecommunications
industry. As used herein, EBITDA is not intended as either a substitute or
replacement for operating income (as presented according to generally
accepted accounting principles ("GAAP")) as a measure of the financial
results of operations or for cash flows from operations (as presented
according to GAAP).
(5) Total debt consists of debt (both short- and long-term) and capital lease
obligations.
15
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS
RELATING TO THE COMPANY AND THE OFFERED SECURITIES. THESE FACTORS SHOULD BE
CONSIDERED IN CONJUNCTION WITH THE OTHER INFORMATION AND FINANCIAL DATA
APPEARING ELSEWHERE IN THIS PROSPECTUS. CERTAIN STATEMENTS SET FORTH BELOW UNDER
THIS CAPITAL CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
REFORM ACT. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 4
FOR ADDITIONAL FACTORS RELATING TO SUCH STATEMENTS.
LOSSES FROM CONTINUING OPERATIONS; LIMITED HISTORY OF OPERATIONS
The Company has experienced significant losses from continuing operations
since its inception, with such losses of approximately $970,000, $1,819,000 and
$1,935,000 for the fiscal years ended December 31, 1993, 1994 and 1995,
respectively. For the nine months ended September 30, 1996, the Company had
losses from continuing operations of approximately $1,180,000. The Company
expects to continue to incur losses from continuing operations in the future as
it pursues its plans to make acquisitions and expand its network, customer base
and product offerings. There can be no assurance that such losses will not
continue indefinitely.
The Company entered the telecommunications business in 1991 through the
acquisition of NATC. In 1994, the Company entered the business of providing "1+"
domestic long distance telecommunications services as a switchless reseller by
acquiring LDN. In 1995, the Company acquired USC, expanding its switchless
reseller business. Also during late 1995 and early 1996, the Company purchased
and installed switches in Dallas, Texas and Phoenix, Arizona and added leased
transmission facilities between these switches and the operator switch the
Company acquired in the USC acquisition and became a fully integrated IXC. In
1996, the Company completed asset acquisitions of switched resellers of long
distance telephone services in Amarillo and McKinney, Texas, and acquired the
stock of Uniquest, a corporation engaged in third party customer verification
services and outbound telemarketing. Effective November 1, 1996, the Company
purchased all of the stock of Addtel, a switchless reseller of both retail and
wholesale long distance services based in Glendale, Califorina. As a result,
prospective investors have limited historical financial information about the
Company's business of providing domestic long distance telecommunications
services upon which to base an evaluation of the Company's performance and an
investment in the Offered Securities offered hereby. The development of the
Company's business and the expansion of its network, customer base and product
offerings will require significant expenditures. Certain of these expenditures,
including marketing, sales and general and administrative costs, are expensed as
incurred while other expenditures, including goodwill associated with
acquisitions, network design costs and costs to obtain legal and regulatory
approval, are deferred and expensed over a period of time. The Company will
continue to incur significant expenditures in connection with the growth of its
business, including expenses associated with acquisitions, capital costs
associated with expanding the Company's network, and sales, marketing and other
expenses associated with expanding the Company's customer base and product
offerings.
In light of the Company's limited history of operating as a regional IXC,
its history of losses from continuing operations and its expectation that it
will continue to incur significant expenses and such losses for the foreseeable
future, there can be no assurance that the Company will be able to implement its
growth strategy, achieve or sustain profitability or generate sufficient cash
flow to service the Notes. If the Company is unable to generate positive cash
flow, the Company's ability to make interest payments and repay the principal
amount of the Notes would be adversely effected. See "BUSINESS--HISTORY" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
16
<PAGE>
SUBSTANTIAL LEVERAGE
The Company has not, since its inception, generated earnings adequate to
cover its fixed charges. Commencing on February 15, 1997, semi-annual cash
interest payments of $1.36 million will be due on the Notes. As of September 30,
1996, the Company's total amount of debt outstanding was $29.2 million
(including the Notes) and the Company had shareholders' equity of $11.1 million.
On January 9, 1997, the Company incurred an additional $1.6 million principal
amount of indebtedness under the Greyrock Facility. The Company expects to incur
additional indebtedness in the future. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
The Company's ratio of debt to total assets has steadily increased in recent
years from 5.5% at December 31, 1994 to 44.8% at December 31, 1995 and 60.4% at
September 30, 1996. The majority of these borrowings were incurred in
conjunction with the Company's acquisition program. As of September 30, 1996,
the Company had a retained deficit of $11,557,089. The Company's ability to make
scheduled payments on its indebtedness depends on its financial and operating
performance, which is subject to prevailing economic conditions, and financial,
business and other factors, some of which are outside the Company's control. The
failure of the Company to comply with financial and other restrictive covenants
under any existing or future borrowings may result in an event of default,
which, if not cured or waived, could have a material adverse effect on the
Company.
In July 1995, the Company borrowed an aggregate of $7.0 million from Norwest
Bank Minnesota ("Norwest") to fund the cash portion of the purchase price of the
USC acquisition. On November 10, 1995 and March 13, 1996, the Company entered
into amendments to its Credit Agreement with Norwest, which, among other things:
(i) amended certain definitions, agreements and covenants relating to operating
cash flow, senior debt service coverage, and prepayments on subordinated debt,
and (ii) waived any breach of financial covenants with respect to senior debt
service coverage and with respect to operating cash flow at September 30, 1995
and December 31, 1995. In connection with obtaining the consent of Norwest to
the sale of the Notes, on July 17, 1996, the Company received a waiver of any
breach with respect to the computation of senior debt service coverage and
operating cash flow as of May 31, 1996 for the preceding six months and paid a
waiver fee of $20,000. The Company repaid all amounts outstanding under the
Norwest Credit Agreement on August 12, 1996 with approximately $7.0 million of
the net proceeds derived from the Original Offering of Notes.
In March, April and June 1996, the Company entered into private placements
whereby it sold an aggregate of $2 million of its 9% Convertible Debentures. The
proceeds derived from these offerings were used for working capital purposes and
to finance the Company's network expansion. The Company redeemed or repurchased
these debentures with proceeds from the Original Offering of Notes.
Because the Company historically has experienced operating cash flow
deficits, its ability to make cash interest payments on the Notes commencing on
February 15, 1997, and to repay its obligations on the Notes at maturity will be
dependent on developing one or more sources of significant cash flow prior to
the date on which cash interest obligations begin on the Notes. As a result, the
Company may seek to (i) refinance all or a portion of the Notes, (ii) invest in
companies or assets that will provide substantial cash flow or (iii) sell equity
through public or private offerings or to strategic business partners willing to
acquire an interest in the Company or its businesses. There can be no assurance
that (i) the Company will be able to refinance the Notes, (ii) there will be a
market for the debt or equity securities of the Company in the future, or (iii)
the Company will be able to locate and acquire companies or assets that will
generate substantial cash contributions to the Company prior to the time that
cash interest payments will be due on the Notes or prior to maturity of the
Notes. The Company's operating cash flow could be affected by provisions of the
Indenture which restrict the Company and its subsidiaries from incurring certain
indebtedness other than Additional Permitted Indebtedness without triggering an
Incurrence Event when the $2 Minimum Threshold is not met and the Company's Pro
Forma Interest Coverage (as defined herein) is less than 2.0 to 1. The Company
does not currently meet the Pro Forma Interest Coverage test
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and since January 10, 1997 has not met the $2 Minimum Threshold. The Company
does not anticipate meeting the Pro Forma Interest Coverage test in the
forseeable future. There can be no assurances that the price of the Company's
Common Stock will increase to equal or exceed the $2 Minimum Threshold
permitting the Company to incur additional indebtedness, or that if the price
equals or exceeds such threshold, the price will not again fail to meet such $2
Minimum Threshold. Moreover, should the Company ever be required to repurchase
the Notes, there can be no assurance that the Company will have adequate
liquidity to fulfill such obligation. If the Company failed to pay the
repurchase price on the due date after triggering a Fundamental Change or an
Incurrence Event, such failure would result in an event of default under the
Greyrock Facility. The outstanding principal amount of such indebtedness was
$1.6 million as of January 9, 1997. SEE "BUSINESS-GREYROCK FACILITY,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and "DESCRIPTION OF NOTES."
RANKING OF NOTES; HOLDING COMPANY STRUCTURE; DEPENDENCE OF COMPANY ON
SUBSIDIARIES FOR REPAYMENT OF NOTES
The Notes are senior unsecured obligations of the Company and rank PARI
PASSU in right of payment with all existing and future senior obligations of the
Company and senior in right of payment to any future subordinated obligations of
the Company. Holders of secured obligations of the Company, however, have claims
that are prior to the claims of the holders of the Notes with respect to the
assets securing such obligations. As of December 31, 1996, the total outstanding
consolidated liabilities of the Company and the Company's subsidiaries
(including trade payables) was approximately $35.0 million (exclusive of the
Notes and liabilities of Addtel), substantially all of which were liabilities of
the Company's subsidiaries. An aggregate of approximately $177,000 of the total
outstanding consolidated liabilities of the Company and its subsidiaries on
December 31, 1996 represents secured debt of the Company. The foregoing does not
include $1.6 million of indebtedness incurred on January 9, 1997 under the
Greyrock Facility. SEE "BUSINESS--GREYROCK FACILITY" and "DESCRIPTION OF THE
NOTES--RANKING."
Subject to (i) the repurchase right of the holders upon an Incurrence Event
and (ii) certain limitations on the incurrence of subordinated indebtedness, the
Indenture does not limit the amount of additional indebtedness that the Company
and its subsidiaries can incur, assume or guarantee. Since January 10, 1997, the
Company has been prohibited under the Indenture from incurring certain
indebtedness other than Additional Permitted Indebtedness until the average
price of the Company's Common Stock for the preceding twenty trading days
exceeds $2.00 per share. The Company has also previously failed to meet this
$2.00 threshold test. The Company does not anticipate meeting the Pro Forma
Interest test in the forseeable future. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "DESCRIPTION OF
NOTES--REPURCHASE AT OPTION OF HOLDER UPON AN INCURRENCE EVENT."
To the extent that either the $2 Minimum Threshold or the Pro Forma Interest
test has been satisfied, the Company and its subsidiaries may incur significant
additional indebtedness in the future in connection with the Company's
acquisition program. Subject to the limitations set forth in "DESCRIPTION OF
NOTES-- CERTAIN COVENANTS--LIMITATION ON LIENS," such indebtedness may be
secured. The Notes are obligations exclusively of the Company and not of its
subsidiaries. All of the operations of the Company are conducted through direct
and indirect subsidiaries. The Company's cash flow and, consequently, its
ability to service debt, including the Notes, is dependent upon the cash flow of
its subsidiaries and the transfer of funds by those subsidiaries to the Company
in the form of loans or otherwise. The subsidiaries are separate and distinct
legal entities and have no obligation, contingent or otherwise, to pay any
amounts due pursuant to the Notes or to make funds available therefor, whether
in the form of loans or otherwise. In addition, the payment of dividends and the
making of loans and advances to the Company by the subsidiaries may be subject
to statutory, contractual or other restrictions, are dependent upon the earnings
of those subsidiaries and are subject to various business considerations. Any
right of the Company to receive assets of any of its subsidiaries upon their
liquidation or reorganization (and consequent right of the holders of the Notes
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to participate in those assets) are structurally subordinated to claims of that
subsidiary's creditors (including trade creditors).
Because the Company is a holding company that conducts its business through
its subsidiaries, all existing and future indebtedness and other liabilities and
commitments of the Company's subsidiaries, including trade payables, will be
effectively senior to the Notes. As of December 31, 1996, the Company's
consolidated subsidiaries (excluding Addtel) had aggregate liabilities of
approximately $34.8 million. Addtel's liabilities at January 14, 1997 were
approximately $5.0 million.
AVAILABILITY OF GROWTH OPPORTUNITIES
The Company has in the past made certain acquisitions and contemplates
making additional acquisitions in connection with implementing its business
strategy. Execution of the Company's business strategy will involve locating
businesses meeting the Company's acquisition criteria, negotiating commercially
reasonable terms therefor and integrating those businesses with operations of
the Company following acquisition. The Company can be expected to seek to
acquire additional customers in its existing markets and in adjacent or related
markets. However, depending upon the circumstances and the evolution of the
telecommunications market, the Company may make acquisitions in geographic areas
or markets outside of the Company's historical focus on secondary and rural
markets in the southwestern and south central United States. The Company has
made and may make in the future acquisitions for cash, securities, including the
Company's Common Stock, or combinations thereof. The Company recently utilized
substantially all of the remaining proceeds from the Note Offering to effect the
Addtel acquisition. The Company's ability to effect such acquisitions may be
limited by availability of funds and by virtue of the covenants set forth in the
Indenture, including that covenant specifically described in "DESCRIPTION OF
NOTES--CERTAIN COVENANTS--LIMITATION ON ACQUISITIONS." There can be no assurance
that the Company will be able to locate a sufficient number of acquisition
targets, that once located, the Company will be able to acquire such entities on
a commercially reasonable basis or that upon acquisition the Company will be
able to successfully integrate the acquired entity's operations with its own.
See "BUSINESS--ADDTEL ACQUISITION." The issuance of equity to effect or finance
such acquisitions would have the effect of reducing the percentage ownership of
the Company held by each pre-acquisition stockholder, including purchasers of
the Conversion Shares or the Shares or holders of the Notes who have exercised
their right of conversion into the Company's Common Stock, and the incurrence of
indebtedness in connection with such acquisitions could adversely affect the
liquidity, results of operations and financial condition of the Company. See
"BUSINESS--BUSINESS STRATEGY."
ACQUISITION INTEGRATION; MANAGEMENT OF GROWTH
As a result of implementing its strategy of growth through acquisitions of
regional telecommunications companies, a substantial portion of the Company's
growth in recent years has resulted, and in the future is anticipated to result,
from acquisitions, which involve certain significant operational and financial
risks. Operational risks include the possibility that an acquisition may not
ultimately or timely provide the benefits originally anticipated by management,
while resulting in operating expenses relating to the acquired business.
Financial risks involve the incurrence of indebtedness and the subsequent need
to service such indebtedness or the utilization of cash or other assets to
consummate the acquisition. There can be no assurance that the Company will be
able to accomplish such integration with the Company's operations quickly, or
that the efficiencies and growth opportunities anticipated as a result of the
combination of the Company and the acquired entities will ever materialize. See
"BUSINESS--BUSINESS STRATEGY" and "BUSINESS--ADDTEL ACQUISITION."
The Company has experienced rapid growth in the number of its employees and
the scope of its operations. This growth has resulted in an increased level of
responsibility for both existing and new management personnel. To manage its
growth effectively, the Company will be required to implement and improve its
operating and financial systems and controls and to expand, train and manage its
employee
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base. As a result, the Company will be dependent upon its management to manage
both the day-to-day operations of the Company as well as any acquisitions the
Company may make. There can be no assurance that the management, systems and
controls currently in place or any steps taken to improve such management,
systems or controls will be adequate for the Company's needs. See
"BUSINESS--BUSINESS STRATEGY" and "BUSINESS--ADDTEL ACQUISITION."
HIGHLY COMPETITIVE INDUSTRY
The telecommunications industry is highly competitive. In addition, as a
result of changing economic and regulatory conditions, both the number and type
of competitors participating in the telecommunications business are expected to
change rapidly in the near future. Many of the Company's actual competitors
(such as AT&T Corp. ("AT&T"), MCI Communications Corp. ("MCI"), Sprint
Corporation ("Sprint"), WorldCom, Inc. ("WorldCom") and others) and potential
competitors (such as electric and gas utilities, cable television providers,
large data processing companies and others) have financial, personnel and other
resources substantially greater than those possessed by the Company. Many of
these entities have or can be expected to acquire telecommunications networks
having greater geographic scope than the Company's network. The continuing trend
toward consolidation and strategic alliances in the telecommunications industry,
together with recent and anticipated regulatory changes could give rise to
significant new competitors to the Company.
The Telecommunications Act of 1996 (the "1996 Act") is expected to result in
the entry of new competitors, including some or all of the RBOCs, into the
domestic long distance market. It is not clear whether the RBOCs will build
their own national networks, lease facilities from others or acquire smaller
domestic long distance service providers. To the extent that the RBOCs enter the
domestic long distance market by acquiring other IXCs, the domestic long
distance service industry can be expected to consolidate, resulting in increased
competition for the Company from a relatively small number of very large,
nationwide providers. No assurance can be given that the Company will be able to
compete effectively with the RBOCs or other owners of nationwide long distance
networks. See "OVERVIEW OF TELECOMMUNICATIONS INDUSTRY--INDUSTRY
BACKGROUND--TELECOMMUNICATIONS ACT OF 1996" and "BUSINESS--COMPETITION."
The Company believes that customer attrition is common in the long distance
and operator services industries. Although the Company has not experienced
significant attrition in its various businesses, the Company's historical levels
of customer attrition may not be indicative of future attrition levels, and
there can be no assurance that any steps taken by the Company to counter
increased customer attrition would accomplish the Company's objectives. See
"OVERVIEW OF TELECOMMUNICATIONS INDUSTRY," "BUSINESS--MARKETING AND SALES,"
"BUSINESS--COMPETITION" and "BUSINESS--GOVERNMENT REGULATION."
REGULATORY AND LEGISLATIVE UNCERTAINTY
The Company is currently subject to federal and state government regulations
relating to its long distance telephone service and local exchange service. The
Company's activities are regulated by the Federal Communications Commission
("FCC") and the PUCs of the various states in which the Company operates. FCC
regulatory actions have had, and are expected to continue to have, both positive
and negative effects on the Company. The Company's international service is also
regulated by the FCC and is further regulated by jurisdictions in which the
Company services foreign customers. As with the Company's domestic long distance
services, regulatory actions by applicable authorities have had both positive
and negative effects on the Company's international service and can be expected
to continue to do so.
The Company is regulated at the federal level by the FCC and is required to
maintain international tariffs for its services containing the rates, terms and
conditions of service. Due to a recent FCC order, the Company is not currently
required to maintain domestic tariffs at the federal level. The Company is
required to maintain a certificate, issued by the FCC, in connection with its
international services. The intrastate telecommunications operations of the
Company are also subject to various state laws and
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regulations, including prior certification, notification or registration
requirements. The Company generally must obtain and maintain certificates of
public convenience and necessity from regulatory authorities in those states in
which it offers service. In most of these jurisdictions, the Company must file
and obtain prior regulatory approval of tariffs for intrastate services. In
addition, the Company must update or amend its tariffs and, in some cases, the
certificates of public convenience and necessity when rates are adjusted or new
products are added to the long distance service offered by the Company. Any
failure to maintain proper certification or tariffing could have a material
adverse effect on the Company's results of operations and could result in the
Company losing the ability to conduct business in one or more jurisdictions. The
FCC, the numerous state agencies and foreign governments impose prior approval
requirements on transfers of control and assignments of regulatory
authorizations. There can be no assurance that the FCC or any other regulatory
authority will not raise material issues with regard to the Company's compliance
with applicable regulations or that regulatory authorities will not have a
material adverse effect on the Company. See "BUSINESS--GOVERNMENT REGULATION."
The 1996 Act is designed to increase competition in the domestic
telecommunications market by removing barriers previously imposed on providers
desiring to enter the local access service market. The 1996 Act also removes
restrictions to permit the RBOCs and General Telephone and Electronics ("GTE")
operating companies to provide long distance service and engage in the
manufacturing of telecommunications equipment. As a result of the 1996 Act, the
Company is likely to face competition from RBOCs seeking to provide
out-of-market services within Arizona, Arkansas, California, Colorado, Kansas,
Louisiana, New Mexico, Oklahoma and Texas. Bell Atlantic has already announced
plans to provide out of region long distance service within the state of Texas.
Depending on the exact nature and timing of entry by U.S. West, Southwestern
Bell and other LECs into the in-region long distance market, competition from
those companies could have a material adverse effect upon the Company's results
of operations. Southwestern Bell (Texas, Oklahoma, Kansas and Arkansas), U.S.
West Communications (New Mexico, Colorado and Arizona), Pacific Telesis Group
(California) and Bell South (Louisiana) are the principal RBOCs serving the
states in the Company's geographic area. Operating subsidiaries of GTE also
provide local exchange services in portions of Texas, New Mexico and Arkansas.
It can be anticipated that some or all of these RBOCs will establish
transmission facilities competitive with those of the Company, to the extent
that they have not already done so in connection with other business activities
(such as cellular telephone services). Other RBOCs may seek to enter
out-of-region markets by entering into business relationships or acquiring IXCs
such as the Company. In addition, although the 1996 Act provides for certain
safeguards to protect against anti-competitive abuse by the RBOCs, it is unknown
whether these safeguards will provide adequate protection and the impact of
anti-competitive conduct on the Company, if such conduct occurs, is necessarily
uncertain.
The 1996 Act also addresses a wide range of other telecommunications issues,
some of which will potentially impact the Company's operations, including the
payment of surcharges for dial around calls, the payment of universal service
support discounts on long distance rates charged to hospitals, schools and
libraries; the elimination of equal access for all wireless telephones; a sunset
provision pertaining to when safeguards designed to prevent the RBOCs from
capitalizing on their local exchange monopolies will cease to apply; provisions
pertaining to regulatory forbearance by the FCC; the imposition of liability for
the unauthorized switching of customers' long distance carriers; the creation of
new opportunities for competitive local service providers; and requirements
pertaining to the treatment and confidentiality of subscriber network
information. It is unknown at this time what impact such legislation and any
proposed or final regulations promulgated pursuant to such legislation will have
on the Company, if any. See "OVERVIEW OF TELECOMMUNICATIONS INDUSTRY--INDUSTRY
BACKGROUND--TELECOMMUNICATIONS ACT OF 1996."
In addition to the 1996 Act, a variety of other regulatory approaches are
being considered by state and federal authorities with regard to deregulating
local access services. CLECs have installed local networks in many parts of the
country, primarily large urban areas, that allow subscribers to route their long
distance traffic directly to a designated IXC, thereby bypassing the LEC. In
certain instances, the LECs have been
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afforded a degree of pricing flexibility in differentiating among markets and
carriers in setting access charges and other rates in areas where adequate
competition has emerged. Although CLECs exist in a limited number of the
Company's markets, including the Dallas, Phoenix and Los Angeles markets, a
substantial majority of the Company's customers are currently concentrated
outside of markets served by CLECs. As LECs become free to set rates and to
discriminate between customers, the ability of IXCs which are larger than the
Company to obtain volume discounts for access and termination charges could
adversely affect the Company by reducing the operating costs of its larger
competitors relative to those of the Company. In particular, it is expected that
the largest players in the long distance market, such as AT&T, MCI, Sprint and
WorldCom will be able to guarantee substantially larger volumes to LECs than
will the Company. As deregulation of the local exchange market occurs, LECs may
be willing to grant large IXCs significant discounts in return for guarantees of
volume. There can be no assurance that the Company will be able to obtain
similar discounts.
An issue under consideration by the FCC which is of potential significance
to the Company is that of "Billed Party Preference," or BPP. This term refers to
a concept in which any long distance call outside the local telephone company's
calling area carried from a publicly available telephone would be completed over
the long distance carrier network of the billed party's previously expressed
preference. If such a system were implemented successfully, the market niche of
operator services, such as that of the Company, would be rendered ineffectual,
because an owner of publicly available telephones would be unable to direct
operator assisted calls over the network of such owner's desired carrier. The
Company derives revenues from such "payphone" business wherein the Company is
the desired carrier of the pay telephone owner. Under the 1996 Act, LECs are
required to implement local number portability in the 100 largest Metropolitan
Statistical Areas (MSA) between October 1, 1997 and December 31, 1998. Because
the technology necessary to implement local number portability is similar to
that proposed for implementation of BPP, the FCC has indicated that it considers
the incremental investment necessary to implement BPP after the commencement of
local number portability to be insignificant. Therefore, the Company believes
that if BPP is ever required, it is not likely to be implemented until some
point after December 31, 1998. As an interim measure, the FCC has proposed to
require operator service providers to verbally disclose the applicable charges
to consumers before connecting a call if they charge rates greater than certain
benchmarks.
TECHNOLOGICAL CHANGE AND NEW SERVICES
The telecommunications industry has been characterized by rapid
technological change, frequent new service introductions and evolving industry
standards. The Company believes that its future success will depend on its
ability to anticipate such changes and to offer market responsive services that
meet these evolving industry standards on a timely basis. The effect of
technological change upon the Company's business cannot be predicted and there
can be no assurance that the Company will have sufficient resources to make the
investments necessary to acquire new technology or to introduce new services to
satisfy an expanded range of customer needs. See "BUSINESS--BUSINESS STRATEGY."
RISKS RELATING TO DEVELOPMENT OF A LONG DISTANCE NETWORK
The Company's business strategy includes the continued development of its
long distance network. In connection with such development, the Company expects
to acquire or lease additional switching equipment and dedicated transmission
lines. There can be no assurance that the Company will be able to continue
developing its network, or, if it does so develop its network, that such
development will be beneficial to the Company. In acquiring or leasing the
switching equipment and dedicated transmission lines needed to develop a long
distance network, the Company may incur indebtedness or utilize substantial
portions of its cash. In addition, in acquiring such equipment and lines, the
Company will incur additional fixed operating costs. There can be no assurance
that the Company will be able to profitably utilize additional equipment or
transmission lines. The Company's success will depend, in part, on its
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ability to manage the continued expansion of its long distance network. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and "BUSINESS--BUSINESS STRATEGY."
SIGNIFICANT WHOLESALE CUSTOMER
As a result of the acquisition of Addtel, the Company presently derives a
significant portion of its revenue from the provision of wholesale long distance
services to Star Telecommunications, Inc. ("Star"). Although the Company
believes its relationship with Star is good, there can be no assurance that the
relationship will continue as presentaly in effect. Any termination or
significant disruption of the Company's relationship with Star would have a
material adverse effect on the Company's gross revenues but would likely improve
profit margins. In addition, a deterioration in the financial condition of Star
could possibly expose the Company to possibly large accounts receivable
write-offs which would adversely effect the Company's financial condition and
results of operations.
CAPITAL INTENSIVE INDUSTRY; INCREASED EXPENDITURES FOR ANTICIPATED EXPANSION
The Company operates in a capital intensive industry and will require
substantial funds to expand its transmission network and to offset the increased
costs associated with anticipated expansion in the Company's marketing and
promotional efforts and the corresponding growth of its business. The expansion
and growth of the Company's business depends substantially on the ability of the
Company to secure sufficient capital resources to finance its capital
expenditures. There can be no assurance, however, that such financing will be
available or, if available, will be on terms satisfactory to the Company. In
addition, implementation of the Company's expansion strategy may be limited by
restrictions in the Indenture on the Company's ability to effect certain
acquisitions and incur certain indebtedness and certain liens. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,"
"DESCRIPTION OF NOTES--CERTAIN COVENANTS--LIMITATIONS ON ACQUISITIONS,"
"--LIMITATION ON LIENS" and "--REPURCHASE AT OPTION OF HOLDER UPON AN INCURRENCE
EVENT." To the extent that the Company is unable to increase network capacity to
meet the anticipated growth in demand for the Company's long distance telephone
service, or to maintain product quality and customer service standards while
experiencing such growth, the Company may experience higher levels of customer
attrition resulting in a loss of anticipated revenues. In addition, due to the
increases in the Company's overhead and operating expenses resulting from the
anticipated expansion of its business, the Company's operating results may be
adversely affected if revenues do not increase to the extent necessary to offset
such increased costs. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES" and
"BUSINESS--BUSINESS STRATEGY."
DEPENDENCE ON THIRD-PARTY TRANSMISSION LINES AND CIRCUITS
A significant factor in the future profitability of the Company is its
ability to transmit its customers' long distance telephone calls over
transmission facilities leased from others on a cost effective basis. The
Company leases substantially all of its transmission lines and circuits from
third parties. The Company's local and long distance telephone business is
dependent upon lease arrangements, both long-term and short-term, with others.
In addition, the Company's operator services, "800/888" service and
international business are also dependent to some extent upon contractual
arrangements with third parties.
During the quarter ended September 30, 1996 and a majority of the fourth
quarter ended December 31, 1996, the Company experienced delays in obtaining
circuits in New Mexico and, to a lesser extent, Arizona and Colorado. This delay
adversely impacted the Company's gross margins and related profitability. The
Company may in the future experience difficulties in obtaining circuits as the
demand for circuits increases. These circuits, which must be obtained from the
local RBOC, CLEC or a competitive access provider, enable the Company's network
to operate at optimum efficiency by increasing the number of calls originating
and terminating on its network. Should the lack of available circuits recur,
this condition will have a negative impact on gross profit margin and related
profitability because the Company will be
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forced to terminate calls off its network at a higher cost than if terminated on
its network. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS." The Company presently believes it has ample access
to lines and circuits as well as additional facilities and services needed to
conduct its business. This ongoing availability cannot be assured. See
"BUSINESS--THE COMPANY'S NETWORK."
SERVICE INTERRUPTIONS; EQUIPMENT FAILURES
The Company's business requires transmission and switching facilities and
other equipment to be operational 24 hours per day, 365 days per year. Long
distance telephone companies, including the Company, have on occasion
experienced and may in the future experience temporary service interruptions or
equipment failures, in some cases resulting from causes beyond their control,
including power failures, fires, floods or other natural disasters at switching
facilities, failures caused by unanticipated hardware or software defects, work
stoppages or other personnel related problems. Any such event experienced by the
Company would impair the Company's ability to service customers and could have a
material adverse effect on the Company's business. See "BUSINESS--THE COMPANY'S
NETWORK."
HOLIDAY AND SEASONAL VARIATIONS IN REVENUES
The Company's revenues, and thus its potential earnings, are affected by
holiday and seasonal variations. A substantial portion of the Company's revenues
are generated by direct dial domestic long distance commercial customers, and,
accordingly, the Company experiences decreases in revenues around national
holidays when the number of business days is reduced and the commercial
customers reduce their usage. In addition, operator services revenues from pay
telephone usage declines during the fall and winter months. Additional factors
causing pay telephone usage declines are inclement weather, schools being in
session, and the lack of vacation travel. Consequently, the Company's fourth
fiscal quarter ending December 31, which includes the Thanksgiving, Hanukkah,
Christmas and New Year's Eve holidays and the Company's first fiscal quarter
ending March 31, historically have been its slowest revenue periods of the
Company's fiscal year. The Company's fixed operating expenses, however, do not
decrease during these quarters. Accordingly, the Company will likely continue to
experience lower revenues and earnings in its first and fourth fiscal quarters
when compared with other fiscal quarters.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success depends, to a significant extent, on
the efforts and abilities of its senior management. In particular, the loss of
Jack W. Matz, Jr., the Company's Chairman and Chief Executive Officer, or Paul
R. Miller, the Company's President and Chief Operating Officer, could have a
material adverse effect on the Company. In addition, the Company believes that
its success will depend in large part upon its ability to attract, retain and
motivate skilled employees and other senior management personnel. Although the
Company expects to continue to attract sufficient numbers of such persons for
the foreseeable future, there can be no assurance that the Company will be able
to do so. In addition, because the Company may acquire one or more businesses in
the future, the Company's success will be in part dependent upon its ability to
retain and integrate into its own operations personnel from acquired entities
who are necessary to the continued success or successful integration of the
acquired business. See "MANAGEMENT."
LIMITATIONS ON REPURCHASE UPON A FUNDAMENTAL CHANGE OR AN INCURRENCE EVENT
Upon a Fundamental Change or an Incurrence Event, each holder of the Notes
has the right, at the holder's option, to require the Company to repurchase all
or a portion of such holder's Notes at a purchase price equal to 100% of the
principal amount thereof plus accrued and unpaid interest to the date of
repurchase. In order to exercise such repurchase right, the holder must
surrender irrevocable written notice to the Company and the Trustee of the
holder's exercise of such right together with the Notes (if
24
<PAGE>
such Notes are represented by a Global Note, by book-entry transfer to the
conversion agent through the facilities of the Depository Trust Company) with
respect to which the right is being exercised, duly endorsed for transfer to the
Company. The submission of such notice together with such Notes pursuant to the
exercise of a repurchase right is irrevocable on the part of the holder (unless
the Company fails to repurchase the Notes on the date specified by the Company
for such repurchase) and the right to convert the Notes expires upon such
submission.
A merger of the Company pursuant to which the Company is not the surviving
corporation or the sale of substantially all of the assets of the Company, both
of which are included within the definition of a "Fundamental Change," as well
as the incurrence of additional indebtedness could result in an event of default
under certain existing indebtedness of the Company if the holder of such
indebtedness does not consent in advance to such actions. Such indebtedness
would include the Greyrock Facility, the outstanding principal amount of which
was $1.6 million on January 9, 1997, and the Company's subsidiary's capital
leases with Telecommunications Finance Group, the outstanding principal amount
of which was approximately $1.5 million on January 9, 1997. The Company is not
prohibited from incurring additional indebtedness outside the ordinary course of
business under the terms of the Greyrock Facility unless such incurrence would
have a material adverse effect on the Company or on the prospect of the
repayment of all obligations under the Greyrock Facility. If the Company failed
to pay the repurchase price on the due date after triggering a Fundamental
Change or an Incurrence Event, such failure would result in an event of default
under the Greyrock Facility. SEE "BUSINESS--GREYROCK FACILITY" AND "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The
Company's ability to repurchase the Notes upon a Fundamental Change or an
Incurrence Event may also be limited by the terms of the Company's future
indebtedness. Each of the terms "Fundamental Change" and "Incurrence Event" is
limited to certain specified transactions and may not include other events that
may adversely affect the financial condition of the Company, nor would the
requirement that the Company offer to repurchase the Notes upon a Fundamental
Change or an Incurrence Event necessarily afford the holders of the Notes
protection in the event of a highly leveraged transaction, reorganization,
merger or similar transaction involving the Company. There can be no assurance
that the Company would have sufficient funds to pay the repurchase price for the
Notes tendered by the holders thereof. The Company's failure to purchase
tendered Notes would constitute an Event of Default under the Indenture, which
could, in turn, constitute a default under the terms of the Greyrock Facility
and other indebtedness that the Company may enter into from time to time. See
"DESCRIPTION OF NOTES."
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of the Company's Common Stock in
the public market could adversely affect the market price of the Common Stock
and the Notes. Certain persons have and will have the right to sell a
substantial number of shares publicly. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL
RESOURCES," "MANAGEMENT," "SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND
MANAGEMENT," "TRANSACTIONS WITH RELATED PARTIES" and "DESCRIPTION OF CAPITAL
STOCK--REGISTRATION RIGHTS."
ABSENCE OF A PUBLIC MARKET FOR THE NOTES; POSSIBLE VOLATILITY OF NOTE AND COMMON
STOCK PRICES
Prior to the resale of the Notes pursuant to this Prospectus, each of the
Notes was eligible for trading in the PORTAL market by eligible investors. Notes
sold pursuant to this Prospectus will no longer be eligible for trading in the
PORTAL market. Furthermore, the Company does not currently intend to list the
Notes resold pursuant to this Prospectus on any securities exchange or to seek
approval for quotation through any automated quotation system. Although the
Initial Purchasers currently make a market in the Notes, they are not obligated
to do so and any such market making may be discontinued at any time without
notice. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Notes resold pursuant to this Prospectus.
25
<PAGE>
Notes can trade at various prices depending upon many factors, including
prevailing interest rates, the Company's operating results and the markets for
similar securities. Historically, the market for non-investment grade debt has
been subject to disruptions that have caused substantial volatility in the
prices of securities similar to the Notes. There can be no assurance that the
market for the Notes will not be subject to similar disruptions. The liquidity
of, and trading market for, the Notes may also be materially and adversely
affected by the declines in the market for debt securities generally. Such a
decline may materially and adversely affect such liquidity and trading
independent of the financial performance of, and prospects for, the Company.
The market price of the shares of the Company's Common Stock has varied
significantly and may be volatile depending on news announcements or changes in
general market conditions. In particular, news announcements regarding quarterly
results of operations, competitive developments, litigation or governmental
regulatory actions impacting the Company may adversely affect the Company's
Common Stock price. In addition, because the number of shares of Common Stock
held by the public is relatively small, the sale of substantial number of shares
of the Common Stock in a short period of time could adversely affect the market
price of the Common Stock. See "--SHARES ELIGIBLE FOR FUTURE SALE,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES," "MANAGEMENT," "SECURITY OWNERSHIP
OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT," "TRANSACTIONS WITH RELATED PARTIES,"
"DESCRIPTION OF NOTES" and "DESCRIPTION OF CAPITAL STOCK--REGISTRATION RIGHTS."
FRAUDULENT CONVEYANCE CONSIDERATIONS
Approximately $9.1 million of the net proceeds of the Original Offering of
the Notes was used by the Company to repay and redeem certain indebtedness.
Under applicable provisions of federal bankruptcy law and state fraudulent
transfer or conveyance laws, if: (i) the Notes were issued by the Company with
the intent to hinder, delay or defraud any present or future creditor of the
Company or the Company contemplated insolvency with a design to prefer one or
more creditors to the exclusion in whole or in part of others; or (ii) at the
time the Notes were issued, the Company received less than reasonably equivalent
value or fair consideration, and (a) was insolvent or rendered insolvent by
reason of such incurrence, (b) was engaged in a business or transaction for
which the remaining assets of the Company constituted unreasonably small capital
or (c) intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature, the obligations of the Company under
the Notes could be avoided, or claims in respect of the Notes could be
subordinated to all existing and future debts of the Company. Although the
Company believes that at the time of the issuance of the Notes the Company was
not insolvent under any of the foregoing tests, that the Company has sufficient
capital to carry on its business and that the Company will be able to pay its
respective debts as they mature, there can be no assurance that a court passing
on such question would agree. See "SELECTED HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL AND OTHER OPERATING INFORMATION."
In rendering their opinion on the validity of the Offered Securities, Arter
& Hadden, counsel for the Company, will express no opinion as to federal or
state laws relating to fraudulent transfers or conveyances.
ANTI-TAKEOVER EFFECTS OF CERTAIN INSTRUMENTS; UNISSUED PREFERRED STOCK AND
DELAWARE LAW
In addition to provisions of the Notes giving rise to repurchase obligations
by the Company in the event of a Fundamental Change, certain provisions of the
Company's Certificate of Incorporation, Bylaws, stock option plans, Delaware
law, employment agreements and severance agreements with certain officers of the
Company may have an anti-takeover effect. Such provisions may delay, defer or
prevent a tender offer or takeover attempt that a stockholder might consider to
be in the stockholder's best interest, including attempts that might result in a
premium over the market price for the shares held by stockholders. See
"MANAGEMENT--1994 EMPLOYEE STOCK OPTION PLAN," "MANAGEMENT--EMPLOYMENT
AGREEMENTS AND CHANGE-IN-CONTROL AGREEMENTS," "DESCRIPTION OF NOTES--REPURCHASE
AT OPTION OF HOLDERS UPON AND A
26
<PAGE>
FUNDAMENTAL CHANGE," "DESCRIPTION OF CAPITAL STOCK--ANTITAKEOVER PROVISIONS" AND
"DESCRIPTION OF CAPITAL STOCK--SEVERANCE AGREEMENTS."
On August 3, 1995, the Company amended its Certificate of Incorporation and
Bylaws to provide for a classified Board of Directors, consisting of three
classes. After the transition period, each class of Directors will serve for
three years with one class being elected each year. Currently, five members of
the Board of Directors have been elected to serve for a term expiring at the
1999 Annual Meeting of Stockholders, and four directors were classified to serve
for extended terms expiring at each of the 1997 and 1998 Annual Meetings of
Stockholders, respectively. Classification of the Board of Directors makes it
more difficult and time consuming for the stockholders to change the overall
composition of the Board, in that at least two stockholders' meetings will be
required to effect a change in a majority of the Board of Directors.
In addition to shares of the Series A Cumulative Convertible Preferred Stock
(the "Series A Stock") outstanding, 14,750,000 additional shares of Preferred
Stock may be issued by the Company in the future without stockholder approval
and upon such terms as the Board of Directors may determine. The rights of the
holders of the Common Stock will be subject to, and may be adversely affected
by, the rights of holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire or
discourage a third party from acquiring, a majority of the outstanding stock of
the Company and potentially reduce the likelihood that stockholders would
receive a premium to the market value of their shares in any acquisition
transaction. See "DESCRIPTION OF CAPITAL STOCK."
On October 30, 1996, the Board of Directors of the Company created a
Takeover Defense Committee of the Board to recommend to the Board on or prior to
March 1, 1997 whether it is advisable and in the best interest of the Company
and its stockholders to implement any provisions to the Company's Certificate of
Incorporation or Bylaws to prevent a hostile takeover of the Company, and if so,
the various alternatives that such Committee would recommend to the Board. As of
the date hereof, the Committee has not completed its report and has made no
recommendation to the Board.
CONCENTRATION OF STOCK OWNERSHIP
As of December 31, 1996, the directors and executive officers of the Company
beneficially owned approximately 50.2% of the Company's Common Stock. See
"SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT" and "DESCRIPTION
OF CAPITAL STOCK--REGISTRATION RIGHTS." The Company's Chairman and Chief
Executive Officer, Jack W. Matz, Jr., beneficially owned approximately 21.9% of
the Common Stock as of December 31, 1996. See "DESCRIPTION OF CAPITAL
STOCK--ANTI-TAKEOVER PROVISIONS--VOTING AGREEMENTS" for a description of the
voting agreements and voting trusts applicable to certain of such shares of
Common Stock. As a result, these persons will be able to exercise significant
influence over all matters requiring stockholder approval, including the ability
to elect a majority of the Company's Board of Directors and to approve of
significant corporate transactions. Such concentration of ownership may also
have the effect of delaying or preventing a change in control of the Company.
USE OF PROCEEDS
The Notes and the Conversion Shares being offered hereby are for the account
of the Selling Noteholders and the Shares being offered hereby are for the
account of the Selling Stockholders. Accordingly, the Company will not receive
any of the proceeds from the sale of the Notes, the Conversion Shares or the
Shares offered hereby except for an aggregate of $1,351,250 arising from the
exercise of the Finder's Warrants. These proceeds will be used by the Company
for general corporate purposes. See "SELLING NOTEHOLDERS AND SELLING
STOCKHOLDERS."
27
<PAGE>
SELLING NOTEHOLDERS AND SELLING STOCKHOLDERS
SELLING NOTEHOLDERS
The Notes were originally issued and sold by the Company in the Original
Offering to the Initial Purchasers in transactions exempt from the registration
requirements of the Securities Act and simultaneously resold by the Initial
Purchasers in the United States to persons reasonably believed by such Initial
Purchasers to be "qualified institution buyers" (as defined in Rule 144A of the
Securities Act) or to institutional "accredited investors" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act. These purchasers or their
transferees, pledgees, donees or successors constitute the Selling Noteholders
and may from time to time offer and sell pursuant to this Prospectus any or all
of the Notes or the Conversion Shares issuable upon conversion of the Notes.
The Notes and the Conversion Shares have been registered pursuant to a
Registration Rights Agreement between the Company and the Initial Purchasers
which provides that the Company file a registration statement with regard to the
Notes and the Conversion Shares by December 10, 1996 and keep such registration
effective until the earlier to occur of August 12, 1999 or the sale of all Notes
and Conversion Shares covered by the Registration Statement. Although none of
the Selling Noteholders have advised the Company that they currently intend to
sell all or any of the Notes or the Conversion Shares pursuant to this
Prospectus, the Selling Noteholders may choose to sell the Notes and the
Conversion Shares from time to time upon notice to the Company. See "PLAN OF
DISTRIBUTION." Pursuant to the Registration Rights Agreement between the Company
and the Initial Purchasers, (1) the Company has agreed to bear all expenses of
registration of the Notes and the Conversion Shares (including up to $25,000 of
not more than one counsel (in addition to appropriate local counsel) chosen by
the holders of a majority in principal amount of the Notes of the Selling
Noteholders included in the Registration Statement) except for underwriting fees
and commissions, transfer fees or taxes, and (2) the Company and the Selling
Noteholders have agreed to certain indemnity provisions between the Company and
such Selling Noteholders and controlling persons thereof against certain
liabilities, including liabilities arising under the Securities Act.
Prior to any use of this Prospectus in connection with an offering of the
Notes or the Conversion Shares, this Prospectus will be supplemented to set
forth the name and number of shares beneficially owned by the Selling
Noteholders intending to sell such securities and the number of Notes and/or
Conversion Shares to be offered. The Prospectus Supplement will also disclose
whether any Selling Noteholder selling in connection with such Prospectus
Supplement has held any position or office with, been employed by or otherwise
has a material relationship with, the Company or any of its affiliates during
the three years prior to the date of the Prospectus Supplement.
SELLING STOCKHOLDERS
The following table sets forth the name of each of the Selling Stockholders
and the number of Shares that may be offered by each. The number of Shares that
may be actually sold by each of the Selling Stockholders will be determined by
each Selling Stockholder, and may depend upon a number of factors, including
among other things, the market price of the Common Stock. See "PLAN OF
DISTRIBUTION." The table below sets forth information as of December 31, 1996
concerning the beneficial ownership of the Shares of
28
<PAGE>
each of the Selling Stockholders. All information as to beneficial ownership has
been furnished by each of the Selling Stockholders.
<TABLE>
<CAPTION>
SHARES OF
SHARES OF COMMON STOCK
SHARES OF COMMON STOCK COMMON STOCK BENEFICIALLY
BENEFICIALLY OWNED BEFORE OFFERED IN THE OWNED AFTER
OFFERING OFFERING THE OFFERING*
-------------------------- -------------- --------------
NAME OF SELLING STOCKHOLDER NUMBER PERCENT(1) NUMBER NUMBER
- -------------------------------------------------- ---------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Jesup & Lamont Capital Markets, Inc............... 1,990,000 11.3% 50,000 1,940,000(2)
Economy Communications, Inc....................... 26,316 ** 26,316 0
Phillip and Rae Huberfeld......................... 16,353 ** 16,353 0
Moses Elias....................................... 16,353 ** 16,353 0
Muller Trading L.P................................ 400,000 2.5%(3) 400,000 0
Mark Kabbash...................................... 250,000 1.6%(4) 250,000 0
Barretto Pacific Corp............................. 100,000 ** (5) 100,000 0
</TABLE>
- ------------------------
* Assumes all Shares of Common Stock are sold.
** Represents less than one percent (1%).
(1) Shares of Common Stock which were not outstanding but which could be
acquired upon exercise of any warrant or option within sixty (60) days of
December 31, 1996 are deemed outstanding for the purpose of computing the
percentage of outstanding shares beneficially owned. However, such shares
are not deemed to be outstanding for any other purpose except as noted
elsewhere herein. There were 15,660,535 shares of Common Stock issued and
outstanding as of December 31, 1996.
(2) Represents 11.0% of the Company's issued and outstanding Common Stock as of
December 31, 1996.
(3) Includes 300,000 shares of Common Stock issuable upon exercise of such
Selling Stockholder's Finder's Warrant issued March 7, 1996 and exercisable
until March 6, 1998, and 100,000 shares of Common Stock issuable upon
exercise of such Selling Stockholder's Finder's Warrant issued June 21, 1996
and exercisable until June 21, 1998.
(4) All 250,000 shares of Common Stock are issuable upon exercise of such
Selling Stockholder's Finder's Warrant issued March 7, 1996 and exercisable
until March 6, 1998.
(5) All 100,000 shares of Common Stock are issuable upon exercise of such
Selling Stockholder's Finder's Warrant issued June 21, 1996 and exercisable
until June 21, 1998.
On July 31, 1995, the Company entered into a (1) Share Purchase Agreement
with JLCM pursuant to which JLCM purchased 166,667 shares of the Company's
Series A Cumulative Convertible Preferred Stock ("Series A Stock") for
$1,500,000 (the "Share Purchase Agreement"), and (2) a Warrant Purchase
Agreement with JLCM pursuant to which the Company issued to JLCM a Common Stock
Purchase Warrant (the "JLCM Warrant") exercisable into an aggregate of 500,000
shares of Common Stock, subject to adjustment in certain events (the "Warrant
Purchase Agreement"). The JLCM Warrant is exercisable through July 31, 1998.
JLCM has certain registration rights pursuant to which the Company previously
registered for resale (the Company's Form S-3 Registration Statement No.
33-64271) by JLCM 1,333,336 shares of Common Stock issuable upon conversion of
the Series A Stock held by JLCM and 500,000 shares of Common Stock issuable upon
exercise of the JLCM Warrant. On March 25, 1996, the Company entered into a
Settlement Agreement with JLCM pursuant to which the Company issued to JLCM
50,000 shares of Common Stock which have the same registration rights as the
shares issuable upon conversion of the Series A Stock and the JLCM Warrant
pursuant to which the Company is registering such shares pursuant to the
Registration Statement. On July 31, 1996, the Company issued to JLCM an
additional 13,333 shares of Series A Stock as a stock dividend on the Series A
Stock, and such shares are currently convertible into 106,664 shares of Common
Stock. Such shares are also covered by the registration rights granted under the
29
<PAGE>
Share Purchase Agreement, but are not registered under the Registration
Statement hereunder. JLCM served as financial advisor to the Company in
connection with the financing of the USC acquisition. Reuben Richards, Senior
Managing Director of JLCM, and Howard Curd, Managing Director of JLCM, both
serve on the Company's Board of Directors. See "MANAGEMENT--DIRECTORS AND
EXECUTIVE OFFICERS" and "TRANSACTIONS WITH RELATED PARTIES." The Company has
agreed to bear all costs associated with such registration except underwriter's
fees or commissions and legal fees and expenses of JLCM in excess of $20,000.
See "DESCRIPTION OF CAPITAL STOCK--REGISTRATION RIGHTS."
On March 13, 1996, the Company purchased effective as of February 1, 1996
substantially all the assets of Economy, a switched reseller of long distance
services located in McKinney, Texas. The Company issued 26,316 shares of Common
Stock as consideration for such assets in a private placement transaction. The
acquisition agreement included registration rights pursuant to which the Company
has registered such shares pursuant to the Registration Statement. The Company
has agreed to bear all costs associated with such registration except any
underwriter's fees or commissions, transfer taxes, and the fees and expenses of
accountants, legal counsel and other representatives of Economy. See
"REGISTRATION RIGHTS."
On March 18, 1996, the Company entered into Subscription Agreements with
each of Phillip and Rae Huberfeld and Moses Elias pursuant to which the
Huberfelds and Mr. Elias each purchased $50,000 of the Company's March 18
Debentures. Pursuant to certain negotiated rights in the Subscription
Agreements, the Huberfelds and Mr. Elias were each also issued 16,353 shares of
Common Stock. The March 18 Debentures were redeemed on August 23, 1996 for
$51,937.50. Pursuant to its obligations under the Subscription Agreements, the
Company has registered such 32,706 shares of Common Stock pursuant to the
Registration Statement. The Company has agreed to bear all costs associated with
such registration except any underwriter's fees or commissions and the fees and
expenses of legal counsel for such persons. See "DESCRIPTION OF CAPITAL
STOCK--REGISTRATION RIGHTS."
Pursuant to a Letter Agreement dated February 28, 1996 between the Company
and Mueller Trading L.P. ("Mueller"), on March 7, 1996 the Company issued to
Mueller as a finder's fee in connection with the issuance of the Company's 9%
Convertible Subordinated Debentures Due March 7, 1997, March 18, 1997 and April
10, 1997 (the "March and April Debentures") a Warrant exercisable for 300,000
shares of Common Stock at $1.40 per share until March 6, 1998. Pursuant to its
obligations under the Letter Agreement, the Company has registered the shares
issuable upon exercise of this Warrant under the Registration Statement, and the
Company has agreed to bear all costs associated with such registration except
any underwriter's fees or commissions and the fees and expenses of legal counsel
for Mueller. See "DESCRIPTION OF CAPITAL STOCK--REGISTRATION RIGHTS."
Pursuant to a Letter Agreement dated February 28, 1996 between the Company
and VistaQuest, Inc. ("VQI"), on March 7, 1996 the Company issued to Mark
Kabbash, President of VQI, as a finder's fee in connection with the issuance of
the Company's March and April Debentures a Warrant exercisable for 250,000
shares of Common Stock at $2.125 until March 6, 1998. Pursuant to its
obligations under the letter agreement, the Company has registered the shares
issuable upon exercise of this Warrant under the Registration Statement, and has
agreed to bear all costs associated with such registration except any
underwriter's fees or commissions and the fees and expenses of legal counsel for
Mr. Kabbash. See "DESCRIPTION OF CAPITAL STOCK--REGISTRATION RIGHTS."
Pursuant to Letter Agreements dated June 21, 1996 between the Company and
each of Mueller and Barretto Pacific Corp. ("BPC"), on June 21, 1996 the Company
issued to each of Mueller and BPC as a finder's fee in connection with the
issuance of the Company's 9% Convertible Subordinated Debentures Due June 21,
1997 (the "June Debentures") a Warrant exercisable for 100,000 shares of Common
Stock at $2.00 per share until June 21, 1998. The Company has registered an
aggregate of 200,000 shares of Common Stock issuable upon exercise of such
warrants pursuant to registration rights granted under such letter agreements,
and the Company has agreed to bear all costs associated with such registration
except any underwriter's fees or commission, transfer taxes and fees and
expenses of legal counsel for Mueller and
30
<PAGE>
BPC. See "DESCRIPTION OF CAPITAL STOCK--REGISTRATION RIGHTS." On August 27,
1995, the Company entered into a one year Agreement with BPC pursuant to which
BPC provides public relations services for the Company, including dissemination
of information provided by the Company concerning its business and affairs in
exchange for a $40,000 fee.
In the September 20, 1995 private placement of the Company's securities,
Mueller purchased 5,000 shares of the Company's Common Stock and a warrant
exercisable for 5,000 shares of Common Stock until September 11, 1997 at $1.25
per share, and Moses Elias purchased 8,000 shares of the Company's Common Stock
and a warrant exercisable for 8,000 shares of Common Stock until September 11,
1997 at $1.25 per share. Both Mueller and Mr. Elias entered into a Voting
Agreement with the Company and Jack W. Matz, Jr., the Company's Chairman and
Chief Executive Officer, pursuant to which such persons granted Mr. Matz the
right to vote such shares until August 31, 2005. Mueller and Mr. Elias exercised
such warrants on May 29, 1996 and have transferred all such shares pursuant to
the Company's Registration Statement No. 33-64271, and such shares are no longer
subject to the Voting Agreement.
