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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A
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(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ---------------- TO ----------------
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Commission file number 0-18048
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SA TELECOMMUNICATIONS, INC.
(Name of small business issuer in its charter)
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DELAWARE 75-2258519
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
1600 PROMENADE CENTER, 15TH FLOOR 75080
RICHARDSON, TEXAS (Zip Code)
(Address of principal executive
offices)
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Issuer's telephone number: (972) 690-5888
--------------------------
Securities registered under Section 12(b) of the Exchange Act:
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Title of each Name of each exchange
class on which registered
NONE N/A
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Securities registered under Section 12(g) of the Exchange Act:
COMMON SHARES, $.0001 PAR VALUE PER SHARE
(Title of Class)
--------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90
days. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Section
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended December 31, 1996 were
$35,668,502.
The aggregate market value of the voting stock held by non-affiliates of the
registrant computed by reference to the closing price of the registrant's common
stock at March 27, 1997 ($1.19 per share) was $15,740,442.
There were 15,668,835 shares of the registrant's common stock outstanding as
of March 27, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report incorporates by reference information in the
definitive Proxy Statement for the Annual Meeting of Stockholders of SA
Telecommunications, Inc. to be held on May 29, 1997 to the extent indicated in
Part III, which definitive Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the registrant's fiscal year
end of December 31, 1996.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
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GLOSSARY
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1996 Act Telecommunications Act of 1996, which became law on February 8, 1996.
AT&T AT&T Communications, Inc., an IXC wholly owned by American Telephone and
Telegraph Company which provides interexchange services and facilities on a
nationwide and international basis.
AT&T Decree AT&T Divestiture Decree entered into on August 24, 1982, by the United
States District Court for the District of Columbia. The AT&T Decree, among
other things, ordered AT&T to divest its wholly owned BOCS from its long
lines division and manufacturing operations and generally prohibited BOCS
from providing long distance telephone service between LATAs.
BOC Bell System Operating Company--A LEC owned by any of the seven RBOCS.
Carrier A company engaged in carrying signals or messages for hire.
CLEC Competitive Local Exchange Carrier--a LEC other than a BOC or GTE.
FCC Federal Communications Commission.
GTE GTE Corporation and its subsidiaries, the largest U.S. based LEC.
Inter-LATA
Service Telephone service originating and terminating between LATAs.
Intra-LATA
Service Telephone service originating and terminating within a single LATA.
IXC Interexchange carrier--a carrier providing Inter-LATA, interstate and/or
international telecommunications services over its own switch and
transmission facilities or facilities provided by other interexchange
carriers or a combination of both.
LATAs Local Access and Transport Areas--the approximately 200 geographic areas
defined pursuant to the AT&T Decree between which the BOCs were generally
prohibited from providing long distance services prior to the 1996 Act.
Local Exchange A geographic area generally determined by a PUC, in which calls generally
are transmitted without toll charges to the calling or called party.
LEC Local Exchange Carrier--a company providing local telephone services. Each
BOC is a LEC.
MCI MCI Communications Corp., an IXC which provides interexchange services and
facilities on a nationwide and international basis.
PUC Public Utility Commission--a state regulatory body empowered to establish
and enforce rules and regulations governing public utility companies and
others, such as the companies engaging in the provision of long distance
services or local exchange services.
RBOC Regional Bell Operating Company--any of the seven regional Bell holding
companies which the AT&T Decree established to serve as parent companies
for the BOCs--NYNEX, Bell Atlantic, Bell South, Ameritech, US West,
Southwestern Bell and Pacific Telesis Group.
SPCOA Service Provider Certificate of Authority.
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Sprint Sprint Corporation, an IXC which provides interexchange services and
facilities on a nationwide and international basis.
Tariff The schedule of rates and regulations set by the communications common
carriers and filed with the appropriate federal and state regulatory
agencies, the published official list of charges, terms and conditions
governing provision of a specific communications service or facility, which
functions in lieu of a contract between the commercial or residential
customers or other user and the supplier or carrier.
Southwestern
Bell Southwestern Bell Telephone Company, a BOC owned by SBC Communications,
Inc. which provides local exchange services in Texas, Missouri, Oklahoma,
Kansas and Arkansas.
Switched
Reseller A long distance provider which resells the services of other long distance
providers and owns or leases switching equipment but does not own or lease
transmission facilities.
Switchless
Reseller A long distance provider which resells the services of other long distance
providers but does not own or lease any switching equipment or transmission
facilities.
Texas PUC Public Utility Commission of Texas.
WorldCom WorldCom, Inc., an IXC which provides interexchange services and facilities
on a nationwide and international basis.
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SA TELECOMMUNICATIONS, INC. & SUBSIDIARIES
ANNUAL REPORT ON FORM 10-KSB/A
TABLE OF CONTENTS
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PART I
Item 1. Description of Business........................................................................ 1
Item 2. Description of Property........................................................................ 16
Item 3. Legal Proceedings.............................................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders............................................ 18
PART II
Item 5. Market for Common Equity and Related Stockholder Matters....................................... 18
Item 6. Management's Discussion and Analysis or Plan of Operation...................................... 21
Item 7. Financial Statements........................................................................... 31
Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure........... 31
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of
the Exchange Act............................................................................. 31
Item 10. Executive Compensation......................................................................... 31
Item 11. Security Ownership of Certain Beneficial Owners and Management................................. 31
Item 12. Certain Relationships and Related Transactions................................................. 31
PART IV
Item 13. Exhibits and Reports on Form 8-K............................................................... 32
Index to Financial Statements.............................................................................. F-1
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION REFORM
ACT OF 1995
This report contains certain forward-looking statements regarding the
Company's business and future financial condition and results of operations that
involve risks and uncertainties, including but not limited to, those set forth
under the section entitled "BUSINESS--SPECIAL CONSIDERATIONS" and elsewhere in
this report and in the Company's other filings with the Securities and Exchange
Commission. Words or phrases such as "will continue", "anticipate", "expect",
"believe", "intend", "estimate", "project", "plan" or similar expressions are
intended to identify forward-looking statements. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, the Company's actual results may vary significantly from those
indicated.
GENERAL
SA Telecommunications, Inc. is a publicly held holding company which,
through its operating subsidiaries, is a full-service regional interexchange
carrier providing a wide range of domestic telecommunications services through
its network of owned and leased transmission and switching facilities. As used
herein, the term "Company" refers to SA Telecommunications, Inc. and its
subsidiaries, unless the context otherwise requires.
The Company primarily serves small and medium sized commercial accounts in
the west, southwest and south central United States. A vast majority of the
Company's commercial and residential customers are located in suburban,
secondary and rural markets. 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. The Company is also an authorized reseller of local telephone service in
Texas and California.
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, in 1996 the Company
acquired Economy Communications, Inc. ("Economy"), a switchless reseller located
in McKinney, Texas, and acquired Uniquest Communications, Inc., ("Uniquest") a
corporation engaged in third party customer verification services and outbound
telemarketing.
Effective November 1, 1996, the Company purchased all of the issued and
outstanding capital stock of AddTel Communications, Inc. ("Addtel"), a
switchless reseller of long distance services based in Glendale, California. At
December 31, 1996, a majority of Addtel's revenue was derived from the provision
of wholesale long distance services while its retail customer base primarily
consisted of small and medium sized commercial accounts and residential
customers concentrated in the greater Los Angeles metropolitan area.
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. During
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1997, the Company plans to upgrade and move the Amarillo switch to Los Angeles,
California and to add leased transmission facilities between this switch and its
other switches.
The Company markets its services in areas in the west, southwest and south
central United States served by its network primarily under the trade names
"USC," "USI," "First Choice Long Distance" and "Southwest Long Distance
Network." The Company also markets its services under the trade name "Addtel"
through agents. The Company currently anticipates future growth will primarily
result from sales and marketing efforts of its direct sales force,
telemarketing, agent sales, mass marketing sales, and from continued
acquisitions of telecommunications companies within its market area or adjacent
thereto.
The Company's Common Stock is traded on the Nasdaq SmallCap Market tier of
The Nasdaq Stock Market ("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 Company was incorporated on December 23, 1988.