Other than as set forth under "SELLING NOTEHOLDERS AND SELLING
STOCKHOLDERS--SELLING STOCKHOLDERS," "REGISTRATION RIGHTS" and "TRANSACTIONS
WITH RELATED PARTIES," none of the Selling Stockholders were affiliated with the
Company within the last three fiscal years.
In connection with the offering made hereby, the Company and each of the
Selling Stockholders have entered into an agreement that contains certain
indemnity provisions between the Company and such Selling Stockholder and any
controlling persons thereof against certain liabilities, including liabilities
arising under the Securities Act.
PLAN OF DISTRIBUTION
The Offered Securities may be sold from time to time to purchasers directly
by the Selling Noteholders or the Selling Stockholders holding such Offered
Securities. Alternatively, the Selling Noteholders or the Selling Stockholders
may from time to time offer the Offered Securities they own to or through
underwriters, broker/dealers or agents, who may receive compensation in the form
of underwriting discounts, concessions or commissions from the Selling
Noteholders or the Selling Stockholders, as the case may be, or the purchasers
of such Offered Securities for whom they may act as agents. The Selling
Noteholders and the Selling Stockholders and any underwriters, broker/dealers or
agents that participate in the distribution of the Offered Securities may be
deemed to be "underwriters" within the meaning of the Securities Act and any
profit on the sale of such Offered Securities and any discounts, commissions,
concessions or other compensation received by any such underwriter,
broker/dealer or agent may be deemed to be underwriting discounts and
commissions under the Securities Act.
The Offered Securities may be sold from time to time in one or more
transactions at fixed prices, at the prevailing market prices at the time of
sale, at varying prices determined at the time of sale or at negotiated prices.
This sale of the Offered Securities may be effectuated in transactions (which
may involve crosses or block transactions) (i) on any national securities
exchange or quotation service which the Offered Securities may be listed or
quoted at the time of sale, (ii) in the over-the-counter market, and (iii) in
transactions otherwise than on such exchanges or in the over-the-counter
markets. At the time a particular offering of the Offered Securities is made, a
Prospectus Supplement, if required, will be distributed which will set forth the
aggregate amount of the type of Offered Securities being offered and the terms
of the offering, including the name or names of any underwriters, broker/dealers
or agents, any discounts, commissions and other terms constituting compensation
from the Selling Noteholders or the Selling Stockholders, as the case may be,
and any discounts, commissions or concessions allowed or reallowed to be paid to
broker/dealers. To comply with the securities laws of certain jurisdictions, if
applicable, the Offered Securities will be offered or sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
jurisdictions the Offered Securities may not be offered
31
<PAGE>
or sold unless they have been registered or qualified for sale in such
jurisdictions or an exemption from registration or qualification is available
and is complied with.
As described in "SELLING NOTEHOLDERS AND SELLING STOCKHOLDERS," the Company
has agreed to pay all expenses of registration of the Offered Securities with
certain exceptions. The Selling Noteholders and the Selling Stockholders will be
indemnified by the Company against certain civil liabilities, including certain
liabilities under the Securities Act, or will be entitled to contribution in
connection therewith. The Company will be indemnified by such persons severally
against certain civil liabilities, including certain liabilities under the
Securities Act, or will be entitled to contribution in connection therewith.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is currently traded on the SmallCap Market under
the symbol "STEL." The table below sets forth the high and low closing sale
price for the Common Stock on the SmallCap Market for the periods indicated. All
price quotations represent prices between dealers, without retail mark-ups,
mark-downs or commissions and may not represent actual transactions. See "RISK
FACTORS--ABSENCE OF A PUBLIC MARKET FOR THE NOTES; POSSIBLE VOLATILITY OF NOTE
AND COMMON STOCK PRICES."
<TABLE>
<CAPTION>
CLOSING SALE PRICE
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal Year Ended December 31, 1995:
First Quarter........................................................ $ 2.32 $ 1.19
Second Quarter....................................................... $ 2.50 $ 1.50
Third Quarter........................................................ $ 2.94 $ 1.56
Fourth Quarter....................................................... $ 3.03 $ 1.81
Fiscal Year Ended December 31, 1996:
First Quarter........................................................ $ 2.59 $ 2.03
Second Quarter....................................................... $ 3.84 $ 2.03
Third Quarter........................................................ $ 3.75 $ 2.38
Fourth Quarter....................................................... $ 3.38 $ 1.48
Fiscal Year Ending December 31, 1997:
First Quarter (through February 6, 1997)............................. $ 1.56 $ 1.43
</TABLE>
On February 6, 1997, the last reported sale price of the Common Stock as
reported on the SmallCap Market was $1.50 per share. As of December 31, 1996,
there were 461 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has not declared or paid cash dividends on its Common Stock
since inception. Dividends on the Company's outstanding Series A Stock accrue at
the rate of $.72 per share per annum and are payable in kind in the form of
Series A Stock or in cash. On July 31, 1996, the Company issued an additional
13,333 shares of Series A Stock to the holders thereof in connection with the
first annual dividend distribution. The Company anticipates that any income
generated in the foreseeable future will be retained for the development and
expansion of its business and the repayment of indebtedness and therefore does
not anticipate paying cash dividends on its Common Stock in the foreseeable
future. The Indenture and the Greyrock Facility restrict the payment of
dividends in certain cases. See "BUSINESS-- GREYROCK FACILITY" and "DESCRIPTION
OF NOTES--CERTAIN COVENANTS--LIMITATIONS ON RESTRICTED PAYMENTS." Future
borrowings, if any, obtained by the Company or any of its subsidiaries may also
prohibit or restrict the payment of dividends or other distributions. Subject to
the waiver of such prohibitions and compliance with such limitations, the
payment of cash dividends on shares of the Common Stock will be within the
discretion of the Company's Board of Directors and will depend upon the earnings
of the Company, the Company's capital requirements, applicable requirements of
the Delaware General Corporation Law (the "DGCL") and other factors that are
considered relevant by the Company's Board of Directors.
32
<PAGE>
SELECTED HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL AND OTHER OPERATING INFORMATION
The selected historical consolidated financial information presented below
(other than the unaudited information as of and for the nine months ended
September 30, 1995 and 1996 and the pro forma information) are derived from the
audited Consolidated Financial Statements of the Company. The unaudited pro
forma information assumes that the acquisition of USC was completed at the
beginning of 1995. The selected unaudited consolidated financial information as
of and for the nine months ended September 30, 1995 and 1996, in the opinion of
management, reflect all adjustments, consisting only of a normal recurring
nature, necessary for a fair presentation of the consolidated financial position
and consolidated results of operations for interim periods. The consolidated
operating results for the nine months ended September 30, 1996 are not
necessarily indicative of the results which ultimately will be reported for the
full fiscal year ending December 31, 1996. The unaudited pro forma combined
results of operations gives effect to the consummation of the USC acquisition as
if it was completed on January 1, 1995. All of the following information should
be read in conjunction with the financial statements as set forth in the index
on page F-1 and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" contained elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA NINE MONTHS
YEAR ENDED ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, DECEMBER 31, 30,
---------------------------------- ------------ ----------------
1992 1993 1994(1) 1995(1) 1995(2) 1995(1) 1996(1)
------- ------- ------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Telecommunications revenues............................... $ 546 $ 2,592 $ 9,755 $20,748 $28,695 $13,773 $22,200
Cost of revenue........................................... 573 2,395 8,298 14,116 18,754 9,575 13,059
------- ------- ------- ------- ------------ ------- -------
Gross profit (loss)....................................... (27) 197 1,457 6,632 9,941 4,198 9,141
Operating expenses:
General and administrative.............................. 1,134 1,096 2,854 6,478 9,354 4,529 7,408
Depreciation and amortization........................... 104 143 413 1,287 1,837 910 1,607
Nonrecurring Russian venture charges.................... -- -- -- 143 143 143 --
------- ------- ------- ------- ------------ ------- -------
Total operating expenses.............................. 1,238 1,239 3,267 7,908 11,334 5,582 9,015
------- ------- ------- ------- ------------ ------- -------
Income (loss) from continuing operations before other
income (expense) and extraordinary item................. (1,265) (1,042) (1,810) (1,276) (1,393) (1,384) 126
Other income (expense):
Interest expense........................................ (12) (12) (30) (683) (1,184) (364) (1,352)
Other, net.............................................. 19 84 21 24 24 10 46
------- ------- ------- ------- ------------ ------- -------
Total other income (expense).......................... 7 72 (9) (659) (1,160) (354) (1,306)
------- ------- ------- ------- ------------ ------- -------
Loss from continuing operations before extraordinary
item.................................................... (1,258) (970) (1,819) (1,935) $(2,553) (1,738) (1,180)
------------
------------
Discontinued operations:
Loss from title plant services operations............... (104) (106) (478) -- -- --
Provision for operating losses during phase-out
period................................................ -- -- (150) (475) (475) --
Loss from impairment.................................... -- -- -- (4,056) -- --
------- ------- ------- ------- ------- -------
Loss from discontinued operations....................... (104) (106) (628) (4,531) (475) --
------- ------- ------- ------- ------- -------
Loss before extraordinary item............................ (1,362) (1,076) (2,447) (6,466) (2,213) (1,180)
Extraordinary item-gain on extinguishment of debt......... -- -- -- -- -- 1,817
------- ------- ------- ------- ------- -------
Net income (loss)......................................... (1,362) (1,076) (2,447) (6,466) (2,213) 637
Preferred dividend requirements, including accretion...... -- -- -- (125) (37) (198)
------- ------- ------- ------- ------- -------
Net income (loss) applicable to common shareholders....... $(1,362) $(1,076) $(2,447) $(6,591) $(2,250) $ 439
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA NINE MONTHS
YEAR ENDED ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, DECEMBER 31, 30,
---------------------------------- ------------ ----------------
1992 1993 1994(1) 1995(1) 1995(2) 1995(1) 1996(1)
------- ------- ------- ------- ------------ ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Loss per weighted average common share outstanding:
Continuing operations................................... $ (0.34) $ (0.18) $ (0.20) $ (0.17) $ (0.22) $ (0.16) $ (0.07)
------------
------------
Discontinued operations................................. (0.03) (0.02) (0.07) (0.39) (0.04) --
Extraordinary item...................................... -- -- -- -- -- 0.11
------- ------- ------- ------- ------- -------
Net income (loss) per share............................. $ (0.37) $ (0.20) $ (0.27) $ (0.56) $ (0.20) $ 0.04
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Weighted average number of common shares outstanding.... 3,684 5,480 9,200 11,639 11,639 11,129 16,962
------- ------- ------- ------- ------------ ------- -------
------- ------- ------- ------- ------------ ------- -------
OTHER DATA:
Gross profit margin....................................... -- 8% 15% 32% 35% 30% 41%
Net cash used in operating activities..................... $(1,219) $(1,069) $(2,289) $(1,224) $(1,505) $(1,860)
Net cash used in investing activities..................... $ (245) $ (373) ($1,744) $(7,142) $(6,974) $(2,547)
Net cash provided by financing activities................. $ 1,503 $ 2,615 $ 3,166 $ 8,859 $ 8,419 $16,274
EBITDA (loss), as defined herein(3)....................... $(1,161) $ (899) $(1,397) $ 154 $ (331) $ 1,732
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.......................................................... $ 331 $ 824 $ 271 $ 12,691
Total assets....................................................................... 11,777 26,041 29,801 48,243
10% Convertible Notes.............................................................. -- -- -- 27,200
Total debt(4)...................................................................... 650 11,669 10,791 29,158
Total liabilities.................................................................. 1,793 15,933 14,755 35,864
Series A Cumulative Convertible Preferred Stock.................................... -- 1,129 1,239 1,310
Shareholders' equity............................................................... 9,984 8,979 13,807 11,069
OPERATING DATA:
Employees.......................................................................... 58 165 199 263
Sales offices...................................................................... 2 20 20 25
Customers.......................................................................... 1,282 23,145 22,380 25,719
Switches........................................................................... 1 2 2 3
</TABLE>
- --------------------------
(1) The selected historical consolidated financial and other information
includes the acquisitions of LDN effective March 1, 1994, USC effective June
1, 1995, and FCLD effective September 1, 1996.
(2) The unaudited pro forma consolidated financial information for the Company
assumes that the acquisition of USC was completed on January 1, 1995. The
pro forma amounts represent the historical operating results of USC combined
with those of the Company with appropriate adjustments which give effect to
interest expense, amortization and utilization of consolidated net operating
loss carryforwards. These pro forma amounts are not necessarily indicative
of consolidated operating results which would have occurred had USC been
included in the operations of the Company during all of 1995, or which may
result in the future, because these amounts do not reflect full transmission
and switched service cost optimization, and the synergistic effect on
operating, selling, general and administrative expenses nor do the amounts
reflect any higher costs associated with unanticipated integration or other
organizational activities the Company may be forced to undertake as a result
of the acquisition.
(3) Earning (loss) before interest, taxes, depreciation, amortization,
nonrecurring charges, and other income (expense) or "EBITDA" (as defined
herein), is a commonly used measure of performance in the telecommunications
industry. As used herein, EBITDA is not intended as either a substitute or
replacement for operating income (as presented according to GAAP) as a
measure of the financial results of operations or for cash flows from
operations (as presented according to GAAP).
(4) Total debt consists of debt (both short- and long-term) and capital lease
obligations.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the three years ended December 31,
1993, 1994 and 1995 and for the three and nine months ended September 30, 1995
and 1996. It should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto included elsewhere in this
Prospectus.
GENERAL
The Company is a regional IXC providing a wide range of domestic
telecommunications services through its network of owned and leased facilities.
The Company's customer base is primarily composed of small and medium sized
commercial accounts and residential customers which, prior to the Company's
acquisition of Addtel, were concentrated in the southwestern and south central
United States. In addition to providing "1+" domestic long distance services,
the Company also offers international long distance, wholesale long distance,
operator and wireless services, and other products such as voice and data
private lines, "800/888" services, Internet access and travel cards. In
addition, the Company recently began test marketing the resale of local exchange
services of Southwestern Bell in portions of Texas through the grant of an SPCOA
by the Texas PUC.
Effective November 1, 1996, the Company purchased all of the issued and
outstanding capital stock of Addtel, a switchless reseller of long distance
services based in Glendale, California. The acquisition was consummated for an
aggregate purchase price of $9.5 million (including $2 million allocated to
nonsolicitation agreements) subject to potential downward adjustment. Addtel's
audited revenues for its fiscal year ended May 31, 1996 were approximately $16.4
million (consisting primarily of retail revenues) and its unaudited revenues for
the seven months ended December 31, 1996 were approximately $18.3 million,
consisting of approximately $8.1 million of retail revenues and $10.2 million of
wholesale revenues. Presently, Addtel's revenue is primarily derived from the
provision of wholesale long distance services while its retail customer base
primarily consists of small and medium sized commercial accounts and residential
customers concentrated in the greater Los Angeles metropolitan area. The Company
intends to continue to provide long distance services through Addtel in addition
to its other operating telecommunications subsidiaries.
The Company entered the telecommunications business in 1991 through the
acquisition of NATC, a telecommunications provider offering international long
distance service to foreign customers. In 1994 and 1995, the Company acquired
two Texas-based switchless resellers (e.g., entities which resell long distance
services but do not own or lease switching equipment or transmission
facilities), LDN and USC. During 1996, the Company purchased substantially all
of the assets of FCLD, a switched reseller of long distance telephone services
located in Amarillo, Texas. In addition, effective in 1996, the Company acquired
the assets of Economy, a switchless reseller of long distance telephone services
located in McKinney, Texas, acquired Uniquest, a company engaged in third party
customer verification services and outbound telemarketing and purchased all of
the stock of Addtel. Also during late 1995 and early 1996, the Company purchased
and installed switches in Dallas, Texas and Phoenix, Arizona and added leased
transmission facilities between these switches and the operator switch the
Company acquired in the USC acquisition. The Company expanded its network
through the acquisition of switching equipment in Amarillo and Lubbock in
connection with the FCLD acquisition.
The FCLD acquisition was effective September 1, 1996. The assets acquired
included FCLD's customer base of approximately 4,500 customers and two Siemens
Stromberg-Carlson DCO Central Office type switches, which will be integrated
into the Company's existing network.
The Company markets its services in areas in the southwestern and south
central United States served by its network primarily under the "USC," "USI,"
"First Choice Long Distance," and "Southwest Long Distance Network" trade names.
The Company markets its services in the Addtel service area under the
35
<PAGE>
trade name "Addtel." The growth of the Company's initial customer base was
largely the result of its acquisitions. The Company anticipates future growth
will result from sales and marketing efforts of its sales force and from
continued acquisitions of telecommunications companies within its market area or
adjacent thereto. See "Risk Factors--Availability of Growth Opportunities."
On August 12, 1996, the Company consummated a private placement of
$27,200,000 of the Notes. The Notes are currently convertible into the Company's
Common Stock at a conversion price of $2.55 per share. The net proceeds from the
sale of the Notes were approximately $25.4 million after giving effect to the
transaction related fees and expenses. The Company used approximately $12.0
million of the net proceeds from the private placement to repay certain
indebtedness, and to repurchase or redeem certain shares of the Company's Common
Stock and outstanding debentures. The Company utilized the balance of the
proceeds (approximately $13.4 million) to effect the Addtel and FCLD
acquisitions and for network expansion and working capital.
The geographic concentration of LDN's, USC's, Economy's, and FCLD's
customers has allowed the Company to add call volume to its network and has
provided the Company with the opportunity to expand its network into adjacent
geographic areas. Management of the Company presently anticipates expanding its
network into the Addtel service area. See "RISK FACTORS--RISKS RELATING TO
DEVELOPMENT OF LONG DISTANCE NETWORK" AND "RISK FACTORS--CAPITAL INTENSIVE
INDUSTRY; INCREASED EXPENDITURES FOR ANTICIPATED EXPANSION."
In addition, commencing in October 1994, the Company modified its marketing
efforts to focus on building revenues derived from switched "1+" domestic long
distance and related services such as private line services, "800/888" service
and travel cards, and reduced its marketing of pay telephone operator
assistance, wholesale long distance services and international call-back.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's Consolidated
Statements of Operations as a percentage of its revenues for the years ended
December 31, 1993, 1994 and 1995 and the three and nine months ended September
30, 1995 and 1996. For purposes of this Management's Discussion and Analysis,
the term "revenues" refers to the Company's telecommunications revenues as
reflected in the Company's Consolidated Statement of Operations, exclusive of
any revenues attributable to discontinued operations.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
--------- ----------- --------
<S> <C> <C> <C>
Operating revenue................................. 100 % 100 % 100%
Cost of revenue................................... 92 85 68
--------- ----------- --------
Gross profit...................................... 8 15 32
Operating expenses:
General and administrative...................... 42 30 32
Depreciation and amortization................... 6 4 6
Nonrecurring Russian venture charge............. -- -- --
--------- ----------- --------
Income (loss) from continuing operations before
other........................................... (40 ) (19 ) (6)
Other income (expense)............................ 3 -- (3)
--------- ----------- --------
Loss from continuing operations................... (37 ) (19 ) (9)
Loss from discontinued operations................. (4 ) (6 ) (22)
Extraordinary gain (loss) on extinguishment of
debt............................................ -- -- --
--------- ----------- --------
Net income (loss)................................. (41 )% (25 )% (31)%
--------- ----------- --------
--------- ----------- --------
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ---------------------
1995 1996 1995 1996
-------- -------- --------- ----------
<S> <C> <C> <C> <C>
Operating revenue................................. 100 % 100 % 100 % 100 %
Cost of revenue................................... 66 60 70 59
-------- -------- --------- ----------
Gross profit...................................... 34 40 30 41
Operating expenses:
General and administrative...................... 34 35 33 33
Depreciation and amortization................... 7 8 6 7
Nonrecurring Russian venture charge............. 2 -- 1 --
-------- -------- --------- ----------
Income (loss) from continuing operations before
other........................................... (9 ) (3 ) (10 ) 1
Other income (expense)............................ (3 ) (8 ) (3 ) (6 )
-------- -------- --------- ----------
Loss from continuing operations................... (12 ) (11 ) (13 ) (5 )
Loss from discontinued operations................. (3 ) -- (3 ) --
Extraordinary gain (loss) on extinguishment of
debt............................................ -- (4 ) -- 8
-------- -------- --------- ----------
Net income (loss)................................. (15 )% (15 )% (16 )% 3 %
-------- -------- --------- ----------
-------- -------- --------- ----------
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1996 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
1995
Revenues increased by $502,417, or 7%, from $7,459,367 for the three months
ended September 30, 1995 to $7,961,784 for the three months ended September 30,
1996. This $502,417 net increase in revenues
36
<PAGE>
was the result of (i) the FCLD acquisition which contributed $222,923, (ii) a
$501,570 increase in the Company's "1+" revenue primarily arising from internal
growth (excluding the FCLD acquisition), and (iii) a net decline of $222,076 in
revenue relating to certain operator services, and the Company's wholesale and
international business which the Company is de-emphasizing. The Company has
continued to emphasize the generation of "1+" revenue from internal growth and
acquisitions, and to de-emphasize the marketing of its operator service,
wholesale and international business because "1+" business currently carries
higher gross profit margins. As a result, the Company expects its operator
services, wholesale and international revenues to remain flat or decline in the
future, unless an opportunity arises whereby the margins for such lines of
business are acceptable to management of the Company.
Gross profit increased by $678,044 from $2,514,633 for the three months
ended September 30, 1995 to $3,192,677 for the same quarter in 1996. The gross
profit margin increased by 6% from 34% for the three months ended September 30,
1995 to 40% for the three months ended September 30, 1996. This increase was
primarily attributable to the integration and operation of the Company's network
coupled with an increased number of calls originating and terminating on the
network more than offsetting the unfavorable impact of the circuit availability
problems experienced during the three months ended September 30, 1996, as
disucussed under "Liquidity and Capital Resources." Additionally, there has been
an improved call mix with the lower margin operator service and wholesale
traffic declining while being replaced with the higher margin "1+" type traffic.
General and administrative expense increased by $215,238 from $2,547,565 for
the three months ended September 30, 1995 to $2,762,803 for the same quarter in
1996, and as a percentage of revenues, increased from 34% in 1995 to 35% in
1996. The increase in total general and administrative expense and small
increase as a percentage of revenues is primarily attributable to the gearing up
for additional growth and acquisitions in anticipation of an earlier closing
date for the Original Offering of Notes than the actual closing date in August
1996.
Depreciation and amortization expense increased by $125,711 from $533,213
for the three months ended September 30, 1995 to $658,924 for the same quarter
in 1996, and as a percentage of revenues, increased from 7% in 1995 to 8% in
1996. This increase resulted from higher depreciation and amortization charges
arising from the acquisition of FCLD and increased depreciation from the
acquisition of switching and other network equipment.
During the third quarter of 1995, the Company incurred a $143,558
nonrecurring charge to operations relating to the discontinuation of its
non-telecommunications Russian ventures. This charge was made for costs
associated with winding down the affairs of these ventures including termination
costs, collectability of receivables, and write-downs of certain assets.
The Company incurred a loss from continuing operations of $709,703 for the
three months ended September 30, 1995 versus a loss from continuing operations
of $229,050 for the same quarter in 1996. This improvement was primarily
attributable to improved gross profit margins, partially offset by increased
depreciation and amortization.
The Company had net other expense of $241,262 for the three months ended
September 30, 1995 compared to net other expense of $606,355 for the same
quarter in 1996. This increase was primarily due to an increase in interest
expense from $253,727 to $658,212 related to the Original Offering of the Notes
in August 1996.
The Company recorded an additional $225,000 provision for operating losses
during the phase-out period for its discontinued Strategic Abstract and Title
Corporation ("SATC") subsidiary for the three months ended September 30, 1995.
On February 29, 1996, SATC was sold to a key member of SATC management and an
impairment loss was recorded as of December 31, 1995.
The Company incurred a loss on extinguishment of debt of $331,813 for the
three months ended September 30, 1996. This loss relates to the Company's
redemption of its $2 million principal amount of
37
<PAGE>
convertible debentures from the proceeds of the Original Offering of Notes. The
convertible debentures had been recorded at less than the principal or face
amount due to the valuation of warrants issued in conjunction with these
convertible debentures.
The Company incurred a net loss of $1,175,965 for the three months ended
September 30, 1995 as compared to a net loss of $1,167,218 for the same quarter
in 1996. This improvement is primarily attributable to the increased interest
expense and the one-time extraordinary loss on extinguishment of debt, partially
offset by improved gross profit margins on increased revenues.
NINE MONTHS ENDED SEPTEMBER 30, 1996 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1995
Revenues increased $8,426,787, or 61%, from $13,772,942 for the nine months
ended September 30, 1995 to $22,199,729 for the nine months ended September 30,
1996. This $8,426,787 net increase in revenues was the result of (i) the
customers, net of attrition, obtained in the USC acquisition which contributed
$5,971,677, (ii) the FCLD acquisition which contributed $222,923, (iii) a
$3,112,283 increase in the Company's "1+" revenue primarily arising from
internal growth (excluding the USC and FCLD acquisitions), and (iv) a net
decline of $880,096 in revenue relating to certain operator services, and the
Company's wholesale and international business which the Company is
de-emphasizing. The Company has continued to emphasize the generation of "1+"
revenue from internal growth and acquisitions, and to de-emphasize the marketing
of its operator service, wholesale and international business because "1+"
business carries a higher gross profit margin. As a result, the Company expects
its operator services, wholesale and international revenues to remain flat or
decline in the future, unless an opportunity arises whereby the margins for such
lines of business are comparable to the Company's other products.
Gross profit increased by $4,942,852 from $4,198,011 for the nine months
ended September 30, 1995 to $9,140,863 for the nine months ended September 30,
1996. The gross profit margin increased by 11% from 30% for the nine months
ended September 30, 1995 to 41% for the nine months ended September 30, 1996.
This increase was primarily attributable to the integration and operation of the
Company's network coupled with an increased number of calls originating and
terminating on the network more than offsetting the unfavorable impact of the
circuit availability problems experienced during the three months ended
September 30, 1996, as disucussed under "Liquidity and Capital Resources."
Additionally, there has been an improved call mix with the lower margin operator
service and wholesale traffic declining while being replaced with the higher
margin "1+" type traffic.
General and administrative expense increased by $2,879,609 from $4,528,945
for the nine months ended September 30, 1995 to $7,408,554 for the nine months
ended September 30, 1996, and as a percentage of revenues, remained constant at
33% during each respective period. The increase in total general and
administrative expense is attributable to the gearing up for additional growth
and acquisitions in anticipation of an earlier closing date for the Original
Offering of the Notes.
Depreciation and amortization expense increased by $697,726 from $909,014
for the nine months ended September 30, 1995 to $1,606,740 for the same nine
months ended September 30, 1996, and as a percentage of revenues, increased from
6% in 1995 to 7% in 1996. This increase resulted from higher depreciation and
amortization charges arising from the acquisition of FCLD and increased
depreciation from the acquisition of switching and other network equipment.
During the third quarter of 1995, the Company incurred a $143,558
nonrecurring charge to operations related to the discontinuation of its
non-telecommunications Russian ventures. This charge was made for costs
associated with winding down the affairs of these ventures including termination
costs, collectibility of receivables, and write-down of certain assets.
The Company incurred a loss from continuing operations of $1,383,506 for the
nine months ended September 30, 1995 versus income from continuing operations of
$125,569 for the same period in 1996. This improvement was primarily
attributable to improved gross profit margins.
38
<PAGE>
The Company had net other expense of $354,440 for the nine months ended
September 30, 1995 compared to the net other expense of $1,305,720 for the same
period in 1996. This increase was primarily due to an increase in interest
expense from $364,260 to $1,352,072 related to the Original Offering of the
Notes in August 1996.
The Company recorded an additional $475,000 provision for operating losses
during the phase-out period for its discontinued SATC subsidiary for the nine
months ended September 30, 1995. On February 29, 1996, SATC was sold to a key
member of SATC management and an impairment loss was recorded as of December 31,
1995.
The Company recognized a net gain (made up of two components) on
extinguishment of debt of $1,817,378 for the nine months ended September 30,
1996. The first component was a gain on extinguishment of debt of $2,149,191
relating to the Company's redemption of securities issued in connection with the
USC acquisition for an aggregate of 843,023 shares of the Company's Common Stock
and $308,500 of cash. This gain was recognized in the second quarter of 1996.
These securities redeemed included (i) notes having an aggregate principal
amount of $3,150,000 and bearing interest at 11% per annum, (ii) an aggregate of
125,000 shares of Series B Cumulative Convertible Preferred Stock, and (iii) a
warrant which was exercisable into an aggregate of 1,050,000 shares of the
Company's Common Stock at any time prior to July 31, 2000 at a per share price
of $1.25. The second component was a loss on extinguishment of debt of $331,813
relating to the Company's redemption of its $2,000,000 principal amount of
convertible debentures from the proceeds of the Original Offering of the Notes
which was incurred in the third quarter of 1996.
The Company incurred a net loss of $2,212,946 for the nine months ended
September 30, 1995 as compared to net income of $637,227 for the same period in
1996. This improvement is primarily attributable to the one-time net
extraordinary gain on extinguishment of debt and improved profit margins,
partially offset by increased interest expense.
YEAR ENDED DECEMBER 31, 1995 VERSUS YEAR ENDED DECEMBER 31, 1994
Revenues increased by $10,992,678 or 113%, from $9,755,343 in 1994 to
$20,748,021 in 1995. This $10,992,678 net increase in revenues was the result of
(i) the USC acquisition which contributed $10,452,248, (ii) a $1,911,489
increase in the Company's "1+" revenue primarily arising from new customers
(excluding the USC acquisition), (iii) a decline of $1,217,161 in revenue
relating to certain operator services, and the Company's wholesale and
international business, and (iv) a decline in other revenues of $153,898.
Gross profit increased by $5,174,995 from $1,456,913 in 1994 to $6,631,908
in 1995 principally due to the USC acquisition. The gross profit margin
increased by 17% from 15% in 1994 to 32% in 1995. This increase was principally
due to the improved mix of call traffic provided by the USC revenues which
consisted of a higher percentage of "1+" calls. The percentage of "1+" calls,
which have a higher gross profit margin, has increased as compared to the lower
margin operator service and wholesale calls.
General and administrative expense increased by $3,624,157 from $2,854,237
in 1994 to $6,478,394 in 1995, and, as a percentage of revenues, increased from
30% in 1994 to 32% in 1995. The increase in total general and administrative
expense was primarily attributable to the USC acquisition. The increase as a
percentage of revenues was indicative of the duplicity of costs experienced when
USC was first acquired. These costs consisted primarily of personnel related
items. The Company focused on decreasing the relative percentage of these costs
and, in the fourth quarter of 1995, such costs decreased to 28% of revenues.
Depreciation and amortization expense increased by $873,908 from $413,317 in
1994 to $1,287,225 in 1995 and, as a percentage of revenues, increased from 4%
in 1994 to 6% in 1995. This increase resulted
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from higher depreciation and amortization charges arising from the USC
acquisition and increased depreciation from the acquisition of switching
equipment in December 1994.
The Company incurred a loss from continuing operations before other income
(expense) of $1,810,641 in 1994 versus a $1,277,110 loss in 1995. This decrease
was principally attributable to an improvement in gross profit margins but was
partially offset by small percentage increases in general and administrative
expense and depreciation and amortization expense.
The Company had net other expense of $8,429 in 1994 as compared to net other
expense of $658,111 in 1995. This increase was primarily due to an increase in
interest expense from $29,903 to $682,796 related to the increased debt incurred
in connection with the USC acquisition.
The loss from discontinued operations increased by $3,902,826 from $627,916
in 1994 to $4,530,742 in 1995. The provision for operating losses of the
discontinued operations during the phase-out period was increased by $475,000 in
1995. The $150,000 reserve established at December 31, 1994 became inadequate
due to unforeseen delays in the proposed spin off of SATC and the ultimate
decision to cancel the spin-off and sell the subsidiary after the death of
SATC's president in September 1995. On February 29, 1996, SATC was sold to a key
member of SATC management for a $500,000 note, payable over ten years bearing
interest at 7% per annum. At December 31, 1995, the Company recorded an
impairment loss of $4,055,742, including a reserve against the note, to reflect
the net realizable value of SATC. This amount was a noncash charge against
earnings.
The Company incurred a net loss of $2,446,986 for 1994 as compared to
$6,465,963 in 1995. The increased net loss was principally attributable to the
loss from discontinued operations and increased interest expense related to the
debt incurred in connection with the USC acquisition.
YEAR ENDED DECEMBER 31, 1994 VERSUS YEAR ENDED DECEMBER 31, 1993
Revenues increased by $7,162,870, or 276%, from $2,592,473 in 1993 to
$9,755,343 in 1994. Of the total increase, $7,450,273 (or 104%) was attributable
to the increase in revenues arising from the LDN acquisition in 1994, of which
$2,118,156 was "1+", $4,482,615 was operator services and $849,502 were
wholesale call revenues. In October 1994, management made the decision to
aggressively market "1+" services which have a higher gross profit margin and
de-emphasize operator services and wholesale calls which are less profitable
lines of business. International telecommunications revenues decreased by
$287,853 because of the phasing out of agent run offices and transitioning into
Company owned offices. Additionally, a wholesaling arrangement with a reseller
in Brazil was discontinued because of the lack of adequate profit margins and
the cost of administration.
Gross profit increased by $1,259,484 from $197,429 in 1993 to $1,456,913 in
1994 principally due to the LDN acquisition. The gross profit margin increased
by 7% from 8% in 1993 to 15% in 1994. This improvement is principally due to the
Company's success in negotiating rate reductions with transmission carriers and
switched service providers. Additionally, the Company experienced a more
favorable mix of call traffic in 1994 with the increase in higher margin
domestic revenues from the LDN acquisition.
General and administrative expense increased by $1,757,475 from $1,096,762
in 1993 to $2,854,237 in 1994, and as a percentage of revenues, decreased from
42% in 1993 to 30% in 1994. The increase in total expense reflects the increase
in the revenue base from the LDN acquisition and the increased costs required to
evaluate a number of acquisition candidates. The decrease as a percentage of
revenues reflects management's continued focus on cost containment.
Additionally, an extensive review of foreign customer accounts receivable at the
end of the third quarter of 1994 revealed several areas of exposure related to
foreign customers loyal to ex-agents which required reserving. Accordingly, bad
debt expense increased from $61,552 in 1993 to $318,583 in 1994.
Depreciation and amortization expense increased by $270,521 from $142,796 in
1993 to $413,317 in 1994; however, this represented a decrease from 6% of
revenues in 1993 to 4% of revenues in 1994. The
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increased total of such expense in 1994 resulted from amortization of intangible
assets from the acquisition of LDN.
The Company incurred a loss from continuing operations before other income
(expenses) of $1,042,129 in 1993 versus a $1,810,641 loss in 1994. The increase
is principally attributable to an increase in general and administrative expense
and depreciation and amortization expense partially offset by improved gross
profit margins.
The Company had net other income of $72,725 in 1993 as compared to net other
expense of $8,429 in 1994. Other income in 1993 is principally comprised of a
$100,417 litigation settlement offset by interest expense of $11,721. Other
expense in 1994 is principally comprised of interest expense of $29,903.
The loss from discontinued operations increased by $521,712 from $106,204 in
1993 (loss from operations) to $627,916 in 1994 ($477,916 loss from operations
and $150,000 provision for operating losses during the phase out period). The
increased loss from title plant services operations is attributable to a decline
in revenues, increased costs associated with maintaining existing data bases,
and the emphasis on completing the second title plant in 1994 instead of
focusing on marketing.
The Company incurred a net loss of $1,075,608 for 1993 as compared to a net
loss of $2,446,986 for 1994. This increased net loss is attributable to
increased depreciation and amortization expense related to intangible assets
from the LDN acquisition, increased bad debt expenses related to foreign
customers loyal to ex-agents, and expenses related to phasing out agent run
offices and transitioning into Company-owned offices. Also contributing to the
net loss were increased losses from discontinued title plant services operations
due to focusing on building the second title plant in 1994 instead of marketing
efforts, plus required reserves for losses during the phase out period.
Additionally, significant general and administrative expenses were incurred in
connection with the acquisition related activities conducted by the Company.
LIQUIDITY AND CAPITAL RESOURCES
On August 12, 1996, the Company completed a $27.2 million private placement
of the Notes, which are generally convertible at any time prior to maturity at a
conversion price of $2.55 per share, subject to adjustments in certain
circumstances. The Notes are redeemable at the option of the Company in whole or
in part at any time on or after August 15, 1999 at annual redemption prices
starting at 107% of principal, plus accrued interest to the redemption date.
Each holder of the Notes has the right to require the Company to repurchase the
Notes in the event that all three of the following events occur: (i) the Company
incurs certain indebtedness, (ii) the Pro-Forma Interest Coverage (as defined
herein) is less than 2.0 to 1, and (iii) the average closing price of the
Company's Common Stock is less than $2.00 per share for the preceding twenty
trading days.
The Company has used the net proceeds received from the Original Offering of
the Notes of approximately $25.4 million after deducting estimated transaction
related fees and expenses to (i) refinance existing bank debt to Norwest of
approximately $7 million, (ii) exercise the Company's option to purchase 843,023
shares of the Company's Common Stock from former USC shareholders for
approximately $2.9 million, (iii) redeem or repurchase certain of the Company's
outstanding debentures for $2.1 million, and (iv) the remaining balance of
approximately $13.4 million was utilized to effect the Addtel and FCLD
acquisitions and for network expansion and working capital.
Effective November 1, 1996, the Company purchased all of the issued and
outstanding capital stock of Addtel, a switchless reseller of long distance
services based in Glendale, California. The acquisition was consummated for an
aggregate purchase price of $9.5 million (including $2 million allocated to
nonsolicitation agreements) subject to potential downward adjustment. Addtel's
audited revenues for its fiscal year ended May 31, 1996 were approximately $16.4
million (consisting primarily of retail revenues) and its unaudited revenues for
the seven months ended December 31, 1996 were approximately $18.3 million,
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consisting of approximately $8.1 million of retail revenues and $10.2 million of
wholesale revenues. Presently, Addtel's revenue is primarily derived from the
provision of wholesale long distance services while its retail customer base
primarily consists of small and medium sized commercial accounts and residential
customers concentrated in the greater Los Angeles metropolitan area. The Company
intends to continue to provide long distance services through Addtel in addition
to its other operating telecommunications subsidiaries. Addtel's wholesale
revenue produces a substantially lower gross profit margin than its retail
revenue. The Company is evaluating methods of enhancing its margin on this
wholesale revenue while protecting the interests of its wholesale clientele. The
dollar amount of the Company's consolidated gross margin is expected to increase
as a result of the acquisition; however, gross margin as a percentage of revenue
will be adversely affected by the blending of Addtel's lower margain wholesale
revenue into the Company's total revenue base.
On January 9, 1996, the Company completed a Line of Credit arrangement with
Greyrock, a division of NationsCredit Commercial Corporation. The line of credit
has maximum availability of $10 million, with borrowings based on 80% of
eligible accounts receivable and inventory, other than receivables arising from
telecommunications services rendered to customers which are billed to the
customers by a regional Bell operating company, a Bell operating company, a
local exchange company, a credit card company, or a provider of local telephone
services. The borrowings are secured by all of the assets of the Company and its
subsidiaries and the stock of the Company's subsidiaries. The line of credit
matures December 31, 1997 and automatically renews for successive additional one
year terms unless either party elects to terminate by giving written notice to
the other not less than 60 days prior to the next maturity date.
The borrowings bear interest at a floating rate of 2.5% above the reference
rate of Bank of America NT & SA, provided that the interest rate is not less
than 9% per annum. Interest is payable monthly and to the extent that accrued
interest does not equal $10,000 per month, the Company is required to pay an
unused line of credit fee of such difference. The initial borrowing by the
Company under this facility aggregated $1.6 million principal amount on January
9, 1997.
The agreements regarding the line of credit contain covenants which, among
other matters, limit the ability of the Company and its subsidiaries to (1)
merge, consolidate and acquire or sell assets, (2) incur indebtedness outside
the ordinary course of business which would have a material adverse effect on
the Company and its subsidiaries taken as a whole or on the prospect of
repayment of the obligations under the line of credit, (3) pay dividends other
than stock dividends and certain dividends with respect to the Company's Series
A Cumulative Convertible Preferred Stock, and (4) redeem, purchase of acquire
its capital stock.
Since January 10, 1997, the average closing price of the Company's Common
Stock has been less than $2.00 for the prior twenty trading days. Additionally,
the Company's Pro Forma Interest Coverage remains less than 2.0 to 1. Therefore,
if the Company incurs additional indebtedness (other than as permitted under the
Indenture), then the holder of the Notes would have the right to require the
Company to repurchase the Notes. Management currently is of the opinion that
this restriction on additional borrowings will have no adverse effect on the
Company's operations but may restrict its acquisition program. Should holders of
the Notes ever have the ability to cause the Company to repurchase the Notes,
there can be no assurance that the Company would have sufficient liquidity to
effect such repurchase.
During the Company's third quarter ended September 30, 1996 and a majority
of the fourth quarter ended December 31, 1996, the Company experienced delays in
obtaining circuits primarily in New Mexico, and, to a lesser extent, Arizona and
Colorado. This delay in obtaining circuits adversely impacted the Company's
gross margins and related profitability. The Company may in the future
experience difficulties in obtaining circuits as the demand for circuits
increases. These circuits, which must be obtained from the local RBOC, CLEC or a
competitive access provider, enable the Company's network to operate at its
optimum efficiency by increasing the number of calls originating and terminating
on the network. Should the lack of available circuits recur, this condition will
have a negative impact on gross profit margin and
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related profitability because the Company will be forced to terminate calls off
its network at a higher cost than if terminated on its network.
The Company experienced negative cash flow from operating activities of
$1,069,303, $2,289,481, $1,224,486, $1,505,177 and $1,859,549 in 1993, 1994,
1995 and the nine months ended September 30, 1995 and 1996, respectively. The
negative cash flow of $1,849,549 for the nine months ended September 30, 1996
includes approximately $1.0 million of claims for transmission and access
charges which the Company has paid but believes were overbilled by the Company's
long line transmission carriers and several local exchange carriers. The Company
intends to vigorously pursue settlement of these disputed charges by demanding
cash repayment or credit against future billings. The improvement in 1995 over
1994 is primarily due to the improvement in operations resulting from the USC
acquisition and subsequent integration of the combined operations.
The increased loss in 1994, which was compounded by an overall increase in
accounts receivable and decreases in accounts payable and accrued expenses,
contributed to the increase in negative cash flow from 1993 to 1994. In 1994,
accounts receivable expanded due to a growth in revenues without proportionate
increases in accounts payable and accrued expenses, which caused working capital
to be expended. Domestic accounts receivable are generally collected in 45 days
and foreign accounts receivable are generally collected in 65 days. However,
accounts payable for contracts with transmission carriers and switched service
providers must generally be paid in 30 days. As is customary in the industry,
the Company has entered into a contractual arrangement with one or more third
party billing and collection companies with respect to certain of its
receivables.
Cash used in investing activities was $373,343, $1,743,558, and $7,141,820
in 1993, 1994, 1995, respectively, and $6,973,931 and $2,546,914 for the nine
months ended September 30, 1995 and 1996, respectively. Of the total in fiscal
year 1995, $6,854,247 was utilized in the acquisition of USC and of the total in
fiscal year 1994, $1,330,397 was utilized in the acquisition of LDN. The
$2,546,914 in 1996 was attributable to expenditures for property and equipment
primarily related to switching equipment and network associated costs.
Cash provided by financing activities was $2,615,466, $3,166,078, and
$8,858,613, respectively in 1993, 1994, 1995, respectively, and $8,418,752 and
$16,273,674 for the nine months ended September 30, 1995 and 1996, respectively.
Proceeds generated from the issuance of $7,000,000 of long term debt and
$1,000,000 of Series A Stock were utilized in the 1995 acquisition of USC.
Proceeds from private placements of common stock were the principal source of
the $1,330,397 of cash used for the 1994 acquisition of LDN. The majority of the
increase in 1996 is attributable to the Original Issuance of Notes in August
1996.
In connection with the USC acquisition, the Company (i) paid $6,500,000 in
cash (including $2,400,000 paid in connection with certain agreements pertaining
to non-competition and confidentiality); (ii) issued the notes having an
aggregate principal amount of $4,250,000 and bearing interest at the rate of 11%
per annum (the "USC Notes"); (iii) issued an aggregate of 125,000 shares of
Series B Cumulative Convertible Preferred Stock ("Series B Stock"); and (iv)
issued warrants exercisable into an aggregate of 1,050,000 shares of the
Company's Common Stock at any time prior to July 31, 2000 at a per share
exercise price of $1.25. On June 21, 1996, the Company acquired all of such
securities for an aggregate of $308,500 of cash and the issuance of an aggregate
of 843,023 shares of the Company's Common Stock. On August 14, 1996, the Company
used $2,900,000 of the net proceeds of the Original Offering of the Notes to
exercise its option to purchase such 843,023 shares of the Company's Common
Stock for an exercise price of $3.44 per share.
In order to provide the cash portion of the purchase price to be paid to the
stockholders of USC, the Company entered into a series of related transactions
which were consummated concurrently with the closing of the USC acquisition on
July 31, 1995. The primary transaction was the $10,000,000 Credit Agreement with
Norwest under which $7,000,000 was advanced to fund a majority of the cash
proceeds
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utilized in the acquisition. On November 10, 1995 and March 13, 1996, the
Company entered into amendments to its Credit Agreement with Norwest, which,
among other things: (i) amended certain definitions, agreements, and covenants
relating to operating cash flow, senior debt service coverage, and prepayments
on subordinated debt, and (ii) waived any breach of financial covenants with
respect to senior debt service coverage and with respect to operating cash flow
at September 30, 1995 and December 31, 1995. As part of such amendments, the
Company paid default fees of $35,000 and prepaid $150,000 of indebtedness on
November 30, 1995. In connection with obtaining the consent of Norwest to the
sale of the Notes, on July 17, 1996 the Company received a waiver from Norwest
with respect to any breach arising out of the computation of senior debt service
coverage and operating cash flow as of May 31, 1996 for the preceding six months
and paid a waiver fee of $20,000. These amendments and waivers to the Credit
Agreement were necessitated because (1) the general and administrative expenses
being incurred by USC exceeded those projected by the Company and (2) the
closing date of the acquisition was delayed beyond the originally scheduled
closing date. On August 12, 1996, the Company used approximately $7,000,000 of
the net proceeds from the Original Offering of the Notes to fully repay the
principal and interest outstanding to the date of such repayment under the
Credit Agreement.
In addition, in consideration of the payment of $1,000,000 in cash and
services provided in connection with the USC acquisition by JLCM, the Company
privately placed with JLCM an aggregate of 166,667 shares of Series A Stock and
issued to JLCM the JLCM Warrant entitling JLCM to purchase an additional 500,000
shares of the Company's Common Stock at a price of $1.125 per share. On July 31,
1996, the Company issued JLCM an additional 13,333 shares of Series A Stock in
payment of the annual dividend on such stock.
The terms and provisions relating to the Series A Stock provide for the
conversion of such shares into an aggregate of 1,440,000 shares of Common Stock
of the Company at any time prior to redemption by the Company (either through
optional redemption at any time after July 31, 1997, or through mandatory
redemption no later than July 31, 2000), which number of shares was subject to
adjustment in certain circumstances, including the issuance by the Company of
shares of Common Stock at prices below the $1.125 stipulated conversion price.
At September 30, 1996, the Company had $29,113,717 of long term debt of
which $528,873 was the current portion. On January 7, 1997, the Company incurred
an additional $1.6 million of indebtedness under the Greyrock Facility. Although
management believes that cash flows generated from operations will improve with
the integration of USC, Economy, FCLD and Addtel and expansion of the Company's
telecommunications network, the Company has put into place the Greyrock Facility
to provide that working capital is available. Also, in order for the Company to
continue its aggressive acquisition program, additional debt or equity must be
raised. There is no assurance that such capital will be available. In the past,
the Company has financed its operations and expansion needs from proceeds from
private placements of Common Stock and the exercise of stock options. There can
be no assurances that these or other sources of funds will continue to be
available.
At September 30, 1996, the Company had a cash and cash equivalent balance of
$12,690,949 as compared to $823,738 at December 31, 1995 and $331,431 at
December 31, 1994. As of December 31, 1995, working capital was a negative
$2,841,834 as compared to a positive $561,902 at December 31, 1994. As of
September 30, 1996, working capital was a positive $13,331,725 as compared to a
negative $2,841,834 at December 31, 1995. This improvement is attributable to
the issuance of the Notes in August 1996.
In March, April and June 1996, the Company entered into private placements
whereby it sold an aggregate of $600,000 of its 9% Convertible Subordinated
Debentures in March 1996 (the "March Debentures") and $400,000 of its 9%
Convertible Subordinated Debentures in April 1996 (the "April Debentures"), and
$1,000,000 of its 9% Convertible Subordinated Debentures in June 1996. All such
debentures were repurchased by the Company on September 6, 1996 with
approximately $2,100,000 of the net proceeds of the Original Offering of the
Notes. In connection with such private placements, the
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Company paid $75,000 of finders fees and issued the Finder's Warrants
exercisable into an aggregate of 200,000 shares of Common Stock. See "SELLING
NOTEHOLDERS AND SELLING STOCKHOLDERS--SELLING STOCKHOLDERS."
On May 7, 1996, six holders of the Common Stock Purchase Warrants issued in
the Company's September 20, 1995 private placement exercised such warrants for
an aggregate of 1,070,000 shares of Common Stock at an exercise price of $1.25
per share or $1,337,500. In connection with such early exercise, the Company
issued additional Common Stock Purchase Warrants to such holders exercisable
into an aggregate of 1,337,500 shares of Common stock at an exercise price of
$2.40 per share between November 7, 1996 and May 7, 1998.
CAPITAL EXPENDITURES
Capital expenditures for the nine months ended September 30, 1996 totaled
$4,793,026, of which $1,346,112 were financed. Capital expenditures for 1995
totaled $693,977 of which $500,701 were financed. Capital expenditures for 1994
totaled $679,210 of which $404,845 were financed. The majority of these capital
expenditures relate to switching equipment acquired by means of capital leases
and network costs.
Other than additional fixed facilities, such as switching equipment
requirements as the network expands, future capital expenditures are expected to
be minimal. The Company's future capital expenditures related to network
expansion will be made primarily to acquire switches and related equipment.
Additional switching equipment would require significant capital expenditures by
the Company.
DISCONTINUED OPERATIONS
In October 1994, the Company made the determination to focus its long-term
strategy and resources on the expansion of its domestic telecommunications
services business, ultimately resulting in the sale of all of the issued and
outstanding capital stock of SATC described below as well as the discontinuation
of the operations of Baltic States/CIS Ventures, Inc. ("BSCV").
Management of the Company determined to sell SATC in October 1995, after the
death of SATC's president, resulting in the cancellation of the previously
proposed spin-off and distribution of SATC to the Company's stockholders. A
corporation formed by a key member of SATC's management purchased SATC on
February 29, 1996. SATC had developed a proprietary information database for the
offering of on-line title abstracting and title insurance and reporting services
and operates title plants in Midland County and Ector County, Texas. The
consideration received by the Company for such sale was a promissory note in the
original principal amount of $500,000 with interest at 7% per annum payable over
10 years, secured by a pledge of the stock of and guaranty by SATC and a
security interest in the assets of SATC. The Company has retained the benefits
of certain net operating losses incurred by SATC.
HOLIDAY AND SEASONAL VARIATIONS IN REVENUES
The Company's revenues, and thus its potential earnings, are affected by
holiday and seasonal variations. A substantial portion of the Company's revenues
are generated by direct dial domestic long distance commercial customers, and,
accordingly, the Company experiences decreases in revenues around holidays (both
domestic and international) when commercial customers reduce their usage. The
Company's fourth fiscal quarter ending December 31, which includes the
Thanksgiving, Hanukkah, Christmas and New Year's Eve holidays, and the Company's
first fiscal quarter ending March 31, historically have been the slowest revenue
periods of the Company's fiscal year. The Company's fixed operating expenses,
however, do not decrease during these quarters. Accordingly, the Company will
likely experience lower revenues and earnings in its first and fourth fiscal
quarters when compared with the other fiscal quarters.
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EFFECT OF INFLATION
Inflation is not a material factor affecting the Company's business.
Historically, transmission and switched service costs per minute have decreased
as the volume of minutes increased. General operating expenses such as salaries,
employee benefits and occupancy costs are, however, subject to normal
inflationary pressures. Management has been able to contain these expenses
through cost control measures.
NEW ACCOUNTING STANDARDS
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" (SFAS 123), was issued. This statement
requires the fair value of stock options and other stock-based compensation
issued to employees to either be included as compensation expense in the income
statement, or the pro forma effect on net income and earnings per share of such
compensation expense to be disclosed in the footnotes to the Company's financial
statements commencing with the Company's 1996 fiscal year. The Company expects
to adopt SFAS 123 on a disclosure basis only. As such, implementation of SFAS
123 is not expected to impact the Company's consolidated balance sheet or
statement of operations.
OVERVIEW OF TELECOMMUNICATIONS INDUSTRY
INDUSTRY BACKGROUND
The competitive long distance telecommunications industry in the United
States has evolved principally as the result of the court-ordered divesture in
1984 by AT&T of its local exchange operations previously performed by AT&T's 22
operating companies. The Modification of Final Judgment (the "AT&T Decree")
between AT&T and the United States Department of Justice ("DOJ") divided the
United States into approximately 200 Local Access Transport Areas ("LATAs") and
combined these 22 companies into seven RBOCs. These RBOCs (NYNEX, Bell Atlantic,
Bell South, Ameritech, US West, Southwestern Bell and Pacific Telesis Group)
along with other entities such as GTE and other smaller companies, were given
the exclusive right to provide telephone service originating and terminating
within a single LATA ("intra-LATA service"), local access service to long
distance carriers and intra-LATA toll service. RBOCs were prohibited from
transmitting telephone calls between LATAs ("inter-LATA services"), which
services became the province of long distance companies which own or lease and
operate both switching equipment and long distance transmission facilities,
including AT&T, MCI, Sprint, WorldCom and other IXCs such as the Company. Other
companies offering long distance service act as resellers for the services of
long distance companies and do not own or lease any switching equipment or
transmission facilities themselves ("switchless resellers"). A third group of
companies owns or leases switching equipment but does not own or lease
transmission facilities ("switched resellers").
Prior to the AT&T Decree, AT&T controlled the vast majority of the
inter-LATA market. Since 1984, this domestic long distance market has roughly
doubled to an estimated $75 billion in annual revenues in 1995. Although AT&T's
share of this market has increased slightly recently, overall, its market share
has declined to approximately 59%, and MCI and Sprint increased their market
shares in 1995 to approximately 30% combined. Numerous competitors comprise the
remaining 11% of the market, including WorldCom, Cable & Wireless
Communications, Inc., LCI International, Inc., Allnet, the Company and other
long distance carriers. These carriers are of varying size and own or lease
switching equipment and transmission facilities permitting them to handle all
aspects of inter-LATA traffic over all or part of the United States.
The AT&T Decree, together with a separate court decree ("GTE Decree")
entered in 1984, helped create the foundation for smaller companies, such as the
Company, to emerge as competitive alternatives to AT&T, MCI, Sprint and WorldCom
for long distance telecommunications services. The AT&T Decree required that the
RBOCs provide all IXCs with access to local exchange service for the purpose of
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accepting and completing inter-LATA calls. The access provided must be "equal in
type, quality and price" to that provided to AT&T. In addition, RBOCs are
required to maintain a subscription process that gives a telephone customer the
right to select an IXC for carrying such customer's inter-LATA telephone calls.
These so-called "equal access" and related provisions were intended to prevent
preferential treatment of AT&T by the RBOCs and to regulate charges that the
RBOCs could charge the IXCs, regardless of their volume of traffic. Similar
access requirements have been imposed upon the subsidiaries of GTE, which
provide local telephone service, and upon other independent LECs.
Notwithstanding the AT&T Decree, the GTE Decree and certain FCC regulations,
there are limited "nonequal access" areas in the United States where local
access providers are not required to provide "equal access" and where the
competitive market in long distance services has not developed to the degree it
has elsewhere. Equal access is also not required for wireless calls. The equal
access rules have resulted in IXCs, such as the Company, being able to offer
"1+" dialing (i.e., by dialing "1" (plus the area code when necessary) and the
telephone number of the person being called) rather than the customer dialing
access codes or identification numbers and codes in order to utilize the
Company's long distance telephone services.
TELECOMMUNICATIONS ACT OF 1996. On February 8, 1996, President Clinton signed
into law the 1996 Act. The 1996 Act is intended to foster additional competition
in the United States domestic telecommunications market. The legislation opens,
for the first time, the local access service market to competition, by requiring
that LECs permit interconnection to their networks and, among other things, to
provide unbundled access, resale, number portability, dialing parity, access to
rights of way and mutual compensation. In effect, the 1996 Act seeks to foster
competition in the local telephone market as the AT&T Decree and GTE Decree did
in the long distance market by requiring LECs to allow the resale by third
parties, of some or all of the services now being provided to residential and
business customers. The legislation also codifies the LECs' equal access and
non-discrimination obligations and preempts inconsistent state regulation.
Finally, the legislation also contains special provisions which eliminate the
AT&T Decree and the GTE Decree, which restrict the RBOCs and GTE operating
companies, respectively, from providing long distance service and engaging in
telecommunications equipment manufacturing. These new provisions permit RBOCs to
enter the long distance market under certain conditions and to enter into
business relationships with IXCs that were previously prohibited. An RBOC will
no longer be restricted from providing inter-LATA long distance service outside
of those markets in which it provides local access service (referred to as
"out-of-region" long distance service). An RBOC may provide long distance
service within the regions in which it also provides local exchange service
(referred to as "in-region" service) if it satisfies several procedural and
substantive requirements, including obtaining FCC approval. FCC approval is to
be granted upon a showing that (i) facilities-based competition is present in
the state in question, (ii) the RBOC has entered into interconnection agreements
in those states in which it seeks long distance relief and (iii) the
interconnection agreements satisfy a 14-point "checklist" of competitive
requirements, and if the FCC is satisfied that the RBOC's entry into the long
distance market in question is in the public interest. Before making its ruling
the FCC is instructed to consult with the DOJ, but the FCC is not bound by
recommendations of the DOJ. See "RISK FACTORS--HIGHLY COMPETITIVE INDUSTRY" and
"RISK FACTORS--REGULATORY AND LEGISLATIVE UNCERTAINTY."
The Company believes that the 1996 Act will result in substantial changes in
the marketplace that should be generally favorable for the Company. Since the
1996 Act seeks to foster greater competition in the telecommunications industry,
the Company believes it will benefit from a wide array of potential products and
services. The Company also believes it will have the ability to market a full
range of local telecommunications services, and to negotiate favorable
agreements with a variety of products for local, long distance and associated
telecommunications services.
Recently, the FCC concluded many months of hearings based on the
implementation of the 1996 Act, and as a result, issued several sweeping orders,
of which the "interconnection" order is most significant. The "interconnection"
order outlined how companies desiring to enter into local phone markets can
"hook up" to RBOCs and GTE. It also set specific formulas to determine the
charges associated to leasing
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part of a local network. These formulas outline reductions to the companies of
17% to 25% below the price of leasing services for connection to the RBOCs and
GTE retail local phone service. The RBOC's and GTE appealed this order, and in
October 1996, they were granted a temporary stay of the FCC order by the U.S.
Court of Appeals. Further, the court suspended key provisions of the
"interconnection" order such as pricing and contract rules. Furthermore, the
court's decision places the oversight of the 1996 Act back under the
jurisdiction of the state PUCs, in which the RBOCs and GTE has historically
enjoyed a more favorable relationship. The FCC is appealing these rulings to the
U.S. Supreme Court, but industry estimates are that this action will delay local
telephone competition.
Also, the FCC has proposed rules to implement the 1996 Act's "universal
fund," in which all local telephone subscribers will bear the charges currently
being assessed to IXCs and switched resellers for origination and termination.
Upon adoption of these proposed rules in 1997, the Company currently expects a
reduction in the average per minute access charges it incurs now from RBOCs and
GTE in the Company's region.
PROCESSING OF A LONG DISTANCE TELEPHONE CALL
[Diagram showing processing of on-network telephone call from origination to
termination]
A long distance telephone call is processed in three basic phases:
origination, transport (long haul) and termination. A call is originated when a
customer first obtains a dial tone provided by such customer's LEC, such as an
RBOC. A customer who has chosen a primary long distance provider may initiate a
long distance telephone call by dialing "1" (plus the area code when necessary)
and the telephone number of the person being called. If a customer has chosen a
long distance provider which, like the Company, is an IXC, or which is a
switched reseller, the long distance call is routed to the switching equipment
maintained by that long distance provider. If the customer has designated a long
distance carrier which is a switchless reseller, the call is routed to a switch
owned by the IXC providing switching service to the switchless reseller. The
Company will pay access charges to the LECs originating and terminating the
call. The diagram on the immediately preceding page illustrates the switching
process for an on-net origination to an on-net termination call type on the
Company's network.
The IXC's switch, or point of presence ("POP"), deciphers the call and
switches it to the long distance transmission lines for transport to the
appropriate region of the country. Calls handled by the Company's switches are
routed to the Company's transmission lines, where available, or to the
transmission lines of
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others, depending upon the destination of the call. Currently, the Company
utilizes various telecommunications carriers to carry long distance calls that
cannot be carried by the Company's own transmission facilities.
A long distance call leaves the transport process when it reaches a switch
owned by a LEC providing local access service to the termination telephone. This
switch routes the long distance call onto the LEC's local access network for
termination. For each long distance call, the originating and terminating LECs
receive an access fee from the switched reseller or IXC providing long distance
service to the local customer. A switched reseller or IXC builds this fee and
any termination fees into the fees it charges its customers for long distance
telephone service.
The Company's switches and long distance transmission facilities are located
primarily in the southwestern and south central United States. In order to
complete a telephone call outside of the area covered by the Company's network
facilities, the Company must utilize transmission facilities maintained by third
parties. The Company pays a fee to these companies on a usage basis. The
Company's switches are capable of routing calls to the provider of long distance
transmission facilities for the call in question with the least cost to the
Company, based upon pre-coded instructions.
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BUSINESS
HISTORY
Effective December 1991, the Company entered the telecommunications industry
through its acquisition of all of the stock of NATC, a telecommunications
carrier offering international telecommunications services to foreign customers.
From 1991 to 1993, NATC was the Company's primary business activity. Although
NATC's international business continues under the product name "GlobalCOM," its
significance to total revenues has diminished largely as a result of the
Company's entry into the domestic telephone business. This expansion began with
the acquisition of the stock of LDN, a domestic switchless reseller located in
Dallas, Texas effective March 1, 1994.
In October 1994, the Company decided to focus its long-term strategy and
resources on the expansion of its domestic telecommunications services business,
ultimately resulting in the sale of SATC on February 29, 1996. Similarly, in
October 1995, the Company discontinued the operations of BSCV, a subsidiary of
the Company which engaged in the international long distance business, primarily
in the Russian Federation through joint ventures or contractual arrangements.
BSCV historically did not generate significant revenues for the Company. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--DISCONTINUED OPERATIONS." In 1995, the Company changed its name to
SA Telecommunications, Inc. and continued the growth of its domestic
telecommunications services through the acquisition of USC, a domestic
switchless reseller located in Levelland, Texas, with a customer base located in
Arizona, Arkansas, New Mexico, Oklahoma and Texas.
The Company's predecessor, Mineral Leasing Corporation, was incorporated in
Texas on September 16, 1981 and was originally engaged in the oil and gas
leasing business. In April 1989, such entity merged into Coquina Search Corp., a
Delaware corporation.
GENERAL
SA Telecommunications, Inc. is a regional interexchange carrier providing a
wide range of domestic telecommunications services through its network of owned
and leased facilities. The Company's customer base is primarily composed of
small and medium sized commercial accounts and residential customers which,
prior to the Addtel acquisition, were concentrated in secondary and rural
markets in the southwestern and south central United States. In addition to
providing "1+" domestic long distance services, the Company also offers
international long distance, wholesale long distance, operator, and wireless
services, and other products such as voice and data private lines, "800/888"
services, Internet access and travel cards. In addition, the Company recently
began test marketing the resale of local exchange services of Southwestern Bell
in portions of Texas through the grant of an SPCOA from the Texas PUC.
Effective November 1, 1996, the Company purchased all of the issued and
outstanding capital stock of Addtel, a switchless reseller of long distance
services based in Glendale, California. The acquisition was consummated for an
aggregate purchase price of $9.5 million (including $2 million allocated to
nonsolicitation agreements) subject to potential downward adjustment. Addtel's
audited revenues for its fiscal year ended May 31, 1996 were approximately $16.4
million (consisting primarily of retail revenues) and its unaudited revenues for
the seven months ended December 31, 1996 were approximately $18.3 million,
consisting of approximately $8.1 million of retail revenues and $10.2 million of
wholesale revenues. Presently, Addtel's revenue is primarily derived from the
provision of wholesale long distance services while its retail customer base
primarily consists of small and medium sized commercial accounts and residential
customers concentrated in the greater Los Angeles metropolitan area. The Company
intends to continue to provide long distance services through Addtel in addition
to its other operating telecommunications subsidiaries.
THE COMPANY'S NETWORK
The Company currently operates switching equipment located in Amarillo,
Dallas, and Lubbock, Texas and Phoenix, Arizona under capital lease arrangements
and an operator service switch located in Levelland, Texas. In addition, the
Company leases local access circuits and long distance transmission
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facilities from various providers. The Company has negotiated agreements with
these various providers that allow for flexibility and change with little
notice. This allows the Company the ability to direct its network expenses as
market conditions dictate. The local access circuits and transmission facilities
connect the Company's switches with each other and with switching equipment
owned by third parties in other geographic areas. Together, the Company's
switches, local access circuits, and long distance transmission facilities
comprise the Company's network. A map illustrating the Company's network can be
found on page 5 of this Prospectus. The Company's transmission facilities
between the Company's switches and the LECs in its market area permit the
routing of a customer's telephone call directly from the LEC's switch to the
Company's switch and ultimately to the destination number. The call can be
routed over the Company's network, to the extent that the Company's long
distance transmission facilities originate and terminate in the appropriate
geographic region, or a combination of the Company's facilities and a third
party provider. Also, the call can be routed completely over a third party
provider based upon a contractual relationship with the Company. Calls which
originate and terminate on the Company's network have a higher gross margin than
other calls because the Company only has to pay origination and termination fees
to the serving LECs and not to another IXC for off-network coverage. The
Company's digital switches in Amarillo, Dallas, Lubbock and Phoenix permit the
Company to route calls to the least expensive alternative available to the
Company. The Company believes that its network provides access to an attractive
region for IXCs and LECs for call termination and business expansion.
Additionally, the Company's network could be utilized by an RBOC or any other
LEC in its region to bypass national carriers to carry or terminate long
distance traffic.
The Company currently utilizes Siemens Stromberg Carlsen DCO Class 4/Class 5
switches for its network platform. These switches are connected through leased
fiber-optic transmission lines, which are connected to LEC's tandem switches in
LATAs in its target market. The Company's switches are fully digital and utilize
advanced routing systems for enhanced transmission quality. Siemens switches are
used extensively by RBOCs and IXCs, and because they are mobile and modular,
they are very flexible and easily adaptable. The Company can quickly expand
these switches as network demands warrant.
SERVICES
DOMESTIC LONG DISTANCE SERVICES. The Company provides its customers with
24-hour long distance telephone services to all points in the United States and
to any foreign country. The Company's primary services are switched "1+"
domestic long distance service, in-bound domestic "800/888" service, and
domestic travel card service. The Company's "1+" domestic service is provided
through equal access to the network of the LEC with the Company as the
customer's primary long distance carrier. In-bound "800/888" service allows a
customer to receive calls at a specified number from the general public. This
service is utilized for a variety of purposes and it enables businesses to
provide an entrance to their company for information and other products and
services. Travel card service allows an individual to call another destination
while outside of their office or home. Other offerings include the ability to
call foreign countries from a domestic location (international calling) and
domestic long distance directory assistance. Further, the Company also provides
voice and data private line services and dedicated "1+" domestic long distance
service, as well as a domestic operator assistance service.
The Company's customers can access the Company's network in several ways. If
a customer is located in an area that has been converted to equal access
(meaning that all long distance carriers are provided with equal access to the
respective LEC's network) and that customer has selected the Company as its
primary long distance carrier, access is gained by dialing "1" plus the area
code and number desired. Substantially all of the Company's customers gain
access to the Company's network in this manner. The Company also provides access
to its switches through dedicated access lines which are private-leased lines
dedicated to one customer. Finally, customers in both equal access areas and
non-equal access areas can access the Company's network by dialing a Company
provided access number. Under its service options, the Company charges its
customers on the basis of minutes of usage at rates that vary with the distance,
duration and/or time of day of the call.
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OPERATOR SERVICES. The Company provides operator services to pay telephone
owners, hotels and other persons who provide telephone equipment that is
available to the public. These services consist of directory assistance and
assistance in placing long distance telephone calls, including collect calls or
person-to-person calls. Operator services represented approximately 60% of the
Company's domestic long distance revenues in 1994, 24% in 1995, and 13% in the
third quarter of 1996. The Company does not anticipate spending significant
additional capital or otherwise devoting the Company's resources to expanding
its operator service business unless an opportunity arises whereby the margins
for such line of business is comparable to the Company's other products.
INTERNATIONAL CALL BACK. The Company also provides international service under
the GlobalCOM product name to individuals originating long distance telephone
calls from outside the United States. Long distance telephone calls that
originate outside of the United States and terminate in a different foreign
country are often more expensive than calls originating in the United States and
terminating in each of the respective foreign countries. The differences in rate
structures between the United States and foreign countries result from differing
regulatory environments in various countries and from the greater sophistication
of the telecommunications infrastructure and the higher level of call volume in
the United States. Utilizing the Company's GlobalCOM service, a foreign customer
is often able to reduce its international long distance telephone charges by
arranging for its calls to originate in the United States and terminate in a
foreign country. The Company provides international services primarily to
foreign commercial customers in Central America and South America. Utilizing the
GlobalCOM service, a foreign customer dials a U.S. telephone number and directs
the Company's equipment to call him back at a foreign number. Once the customer
receives the call from the United States, access is provided by the Company's
international provider. Utilizing this provider, the foreign customer is able to
place a telephone call to another location, either inside the United States or
elsewhere. Although the Company continues to provide international call back
services, its significance to total revenues has diminished largely as a result
of the Company's decision to focus on higher margin domestic telecommunications
services.
NEW PRODUCTS AND SERVICES. In May 1996 the Company was granted an SPCOA from
the Public Utility Commission of Texas permitting the Company to offer
Southwestern Bell local services on a resale basis to customers within the
state. This service allows the Company to offer a local telecommunications
service, together with a variety of long distance services, to its customers
under one invoice. The Company is currently test marketing such service in
portions of Texas and has also applied for similar certification in seven of the
other states where it is currently providing services. The Company has also
entered into contractual relationships which will permit the Company to offer
paging services, Internet access services and to provide conference calling. See
"BUSINESS STRATEGY--STRATEGIC ALLIANCES."
WHOLESALE SERVICES. The Company also provides transport and switch services
through its network to resellers of domestic long distance services. Management
has determined to de-emphasize this product line due to low profit margins when
compared to direct provision of domestic long distance services to customers
unless an opportunity arises whereby the margins for this line of business are
acceptable to management of the Company. See "RISK FACTORS--SIGNIFICANT
WHOLESALE CUSTOMER."
BUSINESS STRATEGY
The Company's objective is to become a leading regional provider of domestic
telecommunications services by expanding its customer base and increasing the
utilization of its network. The Company plans to achieve this goal through (i)
acquisitions; (ii) internal growth; (iii) network expansion; and (iv) strategic
alliances. See "RISK FACTORS--AVAILABILITY OF GROWTH OPPORTUNITIES," "RISK
FACTORS--ACQUISITION INTEGRATION; MANAGEMENT OF GROWTH" AND "RISK FACTORS--RISKS
RELATING TO DEVELOPMENT OF A LONG DISTANCE NETWORK."
ACQUISITIONS. An important part of the Company's growth strategy is to continue
to acquire and integrate telecommunications companies whose customer base is
located in areas contiguous to or overlapping with the Company's existing
service area. The Company will seek to achieve operating efficiencies as a
regional consolidator by increasing customers and benefiting from compatible
call traffic patterns within its targeted expansion areas of Arizona, Arkansas,
California, Colorado, Idaho, Illinois, Kansas, Louisiana,
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Mississippi, Missouri, Nevada, New Mexico, Oklahoma, Oregon, Tennessee, Texas,
Utah, and Washington. In considering acquisitions, the Company will evaluate
customer profiles, feasibility of obtaining operating efficiencies, network and
equipment compatibility, managerial and personnel resources and ease of
integration on a timely basis. Once the Company consummates an acquisition, it
intends to integrate the target's customer base into its own network and billing
system and to eliminate duplicative costs. The Company currently anticipates
that switchless long distance resellers and switched long distance resellers are
most likely to meet its acquisition criteria, although the Company may also
consider other regional IXCs, rural LECs and other telecommunications and
related service providers. The Company's ability to effect such acquisitions may
be limited by virtue of the covenants set forth in the Indenture and the
Greyrock Facility, including the covenants specifically described in
"BUSINESS--GREYROCK FACILITY", "DESCRIPTION OF NOTES--CERTAIN
COVENANTS--LIMITATION ON ACQUISITIONS" and "--REPURCHASE AT OPTION OF HOLDER
UPON AN INCURRENCE EVENT."
INTERNAL GROWTH. The Company will seek to increase its revenues through the use
of its direct sales force, telemarketing sales, agents and other marketing
techniques such as direct mail and mass marketing to achieve internal growth.
The Company's strategy also includes increasing its customers' utilization of
its network by promoting the sale of additional or "bundled" services, such as
Internet access, local access and wireless services, and enhanced services such
as voice mail, broadcast fax, and conference calling.
The domestic long distance usage market in the United States has experienced
annual growth rates of approximately 8% to 10% throughout the first half of this
decade as a result of increased usage resulting from declining per minute costs,
increased data transmission needs of consumers and business and the
popularization of such products as facsimile machines, "800/888" services and
Internet access. The Company expects these factors to continue to result in
increased usage of telecommunications services in the future.
NETWORK EXPANSION. The Company believes that expanding its network will enable
the Company to control the flow of its long distance traffic and to increase its
overall profit margin as well as improve the quality of its network
transmission. The Company monitors traffic patterns on its network, allowing it
to replace variable long distance transport costs with fixed transport costs
when call volumes to particular geographic areas dictate. The Company's switches
utilize software to reduce long distance transport costs of individual calls.
Management of the Company anticipates that acquisitions will provide
opportunities to increase the call volume on existing network facilities and to
increase the geographic coverage of the network. Since 1995, the Company has
transformed from a switchless reseller to an IXC with switched network
facilities.
STRATEGIC ALLIANCES. The Company's growth plans include the exploration of
strategic alliances with product and service providers in the telecommunications
industry primarily inside its present geographic area. The Company believes that
such strategic relationships may enable it to penetrate new markets, enhance its
product offerings or more efficiently utilize its network. Among other things,
the Company's network offers potential alliance partners in the Company's market
area the opportunity to offer additional products and services to the Company's
customer base. Potential partners could include existing and potential
telecommunications providers as well as companies offering paging, cellular
telephone and personal communications services, Internet access and voice and
data transmission services, electric and gas utilities, railroads, CLECs,
competitive access providers, and LECs.
In May 1996, the Company was issued an SPCOA by the Texas PUC to provide
local exchange service as a reseller of Southwestern Bell's local exchange
services. This enables the Company to offer its customers within Southwestern
Bell's territory in Texas an integrated package of services. The Company is
currently test marketing the sale of such local exchange services in portions of
Texas while evaluating the operational factors involved in such sales. The
Company has also filed applications to offer local exchange services in the
other seven states in its service area. The Company has also entered into
contractual arrangements with PageMart Wireless, Inc. to provide paging services
to its customer base, Conference Pros International, Inc. to provide conference
call capabilites to its customers, and Leapfrog Technologies, LLC to provide
Internet access through its "Bitstreet" software product.
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ADDTEL ACQUISITION
Effective November 1, 1996, the Company purchased all of the issued and
outstanding capital stock of Addtel, a switchless reseller of long distance
services based in Glendale, California. The acquisition was consummated for an
aggregate purchase price of $9.5 million (including $2 million allocated to
nonsolicitation agreements) subject to potential downward adjustment. Addtel's
audited revenues for its fiscal year ended May 31, 1996 were approximately $16.4
million (consisting primarily of retail revenues) and its unaudited revenues for
the seven months ended December 31, 1996 were approximately $18.3 million,
consisting of approximately $8.1 million of retail revenues and $10.2 million of
wholesale revenues. Presently, Addtel's revenue is primarily derived from the
provision of wholesale long distance services while its retail customer base
primarily consists of small and medium sized commercial accounts and residential
customers concentrated in the greater Los Angeles metropolitan area. The Company
intends to continue to provide long distance services through Addtel in addition
to its other operating telecommunications subsidiaries.
GREYROCK FACILITY
On January 9, 1996, the Company completed a Line of Credit arrangement with
Greyrock, a division of NationsCredit Commercial Corporation. The line of credit
has maximum availability of $10 million, with borrowings based on 80% of
eligible accounts receivable and inventory, other than receivables arising from
telecommunications services rendered to customers which are billed to the
customers by a regional Bell operating company, a Bell operating company, a
local exchange company, a credit card company, or a provider of local telephone
services. The borrowings are secured by all of the assets of the Company and its
subsidiaries and the stock of the Company's subsidiaries. The line of credit
matures December 31, 1997 and automatically renews for successive additional one
year terms unless either party elects to terminate by giving written notice to
the other not less than 60 days prior to the next maturity date.
The borrowings bear interest at a floating rate of 2.5% above the reference
rate of Bank of America NT & SA, provided that the interest rate is not less
than 9% per annum. Interest is payable monthly and to the extent that accrued
interest does not equal $10,000 per month, the Company is required to pay an
unused line of credit fee of such difference. The initial borrowing by the
Company under this facility aggregated $1.6 million principal amount on January
9, 1997.
The agreements regarding the line of credit contain covenants which, among
other matters, limit the ability of the Company and its subsidiaries to (1)
merge, consolidate and acquire or sell assets, (2) incur indebtedness outside
the ordinary course of business which would have a material adverse effect on
the Company and its subsidiaries taken as a whole or on the prospect of
repayment of the obligations under the line of credit, (3) pay dividends other
than stock dividends and certain dividends with respect to the Company's Series
A Cumulative Convertible Preferred Stock, and (4) redeem, purchase of acquire
its capital stock.
SALES AND MARKETING
The Company employs a sales staff to directly market its services to clients
in certain secondary and rural markets where national IXCs, regional long
distance carriers and RBOCs typically do not maintain sales personnel and
utilizes agents to market its services in the Addtel service area. The Company
currently directly markets its services from 27 locations situated throughout
the Company's contiguous primary nine state region. In addition, the Company has
begun building an internal telemarketing staff. The Company's historical
customer profile has been primarily a single location businesses with 25 or
fewer employees averaging approximately four to ten business lines and one
"800/888" number. During the third quarter of 1996, the average monthly bill for
the Company's domestic commercial customers was approximately $140. The Company
markets an array of complete telecommunications services to its customers
including "1+" long distance, "800/888" service, travel cards, voice and data
private line services, wireless and Internet access. The Company plans to focus
its expansion efforts on its target market in contiguous states. The Company
believes it offers comparable products and services generally provided by
national carriers. The
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Company emphasizes local market representation in both sales and service in the
southwestern and south central markets which it serves. The Company believes its
local presence in these markets provides it with a competitive advantage.
The Company also offers its customers various billing and information
benefits. These benefits allow large business subscribers to individualize and
customize their invoices. Examples of the Company's billing features include
summary reports by area codes, most frequent number called and longest duration
calls. Further, the Company can provide business subscribers with a group of
assigned codes that can be used to classify each call by individuals,
departments, or projects. These classifications can then be summarized on the
customer's invoice, assisting business subscribers in the effective management
of their long distance usage. The customer can also choose to receive their
billing information in several manners, either electronically or on paper. These
features allow business subscribers to be flexible in designing how their
statements will be prepared. Individualized design is provided to customers by
consultation through the Company's sales force and support personnel. Management
of the Company believes these customized billing services provide a competitive
advantage in the target market.
COMPETITION
The domestic long distance telecommunications industry is highly
competitive, and the Company expects it to remain so for the foreseeable future.
As a result of the AT&T Decree, numerous competitors entered the domestic long
distance telecommunications market, resulting in, among other things, a
significant drop in the consumer or retail price of long distance service. The
1996 Act can be expected to increase competition in the domestic long distance
market as the RBOCs begin providing both in region and out of region long
distance service. The Company competes directly with other IXCs and with
resellers of long distance service, some of which have substantially greater
financial, marketing and product development resources than the Company.
In recent years, increased competition among long distance carriers has
resulted in an overall reduction in the retail price of long distance service.
At the same time, technological change and the rapid expansion of circuit
capacity in the United States as a result of the installation of fiber-optic
transmission facilities have resulted in increased efficiency of the long
distance network, also contributing to the declining prices. The Company's
target market, primarily small and medium sized businesses, is believed by the
Company to be motivated by cost in its choice of a long distance provider as
well as such additional factors as local presence, cost effectiveness and
flexible billing programs.
The 1996 Act is expected to result in the entry of new competitors,
including some or all of the RBOCs, into the domestic long distance market. It
is not clear whether the RBOCs will build their own national networks, lease
facilities from others or acquire smaller domestic long distance service
providers. To the extent that the RBOCs enter the domestic long distance market
by acquiring other IXCs, the domestic long distance service industry can be
expected to consolidate, resulting in increased competition for the Company from
a relatively small number of very large, nationwide providers. See "RISK
FACTORS-- HIGHLY COMPETITIVE INDUSTRY," "RISK FACTORS--REGULATORY AND
LEGISLATIVE UNCERTAINTY," "OVERVIEW OF TELECOMMUNICATIONS INDUSTRY--INDUSTRY
BACKGROUND--TELECOMMUNICATIONS ACT OF 1996" and "--GOVERNMENT REGULATION."
EMPLOYEES
At December 31, 1996, the Company employed 265 individuals on a full-time
equivalent basis and 20 part-time employees. As of the date Addtel was acquired,
it had 63 full time employees and one part time employee. None of the Company's
employees is represented by a labor union. The Company considers its relations
with its employees to be good and has not experienced any interruption of
operations as a result of labor disagreements. The Company's future success will
depend on its ability to attract, motivate and retain highly skilled employees.
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GOVERNMENT REGULATION
The Company's domestic long distance telephone business is subject to
regulation at the federal level by the FCC and at the state level by PUCs of the
various states in which the Company operates. Pursuant to regulation by the FCC,
the Company's international business must maintain compliance in jurisdictions
where the Company services foreign customers.
The FCC has regulatory jurisdiction over interstate and international
telecommunications common carriers, like the Company. Under Section 214 of the
Federal Communications Act, the FCC must certify a communications common carrier
before it may provide international services. The Company's subsidiaries, LDN,
USC and NATC, have obtained Section 214 authorization to provide international
switched services by means of resale. The FCC has ruled that "non-dominant"
common carriers, like the Company, need not apply for Section 214 authorization
for the provision of domestic U.S. interstate services. The FCC has also ruled
that non-dominant carriers such as the Company are not required to file
interstate tariffs but must continue to file tariffs with the FCC for
international service.
In addition to its certification as a long distance carrier, in May 1996 the
Company was issued an SPCOA by the Texas PUC to provide local exchange service
as a reseller of Southwestern Bell local exchange services. The Company has also
filed application to offer local exchange services in the seven other states in
its service area.
Prior to November 1995, AT&T was classified as a "dominant" carrier for
certain domestic long distance and long distance related services. As a result,
AT&T was limited in its ability to change its pricing for these services or to
discriminate among customers other than by reasons of specifically described
volume levels and categories of service. In November 1995, the FCC terminated
AT&T's status as a "dominant" carrier for the following domestic services:
commercial and residential, operator, "800," directory assistance, private line
services and in October 1996 the FCC ruled that non-dominant carriers are not
required to file domestic interstate tariffs. As a result, AT&T is on a level
playing field with other non-dominant carriers such as the Company with respect
to its ability to change prices quickly to meet competition. As a non-dominant
carrier, AT&T also will no longer have to submit cost support data with certain
of its tariff filings. In addition, AT&T will no longer have to file
carrier-to-carrier contracts and will be relieved of certain annual reporting
requirements and will automatically be authorized to extend service to any
domestic point. As a result of AT&T's new status as a non-dominant carrier, AT&T
will be able to more rapidly respond to competitive conditions in the long
distance market, including price and service innovations implemented by other
non-dominant carriers such as the Company. AT&T will also be able to implement
service agreements with other long distance service providers, such as the
Company and its competitors, on a case by case basis, depending upon competitive
conditions at the time of negotiation.
An issue under consideration by the FCC which is of potential significance
to the Company is that of "Billed Party Preference," or BPP. This term refers to
a concept in which any long distance call outside the local telephone company's
calling area carried from a publicly available telephone would be completed over
the long distance carrier network of the billed party's previously expressed
preference. If such a system were implemented successfully, the market niche of
operator services, such as that of the Company, would be rendered ineffectual,
because an owner of publicly available telephones would be unable to direct
operator assisted calls over the network of such owner's desired carrier. The
Company derives revenues from such "payphone" business wherein the Company is
the desired carrier of the pay telephone owner. Under the 1996 Act, LECs are
required to implement local number portability in the 100 largest Metropolitan
Statistical Areas (MSA) between October 1, 1997 and December 31, 1998. Because
the technology necessary to implement local number portability is similar to
that proposed for implementation of BPP, the FCC has indicated that it considers
the incremental investment necessary to implement BPP after the commencement of
local number portability to be insignificant. Therefore, the Company believes
that if BPP is ever required, it is not likely to be implemented until some
point after December 31, 1998. As an interim measure, the FCC has proposed to
require operator service providers to verbally disclose the applicable charges
to consumers before connecting a call if they charge rates greater than certain
benchmarks.
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<PAGE>
The regulation of the telecommunications industry is changing rapidly, and
the regulatory environment varies substantially from state to state. FCC
regulatory actions have had, and are expected to continue to have, both positive
and negative effects upon the Company. Decisions by the FCC with respect to the
permissible business activities or pricing practices of the Company's dominant
competitors, such as AT&T, may also have an adverse impact on the Company's
operations. Moreover, any significant change in regulations by state
governmental agencies could significantly increase the Company's costs or
otherwise have an adverse effect on the Company's activities and on any future
expansion efforts.
As a result of the 1996 Act, the RBOCs will be permitted to enter into the
out-of-region long distance market immediately and will be able to enter the
in-region long distance market subject to FCC approval. There is expected to be
no uniformity in the RBOCs' approach to entering in-region or out-of-region
service, although eventually it is likely that one or more of the RBOCs will
provide long distance service throughout their respective in-region markets and
nationally. Importantly for the Company, the 1996 Act defines in-region service
to include every state, in its entirety, in which the RBOC provides local
exchange service, even if the RBOC is not the incumbent local service provider
in all parts of that state. Southwestern Bell (Texas, Oklahoma, Kansas and
Arkansas) and US West Communications (New Mexico, Colorado and Arizona) and Bell
South (Louisiana) are the principal RBOCs serving the states in which the
Company's customers are concentrated. Operating subsidiaries of GTE also provide
local exchange service in portions of Texas, New Mexico and Arkansas. It can be
anticipated that some or all of these RBOCs will establish switches and
transmission facilities competitive with those of the Company, to the extent
that they have not already done so in connection with other business activities
(such as cellular telephone services). Other RBOCs may seek to enter out of
region markets by entering into business relationships or acquiring IXCs such as
the Company. In addition, although the 1996 Act provides for certain safeguards
to protect against anti-competitive abuse by the RBOCs, it is unknown whether
these safeguards will provide adequate protection and the impact of
anti-competitive conduct on the Company, if such conduct occurs, is uncertain.
See "RISK FACTORS--HIGHLY COMPETITIVE INDUSTRY" and "RISK FACTORS-- REGULATION
AND LEGISLATIVE UNCERTAINTY."
In addition to the 1996 Act, a variety of other regulatory approaches are
being considered by state and federal authorities with regard to deregulating
local access services. Competitive access providers have installed local
networks in many parts of the country, primarily large urban areas, that allow
subscribers to route their long distance traffic directly to a designated IXC,
thereby bypassing the LEC. In certain instances, the LECs have been afforded a
degree of pricing flexibility in differentiating among markets and carriers in
setting access charges and other rates in areas where adequate competition has
emerged. Although competitive access providers exist in a limited number of the
Company's markets, including the Dallas and Phoenix markets, a substantial
majority of the Company's customers are concentrated outside of markets served
by competitive access providers. As local exchange carriers become free to set
rates and to discriminate between customers, the ability of IXCs which are
larger than the Company to obtain volume discounts for access and termination
charges could adversely affect the Company by reducing the operating costs of
its larger competitors relative to those of the Company. In particular, it is
expected that the largest players in the long distance market, such as AT&T,
MCI, Sprint and WorldCom will be able to guarantee substantially larger volumes
to LECs than will the Company. As deregulation of the local exchange market
occurs, LECs may be willing to grant large IXCs significant discounts in return
for guarantees of volume. There can be no assurance that the Company will be
able to obtain similar discounts.
The FCC is currently considering action on various proposals that may have
an impact on the Company. Recent developments include implementation of the 1996
Act discussed above; action by the FCC or PUCs changing access rates charged by
LECs and making other related changes to access and interconnection policies,
certain of which could have material adverse consequences for the Company;
related FCC and state regulatory proceedings considering additional deregulation
of LEC access pricing; a pending FCC rulemaking on BPP as described above that
could adversely affect the Company's provision
57
<PAGE>
of operator services; and various legislative and regulatory proceedings that
could result in new local exchange competition.
The Company is not required to file and maintain tariffs for domestic
interstate services. Under recently adopted regulations, the Company has the
option to maintain its domestic tariffs on file at the FCC. At the end of an
FCC-prescribed transition period, non dominant-carriers, such as the Company,
must cancel their domestic tariffs.
The Company will need to comply with the applicable laws and obtain the
approval of the regulatory authority of each state and country in which it
provides or proposes to provide telecommunications services. The laws and
regulatory requirements vary in these jurisdictions. Some have substantially
deregulated various communications services, while other jurisdictions have
maintained strict regulatory regimes. The application and tariff procedures can
be time-consuming and costly, and terms of licenses vary for different
jurisdictions.
IXCs providing long distance service to the Company where the Company does
not maintain its own transmission facilities are similarly obligated to file
tariffs with the FCC. As with the Company's tariffs, these tariffs define the
eligibility for, and the rate structures and the other terms and conditions of,
long distance service. High volume customers such as the Company, may be able to
utilize such IXCs, tariffs or contracts with which provide discounted long
distance rates. These tariffs or contracts are generally available to any
similarly situated customer; however, since customer needs may vary
substantially, contracts created specifically for a customer may have little
utility to others. The Company believes that it has been successful in
negotiating contracts with IXCs to terminate calls outside of the areas covered
by its network at advantageous rates. These contracts generally have a term of
one year or more and can be extended by mutual agreement. No IXC is under any
obligation to structure tariffs specifically for the Company, and there can be
no assurance that tariffs created for other customers will meet the Company's
needs in the future.
For a further description of the AT&T Decree and the 1996 Act see
"--OVERVIEW OF THE TELECOMMUNICATIONS INDUSTRY."
PROPERTIES
The executive offices of the Company and its subsidiaries are located at
1600 Promenade Center, 15th Floor, Richardson, Texas. The Richardson facility,
currently consists of two floors aggregating approximately 17,500 square feet
and the Company is negotiating with the lessee for additional space on another
floor. This facility also includes the Company's sales operations, and is
currently leased under a five year term expiring on February 28, 2001 and April
30, 2001. During 1995, the Company purchased a 14,000 square foot facility at
1107 Austin Ave., Levelland, Texas, in which the operator services and customer
service functions are located. The purchase involved the assumption by the
Company of a promissory note, which had a principal amount outstanding of
$116,987.40 as of September 30, 1996 and which is secured by a deed of trust.
The Company also purchased a 4,100 square foot facility in Midland, Texas for
$170,000 in 1994, which is subject to a deed of trust and vendor's lien note
having $100,872.49 in principal amount outstanding as of September 30, 1996.
This space was formerly utilized by the abstract and title business of the
Company's subsidiary, SATC, and remains leased to SATC. The Company also leases
space in Amarillo, Dallas and Lubbock, Texas and Phoenix, Arizona for the
switches which route long distance calls. These leases expire in September 1,
1997, September 2000, March 31, 1998, and November 2000, respectively. Addtel
leases office space in Glendale, California.
The Company leases space for sales offices in Fort Smith, Fayetteville and
Little Rock, Arkansas, Phoenix and Tucson, Arizona, Longmont, Colorado, Topeka,
Kansas, Hammond, Louisiana, Albuquerque, Farmington, Hobbs, Las Cruces and
Roswell, New Mexico, Oklahoma City, Oklahoma, and Amarillo, Big Spring,
Brownfield, El Paso, Euless, Grand Prairie, Lamesa, Levelland, McKinney, Odessa,
Richardson, and Snyder, Texas.
58
<PAGE>
The Company paid a total of $441,664 in lease expense in fiscal 1996
(excluding Addtel's lease expense which accrues at approximately $7,500 per
month). The Company considers its owned and leased properties adequate to meet
its current and reasonably foreseeable needs. The Company believes that
additional or alternative space will be available as needed to accommodate any
expansion.
LEGAL PROCEEDINGS
On July 20, 1995, a suit was filed in the 101st Judicial District Court for
Dallas County, Texas, Cause No. 95-07136-E (SILVIO AVYAM V. SA HOLDINGS, INC.
AND NORTH AMERICAN TELECOMMUNICATIONS CORPORATION) against the Company and its
wholly-owned subsidiary NATC, in which the plaintiff is seeking damages from the
Company and NATC in excess of $1,500,000 for alleged breach of contract, breach
of fiduciary duty, conspiracy and fraud arising out of the termination of the
consulting agreement between NATC and the plaintiff. The plaintiff is also
seeking an accounting with respect to his relationship with NATC, the issuance
of shares of the Company's Common Stock allegedly owed to him and exemplary
damages and attorney's fees. The Company believes it has meritorious defenses to
the alleged claims and intends to vigorously defend the lawsuit. However, if the
Company were required to pay the alleged damages in such lawsuit, it could have
a material adverse effect on the Company's financial condition and results of
operations. In connection with the termination of the agreement with Mr. Avyam,
the Company relocated its offices to another location in Guatemala. On February
5, 1996, the Company and NATC filed a counterclaim against the plaintiff for
breach of his consulting agreement and other related claims alleging an
unspecified amount of damages. On March 7, 1996, the plaintiff filed a general
denial in such counterclaim. A hearing was held on the Company's motion for
summary judgment on July 12, 1996 which was later verbally denied and no order
was issued. On September 24, 1996, the parties met for a court ordered mandatory
but nonbinding mediation which did not result in settlement. A nonjury trial has
been scheduled for March 4, 1997.
In addition to the proceeding brought by Mr. Avyam noted above, Mr. Avyam
has filed a criminal theft complaint in the Juzgado Tercero de Primera Instancia
del Ramo Penal de Narcoactividad y Delitos Contra el Medio Ambiente (Third Court
of First Degree of Drug Activity and Crimes against the Environment) in
Guatemala City, Guatemala against Paul Miller and a present and past employee of
NATC claiming that the personal property which was relocated belonged to Mr.
Avyam personally and not the Company. Mr. Miller and such employees believe the
criminal complaint is without merit and have been and intend to continue to
vigorously contest such proceedings.
The Company filed suit on January 23, 1996 against Dickinson & Co., an
investment banking firm ("Dickinson"), its parent, Dickinson Holding Corp. and
Polish Telephone and Microwave Corporation ("PTMC") in the 298th Judicial
District Court for Dallas County, Texas, Cause No. 96-00768-M (SA
TELECOMMUNICATIONS, INC. F/K/A SA HOLDINGS V. DICKINSON CO. & DICKINSON HOLDINGS
CORP. AND POLISH TELEPHONE AND MICROWAVE CORPORATION). The Company has alleged,
among other claims, that Dickinson intentionally and willfully breached its
fiduciary duty to the Company under its financial consulting agreement with the
Company and that it interfered with the business relationship between the
Company and PTMC in conspiracy with the other two defendants. The Company is
seeking an unspecified amount of actual and exemplary damages and recovery of
attorneys fees. The matter is presently scheduled for trial on March 3, 1997. An
agreement has been reached between the parties to reschedule the trial date.
On December 19, 1996, a suit was filed in the Circuit Court of the 20th
Judicial Circuit, St. Clair County, Illinois (THE PEOPLE OF THE STATE OF
ILLINOIS VS. LONG DISTANCE NETWORK, INC.), Cause No. 96CH394. This is a suit by
the Attorney General of the State of Illinois against LDN alleging violations of
Sections 2 and 2DD of the Illinois Consumer Fraud and Deceptive Business
Practices Act ("Consumer Fraud Act") arising out of LDN's use of an independent
agent to solicit long distance customers through the use of the agent's
sweepstakes promotion. The suit states that the Attorney General has received
approximately 26 consumer complaints through December 1996 and basically alleges
that Illinois consumers have had their chosen long distance carrier switched
without valid authorization (through misrepresentation and/or forgery), and that
the sweepstakes promotion constituted an illegal lottery. Plaintiff is seeking
among other
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<PAGE>
remedies: (1) findings that LDN has violated such sections of the Consumer Fraud
Act and assessing a civil penalty in the amount of up to $50,000 per violation
if the court finds LDN engaged in such acts with intent to defraud, and if
without intent to defraud, a single penalty of up to $50,000, (2) a permanent
injunction against such acts and such sweepstakes promotion, (3) a declaration
that all contracts entered into between LDN and Illinois consumers as a result
of such acts be rescinded, (4) full restitution to all Illinois consumers who
paid for telephone charges billed by or on behalf of LDN as a result of such
actions and cancellation of any related charges assessed against Illinois
residents, and (5) costs of prosecution and investigation. The parties have
entered into a stipulation extending the time for LDN's answer in such suit
while the parties are engaged in negotiations aimed at resolving these matters.
The Company is a party, from time to time, in routine litigation incident to
its business. Management believes that it is unlikely that the final outcome of
any of these claims or proceedings to which the Company is currently a party if
determined adverse to the Company would have a material adverse effect on the
Company's financial position or results of operations.
60
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth certain information as of the date of this
Prospectus regarding the directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Jack W. Matz, Jr................ 47 Chairman, Chief Executive Officer and Director(1)
Paul R. Miller.................. 54 President, Chief Operating Officer and Director(1)
J. David Darnell................ 51 Vice President-Finance, Chief Financial Officer and Director(1)
John H. Nugent.................. 52 Vice President and Director(2)
Lynn H. Johnson................. 47 Vice President, General Counsel and Secretary
Igor I. Mamantov................ 54 Vice President and Director
John Q. Ebert................... 55 Director(2)
Howard F. Curd.................. 32 Director
Dean A. Thomas.................. 77 Director(1)(3)
Barry J. Williams, M.D.......... 52 Director(3)
Pete W. Smith, Jr............... 42 Director(1)(2)
Thomas L. Cunningham............ 53 Director(2)(3)
Rueben F. Richards.............. 39 Director
Thomas Ole Dial................. 40 Director
</TABLE>
- ------------------------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
MANAGEMENT BACKGROUND
The following is a description of the business experience and other matters
concerning the directors and executive officers of the Company.
JACK W. MATZ, JR. serves as Chairman of the Board and Chief Executive
Officer of the Company. For more than eight years, Mr. Matz served as President
and a director of the Company and its predecessor, SATC. Mr. Matz has also
served as director and/or executive officer of the following privately held
corporations: Strategic Industries, Inc., an investment company (1982-1989); El
Dorado Systems (Canada), Inc., a computer systems firm (1983-1986); HCS Drilling
and Operating Corporation, an oil and gas firm (1981-1984) and Koewell Oil and
Gas Corporation (1980-1981). Prior to these relationships, Mr. Matz held
numerous positions with Chrysler Corporation, ending with zone sales manager for
the Rocky Mountain States in 1981.
PAUL R. MILLER was elected President, Chief Operating Officer and a director
of the Company in February 1995. He previously served as Executive Vice
President of LDN since 1991. LDN was acquired by the Company in March 1994 and
is currently a wholly owned subsidiary of the Company. Mr. Miller's career in
telecommunications began in 1981 with U.S. Telephone, Inc. as a member of the
management team. His last position with that company was Vice President of
Sales, Southwest. He left U.S. Telephone, Inc. in 1984 and for the next three
years was involved in other start-up companies concentrating in the field of
telecommunications. In 1987, Mr. Miller was appointed Vice President of Sales,
North Region for ClayDesta Communications and directed the sales effort in that
area. He left ClayDesta in 1988 to join
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<PAGE>
Telesphere International, Inc. as Vice President of Sales where he directed a
nationwide sales force until joining LDN. For disclosure of certain allegations
against Mr. Miller in connection with the Company's dispute with a former
consultant, see "BUSINESS--LEGAL PROCEEDINGS."
J. DAVID DARNELL was appointed Vice President-Finance and Chief Financial
Officer of the Company in October 1993 and became a director of the Company in
December 1993. From December 1989 through September 1993, Mr. Darnell was Chief
Financial Officer and a minority owner of Message Phone, Inc., a privately held
intellectual property company which develops, patents and licenses technology
for the telecommunications industry. From 1986 through November 1989, Mr.
Darnell held several key financial management positions with TIC United
Corporation, a privately held conglomerate and a group of privately owned
insurance companies, the largest of which was American Equitable Life Insurance
Company. Mr. Darnell is a certified public accountant.
JOHN H. NUGENT was elected to the Board of Directors of the Company in July
1995 and was elected a Vice President of the Company in September 1996. Mr.
Nugent served as a consultant to the Company from June 1, 1996 to August 31,
1996 when he became an employee of the Company. Mr. Nugent was engaged in a
consulting practice between August 1993 and August 31, 1996. He was also
employed by CDx, Inc., a physiological laboratory involved in monitoring cardiac
patients over the public switched telephone network, as Vice President and
Director from January 1995 to November 1995. In June 1996, CDx, Inc. filed a
petition under Chapter 7 of the Federal Bankruptcy Code. Mr. Nugent has served
as an Adjunct Professor of advanced accounting and corporate finance courses at
the University of Dallas (Graduate School of Management) from 1988 to December
1991. From September 1985 to March 1992, Mr. Nugent was President and a member
of the Board of Directors of AT&T/DATOTEK, INC., a wholly owned subsidiary of
AT&T. From January 1993 through August 1993, Mr. Nugent served as President and
a member of the Board of Directors of AT&T Aviation Technologies and Systems,
Ltd., a joint venture owned principally by AT&T. Mr. Nugent is a certified
public accountant. On November 8, 1995, a suit was filed in the United States
District Court for the Southern District of New York, Cause No. 95CIV 9505(RWS)
(EXECUTIVE TELECARD, LTD. V. DARYL ENGELMAN, JOHN NUGENT AND WALTER KRAUTH)
naming Mr. Nugent as a defendant for breaches of duties of care and good faith,
misappropriation of confidential corporate information and tortious interference
with business relations of Executive Telecard, Ltd. ("ELT"). ELT is seeking
damages from Mr. Nugent in excess of $500,000. Mr. Nugent never served as an
officer or director of ELT and was a paid consultant of ELT from January 26,
1995 to March 10, 1995 under an agreement with ELT and a shareholders' committee
that he was to become its Chief Executive Officer. Mr. Nugent filed a general
denial to such action and believes the suit is without merit and that he has
meritorious defenses to the alleged claims. Mr. Nugent intends to vigorously
defend the lawsuit.
LYNN H. JOHNSON has served as the Company's General Counsel and Secretary
since September 1995, and was elected a Vice President in January 1996. Ms.
Johnson served as Counsel-Corporate Acquisitions and Finance at Electronic Data
Systems Corporation from August 1990 to June 1995. From 1979 to July 1990, Ms.
Johnson was a partner and an associate in the corporate section of the law firm
of Hughes & Luce in Dallas, Texas.
IGOR I. MAMANTOV was appointed Vice President of the Company in October
1992, became President of BSCV, a wholly owned subsidiary of the Company, in
November 1992 and was appointed to the Board of Directors of the Company in July
1993. From 1987 to 1992, Mr. Mamantov had been consulting others in product
development and distribution in the Eastern European markets through his
company, Dallas International Marketing, Inc. Prior to organizing this company,
Mr. Mamantov was associated with Ideal Industries, Inc., Parker Pen Company, and
Ridge Tool Company, managing and developing their foreign marketing and
distribution divisions.
JOHN Q. EBERT has served as a director since April 1990 and served as
Secretary of the Company from April 1990 to August 1995. He joined the Company
as Vice President in December of 1993. Mr. Ebert was formerly the Chairman of
the Board and Chief Executive Officer of Redlake Corporation of Carmel,
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Indiana. Prior to Mr. Ebert's association with Redlake, he was Chairman,
President and Chief Executive Officer of ATEK Information Services, Inc., an
information services company. ATEK was acquired in January 1992 by Redlake
Corporation. Before the ATEK relationship, Mr. Ebert was President of The Ebert
Corporation, a Michigan corporation engaged in the development and
administration of computerized appraisal systems and property databases for
property tax administration.
HOWARD F. CURD was elected as a director of the Company in September 1995.
Mr. Curd is President, CEO, Director and shareholder of Jesup & Lamont Group
Holdings, Inc., a diversified financial holding company. Jesup & Lamont Group
Holdings, Inc. operates primarily through its two operating subsidiaries, Jesup
& Lamont Securities Corporation, a fully registered NASD broker/dealer, and
JLCM, a full service investment bank and financial advisory company. Mr. Curd is
Chairman, President and CEO of Jesup & Lamont Securities Corporation and a
Managing Director of JLCM. He has held such positions for more than five years.
DEAN A. THOMAS was elected as a director of the Company in March 1992. Mr.
Thomas is a retired insurance executive and actuary and was associated with
Lincoln National Life Insurance Company in various management capacities. He
retired in 1983 as a Vice President of Lincoln National Life after 40 years of
service. Since 1983, Mr. Thomas has been active as a business consultant to
insurance companies and others.
BARRY J. WILLIAMS, M.D. has served as a member of the Board of Directors of
the Company since March 1992. Dr. Williams is a family practitioner in Plano,
Texas and has served as Vice President of Medshare, Inc., an international
medical software development and sales company since January 1993 and Senior
Medical Director for Allied Physicians of DFW, Inc., a physicians management
services group since April 1996. In addition to being the former Chief of Staff
of HCA Medical Center of Plano and Vice Chairman of the Board of Trustees, Dr.
Williams has served on the Board of Directors of Koewell Oil & Gas Corp.,
Strategic Industries, Inc., United City Corporation and West Plano Medical
Center, Inc.
PETE W. SMITH, JR. was elected to the Board of Directors of the Company in
July 1993. Since 1971, Mr. Smith has been the President of Spectrum
International Corp., a distributor of tools, test equipment and maintenance
related products in the electronics and telecommunications industries. Mr. Smith
has also been President of PulseTech Products Corporation, a distributor of
battery enhancement devices, since August 1994.
THOMAS L. CUNNINGHAM, was elected to the Board of Directors of the Company
in July 1995. Mr. Cunningham was employed from May 1995 through December 31,
1996 at Rauscher Pierce Refsnes, Inc., a subsidiary of Inter-Regional Financial
Group, Inc., as a vice president and senior investment research analyst. From
January 1993 to March 1995, Mr. Cunningham was employed as a securities analyst
at William K. Woodruff & Company Incorporated. From August 1992 to January 1993,
he served as Chief Operating Officer of Healthcare Billing Management, Inc.,
Medical Infusion Technologies, Inc. and fifteen additional privately-owned
related entities engaged in providing outpatient infusion services to oncology
patients. From June 1963 (partner since 1979) to September 1991, he was
associated with Ernst & Young and predecessor "Ernst" firms. From September 1991
to August 1992 and during April 1995, he was a self-employed business consultant
operating as Cunningham Enterprises. Mr. Cunningham has been a director of
Bluebonnet Savings Bank FSB, Dallas, Texas, a federally chartered savings bank
that is privately owned, since December 1991. He is a member of the National
Association of Corporate Directors. Mr. Cunningham is licensed as a Certified
Public Accountant and under NASD Series 24, Series 7 and Series 63.