SERVICES
DOMESTIC LONG DISTANCE AND RELATED 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 at no
cost to the caller. 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 domestic locations (international
calling), domestic long distance directory assistance, the provision of voice
and data private line services, dedicated "1+" domestic long distance service,
as well as a domestic operator assistance service. Customer billing is generated
internally for the Company's "1+" business and is LEC billed through a third
party service provider with respect to operator service and certain mass
marketing programs. Domestic long distance and related services represented
approximately 76% of the Company's revenues in 1994, 92% in 1995 and 95% in
1996. This growth is a result of a primary focus on this segment due to higher
profit margins and network utilization.
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.
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 assistance in placing long
distance telephone calls, including collect calls or person-to-person calls.
Operator services represented approximately 46% of the Company's revenues in
1994, 22% in 1995, and 11% in 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.
WHOLESALE SERVICES. The Company also provides transport and switch services
through its network to resellers of domestic long distance services. Wholesale
services constituted 9% of total revenue in 1994,
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4% in 1995, and increased to 13% in 1996 due to the Addtel acquisition. 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 presently 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 potentially large accounts receivable write-offs which
would adversely effect the Company's financial condition and results of
operations. The Company plans on phasing out the wholesale business obtained in
the Addtel acquisition by the end of the second quarter of 1997. Management of
the Company believes this seqment of the business is substantially less
profitable than the retail business and bears a higher credit risk.
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. During the fourth quarter of
1996, management of the Company decided to offer the international call back
business for sale, and if such sale was not forthcoming during the second
quarter of 1997, to discontinue these international services by the end of the
second quarter. The revenues from international call back services as a
percentage of total revenues which was 8% in 1995 had already diminished to 5%
of total revenues in 1996 largely as a result of the Company's previous decision
in October 1994 to focus on higher margin domestic telecommunications services.
OTHER TELECOMMUNICATIONS SERVICES. In May 1996, the Company was granted an
SPCOA from the Texas PUC permitting the Company to offer Southwestern Bell local
services on a resale basis to customers within Texas. The Company is currently
test marketing such service in portions of Texas at rates specified under
Southwestern Bell's resale tariff and is negotiating an interconnection
agreement for resale of local services in Texas and other states within the
Company's and Southwestern Bell's overlapping service areas. The Company has
also applied for similar certification in seven of the other states where it is
currently providing long distance services. On February 23, 1996, Addtel was
granted authority to resell local exchange services in California, but is
currently not providing such service. Management of the Company believes that
the resale of local exchange services will be instrumental to the Company in the
future because it will permit the Company to offer local telecommunications
service, together with a variety of long distance services, to its customers
under one invoice.
The Company has also entered into contractual relationships which permit the
Company to offer paging services, Internet access services and conference
calling services of other providers.
BUSINESS STRATEGY
The Company's objective is to become the 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 the implementation of a four point strategy consisting of
acquisitions, internal growth, network expansion and strategic alliances.
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 in the
west, southwest and south central United States. The Company's ability to effect
such acquisitions may be limited by virtue of the Company's liquidity, the
covenants set forth in the Indenture ("Notes Indenture") with respect to the
Company's $27,200,000 principal amount of 10% Convertible Notes Due 2006 (the
"Notes"), the Company's $3,800,000 10% Convertible Debenture Due 2006 (the
"Debenture") and the Company's line of credit arrangement (the
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"Greyrock Facility") with Greyrock Business Credit ("Greyrock"). See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
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 seeks to increase 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 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.
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. The Company has
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.
PROCESSING OF A LONG DISTANCE TELEPHONE CALL
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, either an
RBOC or a CLEC. 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 long distance provider will pay access charges to the
LECs originating and terminating the call.
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 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 network
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.
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
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long distance transmission facilities for the call in question with the least
cost to the Company, based upon pre-coded instructions.
THE COMPANY'S NETWORK
The Company currently operates switching equipment located in Dallas and
Lubbock, Texas and Phoenix, Arizona under capital lease arrangements and an
operator service switch located in Levelland, Texas. During 1997, the Company
plans to upgrade and move the switch formerly located in Amarillo, Texas to Los
Angeles, California. In addition, the Company leases local access circuits and
long distance transmission facilities from various providers. 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. 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 Dallas, Lubbock and Phoenix and the
switch to be relocated in Los Angeles will permit the Company to route calls to
the least expensive alternative available to the Company.
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 because they are modular, very flexible and
easily adaptable.
SALES AND MARKETING
The Company markets its services primarily through four sales channels:
direct sales, agent sales, telemarketing and mass marketing sales. Currently,
the Company directly markets its services from 27 locations situated throughout
the Company's contiguous primary nine state region. The Company believes it
offers comparable products and services generally provided by national carriers.
The Company emphasizes local market representation in both sales and service in
the markets which it serves.
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 AT&T Decree divided the United States into
approximately 200 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 intra-LATA
telephone service, local access service to long distance carriers and intra-LATA
toll service. RBOCs were prohibited from transmitting inter-LATA telephone
calls, 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 as switchless resellers or switched
resellers.
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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
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.
1996 ACT. The 1996 Act is intended to foster additional competition in the
United States domestic telecommunications market. The legislation opened, 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 (1) facilities-based competition is present in
the state in question, (2) the RBOC has entered into interconnection agreements
in those states in which it seeks long distance relief and (3) 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 Department of Justice ("DOJ"), but the
FCC is not bound by recommendations of the DOJ.
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 by being able to offer a wider array of
potential products and services formerly not sold by long distance providers.
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.
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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 and the networks of other LECs. It also set specific
formulas to determine the charges associated with leasing part of a local
network. These formulas outline reductions to the companies of 17% to 25% below
the price of the RBOCs and GTE retail local phone service for purposes of local
resale. 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 have 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," which will replace subsidies associated with access charges, but be paid
for by all carriers, including the Company. Upon adoption of these proposed
rules in 1997, the Company currently expects a reduction in the average per
minute access charges it now pays the RBOCs and GTE in the Company's region.
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. The
larger IXCs are obtaining financing from large foreign telecommunications
carriers seeking to enter the United States, such as British Telecom's
acquisition of MCI and the investments in Sprint by Deutsche Telecom and France
Telecom.
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, customer service 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. 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.
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.
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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,
Addtel 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.
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,
Addtel, 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.
In addition to its certification as a long distance carrier, the Company is
an authorized reseller of local exchange service in Texas and California. 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. 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. AT&T is
also building a wireless local loop network to avoid the payment of access
charges which could result in the Company incurring costs that AT&T can avoid.
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
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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. The FCC has ordered all long distance
companies, including the Company, to pay per call compensation to pay phone
owners for calls initiated by 800 numbers or access codes rather than by the
depositing of coins.
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), US West Communications (New Mexico, Colorado and Arizona), Bell South
(Louisiana) and Pacific Telesis Group (California) 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.
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. CLECs, which exist in an expanding number of the Company's markets, are
currently providing more competitive access and termination charges to IXCs than
LECs. 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
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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 of operator services; and various
legislative and regulatory proceedings that could result in new local exchange
competition.
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 ending September 22, 1997, non dominant-carriers, such as the
Company, are required by the FCC to cancel their domestic tariffs. In February
1997, the U.S. Court of Appeals for the District of Columbia Circuit stayed the
FCC's order requiring mandatory detariffing for domestic interstate long
distance service. Management of the Company believes that the Court's action
will likely delay or alter the impact of the FCC's order requiring long distance
carriers to remove their FCC tariffs for domestic interstate service by
September 22, 1997. Mandatory detariffing would require the Company and other
carriers to enter into individual contracts with long distance customers
regarding the rates and terms of its service, including limitations on
liability.
The Company must contract with other IXCs providing long distance service to
the Company where the Company does not maintain its own network facilities. High
volume customers such as the Company, may be able to utilize such IXCs, tariffs
or contracts 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 or contracts
specifically for the Company, and there can be no assurance that tariffs or
contracts created for other customers will meet the Company's needs in the
future.
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.
SPECIAL CONSIDERATIONS
In addition to the other information contained in this report, readers are
urged to carefully consider the following factors related to the Company. See
"SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION REFORM
ACT OF 1995."
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 $1,819,000, $1,935,000
and $5,382,000 for the fiscal years ended December 31, 1994, 1995 and 1996,
respectively. 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.
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The Company did not enter into the retail domestic telecommunications
business until 1994 and has since grown through a series of acquisitions
culminating with the latest acquisition of Addtel, effective November 1, 1996.
In addition, the Company has transformed itself from a switchless reseller to a
switched and transmission facilities based IXC. As a result, there is 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. 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 its debt.
SUBSTANTIAL LEVERAGE
The Company has not, since its inception, generated earnings adequate to
cover its fixed charges. Semi-annual cash interest payments of $1.6 million will
be due on the Notes and the Debenture. As of December 31, 1996, the Company's
total amount of debt outstanding was $29.8 million (including the Notes) and the
Company had shareholders' equity of $6.3 million. As of March 26, 1997, the
Company has outstanding an additional $1.9 million principal amount of
indebtedness under the Greyrock Facility and $3.8 million on the Debenture
issued on March 25, 1997. The Company expects to incur additional indebtedness
in the future. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
Because the Company historically has experienced operating cash flow
deficits, its ability to make cash interest payments on the Notes and Debenture
and to repay its obligations on the Notes and the Debenture at maturity will be
dependent on developing one or more sources of significant cash flow prior to
the date on which cash interest obligations are due on the Notes and Debenture.
As a result, the Company may seek to (i) refinance all or a portion of the Notes
and Debenture, (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 and Debenture, (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
are due on the Notes and Debenture or prior to maturity of the Notes and
Debenture.
INDENTURE AND DEBENTURE COVENANTS RESTRICTING ADDITIONAL INDEBTEDNESS.
The Company's operating cash flow could be affected by provisions of the
Debenture and the Notes Indenture with respect to the Notes, which restrict the
Company and its subsidiaries from incurring (i) certain indebtedness other than
Additional Permitted Indebtedness (as herein defined), and (ii) subordinated
indebtedness that matures or requires any mandatory prepayment of principal
prior to 120 days after the final maturity of the Notes and Debenture other than
subordinated indebtedness incurred in acquisitions. Under the Debenture and the
Notes Indenture, "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
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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 generally accepted accounting principles (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. As of December 31, 1996, the Company would have been
entitled to incur $24.7 million Additional Permitted Indebtedness, which amount
would be reduced by indebtedness outstanding from time to time under the
Greyrock facility and the Debenture.
An Incurrence Event will occur if indebtedness other than Additional
Permitted Indebtedness is incurred when 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") and the
Company's Pro Forma Interest Coverage (as defined in the Notes Indenture and the
Debenture) is less than 2.0 to 1. Upon an Incurrence Event, each holder of Notes
and the Debenture has the right, at the holder's option, to require the Company
to repurchase all or a portion of such holder's Notes and Debenture within a
certain time period at a price equal to 100% of the principal amount of the
Notes and Debenture, respectively, plus accrued interest to the repurchase date.
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.
Moreover, should the Company ever be required to repurchase the Notes and the
Debenture, there can be no assurance that the Company will have adequate
liquidity to fulfill such obligations. 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
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
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 suburban, secondary and
rural markets in the west, southwest and south central United States. The
Company has made and may make in the future acquisitions for cash, debt
securities, equity securities (including the Company's Common Stock) or
combinations thereof. 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
Debenture and the Notes Indenture. 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. The
issuance of equity to effect or finance such acquisitions would have the effect
of reducing the percentage ownership
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of the Company held by each pre-acquisition stockholder, and the incurrence of
indebtedness in connection with such acquisitions could adversely affect the
liquidity, results of operations and financial condition of the Company.
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 as planned, or
that the efficiencies and growth opportunities anticipated as a result of the
combination of the Company and the acquired entities will ever materialize.
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 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.
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, MCI, Sprint, WorldCom and others) and potential competitors (such
as RBOCs, 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.
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 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.
Regulatory actions by applicable authorities have had both positive and negative
effects on the Company's business and can be expected to continue to do so.
The Company is regulated at the federal level by the FCC and is currently
required to maintain domestic and international tariffs for its services
containing the rates, terms and conditions of service. The recent FCC order not
requiring maintenance of domestic tariffs at the federal level has been stayed
by court action. The Company is required to maintain a certificate, issued by
the FCC, in connection with its
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international services. The intrastate telecommunications operations of the
Company are also subject to various state laws and 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.
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 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 the
portions of the west, southwest and south central United States in which the
Company operates. 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.
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. CLECs, which exist in an expanding number of the
Company's markets, are currently providing more competitive access and
termination charges to IXCs than LECs. 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.
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.
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 ability
to manage the continued expansion of its long distance network. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
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 Debenture and the Notes Indenture on the Company's ability
to effect certain acquisitions and incur certain indebtedness and certain liens.
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 OR PLAN OF
OPERATION--LIQUIDITY AND CAPITAL RESOURCES."
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<PAGE>
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 forced to terminate calls off its
network at a higher cost than if terminated on its network. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION." 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.
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.
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.
ITEM 2. DESCRIPTION OF PROPERTY.
The executive offices of the Company and its subsidiaries are located in
Richardson, Texas and are leased under a five year term expiring on February 28,
2001 and April 30, 2001. The Company owns its operator services and customer
service facilities in Levelland, Texas, which is subject to a deed of trust and
promissory note having a principal amount outstanding of $94,822 as of December
31, 1996. The Company also owns an office building in Midland, Texas, which is
subject to a deed of trust and vendor's lien note
16
<PAGE>
having $99,376 in principal amount outstanding as of December 31, 1996. The
Company also leases space in Dallas and Lubbock, Texas, Phoenix, Arizona and Los
Angeles, California for the switches which route long distance calls. These
leases expire in September 1, 1997, September 2000, March 31, 1998, and November
2000, respectively.
In addition, Addtel leases office space in Glendale, California and 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.
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.
ITEM 3. LEGAL PROCEEDINGS.
On February 24, 1997, the parties reached a settlement with respect to the
lawsuit 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), the terms of which are not material to the
Company. As part of such settlement, this lawsuit and the criminal complaint
filed by Mr. Avyam in Guatemala City, Guatemala against NATC, Paul Miller and
two other NATC employees is in the process of being dismissed.
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 currently scheduled for trial on July 1, 1997.
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 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
17
<PAGE>
while the parties are engaged in negotiations aimed at resolving these matters.
The case has been set for trial on May 8, 1997.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of fiscal 1996, no matter was submitted by the
Company to a vote of its shareholders through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET FOR COMMON STOCK
The Company's Common Stock is 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.
<TABLE>
<CAPTION>
CLOSING SALE PRICE
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal Year Ended December 31, 1995:
First Quarter.................................................... $ 2.25 $ 1.31
Second Quarter................................................... $ 2.25 $ 1.28
Third Quarter.................................................... $ 2.56 $ 1.56
Fourth Quarter................................................... $ 2.94 $ 1.88
Fiscal Year Ended December 31, 1996:
First Quarter.................................................... $ 2.59 $ 2.03
Second Quarter................................................... $ 3.84 $ 2.16
Third Quarter.................................................... $ 2.66 $ 2.00
Fourth Quarter................................................... $ 2.16 $ 1.44
</TABLE>
On March 27, 1997, the last reported sale price of the Common Stock as
reported on the SmallCap Market was $1.19 per share and, according to the
Company's transfer agent, there were 463 holders of record of the Common Stock
on such date.
DIVIDENDS
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 Cumulative Convertible 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 Debenture, the Notes Indenture and the Greyrock Facility
restrict the payment of dividends in certain cases. 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
18
<PAGE>
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.
RECENT SALES OF UNREGISTERED SECURITIES
During the year ended December 31, 1996, the Company consummated the
following private placements under Section 4(2) of the Securities Act of 1933,
as amended (the "Securities Act"):
1. In January 1996, 2,942 shares of Common Stock were issued to an
accredited investor in payment of $3,825 of certain placement services
rendered by such accredited investor to the Company.
2. On March 14, 1996, Economy received 26,316 shares of Common Stock in
connection with the acquisition of such corporation's assets by the
Company.
3. On March 18, 1996, two accredited investors purchased an aggregate of
$100,000 principal amount of the Company's 9% Subordinated Convertible
Debentures Due March 18, 1997 (the "March 18 Debentures") for $100,000
cash. The March 18 Debentures were convertible after issuance into shares
of Common Stock at a conversion price equal to the lower of (1) 75% of
the average closing price of the Company's Common Stock for the 5 days
immediately preceding conversion or (2) $1.75.