REUBEN F. RICHARDS, was elected as a director of the Company in March 1996.
Mr. Richards has been Senior Managing Director of JLCM since June 1994. From
January 1990 through June 1994, Mr. Richards was a principal of Hauser Richards
& Co., Inc., an investment firm. Mr. Richards has also been President and Chief
Operating Officer of Emcore Technology Corporation, a privately held compound
semiconductor equipment manufacturer, since October 1995.
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<PAGE>
THOMAS OLE DIAL, was elected as a director of the Company in October 1996.
Mr. Dial has been Executive Vice President and Chief Investment Officer for
Northstar Investment Management Corporation since its inception in October 1993.
Northstar Investment Management is a majority owned subsidiary of Reliastar
Financial Corporation. Mr. Dial has been President and sole shareholder of TD &
Associates since August 1993. TD & Associates is the General Partner of TD
Partners. Northstar Investment Management has been the sub-advisor to TD &
Associates since September 1994. Mr. Dial was an officer of National Securities
and Research Corporation from July 1989 through July 1993. He was Senior Vice
President and Chief Investment Officer from June 1990 through March 1993, and
Vice President from July 1989 through June 1990. National Securities and
Research Corporation was the investment advisor to the National Funds. Mr. Dial
also serves as a director of Telcom Technologies and Intracel Corporation.
BOARD OF DIRECTORS
The Company has a classified Board of Directors currently comprised of three
separate classes, each of which serves for three years, with one class being
elected each year. The terms of John Q. Ebert, Dean A. Thomas, Barry J.
Williams, M.D. and Thomas Ole Dial expire at the 1997 Annual Meeting of
Stockholders. The terms of Jack W. Matz, Jr., Paul R. Miller, J. David Darnell
and Pete W. Smith, Jr. expire at the 1998 Annual Meeting of Stockholders. The
terms of Igor I. Mamantov, Thomas L. Cunningham, John H. Nugent, Howard F. Curd
and Reuben F. Richards will expire at the 1999 Annual Meeting of Stockholders.
All directors hold office for their elected term or until their respective
successors are duly elected and qualified, except that Messrs. Curd and Richards
have agreed to resign from the Board at the time the contractual obligations
giving rise to their nominations are no longer in effect. See "TRANSACTIONS WITH
RELATED PARTIES." If a director should be disqualified or unable to serve as a
director, the vacancy so arising may be filled by the Board for the unexpired
portion of the term. All officers serve at the discretion of the Board. There
are no family relationships between members of the Board of Directors or any
executive officers of the Company.
The Board of Directors conducts its business through meetings of the Board
and through its various committees. In accordance with the Bylaws of the
Company, the Board of Directors has established, among other committees, an
Executive Committee, an Audit Committee, a Compensation Committee and an
Employee Option Committee.
EXECUTIVE COMMITTEE. The Executive Committee exercises broad authority
including the powers of the Board between meetings of the entire Board other
than such power and authority as Delaware Corporation Law specifically prohibits
a committee of the Board from performing. This committee is currently comprised
of Messrs. Matz, Miller, Darnell, Thomas and Smith.
AUDIT COMMITTEE. The Audit Committee acts on behalf of the Board of Directors
with respect to the Company's financial statements, record-keeping, auditing
practices and matters relating to the Company's independent public accountants.
Such functions include recommending to the Board of Directors the firm to be
engaged as independent public accountants for the next fiscal year; reviewing
with the Company's independent public accountants the scope and results of the
audit; consulting with the independent public accountants and management with
regard to the Company's accounting methods and the adequacy of its internal
accounting controls; and approving professional services by the independent
public accountants. The Audit Committee is limited to directors who are not
officers or employees of the Company or any of its subsidiaries. Messrs.
Cunningham, Williams and Thomas are currently members of the Audit Committee.
COMPENSATION COMMITTEE. The Compensation Committee reviews and makes
recommendations to the Board of Directors concerning major compensation policies
and compensation of executive employees. This committee is comprised of Messrs.
Ebert, Cunningham, Nugent and Smith.
COMPENSATION OF DIRECTORS. The Company historically has granted stock options
(at market price or above) in lieu of directors fees to its various directors.
Since the adoption of the 1994 Stock Option Plan
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for Non-Employee Directors (the "Director Option Plan"), options generally have
been granted to directors under that plan. No other compensation was paid to the
members of the Board of Directors of the Company (in such capacity) during
fiscal 1996. The following table summarizes stock grants made to outside
directors under the Director Option Plan in 1996.
<TABLE>
<CAPTION>
DIRECTOR OPTION PLAN
--------------------------------
NUMBER OF
SECURITIES
UNDERLYING EXERCISE PRICE
DIRECTOR OPTIONS GRANTED PER SHARE (1)
- ------------------------------------------------------------- --------------- ---------------
<S> <C> <C>
Barry J. Williams............................................ 12,500 $ 3.47
Pete W. Smith, Jr............................................ 17,500 3.47
Thomas L. Cunningham......................................... 20,000 3.47
John H. Nugent............................................... 20,000 3.47
Howard F. Curd............................................... 15,000 3.47
Dean A. Thomas............................................... 17,500 3.47
John Q. Ebert................................................ 10,000 3.47
Reuben F. Richards........................................... 10,000 2.44
-------
Total options granted...................................... 122,500
</TABLE>
- ------------------------
(1) The exercise price of the options, in each case, was based upon the market
value of the Common Stock of the Company on the date of each respective
option grant.
EXECUTIVE COMPENSATION
The following information is furnished for the years ended December 31,
1996, 1995 and 1994 with respect to the Company's Chief Executive Officer and
each of the other most highly compensated executive officers of the Company
whose total salary during 1996 exceeded $100,000. No other executive officer of
the Company received total salary and bonus compensation for services rendered
to the Company during fiscal 1996 in excess of $100,000.
65
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------
AWARDS
-------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
STOCK UNDERLYING ALL OTHER
---------------------- AWARD(S) OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) SARS (#) ($)
- ----------------------------------------------------- --------- ----------- --------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Jack W. Matz, Jr..................................... 1996 $ 199,379 50,000 -- 20,000 (3)
Chairman of the Board and 1995 203,750(1) -- -- 1,170,000(2) 4,500
Chief Executive Officer 1994 150,000 -- -- 80,000 --
Paul R. Miller....................................... 1996 195,003 50,000 -- 20,000 (3)
President and Chief Operating Officer 1995 160,000 -- -- 135,000 3,750
1994 126,323(4) -- -- 25,000 --
J. David Darnell..................................... 1996 116,253 25,000 -- 72,500 (3)
Vice President--Finance and 1995 114,000 -- -- 118,750 2,250
Chief Financial Officer 1994 68,000 -- -- 52,500 --
Lynn H. Johnson...................................... 1996 105,002 25,000 -- 62,500 (3)
Vice President, General Counsel 1995 29,000(5) -- $ 48,331(6) -- 1,500
and Secretary
Terry R. Houston(7).................................. 1996 72,919 -- -- 10,000 $ 503,795(8)
Vice President--Telecom Acquisitions 1995 185,000 -- -- 110,000
1994 163,636(4) -- -- 40,000
</TABLE>
- ------------------------------
(1) Includes $40,000 paid in 1995 which represented accrued compensation for
1994.
(2) Effective March 24, 1995, Mr. Matz received an option to acquire up to
1,000,000 shares of Common Stock in connection with the renegotiation of his
employment agreement. See "MANAGEMENT--EMPLOYMENT AGREEMENTS AND CHANGE IN
CONTROL ARRANGEMENTS."
(3) The Company intends to make "matching" contributions to each of the named
executive officers in the employ of the Company at the end of fiscal 1996
under the Company's recently adopted 401(k) Plan with respect to
contributions by such participants in 1996. As of the date of this
Prospectus, the amount shown is the amount to be contributed by the Company
to the various Participants and is equal to 50% of the aggregate amount
contributed by such officer in 1996.
(4) Amount shown reflects salary paid to Mr. Miller and Mr. Houston from March
1, 1994, the beginning date of their employment with the Company, through
December 31, 1994.
(5) Amount shown reflects salary paid to Ms. Johnson from September 1, 1995, the
beginning date of her employment with the Company, through December 31,
1995.
(6) As of the end of the most recently completed fiscal year, Ms. Johnson held
no shares of restricted stock as all of such shares were relinquished prior
to the vesting thereof (which was to occur incrementally over 5 years). The
market value of such shares on the date of grant was $41,300. On September
1, 1995 Ms. Johnson was also granted a stock option to acquire up to 177,778
shares of Common Stock until November 30, 1995. The option was exercisable
at a price of $1.125 per share and the market price of the Common Stock on
the date of grant was $2.0625 per share. Ms. Johnson exercised such option
to acquire 5,000 shares of Common Stock on November 29, 1995 and the
remainder of the option expired unexercised. The amount shown includes the
difference between the market price of the Common Stock on the exercise date
and the exercise price with respect to such 5,000 shares of Common Stock.
(7) Mr. Houston resigned from the position of Vice President--Telecom
Acquisitions effective April 11, 1996 and from his position as a director of
the Company on June 21, 1996.
(8) Consists of a release of Mr. Houston's obligations under a promissory note
in the principal amount of $195,903.75 with accrued interest of $58,771 and
142,354 shares of restricted common stock ($249,120).
For information regarding the contractual compensation paid or to be paid to
the above named executive officers, see "--EMPLOYMENT AGREEMENTS AND
CHANGE-IN-CONTROL ARRANGEMENTS."
66
<PAGE>
STOCK OPTION GRANTS IN FISCAL 1996
The following table provides information related to the stock options
granted to the named executive officers during fiscal 1996. All options granted
during fiscal 1996 were granted pursuant to the Company's 1994 Employee Stock
Option Plan ("Employee Option Plan") at an exercise price equal to or in excess
of the fair market value on the date of grant.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM(2)
OPTIONS GRANTED TO EMPLOYEES IN BASE PRICE --------------------
NAME (#)(1) FISCAL YEAR ($/SH) EXPIRATION DATE 5% ($) 10% ($)
- --------------------------------- --------------- ----------------- ----------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jack W. Matz, Jr................. 20,000 3% $ 2.23 3/28/2001 $ 12,339 $ 27,265
Paul R. Miller................... 20,000 3% 2.03 3/28/2001 11,217 24,787
J. David Darnell................. 72,500 10% 2.03 3/28/2001 40,662 89,852
Lynn H. Johnson.................. 62,500 9% 2.03 3/28/2001 35,053 77,458
Terry R. Houston (3)............. 10,000 1% 2.03 3/28/2001 5,609 12,393
</TABLE>
- ------------------------
(1) On March 28, 1996, the Board of Directors granted the options listed in the
chart above under the Employee Option Plan. The options are non-transferable
and forfeitable if the executive leaves the Company for any reason. After a
six-month waiting period from the date of grant, the shares acquired upon
exercise may only be sold over periods varying from 18 months to 24 months
and are subject to repurchase by the Company under certain circumstances.
(2) Potential realizable value is based on the assumption that the price of the
Company's Common Stock appreciates at the annual rate shown, compounded
annually, from the date of grant until the end of the option term. The
values are calculated in accordance with rules promulgated by the Commission
and do not reflect the Company's estimate of future stock price
appreciation.
(3) Mr. Houston resigned from the position of Vice President--Telecom
Acquisitions effective April 11, 1996 and from his position as a director of
the Company on June 21, 1996.
AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information concerning the exercise
of options by each of the named executive officers during fiscal 1996, including
the aggregate amount of gains on the date of exercise. In addition, the table
includes the number of shares covered by both exercisable and unexercisable
stock options as of December 31, 1996. Also reported are values of
"in-the-money" options that represent the possible spread between the respective
exercise prices of outstanding stock options and $1.56 per share, which was the
market value of the Company's Common Stock as of December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
SHARES UNDERLYING UNEXERCISED MONEY OPTIONS AT YEAR-
ACQUIRED OPTIONS AT YEAR-END(#) END($)(2)
ON VALUE -------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE(3) UNEXERCISABLE
- ------------------------------------ ----------- ------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jack W. Matz, Jr. (4)............... 213,720 $ 558,641 932,000 640,000 $ 334,466 $ 200,320
Paul R. Miller...................... -0- -0- 180,000 -0- -0- -0-
J. David Darnell.................... -0- -0- 308,750 -0- 49,595 -0-
Lynn H. Johnson..................... -0- -0- 62,500 -0- -0- -0-
Terry R. Houston (5)................ -0- -0- 160,000 -0- -0- -0-
</TABLE>
- ------------------------------
(1) Aggregate market value of the underlying securities at exercise date minus
the exercise price.
(2) Aggregate market value of the underlying securities at December 31, 1996
minus the exercise price.
67
<PAGE>
(3) With respect to stock options granted under the Employee Option Plan, the
shares acquired upon exercise are subject to varying resale restrictions
over a period of 18 or 24 months after vesting of the option (vesting
generally occurs six months after the date of grant) and repurchase rights
by the Company.
(4) Mr. Matz had 360,000 shares exercisable and 640,000 shares unexercisable as
of December 31, 1996 under his Employment Agreement described below. See
"--EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL ARRANGEMENTS."
(5) Mr. Houston resigned from the position of Vice President--Telecom
Acquisitions effective April 11, 1996 and from his position as a director of
the Company on June 21, 1996.
1994 EMPLOYEE STOCK OPTION PLAN
GENERAL. On June 16, 1994 the Company's Board of Directors adopted, and on July
11, 1994, the stockholders of the Company approved, the Employee Option Plan.
The purpose of the Employee Option Plan is to further the success of the Company
and its affiliates by making available Common Stock for purchase by officers and
employees of the Company and its affiliates, and thus to provide an additional
incentive to such individuals to continue in the service of the Company and its
affiliates and to give them a greater interest as shareholders in the success of
the Company. The Employee Option Plan provides for the granting of non-qualified
stock options ("NQSOs") as well as incentive stock options ("ISOs") under
Section 422 of the Code (collectively, the "Employee Options"). Under the
Employee Option Plan, 2,000,000 shares of Common stock are reserved for granting
as Employee Options. At December 31, 1996, the Company had granted outstanding
Employee Options to purchase an aggregate of 1,570,050 shares of Common Stock
under the 1994 Employee Option Plan.
TERMS AND CONDITIONS. The 1994 Employee Option Plan is administered by a
committee comprised of two or more disinterested directors appointed by the
Board of Directors of the Company (the "Employee Option Committee"). Currently,
the Employee Option Committee consists of five members, namely, Messrs.
Williams, Smith, Curd, Cunningham and Ebert. The Employee Option Committee is
constituted in a manner intended to comply with the requirements of Rule 16b-3
under the Securities Exchange Act of 1934 (the "Exchange Act") pertaining to the
disinterested administration of employee benefit plans. If the Employee Option
Plan satisfies the disinterested administration and other requirements of Rule
16b-3, discretionary grants of options under the Employee Option Plan to persons
subject to liability under Section 16(b) will be exempt from such liability to
the extent provided by Rule 16b-3.
The Employee Option Plan grants broad authority to the Employee Option
Committee to grant Employee Options to (i) full time employees and officers of
the Company, (ii) those directors of the Company who are also employees of the
Company and (iii) certain non-employee consultants of the Company selected by
the Employee Option Committee. Such authorization includes the right to
determine the number of shares subject to option, and the appropriate periods
and methods of exercise, and requirements regarding the vesting of all options.
The Employee Option Plan further authorizes the Employee Option Committee to set
forth provisions in individual option agreements (which need not be identical or
consistent with respect to each optionee) regarding the exercise and expiration
of Employee Options according to stated criteria. The Employee Option Committee
oversees the methods of exercise of Employee Options with attention being given
to compliance with appropriate securities laws and regulation.
With respect to any participant who owns stock possessing more than 10% of
the voting power of all classes of the Company's outstanding capital stock (a
"10% Stockholder"), the exercise price of any ISO granted must be at least 110%
of the fair market value of the Common Stock on the date of grant. The exercise
price of ISOs for all other employees shall be no less than 100% of the fair
market value of the Common Stock on the date of grant. There is no specified
price requirement for NQSOs, except that the option exercise price must exceed
the par value of the Common Stock. Payment for the Common Stock upon exercise of
an Employee Option may be made in cash, by certified check, by money order or by
the delivery of shares of Common Stock owned by the option holder having a fair
market value equal to the exercise price, or by delivery of a combination of any
of the foregoing.
68
<PAGE>
The Employee Options are not generally transferable by an optionee, other
than by will or by the laws of descent and distribution or pursuant to a
qualified domestic relations order and are exercisable during the lifetime of an
optionee only by such optionee. The Company may make or guarantee loans to
individuals to finance the purchase of shares of Common Stock upon the exercise
of Employee Options under the Employee Option Plan. The maximum term of an
option granted under the Employee Option Plan may not exceed five years from the
date of grant in the case of an option granted to a 10% Stockholder and not more
than 10 years from the date of grant in the case of all other optionees.
Employee options generally contain certain anti-dilution provisions which
provide for adjustment in the number of shares of Common Stock and option price
in the case of subdivisions or consolidations of the Common Stock, stock
dividends, recapitalizations and similar events.
The Company has the option to repurchase shares of its Common Stock from
optionees who acquire such shares through the exercise of options under the
Employee Option Plan, and who do not remain in the employee of the Company for
specified minimum periods following the date of grant, generally at least 18
months in the case of employee directors, 24 months in the case of officers and
30 months in the case of all other employees. The amount payable by the Company
in each case is equal to the amount which the optionee paid for such shares upon
exercise of the option giving rise to the Company's repurchase rights.
The Employee Option Plan terminates on January 1, 2004. The Board may at any
time suspend or terminate the Employee Option Plan prior to such time or may
amend it from time to time in such respects as the Board may deem advisable,
except that no amendment, suspension or termination may impair any of the rights
or obligations of an optionee under any Employee Option previously granted to
such optionee under the Employee Option Plan.
On May 31, 1996, the Company approved certain amendments to the Employee
Option Plan which provide that all Employee Options granted under the Employee
Option Plan automatically vest upon a Change of Control (as defined below) and
that in the event of a termination of employment following a Change of Control
all options will be exercisable for a minimum of 90 days. For these purposes, a
"Change of Control" is defined as (i) the consummation of any consolidation or
merger of the Company in which the surviving corporation or in which shares of
the Company's Common Stock are converted into cash, securities or other
property, (ii) a sale or other transfer of all or substantially all of the
assets of the Company, (iii) stockholder approval of a proposal to liquidate or
dissolve the Company, (iv) a person shall become the beneficial owner of 30% or
more of the Company's outstanding Common Stock (except for those who had such
beneficial ownership prior to May 31, 1996) or (v) during the period of any two
consecutive years, individuals at the beginning of such period constitute the
entire Board of Directors shall cease for any reason to constitute a majority
thereof. In each instance, such events are subject to certain exclusions. In
addition, upon a Change in Control, (i) provisions of the Employee Option Plan
requiring termination of Employee Options upon termination of the employment of
the holder will not apply except for a termination due to conviction for a
felony or a crime involving moral turpitude, and (ii) all Employee Options
granted thereunder will be deemed to vest immediately and that any Company
repurchase option or salability restriction set forth in any option agreement
would be considered void and of no further force and effect.
The shares of Common Stock issuable pursuant to the exercise of Employee
Options have been registered with the Commission.
1994 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
GENERAL. On June 16, 1994, the Board of Directors adopted, and on July 11,
1994, the stockholders of the Company approved, the Director Option Plan. The
purpose of the Director Option Plan is to advance the interests of the Company
by providing additional incentives to attract and retain qualified and competent
non-employee directors. In furtherance of such purpose, the Director Option Plan
provides for the granting of NQSOs to such non-employee directors to purchase
Common Stock ("Director Options"). A
69
<PAGE>
total of 1,000,000 shares of Common Stock (subject to adjustment as described
below) has been reserved for issuance under the Direction Option Plan. At
December 31, 1996, the Company had granted outstanding Director Options to
purchase an aggregate of 280,000 shares of Common Stock under the Director
Option Plan.
TERMS AND CONDITIONS. The Director Option Plan provides that any non-employee
director of the Company who is elected to the Board of Directors of the Company
shall be automatically granted a Director Option to purchase 10,000 shares of
Common Stock (plus an additional Director Option to purchase 2,500 shares of
Common Stock for each Committee of the Board of Directors to which such director
was appointed) on the date immediately following the date on which such person
becomes a non-employee director, whether at an annual meeting of stockholders or
otherwise. Such director shall also automatically receive a Director Option to
purchase an additional 10,000 shares of Common Stock (plus an additional
Director Option to purchase 2,500 shares of Common Stock for each Committee of
the Board of Directors to which such director was appointed), on the date
immediately following the date of each successive annual meeting of the
stockholders of the Company thereafter, unless any such date shall be within 185
calendar days of a previous grant to such director. Each Director Option will
vest six months after the date of the grant and will expire five years after the
date of grant.
No Director Option may be granted at an exercise price per share that is
less than the fair market value of the Common Stock at the date of grant. The
exercise price of a Director Option may be paid in cash, certified or by
cashier's check, by money order, or by delivery of shares of Common Stock owned
by the option holder having a fair market value equal to the exercise price, or
by delivery of a combination of any of the foregoing.
Director Options generally contain certain anti-dilution provisions which
provide for an adjustment in the number of shares of Common Stock and option
prices in the case of subdivisions or consolidations of the Common Stock, stock
dividends, recapitalizations and similar events.
The Director Options are not generally transferable by the optionee except
by will or by the laws of descent and distribution or pursuant to a qualified
domestic relations order, and are exercisable during the lifetime of an optionee
only by such optionee.
A Director Option will terminate on the earlier to occur of (i) 30 days
after the date that the optionee ceases to be a Director, except that if the
optionee dies while serving as a director, the Director Option will expire one
year from the date of death or six months from such date if the optionee dies
within 30 days after ceasing to serve as a director, or (ii) five years from the
date of grant of the Director Option. No executive officer or other employee of
the Company is entitled to participate in the Director Option Plan.
The administration and other terms of the Director Option Plan have been
structured so that the options granted to the non-employee directors who
administer the company's stock plans shall qualify as transactions exempt from
Section 16(b) of the Exchange Act, pursuant to Rule 16b-3 promulgated
thereunder. See "--1994 EMPLOYEE STOCK OPTION PLAN."
The Company has the right to repurchase shares of its Common Stock from any
director optionee who acquires such shares of Common Stock through the exercise
of options under the Direction Option Plan and who does not continue to serve as
a director of the Company, for any reason, for at least 18 months following the
date of grant of the option. The amount payable by the Company in each case is
equal to the amount which the optionee paid for such shares upon exercise of the
option giving rise to the Company's repurchase rights.
The Director Option Plan will terminate on January 1, 2004, and any Director
Option outstanding on such date will remain outstanding until it has either
expired or been exercised.
The shares of Common Stock issuable pursuant to the Director Options have
been registered with the Commission.
70
<PAGE>
INCENTIVE STOCK OPTION PLAN
The Company's Incentive Stock Option Plan (the "Incentive Stock Option
Plan") is comprised of two separate employee benefit plans; namely, the 1992
Employee Stock Option Plan and the July 1, 1993 Stock Option Plan which was
subsequently amended and restated by the Board of Directors of the Company as
the January 1, 1994 Amended Stock Option Plan.
The purposes of the Incentive Stock Option Plan were (i) to attract, retain,
reward, and motivate the officers, directors and key employees of the Company,
(ii) to encourage stock ownership by providing them with the means to acquire
shares of the Company's Common Stock or to increase their stock holdings and
(iii) to provide a greater community of interest between such individuals and
the Company's stockholders. The Incentive Stock Option Plan provided for the
granting of NQSOs and ISOs to officers, directors and other employees and was
intended to qualify as a "formula plan" under Rule 16b-3 of the Exchange Act,
being administered by a disinterested committee. At December 31, 1996, the
Company had outstanding options to acquire an aggregate of 438,000 shares of the
Company's Common Stock under the Incentive Stock Option Plan. No new option
grants will be made under the Incentive Stock Option Plan.
OTHER OPTIONS; RESTRICTED STOCK
The Company historically has granted stock options and/or awarded restricted
stock to a limited number of key employees (including certain officers and
directors) which have not been granted or issued pursuant to a specific plan but
rather have been made to attract and retain such key employees in special
circumstances. Generally, these grants have occurred contemporaneously with the
employment of such key employees (as an inducement to accept employment),
although some grants have been made subsequent to commencing employment with the
Company. The Company believes that the use of these options and restricted stock
grants have been, and in the foreseeable future will continue to be, an
important and necessary incentive to permit the Company to attract and retain
key employees in competition with companies having much greater resources.
EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL ARRANGEMENTS
Effective March 24, 1995, the Company entered into an Employment Agreement
with Jack W. Matz, Jr. which was amended effective January 1, 1996 on March 13,
1996. The Employment Agreement with Mr. Matz will expire on March 24, 2000,
unless terminated earlier as provided therein, including termination by the
Company with or without cause. In the event Mr. Matz is terminated for cause
(defined in the Employment Agreement to include such reasons as an act of
dishonesty on the part of Mr. Matz constituting a felony or intended to result
in substantial gain or personal enrichment at the expense of the Company, his
willful failure to perform his duties and a determination by 75% of the members
of the Board of Directors to terminate the Employment Agreement), Mr. Matz shall
be entitled to receive only the base salary being paid to him at such time,
through the date of termination. The Employment Agreement may also be terminated
by the Company at any time without cause upon 30 days written notice to Mr.
Matz. In the event of this termination without cause, Mr. Matz shall be entitled
to continue to receive the base salary effective at the time of termination, and
to continue to participate in all regular employee benefit plans, for a period
of two and one-half (2 1/2) years or until March 23, 2000, whichever occurs
earlier. Mr. Matz may voluntarily terminate the Employment Agreement at any time
upon 30 days written notice to the Company, in which event he shall be entitled
to receive only his base pay in effect at that time through the date of
termination.
The Employment Agreement provides that Mr. Matz shall be paid an annual base
salary of $150,000, subject to increase by the Compensation Committee of the
Board of Directors, and, at Mr. Matz's option, to a level equal to the highest
salary level being paid to any other employee of the Company from time to time
during Mr. Matz's employment period. Additionally, Mr. Matz is entitled to
receive annual cash
71
<PAGE>
bonuses based upon the attainment by the Company of certain annual consolidated
net income levels, as follows:
<TABLE>
<CAPTION>
ANNUAL NET INCOME LEVEL PERCENTAGE TO BE PAID AS BONUS COMPENSATION
- ------------------------------- -----------------------------------------------------------------------
<S> <C>
$0-200,000..................... 1% of net income up to and including $200,000
$200,001-1,200,000............. 4% of net income from $200,001 up to and including $1,200,000
$1,200,001 and above........... 8% of net income above $1,200,000
</TABLE>
For purposes of this bonus, net income is the net income of the Company and
its consolidated subsidiaries determined in accordance with GAAP as reflected in
the Company's audited financial statements, excluding the effect of income taxes
and including cash bonuses paid to any employee or consultant other than Mr.
Matz and 50% of goodwill amortization expense for such year.
Mr. Matz may also be awarded additional bonuses, at the discretion of the
Board of Directors.
The Employment Agreement also provides that Mr. Matz will be entitled to
receive stock options entitling Mr. Matz to purchase up to an aggregate of
60,000 shares of Common Stock of the Company, in three 20,000 share allotments,
to be granted at such time that the annual earnings per share of the Company and
its subsidiaries (on a consolidated basis) exceed, for the first time, $.01,
$.15 and $.25 earnings per share, respectively. Any option granted under this
provision of Mr Matz's Employment Agreement shall be exercisable for a period of
five years from the date of grant and shall have an exercise price equal to the
fair market value of the Common Stock on the date of grant.
Effective March 24, 1995, in connection with Mr. Matz's agreement to release
any and all claims against the Company under any prior agreements relating to
his employment with the Company, Mr. Matz was granted an option to acquire up to
1,000,000 shares of Common Stock at an exercise price of $1.25 per share, the
fair market value of the Common Stock on the settlement date. This stock option
vested as to 200,000 shares of Common Stock on the date of grant, March 24,
1995, 160,000 shares of Common Stock on March 24, 1996 and vests as to an
additional 160,000 shares of Common Stock on each of the four anniversaries
thereafter. Mr. Matz's stock option is exercisable for up to five years after
full vesting. However, if Mr. Matz is terminated by the Company without cause,
such stock option will become immediately exercisable, and will remain
exercisable for two years thereafter, with respect to a number of shares of
Common Stock equal to 500,000 plus all vested but unexercised options then
outstanding, but in no event in excess of 1,000,000 shares. The price to be paid
for the shares of Common Stock to be issued pursuant to the exercise of this
option may be paid at the option of Mr. Matz (i) in cash, (ii) through a
combination of cash and a promissory note, or (iii) by the delivery to the
Company of an equivalent number of shares of Common Stock.
In the event Mr. Matz is no longer employed by the Company prior to March
24, 2000, the Company may repurchase any or all of the shares of Common Stock,
in excess of 500,000 shares of Common Stock, acquired by Mr. Matz pursuant to
the exercise of the options issued in connection with the Employment Agreement.
The price payable by the Company in connection with any such repurchase shall be
equal generally to the fair market value of such shares at the date of the
repurchase and shall be payable, at the option of the Company, in cash or by the
delivery of a promissory note of the Company.
Mr. Matz also has the right to require the Company to register for sale, on
three separate occasions until March 23, 2000, any or all of the shares of
Common Stock acquired as a result of the exercise of the options issued in
connection with the Employment Agreement.
On March 13, 1996, the Company entered into an Employment Agreement with
Paul R. Miller effective as of January 1, 1996. The Employment Agreement will
expire on December 31, 1998, but is automatically extended for additional
successive one-year terms thereafter unless the agreement is terminated by the
Company or Mr. Miller upon at least 60 days prior written notice as provided
therein. Similar to Mr. Matz's employment agreement, if the Employment Agreement
with Mr. Miller is terminated with cause, he is entitled to the base salary
earned by him to the date of termination. Pursuant to the
72
<PAGE>
terms of Mr. Miller's Employment Agreement, he is entitled to an annual base
salary of $160,000, subject to increase at the sole discretion of the
Compensation Committee.
Additionally, Mr. Miller is entitled to receive annual cash bonuses based
upon the attainment by the Company of certain annual consolidated net income
levels (calculated in generally the same method as set forth in Mr. Matz's
Employment Agreement), as follows:
<TABLE>
<CAPTION>
ANNUAL NET INCOME LEVEL PERCENTAGE TO BE PAID AS BONUS COMPENSATION
- ------------------------------- -----------------------------------------------------------------------
<S> <C>
$0-$250,000.................... None
$250,001 to $500,000........... 1% of net income up to and including $500,000
$500,001-$1,200,000............ 2% of net income from $500,001 up to and including $1,200,000
$1,200,001 and above........... 5% of net income above $1,200,000
</TABLE>
Mr. Miller may also be awarded additional bonuses, at the discretion of the
Board of Directors.
The Employment Agreement with Mr. Miller also provides that he will be
entitled to receive stock options entitling Mr. Miller to purchase up to an
aggregate of 60,000 shares of Common Stock of the Company, in three 20,000 share
allotments, to be granted at such time that the annual earnings per share of the
Company and its subsidiaries (on a consolidated basis) exceed, for the first
time, $.01, $.15 and $.25 earnings per share, respectively. Any option granted
under this provision of Mr. Miller's Employment Agreement shall be exercisable
for a period of five years from the date of grant and shall have an exercise
price equal to the fair market value of the Common Stock on the date of grant.
Mr. Miller has the right to require the Company to register for resale, on two
separate occasions until the later of December 31, 1998 or the final termination
date of any automatic extension of his Employment Agreement, any and all of the
shares of Common Stock acquired as a result of the exercise of these options.
In the event Mr. Miller is no longer employed by the Company on the later to
occur of December 31, 1998 or, if his Employment Agreement is automatically
extended, the date of termination as so extended, the Company may repurchase any
or all of the shares of the Common Stock, in excess of 500,000 shares of Common
Stock, acquired by Mr. Miller pursuant to the exercise of the options issued in
connection with the Employment Agreement. The price payable by the Company in
connection with any such repurchase shall be equal generally to the fair market
value of such shares at the date of the repurchase and shall be payable, at the
option of the Company, in cash or by the delivery of a promissory note of the
Company.
Under the terms of the Company's employment agreements with Mr. Miller and
Mr. Matz, a "Change of Control" of the Company is deemed to exist upon the
occurrence of any of the following: (i) any person other than such employee or a
person acquiring securities directly or indirectly in connection with any
financing or capital raising activity undertaken by the Company in connection
with the USC acquisition is or becomes a beneficial owner (as defined in Rule
13d-3 promulgated under the Exchange Act), directly or indirectly, of securities
of the Company representing more than 25% of the combined voting power of the
Company's outstanding securities; (ii) at any time during the twenty-four month
period following a merger, tender offer, consolidation, sale of assets or
contested election, or any combination of such transactions, at least a majority
of the Company's Board of Directors shall cease to be "continuing directors"
(meaning directors of the Company prior to such transaction or who subsequently
become directors and whose election or nomination for election by the Company's
stockholders, was approved by a vote of at least two-thirds of the directors
then still in office prior to such transaction); or (iii) the Company's
stockholders approve a plan of complete liquidation of the Company or an
agreement of sale or disposition by the Company of all or substantially all of
the Company's assets.
If such a "Change of Control" occurs under Mr. Matz's Employment Agreement,
Mr. Matz is generally entitled to receive (i) one year's base salary as a lump
sum payment if he voluntarily terminates his employment within 90 days of such
event, (ii) no severance if he voluntarily terminates his employment after 90
days of such event; (iii) a lump sum severance payment equal to any remaining
salary payments due from date of termination until March 23, 2000 if he is
involuntarily terminated other than for "cause" (as defined above); provided
that such lump sum cannot exceed 2.99 times his five year average annual
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compensation; and (iv) his base salary up until the last date of employment if
he is involuntarily terminated for "cause."
If such "Change of Control" occurs under Mr. Miller's Employment Agreement,
Mr. Miller is entitled to have such employment agreement assumed by the
Company's successor or purchaser or be compensated in accordance with the terms
thereof even if relieved of his duties.
Effective April 11, 1996, Mr. Houston and the Company entered into a
settlement agreement (the "Settlement Agreement") pursuant to which Mr.
Houston's employment agreement with LDN was terminated, the Company issued to
Mr. Houston 142,354 shares of restricted Common Stock and Mr. Houston was
released from his obligations under a certain Promissory Note of Mr. Houston to
LDN in the principal sum of $195,903.75. In reaching this agreement, the Company
calculated the present value of all sums remaining to be paid under his
employment agreement and offset the outstanding balance under the Promissory
Note against such sum. In connection with the Settlement Agreement, Mr. Houston
agreed to remain available to advise and consult with the Company (for no
additional consideration other than reasonable out-of-pocket expenses) through
March 31, 1999, and agreed not to compete with the Company for three years after
the date of the Settlement Agreement. In addition, Mr. Houston executed a voting
agreement in connection with such transaction granting Mr. Matz the right to
designate the manner in which the shares of Common Stock owned by Mr. Houston
are voted. On June 10, 1996, the Company and Mr. Houston amended the Settlement
Agreement to provide for additional understandings with respect to the date Mr.
Houston ceased being an employee of the Company and with respect to insurance
coverage for Mr. Houston and his wife.
The Company entered into a Severance Agreement with Mr. Darnell terminating
Mr. Darnell's rights under an employment agreement with the Company dated August
8, 1993, except for his right to receive formula bonuses based on the annual
profitability of the Company determined by measuring gross income less all
operating expenses on a consolidated basis. Generally, should the Company have
profits of between $500,001 and $1,500,000 or profits in excess of $1,500,000,
Mr. Darnell is eligible to receive a bonus of 1.0% and 1.5%, respectively, of
such profits. Under the Severance Agreement, Mr. Darnell will be entitled to
receive as severance 150% of his annual salary in effect on the date of a change
of control of the Company if he is terminated for any reason (other than death,
voluntarily or due to a conviction of a felony involving a crime of moral
turpitude) within one year after such change of control.
The Company entered into a Severance Agreement with Ms. Johnson terminating
Ms. Johnson's rights to 20,000 shares of restricted stock granted on her
employment on September 1, 1995, none of which were vested at the time of
termination. Under the Severance Agreement, Ms. Johnson will be entitled to
receive as severance 150% of her annual salary in effect on the date of a change
of control of the Company if she is terminated for any reason (other than death,
voluntarily or due to a conviction of a felony involving a crime of moral
turpitude) within one year after such change of control.
Pursuant to the terms of the terms of the Employee Option Plan as amended at
the Annual Meeting of Stockholders on May 31, 1996, all options granted under
either such plan will (i) vest automatically upon a change of control of the
Company and (ii) remain exercisable for a minimum of 90 days upon the
termination of such optionee following such a change of control of the Company.
See "MANAGEMENT--1994 EMPLOYEE STOCK OPTION PLAN."
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SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table and notes thereto set forth certain information with
respect to the shares of Common Stock beneficially owned by (i) each person
known by the Company to own beneficially more than 5% of the Company's Common
Stock, (ii) each director and executive officer of the Company included in this
Prospectus under "MANAGEMENT--EXECUTIVE COMPENSATION" and (iii) all executive
officers and directors of the Company as a group, as of December 31, 1996.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
----------------------------------
SHARES OF
NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK(1) PERCENT(2)
- ------------------------------------------------------------------------ ------------------- -------------
<S> <C> <C>
Jack W. Matz, Jr. ...................................................... 4,257,309(3)(4) 21.9%
1600 Promenade Center, 15th Floor
Richardson, Texas 75080
Paul R. Miller ......................................................... 351,272(5) 2.2%
1600 Promenade Center, 15th Floor
Richardson, Texas 75080
J. David Darnell ....................................................... 323,750(6) 2.0%
1600 Promenade Center, 15th Floor
Richardson, Texas 75080
Lynn H. Johnson ........................................................ 67,500(7) *
1600 Promenade Center, 15th Floor
Richardson, Texas 75080
Igor I. Mamantov ....................................................... 278,300(8) 1.7%
1600 Promenade Center, 15th Floor
Richardson, Texas 75080
John H. Nugent ......................................................... 70,000(9) *
1600 Promenade Center, 15th Floor
Richardson, Texas 75080
John Q. Ebert .......................................................... 18,800(10) *
3612 Garden Brook Dr., Apt. 134
Farmers Branch, Texas 75234
Howard F. Curd ......................................................... 2,020,000(11)(12) 11.5%
650 Fifth Ave.
New York, New York 10019
Dean A. Thomas ......................................................... 349,405(13) 2.2%
1907 Ridge Creek Dr.
Richardson, Texas 75082
Barry J. Williams, M.D. ................................................ 340,316(14) 2.1%
4100 W 15th St., #103
Plano, Texas 75075
Pete W. Smith, Jr. ..................................................... 450,923(15) 2.9%
3131 Premier Drive
Irving, Texas 75063
Thomas L. Cunningham ................................................... 70,790(16) *
1717 Endicott Drive
Plano, Texas 75205-3057
Reuben F. Richards ..................................................... 2,000,000(11)(17) 11.4%
650 Fifth Ave.
New York, New York 10019
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
----------------------------------
SHARES OF
NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK(1) PERCENT(2)
- ------------------------------------------------------------------------ ------------------- -------------
<S> <C> <C>
Thomas Ole Dial ........................................................ 4,607,843(18) 22.7%
2 Pickwick Plaza
Greenwich, Connecticut 06830
Jesup & Lamont Capital Markets, Inc. ................................... 1,990,000(11) 11.3%
650 Fifth Avenue
New York, New York 10019
Terry R. Houston ....................................................... 834,750(19) 5.3%
9 Carriage Hill
San Antonio, Texas 78257
Northstar Investment Management Corporation ............................ 4,607,843(20) 22.7%
2 Pickwick Plaza
Greenwich, Connecticut 06830
McCullough, Andrews & Capprello, Inc. .................................. 1,176,471(21) 7.0%
101 California Street, Suite 4250
San Francisco, California 94111
All executive officers and directors as a group (consisting of 14 13,046,936(22) 50.2%
persons)
</TABLE>
- --------------------------
* Represents less than one percent (1%).
(1) Beneficial ownership as reported in the above table has been determined in
accordance with Rule 13d-3 under the Exchange Act. Unless otherwise
indicated each of the persons or entities named has sole voting and
investment power with respect to the shares reported.
(2) The percentages indicated are based on exercisable outstanding options and
conversion privileges for each individual or entity listed and 15,660,535
shares of Common Stock issued and outstanding on December 31, 1996.
(3) Includes 932,000 shares that Mr. Matz has the right to acquire upon the
exercise of stock options and other rights exercisable within 60 days.
(4) Includes shares that Mr. Matz has the right to vote (or direct the vote)
under voting agreements or voting trusts but over which he does not have
dispositive power. Mr. Matz, as trustee under nine separate voting trust
agreements, has the right to vote 1,363,781 shares of the Company's Common
Stock on any matters presented to the stockholders for a vote. Each of these
voting trust agreements has a duration of five years and will terminate at
various times through April 1999. In addition, under certain other voting
agreements with five purchasers of the Company's Common Stock and Warrants
in connection with a September 20, 1995 private placement, Mr. Matz has the
right to vote 37,300 shares of the Company's Common Stock held by (and
included herein), and 10,000 shares of Common Stock issuable upon exercise
of such Common Stock Purchase Warrants ("1995 Warrants") issued to such
purchasers. Also, under voting agreements with six purchasers of the
Company's warrants in connection with a private placement on May 7, 1996,
Mr. Matz has the right to vote 1,337,500 shares of Common Stock issuable
upon exercise of such Common Stock Purchase Warrants (the "1996 Warrants")
issued to such purchasers. The voting agreements with respect to the 1995
Warrants and 1996 Warrants terminate on August 31, 2005 and May 7, 2006,
respectively. The 1995 Warrants are exercisable until September 11, 1997.
The 1996 Warrants are exercisable until May 7, 1998. Also includes 142,354
shares of Common Stock which Mr. Matz has the right to vote under a voting
agreement with Mr. Houston until the earlier of Mr. Houston's transfer of
such shares or April 11, 2001. Does not include 500,000 shares of Common
Stock which Mr. Matz has the right to vote under a voting agreement on
behalf of the former Addtel Shareholders, which shares were pledged by USC
to such shareholders. See "DESCRIPTION OF CAPITAL STOCK--ANTI-TAKEOVER
PROVISIONS--VOTING AGREEMENT."
(5) Includes 180,000 shares that Mr. Miller has the right to acquire upon the
exercise of options and other rights exercisable in 60 days. Pursuant to
that certain Voting Trust Agreement, dated April 12, 1994, Mr. Miller has
transferred the right to vote 169,272 shares of Common Stock to Jack W.
Matz, Jr. as Trustee on all matters presented to the stockholders for a
vote. Mr. Miller retains sole dispositive power over all shares beneficially
owned by him.
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<PAGE>
(6) Includes 308,750 shares that Mr. Darnell has the right to acquire upon the
exercise of stock options, exercisable within 60 days.
(7) Includes 62,500 shares that Ms. Johnson has the right to acquire upon the
exercise of stock options, exercisable within 60 days.
(8) Includes 278,300 shares that Mr. Mamantov has the right to acquire upon the
exercise of stock options and other rights exercisable within 60 days.
(9) Includes 40,000 shares that Mr. Nugent has the right to acquire upon the
exercise of stock options and other rights exercisable within 60 days.
(10) Includes 18,800 shares that Mr. Ebert has the right to acquire upon the
exercise of stock options, exercisable within 60 days.
(11) Includes 500,000 shares of the Company's Common Stock that JLCM has the
right to acquire upon the exercise of Common Stock Purchase Warrants
exercisable within 60 days and 1,440,000 shares issuable upon conversion of
shares of Series A Stock of the Company. Messrs. Curd and Richards are
Managing Director and Senior Managing Director, respectively, of such
entity.
(12) Includes 30,000 shares that Mr. Curd has the right to acquire upon the
exercise of stock options and other rights exercisable within 60 days.
(13) Includes 169,166 shares that Mr. Thomas has the right to acquire upon the
exercise of stock options and other rights exercisable within 60 days.
(14) Includes 274,166 shares that Dr. Williams has the right to acquire upon the
exercise of stock options and other rights exercisable within 60 days.
(15) Includes 121,666 shares that Mr. Smith has the right to acquire upon the
exercise of stock options and other rights exercisable within 60 days.
(16) Includes 40,000 shares that Mr. Cunningham has the right to acquire upon
the exercise of stock options and other rights exercisable within 60 days.
(17) Includes 10,000 shares that Mr. Richards has the right to acquire upon the
exercise of stock options exercisable within 60 days.
(18) Includes 4,607,843 shares issuable upon conversion of $11,750,000 principal
amount of Notes that Mr. Dial, in his position as Investment Manager for
Northstar Investment Management, has the right to direct the investment
thereof.
(19) Includes 160,000 shares that Mr. Houston has the right to acquire upon the
exercise of options and other rights exercisable within 60 days. Pursuant to
that certain Voting Trust Agreement, dated April 12, 1994, Mr. Houston has
transferred the right to vote 532,396 shares of Common Stock to Jack W.
Matz, Jr. as Trustee on all matters presented to the stockholders for a
vote. Mr. Matz also has the right to vote an additional 142,354 shares of
Common Stock owned by Mr. Houston under a separate voting agreement. Mr.
Houston retains sole dispositive power over all shares beneficially owned by
him.
(20) Includes 4,607,843 shares issuable upon conversion of $11,750,000 principal
amount of Notes.
(21) Includes 1,176,471 shares issuable upon conversion of $3,000,000 principal
amount of Notes that such firm has discretionary authority to buy, sell, and
vote for its investment advisory clients.
(22) Includes 10,360,691 shares that 14 directors and executive officers have
the right to acquire beneficial ownership of upon the exercise of stock
options and other rights exercisable or convertible within 60 days.
Except as set forth in the chart above, the Company knows of no person or entity
that on December 31, 1996 had or could be deemed to have beneficial ownership of
5% or more of the Common Stock.
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<PAGE>
TRANSACTIONS WITH RELATED PARTIES
During fiscal 1993, Jack W. Matz, Jr. and Igor I. Mamantov, directors of the
Company, made loans to the Company in the original principal amounts of $72,000
and $60,000, respectively. Each of these loans were repaid during the year ended
December 31, 1993, including accrued interest at 12% per annum. In connection
with these loans, each such director was granted an option to purchase (i) one
share of Common Stock and (ii) one Common Stock purchase warrant for each $.75
of principal amount loaned to the Company at an exercise price of $.75 per share
for the option and $.94 for the warrant. The Company granted options and
warrants to purchase an aggregate of 352,000 shares of Common Stock to Messrs.
Matz and Mamantov in this regard. The options expire on April 1, 1998 and the
warrants expire on April 1, 2003. Neither Messrs. Matz nor Mamantov have
exercised any such options or warrants.
On February 17, 1995, Messrs. Matz, Thomas, Houston, Williams and Smith each
made a loan in the principal amount of $25,000 and Mr. Miller made a loan in the
principal amount of $20,000 to the Company with an interest rate of 12% per
annum. The loans were originally due on May 17, 1995 and were extended for
varying periods through October 1995 for a 1% extension fee. Mr. Thomas' loan
was repaid by the issuance of 27,239 shares of Common Stock. All other such
loans were repaid in cash or offset in connection with the exercise of options
by the Company during 1995. In addition, in connection with such loans, Messrs.
Matz, Houston and Smith accepted options to purchase 14,286 shares of Common
Stock and Mr. Miller accepted options to purchase 11,429 shares of Common Stock,
all exercisable between June 17, 1995 and December 17, 1995 at $1.75 per share.
All of such options expired unexercised.
In addition to the loans described above, Mr. Matz made loans to the Company
with an interest rate of 12% per annum in the following principal amounts on the
following dates: $48,610 on July 1, 1994, $75,000 on May 15, 1995 and $25,000 on
June 1, 1995. The Company made aggregate repayments on such loans of $18,000 in
1994 and $130,000 in 1995. At December 31, 1995, the outstanding principal
balance on such loans was $25,610.
In connection with the financing of the Company's acquisition of USC, JLCM
purchased 166,667 shares of Series A Stock and was issued the JLCM Warrant to
purchase 500,000 shares of Common Stock (with an exercise price of $1.125 per
share) for an aggregate of $1.5 million. In addition, the Company paid fees and
expenses of $49,241 to JLCM in 1995. Bill Johnson, a director and officer of the
Company from September 1995 through January 1996 and a former shareholder of USC
was issued (i) promissory notes in the aggregate principal amount of $1,700,000,
(ii) 50,000 shares of Series B Stock, and (iii) a warrant exercisable for
420,000 shares of Common Stock in connection with the purchase of his shares of
USC Common Stock (collectively, the "Johnson USC Securities"). During 1995, the
Company made aggregate payments of principal and interest of $468,396 to Mr.
Johnson under such notes (and other immaterial notes which were outstanding to
USC before consummation of the acquisition) and additional payments of $75,000
under an employment agreement with Mr. Johnson. Mr. Johnson also received a
payment of $1,000,000 in cash for his USC Stock and the sum of $799,920 as a
nonsolicitation fee in connection with such transaction. On June 21, 1996, the
Company purchased the Johnson USC Securities with the issuance of 337,209 shares
of the Company's Common Stock, and on August 14, 1996, the Company exercised its
option to purchase such shares of Common Stock held by Mr. Johnson for
$1,160,000. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
In connection with the Company's credit facility with Norwest, the Company
agreed to pay Mr. Matz an annual guarantee fee of 5% of $500,000, the maximum
amount of Mr. Matz's guarantee. Because the Company borrowed in excess of Mr.
Matz's guarantee under this facility, the Company incurred an expense of $25,000
during 1995 as a result of this obligation, which was paid in 1996.
Pursuant to the Share Purchase Agreement dated as of July 31, 1995 (the
"Share Purchase Agreement") under which JLCM purchased 166,667 shares of the
Company's Series A Stock, the Company is obligated to use its best efforts to
cause up to two persons nominated by JLCM to be elected to the Board. The
Company's obligation ceases when there are less than 100,000 shares of Series A
Stock outstanding or
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JLCM and its affiliates (together with the directors, officers and employees of
JLCM and its affiliates) beneficially own collectively less than five percent of
the combined voting power of all shares of capital stock then outstanding,
assuming all conversion rights are exercised. Messrs. Curd and Richards were
JLCM designees to the Company's Board of Directors under the provisions of the
Share Purchase Agreement and were first appointed to the Board of Directors in
September 1995 and March 1996, respectively, in accordance therewith.
In addition to the right noted immediately above, if at any time while there
are at least 100,000 shares of Series A Stock outstanding, the Company fails to
(a) redeem shares of Series A Stock in accordance with the terms thereof or (b)
declare and legally pay the equivalent of one year's dividend payments on the
outstanding shares of Series A Stock, then, in such event, the holders of such
Series A Stock shall be entitled to elect, voting as a class, a certain
additional number of individuals to the Board of Directors of the Company and
the Company is obligated to increase the number of directorships by that number.
The exact number of directors to be elected by the holders of Series A Stock is
based upon a fraction of the number of directors then in office where the
numerator of such fraction is equal to the maximum number of shares of Common
Stock issuable upon conversion of the Series A Stock and the denominator of such
fraction is equal to the total number of shares of Common Stock then outstanding
on a fully diluted basis. Directors elected by the holders of the Series A Stock
may not be removed at any time without the written consent of at least 51% of
the shares of Series A Stock.
On March 25, 1996, JLCM and the Company entered into an agreement (the
"Settlement Agreement") resolving prior disputes regarding (i) registration and
conversion rights attributable to the Series A Stock and Common Stock acquired
upon the conversion of Series A Stock or upon the exercise of warrants held by
JLCM; (ii) any obligation of the Company to enter into a new agreement with
respect to JLCM's services; and (iii) certain fees and expenses. The parties
also amended certain related provisions in existing agreements between the
Company and JLCM. In connection with the resolution of these disputes, the
Company paid $63,000 of fees and expenses and issued to JLCM an additional
50,000 shares of Common Stock of the Company. Mr. Reuben Richards and Mr. Howard
Curd, both directors of the Company, serve as Senior Managing Director and
Managing Director, respectively, of JLCM.
Under various agreements with holders of the Company's securities
convertible into common stock, Mr. Matz has obtained the right to vote such
shares of Common Stock held by such persons or the shares of Common Stock which
may be acquired by such persons upon exercise of the convertible security. Such
voting agreements provide Mr. Matz with a substantial portion of his beneficial
ownership of the Company's Common Stock. See "SECURITY OWNERSHIP OF PRINCIPAL
STOCKHOLDERS AND MANAGEMENT" and "DESCRIPTION OF CAPITAL STOCK--ANTI-TAKEOVER
PROVISIONS--VOTING AGREEMENTS."
Effective April 11, 1996, Mr. Houston, formerly Vice President--Telecom
Acquisitions and a director for the Company, entered into a settlement agreement
with the Company pursuant to which Mr. Houston's employment agreement with LDN
was terminated, the Company issued to Mr. Houston certain shares of restricted
Common Stock and Mr. Houston was released from his obligations under a certain
promissory note. See "MANAGEMENT--EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL
ARRANGEMENT."
On June 21, 1996, Mr. Nugent, a director of the Company, entered into a
consulting agreement to perform certain acquisition related services for the
Company for a three month period ending August 31, 1996 for $40,000 aggregate
compensation. On September 1, 1996 Mr. Nugent became an employee of the Company
and on September 18, 1996, Mr. Nugent was elected as a Vice President of the
Company. The Company has agreed to pay Mr. Nugent a base salary of $120,000 per
year and a bonus (comprised of cash and stock options) based on each acquisition
completed by the Company after September 1, 1996. The cash portion of the bonus
is generally determined by multiplying the annualized revenues of the acquired
Company (based on revenue of the acquired Company during the month prior to the
acquisition) by $.001. The number of options to be awarded to Mr. Nugent upon
consummation of an acquisition are generally determined by multiplying the
annualized revenues of the acquired Company by .0075 and dividing such
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product by the closing price of the Company's Common Stock on the date of grant
(to occur in connection with next scheduled Stock Option Committee meeting).