4. On March 7, 1996, a warrant to purchase 300,000 shares of Common Stock
at an exercise price of $1.40 per share exercisable until March 6, 1998
was issued to an accredited investor in payment of services rendered by
such accredited investor to the Company. The Company estimates it
received approximately $169,770 of services from this purchaser.
5. On March 7, 1996, a warrant to purchase 250,000 shares of Common Stock
at an exercise price of $2.125 per share exercisable until March 6, 1998
was issued to an accredited investor in payment of services rendered by
such accredited investor to the Company. The Company estimates it
received approximately $92,025 of services from this purchaser.
6. 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 in settlement of certain disputes between the Company and JLCM. The
aggregate market value of the Common Stock issued to JLCM on the date of
settlement was $107,812.50.
7. On April 11, 1996, the Company issued to Terry Houston 142,354 shares of
Common Stock in consideration of the early termination of his Employment
Agreement with the Company.
8. On April 25, 1996, the Company issued to Gary White 15,000 shares of
Common Stock of the Company in satisfaction of $25,050 services rendered
to the Company.
9. On May 7, 1996, six accredited investors who held warrants to purchase
Common Stock issued in a September 1995 private placement (the "1995
Warrants") exercised such 1995 Warrants for an aggregate of 1,070,000
shares and paid an aggregate exercise price of $1,337,500 cash. As
consideration for exercising such warrants early, the Company issued to
such holders new warrants exercisable into an aggregate of 1,337,500
shares of Common Stock at an exercise price of $2.40 per share through
May 7, 1998.
10. In June 1996, three accredited investors who held 1995 Warrants
exercised such 1995 Warrants for an aggregate of 20,000 shares and paid
an aggregate exercise price of $25,000.
11. On June 21, 1996, the Company repurchased the following securities for
aggregate consideration of $3,208,500, of which $308,500 was payable in
cash and the rest by the issuance of
19
<PAGE>
843,203 shares of the Company's Common Stock: (1) notes having an
aggregate original principal amount of $4,250,000, (2) 125,000 shares of
Series B Cumulative Convertible Preferred Stock, and (3) warrants
exercisable into an aggregate of 1,050,000 shares of Common Stock at
$1.25 per share. As an incentive for the former USC shareholders to
accept the 843,023 shares of restricted Common Stock as part of the
consideration but to alleviate the concern over the market risk in the
price of the Company's Common Stock, the Company (1) granted demand
registration rights for these shares exercisable between August 31, 1996
and August 31, 1997, (2) retained a call option to purchase all such
shares during the period beginning August 1, 1996 through October 31,
1996 at $3.44 per share (which if exercised would void the demand
registration obligations), (3) guaranteed that if these shares were sold
on or before June 24, 1997 in a bona fide sale transaction, USC
shareholders were guaranteed to receive at least an aggregate of
$2,900,000 of gross sales proceeds for all such shares (with a limitation
of the Company's liability fixed at $1,213,954), and (4) required the USC
Shareholders to return sale proceeds in excess of $1,160,000 for such
shares if so sold.
12. On June 21, 1996, warrants exercisable into an aggregate of 200,000
shares of Common Stock at an exercise price of $2.00 per share
exercisable until June 21, 1998 were issued to two accredited investors
in payment of services rendered by such accredited investors to the
Company. The Company estimates it received approximately $107,132 of
services from this purchaser.
13. On July 31, 1996, the Company issued to JLCM an additional 13,333 shares
of the Company's Series A Cumulative Convertible Preferred Stock as
payment of the required dividend on the 166,667 shares of Series A
Cumulative Convertible Preferred Stock held by JLCM.
14. On August 7, 1996, the Company issued an aggregate of 4,706 shares of
Common Stock to the two holders of the March 18 Debentures pursuant to
the provisions of the March 18 Debentures in satisfaction of a
registration penalty.
15. On August 12, 1996, the Company sold $27,200,000 aggregate principal
amount of the Notes to Furman Selz LLC and Rauscher Pierce Refsnes, Inc.
(the "Initial Purchasers"). The Notes were simultaneously sold by the
Initial Purchasers in transactions exempt from the registration
requirements of 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). 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 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.
16. On August 23, 1996, in connection with the redemption of the March 18
Debentures, the Company issued an aggregate of 28,000 shares of Common
Stock to the two holders under the redemption provisions for such
Debentures.
17. On March 25, 1997, the Company sold the Debenture to Northstar High
Total Return Fund for $3.2 million. The Debenture matures on August 15,
2006. The Debenture is currently convertible at any time prior to
maturity, unless previously redeemed, into shares of Common Stock of the
Company at an initial conversion price of $2.55 per share (currently
1,490,196 shares of Common Stock), subject to adjustment in certain
circumstances.
The transactions described above were unrelated private transactions
effected in reliance upon Section 4(2) of the Securities Act. The securities
were sold to a limited number of purchasers. Such purchasers were provided with
access to all relevant information regarding the Company and/or represented to
the Company that they were "accredited investors," as defined under the
Securities Act. In addition, each purchaser represented to the Company that the
shares were purchased for investment purposes only and not with a view toward
distribution.
20
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the three years ended December 31,
1994, 1995 and 1996. It should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto included elsewhere in
this report.
GENERAL
SA Telecommunications, Inc. is a publicly held holding company which,
through its operating subsidiaries, is a full-service regional interexchange
carrier providing a wide range of domestic telecommunications services through
its network of owned and leased transmission and switching facilities. The
Company primarily serves small and medium sized commercial accounts in the west,
southwest and south central United States. A vast majority of the Company's
commercial and residential customers are located in suburban, secondary and
rural markets. 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. The Company
is also an authorized reseller of local telephone service in Texas and
California.
The Company entered the telecommunications business in 1991 through the
acquisition of NATC, a telecommunications provider offering international call
back long distance service to foreign customers. In 1994 and 1995, the Company
acquired two Texas-based switchless resellers, 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.
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.
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 various sales channels and from continued
acquisitions of telecommunications companies within its market area or adjacent
thereto.
The Company markets its services in areas in the west, southwest and south
central United States served by its network primarily under the "USC," "USI,"
"First Choice Long Distance," "Southwest Long Distance Network" and "Addtel"
trade names.
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<PAGE>
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.
Commencing 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. During the year ended
December 31, 1996, the Company derived 95% of its revenues from the provision of
domestic long distance services.
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, 1994, 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,
----------------------------------------------
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Operating revenue................................................. 100% 100% 100%
Cost of revenue................................................... 85 68 63
-------------- -------------- --------------
Gross profit...................................................... 15 32 37
Operating expenses:
General and administrative...................................... 30 32 31
Depreciation and amortization................................... 4 6 8
Nonrecurring network reconfiguration costs...................... -- -- 2
Nonrecurring restructuring and integration costs................ -- -- 6
Loss from continuing operations before other...................... (19) (6) (10)
Other income (expense)............................................ -- (3) (5)
-------------- -------------- --------------
Loss from continuing operations................................... (19) (9) (15)
Loss from discontinued operations................................. (6) (22) --
Extraordinary net gain on extinguishment of debt.................. -- -- 4
-------------- -------------- --------------
Net loss.......................................................... (25)% (31)% (11)%
-------------- -------------- --------------
-------------- -------------- --------------
Net cash provided by (used in) operating activities............... $ (2,289,481) $ (1,224,486) $ 635,390
Net cash used in investing activities............................. $ (1,743,558) $ (7,141,820) $ (3,172,528)
Net cash provided by financing activities......................... $ 3,166,078 $ 8,858,613 $ 16,073,866
EBITDA (loss), as defined herein(1)............................... $ (1,397,324) $ 153,514 $ 1,751,374
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
- --------------------------
(1) Earnings (loss) before interest, taxes, depreciation, amortization, certain
nonrecurring items, and other income (expense) or "EBITDA," 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).
22
<PAGE>
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995
Revenues increased $14,920,481, or 72%, from $20,748,021 in 1995 to
$35,668,502 in 1996. Revenue minutes increased approximately 82,000,000, or 85%,
from approximately 97,000,000 in 1995 to approximately 179,000,000 in 1996.
On a pro forma basis, as though the acquisition of USC occurred at the
beginning of 1995, revenues and minutes for 1996 increased 24% and 29%,
respectively, compared with pro forma revenues of $28,694,683 or approximately
139,000,000 revenue minutes for 1995. Revenue growth for 1996 was also impacted
by the FCLD acquisition which contributed $1,049,504 and the Addtel acquisition
which contributed $2,057,176 in retail revenue and $3,241,667 in wholesale
revenue. Operator services, wholesale (excluding Addtel) and international call
back business revenues increased by $257,335 from 1995 to 1996; however, as a
percentage of total revenues, declined from 35% in 1995 to 21% in 1996. The
Company's marketing strategy continues to be the aggressive marketing of its
"1+" services, which have a higher gross profit margin, and the de-emphasizing
of operator services, wholesale (excluding Addtel) and international call back
business which are less profitable product lines.
The Company plans on phasing out the wholesale business obtained in the
Addtel acquisition by the end of the second quarter of 1997. The wholesale
business is substantially less profitable than the retail business and bears a
higher credit risk.
Gross profit increased by $6,506,366 from $6,631,908 in 1995 to $13,138,274
in 1996. The gross profit margin increased by 5% from 32% in 1995 to 37% in
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 third and fourth
quarters of 1996, as discussed under "Liquidity and Capital Resources."
Additionally, there has been an overall improved call mix with the higher margin
"1+" traffic comprising a larger percentage of total traffic than the lower
margin operator service and wholesale traffic. Negatively impacting the margin
was the $3,241,667 of wholesale revenue from the Addtel acquisition which has a
4% gross profit margin.
General and administrative expense increased by $4,449,496 from $6,478,394
in 1995 to $10,927,890 in 1996, and as a percentage of revenues, decreased from
32% in 1995 to 31% in 1996. The increase in total general and administrative
expense is attributable to additional growth and acquisitions in 1996. However,
the full impact of general and administrative expense reductions from the
integration of FCLD and Addtel will not be realized until this process is
completed in 1997. The decrease as a percentage of revenues reflects
management's continued focus on cost containment.
Depreciation and amortization expense increased by $1,574,675 from
$1,287,225 in 1995 to $2,861,900 in 1996, and as a percentage of revenues,
increased from 6% in 1995 to 8% in 1996. This increase resulted from higher
depreciation and amortization charges arising from the acquisitions of USC, FCLD
and Addtel, and increased depreciation from the acquisition of switching and
other network equipment.
During the fourth quarter of 1996, the Company incurred an $806,436
nonrecurring charge to operations related to reconfiguring its network. This
reconfiguration included (i) the deployment of two additional switches to
enhance the efficiency of the network, (ii) the addition of a number of new
circuits throughout the Company's service area, and (iii) the planned expansion
of the network to the west coast. The combination of these factors necessitated
the Company to take its network down for a period of time, thus increasing the
volume of lower margin off-net traffic.
During 1996, the Company incurred a $2,015,506 nonrecurring restructuring
and integration charge to operations comprised of (i) $227,201 for restructuring
the Company's sales organization, (ii) $1,244,511 for discontinuing the
Company's international call back product line, and (iii) $543,794 for
integration of the FCLD and Addtel acquisitions during 1996.
The $227,201 sales restructuring charge represents excess and duplicate
costs in the fourth quarter of 1996 arising from restructuring the Company's
sales organization from a predominant single sales channel
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<PAGE>
direct approach to a more cost effective four channel approach consisting of (i)
direct sales, (ii) telemarketing, (iii) agents, and (iv) mass marketing. Major
customer accounts will continue to be solicited by direct sales efforts. The
preponderance of this charge is comprised of salary and benefit costs associated
with headcount reductions. The $1,244,511 charge for discontinuing the Company's
international call back product line is principally comprised of employee
associated costs and reserves for uncollectible accounts receivable. The
$543,794 charge for integration of the FCLD and Addtel acquisitions is
principally comprised of costs associated with excess and duplicate personnel
reductions. The integrations of FCLD and Addtel are expected to be completed by
March 31, 1997 and June 30, 1997, respectively.
During 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 before other income
(expense) of $1,277,110 in 1995 versus a loss from continuing operations before
other income (expense) of $3,473,458 in 1996. This increase was primarily
attributable to the nonrecurring charges and increased depreciation and
amortization expense, partially offset by improved gross profit margins.
The Company had net other expense of $658,111 in 1995 compared to net other
expense of $1,908,701 in 1996. This increase was primarily due to an increase in
interest expense from $682,796 to $2,129,876 related to the offering of the
Notes in August 1996.
The Company recorded a loss from discontinued operations before other income
(expense) of $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 Strategic Abstract & Title
Corporation ("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 recognized a net gain (made up of two components) on
extinguishment of debt of $1,327,644 for 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 $821,547 relating to the Company's redemption of its
$2,000,000 principal amount of convertible debentures from the proceeds of the
offering of the Notes which was incurred in the third and fourth quarters of
1996.
The Company incurred a net loss of $6,465,963 in 1995 as compared to
$4,054,515 in 1996. This improvement is primarily attributable to the one-time
net extraordinary gain on extinguishment of debt, improved profit margins, and
the absence of a discontinued operations charge in 1996, partially offset by the
nonrecurring charges, increased interest expense and increased depreciation and
amortization 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
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<PAGE>
$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 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.
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
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<PAGE>
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. Semi-annual cash interest payments of $1.6 million will be due on
the Notes and the Debenture in August 1997. As a result, a substantial portion
of the Company's cash flow will be devoted to debt service. The ability of the
Company to make payments of principal and interest will be largely dependent
upon its future performance.
The Company has used the net proceeds received from the 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 Bank
Minnesota, N.A. ("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) approximately $13.4 million 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. At
December 31, 1996, Addtel's revenue was primarily derived from the provision of
wholesale long distance services while its retail customer base primarily
consisted of small and medium sized commercial accounts and residential
customers concentrated in the greater Los Angeles metropolitan area. Addtel's
wholesale revenue produces a substantially lower gross profit margin than its
retail revenue. The Company plans on phasing out the wholesale business by the
end of the second quarter of 1997. 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 margin wholesale revenue into the
Company's total revenue base.
On January 9, 1997, the Company completed a line of credit arrangement with
Greyrock Business Credit (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 RBOC, a BOC, a LEC, 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 Company initially borrowed
$1.6 million principal amount on January 9, 1997 under this facility.
The agreements regarding the line of credit contain covenants which, among
other matters, limit the ability of the Company and its subsidiaries to take the
following actions without the consent of Greyrock: (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 or acquire its capital stock.
On March 25, 1997, the Company completed a $3.8 million private placement of
the Debenture, which is generally convertible at any time prior to maturity at a
conversion price of $2.55 per share, subject
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<PAGE>
to adjustments in certain circumstances. The Debenture is 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 has the right to require the
Company to repurchase the Debenture in the event that all three of the following
events occur: (i) the Company incurs certain indebtedness, (ii) the Pro-Forma
Interest Coverage 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 approximately $1.5 million of the $3.2
million of the net proceeds received from the sale of the Debenture to reduce
indebtedness outstanding from time to time under the Greyrock Facility, and
expects to use the remainder for general corporate purposes and working capital.
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
Debenture and Notes Indenture), then the holders of the Notes and the Debenture
would have the right to require the Company to repurchase the Notes and the
Debenture. 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 and the
Debenture ever have the ability to cause the Company to repurchase the Notes and
the Debenture, 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, which was corrected in December
1996, 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 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
$2,289,481 and $1,224,486 in 1994 and 1995, respectively, and positive cash flow
from operating activities of $635,390 in 1996. The positive cash flow of
$635,390 in 1996 includes approximately $1.1 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
overall improvement in cash flow from operating activities in 1996 is
attributable to improved cash management. 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.
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.
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<PAGE>
Cash used in investing activities was $1,743,558, $7,141,820 and $3,172,528
in 1994, 1995 and 1996, respectively. Of the total in 1996, $9,084,591 was
utilized in the acquisition of Addtel, First Choice and Economy. Of the total in
1995, $6,974,685 was utilized in the acquisition of USC and of the total in
1994, $1,330,397 was utilized in the acquisition of LDN. $3,588,786 of the total
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 $3,166,078, $8,858,613 and
$16,073,866 in 1994, 1995 and 1996, respectively. Net proceeds of $25.4 million
from issuance of the Notes in 1996 were utilized to (i) repay existing bank debt
of $7 million, (ii) repurchase 843,023 shares of the Company's Common Stock from
former USC shareholders for $2.9 million, (iii) redeem 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. Proceeds generated from the issuance of
$7,000,000 of long term debt and $1,000,000 of Series A Cumulative Convertible
Preferred Stock ("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 sale 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 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 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 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 Redeemable
Preferred Stock and issued to JLCM the JLCM Warrant entitling JLCM to
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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 Redeemable Preferred Stock in payment of the annual
dividend on such stock.