Such quotient is then rounded up to the nearest unit of 1,000 shares.
Management of the Company believes all such transactions were made on terms
no less favorable to the Company than those available from unaffiliated parties.
Any future transactions with affiliated parties are limited by the Indenture for
so long as the Notes are outstanding. SEE "DESCRIPTION OF NOTES-- LIMITATION ON
TRANSACTIONS WITH AFFILIATES."
DESCRIPTION OF NOTES
The Notes were issued under an Indenture dated as of August 12, 1996 (the
"Indenture"), between the Company and United States Trust Company of New York,
as Trustee (the "Trustee"). Upon the effectiveness of the Registration Statement
of which this Prospectus is a part, the Indenture has become subject to and
governed by the Trust Indenture Act of 1939, as amended (the "TIA"). The
following summary of certain provisions of the Indenture does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the TIA, and to all of the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part of the
Indenture by reference to the TIA. A copy of the Indenture may be obtained from
the Company. For purposes of this section, references to the "Company" include
only SA Telecommunications, Inc. and not its subsidiaries. Additionally, as used
herein, subsidiary means a corporation, a majority of the voting stock of which
is owned, directly or indirectly, by the Company or by one or more subsidiaries,
or by the Company and one or more other subsidiaries.
GENERAL
The Notes are senior unsecured obligations of the Company in the aggregate
principal amount of $27.2 million. The Notes bear interest from August 12, 1996
at ten percent (10%) per annum and mature on August 15, 2006. Interest is
payable semi-annually on February 15 and August 15, commencing February 15,
1997, to the registered holders of record on the preceding February 1 and August
1, respectively.
The Notes were and are issued only in fully registered form, without
coupons, in denominations of $1,000 and integral multiples thereof. As described
below under "--BOOK-ENTRY, DELIVERY AND FORM," the Notes are represented by one
or more global notes (the "Global Notes") registered in the name of or held by
The Depository Trust Company ("DTC") or its nominee. Payments of principal of
and premium, if any, and interest on the Global Notes are made in immediately
available funds to DTC or its nominee, as the case may be, as the registered
holder of such Global Notes. See "--SETTLEMENT AND PAYMENT."
RANKING
The Notes are senior unsecured obligations of the Company, and rank PARI
PASSU in right of payment with all existing and future senior obligations of the
Company and senior in right of payment to any future subordinated obligations of
the Company. However, holders of secured obligations of the Company have claims
that are prior to the claims of the holders of the Notes with respect to the
assets securing such obligations. Additionally, the Notes are effectively
subordinated to all existing and future indebtedness and other liabilities and
commitments (including trade payables) of the Company's subsidiaries. As of
December 31, 1996, the total outstanding consolidated liabilities of the Company
and the Company's subsidiaries (including trade payables) was approximately
$35.0 million (exclusive of the Notes and liabilities of Addtel), substantially
all of which are liabilities of the Company's subsidiaries. An aggregate of
approximately $177,000 of the total outstanding consolidated liabilities of the
Company and its subsidiaries on December 31, 1996 represents secured debt of the
Company and an aggregate of $34.8 million consists of liabilities of the
Company's subsidiaries (excluding Addtel). Addtel's liabilities at January 14,
1997 were
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approximately $5.0 million. The foregoing does not include $1.6 million of
indebtedness incurred on January 9, 1997 under the Greyrock Facility. See
"BUSINESS--GREYROCK FACILITY."
CONVERSION RIGHTS
The Notes are convertible at their principal amount into Common Stock at any
time prior to the close of business on the final maturity date, subject to prior
redemption or repurchase, in whole or from time to time in part (in
denominations of $1,000 and integral multiples thereof), at the option of the
holder thereof, initially at the conversion price $2.55 per share, subject to
adjustment as described below. The right to convert Notes which are called for
redemption terminates at the close of business on the tenth calendar day (or if
such day is not a business day the next succeeding business day) immediately
preceding a redemption date (unless the Company defaults in payment of the
redemption price, in which case the conversion right terminates on the date such
default is cured) and will be lost if not exercised prior to that time, even if
redemption occurs at a time when conversion of the Notes or portions thereof is
in the best interests of the holder.
The right of conversion attaching to any Note may be exercised (a) if such
Note is represented by a Global Note, by book-entry transfer to the conversion
agent (which was initially the Trustee) through the facilities of DTC, or (b) if
definitive Notes have been issued, by delivery at the specified office of a
conversion agent, accompanied, in either case, by a duly signed and completed
notice of conversion. The conversion date is the date on which the Note and the
duly signed and completed notice of conversion have been so delivered. A holder
delivering a Note for conversion is not required to pay any taxes or duties
payable in respect of the issue or delivery of Common Stock upon conversion, but
is required to pay any tax or duty which may be payable in respect of any
transfer involved in the issue or delivery of the Common Stock in a name other
than the holder of the Note. Certificates representing shares of Common Stock
will not be issued or delivered unless all taxes and duties, if any, payable by
the holder have been paid.
The conversion privilege and price are subject to adjustment upon the
occurrence of certain events, including (i) the issuance of capital stock of the
Company as a dividend (or other distribution) on the Common Stock, (ii) the
distribution to all holders of Common Stock of rights or warrants entitling them
to subscribe for or purchase Common Stock at less than the current market price
(as defined in the Indenture) on the record date for such issuance, (iii)
subdivisions, combinations and certain reclassifications of Common Stock, (iv)
the distribution to all holders of Common Stock of cash, debt securities (or
other evidence of indebtedness) or other assets, (v) a dividend or other
distribution consisting exclusively of cash to all holders of Common Stock, and
(vi) payment to holders of Common Stock in respect of a tender or exchange offer
(other than an odd-lot offer) by the Company or any subsidiary of the Company
for Common Stock at a price in excess of 105% of the current market price of
Common Stock as of the trading day next succeeding the last date tenders or
exchanges may be made pursuant to such tender or exchange offer.
In addition, the Indenture provides that if the Company implements a
stockholder rights plan, such rights plan must provide that upon conversion of
the Notes the holders will receive, in addition to the Common Stock issuable
upon such conversion, the rights issued under such plan (notwithstanding the
occurrence of an event causing such rights to separate from the Common Stock at
or prior to the time of conversion); provided such holder would have been
eligible to convert such rights had it been a holder of Common Stock.
No adjustment in the conversion price is required unless such adjustment
would require a change of at least 1% in the conversion price then in effect;
provided that any adjustment that would otherwise be required to be made shall
be carried forward and taken into account in any subsequent adjustment. The
Company from time to time may voluntarily reduce the conversion price for a
period of at least 20 days. Fractional shares of Common Stock are not issuable
upon conversion but, in lieu thereof, the Company will pay a cash adjustment
based upon the market price of the Common Stock. No payment will be made for
accrued interest on a converted Note (other than payment of interest to the
Holder of a Note at the
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close of business on a record date) unless at the time of conversion such Note
has been called for redemption, in which case the Holder of such Note shall be
entitled to interest accrued thereon to the date of conversion. No payment or
adjustment will be made for dividends or distributions on any Common Stock
issued upon conversion of any Note. If the Company makes a cash dividend or
makes a distribution of property to holders of Common Stock, holders of Notes
likely would be considered in receipt of dividend income based on the conversion
adjustments.
Subject to the rights of holders of the Notes described below under
"--REPURCHASE AT OPTION OF HOLDER UPON A FUNDAMENTAL CHANGE," if the Company
consolidates with or merges into or transfers or leases all or substantially all
of its assets to any person, or is a party to a merger that reclassifies or
changes its outstanding Common Stock, the holder of each Note then outstanding
shall after such consolidation, merger, transfer or lease have the right to
convert such Note into the kind and amount of shares of stock, other securities
or property (which may include cash) that such holder would have been entitled
to receive upon such consolidation, merger, transfer or lease if such holder had
held the Common Stock issuable upon the conversion of such Note immediately
prior to such consolidation, merger, transfer or lease (assuming, in a case in
which the Company's stockholders may exercise rights of election, that a holder
of Notes would not have exercised any rights of election as to the stock, other
securities or other property or assets receivable in connection therewith and
received per share the kind and amount received per share by a plurality of
non-electing shares).
REDEMPTION AT THE COMPANY'S OPTION
The Notes may not be redeemed prior to August 15, 1999 and are redeemable on
such date and thereafter at the option of the Company, as a whole or from time
to time in part, at the following prices (expressed as percentages of the
principal amount) plus accrued interest to, but not including, the redemption
date, if redeemed during the 12-month period beginning August 15 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
1999.............................................................................. 107.0%
2000.............................................................................. 105.6%
2001.............................................................................. 104.2%
2002.............................................................................. 102.8%
2003.............................................................................. 101.4%
2004 and thereafter............................................................... 100.0%
</TABLE>
Notice of redemption at the Company's option will be mailed at least 30
days, but not more than 60 days, before the redemption date to the registered
address of each holder of Notes to be redeemed. If fewer than all the Notes are
to be redeemed, selection of Notes for redemption will be made by the Trustee by
lot or, in its discretion, on a pro rata basis (unless the Company specifically
directs the Trustee otherwise). If any Notes are to be redeemed in part only,
the notice of redemption relating to such Notes shall state the portion of the
principal amount (in integral multiples of $1,000) to be redeemed. In that case,
new Notes in principal amount equal to the unredeemed portion thereof will be
issued in the name of the holder thereof upon surrender to the Trustee of the
original Notes.
No sinking fund is provided for the Notes.
REPURCHASE AT OPTION OF HOLDER UPON A FUNDAMENTAL CHANGE
If a Fundamental Change occurs, each holder of Notes has the right, at the
holder's option, to require the Company to repurchase all of such holder's
Notes, or any portion thereof that is an integral multiple of $1,000, on the
date (the "Repurchase Date") selected by the Company that is not less than ten
nor more than 30 days after the Final Surrender Date (as defined below), at a
price equal to 100% of the principal amount of the Notes, plus accrued interest
to the Repurchase Date.
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Within 30 days after the occurrence of a Fundamental Change, the Company is
obligated to mail to all holders of record of the Notes a notice (the "Company
Notice") describing, among other things, the occurrence of such Fundamental
Change and of the repurchase right arising as a result thereof. The Company must
deliver a copy of the Company Notice to the Trustee and cause a copy of such
notice to be sent at least once to the Dow Jones News Service or similar
business service in the United States. To exercise the repurchase right, a
holder of Notes must surrender, on or before the date which is, subject to any
contrary requirements of applicable law, 60 days after the date of mailing of
the Company Notice (the "Final Surrender Date"), irrevocable written notice to
the Company (or an agent designated by the Company for such purpose) and the
Trustee of the holder's exercise of such right together with the Notes (if such
Notes are represented by a Global Note, by book-entry transfer to the conversion
agent through the facilities of DTC) with respect to which the right is being
exercised, duly endorsed for transfer to the Company. The submission of such
notice together with such Notes pursuant to the exercise of a repurchase right
is irrevocable on the part of the holder (unless the Company fails to repurchase
the Notes on the Repurchase Date) and the right to convert the Notes expires
upon such submission.
The term "Fundamental Change" means any of the following:
(i) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2)
of the Exchange Act) becoming the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) other than Permitted Holder of Voting Shares (as defined
below) of the Company entitled to exercise more than 50% of the total voting
power of all outstanding Voting Shares of the Company (including any Voting
Shares that are not then outstanding of which such person or group is deemed the
beneficial owner) for purposes of Rule 13d-3;
(ii) a change in the Board of Directors of the Company in which the
individuals who constituted the Board of Directors of the Company at the
beginning of the two-year period immediately preceding such change (together
with any other director whose election by the Board of Directors of the Company
or whose nomination for election by the shareholders of the Company was approved
by a vote of at least a majority of the directors then in office who either were
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the directors then in office; or
(iii) any consolidation of the Company with, or merger of the Company into,
any other person, any merger of another person into the Company, or any sale or
transfer of all or substantially all of the assets of the Company to another
person in a single transaction or in a series of related transactions (other
than (a) a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock, (b) a merger
which is effected solely to change the jurisdiction of incorporation of the
Company or (c) any consolidation with or merger of the Company into a wholly
owned subsidiary of the Company, or any sale or transfer by the Company of all
or substantially all of its assets to one or more of its wholly owned
subsidiaries, in any one transaction or a series of transactions, provided, in
any such case, that the resulting corporation or each such subsidiary assumes or
guarantees the Company's obligations under the Notes); PROVIDED, HOWEVER, that a
Fundamental Change shall not occur with respect to any transaction under this
clause (iii) if (i) the last sale price of the Common Stock for any five trading
days during the ten trading days immediately preceding the public announcement
by the Company of such transaction is at least equal to 105% of the conversion
price in effect on such trading days or (ii) the consideration in such
transaction to the holders of Common Stock consists of cash, securities that
are, or immediately upon issuance will be, listed on a national securities
exchange or quoted on the NASDAQ National Market, or a combination of cash and
such securities, and the aggregate fair market value of such consideration
(which, in the case of such securities, shall be equal to the average of the
last sale prices of such securities during the ten consecutive trading days
commencing with the sixth trading day following consummation of the transaction)
is at least 105% of the conversion price in effect on the date immediately
preceding the closing date of such transaction or (iii) in the case of a merger
or
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consolidation, the stockholders of the Company immediately prior to the date of
such transaction continue to beneficially own a majority of the Voting Stock of
the surviving entity.
"Permitted Holder" means Jack W. Matz, Jr. or his affiliates.
"Voting Shares" is defined to mean all outstanding shares of any class or
classes (however designated) of capital stock entitled to vote generally in the
election of members of the Board of Directors and includes, without limitation,
the Common Stock.
A merger of the Company pursuant to which the Company is not the surviving
corporation or the sale of substantially all of the assets of the Company, both
of which are included within the definition of a "Fundamental Change," as well
as the incurrence of additional indebtedness could result in an event of default
under certain existing indebtedness of the Company if the holder of such
indebtedness does not consent in advance to such actions. Such indebtedness
would include the Greyrock Facility, the outstanding principal amount of which
was $1.6 million on January 9, 1997, and the Company's subsidiary's capital
leases with Telecommunications Finance Group, the outstanding principal amount
of which was $1.5 million on January 9, 1997. If the Company failed to pay the
repurchase price on the due date after triggering a Fundamental Change, such
failure would result in an event of default under the Greyrock Facility. SEE
"BUSINESS--GREYROCK FACILITY." The right to require the Company to repurchase
the Notes as a result of the occurrence of a Fundamental Change may also create
an event of default under future indebtedness of the Company. Failure by the
Company to repurchase the Notes when required will result in an Event of Default
with respect to the Notes.
The holders' repurchase right upon the occurrence of a Fundamental Change
could, in certain circumstances, make more difficult or discourage a potential
takeover of the Company and, thus, removal of incumbent management. The
Fundamental Change repurchase right, however, is not the result of management's
knowledge of any specific effort to accumulate shares of Common Stock or to
obtain control of the Company by means of a merger, tender offer, solicitation
or otherwise. Instead, the Fundamental Change purchase feature is a standard
term contained in other similar debt offerings and the terms of such feature
have resulted from negotiations between the Company and the Initial Purchasers.
The Indenture does not permit the Company's Board of Directors to waive the
Company's obligation to purchase Notes at the option of a holder in the event of
a Fundamental Change. The Company could, however, in the future, enter into
certain transactions, including highly leveraged recapitalizations, that would
not constitute a Fundamental Change and would, therefore, not provide the
holders with the protection of requiring the Company to repurchase the Notes.
Rule 13e-4 under the Exchange Act requires the dissemination of certain
information to security holders in the event of an issuer tender offer and may
apply in the event that the repurchase option becomes available to holders of
the Notes. The Company will comply with this rule to the extent applicable at
that time.
REPURCHASE AT OPTION OF HOLDER UPON AN INCURRENCE EVENT
If an Incurrence Event occurs, each holder of Notes has the right, at the
holder's option, to require the Company to repurchase all of such holder's
Notes, or any portion thereof that is an integral multiple of $1,000, on the
date (the "Incurrence Repurchase Date") selected by the Company that is not less
than ten nor more than 30 days after the Incurrence Surrender Date (as defined
below), at a price equal to 100% of the principal amount of the Notes, plus
accrued interest to the Incurrence Repurchase Date.
Within 30 days after the occurrence of an Incurrence Event, the Company is
obligated to mail to all holders of record of the Notes a notice (the
"Incurrence Notice") describing, among other things, the occurrence of such an
Incurrence Event and of the repurchase right arising as a result thereof. The
Company must deliver a copy of the Incurrence Notice to the Trustee and cause a
copy of such notice to be sent at least once to the Dow Jones News Service or
similar business service in the United States. To exercise the repurchase right,
a holder of Notes must surrender, on or before the date which is, subject to
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any contrary requirements of applicable law, 60 days after the date of mailing
of the Incurrence Notice (the "Incurrence Surrender Date"), irrevocable written
notice to the Company (or an agent designated by the Company for such purpose)
and the Trustee of the holder's exercise of such right together with the Notes
(if such Notes are represented by a Global Note, by book-entry transfer to the
conversion agent through the facilities of DTC) with respect to which the right
is being exercised, duly endorsed for transfer to the Company. The submission of
such notice together with such Notes pursuant to the exercise of a repurchase
right will be irrevocable on the part of the holder (unless the Company fails to
repurchase the Notes on the Incurrence Repurchase Date) and the right to convert
the Notes will expire upon such submission.
An "Incurrence Event" occurs when (i) the Company and any of its
subsidiaries incurs Indebtedness (as defined herein) (other than Additional
Permitted Indebtedness (as defined herein) or the indebtedness represented by
the Notes), (ii) the Pro Forma Interest Coverage of the Company and its
subsidiaries on a consolidated basis would be less than 2.0:1 and (iii) the
average closing sale price of the Common Stock is less than $2.00 per share,
adjusted for splits, combinations, reclassifications or similar events, for the
twenty trading days prior to the incurrence of such Indebtedness. The Company
does not currently meet the test set forth in subsection (ii) above and since
January 10, 1997 has not met the test set forth in subsection (iii) above. As a
result, the Company and its subsidiaries are prohibited from incurring
Indebtedness (other than Additional Permitted Indebtedness) without triggering
an Incurrence Event. See "RISK FACTORS--SUBSTANTIAL LEVERAGE" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
The Company is not prohibited from incurring additional indebtedness outside
the ordinary course of business under the terms of the Greyrock Facility unless
such incurrence would have a material adverse effect on the Company or on the
prospect of the repayment of all obligations under the Greyrock Facility. The
principal amount outstanding under the Greyrock Facility on January 9, 1997 was
$1.6 million. If the Company failed to pay the repurchase price on the due date
after triggering an Incurrence Event, such failure would result in an event of
default under the Greyrock Facility. SEE "BUSINESS--GREYROCK FACILITY" AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." The right to require the Company to repurchase the Notes as a
result of the occurrence of an Incurrence Event may also create an event of
default under future indebtedness of the Company. Failure by the Company to
repurchase the Notes when required will result in an Event of Default with
respect to the Notes.
Rule 13e-4 under the Exchange Act requires the dissemination of certain
information to security holders in the event of an issuer tender offer and may
apply in the event that the repurchase option becomes available to holders of
the Notes. The Company will comply with this rule to the extent applicable at
that time.
CERTAIN DEFINITIONS
"Additional Permitted Indebtedness" means any Indebtedness incurred by the
Company or its subsidiaries, as the same may be amended, modified, renewed,
refunded, replaced or refinanced from time to time, where the aggregate
principal amount of borrowings available or indebtedness outstanding thereunder
does not exceed (i) 85% of the consolidated inventory and accounts receivable
(excluding accounts receivable subject to third party accounts receivable
billing arrangements or overdue for more than 90 days) of the Company and its
subsidiaries determined on a pro forma basis as if any acquisition or
disposition of stock or assets to be made on or about the time of any required
calculation of Additional Permitted Indebtedness had occurred plus (ii) the
product of (a) consolidated revenues of the Company and its subsidiaries for the
most recent six-month period for which financial statements are available,
calculated in accordance with GAAP (except for the absence of footnotes and
subject to normally recurring year-end audit adjustments) and determined on a
pro forma basis as if any acquisition or disposition of stock or assets had
occurred at the beginning of such six-month period and (b) 2/3.
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"Capital Lease Obligations" of any person means, at the time any
determination thereof is to be made, the amount of the liability in respect of a
capital lease for property leased by such person that would at such time be
required to be capitalized on the balance sheet of such person in accordance
with GAAP.
"Capital Stock" of any person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) corporate stock or other equity participations,
including partnership interests, whether general or limited, of such person,
including any capital stock that has preferential rights to any other capital
stock with respect to dividends or redemptions or upon liquidation.
"Consolidated Interest Expense" means, with respect to any period, the sum,
without duplication, of (i) the interest expense of the Company and its
subsidiaries for such period, determined on a consolidated basis in accordance
with GAAP consistently applied, including, without limitation, (a) amortization
of debt discount (other than debt discount in relation to debentures to be
redeemed from the proceeds of the Offering), (b) the net payments, if any, under
interest rate agreements (including amortization of discounts), (c) the interest
portion of any deferred payment obligation and (d) accrued interest, plus (ii)
the interest component of all Capital Lease Obligations paid, accrued and/or
scheduled to be paid or accrued by the Company and its subsidiaries during such
period (other than the interest component relating to up to $2 million of
Capital Lease Obligations of the Company and its subsidiaries) and all
capitalized interest of the Company and its subsidiaries, in each case as
determined on a consolidated basis in accordance with GAAP consistently applied.
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event (other than an
event which would constitute a Fundamental Change), matures (excluding any
maturity as the result of an optional redemption by the issuer thereof) or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof (except, in each case,
upon the occurrence of a Fundamental Change) on or prior to the final maturity
date of the Notes.
"Indebtedness" means, with respect to any person, without duplication, and
whether or not contingent, (i) all indebtedness of such person for borrowed
money or which is evidenced by a note, bond, debenture or similar instrument,
(ii) all obligations of such person in respect of letters of credit or bankers'
acceptances issued or created for the account of such person, (iii) all
liabilities secured by any consensual Lien (including Capital Lease Obligations
and Liens arising in connection with purchase money debt) on any property owned
by such person even if such person has not assumed or otherwise become liable
for the payment thereof to the extent of the lesser of the amount of the debt
secured thereby or the value of the property subject to such Lien, (iv) all
Disqualified Capital Stock issued by such person after the date hereof (other
than any Series A Preferred Stock issued as a pay-in-kind dividend pursuant to
the terms of Series A Preferred Stock outstanding on the date of the Indenture),
and (v) to the extent not otherwise included, any guarantee by such person of
any other person's indebtedness or other obligations described in clauses (i)
through (iv) above. "Indebtedness" of the Company and its subsidiaries shall not
include trade payables (including, without limitation, obligations under third
party accounts receivable billing agreements) incurred in the ordinary course of
business and payable in accordance with customary practices and non-interest
bearing installment obligations and accrued liabilities incurred in the ordinary
course of business and any current liability for federal, state, local or other
taxes and inter-company indebtedness among the Company and its subsidiaries.
"Independent Directors" means non-management directors of any person.
"Liens" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
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"Operating Cash Flow" means, with respect to any period, the net income (or
loss) of the Company and its subsidiaries on a consolidated basis, determined in
accordance with GAAP consistently applied, plus, without duplication, (i)
extraordinary net losses and net losses realized on any sale or other
disposition of assets during such period, to the extent such losses were
deducted in computing net income (or loss), plus (ii) provision for taxes based
on income or profits, to the extent such provision for taxes was included in
computing such net income (or loss), and any provision for taxes utilized in
computing the net losses under clause (i) hereof, plus (iii) Consolidated
Interest Expense of the Company and its subsidiaries for such period, plus (iv)
depreciation, amortization and all other non-cash charges, to the extent such
depreciation, amortization and other non-cash charges were deducted in computing
such net income (or loss) (including amortization of goodwill and other
intangibles).
"Permitted Liens" means (i) Liens securing purchase money debt; (ii) Liens
arising in connection with capital leases; (iii) Liens in favor of the Company
or any subsidiary of the Company; (iv) Liens to secure debt of any person which
merges with or into or consolidates with or is otherwise acquired by the Company
or any subsidiary of the Company or debt encumbering any asset acquired by the
Company or any subsidiary of the Company, in either case which debt was not
incurred in anticipation of, and was outstanding prior to, such merger,
consolidation or acquisition; (v) Liens outstanding on the date of the
Indenture; (vi) Liens in favor of the Trustee under the Indenture and any Liens
securing the Notes; (vii) Liens in connection with any Additional Permitted
Indebtedness, including interest rate agreements related thereto; (viii) Liens
for taxes, assessments, governmental charges or claims which are not yet
delinquent or which are being contested in good faith by appropriate
proceedings, if a reserve is maintained to the extent required by GAAP; (ix)
other Liens incidental to the conduct of the Company's and its subsidiaries'
business or the ownership of its property and assets not securing any debt for
borrowed money, and which do not in the aggregate materially detract from the
value of the Company's and its subsidiaries' property or assets when taken as a
whole, or materially impair the use thereof in the operation of its business;
(x) Liens incurred or pledges and deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of statutory obligations (including to secure government contracts);
(xi) Liens incurred or deposits made to secure the performance of tenders, bids,
leases, and other obligations of like nature (including appeal, surety and
performance bonds) incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (xii) zoning restrictions,
servitudes, easements, rights-of-ways, restrictions and other similar charges or
encumbrances incurred in the ordinary course of business which, in the
aggregate, do not materially detract from the value of the property subject
thereto or interfere in any material respect with the ordinary conduct of the
business of the Company or its subsidiaries; (xiii) Liens arising out of
judgments or awards against the Company or any of its subsidiaries with respect
to which the Company or such subsidiary is prosecuting an appeal or proceeding
for review and the Company or such subsidiary is maintaining adequate reserves
to the extent required by GAAP; (xiv) any interest or title of a lessor in the
property subject to any lease other than a capital lease; and (xv) any statutory
warehousemen's, materialmen's, mechanic's, carrier's, supplier's, vendor's or
other similar Lien for sums not then due and payable (or which, if due and
payable, are being contested in good faith and with respect to which adequate
reserves are being maintained to the extent required by GAAP). "Permitted Liens"
shall also include the extension, renewal, amendment, refinancing or refunding
of debt secured by any Permitted Lien set forth above, except that in the case
of the extension, renewal, amendment, refinancing or refunding of any debt
secured by a Lien under clause (iv) or (v) of this definition, such Lien does
not extend to any other property not contemplated by the terms of such existing
Lien and the principal amount of debt so secured is not increased.
"Pro Forma Interest Coverage" means, with respect to any date of
determination, the ratio of (i) Operating Cash Flow for the most recent full
fiscal quarter ending on or immediately prior to such date, determined on a pro
forma basis as if any acquisition or disposition of stock or assets had occurred
at the beginning of such quarter, to (ii) Consolidated Interest Expense for the
most recent full fiscal quarter ending on or immediately prior to such date,
determined on a pro forma basis in the case of each of clauses
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(i) and (ii) as if any obligations of the Company or its subsidiaries incurred
or repaid during such quarter had been incurred or repaid at the beginning of
such quarter, to the extent any such obligation gives rise to Consolidated
Interest Expense.
CERTAIN COVENANTS
Summarized below are certain covenants contained in the Indenture.
LIMITATION ON LIENS.
The Indenture provides that the Company will not, and will not permit any
subsidiary to, create, incur, assume or suffer to exist any Liens (other than
Permitted Liens) of any kind against or upon any of their respective property or
assets, or any proceeds therefrom, unless (i) in the case of Liens on property,
assets or proceeds securing Indebtedness that is expressly subordinate or junior
in right of payment to the Notes, the Notes are secured by a Lien on such
property, assets or proceeds that is senior in priority to such Liens and (ii)
in all other cases, the Notes are equally and ratably secured.
LIMITATION ON ACQUISITIONS.
The Indenture provides that the Company will not, and will not permit any
subsidiary to, acquire (by merger, consolidation or acquisition of stock or
assets) any corporation, partnership or other business organization or any
division, operating unit, line of business or subdivision thereof (each an
"Entity"), in a single transaction or series of related transactions, (an
"Acquisition") for total consideration in excess of $2,000,000 unless the fair
market value at the time of entering into such transaction (as evidenced by, in
the case of consideration other than cash or Common Stock of the Company
("Non-Cash Consideration"), (i) a resolution of the Board of Directors of the
Company set forth in an officers certificate delivered to the Trustee if the
fair market value of such Non-Cash Consideration is less than or equal to
$1,000,000 or (ii) an opinion issued by a nationally recognized investment
banking firm, nationally recognized telecommunications industry consultant or
nationally recognized independent public accounting firm if the fair market
value of such Non-Cash Consideration is greater than $1,000,000) of the total
consideration given for such Acquisition is less than 200% of the Annualized
Revenues of the Entity acquired. "Annualized Revenues" for any such Entity shall
mean the product of (i) revenues of such Entity for the most recent fiscal
quarter for which financial statements are available, calculated on a basis
consistent with such Entity's most recent audited annual statements (except for
the absence of footnotes and subject to normally recurring year-end audit
adjustments) or, if not available, actual billings for such period, as certified
to the Trustee either by an officer of the Company or an officer of the Entity
or the seller of the Entity, and (ii) four.
LIMITATION ON RESTRICTED PAYMENTS.
The Indenture provides that the Company will not, and will not permit any of
its subsidiaries to, directly or indirectly, make any Restricted Payment, unless
at the time of and immediately after giving effect to the proposed Restricted
Payment (with the value of any such Restricted Payment, if other than cash, to
be determined by the Board of Directors of the Company, whose determination
shall be conclusive and evidenced by a resolution of the Board of Directors
(including a majority of the Independent Directors) set forth in an officers'
certificate delivered to the Trustee), (i) no Default or Event of Default (and
no event that, after notice or lapse of time, or both, would become an "event of
default" under the terms of any indebtedness of the Company or its subsidiaries)
shall have occurred and be continuing or would occur as a consequence thereof,
and (ii) the aggregate amount of all Restricted Payments made after the Closing
Date shall not exceed the sum of (a) 50% of cumulative Consolidated Net Income
of the Company (or if cumulative Consolidated Net Income is a loss, less 100% of
such loss) from the Closing Date to the last day of the full fiscal quarter for
which financial information is available (but in no event
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ending more than 135 days prior to the date of such proposed Restricted
Payment), plus (b) the aggregate amount of all net cash proceeds received after
the Closing Date by the Company from the issuance and sale (other than to a
subsidiary) of Capital Stock (other than Disqualified Capital Stock).
The foregoing provisions do not prohibit (a) any payment so long as there is
no Default or Event of Default continuing, the payment of any dividend within 60
days after the date of declaration thereof, if at such declaration date such
payment would have been permitted under the Indenture, and such payment shall be
deemed to have been paid on such date of declaration for purposes of clause (ii)
of the preceding paragraph, (b) the application of the net proceeds of the
issuance of the Notes to exercise the Company's option to purchase 843,023
shares of Common Stock from former shareholders of USC and to redeem $2.21
million aggregate principal amount and accrued but unpaid interest of the
Company's March, April or June Debentures, (c) the payment of dividends on, or
the redemption or repurchase of, the 166,667 shares of Series A Stock
outstanding as of March 31, 1996, and any additional shares of Series A Stock
issued as pay-in-kind dividends thereon, (d) the repurchase at below the then
current fair market value (based on the average closing price of the Common
Stock for the twenty trading days preceding such repurchase) of employee and
director options or shares in accordance with the Company's stock option plans
or agreements related thereto, (e) pay cash in lieu of fractional shares for
stock splits, reverse stock splits, and recapitalizations or (f) redeem,
repurchase or otherwise prepay up to $300,000 of subordinated indebtedness of
the Company outstanding on August 12, 1996.
"Consolidated Net Income" means, with respect to any period, the net income
(or loss) of the Company and its subsidiaries, on a consolidated basis,
determined in accordance with GAAP consistently applied, minus (i) extraordinary
net gains and net gains realized on any sale or disposition of assets during
such period, minus (ii) the portion of net income (or loss) of the Company and
its subsidiaries allocable to interests in unconsolidated persons, except to the
extent of the amount of dividends or distributions actually paid in cash to the
Company or its subsidiaries by such person during such period, minus (iii) the
net income of any person combined with the Company or any of its subsidiaries on
a "pooling-of-interests" basis attributable to any period prior to the date of
combination.
"Restricted Payment" means (i) any dividend or other distribution declared
or paid on any Capital Stock of the Company (other than dividends or
distributions payable solely in Capital Stock of the Company); (ii) any payment
to purchase, redeem or otherwise acquire or retire for value any Capital Stock
of the Company, and (iii) any principal payment on, purchase, defease, redeem or
otherwise prepay any Indebtedness of the Company that is subordinate or junior
in right of payment to the Notes, other than any such subordinate or junior
Indebtedness which is issued by the Company as part of the purchase
consideration paid to the seller of any stock, assets or property to the Company
or any of its subsidiaries.
LIMITATION ON INCURRENCE OF SUBORDINATED INDEBTEDNESS
The Indenture provides that the Company will not issue any Indebtedness
subordinate or junior in right of payment to the Notes that matures, or requires
any mandatory payment of principal, prior to 120 days after the final maturity
of the Notes, other than any such subordinate or junior Indebtedness which is
issued by the Company as part of the purchase consideration paid to the seller
of any stock, assets or property to the Company or any of its subsidiaries.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any of
its subsidiaries to, directly or indirectly, enter into or suffer to exist any
transaction or series of related transactions (including, without limitation,
the sale, purchase, exchange or lease of assets, property or services) with any
Affiliate of the Company (other than the Company or a subsidiary of the Company)
unless (i) such transaction or series of transactions is on terms that are no
less favorable to the Company or such subsidiary, as the case may be, than would
be available in a comparable transaction in arm's-length
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dealings with an unrelated third party, and (ii) the Company delivers to the
Trustee (a) an officers certificate certifying that such transaction or series
of related transactions complies with clause (i) above and with respect to any
transaction or series of transactions involving aggregate payments in excess of
$500,000, an officers' certificate certifying that such transaction or series of
related transactions has been approved by a majority of the members of the Board
of Directors of the Company and approved by a majority of the Independent
Directors. Notwithstanding the foregoing, this provision will not apply to (i)
employment agreements or compensation or employee benefit arrangements with any
officer, director or employee of the Company entered into in the ordinary course
of business on customary terms (including customary benefits thereunder), (ii)
any transaction entered into by or among the Company or one of its subsidiaries
with one or more subsidiaries of the Company, (iii) payment of reasonable and
customary fees to directors of the Company who are not employees of the Company
and the payment of reasonable and customary compensation for director and Board
of Director observer fees, meeting expenses, insurance premiums and indemnities
to the extent permitted by law, and (iv) issuance and repurchase of stock
options (and shares of Capital Stock upon exercise thereof) pursuant to stock
options plans and agreements related thereto and loans or advances to employees
for relocation or travel expenses in the ordinary course of business on
customary terms.
CONDUCT OF BUSINESS
The Indenture provides that the Company and its subsidiaries will not engage
in any businesses which are not the same, similar, ancillary, complementary or
related to the businesses in which the Company and its subsidiaries are engaged
on the date of the Indenture.
EVENTS OF DEFAULT AND NOTICE THEREOF
The following are Events of Default: (a) a default in the payment of any
interest on the Notes continued for 30 days, (b) a default in the payment of
principal of or premium, if any, on the Notes or of the repurchase price in
respect of any Note when due, (c) a default in the performance of any other
covenant or agreement of the Company in the Indenture continued for 60 days
after written notice to the Company by the Trustee or the holders of at least
25% in principal amount of outstanding Notes, (d) default by the Company with
respect to any indebtedness for borrowed money of the Company which default
results in acceleration of any such indebtedness which is in an amount in excess
of $10 million, and (e) certain events of bankruptcy, insolvency or
reorganization.
If an Event of Default occurs and is continuing and if it is known to the
Trustee, the Trustee is required to mail to each holder of the Notes a notice of
the Event of Default within 90 days after such default occurs. Except in the
case of a default in payment of the principal of or premium, if any, or interest
on any Note, the Trustee may withhold the notice if and so long as the Trustee
in good faith determines that withholding the notice is in the interests of the
holders of the Notes.
If an Event of Default occurs and is continuing, the Trustee or the holders
of not less than 25% in principal amount of outstanding Notes may declare the
principal of, and accrued interest on, all the Notes to be due and payable
immediately.
Holders of the Notes may not enforce the Indenture or Notes except as
provided in the Indenture. Subject to the provisions of the Indenture relating
to the duties of the Trustee in case an Event of Default occurs and is
continuing, the Trustee is under no obligation to exercise any of the rights or
powers under the Indenture at the request or direction of any holders of the
Notes, unless the holders have offered the Trustee indemnity reasonably
satisfactory to it. Subject to the indemnification provisions and certain
limitations contained in the Indenture, the holders of a majority in principal
amount of the Notes at the time outstanding have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred on the Trustee. Those holders
may, in certain cases, waive any default except a default in payment of
principal of, or premium, if any, or
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interest on, the Notes or a failure to comply with certain provisions of the
Indenture relating to conversion of the Notes.
The Company is required to furnish the Trustee annually with a certificate
as to the compliance with the conditions and covenants provided for in the
Indenture.
DISCHARGE
The Indenture provides that the Company may terminate its obligations under
the Indenture at any time by delivering all outstanding Notes to the Trustee for
cancellation. At any time within one year of maturity of the Notes or the
redemption of the Notes the Company may terminate its substantive obligations
under the Indenture, other than its obligations to pay the principal of, and
interest on, the Notes at any time, by depositing with the Trustee money or U.S.
Government obligations sufficient to pay all remaining indebtedness on the Notes
when due.
MERGER AND CONSOLIDATION
The Indenture provides that the Company may not consolidate or merge with or
into, or sell, lease, convey or otherwise dispose of all or substantially all of
its assets to, another corporation, person or entity unless (i) the Company is
the surviving person or the successor or transferee is a corporation organized
under the laws of the United States, any state thereof or the District of
Columbia, or a corporation or comparable legal entity organized under the laws
of a foreign jurisdiction and whose equity securities are listed on a national
securities exchange in the United States or authorized for quotation on the
Nasdaq National Market, (ii) the successor assumes all the obligations of the
Company under the Notes and the Indenture and (iii) after such transaction no
Event of Default exists. Upon compliance with these provisions by a successor or
transferee corporation or entity, the Company would be released from its
obligations under the Indenture and the Notes.
MODIFICATION AND WAIVER
Subject to certain exceptions, supplements of and amendments to the
Indenture or the Notes may be made by the Company and the Trustee with the
consent of the holders of not less than a majority in aggregate principal amount
of the outstanding Notes and any existing default of compliance with any
provision may be waived with the consent of the holders of a majority in
aggregate principal amount of the outstanding Notes. Without the consent of any
holders of the Notes, the Company and the Trustee may amend or supplement the
Indenture or the Notes to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to holders of
the Notes in case of a merger or acquisition otherwise in compliance with the
Indenture or to make any change that does not materially adversely affect the
rights of any holder of the Notes. Without the consent of the holder of each
Note effected thereby, an amendment, supplement or waiver may not (a) change the
stated maturity date of the principal of, or interest on, any Note, or adversely
affect the right to convert any Note, (b) reduce the principal amount or
repurchase price of, or interest or premium, if any, on any Note, (c) change the
currency for payment of principal of, or interest on, any Note, (d) impair the
right to institute suit for the enforcement of any payment on or with respect to
any Note, (e) reduce the above stated percentage of outstanding Notes necessary
to amend or supplement the Indenture or waive defaults or compliance, (f) modify
(with certain exceptions) any provisions of the Indenture relating to
modification and amendment of the Indenture or waiver of compliance with
conditions and defaults thereunder or (g) modify any of the provisions relating
to the obligations of the Company to repurchase the Notes upon a Fundamental
Change or an Incurrence Event.
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CONCERNING THE TRUSTEE
United States Trust Company of New York, the Trustee under the Indenture,
has been appointed by the Company as the initial paying agent, conversion agent
and registrar with regard to the Notes.
In case an Event of Default occurs (and is not be cured) and holders of the
Notes have notified the Trustee, the Trustee is required to exercise its powers
with the degree of care and skill of a prudent person in the conduct of such
person's own affairs. Subject to such provisions, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any of the holders of Notes, unless they have offered to the Trustee
indemnity satisfactory to it.
The Company is obligated to pay reasonable compensation to the Trustee and
to indemnify the Trustee against losses, liabilities or expenses incurred by it
in connection with its duties relating to the Notes. The Trustee's claims for
such payments will be senior to those of holders of the Notes in respect of all
funds collected or held by the Trustee.
BOOK-ENTRY, DELIVERY AND FORM
The Notes are represented by a Global Note or Notes. Each Global Note having
a CUSIP number distinct from the CUSIP number for the Notes issued in the
Original Offering is deposited with, or on behalf of, DTC and registered in the
name of a nominee of DTC. Except under the limited circumstances described
below, Global Notes are not be exchangeable for definitive certificated Notes.
In the event of a transfer of securities that were issued in fully registered,
certificated form, the holders of such certificates will be required to exchange
them for interests in the Global Notes representing the principal amount of
Notes being transfered.
Ownership of beneficial interests in a Global Note are limited to
institutions that have accounts with DTC or its nominee ("participants") or
persons that may hold interests through participants. In addition, ownership of
beneficial interests by participants in such Global Note are evidenced only by,
and the transfer of that ownership interest is effected only through, records
maintained by DTC or its nominee for such Global Note. Ownership of beneficial
interests in such Global Note by persons that hold through participants are
evidenced only by, and the transfer of that ownership interest within such
participant is effected only through, records maintained by such participant.
DTC has no knowledge of the actual beneficial owners of the Notes. Beneficial
owners do not receive written confirmation from DTC of their purchase, but
beneficial owners are expected to receive written confirmations providing
details of the transaction, as well as periodic statements of their holdings,
from the participants through which the beneficial owners entered the
transaction. The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
laws may impair the ability to transfer beneficial interests in such Global
Note.
Payment of principal of and premium, if any, and interest on Notes
represented by a Global Note registered in the name of or held by DTC or its
nominee are made by the Company through the Trustee, in its capacity as paying
agent under the Indenture, to DTC or its nominee, as the case may be, as the
registered holder of the Global Note representing such Notes. The Company has
been advised by DTC that upon receipt of any payment of principal of or premium,
if any, or interest on a Global Note, DTC will immediately credit, on its
book-entry registration and transfer system, accounts of participants with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of such Global Note as shown in the records of DTC.
Payments by participants to owners of beneficial interests in a Global Note held
through such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the sole
responsibility of such participants, subject to any statutory or regulatory
requirements as may be in effect from time to time.
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None of the Company, the Trustee or any other agent of the Company or the
Trustee have any responsibility or liability for any aspect of the records of
DTC, any nominee or any participant relating to, or payments made on account of,
beneficial interests in a Global Note or for maintaining, supervising or
reviewing any of the records of DTC, any nominee or any participant relating to
such beneficial interests.
A Global Note is exchangeable for definitive Notes registered in the name
of, and a transfer of a Global Note may be registered to, any person other than
DTC or its nominee, only if:
(a) DTC notifies the Company that it is unwilling or unable to continue as
depository for such Global Note and the Company does not appoint a successor
depository or if at any time DTC ceases to be a clearing agency registered under
the Exchange Act; or
(b) the Company in its sole discretion determines that such Global Note
shall be exchangeable for definitive Notes in registered form.
Any Global Note that is exchangeable pursuant to the preceding sentence will be
exchangeable in whole for definitive Notes in registered form, of like tenor and
of an equal aggregate principal amount as the Global Note, in denominations of
$1,000 and integral multiples thereof. Such definitive Notes will be registered
in the name or names of such persons as DTC shall instruct the Trustee. The
principal of, premium, if any, and interest with respect to definitive Notes is
payable, the transfer of the definitive Notes is registrable, the definitive
Notes are exchangeable, and the definitive Notes may be presented for
conversion, at the office or agency of the Company maintained for such purposes,
which initially is the Corporate Trust Office of the Trustee located in the
Borough of Manhattan, The City of New York. In addition, payment of interest on
definitive Notes may, at the option of the Company, be made by check mailed to
the address of the person entitled thereto as it appears in the Note register.
Interest payable to any holder of definitive Notes having an aggregate principal
amount in excess of $5,000,000 is, at the election of such holder in writing to
the Trustee at least 10 days prior to the date of payment, payable by wire
transfer in immediately available funds.
The Company is not required to (i) issue, register the transfer of or
exchange any Note during a period beginning at the opening of business 15 days
before the date of the mailing of a notice of redemption and ending at the close
of business on the date of such mailing, or (ii) register the transfer of or
exchange any Note selected for redemption in whole or in part, except the
unredeemed portion of Notes being redeemed in part.
Except as provided above, owners of beneficial interests in a Global Note
are not entitled to receive physical delivery of Notes in definitive form and
are not considered the holders thereof for any purpose under the Indenture, and
no Global Note is exchangeable except for another Global Note of like
denomination and tenor to be registered in the name of DTC or its nominee.
Accordingly, each person owning a beneficial interest in such Global Note must
rely on the procedures of DTC and, if such person is not a participant, on the
procedures of the participant through which such person owns its interest, to
exercise any rights of a holder under the Global Note.
The Company understands that, under existing industry practices, in the
event that the Company requests any action of holders, or an owner of a
beneficial interest in such Global Note desires to take any action that a holder
is entitled to take under the Notes, DTC would authorize the participants
holding the relevant beneficial interests to take such action, and such
participants would authorize beneficial owners owning through such participants
to take such action or would otherwise act upon the instructions of beneficial
owners owning through them.
DTC has advised the Company that DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered under the Exchange Act. DTC
was created to hold securities of its participants and to facilitate the
clearance and settlement of securities transactions
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among its participants in such securities through electronic book-entry changes
in accounts of the participants, thereby eliminating the need for physical
movement of securities certificates. DTC's participants include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. DTC is owned by a number of its participants and by the New
York Stock Exchange, the American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc. Access to DTC's book-entry system is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
either directly or indirectly. The rules applicable to DTC and its participants
are on file with the Commission.
PAYMENT
So long as the Notes are represented by a Global Note or Notes, all payments
of principal, premium, if any, and interest will be made by the Company through
the Trustee, in its capacity as paying agent under the Indenture, to DTC or its
nominee in immediately available funds.
GOVERNING LAW
The Indenture and Notes are governed by and construed in accordance with the
laws of the State of New York, without giving effect to such State's conflicts
of law principles.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of (i) 50,000,000 shares of
Common Stock and (ii) 15,000,000 shares of Preferred Stock, par value $0.00001
per share ("Preferred Stock"). At December 31, 1996, there were 15,660,535
shares of Common Stock and 180,000 shares of Series A Stock issued and
outstanding. Upon the purchase by the Company of the Company's securities held
by the former USC shareholders ("USC Securities"), an amendment was filed to the
Company's Certificate of Incorporation on July 9, 1996 deleting the Company's
Series B Cumulative Convertible Preferred Stock.
On May 31, 1996, the Company's stockholders approved a proposed reverse
stock split of not less than one share of Common Stock for every two shares of
the Company's then issued Common Stock nor more than one share of Common Stock
for every three shares of the Company's then issued Common Stock, subject to the
Board of Directors of the Company determining whether such reverse stock split
is in the best interests of the Company and setting the specific exchange ratio.
On November 27, 1996, the Company's Board of Directors determined not to effect
a reverse stock split at this time and may or may not reconsider the matter at a
later date.
The following summary of the Company's capital stock does not purport to be
complete and is subject to, and qualified in its entirety by, the Company's
Certificate of Incorporation, as amended (the "Certificate"), including the
Certificate of Designations, Preferences and Rights for the Series A Stock (the
"Series A Designation").
COMMON STOCK
The holders of Common Stock are entitled to all of the rights and privileges
of holders of shares of common stock under the DGCL. Subject to the preferences
applicable to shares of Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors of the Company out of legally available funds.
In the event of liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to the prior distribution rights of
holders of shares of Preferred Stock. The holders of Common Stock do not have
any preemptive rights or other rights to subscribe for additional shares and
there are no redemption or sinking fund provisions applicable
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to the Common Stock. All of the outstanding shares of Common Stock are duly
authorized, validly issued, fully paid and nonassessable.
Each holder of Common Stock is entitled to one vote for each share of Common
Stock on all matters submitted to the vote of stockholders, including the
election of directors. Cumulative voting for the election of directors is not
permitted, with the effect that the holders of a majority of the shares voting
for the election of directors can elect all members of each class of the Board.
Except as otherwise required by applicable Delaware law, a majority vote is
sufficient for any action that requires the vote or concurrence of stockholders,
except that a plurality vote is sufficient to elect directors.
The Common Stock trades on the SmallCap Market under the symbol "STEL."
PREFERRED STOCK
The Certificate authorizes the Board of Directors of the Company, at any
time or from time to time, to divide and establish any and all of the unissued
shares of Preferred Stock not then allocated to any series of Preferred Stock
into one or more series and, without limiting the generality of the foregoing,
to fix and determine the designation of each such share, the number of shares
which shall constitute such series and certain powers, preferences and relative,
optional or other special rights and qualifications, limitations and
restrictions thereof, of the shares or each series so established.
Pursuant to the Certificate, 250,000 shares of Preferred Stock have been
designated as Series A Stock. At December 31, 1996, there were 180,000 shares of
Series A Stock outstanding. On June 24, 1996, the Company and the holders of the
Series B Stock entered into an Amended and Restated Purchase Agreement whereby
the Company purchased the USC Securities, which included all of the issued and
outstanding Series B Stock from the holders thereof, in exchange for the
issuance of 843,023 shares of the Company's Common Stock. The Company used $2.9
million of the net proceeds of the Original Offering to exercise the Company's
option to reacquire such 843,023 shares for $3.44 per share. The description set
forth below of the powers, preferences and relative, participating, optional and
other special rights of the outstanding Preferred Stock and the qualifications,
limitations and restrictions thereof gives effect to the cancellation of all
outstanding shares of Series B Stock and the amendment of the Certificate
described above.
SERIES A STOCK
GENERAL AND CONVERTIBILITY. The Certificate designates up to 250,000 shares of
Preferred Stock as Series A Stock, having a liquidation preference equal to the
greater of $9.00 per share or the amount which would be payable with respect to
the Common Stock (assuming conversion had occurred), being entitled to receive
annual cumulative dividends of $0.72 per share (i.e. 8% of the $9.00 liquidation
preference) and being convertible into a number of shares of Common Stock equal
to $9.00 (plus the value of any accrued but unpaid dividends on such shares)
divided by the "conversion price" (initially $1.125 per share, subject to
adjustment in certain circumstances). If all of the outstanding shares of Series
A Stock were convertible into Common Stock at the date of this Prospectus, the
holders thereof would receive an aggregate of 1,440,000 shares of Common Stock
of the Company. The holders of Series A Stock have no preemptive rights with
respect to any shares of capital stock of the Company or any other securities of
the Company convertible into or carrying rights or options to purchase any of
such shares. The Series A Stock is not subject to any sinking fund, but is
subject to mandatory redemption on July 31, 2000 at a per share price of $9.00,
plus the value of any accrued and unpaid dividends on such shares.
RANKING. The Series A Stock ranks senior, as to dividends and liquidation, to
the Common Stock and all other shares of capital stock of the Company.
DIVIDENDS. The holders of Series A Stock shall be entitled to receive, when, as
and if declared by the Board of Directors of the Company out of funds legally
available therefor, stock dividends in the form of
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Series A Stock or cash dividends at the rate of $0.72 annually, to be payable
annually on the last day of July in each year, commencing July 31, 1996, except
that no cash dividends may be paid (but shall accrue) at any time during which
there remains unpaid any indebtedness under the Credit Agreement without the
consent of Norwest. Indebtedness under such Credit Agreement was paid on August
12, 1996. See "DIVIDEND POLICY." Unless all accrued and unpaid dividends on the
Series A Stock have been paid, no dividends (other than dividends in Common
Stock or another stock ranking junior to the Series A Stock as to dividends and
liquidation) shall be declared or paid or set aside for payment or other
distribution made upon the Common Stock or any other stock ranking junior to the
Series A Stock ("Junior Stock"). On July 31, 1996, the Company issued an
additional 13,333 shares of Series A Stock to the holders thereof in connection
with the first annual dividend distribution.
RIGHTS ON LIQUIDATION. Upon the liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, the holders of Series A Stock are
entitled to receive, out of the assets of the Company available for distribution
to stockholders after satisfying claims of creditors but before any payment or
distribution of assets is made to holders of the Common Stock or any Junior
Stock, a liquidating distribution in an amount equal to the greater of $9.00 per
share (plus the value of any accrued but unpaid dividends on such shares) or the
amount that would be payable upon the conversion of the Common Stock into which
the shares of Series A Stock are then convertible, assuming that conversion had
occurred. Unless and until payment in full has been made to the holders of the
Series A Stock of the liquidating preferences to which they are entitled, no
dividend or distribution will be made to the holders of the Common Stock or any
Junior Stock upon liquidation, dissolution or winding up, and no purchase,
redemption or other acquisition for any consideration by the Company will be
made in respect of the Common Stock or Junior Stock in such event.
In the event that the assets distributable to the holders of Series A Stock
are insufficient to permit payment of the full preferential amounts payable in
respect thereof, the assets shall be distributed ratably among the shares of
Series A Stock.
After payment of the full amount of the liquidating distribution to which
they are entitled, the holders of the Series A Stock (in their capacities as
such holders) will have no right or claim to any of the remaining assets of the
Company.