The terms and provisions relating to the Series A Redeemable Preferred 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.
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 offering of the Notes. In
connection with such private placements, the Company paid $75,000 of finders
fees and issued the Finder's Warrants exercisable into an aggregate of 200,000
shares of Common Stock.
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.
At December 31, 1996, the Company had $29,048,762 of long term debt of which
$570,859 was the current portion. On January 7, 1997, the Company incurred
additional short-term indebtedness under the Greyrock Facility. The initial
borrowing was $1.6 million and the balance fluctuates with pay-downs and
additional borrowings on a daily basis. 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 December 31, 1996, the Company had a cash and cash equivalent balance of
$14,360,466 as compared to $823,738 at December 31, 1995. As of December 31,
1996, working capital was a negative $3,011,355 as compared to a negative
$2,841,834 at December 31, 1995. These working capital amounts are comparable
between the years.
CAPITAL EXPENDITURES
Capital expenditures in 1996 totaled $4,590,027, of which $1,001,241 were
financed. Capital expenditures for 1995 totaled $693,977 of which $500,701 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 and peripheral equipment such as billing
systems to support such expansion, 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.
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<PAGE>
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.
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 has
adopted SFAS 123 on a disclosure basis only. As such, implementation of SFAS 123
has not impacted the Company's consolidated balance sheet or statement of
operations.
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ITEM 7. FINANCIAL STATEMENTS.
The consolidated financial statements of the Company and its subsidiaries
and notes thereto are included elsewhere in this report on Form 10-KSB as
follows:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Reports of Independent Public Accountants for the years ended December 31, 1996, 1995 and 1994... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994..... F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and
1994......................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994..... F-6
Notes to Consolidated Financial Statements..................................................... F-7
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
Information with respect to directors and executive officers of the Company
is incorporated herein by reference to the information under the caption
"MANAGEMENT--Executive Officers and Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" contained in the definitive Proxy Statement for
the 1997 Annual Meeting of Stockholders of the Company tentatively scheduled to
be held on May 29, 1997. (the "Proxy Statement").
ITEM 10. EXECUTIVE COMPENSATION.
Information with respect to compensation of directors and executive officers
of the Company is incorporated herein by reference to the information under the
captions "EXECUTIVE COMPENSATION" and "MANAGEMENT--Committees, Meetings and
Compensation of the Board of Directors" contained in the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership by persons known to the
Company to beneficially own more than five percent of the Common Stock, by each
director of the Company and by all directors and executive officers as a group
is incorporated herein by reference to the information under the captions
"VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS" and "PROPOSAL NO. 1--ITEM NO. 1
ON PROXY--Election of Directors" contained in the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related transactions
is incorporated herein by reference to the information under the caption
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" contained in the Proxy
Statement.
31
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ---------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Certificate of Incorporation of the Company, as amended through December 31, 1994 (filed as Exhibit 3.1
to the Company'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 Company'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 Company'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 Company'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 Company'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 Company filed with the Delaware
Secretary of State on July 9, 1996 (filed as Exhibit 3.2 to the Company'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 Company (filed as Exhibit 3.5 to the Company'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 Company and United States Trust Company of New York as
Trustee (filed as Exhibit 4.1 to the Company'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 Company, Furman Selz LLC and Rauscher Pierce
Refsnes, Inc. (filed as Exhibit 10.1 to the Company'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 Company, Furman Selz LLC and Rauscher
Pierce Refsnes, Inc. (filed as Exhibit 10.2 to the Company'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 Company'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>
32
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ---------------------------------------------------------------------------------------------------------
<C> <S>
4.5 Form of Certificate Evidencing Common Stock (filed as Exhibit 4.19 to the Company's Registration
Statement on Form S-3 (Registration No. 33-64271) and incorporated herein by reference)
9.1 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and ITEX Corporation, dated June 30, 1992
(filed as Exhibit 9.1 to the Company's Form 10-KSB for the year ended December 31, 1994 and incorporated
herein by reference)
9.2 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Terry Houston, dated April 12, 1994
(filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated May 16, 1994 and incorporated
herein by reference)
9.3 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Scott Moster, dated April 12, 1994 (filed
as Exhibit 2.2 to the Company's Current Report on Form 8-K dated May 16, 1994 and incorporated herein by
reference)
9.4 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Roy D. Duckworth, dated April 12, 1994
(filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated May 16, 1994 and incorporated
herein by reference)
9.5 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Daniel J. Dziuba, dated April 12, 1994
(filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated May 16, 1994 and incorporated
herein by reference)
9.6 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Paul R. Miller, dated April 12, 1994
(filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated May 16, 1994 and incorporated
herein by reference)
9.7 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and David L. Hover, dated April 12, 1994
(filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated May 16, 1994 and incorporated
herein by reference)
9.8 Form of Voting Agreement, executed as of September 20, 1995 between the Company, Jack W. Matz, Jr. and
each of Seth Joseph Antine, Fred Rudy, Jules Nordlicht, Moses Elias, Harry Adler, Dr. Seymour Huberfeld,
Connie Lerner, Mueller Trading L.P., Jack Ehrenhaus, Cong. Ahavas Tzedach Vachsed and Laura
Huberfeld/Naomi Bodner Partnership (the "Investors") filed as Exhibit 4.15 to the Company's Registration
Statement on Form S-3 (Registration No. 33-64271) and incorporated herein by reference)
9.9 Voting Agreement dated as of April 11, 1996 among the Company, Terry R. Houston and Jack W. Matz, Jr.
(filed as Exhibit 9.1 to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31,
1996 and incorporated herein by reference)
9.10 Form of Voting Agreement dated as of May 7, 1996 among the Company, Jack W. Matz, Jr. and each of Laura
Huberfeld/Naomi Bodner Partnership, Fred Rudy, Seth Joseph Antine, Harry Adler, Dr. Seymour Huberfeld and
Jules Nordlicht (the "1996 Investors") and schedule of differences thereto (filed as Exhibit 9.1 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996 and incorporated herein by
reference)
9.11 Pledge Agreement dated January 10, 1997 between Charles Tony Lonstein, Agent, U.S. Communications, Inc.
and the Company (Filed as Exhibit B to Exhibit 2.1 to the Company's Current Report on Form 8-K for the
event occurring on January 10, 1996, filed with the Commission on January 22, 1997 and incorporated
herein by reference)
10.1 Share Purchase Agreement, dated as of July 31, 1995, by and between the Company and Jesup & Lamont
Capital Markets, Inc. (filed as Exhibit 4.3 to the Company'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)
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ---------------------------------------------------------------------------------------------------------
<C> <S>
10.2 Warrant Purchase Agreement, dated as of July 31, 1995, by and between the Company and Jesup and Lamont
Capital Markets, Inc. (filed as Exhibit 4.4 to the Company'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 Company'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 Company and Jesup & Lamont Capital Markets, Inc.
(filed as Exhibit 4.18 to the Company'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 Company and each of the Investors (filed as
Exhibit 4.16 to the Company'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 Company'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 Company and each of
the Investors and schedule of differences thereto pursuant to General Instructions to Item 601 (filed as
Exhibit 4.13 to the Company'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 Company and Jack Matz (filed as Exhibit 10.8
to the Company'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 Company and Jack Matz
(filed as Exhibit 10.19 to the Company'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 Company and Paul R. Miller (filed as Exhibit
10.20 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995 and incorporated
herein by reference)
10.11 Employment Agreement dated April 1, 1994 by and between LDN and Terry Houston (filed as Exhibit 2.2 to
the Company'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 Company and Terry Houston (filed as Exhibit
10.3 to the Company'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 Company and Terry Houston (filed as
Exhibit 10.13 to the Company's Form S-2 Registration Statement (Registration No. 333-17547) and
incorporated herein by reference)
10.14 Severance Agreement dated as of March 18, 1996 by and between the Company and J. David Darnell (filed as
Exhibit 10.22 to the Company'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 Company (Non-Employee Director Plan")(filed as
Item 2 of the Company's Proxy Statement dated June 29, 1994 and incorporated herein by reference)
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ---------------------------------------------------------------------------------------------------------
<C> <S>
10.16 Form of Stock Option Agreement used in connection with Non-Employee Director Plan (filed as Exhibit 10.12
to the Company'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 Company'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 Company'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 Company'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 Company and Jesup & Lamont Capital Markets, Inc.
(filed as Exhibit 10.38 to the Company'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 Company and each of the 1996 Investors
and schedule of differences thereto pursuant to General Instruction 601 (filed as Exhibit 10.4 to the
Company'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 1996 Investors and
schedule of differences thereto pursuant to General Instruction 601 (filed as Exhibit 10.5 to the
Company'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 Company and John Nugent (Filed as Exhibit
10.23 to the Company's Form S-2 Registration Statement (Registration No. 333-17547) and incorporated
herein by reference)
10.24 Lease Agreement effective as of October 11, 1995 between Telecommunications Finance Group and Long
Distance Network, Inc. (Filed as Exhibit 10.24 to the Company's Form S-2 Registration Statement
(Registration No. 333-17547) and incorporated herein by reference)
10.25 Stock Purchase Agreement dated as of January 10, 1997 among the Company, Addtel Communications, Inc.,
Charles Tony Lonstein, Aviram Lonstein, Daniel G. Lonstein and David R. Lonstein (filed as Exhibit 2.1 to
the Company'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 Company, U.S.
Communications, Inc., Long Distance Network, Inc., and Southwest Long Distance Network, Inc. (filed as
Exhibit 10.1 to the Company'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
Company, U.S. Communications, Inc., Long Distance Network, Inc. and Southwest Long Distance Network, Inc.
(filed as Exhibit 10.2 to the Company'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 Company, U.S. Communications, Inc.,
Long Distance Network, Inc., and Southwest Long Distance Network, Inc. (filed as Exhibit 10.3 to the
Company'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
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ---------------------------------------------------------------------------------------------------------
Uniquest Communications, Inc. (filed as Exhibit 10.4 to the Company's Current Report on Form 8-K, dated
January 10, 1997, and incorporated herein by reference)
<C> <S>
10.30 Pledge Agreement dated as of December 26, 1996 between Greyrock Business Credit and the Company (filed as
Exhibit 10.5 to the Company'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 Company'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 Company'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 Company and Lynn H. Johnson (filed as
Exhibit 10.33 to the Company's Form S-2 Registration Statement (Registration No. 333-17547) and
incorporated herein by reference)
10.34 Assumption Agreement and Amendment to Loan Agreement dated February 12, 1997 between Greyrock Business
Credit and AddTel Communications, Inc., the Company, Long Distance Network, Inc., U.S. Communications,
Inc. and Southwest Long Distance Network, Inc.*
10.35 Pledge Agreement dated February 12, 1997 between Greyrock Business Credit and the Company*
10.36 Cross-Corporate Continuing Guaranty dated February 12, 1997 of AddTel Communications, Inc.*
10.37 Cross-Corporate Continuing Guaranty dated February 12, 1997 of the Company, U.S. Communications, Inc.,
Long Distance Network, Inc., and Southwest Long Distance Network, Inc.*
10.38 Continuing Guaranty dated February 12, 1997 of AddTel Communications, Inc.*
10.39 Second Amendment to Employment Contract dated March 26, 1997 between the Company and Jack W. Matz, Jr.*
10.40 Amendment to Employment Contract dated March 26, 1997 between the Company and Paul R. Miller*
10.41 Purchase Agreement dated March 25, 1997 between the Company and Northstar High Total Return Fund*
10.42 Registration Rights Agreement dated March 25, 1997 between the Company and Northstar High Total Return
Fund*
10.43 Severance Agreement dated March 26, 1997 between the Company and John Nugent*
10.44 The Company's 10% Convertible Debenture Due 2006*
21.1 Subsidiaries of the Company*
23.1 Consent of Price Waterhouse LLP**
27.1 Financial Data Schedule*
</TABLE>
- ------------------------
* Previously filed
** Filed herewith
(b) REPORTS ON FORM 8-K
On December 11, 1996, the Company filed a Form 8-K dated December 10, 1996,
which reported the execution of a letter of intent between the Company and
Addtel to acquire all of the outstanding stock of Addtel.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
SA TELECOMMUNICATIONS, INC.
By: /s/ JACK W. MATZ, JR.
-----------------------------------------
Jack W. Matz, Jr.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
Date: April 18, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
in the capacities and on the date indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
/s/ JACK W. MATZ, JR.
------------------------------------------- Director, Chairman and Chief April 18, 1997
Jack W. Matz, Jr. Executive Officer
/s/ PAUL R. MILLER
------------------------------------------- Director, President and Chief April 18, 1997
Paul R. Miller Operating Officer
/s/ J. DAVID DARNELL Director, Vice President--
------------------------------------------- Finance and Chief Financial April 18, 1997
J. David Darnell Officer
/s/ JOHN H. NUGENT
------------------------------------------- Director, Vice President April 18, 1997
John H. Nugent
/s/ THOMAS L. CUNNINGHAM
------------------------------------------- Director April 18, 1997
Thomas L. Cunningham
/s/ PETE W. SMITH
------------------------------------------- Director April 18, 1997
Pete W. Smith
/s/ BARRY J. WILLIAMS
------------------------------------------- Director April 18, 1997
Barry J. Williams
/s/ HOWARD F. CURD
------------------------------------------- Director April 18, 1997
Howard F. Curd
/s/ REUBEN F. RICHARDS
------------------------------------------- Director April 18, 1997
Reuben F. Richards
/s/ DEAN A. THOMAS
------------------------------------------- Director April 18, 1997
Dean A. Thomas
/s/ JOHN Q. EBERT
------------------------------------------- Director April 18, 1997
John Q. Ebert
/s/ IGOR I. MAMANTOV
------------------------------------------- Director April 18, 1997
Igor I. Mamantov
</TABLE>
37
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants for the years ended December 31, 1996, 1995 and 1994..................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995............................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994............... F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994..... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994............... F-6
Notes to Consolidated Financial Statements............................................................... F-7
</TABLE>
F-1
<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,
1996 and 1995, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, 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.