VOTING RIGHTS. Except as set forth below, or as otherwise provided by law, the
Series A Stock has no voting rights. Notwithstanding the foregoing, without the
affirmative vote of the holders of at least 51% of all of the shares of Series A
Stock then outstanding, voting separately, as a class, the Company may not (i)
create, authorize or issue any class or series of capital stock ranking prior to
the Seriesx A Stock as to dividends or upon liquidation, (ii) amend the
Certificate, or in any manner alter or change the powers, rights, privileges or
preferences of the Series A Stock, if such amendment or action would adversely
affect the powers, rights, privileges and preferences of the holders of the
Series A Stock (except that the Company may amend the Certificate to increase
the amount of shares of Common Stock or amend the terms relating to any Common
Stock, or to create, authorize or issue shares of Junior Stock), (iii) amend the
Series A designation, (iv) adopt any agreement, plan or proposal for the sale of
substantially all of the assets of the Company, or providing for a merger,
consolidation or dissolution of the Company or an exchange of shares of any
capital stock of the Company which is submitted to the vote of the stockholders
of the Company.
In addition, in the event that at least 100,000 shares of Series A Stock are
then outstanding, the holders thereof shall be entitled to elect one or more
directors to the Board of Directors of the Company (the number of which, when
determining the entire Board, shall be substantially equivalent to the ratio
that the Common Stock into which the Series A Stock may then be convertible
bears to the total number of shares of Common Stock then outstanding, but always
at least one director), in the event of a continuing default by the Company of
its obligations to redeem shares of Series A Stock in certain circumstances.
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REDEMPTION. The Series A Stock may not be redeemed prior to July 31, 1997 and
thereafter, at the option of the Company, only in the event that the Common
Stock is then being traded in a recognized national securities market and has
traded for 20 consecutive days prior to such redemption at price level equal to
at least 250% of the then conversion price of the Common Stock. Any Series A
Stock remaining outstanding on July 31, 2000 must be redeemed by the Company on
such date. The redemption price in the case of any optional or a mandatory
redemption on July 31, 2000, shall be payable in cash at the time of redemption
and shall be an amount equal to $9.00 per share of Common Stock being redeemed,
plus the value of all accrued but unpaid dividends on such shares.
CERTAIN ADJUSTMENTS. The Series A Stock is entitled to certain anti-dilution
protections which provide for adjustments to its conversion price, and, in
certain circumstances, the issuance of additional Shares of Common Stock upon
conversion, generally in the event that the Company issues shares of Common
Stock without consideration or at a price below the stipulated conversion price.
The Series A Stock is also subject to adjustments in certain events, such as the
payment of stock dividends, recapitalizations, reclassifications and
reorganizations of the Company and in connection with certain mergers and
consolidations involving the Company or the sale of substantially all of the
assets of the Company. Generally, such adjustments are intended to insure that
the holders of the Series A Stock shall be entitled to receive, following an
event requiring adjustment, substantially equivalent economic and other benefits
which were attributable to the Series A Stock immediately preceding any
adjustment.
SERIES B STOCK
All outstanding shares of Series B Stock were purchased by the Company on
June 24, 1996. An amendment was filed to the Company's Certificate of
Incorporation on July 9, 1996 deleting such series.
REGISTRATION RIGHTS
The Company has entered into several agreements which grant demand
registration rights (the right to require the Company to file a registration
statement with the Commission) and/or "piggyback" registration rights (the right
to be included in a registration statement filed by the Company for itself or
another party) to certain holders of Common Stock of the Company or securities
convertible into Common Stock.
The Company has filed a registration statement with the Commission with
respect to (1) an aggregate of 1,833,336 shares of Common Stock issuable to JLCM
upon conversion of the Series A Stock and the JLCM Warrant pursuant to
piggy-back registration rights with respect to such shares (the "JLCM 1995
Shares"), and (2) an aggregate of 2,200,000 shares of Common Stock owned by or
issuable upon exercise of the 1995 Warrants (the "1995 Private Placement
Shares") pursuant to a single demand registration right with respect to such
shares. Such registration statement was declared effective as of January 3,
1996. The Company is obligated to keep such registration effective until the
earlier to occur of January 3, 1998 or the sale of all of the 1995 Private
Placement Shares. The piggy-back registration rights are not exercisable with
respect to registration statements for sales of less than 300,000 shares, or
registrations relating to securities issued in connection with employee stock
purchase or savings plans on Form S-8 or on Form S-4. The Company has also
granted the demand registration rights with respect to the JLCM 1995 Shares and
to any shares of Series A Stock issued as a stock dividend on two separate
occasions and the same demand and piggy-back registration rights with respect to
the 50,000 shares of Common Stock issuable pursuant to the Settlement Agreement,
exercisable between July 31, 1996 and July 31, 1998. See "TRANSACTIONS WITH
RELATED PARTIES." In each case, the Company has agreed to bear all costs
associated with such registration except underwriter's fees or commissions.
In connection with the issuance of the 1996 Warrants, the Company granted
the holders thereof a single demand registration right exercisable with respect
to 1,337,500 shares of Common Stock issuable upon exercise of such warrants. The
Company is required to keep such registration effective until the
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earlier of May 7, 1998 or the sale of all such shares. The Company has agreed to
bear all costs associated with such registration except any underwriter's fees
or commissions and fees and costs of counsel to the holders.
In connection with the acquisition of assets of Economy by the Company, the
Company issued Economy 26,316 shares of Common Stock and granted Economy
piggy-back registration rights with respect to such shares exercisable March 13,
1996. Such piggy-back rights are not exercisable with respect to a registration
of Common Stock having a proposed sales price of less than $7,500,000, with
respect to a registration statement on Form S-4 or S-8 or similar form, or a
exchange offer or offering of securities solely to the Company's existing
security holders. The Company has agreed to bear all costs associated with such
registration except any underwriter's fees or commissions, transfer taxes, and
the fees and expenses of accountants, legal counsel and other representatives of
Economy.
In connection with the issuance of the March 18 Debentures, the Company has
granted piggy-back registration rights exercisable until March 18, 1999 to the
holders thereof with respect to shares of Common Stock issuable upon conversion
of such Debentures at a conversion rate which is the lower of $1.75 or 75% of
the five day average closing price of the Common Stock immediately preceding the
date of conversion. The Company redeemed or repurchased the March 18 Debentures
with net proceeds of the Original Offering. In connection with certain rights
granted to the holders of the March 18 Debentures prior to such redemption, two
of the Selling Stockholders were granted 16,353 shares of Common Stock to which
such piggy-back rights also applied. Such piggy-back rights are not exercisable
with respect to shares issued in connection with an employee benefit plan, a
merger, consolidation or business combination or exchange offer or offering of
securities solely to the Company's existing security holders. The Company
registered the March Debenture Shares pursuant to the Registration Statement and
has agreed to bear all costs associated with such registration except any
underwriter's fees or commissions and fees and costs of counsel to such persons.
In connection with the issuance of warrants to certain finders in connection
with the March and April Debentures, Mueller was granted piggy-back registration
rights exercisable between February 28, 1996 and March 6, 1997 and a single
demand registration right exercisable after June 30, 1996 for 300,000 shares of
Common Stock exercisable under such Finder's Warrant. Such warrant is
exercisable until March 6, 1998 at $1.40 per share. Mark Kabbash was granted
piggy-back registration rights with respect to 250,000 shares of Common Stock
exercisable under such holder's warrant, which warrant is exercisable until
March 6, 1998 at $2.125 per share. In connection with the issuance of Finder's
Warrants in connection with the issuance of the June Debentures, each of BPC and
Mueller were granted piggy-back registration rights exercisable prior to June
21, 1997 for an aggregate of 200,000 shares of Common Stock exercisable under
such holders' warrants. Such warrants are exercisable until June 21, 1998 at
$2.00 per share. The Company has agreed to bear all costs and expenses of such
registration except any underwriter's fees or commissions and fees and costs of
counsel to such holders.
In connection with the Company's purchase of the USC Securities, the Company
granted to the sellers thereof demand registration rights exercisable until
August 31, 1997 with respect to the 843,023 shares of Common Stock issued in
consideration for the USC Securities (which shares were repurchased by the
Company with $2.9 million of the net proceeds from the Original Offering) and
the additional 166,660 shares of Common Stock owned by such persons. The Company
has agreed to bear all costs associated with such registration except any
underwriter's fees or commissions and fees and costs of counsel to such persons.
The Company's employment agreements with Mr. Matz, the Company's Chairman of
the Board and Chief Executive Officer, provides that Mr. Matz may require the
Company, at the Company's expense, on three separate occasions until March 23,
2000, to register up to 1,060,000 shares of Common Stock of the Company that may
be issuable to Mr. Matz upon the exercise of certain stock options of the
Company granted to Mr. Matz in connection with his Employment Agreement. The
Company's employment
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agreement with Mr. Miller, the Company's President and Chief Operating Officer,
provides that Mr. Miller may require the Company, on two separate occasions, to
similarly register up to 60,000 shares of Common Stock that may be issuable to
Mr. Miller upon stock options granted to him in connection with his Employment
Agreement. See "MANAGEMENT--EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL
ARRANGEMENTS."
The Company entered into a registration rights agreement with the Initial
Purchasers (the "Registration Rights Agreement") pursuant to which the Company
agreed, for the benefit of the holders of the Notes, at the Company's cost, (i)
by December 10, 1996, file the Registration Statement covering resales of the
Notes and the Conversion Shares (the "Registrable Securities"), (ii) use its
commercially reasonable efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act by February 12, 1997 and (iii) use
its commercially reasonable efforts to keep such Shelf Registration Statement
continuously effective for a period ending three years following the Issue Date
or such shorter period that will terminate when each Registrable Security
covered by the Shelf Registration Statement has been sold in the manner set
forth and as contemplated therein or is otherwise transferable pursuant to Rule
144 promulgated under the Securities Act. The Company is permitted to suspend
use of this Prospectus in connection with the sale of Registrable Securities
during certain periods of time relating to pending corporate developments,
acquisitions or public filings with the Commission or similar events.
In connection with the acquisition of Addtel, the Company granted a demand
registration right with respect to 500,000 shares of the Company's Common Stock
pledged to secure the Company's obligations under the escrow provisions of the
Stock Purchase Agreement to the former Addtel shareholders. The demand
registration right is only exercisable if the Company defaults on such
obligations. The Company has agreed to bear all costs and expenses of such
registration except any underwriter's fees or commissions and fees and costs of
counsel to such shareholders.
Certain of the persons or entities noted above will offer Offered
Securities. All of the Offered Securities are offered hereby pursuant to this
Prospectus which comprises a part of the Registration Statement initially filed
with the Commission on December 10, 1996. Certain of the persons and entities
with registration rights are Selling Noteholders and Selling Stockholders
hereunder. See "SELLING NOTEHOLDERS AND SELLING STOCKHOLDERS."
ANTI-TAKEOVER PROVISIONS
GENERAL. The Company's Certificate and Bylaws and certain agreements to which
the Company is a party contain provisions that may reduce the likelihood of a
change in management or voting control of the Company without the consent of the
Board of Directors of the Company.
BOARD OF DIRECTORS. The Bylaws provide that the Board of Directors will consist
of not less than five nor more than 20 members and that the number of directors
shall be determined by resolution of the Board. Further, vacancies in the Board
may be filled by a majority of the directors then in office, even if less than a
quorum. Accordingly, the Board of directors could delay any stockholder from
obtaining majority representation on the Board of Directors by enlarging the
Board and filing the new vacancies with its own nominees until the next
stockholder election. The Certificate further provides that the Board is divided
into three classes of directors, with terms of each class expiring in a
different year. See "MANAGEMENT-- BOARD OF DIRECTORS." Classification of the
Board of Directors in this manner could hinder an effort by stockholders to
unseat a majority of the Board of Directors in any one fiscal year. On October
30, 1996, the Board of Directors created a Takeover Defense Committee consisting
of five members of the Board to meet on an as needed basis to recommend to the
Board on or prior to March 1, 1997 whether it is advisable and in the best
interest of the Company and its stockholders to implement any provisions to the
Company's Certificate of Incorporation or Bylaws to prevent a hostile takeover
of the Company, and if so, the various alternatives that such Committee would
recommend to the Board. As of the date hereof, the Committee has not completed
its report and has made no recommendation to the Board.
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<PAGE>
UNALLOCATED PREFERRED STOCK. In addition to the issued and outstanding Series A
Stock, at the date of this Prospectus, there are 14,750,000 authorized and
unissued shares of unallocated Preferred Stock. The existence of authorized but
unissued Preferred Stock may enable the Board of Directors to render more
difficult or discourage an attempt to obtain control of the Company by means of
a merger, tender offer, proxy contest or otherwise. For example, if in due
exercise of its fiduciary obligations, the Board of Directors were to determine
that a take-over proposal is not in the Company's best interest, the Board of
Directors could cause shares of Preferred Stock to be issued without stockholder
approval in one or more private offerings or other transactions that might
dilute the voting or other rights of the proposed acquiror or insurgent
stockholder or stockholder group or create a substantial voting block in
institutional or other hands that might undertake to support the position of the
incumbent Board of Directors. In this regard, the Company's Certificate grants
the Board of Directors broad power to establish rights and preferences of
authorized and unissued Preferred Stock. The issuance of shares of Preferred
Stock pursuant to the Board of Directors authority described above could
decrease the amount of earnings and assets available for distribution to holders
of Common Stock and adversely affect the rights and powers, including voting
rights, of such holders and may have the effect of delaying, deferring or
preventing a change in control of the Company. The Board of Directors does not
currently intend to seek stockholder approval prior to any issuance of Preferred
Stock, unless otherwise required by law.
VOTING AGREEMENTS. Each of the stockholders who participated in the private
placement of the Company's Common Stock and 1995 Warrants on September 20, 1995
and the private placement of the 1996 Warrants on May 7, 1996 entered into a
Voting Agreement with the Company and Jack W. Matz, Jr., the Company's Chairman
and Chief Executive Officer, requiring such holders to vote all shares of Common
Stock held or owned by such holder in a manner designated by Mr. Matz. Under the
Subscription Agreement pursuant to which such holders purchased such securities,
the holder is not entitled to offer or sell any of such shares (including shares
issuable upon exercise of the 1995 Warrants and the 1996 Warrants) except in
bona fide transactions in which there is no intent for such shares to be
acquired by an affiliate of any of such holders, or in private transactions of
blocks of 400,000 shares or less to persons not affiliated with any of such
holders unless the transferee executes a counterpart of such Voting Agreement as
if it were an initial signatory thereto. In addition to the foregoing voting
rights, at December 31, 1996, Mr. Matz held the right to vote an additional (1)
1,363,781 shares of the Company's Common Stock under nine separate voting trusts
terminating at various times through April 1999, (2) 142,354 shares pursuant to
a voting agreement with Mr. Houston, entered into in connection with the
termination of Mr. Houston's employment agreement with the Company, which voting
agreement terminates on April 11, 2001, and (3) 500,000 shares of Common Stock
of the Company pledged to secure the Company's obligations under the escrow
provisions of the Stock Purchase Agreement with the former Addtel Shareholders,
which voting agreement terminates on the earlier to occur of January 9, 2007 or
the date of sale of the pledged shares as permitted under such agreement. Such
voting rights would only be effective in the event such shareholders have
foreclosed on the shares and not disposed of the same. As a result of such
voting arrangements and shares of Common Stock and Mr. Matz otherwise
beneficially owns (e.g. through direct ownership or options within 60 days), Mr.
Matz beneficially owned, at December 31, 1996, approximately 21.9% of the
Company's Common Stock. Officers and directors of the Company (including Mr.
Matz) own beneficially 50.2% of the Common Stock of the Company as of December
31, 1996. The voting power of Mr. Matz and such other officers and directors
permit them to exercise significant influence over all matters requiring
stockholder approval, including the ability to significantly influence or to
determine the outcome of any election of directors of the Company. Such
concentration of ownership and voting control may have the effect of delaying,
deferring or preventing a change in control of the Company.
CHANGE OF CONTROL PROVISIONS. On March 5, 1996, the Board of Directors of the
Company adopted, and on May 31, 1996 the stockholders approved, certain
amendments to the Company's Employee Option Plan which, among other things,
provide for accelerated vesting of the stock options granted thereunder upon the
occurrence of certain specified events that are defined as constituting a
"Change of Control" of the Company. The existence of such provisions may have
the effect of delaying, deferring or preventing a
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<PAGE>
change in control of the Company. See "MANAGEMENT--1994 EMPLOYEE STOCK OPTION
PLAN." In addition, the Company's employment agreements with Mr. Matz and Mr.
Miller include "change of control" provisions. See "MANAGEMENT--EMPLOYMENT
AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS."
STATUTORY PROVISIONS. The Company is subject to Section 203 of the DGCL, which
prohibits certain transactions between a Delaware corporation and an "interested
stockholder," which is defined as a person who, together with any affiliates
and/or associates of such person, beneficially owns, directly or indirectly, 15%
or more of the outstanding voting shares of a Delaware corporation. This
provision prohibits certain business combinations (defined broadly to include
mergers, consolidations, sales or other dispositions of assets having an
aggregate value in excess of 10% of the consolidated assets of the corporation,
and certain transactions that would increase the interested stockholder and a
corporation for a period of three years after the date such stockholder became
an interested stockholder, when (i) prior to such date the Board of Directors of
the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding for purposes of determining the number of shares
outstanding those shares owned by (x) persons who are directors and also
officers, and (y) employee stock plans in which employee participants do not
have the right to determine confidentiality whether shares held subject to the
plan will be tendered in a tender or exchange offer) or (iii) on or subsequent
to such date the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 65% of the outstanding voting stock
which is not owned by the interested stockholder.
SEVERANCE AGREEMENTS
The Company has entered into severance agreements with respect to certain
officers of the Company which such officers are entitled to receive a certain
percentage of their salary (varying from 1.5 times annual salary to 4 times
monthly salary) in effect on the date of a "Change of Control" of the Company if
such person is terminated within a certain period after such date. "Change of
Control" is defined in such agreements in the same manner as in the Company's
Employee Option Plan. See "MANAGEMENT--1994 EMPLOYEE STOCK OPTION PLAN."
LIMITATIONS ON LIABILITY
DIRECTORS. The Certificate provides that, to the fullest extent permitted by
the DGCL, a director of the Company will not be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duties as a director.
Any repeals or amendments to this provision will be prospective and will not
adversely affect the limitation on the personal liability of any director of the
Company at the time of such repeal or amendment. This provision, however, does
not eliminate the director's liability (i) for any breach of a director's duty
of loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for a transaction from which the director derived an improper
personal benefit or (iv) in respect to certain unlawful dividend payments or
stock purchases or redemptions. The inclusion of this provision in the
Certificate may reduce the likelihood of derivative litigation against directors
and may discourage or deter stockholders or management from bringing a lawsuit
against directors for breaches of their fiduciary duties, even though such an
action, if successful, might otherwise have benefitted the Company and its
stockholders. This provision does not prevent the Company or its stockholders
from seeking injunctive or other equitable remedies against its directors under
applicable state law, although there can be no assurance that such remedies, if
sought, would be obtained.
INDEMNIFICATION. The Certificate and Bylaws require the Company to indemnify
each person who is or was a director, officer, employee or agent, of another
corporation, partnership, joint venture, trust or other
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enterprise against expenses, judgments, fines and amounts incurred in such
capacity of such person acting in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interest of the Company
or, with respect to criminal proceedings, not unlawful. The Company will also
advance to such persons payments incurred in defending a proceeding to which
indemnification might apply provided the recipient provides an undertaking
agreeing to repay all such advanced amounts if it is ultimately determined that
such person is not entitled to be indemnified.
TRANSFER AGENT
The Transfer Agent and Registrar for the Company's Common Stock is
Securities Transfer Corporation, Dallas, Texas.
ADDITIONAL INTEREST
In the event that the Registration Statement ceases to be effective or
usable for resale of the Registrable Securities (a "Registration Default"), the
Company is required to pay Additional Interest to each Holder of Registrable
Securities during the first 90 day period immediately following the occurrence
of such Registration Default at a rate equal to 0.25% per annum. The amount of
Additional Interest will increase by an additional 0.25% per annum at the start
of each subsequent 90 day period until the Registration Statement again becomes
effective up to a maximum rate of Additional Interest of 1.00% per annum. When
the Registration Statement again becomes effective, such Additional Interest
shall cease to accrue on the Notes from the date of such filing or
effectiveness.
Any amounts of Additional Interest due will be payable in cash on February
15 and August 15 of each year to the holders of record on the preceding February
1 or August 1, respectively. The amount of Additional Interest will be
determined by multiplying the applicable Additional Interest rate by (i) the
principal amount of the Notes, in the case of Registrable Securities which are
Notes, or (ii) the per share conversion price set forth on the cover (subject to
adjustment in the event of stock splits, stock recombinations, stock dividends
and the like) in the case of Registrable Securities which are shares of Common
Stock multiplied by a fraction, the numerator of which is the number of days
such Additional Interest rate was applicable during such period (determined on
the basis of a 360-day year comprises of twelve 30-day months, and, in the case
of a partial month, the actual number of days elapsed), and the denominator of
which is 360.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available without charge by writing to the Company
at 1600 Promenade Center, 15th Floor, Richardson, Texas 75080, Attention:
Director of Corporate Communications.
LEGAL MATTERS
The validity of the Offered Securities offered hereby will be passed upon
for the Company by Arter & Hadden, Dallas, Texas.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1995
and 1994 and for each of the two years in the period ended December 31, 1995
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The consolidated statements of operations, shareholders' equity and cash
flows of the Company for the year ended December 31, 1993 included in this
Prospectus have been so included in reliance on the
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report of King, Burns & Company, P.C., independent certified public accountants,
given on the authority of said firm as experts in auditing and accounting.
The balance sheets of U.S. Communications, Inc., as of December 31, 1994 and
1993 and the related statements of operations, changes in retained earnings and
cash flows for each of the two years ended December 31, 1994 included in this
Prospectus have been so included in reliance on the report of Duff & Anderson,
P.C., independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The balance sheets of Long Distance Network, Inc. as of December 31, 1993
and 1992 and the related statements of operations, stockholders' equity
(deficit) and cash flows for each of the two years in the period ended December
31, 1993 included in this Prospectus have been so included in reliance on the
report of Samson, Robbins & Associates, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
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FINANCIAL STATEMENTS
The financial statements of the Company and those of acquirees, notes to the
respective financial statements and the related respective reports of the
independent accountants thereon are included in this Prospectus at the page
indicated and annexed hereto.
<TABLE>
<CAPTION>
ITEM PAGE
- ------------------------------------------------------------------------------------------------------------ ---------
<S> <C>
CONSOLIDATED INTERIM FINANCIAL STATEMENTS OF THE COMPANY
Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995.................................. F-2
Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 1996 and
1995...................................................................................................... F-3
Consolidated Statements of Shareholders' Equity for the Nine Months Ended September 30, 1996 and 1995....... F-4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995................. F-5
Notes to Consolidated Financial Statements.................................................................. F-6
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
Report of Independent Accountants for the Years Ended December 31, 1995 and 1994............................ F-10
Report of Independent Certified Public Accountants for the Year Ended December 31, 1993..................... F-11
Consolidated Balance Sheets as of December 31, 1995 and 1994................................................ F-12
Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993.................. F-13
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1995, 1994 and 1993........ F-14
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993.................. F-15
Notes to Consolidated Financial Statements.................................................................. F-16
CONSOLIDATED PRO FORMA FINANCIAL STATEMENT OF THE COMPANY
Consolidated Pro Forma Statement of Operations for the Year Ended December 31, 1995......................... F-30
Notes to Consolidated Pro Forma Financial Statements........................................................ F-31
FINANCIAL STATEMENTS OF U.S. COMMUNICATIONS, INC.
Report of Independent Accountants for the Years Ended December 31, 1994 and 1993............................ F-32
Balance Sheets as of December 31, 1994 and 1993............................................................. F-33
Statements of Operations for the Years Ended December 31, 1994 and 1993..................................... F-34
Statements of Changes in Retained Earnings for the Years Ended December 31, 1994 and 1993................... F-35
Statements of Cash Flows for the Years Ended December 31, 1994 and 1993..................................... F-36
Notes to Financial Statements............................................................................... F-37
FINANCIAL STATEMENTS OF LONG DISTANCE NETWORK, INC.
Independent Auditors' Report for the Years Ended December 31, 1993 and 1992................................. F-45
Balance Sheets as of December 31, 1993 and 1992............................................................. F-46
Statements of Operations for the Years Ended December 31, 1993 and 1992..................................... F-47
Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1993 and 1992................. F-48
Statements of Cash Flows for the Years Ended December 31, 1993 and 1992..................................... F-49
Notes to Financial Statements............................................................................... F-50
</TABLE>
F-1
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $12,690,949 $ 823,738
Accounts and notes receivable:
Trade, net of allowance for doubtful accounts of $398,585 and $475,845,
respectively.................................................................. 5,338,035 4,022,131
Other, net of allowance for doubtful accounts of $31,479........................ 1,435,050 407,550
Inventory......................................................................... 102,671 146,037
Prepaid expenses and other........................................................ 1,043,467 292,439
------------- ------------
Total current assets............................................................ 20,610,172 5,691,895
------------- ------------
Property and equipment.............................................................. 8,704,678 3,911,652
Less accumulated depreciation and amortization...................................... (1,282,698) (495,613)
------------- ------------
Net property and equipment...................................................... 7,421,980 3,416,039
------------- ------------
Excess of cost over net assets acquired, net of accumulated amortization of
$1,837,784 and $1,068,833, respectively........................................... 17,720,894 16,869,648
------------- ------------
Other assets:
Debt issuance costs............................................................... 2,065,068 --
Other............................................................................. 424,568 63,221
------------- ------------
Total other assets.............................................................. 2,489,636 63,221
------------- ------------
Total assets.................................................................. $48,242,682 $26,040,803
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable--trade........................................................... $ 1,475,812 $ 761,880
Accrued telecommunications expenses............................................... 1,821,410 2,337,420
Other accrued expenses............................................................ 1,337,923 1,163,603
Acquisition obligation............................................................ 2,070,000 --
Short-term notes payable.......................................................... 44,429 475,610
Current maturities of long-term debt.............................................. 528,873 3,795,216
------------- ------------
Total current liabilities....................................................... 7,278,447 8,533,729
------------- ------------
Long-term obligations, less current maturities...................................... 28,584,844 7,398,670
------------- ------------
Commitments and contingencies
Series A redeemable preferred stock, $.00001 par value, 250,000 shares authorized;
180,000 and 166,667 shares issued, respectively................................... 1,310,092 1,129,459
------------- ------------
Shareholders' equity:
Series B Preferred stock, $.00001 par value, 12,500,000 shares authorized, 125,000
shares issued in 1995........................................................... -- 575,280
Common Stock, $.0001 par value, 50,000,000 shares authorized; 16,818,053 and
13,462,120 issued, respectively................................................. 1,682 1,346
Additional paid-in capital........................................................ 26,478,621 20,855,099
Retained deficit.................................................................. (11,557,089) (11,996,179)
Treasury stock (1,197,518 shares and 240,072 shares, respectively) at cost........ (3,853,915) (456,601)
------------- ------------
Total shareholders' equity...................................................... 11,069,299 8,978,945
------------- ------------
Total liabilities and shareholders' equity........................................ $48,242,682 $26,040,803
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- -------------------------
1996 1995 1996 1995
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Telecommunications revenues................................. $7,961,784 $7,459,367 $22,199,729 $ 13,772,942
Cost of revenue............................................. 4,769,107 4,944,734 13,058,866 9,574,931
---------- ---------- ---------- -------------
Gross profit................................................ 3,192,677 2,514,633 9,140,863 4,198,011
Operating expenses:
General and administrative................................ 2,762,803 2,547,565 7,408,554 4,528,945
Depreciation and amortization............................. 658,924 533,213 1,606,740 909,014
Nonrecurring Russian venture charges...................... -- 143,558 -- 143,558
---------- ---------- ---------- -------------
Total operating expenses................................ 3,421,727 3,224,336 9,015,294 5,581,517
---------- ---------- ---------- -------------
Income (loss) from continuing operations before other income
(expense) and extraordinary item.......................... (229,050) (709,703) 125,569 (1,383,506)
---------- ---------- ---------- -------------
Other income (expense):
Interest expense.......................................... (658,212) (253,727) (1,352,072) (364,260)
Other..................................................... 51,857 12,465 46,352 9,820
---------- ---------- ---------- -------------
Total other income (expense)............................ (606,355) (241,262) (1,305,720) (354,440)
---------- ---------- ---------- -------------
Loss from continuing operations before extraordinary item... (835,405) (950,965) (1,180,151) (1,737,946)
Discontinued operations --
Provision for operating losses during phase-out
period................................................ -- (225,000) -- (475,000)
---------- ---------- ---------- -------------
Loss before extraordinary item.............................. (835,405) (1,175,965) (1,180,151) (2,212,946)
Extraordinary item--gain (loss) on extinguishment of debt... (331,813) -- 1,817,378 --
---------- ---------- ---------- -------------
Net income (loss)........................................... (1,167,218) (1,175,965) 637,227 (2,212,946)
Preferred dividend requirements, including accretion........ (50,211) (36,667) (198,137) (36,667)
---------- ---------- ---------- -------------
Net income (loss) applicable to common shareholders......... $(1,217,429) $(1,212,632) $ 439,090 $ (2,249,613)
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
Income (loss) per common share and common share equivalent:
Continuing operations................................... $ (0.05) $ (0.08) $ (0.07) $ (0.16)
Discontinued operations................................. -- (0.02) -- (0.04)
Extraordinary item...................................... (0.02) -- 0.11 --
---------- ---------- ---------- -------------
Net income (loss) per share............................. $ (0.07) $ (0.10) $ 0.04 $ (0.20)
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
Net income (loss) per share applicable to common
shareholders.......................................... $ (0.07) $ (0.10) $ 0.02 $ (0.20)
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
Weighted average number of common share & common share
equivalents outstanding............................... 16,117,789 11,778,005 16,962,389 11,129,177
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
Income (loss) per common share--assuming full dilution:
Continuing operations................................... $ (0.05) $ (0.08) $ (0.06) $ (0.16)
Discontinued operations................................. $ -- (0.02) $ -- (0.04)
Extraordinary item...................................... (0.02) -- 0.10 --
---------- ---------- ---------- -------------
Net income (loss) per share............................... $ (0.07) $ (0.10) $ 0.04 $ (0.20)
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
Net income (loss) per share applicable to common
shareholders............................................ $ (0.07) $ (0.10) $ 0.02 $ (0.20)
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
Weighted average number of common shares outstanding--
assuming full dilution.................................. 16,117,789 11,778,005 18,402,389 11,129,177
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
SERIES B
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ------------------ PAID-IN RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
-------- --------- ---------- ------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994...... 10,566,139 $1,057 $15,629,114 $ (5,404,864) $ (240,950) $ 9,984,357
Private placements of common
stock............................ 1,591,459 159 1,934,337 1,934,496
Issuance of common stock for
exercise of options.............. 829,505 83 538,420 (215,651) 322,852
Issuance of Series A Redeemable
Preferred stock for acquisition
of
USC.............................. 261,250 261,250
Issuance of Series B Preferred
Stock for acquisition of USC..... 125,000 $ 637,874 612,126 1,250,000
Issuance of Common Stock Purchase
Warrants for acquisition of
USC.............................. 2,303,300 2,303,300
Preferred dividend requirements,
including accretion.............. (36,667) (36,667)
Net loss for the period............ (2,212,946) (2,212,946)
-------- --------- ---------- ------ ----------- ------------ ----------- -----------
Balances at September 30, 1995..... 125,000 $ 637,874 12,987,103 $1,299 $21,278,547 $ (7,654,477) $ (456,601) $13,806,642
-------- --------- ---------- ------ ----------- ------------ ----------- -----------
-------- --------- ---------- ------ ----------- ------------ ----------- -----------
Balances at December 31, 1995...... 125,000 $ 575,280 13,462,120 $1,346 $20,855,099 $(11,996,179) $ (456,601) $ 8,978,945
Private placements of common
stock............................ 251,700 25 369,975 370,000
Issuance of common stock for:
Exercise of options.............. 484,036 48 540,413 (497,314) 43,147
Exercise of warrants............. 1,090,000 109 1,362,391 1,362,500
Conversion of debt............... 267,856 27 449,973 450,000
Other............................ 419,318 42 918,614 918,656
Issuance of common stock for
acquisition of USC securities.... (125,000) (575,280) 843,023 85 1,613,229 (2,900,000) (1,861,966)
Issuance of warrants............... 368,927 368,927
Preferred dividend requirements,
including accretion.............. (198,137) (198,137)
Net income for the period.......... 637,227 637,227
-------- --------- ---------- ------ ----------- ------------ ----------- -----------
Balances at September 30, 1996..... -- $ -- 16,818,053 $1,682 $26,478,621 $(11,557,089) $(3,853,915) $11,069,299
-------- --------- ---------- ------ ----------- ------------ ----------- -----------
-------- --------- ---------- ------ ----------- ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................ $ 637,227 $ (2,249,613)
Adjustments to reconcile net loss to net cash used by operating activities:......
Loss from discontinued operations.............................................. -- 475,000
Extraordinary item--gain on extinguishment of debt............................. (1,817,378) --
Depreciation and amortization.................................................. 1,596,386 909,014
Provision for losses on accounts receivable.................................... 718,742 312,522
Provision for Russian venture losses........................................... -- 143,558
Cash used for discontinued SATC business....................................... -- (227,482)
(Increase) decrease in:
Accounts and notes receivable................................................ (2,346,652) (1,042,748)
Prepaid expenses and other................................................... (320,624) 114,555
Other assets................................................................. (440,838) 41,244
Increase (decrease) in:
Accounts payable and accrued expenses........................................ 113,588 18,773
------------- -------------
Net cash used in operating activities.............................................. (1,859,549) (1,505,177)
------------- -------------
Cash flows from investing activities:
Additions to property and equipment.............................................. (2,546,914) (65,792)
Purchase of USC, net of cash acquired............................................ -- (6,854,247)
Cash used for discontinued SATC business......................................... -- (23,319)
Other............................................................................ -- (30,573)
------------- -------------
Net cash used in investing activities............................................ (2,546,914) (6,973,931)
------------- -------------
Cash flows from financing activities:..............................................
Net changes in short-term loans (10,571) (468,028)
Increase in long term debt....................................................... 29,300,695 7,000,000
Principal payments on long-term obligations...................................... (9,519,771) (1,171,182)
Debt issuance cost............................................................... (2,156,208) --
Proceeds from private placement of common stock.................................. -- 1,682,503
Proceeds from Series A Preferred Stock........................................... -- 1,000,000
Proceeds from exercise of warrants............................................... 1,359,149 --
Proceeds from exercise of options................................................ 200,380 375,459
Purchase of treasury stock....................................................... (2,900,000) --
------------- -------------
Net cash provided by financing activities.......................................... 16,273,674 8,418,752
------------- -------------
Increase (decrease) in cash and equivalents........................................ 11,867,211 (60,356)
Cash at beginning of period........................................................ 823,738 331,431
------------- -------------
Cash and equivalents at end of period.............................................. $ 12,690,949 $ 271,075
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated financial statements are those of SA
Telecommunications, Inc. and subsidiaries (the "Company"). These interim
consolidated financial statements are prepared pursuant to the requirements for
reporting on Form 10-QSB. The December 31, 1995 consolidated balance sheet data
was derived from audited consolidated financial statements but does not include
all disclosures required by generally accepted accounting principles. The
interim consolidated financial statements and notes thereto should be read in
conjunction with the consolidated statements and notes included in the Company's
latest annual report on Form 10-KSB. In the opinion of management, the interim
consolidated financial statements reflect all adjustments (consisting only of a
normal recurring nature) necessary for a fair presentation of the consolidated
financial position and consolidated results of operations for interim periods.
The current period consolidated results of operations are not necessarily
indicative of results which ultimately will be reported for the full fiscal year
ending December 31, 1996.
All significant intercompany accounts and transactions have been eliminated.
Certain prior period amounts have been reclassified for comparative purposes.
NOTE B--ACQUISITION OF FIRST CHOICE LONG DISTANCE, INC.
Effective September 1, 1996, the Company acquired substantially all of the
assets of First Choice Long Distance, Inc., a switch-based reseller located in
Amarillo, Texas, for a total consideration of $2,070,000 (including noncompete
agreements). The assets acquired included First Choice's customer base of
approximately 4,500 customers and two Siemens Stromberg-Carlson DCO Central
Office type switches, which will be integrated into the Company's existing
network.
The acquisition was accounted for as a purchase, whereby the excess purchase
price over the net assets acquired has been recorded based upon the fair market
values of assets acquired. The excess of cost over net assets acquired of
$454,000 and noncompete agreements of $720,000 are being amortized on a
straight-line basis over 25 and 2 years, respectively. This allocation was based
on preliminary estimates and may be revised at a later date. The Company's
consolidated statements of operations include the results of operations of First
Choice since September 1, 1996.
The following unaudited pro forma combined results of operations of the
Company assumes that the acquisition of First Choice was completed at the
beginning of 1995. These pro forma amounts represent the historical operating
results of First Choice combined with those of the Company with appropriate
adjustments which give effect to interest expense and amortization expense.
These pro forma amounts are not necessarily indicative of consolidated operating
results which would have been included in the operations of the Company during
the periods presented, or which may result in the future, because these amounts
do not reflect full transmission and switched service cost optimization, and the
synergistic effect of operating, selling, general and administrative expenses.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues.......................................... $ 24,367,722 $ 16,318,071
Net income (loss)................................. 318,779 (2,639,474)
Net income (loss) per share outstanding........... $ 0.02 $ (0.24)
</TABLE>
F-6
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE C--NOTES PAYABLE AND LONG TERM DEBT
On February 9, 1996, $450,000 of the Company's 8% Convertible Subordinated
Debentures due in June 1996 were converted into 267,856 shares of the Company's
Common Stock.
On August 12, 1996, the Company consummated a private placement of
$27,200,000 of its 10% Convertible Notes Due 2006 (the "Notes"). The Notes are
currently convertible into the Company's Common Stock at a conversion price of
$2.55 per share. The net proceeds from the sale of the Notes were approximately
$25.4 million after giving effect to the transaction related fees and expenses.
The Company used approximately $12.0 million of the net proceeds from the
private placement to repay certain indebtedness, and to repurchase or redeem
certain shares of the Company's Common Stock and outstanding debentures. The
Company plans to utilize the balance of the proceeds (approximately $13.4
million) primarily to effect acquisitions and strategic alliances, to make
capital expenditures, and for general corporate purposes.
Interest on the Notes is payable semi-annually on February 15 and August 15
of each year commencing February 15, 1997 at the rate of 10% per annum. The
Notes are redeemable at the option of the Company in whole or in part at any
time on or after August 15, 1999 at annual redemption prices starting at 107% of
principal, plus accrued interest to the redemption date. Upon a Fundamental
Change (as defined), each holder of Notes will have the right to require the
Company to repurchase all of a portion of such holder's Notes at a price equal
to 100% of the principal amount thereof, plus accrued interest to the date of
repurchase. Each holder of the Notes will have the right to require the Company
to repurchase all or a portion of such holder's Notes at a price equal to 100%
of their principal amount, plus accrued interest to the date of such repurchase,
if any, in the event that all three of the following events occur: (1) the
Company or any of its subsidiaries incurs certain indebtedness, (2) the Pro
Forma Interest Coverage (as defined) is less than 2.0 to 1, and (3) the average
closing sale price of the Common Stock is less than $2.00 for the twenty trading
days prior to the incurrence of such indebtedness. The Notes do not have the
benefit of any sinking fund obligations. The Notes are senior unsecured
obligations of the Company, and rank pari passu in right of payment with all
existing and future senior obligations of the Company and senior in right of
payment to any future subordinated obligations of the Company. The Notes are
effectively subordinated in right of payment to all existing and future
liabilities, including trade payables, of the Company's subsidiaries.
Since January 10, 1997, the average closing price of the Company's Common
Stock had been less than $2.00 for the prior twenty trading days and the
Company's Pro Forma Interest Coverage was less than 2.0 to 1. Therefore, if the
Company incurs additional indebtedness (other than as permitted under the Note
Indenture) then the holder of the Notes would have the right to require the
Company to repurchase the Notes.
In September 1996, the Company redeemed its $2,000,000 principal amount of
convertible debentures which had been issued in March, April and June of 1996. A
$331,813 loss on extinguishment of debt was recorded on this redemption. This
loss was incurred because the debentures had been recorded at less than their
principal or face amount due to the valuation of warrants issued in conjunction
with these debentures.
F-7
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE D--STOCK OPTIONS
On March 28, 1996, the Board of Directors granted options under the 1994
Employee Stock Option Plan to purchase up to 607,500 shares of the Company's
Common Stock to employees at a price of $2.03 per share (market value on the
date of grant). After a six-month waiting period, the shares acquired upon
exercise may not be sold earlier than periods varying from eighteen to thirty
months.
NOTE E--COMMON STOCK PURCHASE WARRANTS
On May 7, 1996, six holders of the Common Stock Purchase Warrants issued in
the Company's September 20, 1995 private placement exercised such warrants for
an aggregate of 1,070,000 shares of Common Stock at an exercise price of $1.25
per share or $1,337,500. In connection with such early exercise, the Company
issued additional Common Stock Purchase Warrants to such holders exercisable
into an aggregate of 1,337,500 shares of Common Stock at an exercise price of
$2.40 per share between November 7, 1996 and May 7, 1998. One of the holders of
such warrants exercisable into 750,000 shares of Common Stock has agreed not to
exercise such warrants before January 7, 1997.
NOTE F--EARNINGS (LOSS) PER SHARE
Earnings per share were calculated based upon the weighted average number of
shares outstanding during the period plus the dilutive effect of stock options,
stock warrants, and Series A Preferred Stock using the Modified Treasury Stock
method, except where the assumed exercise or conversion of such stock options,
stock warrants and Series A Preferred Stock would be anti-dilutive.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
-------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PRIMARY:
Average Shares Outstanding........................ 16,117,789 11,778,005 14,972,546 11,129,177
Stock Options..................................... -- -- 2,948,023 --
Stock Warrants.................................... -- -- 1,394,907 --
------------ ------------ ------------ ------------
Total........................................... 16,117,789 11,778,005 19,315,476 11,129,177
Less: Shares purchased under the
Treasury Method................................. -- -- (2,343,087) --
------------ ------------ ------------ ------------
16,117,789 11,778,005 16,962,389 11,129,177
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
FULL DILUTION:
Average Shares Outstanding........................ 16,117,789 11,778,005 14,972,546 11,129,177
Stock Options..................................... -- -- 2,948,023 --
Stock Warrants.................................... -- -- 1,394,907 --
Series A Preferred Stock.......................... -- -- 1,440,000 --
------------ ------------ ------------ ------------
Total........................................... 16,117,789 11,778,005 20,755,476 11,129,177
Less: Shares purchased under the Treasury
Stock Method.................................... -- -- (2,353,087) --
------------ ------------ ------------ ------------
16,117,789 11,778,005 18,402,389 11,129,177
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
F-8
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE G--PURCHASE OF USC SECURITIES
In 1995, in connection with the acquisition of U.S. Communications, Inc.
("USC"), the Company issued securities ("USC Securities") comprised of (i) the
notes having an original principal amount of $4,250,000 (ii) 125,000 shares of
Series B Cumulative Convertible Preferred Stock, and (iii) warrants exercisable
into an aggregate of 1,050,000 shares of Common Stock at $1.25 per share.
On June 21, 1996, the Company completed the acquisition of all of the USC
Securities for an aggregate of $308,500 of cash and the issuance of 843,023
shares of the Company's Common Stock, resulting in an extraordinary gain on
early extinguishment of debt in the amount of $2,149,191. On August 14, 1996,
the Company reacquired the 843,023 shares of the Company's Common Stock for
$2,900,000 of cash.
F-9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of SA Telecommunications, Inc.
In our opinion, the accompanying consolidated financial statements listed in
the accompanying index present fairly, in all material respects, the financial
position of SA Telecommunications, Inc. and its subsidiaries at December 31,
1995 and 1994 and the results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Dallas, Texas
March 21, 1996
F-10
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
SA Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of SA Holdings, Inc. (now known as SA
Telecommunications, Inc.) (a Delaware corporation) and Subsidiaries for the year
ended December 31, 1993. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit of the consolidated statements of
operations, shareholders' equity, and cash flows provides a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of SA Holdings, Inc. (now known as SA Telecommunications, Inc.) and
Subsidiaries for the year ended December 31, 1993, in conformity with generally
accepted accounting principles.
As described in Note 2 to these financial statements, the Company changed
its method of accounting for income taxes in 1993 as required by the provisions
of Statement of Financial Accounting Standards No. 109.
/s/ KING, BURNS & COMPANY, P. C.
King, Burns & Company, P. C.
Dallas, Texas
March 10, 1994
F-11
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................................... $ 823,738 $ 331,431
Accounts and notes receivable:
Trade, net of allowance for doubtful accounts of $475,845 and $178,368,
respectively................................................................... 4,022,131 985,174
Other, net of allowance for doubtful accounts of $46,122 and $48,825,
respectively................................................................... 407,550 142,301
Inventory.......................................................................... 146,037 123,790
Prepaid expenses and other......................................................... 292,439 341,290
------------- ------------
Total current assets........................................................... 5,691,895 1,923,986
------------- ------------
Net assets of discontinued title plant services operations........................... -- 3,537,386
------------- ------------
Property and equipment............................................................... 3,911,652 979,022
Less accumulated depreciation and amortization....................................... (495,613) (187,169)
------------- ------------
Net property and equipment..................................................... 3,416,039 791,853
------------- ------------
Excess of cost over net assets acquired, net of accumulated amortization............. 16,869,648 4,943,494
------------- ------------
Other assets:
Employee note receivable........................................................... -- 195,904
Other.............................................................................. 63,221 384,211
------------- ------------
Total other assets............................................................. 63,221 580,115
------------- ------------
Total assets................................................................. $ 26,040,803 $ 11,776,834
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 761,880 $ 223,362
Accrued telecommunications expenses................................................ 2,337,420 755,669
Other accrued expenses............................................................. 1,163,603 163,195
Short-term notes payable........................................................... 475,610 129,610
Current maturities of long-term obligations........................................ 3,795,216 90,248
------------- ------------
Total current liabilities........................................................ 8,533,729 1,362,084
------------- ------------
Long-term obligations, less current maturities....................................... 7,398,670 430,393
------------- ------------
Commitments and contingencies
Series A redeemable preferred stock, $.00001 par value, 250,000 shares authorized;
166,667 shares issued in 1995...................................................... 1,129,459 --
------------- ------------
Shareholders' equity:
Series B preferred stock, $.00001 par value, 250,000 shares authorized; 125,000
shares issued in 1995............................................................ 575,280 --
Common stock, $.0001 par value, 50,000,000 shares authorized; 13,462,120 and
10,566,139 issued, respectively.................................................. 1,346 1,057
Additional paid-in capital......................................................... 20,855,099 15,629,114
Retained deficit................................................................... (11,996,179) (5,404,864)
Treasury stock (240,072 shares and 136,516 shares, respectively) at cost........... (456,601) (240,950)
------------- ------------
Total shareholders' equity..................................................... 8,978,945 9,984,357
------------- ------------
Total liabilities and shareholders' equity................................... $ 26,040,803 $ 11,776,834
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Telecommunications revenues.......................................... $ 20,748,021 $ 9,755,343 $ 2,592,473
Cost of revenue...................................................... 14,116,113 8,298,430 2,395,044
------------- ------------- -------------
Gross profit......................................................... 6,631,908 1,456,913 197,429
------------- ------------- -------------
Operating expenses:
General and administrative......................................... 6,478,394 2,854,237 1,096,762
Depreciation and amortization...................................... 1,287,225 413,317 142,796
Nonrecurring Russian venture charges............................... 143,399 -- --
------------- ------------- -------------
Total operating expenses......................................... 7,909,018 3,267,554 1,239,558
------------- ------------- -------------
Loss from continuing operations before other income (expense)........ (1,277,110) (1,810,641) (1,042,129)
Other income (expense):
Interest expense................................................... (682,796) (29,903) (11,721)
Litigation settlement.............................................. -- -- 100,417
Other, net......................................................... 24,685 21,474 (15,971)
------------- ------------- -------------
Total other income (expense)..................................... (658,111) (8,429) 72,725
------------- ------------- -------------
Loss from continuing operations...................................... (1,935,221) (1,819,070) (969,404)
Discontinued operations:
Loss from title plant services operations.......................... -- (477,916) (106,204)
Provision for operating losses during phase-out period............. (475,000) (150,000) --
Loss from impairment............................................... (4,055,742) -- --
------------- ------------- -------------
Loss from discontinued operations.................................. (4,530,742) (627,916) (106,204)
------------- ------------- -------------
Net loss............................................................. (6,465,963) (2,446,986) (1,075,608)
Preferred dividend requirements, including accretion................. (125,352) -- --
------------- ------------- -------------
Net loss applicable to common shareholders........................... $ (6,591,315) $ (2,446,986) $ (1,075,608)
------------- ------------- -------------
------------- ------------- -------------
Loss per weighted average common share outstanding:
Continuing operations.............................................. $ (0.17) $ (0.20) $ (0.18)
Discontinued operations............................................ (0.39) (0.07) (0.02)
------------- ------------- -------------
Net loss per share................................................. $ (0.56) $ (0.27) $ (0.20)
------------- ------------- -------------
------------- ------------- -------------
Net loss per share applicable to common shareholders............... $ (0.57) $ (0.27) $ (0.20)
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of common shares outstanding............... 11,639,186 9,199,720 5,479,752
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
--------------------------------------------------------------------------------
SERIES B
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- ---------------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK
--------- --------- --------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1992................. -- -- 5,471,411 $ 547 $8,357,488 $(1,882,270) $ (20,000)
Private placements of common stock............ -- -- 1,407,274 141 1,621,358 -- --
Issuance of common stock for exercise of
options..................................... -- -- 1,511,236 151 1,093,816 -- --
Cancellation of shares held in escrow for:
Foreign trade license agreements.............. -- -- (567,260) (57) (249,943) -- --
Coal methane gas leases agreement............. -- -- (450,000) (45) (2,249,955) -- --
Net loss for the year......................... -- -- -- -- -- (1,075,608) --
--------- --------- --------- ----------- ---------- ----------- ---------
Balances at December 31, 1993................. -- -- 7,372,661 737 8,572,764 (2,957,878) (20,000)
Private placements of common stock............ -- -- 834,317 84 1,885,264 -- --
Issuance of common stock for:
Exercise of options........................... -- -- 1,057,075 106 1,421,216 -- (220,950)
Acquisition of LDN............................ -- -- 1,302,086 130 3,749,870 -- --
Net loss for the year......................... -- -- -- -- -- (2,446,986) --
--------- --------- --------- ----------- ---------- ----------- ---------
Balances at December 31, 1994................. -- -- 10,566,139 1,057 15,629,114 (5,404,864) (240,950)
Private placements of common stock............ -- -- 1,981,120 197 2,379,464 -- (44,057)
Issuance of common stock for exercise of
options..................................... -- -- 914,861 92 633,521 -- (171,594)
Issuance of Series B Preferred Stock for
acquisition of USC.......................... 125,000 $ 575,280 -- -- -- -- --
Issuance of warrants for acquisition and
financing of USC............................ -- -- -- -- 2,213,000 -- --
Dividends on preferred stock.................. -- -- -- -- -- (91,667) --
Accretion of discount on preferred stock...... -- -- -- -- -- (33,685) --
Net loss for the year......................... -- -- -- -- -- (6,465,963) --
--------- --------- --------- ----------- ---------- ----------- ---------
Balances at December 31, 1995................. 125,000 $ 575,280 13,462,120 $ 1,346 $20,855,099 $(11,996,179) $(456,601)
--------- --------- --------- ----------- ---------- ----------- ---------
--------- --------- --------- ----------- ---------- ----------- ---------
<CAPTION>
TOTAL
----------
<S> <C>
Balances at December 31, 1992................. $6,455,765
Private placements of common stock............ 1,621,499
Issuance of common stock for exercise of
options..................................... 1,093,967
Cancellation of shares held in escrow for:
Foreign trade license agreements.............. (250,000)
Coal methane gas leases agreement............. (2,250,000)
Net loss for the year......................... (1,075,608)
----------
Balances at December 31, 1993................. 5,595,623
Private placements of common stock............ 1,885,348
Issuance of common stock for:
Exercise of options........................... 1,200,372
Acquisition of LDN............................ 3,750,000
Net loss for the year......................... (2,446,986)
----------
Balances at December 31, 1994................. 9,984,357
Private placements of common stock............ 2,335,604
Issuance of common stock for exercise of
options..................................... 462,019
Issuance of Series B Preferred Stock for
acquisition of USC.......................... 575,280
Issuance of warrants for acquisition and
financing of USC............................ 2,213,000
Dividends on preferred stock.................. (91,667)
Accretion of discount on preferred stock...... (33,685)
Net loss for the year......................... (6,465,963)
----------
Balances at December 31, 1995................. $8,978,945
----------
----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $ (6,465,963) $ (2,446,986) $ (1,075,608)
Adjustments to reconcile net loss to net cash used by operating
activities:
Loss from discontinued operations................................ -- 477,916 106,204
Provision for discontinued operations............................ 4,530,742 150,000 --
Depreciation and amortization.................................... 1,287,225 413,317 142,796
Provision for losses on accounts receivable...................... 455,793 318,583 61,552
Litigation settlement............................................ -- -- (100,417)
Cash used for discontinued SATC business......................... (263,320) (441,864) (113,319)
Other............................................................ (44,587) 15,280 28,494
(Increase) decrease, net of effect of acquisition:
Accounts and notes receivable.................................. (862,288) (150,480) (510,206)
Prepaid expenses and other..................................... 394,822 (63,759) (62,468)
Other assets................................................... 320,990 (16,581) (53,434)
Increase (decrease), net of effect of acquisition:
Accounts payable and accrued expense........................... (577,900) (544,907) 507,103
------------- ------------- -------------
Net cash used in operating activities.............................. (1,224,486) (2,289,481) (1,069,303)
------------- ------------- -------------
Cash flows from investing activities:
Additions to property and equipment................................ (193,276) (208,317) (101,396)
Purchase of USC, net of cash acquired.............................. (6,974,685) -- --
Purchase of LDN, net of cash acquired.............................. -- (1,330,397) --
Cash used for discontinued SATC business........................... (34,481) (195,393) (286,127)
Sale of assets..................................................... 60,622 -- --
Other.............................................................. -- (9,451) 14,180
------------- ------------- -------------
Net cash used in investing activities................................ (7,141,820) (1,743,558) (373,343)
------------- ------------- -------------
Cash flows from financing activities:
Borrowings......................................................... 7,450,000 120,000 --
Principal payments on obligations.................................. (1,971,510) (39,642) (100,000)
Proceeds from private placements of common stock................... 2,073,104 1,885,348 1,621,499
Proceeds from exercise of options.................................. 307,019 1,200,372 1,093,967
Proceeds from Series A Preferred Stock............................. 1,000,000 -- --
------------- ------------- -------------
Net cash provided by financing activities............................ 8,858,613 3,166,078 2,615,466
------------- ------------- -------------
Increase (decrease) in cash.......................................... 492,307 (866,961) 1,172,820
Cash at beginning of year............................................ 331,431 1,198,392 25,572
------------- ------------- -------------
Cash at end of year.................................................. $ 823,738 $ 331,431 $ 1,198,392
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
SA Telecommunications, Inc. (STEL or the Company) is a full-service,
switch-based global telecommunications carrier that provides intrastate,
interstate and international service, as well as a variety of operator and other
services. In 1995, the Company changed its name to SA Telecommunications, Inc.
from SA Holdings, Inc. to better reflect the focus on its core
telecommunications business.
The Company conducts its domestic telecommunication operations through U.S.
Communications, Inc. (USC) (acquired effective June 1, 1995--See Note 3) and
Long Distance Network, Inc. (LDN) (acquired effective March 1, 1994--See Note
4). USC and LDN provide direct dial long distance services to small and
medium-sized commercial customers and, to a lesser extent, residential
customers. Additionally, operator services (telephone calling card, collect,
third party billing, and credit card calls requiring operator assistance) are
provided to hotels, motels, hospitals, universities, private pay telephone
owners, and residences. Domestic telecommunications revenue comprised
approximately 92%, 76% and 0% of consolidated revenues in 1995, 1994 and 1993,
respectively.
The Company conducts its international telecommunications operations mainly
in Central and South America through North America Telecommunications
Corporation (NATC). NATC is a private telecommunications carrier which provides
various long distance telecommunications services to its foreign customers,
including interchange services, operator services, international long distance,
voice mail, conference calling, and facsimile distribution. Foreign revenues
comprised approximately 8%, 22% and 98% of total consolidated revenues in 1995,
1994 and 1993, respectively. NATC conducts business under the product name of
"GlobalCOM."
Until September 1995, the Company participated in various joint ventures in
the Baltic States and Commonwealth of Independent States (formerly the Soviet
Union). At September 30, 1995, the Company terminated its participation in these
joint ventures to focus on its telecommunications business. These operations had
no significant impact on the consolidated balance sheets at December 31, 1995
and 1994 or the consolidated statements of operations for the three years ended
December 31, 1995.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation. Certain prior period amounts have been
reclassified for comparative purposes.
FINANCIAL INSTRUMENTS
The fair market value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. The Company
believes that the fair values of financial instruments approximate their
recorded values.
BUSINESS AND CREDIT CONCENTRATIONS
In the normal course of business, the Company extends unsecured credit to
its customers. All international telecommunications services are billed and
principally paid in U.S. dollars. Management has provided an allowance for
doubtful accounts to provide for amounts which may eventually become
uncollectible and to provide for any disputed charges. Two domestic
telecommunications customers
F-16
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounted for approximately 31% and 8%, respectively, of total consolidated
revenues in 1994. No customers individually accounted for more than 10% of
consolidated revenues in 1995 or 1993.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and investments with
purchased original maturities of three months or less. The Company has
approximately $365,547 of cash and cash equivalents in excess of FDIC insured
limits at December 31, 1995. The Company has not experienced any losses on its
cash and cash equivalents.
INVENTORY
Inventory is valued at the lower of cost or market with the cost determined
using the first-in, first-out method. Inventory consists of automatic dialers
for installation in customers' telephone equipment at December 31, 1995 and
prepaid travel vouchers held for resale at December 31, 1994.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation for financial
statement purposes is provided by the straight-line method over the estimated
useful lives of the depreciable assets. Maintenance and repairs are expensed as
incurred while replacements and betterments are capitalized.
GOODWILL AND RELATED INTANGIBLES
Goodwill and related intangibles reflect the acquired cost of goodwill,
customer lists, noncompete agreements, and related items. These intangibles are
amortized by the straight-line method over their estimated useful lives. It is
the Company's policy to periodically review the net realizable value of its
intangible assets through an assessment of the estimated future cash flows
related to such assets. The specific business to which these intangible assets
relate is reviewed to determine whether future cash flows, over the remaining
estimated life of the asset, provide for recovery of the assets. In the event
that total assets (including property and equipment) are found to be stated at
amounts in excess of estimated future cash flows, the assets are adjusted for
impairment to a level commensurate with a discounted cash flow analysis of the
underlying assets.
REVENUE RECOGNITION
The Company recognizes revenue as services are performed based on customer
usage, net of an estimate for uncollectible revenue. The Company sells its
services to its customers primarily on a measured time basis.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" (SFAS 123), was issued. This statement
requires the fair value of stock options and other stock-based compensation
issued to employees to either be included as compensation expense in the income
statement, or the pro forma effect on net income and earnings per share of such
compensation expense to be disclosed in the footnotes to the Company's financial
statements commencing with the Company's 1996 fiscal year. This Company expects
to adopt SFAS 123 on a disclosure basis only. As such,
F-17
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
implementation of SFAS 123 is not expected to impact the Company's consolidated
balance sheet or statement of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
LOSS PER SHARE
Loss per share is computed by dividing the net loss by the weighted average
number of shares of common stock outstanding during the periods. The effect of
outstanding options and warrants on the computation of net loss per share is
antidilutive and, therefore, is not included in the computation for the years
ended December 31, 1995, 1994 and 1993.
FEDERAL INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Deferred
income taxes are calculated utilizing an asset and liability approach whereby
deferred taxes are provided for tax effects of basis differences for assets and
liabilities arising from differing treatments for financial and income tax
reporting purposes. Valuation allowances against deferred tax assets are
provided where appropriate. There was no impact on the consolidated financial
statements upon adoption of SFAS 109.
STATEMENT OF CASH FLOWS
Cash paid for interest for the years ended December 31, 1995, 1994 and 1993
was $374,249, $21,896 and $13,463, respectively.
3. ACQUISITION OF U.S. COMMUNICATIONS, INC.
Effective June 1, 1995, the Company acquired all of the outstanding common
stock of U.S. Communications, Inc. (USC), a domestic interexchange long distance
carrier located in Levelland, Texas. The stated purchase price of $12 million
for the USC common stock and the covenants not to compete were paid (i) $6.5
million in cash, (ii) $2.75 million in notes bearing 11% interest per annum,
(iii) $1.5 million in a separate group of notes also bearing 11% interest per
annum, (iv) 125,000 shares of Series B Preferred Stock of the Company, and (v)
common stock purchase warrants exercisable into 1,050,000 shares of stock at
$1.25 per common share. The parties placed $300,000 of the cash portion of the
purchase price into escrow at a bank in order to satisfy claims of the Company
of any breach or nonperformance of representations, warrants, covenants or other
obligations of the sellers. Additionally, the Company has the right to offset
the amounts payable under the $1.5 million notes for any event for which the
Company is entitled to indemnification. The Company has recorded the Series B
Preferred Stock and common stock purchase warrants at their respective fair
values as of the date of issuance.
F-18
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITION OF U.S. COMMUNICATIONS, INC. (CONTINUED)
In order to fund the cash portion of the purchase price, the Company
borrowed an aggregate of $7.0 million from Norwest Bank Minnesota, N.A. and
privately placed 166,667 shares of its Series A Preferred Stock along with a
common stock purchase warrant exercisable into 500,000 shares of stock at $1.125
per share with Jesup & Lamont Capital Markets, Inc. for $1.5 million. The
Company has recorded the Series A Preferred Stock and common stock purchase
warrants at their respective fair values as of the date of issuance.
The acquisition was accounted for as a purchase whereby the excess purchase
price over the net assets acquired has been recorded based upon the fair values
of assets acquired and liabilities assumed. The initial purchase price
allocations are based on current estimates and may change based on final
determination of fair value. As a result, the final purchase price allocations
may differ from the presented estimates.
The Company's consolidated statements of operations include the results of
operations of USC since June 1, 1995. The Company will also include USC in its
1995 consolidated federal income tax return for the period it was owned in 1995
for tax purposes.
A summary of the USC excess of cost for financial reporting purposes over
net assets acquired is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 LIFE
------------- ---
<S> <C> <C>
Goodwill.............................................................. $ 9,325,892 25
Covenants not to compete.............................................. 2,400,000 5
Customer acquisition costs............................................ 1,036,946 10
-------------
12,762,838
Accumulated amortization.............................................. (558,104)
-------------
$ 12,204,734
-------------
-------------
</TABLE>
The following unaudited pro forma combined results of operations for the
Company assume that the acquisition of USC was completed at the beginning of
1994. These pro forma amounts represent the historical operating results of USC
combined with those of the Company with appropriate adjustments which give
effect to interest expense, amortization and utilization of consolidated net
operating loss carryforwards. These pro forma amounts are not necessarily
indicative of consolidated operating results which would have occurred had USC
been included in the operations of the Company during the periods presented, or
which may result in the future, because these amounts do not reflect full
transmission and switched service cost optimization, and the synergistic effect
on operating, selling, general and administrative expenses nor do the amounts
reflect any higher costs associated with unanticipated integration or other
organizational activities the Company may be forced to undertake as a result of
the acquisition.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Revenues....................................................... $ 28,694,683 $ 26,173,431
Net loss....................................................... (7,083,441) (3,864,545)
Net loss per share outstanding................................. (0.61) (0.42)
</TABLE>
F-19
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITION OF LONG DISTANCE NETWORK, INC.
Effective March 1, 1994, the Company acquired all of the outstanding common
stock of Long Distance Network, Inc. (LDN), a domestic interexchange long
distance carrier located in Dallas, Texas. The acquisition was accomplished
through the payment of $1,354,660 in cash and the issuance of 1,302,086 shares
of unregistered, restricted common stock of the Company to the shareholders of
LDN. The Company utilized working capital and funds generated from private
placements of unregistered, restricted common stock to complete the cash portion
of the transaction. Of the total 1,302,086 shares of unregistered, restricted
common stock issued, 1,041,666 shares related to the acquisition of LDN stock
and 260,420 shares related to "Covenants Not to Compete."
The acquisition was accounted for as a purchase whereby the excess purchase
price over the net assets acquired has been recorded based upon the fair values
of assets acquired and liabilities assumed. The fair value of the stock issued
in connection with the acquisition was estimated to be approximately $3,750,000,
which reflects a discount of approximately 25% from the market price of the
Company's publicly traded stock and, in management's view, is reasonable given
its restricted nature.
The Company's consolidated statements of operations include the results of
operations of LDN since March 1, 1994.
A summary of the LDN excess of cost over net assets acquired is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1995 1994 LIFE
------------ ------------ ----------
<S> <C> <C> <C>
Goodwill........................................................ $ 3,983,080 $ 3,983,080 25 Years
Covenants not to compete........................................ 750,000 750,000 10 Years
Customer acquisition costs...................................... 442,563 442,563 10 Years
------------ ------------
5,175,643 5,175,643
Accumulated amortization........................................ (510,729) (232,149)
------------ ------------
$ 4,664,914 $ 4,943,494
------------ ------------
------------ ------------
</TABLE>
The following unaudited pro forma combined results of operations for the
Company assume that the acquisition of LDN was completed at the beginning of
1993. These pro forma amounts represent the historical operating results of LDN
combined with those of the Company with appropriate adjustments which give
effect to amortization and shares of common stock issued. These pro forma
amounts are not necessarily indicative of consolidated operating results which
would have occurred had LDN been included in the operations of the Company
during the periods presented, or which may result in the future, because these
amounts do not reflect full transmission and switched service cost optimization,
and the synergistic effect on operating, selling, general and administrative
expenses nor do the amounts reflect any higher costs associated with
unanticipated integration or other organizational activities the Company may be
forced to undertake as a result of the acquisition.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1994 1993
------------- -------------
<S> <C> <C>
Revenues....................................................... $ 11,136,615 $ 11,097,986
Net loss....................................................... (2,474,726) (1,346,915)
Net loss per share outstanding................................. (0.26) (0.17)
</TABLE>
F-20
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DISCONTINUED OPERATIONS
On December 28, 1994, the Company's board of directors approved a spinoff of
the Company's title plant services subsidiary, Strategic Abstract and Title
Corporation (SATC), in the form of a stock dividend to shareholders. During
1995, SATC filed a Form 10-SB registration statement with the Securities and
Exchange Commission to become a publicly traded company prior to the
distribution to shareholders. Subsequent to this filing, a decision was made to
cancel the spinoff and sell 100% of the stock of the subsidiary, due in large
part to the SATC president's death in September 1995. As a result, an additional
$475,000 reserve was established for SATC losses until the expected date of
disposal.
On February 29, 1996, SATC was sold to a key member of SATC management for a
$500,000 note, payable over ten years, bearing interest at 7% per annum. At
December 31, 1995, the Company recorded an impairment loss of $4,055,742,
including a reserve against the note, to reflect the net realizable value of
SATC. Included among the SATC total assets are other assets, primarily trade
credits with a book value of $362,000, of which the Company retained a minority
portion at a de minimus value.
Revenues for SATC for the years ended December 31, 1995, 1994 and 1993 were
$354,892, $142,212 and $315,078, respectively.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1995 1994 LIFE
------------ ---------- -------------
<S> <C> <C> <C>
Land.......................................................... $ 49,000 $ 34,000
Buildings..................................................... 605,826 136,596 30-40 Years
Switching equipment........................................... 2,244,450 470,893 3-5 Years
Software...................................................... 30,505 37,584 5 Years
Office equipment.............................................. 779,116 230,039 5 Years
Furniture and fixtures........................................ 202,755 69,910 5-7 Years
------------ ----------
$ 3,911,652 $ 979,022
------------ ----------
------------ ----------
</TABLE>
Switching equipment totaling $500,701 and $470,893 was acquired under
capital leases in 1995 and 1994, respectively. The Company has the option to
purchase the switching equipment upon the expiration of the lease. Total
depreciation expense, including amortization of equipment under capital leases,
charged to operations for the years ended December 31, 1995, 1994 and 1993 was
$449,402, $158,612 and $122,082, respectively.
F-21
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SHORT-TERM NOTES PAYABLE
Short-term notes payable consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
Convertible, subordinated debentures with interest at 8% due in June
1996................................................................ $ 450,000 $ --
Note payable to an officer and director with interest at 12% due in
June 1996........................................................... 25,610 30,610
Note payable to a financing institution............................... -- 99,000
---------- ----------
$ 475,610 $ 129,610
---------- ----------
---------- ----------
</TABLE>
On February 9, 1996, the convertible, subordinated debentures were converted
into 267,856 shares of the Company's common stock.
F-22
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM OBLIGATIONS
Long-term obligations consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
------------- ----------
<S> <C> <C>
Senior note payable to a bank.......................................................... $ 6,850,000 $ --
Subordinated notes payable to former USC shareholders due on October 1, 1996 with
interest payable quarterly at 11% per annum.......................................... 1,650,000 --
Subordinated notes payable to former USC shareholders with $308,500 due on March 8,
1996, $441,500 due on April 15, 1996 and $750,000 due on July 31, 1996 plus interest
at 11% per annum..................................................................... 1,500,000 --
Notes payable to former USC shareholders due in monthly installments of $2,319
including interest at 8.5% with the balances due in 1996 and 1997.................... 32,638 --
Note payable to a trust (collateralized by land and building) due in monthly
installments of $1,586 including interest at 10% with the balance due in 2004........ 107,994 115,796
Note payable to a bank (collateralized by land, building and equipment) due in monthly
installments of $8,338 including interest at 9.75% with the balance due in 1998...... 181,232 --
Note payable to a finance company (unsecured) due in monthly installments of $752,
including interest at 7.5% with the balance due in 2000.............................. 33,019 --
Note payable to a bank (collateralized by equipment) due in monthly installments of
$2,170 including interest at 9.75% with the balance due in 1996...................... 15,904 --
Capital lease obligations.............................................................. 823,099 404,845
------------- ----------
11,193,886 520,641
Less current maturities:
Long-term debt....................................................................... (3,632,035) (7,801)
Capital lease obligations............................................................ (163,181) (82,447)
------------- ----------
Long-term portion...................................................................... $ 7,398,670 $ 430,393
------------- ----------
------------- ----------
</TABLE>
The Company obtained a $10 million senior credit facility from a bank to
facilitate the acquisition of USC of which $6,850,000 was outstanding at
December 31, 1995. Additional advances under the credit facility are dependent
upon the Company meeting certain predetermined levels of operating cash flow.
The borrowings are secured by principally all of the assets of the Company.
Principal payments will be due in quarterly installments commencing on December
31, 1996 with the balance due on June 30, 2000.
The borrowings bear interest at a floating rate of from 1% to 2% above the
bank's prime rate (9.75% at December 31, 1995) depending on the ratio of senior
debt to operating cash flow. At the Company's option, the interest rate may be
fixed at a floating rate of from 3% to 4% above the London Interbank Offered
Rate (LIBOR) which is also dependent on the ratio of senior debt to operating
cash flow. Interest is payable quarterly.
F-23
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM OBLIGATIONS (CONTINUED)
The credit facility agreement contains covenants which, among other
restrictions, (i) limit the Company's ability to incur indebtedness, merge,
consolidate and acquire or sell assets; (ii) require the Company to satisfy
certain ratios related to operating cash flow and senior debt service coverage;
and (iii) limit the payment of interest and principal on subordinated debt.
At September 30, and December 31, 1995, the Company was not in compliance
with the senior leverage ratio and operating cash flow maintenance requirements
contained in the senior credit agreement. On November 10, 1995 and March 13,
1996, respectively, the Company entered into amendments with the bank to waive
these events of default and reset the ratio and maintenance requirements for
periods subsequent to the default after the actual USC results of operations
were determined. The Company expects to be in compliance with the covenant
requirements at all future measurement dates. Under these amendments, the
Company was required to pay one-time waiver fees to the bank of $35,000 and to
pay down the principal by $150,000.
On March 8, 1996, the Company entered into an agreement with the former USC
shareholders to purchase debt and equity securities of the Company issued to the
USC shareholders in connection with the acquisition of USC for a $3,085,000
purchase price. The securities to be purchased by the Company consist of
promissory notes of the Company in an aggregate principal amount of $3,150,000,
125,000 shares of the Company's Series B Cumulative Convertible Preferred Stock
and warrants exercisable into 1,050,000 shares of the Company's Common Stock.
The closing of the agreement is subject to, among other things, the
completion of financing by the Company.
9. CAPITAL STOCK
At December 31, 1995, the Chairman and Chief Executive Officer of the
Company voted an aggregate 1,703,781 shares of common stock (13% of voting
control) pursuant to various voting trust agreements. The agreements were
established in conjunction with the LDN acquisition, private placements and
other operating activities of the Company where terms of the transactions
included securities of the Company.
Each share of Series A Cumulative Convertible Preferred Stock entitles its
holder to receive an annual dividend of $.72 per share, payable at the option of
the Company in either cash or shares of Series A Preferred Stock; to convert it
into eight shares of Common Stock as adjusted in the event of future dilution
from stock dividends and recapitalizations; to receive up to $9.00 per share
plus accrued and unpaid dividends in the event of involuntary or voluntary
liquidation; and, subject to certain conditions in loan agreements, may be
redeemed at the option of the Company on or after July 31, 1997, but must be
mandatorily redeemed no later than July 31, 2000, at a price of $9.00 per share
plus accrued and unpaid dividends. Due to the mandatory redemption requirements,
the Series A Preferred Stock was recorded at its fair value at the date of
issuance, with increases to its carrying value via periodic accretions up to the
mandatory redemption date.
Each share of Series B Cumulative Convertible Preferred Stock entitles its
holder to receive an annual dividend of $.80 per share payable at the option of
the Company in either cash or shares of Series B Preferred Stock; to convert it
into eight shares of Common Stock, as adjusted in the event of future dilution
from stock dividends and recapitalizations; to receive up to $10.00 per share
plus accrued and unpaid dividends in the event of involuntary or voluntary
liquidation; and, subject to certain conditions in loan agreements, may be
redeemed at the option of the Company on or after July 31, 1997 at a price of
F-24
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CAPITAL STOCK (CONTINUED)
$10.00 per share plus accrued and unpaid dividends. The Series B Preferred Stock
was recorded at its fair value at the date of issuance. Present holders of the
Series B Cumulative Convertible Preferred Stock have waived their conversion
rights.
In September 1995, the Company sold 1,100,000 shares of unregistered,
restricted Common Stock in a private placement transaction ($1,374,890). In
conjunction with this transaction, the purchasers received common stock purchase
warrants exercisable into an aggregate of 1,100,000 shares of stock at $1.25 per
share.
In 1991, the Company acquired approximately 24,110 net acres of coal methane
gas leases located in Johnson and Campbell Counties, Wyoming. The Company issued
450,000 shares of unregistered, restricted common stock as consideration for the
purchase, valued at $2,250,000. Effective December 31, 1993, all parties
mutually agreed that it would be in their best interests to dissolve this
agreement and did so accordingly. The Company recorded the dissolution by
removing the properties from its books and canceling the 450,000 shares of
common stock. This dissolution resulted in the reduction of total assets by
$2,250,000, shareholders' equity by $2,250,000, and common shares outstanding by
450,000 shares. There was no impact on the Company's consolidated results of
operations.
In 1993, the Company canceled its agreement to acquire certain foreign trade
license agreements because of defaults by the seller. In connection with this
cancellation, the Company canceled a $25,000 note payable and 567,260 shares of
the Company's common stock held in escrow at a value of $250,000, with a
corresponding $275,000 reduction of license agreements. There was no impact on
the Company's consolidated results of operations.
10. STOCK OPTIONS
The Company has several stock option plans under which options to acquire up
to 8,000,000 shares may be granted to directors, officers and employees of the
Company. The options are nontransferable and forfeitable if the holder resigns
or leaves the Company for any reason. After a six-month waiting period from the
date of grant, the shares acquired upon exercise may only be sold over periods
of from eighteen to thirty months. An aggregate of 4,571,750 options had been
granted under these plans as of December 31, 1995.
F-25
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS (CONTINUED)
Additional information regarding options granted and outstanding is
summarized below:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS EXERCISE PRICE
----------- --------------
<S> <C> <C>
Outstanding at December 31, 1992................................ 2,131,200 $ 0.58 - $2.53
Granted....................................................... 2,170,847 $ 0.43 - $0.80
Exercised..................................................... (1,511,236) $ 0.43 - $2.53
Canceled/Expired.............................................. (448,500) $ 0.43 - $2.53
-----------
Outstanding at December 31, 1993................................ 2,342,311 $ 0.43 - $2.53
Granted....................................................... 1,089,500 $ 2.63 - $3.56
Exercised..................................................... (1,057,075) $ 0.43 - $2.53
Canceled/Expired.............................................. (259,936) $ 0.43 - $2.53
-----------
Outstanding at December 31, 1994................................ 2,114,800 $ 0.43 - $3.56
Granted....................................................... 994,250 $ 1.75 - $1.88
Exercised..................................................... (914,861) $ 0.43 - $1.25
Canceled/Expired.............................................. (70,719) $ 0.43 - $3.56
-----------
Outstanding at December 31, 1995................................ 2,123,470 $ 0.43 - $3.56
-----------
-----------
</TABLE>
All of the options outstanding at December 31, 1995 were exercisable at
prices ranging from $0.43 to $3.56. All stock options were granted at exercise
prices not less than the fair market value of the underlying stock on the date
of grant.
F-26
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. FEDERAL INCOME TAXES
The components of the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Trade credits................................... $ -- $ 192,613
Allowance for doubtful accounts................. 126,210 77,246
Other reserves.................................. 123,931 --
Amortization on excess of cost over net assets
acquired...................................... 100,541 --
Net operating loss carryforwards................ 3,047,698 1,297,033
-------------- --------------
Gross deferred tax asset...................... 3,398,380 1,566,892
Deferred tax liabilities:
Depreciation on other assets.................... 40,235 44,345
Other deferred costs............................ 9,958 54,762
-------------- --------------
Gross deferred tax liabilities................ 50,193 99,107
-------------- --------------
3,348,187 1,467,785
Valuation allowance............................... (3,348,187) (1,467,785)
-------------- --------------
Net deferred tax asset............................ $ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
The following is a reconciliation of the provision for income taxes at the
U.S. federal income tax rate to the income taxes reflected in the consolidated
statements of operations:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Income tax benefit at Federal statutory rate........... $ (657,975) $ (618,484) $ (329,597)
Net operating losses not benefited..................... 657,975 611,117 328,084
Other.................................................. -- 7,367 1,513
----------- ----------- -----------
Income tax benefit provided............................ $ -- $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
At December 31, 1995, the Company had net operating loss carryforwards
aggregating approximately $8,963,815 which expire in various years between 2003
and 2010. If certain changes in the Company's ownership should occur as defined
by Internal Revenue Code Section 382, there would be an annual limitation on the
amount of tax carryforwards which can be utilized.
12. EMPLOYMENT CONTRACTS
Effective March 24, 1995, the Company entered into a new Employment
Agreement with the Chairman of the Board and Chief Executive Officer, Mr. Jack
W. Matz, Jr. In connection with this agreement, the parties agreed to terminate
Mr. Matz's previous Employment Agreement dated November 1, 1992. The current
Employment Agreement with Mr. Matz covers a period of five years at an annual
salary of $150,000 and contains a bonus schedule ranging from 1% to 8% of
audited consolidated net income on an annual basis. In addition to the salary
and cash bonuses, Mr. Matz can earn an aggregate of 60,000 shares of
unregistered, restricted common stock for meeting certain earnings per share
goals. As a
F-27
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYMENT CONTRACTS (CONTINUED)
condition for Mr Matz's agreement to release any and all claims under his
previous Employment Agreement, Mr. Matz received an option to acquire up to
1,000,000 shares of unregistered, restricted common stock at an exercise price
of $1.25 per share (fair value of the underlying stock at the date of grant).
This stock option is exercisable for up to five years and vests 200,000 shares
upon execution of the agreement and 160,000 shares annually over five years.
However, if Mr. Matz is terminated prior to the option fully vesting, the number
of shares exercisable will be the greater of 500,000 shares plus all vested but
unexercised options then outstanding.
13. LEASES
The Company leases certain office facilities and equipment under capital
leases and noncancellable operating leases expiring through 2000. Minimum annual
rentals under these leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
- ------------------------------------------------------------------ ------------ ------------
<S> <C> <C>
1996.............................................................. $ 248,397 $ 411,007
1997.............................................................. 248,397 382,872
1998.............................................................. 248,397 310,330
1999.............................................................. 172,917 282,160
2000.............................................................. 135,177 279,964
------------ ------------
Total minimum lease payments...................................... 1,053,285 $ 1,666,333
------------
------------
Amounts representing interest..................................... 230,182
------------
Present value of net minimum lease payments....................... $ 823,103
------------
------------
</TABLE>
The total rent expense incurred during the years ended December 31, 1995,
1994 and 1993 was $319,758, $165,429 and $78,261, respectively.
14. RELATED PARTY TRANSACTIONS
During 1993, five members of the board of directors individually made loans
to the Company in amounts ranging from $25,000 to $72,000. All loans were repaid
during the year ended December 31, 1993, including accrued interest at 12% per
annum. As an inducement for making the loans, each director was granted an
option at $.75 per share (fair market value of the underlying stock at date of
grant) and a warrant at $.94 per share to purchase one share of the Company's
unregistered, restricted common stock, for each $.75 of principal loaned to the
Company, representing an aggregate of 552,030 shares. The options expire on
April 1, 1998 and the warrants expire on April 1, 2003. No options or warrants
were exercised during 1995, 1994 or 1993.
In 1995, six members of the board of directors made loans to the Company
aggregating $293,610 with interest at 12% per annum. All loans were repaid
during the year with the exception of $25,610 outstanding at December 31, 1995.
In connection with such loans, four directors accepted options to purchase
54,287 shares of the Company's unregistered, restricted common stock, all
exercisable between June 17, 1995 and December 17, 1995 at $1.75 per share. All
of such options expired unexercised.
F-28
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
A $195,904 note receivable due from an officer and director bearing interest
at 10% and due in April 1996 is reflected on the consolidated balance sheet in
other notes receivable at December 31, 1995 and in employee note receivable at
December 31, 1994.
15. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. Management believes it is unlikely that the final
outcome of any of the claims or proceedings to which the Company is a party
would have a materially adverse effect on the Company's financial position or
results of operations.
16. BENEFIT PLAN
The Company has adopted the USC 401K Retirement Plan (the Plan) effective
January 1, 1996. Employees may elect to reduce their compensation and contribute
to the Plan provided they are a full-time employee having worked more than 1,000
hours in a six-month period and have attained the age of twenty. Each employee
may defer up to 10% of their salary not to exceed the limit allowable by law in
any one year. Vesting is 20% per year of employment and the employee must be
employed at December 31 to receive that year's vesting. The Company may, at its
option, make discretionary matching contributions not to exceed a maximum of 5%.
No Company contributions were made during 1995. Distributions from the Plan are
not permitted before the age of 59 1/2 except in the event of death, disability,
termination of employment or reason of proven financial hardship.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
-------------------------------------------------------
MARCH 31, JUNE 30,
-------------------------- ---------------------------
1995 1994 1995 1994
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues................................................. $ 2,309,227 $ 1,464,662 $ 4,004,348 $ 2,862,105
Loss from continuing operations.......................... (241,562) (249,066) (545,418) (406,578)
Loss from discontinued operations........................ -- (114,355) (250,000) (108,766)
Net loss................................................. (241,562) (363,421) (795,418) (515,344)
Loss per share........................................... (0.02) (0.05) (0.07) (0.05)
<CAPTION>
FOR THE QUARTERS ENDED
-------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
-------------------------- ---------------------------
1995 1994 1995 1994
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues................................................. $ 7,459,367 $ 2,769,182 $ 6,975,079 $ 2,659,394
Loss from continuing operations.......................... (950,965) (759,457) (197,275) (403,969)
Loss from discontinued operations........................ (225,000) (106,371) (4,055,742) (298,421)
Net loss................................................. (1,175,965) (865,828) (4,253,017) (702,393)
Loss per share........................................... (0.10) (0.09) (0.36) (0.08)
</TABLE>
F-29
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1995
The unaudited consolidated pro forma statement of operations for the year
ended December 31, 1995, includes the historical results of operations of the
Company and USC as if the acquisition had been effected on January 1, 1995. The
Company acquired all of the outstanding common stock of USC effective June 1,
1995 and certain covenants not to compete for a stated purchase price of $12
million paid (i) $6.5 million in cash, (ii) $2.75 million in notes bearing 11%
interest per annum, (iii) $1.5 million in a separate group of notes also bearing
11% interest per annum, (iv) 125,000 shares of Series B Preferred Stock of the
Company, and (v) common stock purchase warrants exercisable into 1,050,000
shares of stock at $1.25 per common share. The statement is not necessarily
indicative of the results that would have been achieved had the transaction been
consummated as of the date indicated or which may be achieved in the future.
<TABLE>
<CAPTION>
SA TELECOMMUNICATIONS,
INC. U.S. COMMUNICATIONS, PRO FORMA
AND SUBSIDIARIES INC. ADJUSTMENTS COMBINED
-------------------------- -------------------- ----------- ----------
<S> <C> <C> <C> <C>
Telecommunications Revenues...... $ 20,748,021 $7,946,662 $28,694,683
Cost of Revenue.................. 14,116,113 4,637,548 18,753,661
------------ ----------- ----------
Gross Profit..................... 6,631,908 3,309,114 9,941,022
------------ ----------- ----------
Operating Expenses
General and Administrative..... 6,478,394 2,875,247 9,353,641
Depreciation and
Amortization................. 1,287,225 151,210 $ 398,645(A) 1,837,080
Nonrecurring Russian Venture
Charges...................... 143,399 143,399
------------ ----------- ----------- ----------
Total Operating Expenses....... 7,909,018 3,026,457 398,645 11,334,120
------------ ----------- ----------- ----------
Income (Loss) From Continuing
Operations Before Other Income
(Expense)...................... (1,277,110) 282,657 (398,645) (1,393,098)
Other Income (Expense):
Interest Expense............... (682,796) (36,280) (465,210)(B) (1,184,286)
Other, Net..................... 24,685 (98,600) 98,600(C) 24,685
------------ ----------- ----------- ----------
Total Other Income (Expense)..... (658,111) (134,880) (366,610) (1,159,601)
------------ ----------- ----------- ----------
Income (Loss) from Continuing
Operations..................... (1,935,221) 147,777 (765,255) (2,552,699)
Preferred Dividend Requirements,
Including Accretion............ (125,352) (175,493)(D) (300,845)
------------ ----------- ----------- ----------
Pro Forma Income (Loss) From
Continuing Operations
Applicable to Common
Shareholders................... $ (2,060,573) $ 147,777 $(940,748) $(2,853,544)
------------ ----------- ----------- ----------
------------ ----------- ----------- ----------
Pro Forma Loss From Continuing
Operations Per Share........... $ (0.17) $ (0.22)
------------ ----------
------------ ----------
Pro Forma Loss From Continuing
Operations Applicable to Common
Shareholders Per Share......... $ (0.18) $ (0.25)
------------ ----------
------------ ----------
Weighted Average Number of Common
Shares Outstanding............. 11,639,186 11,639,186
------------ ----------
------------ ----------
</TABLE>
F-30
<PAGE>
NOTES TO CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
The following describes the assumptions used in determining the pro forma
adjustments necessary to give effect on a pro forma basis to the transaction
described above:
(A) Adjustment to amortization of intangible assets arising from the USC
acquisition based on a useful life of 25 years.
(B) Interest expense related to $11,250,000 of obligations incurred in
connection with the acquisition with imputed interest at 9.9%.
(C) Adjustment from utilization of parent company losses to offset federal
income taxes.
(D) Preferred dividends related to preferred stock issued in connection with the
acquisition with a total face amount of $2,750,000 and a dividend rate of
8%, plus a portion of the accretion of the Series A preferred stock from its
fair value at issuance.
F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
U. S. Communications, Inc.
We have audited the accompanying balance sheets of U.S. Communications,
Inc., DBA: NTS Communications Western Division, as of December 31, 1994 and 1993
and the related statements of operations, changes in retained earnings and cash
flows for the years then ended. These financial statements are the
responsibility of U.S. Communications, Inc., DBA: NTS Communications Western
Division. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As described in Note 14 to these financial statements, the Company changed
its method of accounting for income taxes in 1993 as required by the provisions
of Statement of Financial Accounting Standards No. 109.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of U. S. Communications, Inc.,
DBA: NTS Communications Western Division as of December 31, 1994 and 1993, and
the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
Respectfully submitted,
/s/ DUFF AND ANDERSON, P.C.
Duff and Anderson, P.C.
Certified Public Accountants
Levelland, TX 79336
April 21, 1995
F-32
<PAGE>
U.S. COMMUNICATIONS, INC.
DBA: NTS COMMUNICATIONS WESTERN DIVISION
BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash........................................................................................... $ 48,554.55 $ 392,143.52
Certificates of Deposit (Note 7)............................................................... 1,185.72 1,160.89
Accounts Receivable--Trade, net of allowance for doubtful accounts of $132,700.00 and
$177,100.00, respectively.................................................................... 2,273,923.58 1,663,506.23
Accounts Receivable--Employees................................................................. 6,228.20 440.00
Inventories.................................................................................... 116,626.27 72,171.89
Prepaid Expenses and Other..................................................................... 53,853.05 46,263.40
Prepaid Income Taxes........................................................................... 128,150.00 .00
------------ ------------
Total Current Assets......................................................................... 2,628,521.37 2,175,685.93
------------ ------------
------------ ------------
Property, Plant and Equipment: (Note 2)
Land........................................................................................... 22,000.00 15,000.00
Buildings...................................................................................... 463,219.60 400,592.65
Furniture and Equipment........................................................................ 2,542,489.30 2,264,454.28
Automobiles.................................................................................... 229,110.06 308,697.20
------------ ------------
Total Property, Plant and Equipment.......................................................... 3,256,818.96 2,988,744.13
Less: Accumulated Depreciation................................................................. 2,103,010.48 1,733,404.57
------------ ------------
Net Property, Plant and Equipment............................................................ 1,153,808.48 1,255,339.56
------------ ------------
Other Non-Current Asset:
Cash Surrender Value of Life Insurance Policies (Note 9)....................................... 18,448.39 16,639.58
------------ ------------
TOTAL ASSETS................................................................................... $3,800,778.24 $3,447,665.07
------------ ------------
------------ ------------
LIABILITIES
Current Liabilities:
Accounts Payable............................................................................... $1,008,025.72 $ 762,727.72
Accrued Telecommunications Expense............................................................. 748,379.84 677,215.50
Accrued Payroll and Related Expense (Note 6)................................................... 177,487.55 153,047.27
Notes Payable (Note 3)......................................................................... 69,395.34 331,823.66
Notes Payable, Current Maturities of Long-Term Obligations (Note 3)............................ 227,646.17 140,966.46
State Sales Tax Payable........................................................................ 64,465.44 156,419.11
Federal Excise Tax Payable..................................................................... 119,276.60 100,110.78
Income Tax Payable: Current.................................................................... 245,000.00 136,416.00
------------ ------------
Total Current Liabilities.................................................................... 2,659,676.66 2,458,726.50
------------ ------------
Long-Term Liabilities:
Deferred Income Tax Payable (Note 14).......................................................... 43,026.00 56,910.00
Notes Payable, Less Current Maturities (Notes 3 & 4)........................................... 386,168.67 683,961.87
Capital Lease Payable, Less Current Maturities (Note 12)....................................... 39,149.05 .00
------------ ------------
Total Long-Term Liabilities.................................................................. 468,343.72 740,871.87
------------ ------------
Total Liabilities.......................................................................... 3,128,020.38 3,199,598.37
------------ ------------
STOCKHOLDERS' EQUITY
Contributed Capital:
Common Stock, authorized 100,000 shares of $10 par value, 9,750 shares issued.................. 97,500.00 97,500.00
------------ ------------
Retained Earnings................................................................................ 590,257.86 165,566.70
------------ ------------
Less: Treasury Common Stock, at cost 1,500 shares.............................................. (15,000.00) (15,000.00)
------------ ------------
Total Stockholders' Equity................................................................... 672,757.86 248,066.70
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................................. $3,800,778.24 $3,447,665.07
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
U.S. COMMUNICATIONS, INC.
DBA: NTS COMMUNICATIONS WESTERN DIVISION
STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
---------------- ----------------
<S> <C> <C>
Telecommunications Revenues.................................................. $ 16,418,088.39 $ 13,994,691.90
Cost of Revenues............................................................. 9,145,840.34 8,306,222.95
---------------- ----------------
Gross Profit................................................................. 7,272,248.05 5,688,468.95
---------------- ----------------
Operating Expenses:
General and Administrative................................................. 6,184,013.36 5,032,065.15
Depreciation............................................................... 429,432.27 469,182.67
---------------- ----------------
Total Operating Expenses................................................. 6,613,445.63 5,501,247.82
---------------- ----------------
Income From Operations....................................................... 658,802.42 187,221.13
---------------- ----------------
Other Income (Expense):
Interest Expense........................................................... (100,454.25) (160,300.22)
Interest Income............................................................ 99,207.40 148,302.32
Gain (Loss) on Disposal of Fixed Assets.................................... (7,135.52) 56,065.61
Miscellaneous.............................................................. 5,271.11 60.00
---------------- ----------------
Total Other Income (Expense)............................................. (3,111.26) 44,127.71
---------------- ----------------
Income Before Taxes.......................................................... 655,691.16 231,348.84
Provision for Income Taxes (Note 14)......................................... (231,000.00) (92,000.00)
---------------- ----------------
Income Before Cumulative Effect of Change in Accounting Principle............ 424,691.16 139,348.84
Cumulative Effect of Accounting Change....................................... .00 (103,000.00)
---------------- ----------------
NET INCOME............................................................... $ 424,691.16 $ 36,348.84
---------------- ----------------
---------------- ----------------
Earnings Per Common Share:
Income Before Cumulative Effect of Accounting Change....................... $ 51.48 $ 16.89
Cumulative Effect of Change in Accounting Principle........................ .00 (12.48)
---------------- ----------------
Net Income................................................................. $ 51.48 $ 4.41
---------------- ----------------
---------------- ----------------
Weighted Average Number of Common Shares Outstanding....................... 8,250 8,250
---------------- ----------------
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
U.S. COMMUNICATIONS, INC.
DBA: NTS COMMUNICATIONS WESTERN DIVISION
STATEMENTS OF CHANGES IN RETAINED EARNINGS
FOR YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
------------- -------------
<S> <C> <C>
Retained Earnings at Beginning of Year............................................. $ 165,566.70 $ 129,217.86
Net Income......................................................................... 424,691.16 36,348.84
------------- -------------
Retained Earnings at End of Year................................................... $ 590,257.86 $ 165,566.70
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
U.S. COMMUNICATIONS, INC.
DBA: NTS COMMUNICATIONS WESTERN DIVISION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
-------------- --------------
<S> <C> <C>
Cash Flow from Operating Activities:
Net Income...................................................................... $ 424,691.16 $ 36,348.84
Adjustments to Reconcile Net Income to Net Cash:
(Increase) Decrease in Accounts Receivable.................................... (616,205.55) (157,786.63)
(Increase) Decrease in Inventories............................................ (44,454.38) (10,247.33)
(Increase) Decrease in Notes Receivable....................................... 13,390.55 213,999.11
Depreciation.................................................................. 429,432.27 469,182.67
(Increase) Decrease in Prepaid Expenses....................................... (149,130.20) 25,538.72
Increase (Decrease) in Accounts Payable....................................... 289,510.57 (56,103.42)
Increase (Decrease) in Accrued Telecommunication Expense...................... 71,164.34 239,998.05
Increase (Decrease) in Taxes Payable.......................................... 2,139.86 125,089.14
(Gain) Loss on Disposition of Assets.......................................... 7,135.52 (56,065.61)
-------------- --------------
Total Adjustments............................................................. 2,982.98 793,604.70
-------------- --------------
Net Cash Flow from Operating Activities....................................... 427,674.14 829,953.54
-------------- --------------
Cash Flow from Investing Activities:
Purchase of Equipment........................................................... (408,730.27) (270,731.20)
Proceeds from Sale of Equipment................................................. 73,693.56 95,465.79
Increase in Certificates of Deposit............................................. (24.83) (25.05)
Cash Surrender Value of Life Insurance Policies................................. (1,808.81) (3,509.22)
-------------- --------------
Net Cash Flow from Investing Activities....................................... (336,870.35) (178,799.68)
-------------- --------------
Cash Flow from Financing Activities:
Payments on Notes Payable....................................................... (262,429.12) (171,024.04)
Borrowings...................................................................... 156,685.09 267,881.16
Principal Payment on Long-Term Borrowings....................................... (328,648.73) (381,899.91)
-------------- --------------
Net Cash Flow from Financing Activities....................................... (434,392.76) (285,042.79)
-------------- --------------
Net Increase (Decrease) in Cash................................................... (343,588.97) 366,111.07
Cash at the Beginning of the Year................................................. 392,143.52 26,032.45
-------------- --------------
Cash at the End of the Year....................................................... $ 48,554.55 $ 392,143.52
-------------- --------------
-------------- --------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Income Taxes................................................................ $ 254,566.00 $ .00
Interest.................................................................... 100,454.25 160,300.22
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
U.S. COMMUNICATIONS, INC.
DBA: NTS COMMUNICATIONS WESTERN DIVISION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
BACKGROUND:
U.S. Communications, Inc. (the "Company") is a Texas corporation which was
chartered May 7, 1985. Its purpose is to provide long distance telecommunication
services to the southwestern region of the United States, with the primary
emphasis on the West Texas area. At the present time the Company does business
as NTS Communications Western Division and Southwest Long Distance Network, Inc.
with offices in Levelland (home), Brownfield, Dallas, El Paso, Lamesa, Big
Spring, Odessa and Snyder, Texas. Additional office locations include Oklahoma
City, Oklahoma, Hobbs, Roswell, Las Cruces and Albuquerque, New Mexico, Fort
Smith and Springdale, Arkansas, and Phoenix, Arizona.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company maintains cash and short term certificates of deposit. For
financial reporting purposes any certificate of deposit with a maturity of more
than ninety days is not considered a cash equivalent.
ACCOUNTS RECEIVABLE
Accounts Receivable is stated based on billed and unbilled long distance
services less the current month's discounts earned for early payment. Interest
is assessed on past due amounts receivable and is recorded in the month earned.
Allowances for doubtful accounts are provided at a rate of fifty percent of
ninety day past due accounts.
INVENTORIES
Inventories are stated at the lower of cost (determined on the last in,
first out basis) or market.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at acquisition cost. Depreciation of
such property and equipment is based on a straight-line method over the
estimated useful lives of the respective assets for financial reporting purposes
and on methods acceptable and approved by the Internal Revenue Service for
federal income tax reporting.
CASH SURRENDER OF LIFE INSURANCE POLICIES
The Company has provided life insurance coverage on key management personnel
within the organization. As time passes these policies accumulated cash value
which can be applied to future premiums, loans or cashed. The Company holds a
lien against such policies and records cash accumulations as a non-current asset
redeemable at some point in the future.
ACCRUED EXPENSES
Amounts shown as accrued telecommunications expense include accruals for
line costs on long distance services which have been recognized as income and
recorded in accounts receivable.
F-37
<PAGE>
U.S. COMMUNICATIONS, INC.
DBA: NTS COMMUNICATIONS WESTERN DIVISION
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
As addressed in Note 14, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109),
effective January 1, 1993. The impact of adoption was not significant. Deferred
income taxes are calculated using an asset and liability approach wherein
deferred taxes are provided for basis differences for assets and liabilities
arising from differing treatments for financial and income tax reporting.
NOTE 2. SUMMARY OF PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
BALANCE BALANCE
12-31-94 12-31-93
--------------- ---------------
<S> <C> <C>
CATEGORY
Land........................................................ $ 22,000.00 $ 15,000.00
Buildings................................................... 463,219.60 400,592.65
Furniture and Equip......................................... 2,542,489.30 2,264,454.28
Automobiles................................................. 229,110.06 308,697.20
--------------- ---------------
$ 3,256,818.96 $ 2,988,744.13
--------------- ---------------
--------------- ---------------
ACCUMULATED DEPRECIATION
<CAPTION>
BALANCE BALANCE
12-31-94 12-31-93
--------------- ---------------
<S> <C> <C>
CATEGORY
Land........................................................ $ .00 $ .00
Buildings................................................... 47,909.34 33,020.16
Furniture and Equip......................................... 1,888,177.19 1,525,823.04
Automobiles................................................. 166,923.95 174,561.37
--------------- ---------------
$ 2,103,010.48 $ 1,733,404.57
--------------- ---------------
--------------- ---------------
</TABLE>
NOTE 3. NOTES PAYABLE
The Company's debt consists of several short and long-term notes with
various lenders. The notes were issued in connection with the purchase of
equipment and automobiles, and for working capital purposes.
Notes issued relating to equipment and automobiles are collateralized by
such assets. The note issued for the building and additional equipment is
secured by such assets. Furthermore, the building and equipment loan is
personally guaranteed by the stockholders as required by the Small Business
Administration.
The largest of the equipment notes is secured by the equipment and the
stockholders have assigned life insurance policies to the parties participating
in the loan origination in accordance with loan requirements.
F-38
<PAGE>
U.S. COMMUNICATIONS, INC.
DBA: NTS COMMUNICATIONS WESTERN DIVISION
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
NOTE 3. NOTES PAYABLE (CONTINUED)
All working capital notes are unsecured.
Interest rates vary from a low of 5 percent to a high of 14.728 percent. The
majority of notes contain clauses for a "variable" rate of interest which are
adjusted periodically according to market rates.
Long-term obligations at December 31, consist of:
<TABLE>
<CAPTION>
1994 1993
-------------- --------------
<S> <C> <C>
Note payable to a bank (collateralized by land, building, and equipment)
due in monthly installments of $8,338.00 including interest at 11%
(Variable Rate) with the balance due in 1998.......................... $ 250,003.70 $ 322,631.87
Note payable to a bank (collateralized by land and building) due in
monthly installments of $750.62 including interest at 11% (Variable
Rate) with the balance due in 1999.................................... 53,544.73 .00
Note payable to a bank (collateralized by equipment) due in monthly
installments of $2,170.55 including interest at 11% (Variable Rate)
with the balance due in 1996.......................................... 36,926.06 .00
Note payable to a bank (collateralized by automobile) due in monthly
installments of $706.16 including interest at 10.50% (Variable Rate)
with the balance due in 1996.......................................... 15,147.68 22,409.99
Note payable to a bank (collateralized by truck) due in monthly
installments of $405.62 including interest at 10% (Variable Rate) with
the balance due in 1996............................................... 5,482.65 9,971.68
Note payable to finance company (collateralized by equipment) due in
monthly installments of $596.86 including interest at 14.728% (Fixed)
with the balance due in 1995.......................................... .00 10,035.13
Note payable to finance company (collateralized by equipment) due in
monthly installments of $6,557.00 including interest of 12.50% (Fixed)
with the balance due in 1995.......................................... .00 117,515.93
Note payable to a bank (collateralized by a truck) due in monthly
installments of $317.65 including interest at 8.25% (Variable Rate)
with the balance due in 1995.......................................... .00 5,006.05
Note payable to a bank (collateralized by a truck) due in monthly
installments of $355.93 including interest at 6.25% (Variable Rate)
with the balance due in 1995.......................................... .00 7,381.41
Note payable to a bank (collateralized by an automobile) due in monthly
installments of $469.90 including interest at 6.25% (Variable Rate)
with the balance due in 1995.......................................... .00 5,436.44
</TABLE>
F-39
<PAGE>
U.S. COMMUNICATIONS, INC.
DBA: NTS COMMUNICATIONS WESTERN DIVISION
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
NOTE 3. NOTES PAYABLE (CONTINUED)
<TABLE>
<CAPTION>
1994 1993
-------------- --------------
<S> <C> <C>
Note payable to a bank (collateralized by a truck) due in monthly
installments of $395.31 including interest at 6.25% (Variable Rate)
with the balance due in 1995.......................................... .00 8,897.16
Note payable to a bank (collateralized by a truck) due in monthly
installments of $421.22 including interest at 10% (Fixed) with the
balance due in 1995................................................... .00 8,444.81
Note payable to a municipality (collateralized by life insurance
policies) due in monthly installments of $4,915.04 including interest
at 5% (Fixed) with the balance due in 1997............................ 186,265.24 247,524.26
Note payable to stockholder (unsecured) due in monthly installments of
$590.82 including interest at 8.50% (Variable Rate) with the balance
due in 1996........................................................... 15,895.56 17,473.92
Note payable to stockholder (unsecured) due in monthly installments of
$636.27 including interest at 8% (Fixed) with the balance due in
1996.................................................................. 11,877.88 .00
Note payable to individual (unsecured) due in monthly installments of
$620.72 including interest at 8.50% (Variable Rate) with the balance
due in 1996........................................................... 15,710.81 21,087.25
Note payable to stockholder (unsecured) due in monthly installments of
$471.54 including interest at 8.50% (Variable Rate) with the balance
due in 1996........................................................... 13,149.38 21,112.43
Capital lease obligation (Note 12)...................................... 48,960.20 .00
-------------- --------------
652,963.89 824,928.33
Less current maturities:
Long-term debt........................................................ (217,835.02) (140,966.46)
Capital lease obligations............................................. (9,811.15) .00
-------------- --------------
Long-term Portion....................................................... $ 425,317.72 $ 683,961.87
-------------- --------------
-------------- --------------
The Company had short-term notes due in 1994 and 1993 collateralized by
equipment and trucks, and unsecured short-term notes for operating
purposes due in monthly installments of $10,028.53 (including interest
rates ranging from 8.50% Variable to 14.728% Fixed) and $18,099.75
(including interest rates ranging from 8.25% Variable to 13.50%
Fixed)................................................................ $ 69,395.34 $ 331,823.66
-------------- --------------
-------------- --------------
</TABLE>
F-40
<PAGE>
U.S. COMMUNICATIONS, INC.
DBA: NTS COMMUNICATIONS WESTERN DIVISION
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
NOTE 3. NOTES PAYABLE (CONTINUED)
Cash Requirements for Long-Term Notes and Leases Payable by Year:
<TABLE>
<CAPTION>
1994
YEAR PRINCIPAL DUE
- ------------------------------------------------------------------------------- -------------
<S> <C>
1995........................................................................... $ 227,646.17
1996........................................................................... 225,388.34
1997........................................................................... 141,007.29
1998........................................................................... 18,363.60
Remaining...................................................................... 40,558.49
-------------
$ 652,963.89
-------------
-------------
</TABLE>
NOTE 4. LINE OF CREDIT
The Company has a line of credit with a bank in the amount of $350,000. The
note was dated August 22, 1994 with a maturity date of April 15, 1995. Interest
is to be charged at a rate of 10.25% on a 365 day basis. As of December 31,
1994, the Company had outstanding advances of $500 under this agreement leaving
an amount available for advance of $349,500.
NOTE 5. DEFINED CONTRIBUTION
The Company has available to its employees a Defined Profit Sharing Plan and
Trust (401K). The plan is a "salary reduction plan". Employees may elect to
reduce their compensation and contribute to this plan provided they are a
full-time employee having worked more than 1,000 hours in that six (6) month
period and have attained the age of twenty (20). Each employee may defer up to
ten (10) percent of their salary not to exceed the limit allowable by law in any
one year. Vesting is twenty (20) percent per year of employment and the employee
must be employed December 31, to receive the last year of vesting. The Company
may at its option contribute matching contributions not to exceed a maximum of
five (5) percent. Distributions from the plan are not permitted before age
fifty-nine and one-half (59 1/2) except in the event of death, disability,
termination of employment or reasons of proven financial hardship. The Company
contributed $24,000.00 in 1994 and 1993, respectively.
NOTE 6--ACCRUED VACATION AND SICK LEAVE BENEFITS
On termination, retirement or death of employees the Company will pay any
accrued vacation and sick leave allowances in a lump sum payment to such
employee or his/her estate. Vacation pay and sick leave pay require a minimum of
three months continuous employment. Full-time employees receive allowances at
the rate of eight vacation and four sick leave hours per month. Permanent
part-time employees receive allowances at the rate of four vacation and two sick
leave hours per month. Maximum amounts for payment at termination are ninety-six
vacation hours and forty-eight sick leave hours. The amount of estimated
liability recorded as of December 31, 1994 was $91,717.
F-41
<PAGE>
U.S. COMMUNICATIONS, INC.
DBA: NTS COMMUNICATIONS WESTERN DIVISION
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
NOTE 7--CERTIFICATES OF DEPOSIT
The Company has pledged a certificate in the amount of $1,000 to the
Oklahoma Tax Commission for Sales Tax Reporting purposes.
NOTE 8--CONTRACTS
The Company has entered into a contract with Zero Plus Dialing, Inc., a
Delaware corporation, to provide person-to-person, third party, collect and
calling card billing and collection services for use by the Company in
connection with its provisions of operator services. The contract is renewable
annually with settlements of accounts on a monthly basis.
NOTE 9--SUBSEQUENT EVENTS
During April 1995, the Board of Directors voted and approved the
distribution of key-man insurance cash value on Split-Dollar life insurance
policies to the owners of the policies. As a result, the $18,448 shown as Cash
Surrender Value of Life Insurance Policies and the policies were distributed to
the owners.
NOTE 10--PENDING SALE
The Company's directors approved and entered into a sales contract with S.A.
Holdings, Inc. of Plano, Texas for all of the stock owned by U.S.
Communications, Inc. shareholders as of October 6, 1994.
NOTE 11--RELATED PARTY TRANSACTIONS
The Company had the following related party transactions during 1994:
Howard M. Maddera, Chairman of the Board of Directors and a shareholder, has
personally loaned the Company money for operating purposes and was owed $15,895
as of December 31, 1994.
During 1994, Mr. Maddera purchased and assumed the note of a 1992 Buick
automobile from the Company. The transaction was for $8,747.
William L. (Bill) Johnson, President of the Company and a shareholder, has
personally loaned the Company money for operating purposes and was owed $13,149
as of December 1994.
James T. (Jim) Reed, a former officer and shareholder of the Company during
the first six months of the year, had personally loaned the Company money for
operating purposes and was owed $15,710 as of December 31, 1994.
Marianne Maddera Reed, a stockholder employed by the Company, sold her
interest in four life insurance policies owned on lives of the other
shareholders to the Company. As a result, the Company has a note payable to Ms.
Reed in the amount of $11,877 as of December 31, 1994.
NOTE 12--CAPITAL LEASES
During 1994, the Company entered into a capital lease with a bank for two
Duplex Laser Printers. The lease was for 60 months with monthly payments of
$1,269. The original lease was for $57,941 with an interest rate of 12.21%.
F-42
<PAGE>
U.S. COMMUNICATIONS, INC.
DBA: NTS COMMUNICATIONS WESTERN DIVISION
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
NOTE 12--CAPITAL LEASES (CONTINUED)
Cash requirements for the lease over the next five years is as follows:
<TABLE>
<CAPTION>
YEAR PRINCIPAL INTEREST TOTAL
- ---------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
1995................................................ $ 9,811.15 $ 5,419.97 $ 15,231.12
1996................................................ 11,076.28 4,154.84 15,231.12
1997................................................ 12,508.36 2,722.76 15,231.12
1998................................................ 14,123.39 1,107.73 15,231.12
1999................................................ 1,441.02 13.39 1,454.41
------------ ------------ ------------
$ 48,960.20 $ 13,418.69 $ 62,378.89
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NOTE 13--OPERATING LEASES
The Company has entered into several equipment and building operating
leases. As of December 31, 1994, equipment leases numbered 18 and totaled $9,355
per month. Building leases outstanding at December 31, 1994 totaled 16 with
monthly lease payments of $10,588. The total rent expense incurred during the
years ended December 31, 1994 and 1993 was $186,513 and $167,459, respectively.
NOTE 14--INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS 109.
The Company's provision for income taxes was comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1994 1993
------------- -------------
<S> <C> <C>
Current
Federal...................................................... $ 228,000.00 $ 128,000.00
State........................................................ 17,000.00 10,000.00
Deferred
Federal...................................................... (14,000.00) (46,000.00)
------------- -------------
$ 231,000.00 $ 92,000.00
------------- -------------
------------- -------------
</TABLE>
The following is a reconciliation of the provision for income taxes
reflected in the consolidated statements of income:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1994 1993
------------- -------------
<S> <C> <C>
Income Tax Expense at the Federal Statutory Rate............... $ 206,000.00 $ 79,000.00
State Taxes, net of Federal Benefit............................ 10,000.00 9,000.00
Other, net..................................................... 15,000.00 4,000.00
------------- -------------
$ 231,000.00 $ 92,000.00
------------- -------------
------------- -------------
</TABLE>
F-43
<PAGE>
U.S. COMMUNICATIONS, INC.
DBA: NTS COMMUNICATIONS WESTERN DIVISION
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1993
NOTE 14--INCOME TAXES (CONTINUED)
The components of the net deferred tax liability at December 31 were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1994 1993
------------- -------------
<S> <C> <C>
Deferred Tax Asset
Allowance for Doubtful Accounts.............................. $ (47,879.00) $ (60,958.00)
Deferred Tax Liability
Property and Equipment....................................... 90,905.00 117,868.00
------------- -------------
Net Deferred Tax Liability..................................... $ 43,026.00 $ 56,910.00
------------- -------------
------------- -------------
</TABLE>
F-44
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Long Distance Network, Inc.
We have audited the accompanying balance sheets of Long Distance Network,
Inc. (a Texas corporation) as of December 31, 1993 and 1992 and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
two years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Long Distance Network, Inc.
as of December 31, 1993 and 1992, and the results of its operations, and its
cash flows for the two years then ended in conformity with generally accepted
accounting principles.
Dallas, Texas
June 22, 1994
/s/ SAMSON, ROBBINS & ASSOCIATES
SAMSON, ROBBINS & ASSOCIATES
F-45
<PAGE>
LONG DISTANCE NETWORK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1992
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash.................................................................................. $ 41,760 $ 100,394
Certificate of deposit, pledged (Note 1).............................................. 19,700 --
Accounts receivable, net of allowances for doubtful accounts of $56,591 and $126,300,
respectively (Note 2)............................................................... 514,528 244,046
Accounts receivable--other (Note 3)................................................... 31,265 6,000
----------- -----------
Total current assets................................................................ 607,253 350,440
Note receivable (Note 3)................................................................ 189,210 102,210
Leasehold, furniture and equipment (Note 1)............................................. 151,111 133,233
Less accumulated depreciation......................................................... (87,958) (61,808)
----------- -----------
Net leasehold, furniture and equipment................................................ 63,153 71,425
Other assets............................................................................ 22,211 10,283
----------- -----------
Total assets........................................................................ $ 881,827 $ 534,358
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities
Current liabilities
Accounts payable--trade............................................................. $ 686,295 $ 333,466
Accounts payable--other (Note 3).................................................... 25,673 2,381
Accrued expenses.................................................................... 117,839 73,180
Short-term debt (Note 4)............................................................ -- 80,584
Note payable on matured obligation (Note 4)......................................... 99,000 99,000
----------- -----------
Total current liabilities......................................................... 928,807 588,611
----------- -----------
Total liabilities................................................................. 928,807 588,611
Commitments and contingencies (Notes 4, 5 and 7)........................................ -- --
Stockholders' equity (deficit)
Common stock, no par value, 10,000,000 shares authorized, 3,000,000 shares issued and
outstanding......................................................................... 108,750 108,750
Retained earnings (deficit)........................................................... (155,730) (163,003)
----------- -----------
Total stockholders' equity (deficit)................................................ (46,980) (54,253)
----------- -----------
Total liabilities and stockholders' equity (deficit)................................ $ 881,827 $ 534,358
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
LONG DISTANCE NETWORK, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
--------------------------
1993 1992
------------ ------------
<S> <C> <C>
REVENUES.............................................................................. $ 8,505,513 $ 3,664,493
COST OF REVENUES...................................................................... 7,424,327 2,830,573
------------ ------------
GROSS PROFIT...................................................................... 1,081,186 833,920
OPERATING EXPENSES
General and administrative.......................................................... 1,044,120 976,405
Depreciation........................................................................ 26,150 22,780
------------ ------------
Total operating expenses.......................................................... 1,070,270 999,185
------------ ------------
INCOME (LOSS) FROM OPERATIONS......................................................... 10,916 (165,265)
OTHER EXPENSE
Interest expense.................................................................... 3,643 20,718
------------ ------------
NET INCOME (LOSS)................................................................. $ 7,273 $ (185,983)
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
LONG DISTANCE NETWORK, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
---------------------- EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1992.................................... 3,000,000 $ 108,750 $ 22,980 $ 131,730
Net loss...................................................... (185,983) (185,983)
---------- ---------- ----------- -----------
Balance at December 31, 1992.................................. 3,000,000 $ 108,750 $ (163,003) $ (54,253)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Net income.................................................... 7,273 7,273
---------- ---------- ----------- -----------
Balance at December 31, 1993.................................. 3,000,000 $ 108,750 $ (155,730) $ (46,980)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
LONG DISTANCE NETWORK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
------------------------
1993 1992
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)..................................................................... $ 7,273 $ (185,983)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation........................................................................ 26,150 22,780
Provision for doubtful accounts receivable.......................................... 38,555 113,670
(Increase) in accounts receivable................................................... (309,037) (49,678)
(Increase) in prepaids and other assets............................................. (11,928) --
Increase in accounts payable and accrued expenses................................... 397,488 148,048
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................... 148,501 48,837
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of certificate of deposit.................................................... (19,700) --
Purchase of leasehold, furniture and equipment........................................ (17,878) (21,356)
Loans and advances to related parties................................................. (112,265) (10,639)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES................................................... (149,843) (31,995)
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings................................................................. -- 138,983
Principal payments on debt............................................................ (80,584) (58,399)
Borrowings from related parties....................................................... 23,292 --
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES........................................ (57,292) 80,584
----------- -----------
NET INCREASE (DECREASE) IN CASH......................................................... (58,634) 97,426
CASH AT BEGINNING OF PERIOD............................................................. 100,394 2,968
----------- -----------
CASH AT END OF PERIOD................................................................... $ 41,760 $ 100,394
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................................................ $ 3,643 $ 9,685
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
LONG DISTANCE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1992
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company is a domestic interexchange long distance carrier located in
Dallas, Texas, which began operations five years ago. In addition to providing
intrastate, interstate and international service, the Company provides a variety
of operator and other services. The Company specializes in meeting the long
distance needs of small to medium sized companies.
RECOGNITION OF REVENUE
Customer long distance calls are routed through a switching center operated
over long distance telephone lines provided by others. The Company sells its
services to its customers primarily on a measured time basis. The cost to the
Company for using the facilities of others is lower than the rates the Company
charges its customers. The Company records revenue from its operator and direct
dial long distance services based upon customer usage. The allowance for
doubtful accounts receivable is established based upon periodic analysis of
uncollectible accounts receivable.
COST OF REVENUE
Cost of revenue consists of line costs (representing right of way payments
and payments to local exchange carriers and interexchange carriers for accessed
transport charges), switching costs, commissions, and costs incurred under a
billing and collection agreement.
INCOME TAXES
Effective January 1, 1992, the Company has elected to be taxed under the
provisions of Subchapter S of the Internal Revenue Code. Accordingly, the
financial statements do not include a provision for federal income taxes because
the Company does not incur federal income taxes. Instead, its earnings and
losses are included in the stockholders' personal income tax returns and are
taxed based on their personal strategies.
LEASEHOLD, FURNITURE AND EQUIPMENT
Leasehold, furniture and equipment are stated at cost. Depreciation is
computed on a straight line basis over the estimated useful lives of the related
assets which range from five to seven years. Expenses for maintenance and
repairs are charged to expense as incurred. Major improvements are capitalized.
The cost and related accumulated depreciation are removed from the accounts and
the resulting gain or loss is reflected in other income for that period when
assets are disposed of. The components of leasehold, furniture and equipment at
December 31, are as follows:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Leasehold............................................................. $ 1,583 $ --
Furniture............................................................. 32,230 27,588
Equipment............................................................. 117,298 105,645
---------- ----------
Total leasehold, furniture and equipment............................ $ 151,111 $ 133,233
---------- ----------
---------- ----------
</TABLE>
F-50
<PAGE>
LONG DISTANCE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1992
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all cash on hand and in banks, demand and time
deposits and all other highly liquid investments with maturities of three months
or less when purchased, to be cash and cash equivalents.
CERTIFICATE OF DEPOSIT
At December 31, 1993, the Company owned one certificate of deposit in the
amount of $19,700 which is pledged as security for sales tax liabilities with
the State of Texas. The maturity date is October 29, 1994, with interest paid at
maturity at the fixed rate of 2.85% per annum.
NOTE 2--ACCOUNTS RECEIVABLE
The components of accounts receivable at December 31, are as follows:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
One Plus.............................................................. $ 374,511 $ 285,869
Zero Plus/Zero Minus.................................................. 157,541 81,751
Plan Mundo............................................................ 39,067 --
Other miscellaneous................................................... -- 2,726
---------- ----------
Total accounts receivable............................................. 571,119 370,346
Less allowance for doubtful accounts.................................. (56,591) (126,300)
---------- ----------
Accounts receivable................................................... $ 514,528 $ 244,046
---------- ----------
---------- ----------
</TABLE>
NOTE 3--RELATED PARTY TRANSACTIONS
The Company has advanced funds to various related parties which are
accounted for as receivable amounts by the Company. Signed agreements were
executed for the majority of the outstanding amounts owed to the Company with
payment terms and interest rates included. The amounts outstanding are
classified as current accounts receivable or long-term notes receivable based
upon the terms of the agreements. It should be noted that all the related party
receivables were subsequently collected when the Company was acquired during
1994 with the exception of one which is due from the President of the Company
(see Note 7).
The components of accounts receivable--other which represent loans and
advances to related parties at December 31, are as follows:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
David Hover........................................................... $ 25,265 $ --
NUPAC................................................................. 6,000 6,000
---------- ----------
$ 31,265 $ 6,000
---------- ----------
---------- ----------
</TABLE>
F-51
<PAGE>
LONG DISTANCE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1992
NOTE 3--RELATED PARTY TRANSACTIONS (CONTINUED)
David Hover is a stockholder of the Company with an ownership of 21.5% of
the outstanding shares. NUPAC is a company which is owned jointly by
stockholders of the Company and whose operations are totally independent of the
Company.
The component of note receivable at December 31, is as follows:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Terry Houston......................................................... $ 189,210 $ 102,210
</TABLE>
Terry Houston is the President of the Company with an ownership of 75% of
the outstanding shares at year end 1993.
Certain stockholders and controlled entities were paid commissions for
acting as agents for the Company. The amounts paid are based upon sales
generated by these agents and are comparable to the amounts paid other agents
for similar services.
The components of accounts payable--other at December 31, are as follows:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
David Hover........................................................... $ 2,381 $ 2,381
Pay Phone Management.................................................. 23,292 --
---------- ----------
$ 25,673 $ 2,381
---------- ----------
---------- ----------
</TABLE>
NOTE 4--DEBT
Short-term debt during 1992 is comprised of a note payable to NTS
Communications, Inc. for the payment of invoices related to balances owed for
line charges. The note dated July 17, 1992, was in the principal amount of
$138,983 with an interest rate of 18% and was payable in nine monthly
installments commencing September 15, 1992 with the final payment due May 15,
1993. This note was repaid per the terms of the agreement.
Note payable on matured obligation is comprised of a note payable to the
FDIC. This note is the result of the FDIC taking over Continental National Bank
during 1991. The Company had a revolving line of credit with this bank in the
amount of $99,000 when the FDIC assumed control. During 1993, the Company had
initial communications with the FDIC regarding negotiations for settlement of
this outstanding amount. Negotiations are ongoing with no settlement expected in
the near future. It should be noted that interest on this note has not been
accrued since 1992 per management's view of the uncertainty of the final
settlement.
F-52
<PAGE>
LONG DISTANCE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1992
NOTE 5--COMMITMENTS AND CONTINGENCIES
The Company leases equipment and office space under non-cancelable operating
leases. Rental expenses for 1993 and 1992, were $86,090 and $73,913,
respectively. Future minimum lease payments under these leases at December 31,
1993, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1994.............................................................................. $ 82,226
1995.............................................................................. 75,888
1996.............................................................................. 50,987
----------
Total minimum lease payments...................................................... $ 209,101
----------
----------
</TABLE>
The Company is presently not involved in any legal actions or claims as the
result of the ordinary course of business. The Company does not believe that any
claims or proceedings are likely which would have an adverse effect on the
Company's financial position or results of operations.
NOTE 6--COMMON STOCK
The Company has issued three million (3,000,000) shares of no par common
stock of the ten million (10,000,000) shares authorized. The President of the
Company held 75% of the outstanding shares at year end 1993. One other
stockholder held 21.5% of the remaining 25% of outstanding shares.
NOTE 7--SUBSEQUENT EVENTS
On May 16, 1994, the Company was acquired by SA Holdings, Inc. This
acquisition was accomplished through the payment of $1,354,660 in cash and the
issuance of 1,302,086 shares of unregistered, restricted common stock of SA
Holdings, Inc. to the stockholders of the Company for all the outstanding shares
of common stock of the Company. Of the total 1,302,086 shares of unregistered,
restricted common stock issued, 1,041,666 shares related to the acquisition of
the common stock of the Company and 260,420 shares related to "Confidentiality
and Noncompete Agreements" with two key employees of the Company. These two key
employees will continue to function in senior management positions of the
Company. From the March 1, 1994 effective date of the acquisition, the Company
will operate as a wholly owned subsidiary of SA Holdings, Inc.
As a result of the acquisition of the Company, various related party
receivables were collected at the closing date of the sale. These amounts were
included as adjustments to the actual cash payments received by the various
stockholders. The note receivable of $189,210 at December 31, 1993 due from the
President was to be repaid over fifteen years at $1,470 per month including
interest at 5.0%. Currently, SA Holdings, Inc. and the President of the Company
are renegotiating the payment terms so that the obligation will be repaid by
December 31, 1994.
F-53
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY OF THE SELLING NOTEHOLDERS OR SELLING
STOCKHOLDERS OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY, TO ANY
PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE THEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information............................ 3
Incorporation of Certain Documents by
Reference...................................... 3
Special Note Regarding Forward-Looking
Statements..................................... 4
Prospectus Summary............................... 6
Risk Factors..................................... 16
Use of Proceeds.................................. 27
Selling Noteholders and Selling Stockholders..... 28
Plan of Distribution............................. 31
Price Range of Common Stock...................... 32
Dividend Policy.................................. 32
Selected Historical and Pro Forma Consolidated
Financial and Other Operating Information...... 33
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 35
Overview of Telecommunications Industry.......... 46
Business......................................... 50
Management....................................... 61
Security Ownership of Principal Stockholders And
Management..................................... 75
Transactions with Related Parties................ 78
Description of Notes............................. 80
Description of Capital Stock..................... 94
Additional Interest.............................. 102
Legal Matters.................................... 102
Experts.......................................... 102
Financial Statements............................. F-1
</TABLE>
10% CONVERTIBLE NOTES DUE 2006
AND COMMON STOCK
SA TELECOMMUNICATIONS, INC.
[INSERT LOGO]
---------------------
PROSPECTUS
---------------------
DATED , 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC registration fee........................................... $ 8,911.00
NASD filing fee................................................ 3,351.00
Accounting fees and expenses................................... 120,000.00
Trustee's Fees................................................. 17,000.00
Transfer Agent's Fees.......................................... 5,000.00
Legal fees and expenses (including Blue Sky)................... 260,000.00
Printing, engraving and EDGARization expenses.................. 135,000.00
Miscellaneous expenses......................................... 5,000.00
----------
Total........................................................ $554,262.00
----------
----------
</TABLE>
- ------------------------
* Estimated
All expenses relating to the offering are payable by the Registrant on
behalf of the Selling Stockholders and Selling Noteholders, excluding (1) any
underwriting discounts or commissions, (2) fees and expenses of legal counsel to
JLCM in excess of $20,000, (3) transfer taxes, and fees and expenses of
accountants, legal counsel and other representatives of Economy, (4) the fees
and expenses of legal counsel to Phillip and Rae Huberfeld, Moses Elias,
Mueller, Mark Kabbash, and BPC.
No premium was paid by the Registrant or any Selling Stockholders or Selling
Noteholders on any policy to insure or indemnify directors or officers against
any liabilities they may incur in the registration, offering or sale of the
Shares.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The section of the Prospectus entitled "Description of Capital
Stock--Limitations on Liability" is incorporated herein by reference.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
broad authority for indemnification of officers and directors. Article 10 of the
Registrant's Certificate of Incorporation, as amended, of the Registrant
provides for indemnification of officers and directors to the fullest extent
permitted by the DGCL. Article V of the Registrant's Bylaws contains provisions
requiring the indemnification of the Registrant's directors and officers upon
and pursuant to terms specified therein and under applicable provisions of the
DGCL. The Registrant believes that these provisions are necessary to attract and
retain qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
The Registrant does not currently maintain directors' and officers'
liability insurance.
II-1
<PAGE>
ITEM 16. EXHIBITS.
The exhibits listed below are filed as part of or incorporated by reference
in this Registration Statement. Where such filing is made by incorporation by
reference to a previously filed report or registration statement, such report or
registration statement is identified by asterisk. See the Index of Exhibits
included with the exhibits filed as part of this Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
3.1 Certificate of Incorporation of the Registrant, as amended through
December 31, 1994 (filed as Exhibit 3.1 to the Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 1994 and
incorporated herein by reference)
3.2 Certificate of Designations, Preferences and Rights of Series A Cumulative
Convertible Preferred Stock (filed as Exhibit 4.1 to the Registrant's
Current Report on Form 8-K/A for the event occurring July 31, 1995,
filed with the Commission on August 15, 1995 and incorporated herein by
reference)
3.3 Certificate of Designations, Preferences and Rights of Series B Cumulative
Convertible Preferred Stock (filed as Exhibit 4.6 to the Registrant's
Current Report on Form 8-K/A for the event occurring July 31, 1995,
filed with the Commission on August 15, 1995 and incorporated herein by
reference)
3.4 Certificate of Amendment filed with the Delaware Secretary of State on
August 3, 1995 (filed as Exhibit 3.4 to the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1995 and incorporated
herein by reference)
3.5 Certificate of Amendment of Certificate of Incorporation of SA
Telecommunications, Inc. filed with the Delaware Secretary of State on
July 9, 1996 (filed as Exhibit 3.1 to the Registrant's Quarterly Report
on Form 10-QSB/A for the quarter ended June 30, 1996 filed with the
Commission on August 29, 1996 and incorporated herein by reference)
3.6 Certificate of Elimination of Series B Cumulative Preferred Stock of the
Registrant filed with the Delaware Secretary of State on July 9, 1996
(filed as Exhibit 3.2 to the Registrant's Quarterly Report on Form
10-QSB/A for the quarter ended June 30, 1996 filed with the Commission
on August 29, 1996 and incorporated herein by reference)
3.7 Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.5 to the
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1995 and incorporated herein by reference)
4.1 Indenture dated as of August 12, 1996 between the Registrant and United
States Trust Company of New York as Trustee (filed as Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-QSB/A for the quarter ended
June 30, 1996, filed with the Commission on August 29, 1996 and
incorporated herein by reference)
4.2 Purchase Agreement dated as of August 5, 1996 among the Registrant, Furman
Selz LLC and Rauscher Pierce Refsnes, Inc. (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-QSB/A for the quarter ended
June 30, 1996, filed with the Commission on August 29, 1996 and
incorporated herein by reference)
4.3 Registration Rights Agreement dated as of August 12, 1996 among the
Registrant, Furman Selz LLC and Rauscher Pierce Refsnes, Inc. (filed as
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-QSB/A for
the quarter ended June 30, 1996, filed with the Commission on August 29,
1996 and incorporated herein by reference)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
4.4 Form of Series A Preferred Stock Certificate (filed as Exhibit 4.4 to the
Registrant's Current Report on Form 8-K/A for the event occurring July
31, 1995, filed with the Commission on August 15, 1995 and incorporated
herein by reference)
<C> <S>
4.5 Form of Certificate Evidencing Common Stock (filed as Exhibit 4.19 to the
Registrant's Registrant Statement on Form S-3 (Registration No.
33-64271) and incorporated herein by reference)
5.1 Opinion of Arter & Hadden as to the validity of the Securities being
offered**
10.1 Share Purchase Agreement, dated as of July 31, 1995, by and between the
Registrant and Jesup & Lamont Capital Markets, Inc. (filed as Exhibit
4.3 to the Registrant's Current Report on Form 8-K/A for the event
occurring on July 31, 1995, filed with the Commission on October 13,
1995 and incorporated herein by reference)
10.2 Warrant Purchase Agreement, dated as of July 31, 1995, be and between the
Registrant and Jesup and Lamont Capital Markets, Inc. (filed as Exhibit
4.4 to the Registrant's Current Report on Form 8-K/A for the event
occurring on July 31, 1995, filed with the Commission on August 15, 1995
and incorporated herein by reference)
10.3 Common Stock Purchase Warrant Certificate issued to Jesup & Lamont Capital
Markets, Inc. (filed as Exhibit 4.5 to the Registrant's Current Report
on Form 8-K/A for the event occurring on July 31, 1995, filed with the
Commission on August 15, 1995 and incorporated herein by reference)
10.4 Agreement dated as of October 26, 1995 between the Registrant and Jesup &
Lamont Capital Markets, Inc. (filed as Exhibit 4.18 to the Registrant's
Registration Statement on Form S-3 (Registration No. 33-64271) and
incorporated herein by reference)
10.5 Agreement dated as of October 26, 1995 by and between the Registrant and
each of the Investors (filed as Exhibit 4.16 to the Registrant's
Registration Statement on Form S-3 (Registration No. 33-64271) and
incorporated herein by reference)
10.6 Form of Warrant Certificates issued to each of the Investors and schedule
of differences thereto pursuant to General Instructions to Item 601
(filed as Exhibit 4.14 to the Registrant's Registration Statement on
Form S-3 (Registration No. 33-64271) and incorporated herein by
reference)
10.7 Form of Subscription Agreements executed as of September 20, 1995 by and
between the Registrant and each of the Investors and schedule of
differences thereto pursuant to General Instructions to Item 601 (filed
as Exhibit 4.13 to the Registrant's Registration Statement on Form S-3
(Registration No. 33-64271) and incorporated herein by reference)
10.8 Employment Agreement dated March 24, 1995 by and between the Registrant
and Jack Matz (filed as Exhibit 10.8 to the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1994 and incorporated
herein by reference)
10.9 Amendment to Employment Contract dated as of March 13, 1996 by and between
the Registrant and Jack Matz (filed as Exhibit 10.19 to the Registrant's
Annual Report on Form 10-KSB for the year ended December 31, 1995 and
incorporated herein by reference)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
10.10 Employment Contract dated March 13, 1996 by and between the Registrant and
Paul R. Miller (filed as Exhibit 10.20 to the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1995 and incorporated
herein by reference)
<C> <S>
10.11 Employment Agreement dated April 1, 1994 by and between LDN and Terry
Houston (filed as Exhibit 2.2 to the Registrant's Current Report on Form
8-K, dated May 16, 1994, and incorporated herein by reference)
10.12 Settlement Agreement dated April 11, 1996 by and between the Registrant
and Terry Houston (filed as Exhibit 10.3 to the Registrant's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1996 and
incorporated herein by reference)
10.13 Amendment to Settlement Agreement dated June 10, 1996 between the
Registrant and Terry Houston*
10.14 Severance Agreement dated as of March 18, 1996 by and between the
Registrant and J. David Darnell (filed as Exhibit 10.22 to the
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1995 and incorporated herein by reference)
10.15 1994 Stock Option Plan for Non-Employee Directors of the Registrant
(Non-Employee Director Plan")(filed as Item 2 of the Registrant's Proxy
Statement dated June 29, 1994 and incorporated herein by reference)
10.16 Form of Stock Option Agreement used in connection with Non-Employee
Director Plan (filed as Exhibit 10.12 to the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1994 and incorporated
herein by reference)
10.17 1994 Employee Stock Option Plan ("Employee Plan")(filed as Exhibit A to
the Registrant's Proxy Statement dated April 26, 1996 and incorporated
herein by reference)
10.18 Form of Non-Qualified Stock Option Agreement used in connection with the
Employee Plan (filed as Exhibit 10.15 to the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1994 and incorporated
herein by reference)
10.19 Form of Incentive Stock Option Agreement used in connection with the
Employee Plan (filed as Exhibit 10.14 to the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1994 and incorporated
herein by reference)
10.20 Settlement Agreement dated March 25, 1996 between the Registrant and Jesup
& Lamont Capital Markets, Inc. (filed as Exhibit 10.38 to the
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1995 and incorporated herein by reference)
10.21 Form of Subscription Agreement dated as of May 7, 1996 between the
Registrant and each of the Investors and schedule of differences thereto
pursuant to General Instruction 601 (filed as Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-QSB for the quarter ended March
31, 1996 and incorporated herein by reference)
10.22 Form of Common Stock Purchase Warrant dated as of May 7, 1996 issued to
each of the Investors and schedule of differences thereto pursuant to
General Instruction 601 (filed as Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996 and
incorporated herein by reference)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
10.23 Consulting Agreement dated as of June 21, 1996 between the Registrant and
John Nugent*
<C> <S>
10.24 Lease Agreement effective as of October 11, 1995 between
Telecommunications Finance Group and Long Distance Network, Inc.*
10.25 Stock Purchase Agreement dated as of January 10, 1997 among the
Registrant, Addtel Communications, Inc., Charles Tony Lonstein, Aviram
Lonstein, Daniel G. Lonstein and David R. Lonstein (filed as Exhibit 2.1
to the Registrant's Current Report on Form 8-K, dated January 10, 1997,
and incorporated herein by reference)
10.26 Loan and Security Agreement dated December 26, 1996 among Greyrock
Business Credit and the Registrant, U.S. Communications, Inc., Long
Distance Network, Inc., and Southwest Long Distance Network, Inc. (filed
as Exhibit 10.1 to the Registrant's Current Report on Form 8-K, dated
January 10, 1997, and incorporated herein by reference)
10.27 Schedule to Loan and Security Agreement dated December 26, 1996 among
Greyrock Business Credit, the Registrant, U.S. Communications, Inc.,
Long Distance Network, Inc. and Southwest Long Distance Network, Inc.
(filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K,
dated January 10, 1997, and incorporated herein by reference)
10.28 Cross-Corporate Continuing Guaranty dated December 26, 1996 of the
Registrant, U.S. Communications, Inc., Long Distance Network, Inc., and
Southwest Long Distance Network, Inc. (filed as Exhibit 10.3 to the
Registrant's Current Report on Form 8-K, dated January 10, 1997, and
incorporated herein by reference)
10.29 Continuing Guaranty dated December 26, 1996 of North American
Telecommunications Corporation, Baltic States and CIS Ventures, Inc.,
CIS Intelligence Information Services, Inc. and Uniquest Communications,
Inc. (filed as Exhibit 10.4 to the Registrant's Current Report on Form
8-K, dated January 10, 1997, and incorporated herein by reference)
10.30 Pledge Agreement dated as of December 26, 1996 between Greyrock Business
Credit and the Registrant (filed as Exhibit 10.5 to the Registrant's
Current Report on Form 8-K, dated January 10, 1997, and incorporated
herein by reference)
10.31 Pledge Agreement dated as of December 26, 1996 between Greyrock Business
Credit and U.S. Communications, Inc. (filed as Exhibit 10.6 to the
Registrant's Current Report on Form 8-K, dated January 10, 1997, and
incorporated herein by reference)
10.32 Security Agreement dated December 26, 1996 among Greyrock Business Credit
and North American Telecommunications Corporation, Baltic States and CIS
Ventures, Inc., CIS Intelligence Information Services, Inc. and Uniquest
Communications, Inc. (filed as Exhibit 10.7 to the Registrant's Current
Report on Form 8-K, dated January 10, 1997, and incorporated herein by
reference)
10.33 Severance Agreement dated as of March 18, 1996 by and between the
Registrant and Lynn H. Johnson*
12.1 Statement re computation of ratio of earnings to fixed charges*
23.1 Consent of Arter & Hadden (included in its opinion filed as Exhibit 5.1
and incorporated herein by reference)**
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
23.2 Consent of Price Waterhouse LLP**
<C> <S>
23.3 Consent of King, Burns & Company, P.C.**
23.4 Consent of Duff & Anderson, P.C.**
23.5 Consent of Samson, Robbins & Associates**
24.1 Powers of Attorney*
25.1 Form T-1 Statement of Eligibility Under the Trust Indenture Act of 1939,
as amended, of United States Trust Company of New York under the
Indenture with respect to the 10% Convertible Notes Due 2006*
99.1 Agreement dated as of November 22, 1996 between the Registrant and Jesup &
Lamont Capital Markets, Inc.*
99.2 Agreement dated as of November 22, 1996 between the Registrant, Phillip
and Rae Huberfeld and Moses Elias*
</TABLE>
- ------------------------
* Previously filed
** Filed herewith
II-6
<PAGE>
ITEM 17. UNDERTAKINGS.
(a) RULE 415 OFFERING. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement;
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement or
any material change of such information in the Registration Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the Registration Statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the Registrant pursuant to Section 13
or 15(d) of the Exchange Act that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(e) REQUEST FOR ACCELERATION OF EFFECTIVE DATE. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the Registrant's
Certificate of Incorporation, Bylaws or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(f) RULE 430. The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended (the
"Securities Act"), the Registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-2 and has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on February 7, 1997.
SA TELECOMMUNICATIONS, INC.
By: /s/ JACK W. MATZ, JR.
-----------------------------------------
Jack W. Matz, Jr.
CHAIRMAN OF THE BOARD
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ JACK W. MATZ, JR.
- ------------------------------ Chairman of the Board and February 7, 1997
Jack W. Matz, Jr. Chief Executive Officer
/s/ PAUL R. MILLER*
- ------------------------------ Chief Operating Officer, February 7, 1997
Paul R. Miller President and Director
/s/ J. DAVID DARNELL Chief Financial Officer,
- ------------------------------ Vice President-Finance February 7, 1997
J. David Darnell and Director
/s/ THOMAS OLE DIAL*
- ------------------------------ Director February 7, 1997
Thomas Ole Dial
/s/ JOHN Q. EBERT*
- ------------------------------ Director February 7, 1997
John Q. Ebert
/s/ IGOR I. MAMANTOV*
- ------------------------------ Director February 7, 1997
Igor I. Mamantov
/s/ DEAN A. THOMAS*
- ------------------------------ Director February 7, 1997
Dean A. Thomas
/s/ BARRY J. WILLIAMS*
- ------------------------------ Director February 7, 1997
Barry J. Williams
/s/ PETE W. SMITH*
- ------------------------------ Director February 7, 1997
Pete W. Smith
II-8
<PAGE>
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ THOMAS L. CUNNINGHAM*
- ------------------------------ Director February 7, 1997
Thomas L. Cunningham
/s/ JOHN H. NUGENT*
- ------------------------------ Director February 7, 1997
John H. Nugent
/s/ REUBEN F. RICHARDS*
- ------------------------------ Director February 7, 1997
Reuben F. Richards
/s/ HOWARD F. CURD*
- ------------------------------ Director February 7, 1997
Howard F. Curd
*By: /s/ J. DAVID
DARNELL
- ------------------------------
J. David Darnell
AGENT AND ATTORNEY-IN-FACT
II-9
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
3.1 Certificate of Incorporation of the Registrant, as amended through
December 31, 1994 (filed as Exhibit 3.1 to the Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 1994 and
incorporated herein by reference)
3.2 Certificate of Designations, Preferences and Rights of Series A Cumulative
Convertible Preferred Stock (filed as Exhibit 4.1 to the Registrant's
Current Report on Form 8-K/A for the event occurring July 31, 1995,
filed with the Commission on August 15, 1995 and incorporated herein by
reference)
3.3 Certificate of Designations, Preferences and Rights of Series B Cumulative
Convertible Preferred Stock (filed as Exhibit 4.6 to the Registrant's
Current Report on Form 8-K/A for the event occurring July 31, 1995,
filed with the Commission on August 15, 1995 and incorporated herein by
reference)
3.4 Certificate of Amendment filed with the Delaware Secretary of State on
August 3, 1995 (filed as Exhibit 3.4 to the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1995 and incorporated
herein by reference)
3.5 Certificate of Amendment of Certificate of Incorporation of SA
Telecommunications, Inc. filed with the Delaware Secretary of State on
July 9, 1996 (filed as Exhibit 3.1 to the Registrant's Quarterly Report
on Form 10-QSB/A for the quarter ended June 30, 1996 filed with the
Commission on August 29, 1996 and incorporated herein by reference)
3.6 Certificate of Elimination of Series B Cumulative Preferred Stock of the
Registrant filed with the Delaware Secretary of State on July 9, 1996
(filed as Exhibit 3.2 to the Registrant's Quarterly Report on Form
10-QSB/A for the quarter ended June 30, 1996 filed with the Commission
on August 29, 1996 and incorporated herein by reference)
3.7 Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.5 to the
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1995 and incorporated herein by reference)
4.1 Indenture dated as of August 12, 1996 between the Registrant and United
States Trust Company of New York as Trustee (filed as Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-QSB/A for the quarter ended
June 30, 1996, filed with the Commission on August 29, 1996 and
incorporated herein by reference)
4.2 Purchase Agreement dated as of August 5, 1996 among the Registrant, Furman
Selz LLC and Rauscher Pierce Refsnes, Inc. (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-QSB/A for the quarter ended
June 30, 1996, filed with the Commission on August 29, 1996 and
incorporated herein by reference)
4.3 Registration Rights Agreement dated as of August 12, 1996 among the
Registrant, Furman Selz LLC and Rauscher Pierce Refsnes, Inc. (filed as
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-QSB/A for
the quarter ended June 30, 1996, filed with the Commission on August 29,
1996 and incorporated herein by reference)
4.4 Form of Series A Preferred Stock Certificate (filed as Exhibit 4.4 to the
Registrant's Current Report on Form 8-K/A for the event occurring July
31, 1995, filed with the Commission on August 15, 1995 and incorporated
herein by reference)
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
4.5 Form of Certificate Evidencing Common Stock (filed as Exhibit 4.19 to the
Registrant's Registrant Statement on Form S-3 (Registration No.
33-64271) and incorporated herein by reference)
5.1 Opinion of Arter & Hadden as to the validity of the Securities being
offered**
10.1 Share Purchase Agreement, dated as of July 31, 1995, by and between the
Registrant and Jesup & Lamont Capital Markets, Inc. (filed as Exhibit
4.3 to the Registrant's Current Report on Form 8-K/A for the event
occurring on July 31, 1995, filed with the Commission on October 13,
1995 and incorporated herein by reference)
10.2 Warrant Purchase Agreement, dated as of July 31, 1995, be and between the
Registrant and Jesup and Lamont Capital Markets, Inc. (filed as Exhibit
4.4 to the Registrant's Current Report on Form 8-K/A for the event
occurring on July 31, 1995, filed with the Commission on August 15, 1995
and incorporated herein by reference)
10.3 Common Stock Purchase Warrant Certificate issued to Jesup & Lamont Capital
Markets, Inc. (filed as Exhibit 4.5 to the Registrant's Current Report
on Form 8-K/A for the event occurring on July 31, 1995, filed with the
Commission on August 15, 1995 and incorporated herein by reference)
10.4 Agreement dated as of October 26, 1995 between the Registrant and Jesup &
Lamont Capital Markets, Inc. (filed as Exhibit 4.18 to the Registrant's
Registration Statement on Form S-3 (Registration No. 33-64271) and
incorporated herein by reference)
10.5 Agreement dated as of October 26, 1995 by and between the Registrant and
each of the Investors (filed as Exhibit 4.16 to the Registrant's
Registration Statement on Form S-3 (Registration No. 33-64271) and
incorporated herein by reference)
10.6 Form of Warrant Certificates issued to each of the Investors and schedule
of differences thereto pursuant to General Instructions to Item 601
(filed as Exhibit 4.14 to the Registrant's Registration Statement on
Form S-3 (Registration No. 33-64271) and incorporated herein by
reference)
10.7 Form of Subscription Agreements executed as of September 20, 1995 by and
between the Registrant and each of the Investors and schedule of
differences thereto pursuant to General Instructions to Item 601 (filed
as Exhibit 4.13 to the Registrant's Registration Statement on Form S-3
(Registration No. 33-64271) and incorporated herein by reference)
10.8 Employment Agreement dated March 24, 1995 by and between the Registrant
and Jack Matz (filed as Exhibit 10.8 to the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1994 and incorporated
herein by reference)
10.9 Amendment to Employment Contract dated as of March 13, 1996 by and between
the Registrant and Jack Matz (filed as Exhibit 10.19 to the Registrant's
Annual Report on Form 10-KSB for the year ended December 31, 1995 and
incorporated herein by reference)
10.10 Employment Contract dated March 13, 1996 by and between the Registrant and
Paul R. Miller (filed as Exhibit 10.20 to the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1995 and incorporated
herein by reference)
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.11 Employment Agreement dated April 1, 1994 by and between LDN and Terry
Houston (filed as Exhibit 2.2 to the Registrant's Current Report on Form
8-K, dated May 16, 1994, and incorporated herein by reference)
10.12 Settlement Agreement dated April 11, 1996 by and between the Registrant
and Terry Houston (filed as Exhibit 10.3 to the Registrant's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1996 and
incorporated herein by reference)
10.13 Amendment to Settlement Agreement dated June 10, 1996 between the
Registrant and Terry Houston*
10.14 Severance Agreement dated as of March 18, 1996 by and between the
Registrant and J. David Darnell (filed as Exhibit 10.22 to the
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1995 and incorporated herein by reference)
10.15 1994 Stock Option Plan for Non-Employee Directors of the Registrant
(Non-Employee Director Plan")(filed as Item 2 of the Registrant's Proxy
Statement dated June 29, 1994 and incorporated herein by reference)
10.16 Form of Stock Option Agreement used in connection with Non-Employee
Director Plan (filed as Exhibit 10.12 to the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1994 and incorporated
herein by reference)
10.17 1994 Employee Stock Option Plan ("Employee Plan")(filed as Exhibit A to
the Registrant's Proxy Statement dated April 26, 1996 and incorporated
herein by reference)
10.18 Form of Non-Qualified Stock Option Agreement used in connection with the
Employee Plan (filed as Exhibit 10.15 to the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1994 and incorporated
herein by reference)
10.19 Form of Incentive Stock Option Agreement used in connection with the
Employee Plan (filed as Exhibit 10.14 to the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 1994 and incorporated
herein by reference)
10.20 Settlement Agreement dated March 25, 1996 between the Registrant and Jesup
& Lamont Capital Markets, Inc. (filed as Exhibit 10.38 to the
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1995 and incorporated herein by reference)
10.21 Form of Subscription Agreement dated as of May 7, 1996 between the
Registrant and each of the Investors and schedule of differences thereto
pursuant to General Instruction 601 (filed as Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-QSB for the quarter ended March
31, 1996 and incorporated herein by reference)
10.22 Form of Common Stock Purchase Warrant dated as of May 7, 1996 issued to
each of the Investors and schedule of differences thereto pursuant to
General Instruction 601 (filed as Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996 and
incorporated herein by reference)
10.23 Consulting Agreement dated as of June 21, 1996 between the Registrant and
John Nugent*
</TABLE>
II-12
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.24 Lease Agreement effective as of October 11, 1995 between
Telecommunications Finance Group and Long Distance Network, Inc.*
10.25 Stock Purchase Agreement dated as of January 10, 1997 among the
Registrant, Addtel Communications, Inc., Charles Tony Lonstein, Aviram
Lonstein, Daniel G. Lonstein and David R. Lonstein (filed as Exhibit 2.1
to the Registrant's Current Report on Form 8-K, dated January 10, 1997,
and incorporated herein by reference)
10.26 Loan and Security Agreement dated December 26, 1996 among Greyrock
Business Credit and the Registrant, U.S. Communications, Inc., Long
Distance Network, Inc., and Southwest Long Distance Network, Inc. (filed
as Exhibit 10.1 to the Registrant's Current Report on Form 8-K, dated
January 10, 1997, and incorporated herein by reference)
10.27 Schedule to Loan and Security Agreement dated December 26, 1996 among
Greyrock Business Credit, the Registrant, U.S. Communications, Inc.,
Long Distance Network, Inc. and Southwest Long Distance Network, Inc.
(filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K,
dated January 10, 1997, and incorporated herein by reference)
10.28 Cross-Corporate Continuing Guaranty dated December 26, 1996 of the
Registrant, U.S. Communications, Inc., Long Distance Network, Inc., and
Southwest Long Distance Network, Inc. (filed as Exhibit 10.3 to the
Registrant's Current Report on Form 8-K, dated January 10, 1997, and
incorporated herein by reference)
10.29 Continuing Guaranty dated December 26, 1996 of North American
Telecommunications Corporation, Baltic States and CIS Ventures, Inc.,
CIS Intelligence Information Services, Inc. and Uniquest Communications,
Inc. (filed as Exhibit 10.4 to the Registrant's Current Report on Form
8-K, dated January 10, 1997, and incorporated herein by reference)
10.30 Pledge Agreement dated as of December 26, 1996 between Greyrock Business
Credit and the Registrant (filed as Exhibit 10.5 to the Registrant's
Current Report on Form 8-K, dated January 10, 1997, and incorporated
herein by reference)
10.31 Pledge Agreement dated as of December 26, 1996 between Greyrock Business
Credit and U.S. Communications, Inc. (filed as Exhibit 10.6 to the
Registrant's Current Report on Form 8-K, dated January 10, 1997, and
incorporated herein by reference)
10.32 Security Agreement dated December 26, 1996 among Greyrock Business Credit
and North American Telecommunications Corporation, Baltic States and CIS
Ventures, Inc., CIS Intelligence Information Services, Inc. and Uniquest
Communications, Inc. (filed as Exhibit 10.7 to the Registrant's Current
Report on Form 8-K, dated January 10, 1997, and incorporated herein by
reference)
10.33 Severance Agreement dated as of March 18, 1996 by and between the
Registrant and Lynn H. Johnson*
12.1 Statement re computation of ratio of earnings to fixed charges*
23.1 Consent of Arter & Hadden (included in its opinion filed as Exhibit 5.1
and incorporated herein by reference)**
23.2 Consent of Price Waterhouse LLP**
23.3 Consent of King, Burns & Company, P.C.**
</TABLE>
II-13
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
23.4 Consent of Duff & Anderson, P.C.**
23.5 Consent of Samson, Robbins & Associates**
24.1 Powers of Attorney*
25.1 Form T-1 Statement of Eligibility Under the Trust Indenture Act of 1939,
as amended, of United States Trust Company of New York under the
Indenture with respect to the 10% Convertible Notes Due 2006*
99.1 Agreement dated as of November 22, 1996 between the Registrant and Jesup &
Lamont Capital Markets, Inc.*
99.2 Agreement dated as of November 22, 1996 between the Registrant, Phillip
and Rae Huberfeld and Moses Elias*
</TABLE>
- ------------------------
* Previously filed
** Filed herewith
II-14
<PAGE>
Arter & Hadden
1717 Main Street
Suite 4100
Dallas, TX 75201
Direct Dial: (214) 761-2100
February 5, 1997
SA Telecommunications, Inc.
1600 Promenade Center, 15th Floor
Richardson, Texas 75080
Re: Registration Statement on Form S-2
Ladies and Gentlemen:
We have been advised that on or about February 6, 1997, SA
Telecommunications, Inc., a Delaware corporation (the "Company"), expects to
file under the Securities Act of 1933, as amended (the "Act") with the
Securities and Exchange Commission (the "Commission") Amendment No. 2 to that
Registration Statement on Form S-2 originally filed December 10, 1996 and
amended by that Amendment No. 1 filed January 24, 1997 (as so amended, the
"Registration Statement"). Such Registration Statement relates to the
offering (the "Offering") of up to (1) $27,200,000 aggregate principal amount
of the Company's 10% Convertible Notes due 2006 (the "Notes") to be offered
and sold by certain selling noteholders (the "Selling Noteholders") and (2)
11,525,689 shares of the Company's common stock, par value $.0001 per share
(the "Common Stock") consisting of (a) 109,022 shares of Common Stock (the
"Selling Stockholder Shares") to be offered and sold by certain selling
stockholders (the "Selling Stockholders"), (b) 750,000 shares of Common Stock
(the "Warrant Shares") issuable to the holders of certain Common Stock
Purchase Warrants (the "Warrants") to be offered and sold by the holders
thereof (the "Selling Warrantholders") upon exercise of the Warrants and (c)
10,666,667 shares of Common Stock (the "Conversion Shares") issuable upon
conversion of the Notes (based upon the current conversion price) to be
offered and sold by the Selling Noteholders upon conversion thereof. The
Notes, related Conversion Shares, Selling Stockholder Shares and Warrant
Shares are collectively referred to herein as the "Offered Securities." You
have requested our opinion with respect to certain legal aspects of the
Offering of the Offered Securities.
In rendering our opinion, we have participated in the preparation of the
Registration Statement and have examined and relied upon the original or
copies, certified to our satisfaction, of such documents and instruments of
the Company as we have deemed necessary and have made such other
investigations as we have deemed appropriate in order to express the opinions
set forth
<PAGE>
SA Telecommunications, Inc.
February 5, 1997
Page 2
herein. In our examinations, we have assumed the genuineness of all
signatures and the authenticity of all documents submitted to us as
originals, and the conformity to original documents of all documents
submitted to us as certified or reproduction copies. In addition, we have
assumed and have not verified (i) the accuracy of factual matters of each
document we have reviewed and (ii) that the Notes have been duly
authenticated under that Indenture dated August 12, 1996 between the Company
as sponsor and United States Trust Company of New York as trustee (the
"Indenture").
As to certain questions of fact material to this opinion, we have relied,
to the extent we deem reasonably appropriate, upon representations or
certificates of officers or directors of the Company.
Based upon the foregoing examination and subject to the comments and
assumptions noted below, we are of the opinion as follows:
1. The Notes, as issued, are valid and binding obligations of the
Company and are enforceable against the Company in accordance with their
terms.
2. The Conversion Shares, when issued upon conversion of the Notes in
accordance with the terms of the Indenture, will be validly issued, fully
paid and nonassessable.
3. The Selling Stockholder Shares to be sold by the Selling Stockholders
in the Offering were validly issued and fully paid and are nonassessable.
4. Assuming that (i) the outstanding Warrants were duly issued, (ii) the
Company maintains an adequate number of authorized but unissued shares and/or
treasury shares of Common Stock available for issuance to the Warrantholders
upon exercise of the Warrants, (iii) the Warrants are properly exercised for
shares of Common Stock in accordance with the Warrant certificate and other
applicable documents and (iv) the consideration for the Warrant Shares is
actually received by the Company and such amount exceeds the par value of
such shares, then, the Warrant Shares to be sold by the Selling
Warrantholders in the Offering will be validly issued, fully paid and
nonassessable.
Insofar as the foregoing opinions relate to the legality, validity,
binding effect or enforceability of any agreement or obligations of the
Company, (i) we have assumed that each party to such agreement or obligation
has satisfied those legal requirements that are applicable to it to the
extent necessary to make such agreement or obligation enforceable against it,
(ii) such opinions are subject to applicable bankruptcy, insolvency,
reorganization, liquidation, receivership, fraudulent conveyance or similar
laws, now or hereafter in effect, relating to creditors' rights generally,
and
<PAGE>
SA Telecommunications, Inc.
February 5, 1997
Page 3
(iii) such opinions are subject to general principles of equity,
including, without limitation, concepts of materiality, reasonableness, good
faith and fair dealing (regardless of whether considered in a proceeding at
law or in equity).
This opinion is limited in all respects to the General Corporation Law of
the State of Delaware as in effect on the date thereof; however, we are not
members of the Bar of the State of Delaware and our knowledge of its General
Corporation Law is derived from a reading of the most recent compilation of
that statute available to us without consideration of any judicial or
administrative interpretations thereof.
We bring to your attention the fact that this legal opinion is an
expression of professional judgment and not a guaranty of result. This
opinion is given as of the date hereof, and we assume no obligation to update
or supplement such opinion to reflect any facts or circumstances that may
hereafter come to our attention or any changes in laws or judicial decisions
that may hereafter occur.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement. In
giving such consent, we do not admit that we have come within the category of
persons whose consent is required by Section 7 of the Act or the rules and
regulations of the Commission thereunder.
Respectfully submitted,
ARTER & HADDEN
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-2 of our report dated March 21, 1996 relating
to the financial statements of SA Telecommunications, Inc., which appears in
such Prospectus, and to the incorporation by reference of our report dated
December 18, 1996, except as to Note 8 which is as of January 17, 1997, relating
to the financial statements of AddTel Communications, Inc. which appears in the
Current Report on Form 8K/A of SA Telecommunications, Inc. dated February 7,
1997. We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Dallas, Texas
February 7, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation by reference in this Registration Statement of our report dated
March 10, 1994 included in the Form 10-KSB of SA Holdings, Inc. (now known as SA
Telecommunications, Inc.) for the year ended December 31, 1993, and to all
references to our firm included in the Registration Statement.
/s/ KING, BURNS & COMPANY, P.C.
Dallas, Texas
February 7, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation by reference in the Prospectus constituting part of this
Registration Statement on Form S-2 of our report on U.S. Communications, Inc.
dated April 21, 1995 appearing in such Prospectus and to all references to our
firm included in the Registration Statement.
/s/ DUFF AND ANDERSON, P.C.
Levelland, Texas
February 7, 1997
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-2 of our report dated June 22, 1994 relating to
the financial statements of Long Distance Network, Inc., which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
/s/ SAMSON, ROBBINS & ASSOCIATES
Dallas, Texas
February 7, 1997