PRICE WATERHOUSE LLP
Dallas, Texas
March 25, 1997
F-2
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 14,360,466 $ 823,738
Accounts and notes receivable:
Trade, net of allowance for doubtful accounts of $2,796,946 and $475,845,
respectively................................................................... 7,035,710 4,022,131
Other, net of allowance for doubtful accounts of $31,479 and $46,122,
respectively................................................................... 1,481,072 407,550
Inventory.......................................................................... 136,875 146,037
Prepaid expenses and other......................................................... 594,081 292,439
------------ ------------
Total current assets........................................................... 23,608,204 5,691,895
------------ ------------
Property and equipment............................................................... 10,054,937 3,911,652
Less accumulated depreciation and amortization....................................... (1,380,307) (495,613)
------------ ------------
Net property and equipment....................................................... 8,674,630 3,416,039
------------ ------------
Excess of cost over net assets acquired, net of accumulated amortization............. 27,902,634 16,869,648
------------ ------------
Other assets:
Debt issuance cost................................................................. 2,083,843 --
Other.............................................................................. 409,758 63,221
------------ ------------
Total other assets............................................................. 2,493,601 63,221
------------ ------------
------------ ------------
Total assets................................................................. $ 62,679,069 $ 26,040,803
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 2,023,955 $ 761,880
Accrued telecommunications expenses................................................ 11,360,002 2,337,420
Other accrued expenses............................................................. 2,382,504 1,163,603
Acquisition obligation............................................................. 9,500,000 --
Short-term notes payable........................................................... 782,239 475,610
Current maturities of long-term obligations........................................ 570,859 3,795,216
------------ ------------
Total current liabilities........................................................ 26,619,559 8,533,729
------------ ------------
Long-term obligations, less current maturities....................................... 28,477,903 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 in 1996 and 1995, respectively.................... 1,330,303 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; 16,858,053 and
13,462,120 issued, respectively.................................................. 1,686 1,346
Additional paid-in capital......................................................... 26,402,671 20,855,099
Retained deficit................................................................... (16,299,038) (11,996,179)
Treasury stock (1,197,518 and 240,072 shares, respectively) at cost................ (3,854,015) (456,601)
------------ ------------
Total shareholders' equity....................................................... 6,251,304 8,978,945
------------ ------------
Total liabilities and shareholders' equity..................................... $ 62,679,069 $ 26,040,803
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Telecommunications revenues........................................... $ 35,668,502 $ 20,748,021 $ 9,755,343
Cost of revenue....................................................... 22,530,228 14,116,113 8,298,430
------------ ------------ ------------
Gross profit.......................................................... 13,138,274 6,631,908 1,456,913
------------ ------------ ------------
Operating expenses:
General and administrative.......................................... 10,927,890 6,478,394 2,854,237
Depreciation and amortization....................................... 2,861,900 1,287,225 413,317
Nonrecurring network reconfiguration costs.......................... 806,436 -- --
Nonrecurring restructuring and integration costs.................... 2,015,506 143,399 --
------------ ------------ ------------
Total operating expenses.......................................... 16,611,732 7,909,018 3,267,554
------------ ------------ ------------
Loss from continuing operations before other income (expense) and
extraordinary item................................................... (3,473,458) (1,277,110) (1,810,641)
Other income (expense):
Interest expense.................................................... (2,129,876) (682,796) (29,903)
Other, net.......................................................... 221,175 24,685 21,474
------------ ------------ ------------
Total other income (expense)...................................... (1,908,701) (658,111) (8,429)
------------ ------------ ------------
Loss from continuing operations before extraordinary item............. (5,382,159) (1,935,221) (1,819,070)
Discontinued operations:
Loss from title plant services operations........................... -- -- (477,916)
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)
------------ ------------ ------------
Loss before extraordinary item........................................ (5,382,159) (6,465,963) (2,446,986)
Extraordinary item--net gain on extinguishment of debts............... 1,327,644 -- --
------------ ------------ ------------
Net loss.............................................................. (4,054,515) (6,465,963) (2,446,986)
Preferred dividend requirements, including accretion.................. (248,344) (125,352) --
------------ ------------ ------------
Net loss applicable to common shareholders............................ $ (4,302,859) $ (6,591,315) $ (2,446,986)
------------ ------------ ------------
------------ ------------ ------------
Loss per weighted average common share outstanding:
Continuing operations............................................... $ (0.35) $ (0.17) $ (0.20)
Discontinued operations............................................. -- (0.39) (0.07)
------------ ------------ ------------
Loss before extraordinary item...................................... (0.35) (0.56) (0.27)
Extraordinary item.................................................. 0.08 -- --
------------ ------------ ------------
Net loss per share.................................................. $ (0.27) $ (0.56) $ (0.27)
------------ ------------ ------------
------------ ------------ ------------
Net loss per share applicable to common shareholders................ $ (0.28) $ (0.57) $ (0.27)
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of common shares outstanding................ 15,199,928 11,639,186 9,199,720
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
---------------------------------------------------------------------------------
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, 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 -- --
Preferred dividend requirements,
including accretion.................. -- -- -- -- -- (125,352) --
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)
Private placements of Common Stock.... -- -- 251,700 25 369,975 -- --
Issuance of Common Stock for:
Exercise of options................. -- -- 524,036 52 632,444 -- (497,414)
Exercise of warrants................ -- -- 1,090,000 109 1,362,391 -- --
Conversion of debt.................. -- -- 267,856 27 449,973 -- --
Other............................... -- -- 419,318 42 750,633 -- --
Issuance of Common Stock for
acquisition of USC securities........ (125,000) (575,280) 843,023 85 1,613,229 -- (2,900,000)
Issuance of warrants.................. -- -- -- -- 368,927 -- --
Preferred dividend requirements,
including accretion.................. -- -- -- -- -- (248,344) --
Net loss for the year................. -- -- -- -- -- (4,054,515) --
--------- --------- --------- ----------- ---------- ----------- ----------
Balances at December 31, 1996......... -- $ -- 16,858,053 $ 1,686 $26,402,671 $(16,299,038) $(3,854,015)
--------- --------- --------- ----------- ---------- ----------- ----------
--------- --------- --------- ----------- ---------- ----------- ----------
<CAPTION>
TOTAL
----------
<S> <C>
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
Preferred dividend requirements,
including accretion.................. (125,352)
Net loss for the year................. (6,465,963)
----------
Balances at December 31, 1995......... 8,978,945
Private placements of Common Stock.... 370,000
Issuance of Common Stock for:
Exercise of options................. 135,082
Exercise of warrants................ 1,362,500
Conversion of debt.................. 450,000
Other............................... 750,675
Issuance of Common Stock for
acquisition of USC securities........ (1,861,966)
Issuance of warrants.................. 368,927
Preferred dividend requirements,
including accretion.................. (248,344)
Net loss for the year................. (4,054,515)
----------
Balances at December 31, 1996......... $6,251,304
----------
----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................................ $ (4,054,515) $ (6,465,963) $ (2,446,986)
Adjustments to reconcile net loss to net cash used by operating
activities:
Extraordinary net gain on extinguishment of debts................. (1,327,644) -- --
Loss from discontinued operations................................. -- -- 477,916
Provision for discontinued operations............................. -- 4,530,742 150,000
Depreciation and amortization..................................... 2,861,900 1,287,225 413,317
Provision for losses on accounts receivable....................... 2,197,083 455,793 318,583
Cash used for discontinued SATC business.......................... -- (263,320) (441,864)
Other............................................................. 17,946 (44,587) 15,280
(Increase) decrease, net of effect of acquisitions:
Accounts and notes receivable................................... (925,570) (862,288) (150,480)
Prepaid expenses and other...................................... (280,481) 394,822 (63,759)
Other assets.................................................... 9,162 320,990 (16,581)
Increase (decrease), net of effect of acquisitions:
Accounts payable and accrued expense............................ 2,137,509 (577,900) (544,907)
------------ ------------ ------------
Net cash provided by (used in) operating activities................... 635,390 (1,224,486) (2,289,481)
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment................................. (3,588,786) (193,276) (208,317)
Purchase of First Choice, net of cash acquired...................... (2,244,110) -- --
Purchase of Addtel, net of cash acquired............................ (6,840,481) -- --
Acquisition obligation--Addtel...................................... 9,500,000 -- --
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)
Sale of assets...................................................... 2,557 60,622 --
Other............................................................... (1,708) -- (9,451)
------------ ------------ ------------
Net cash used in investing activities................................. (3,172,528) (7,141,820) (1,743,558)
------------ ------------ ------------
Cash flows from financing activities:
Borrowings.......................................................... 29,269,805 7,450,000 120,000
Debt issuance cost.................................................. (2,174,799) -- --
Principal payments on obligations................................... (9,671,270) (1,971,510) (39,642)
Proceeds from private placements of Common Stock.................... -- 2,073,104 1,885,348
Purchase of treasury stock.......................................... (2,900,000) -- --
Proceeds from exercise of options................................... 187,630 307,019 1,200,372
Proceeds from exercise of warrants.................................. 1,362,500 -- --
Proceeds from Series A Redeemable Preferred Stock................... -- 1,000,000 --
------------ ------------ ------------
Net cash provided by financing activities............................. 16,073,866 8,858,613 3,166,078
------------ ------------ ------------
Increase (decrease) in cash........................................... 13,536,728 492,307 (866,961)
Cash at beginning of year............................................. 823,738 331,431 1,198,392
------------ ------------ ------------
Cash at end of year................................................... $ 14,360,466 $ 823,738 $ 331,431
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<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,
regional interexchange 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 5), Long
Distance Network, Inc. (LDN) (acquired effective March 1, 1994--See Note 6) and
AddTel Communications, Inc. (Addtel) (acquired effective November 1, 1996--see
Note 3). USC, LDN and Addtel 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 95%, 92% and 76% of consolidated revenues in 1996, 1995 and 1994,
respectively.
The Company conducts its international call back telecommunications
operations mainly in Central and South America through North American
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 5%, 8% and 22% of total
consolidated revenues in 1996, 1995 and 1994, respectively. NATC conducts
business under the product name of "GlobalCOM." The Company is discontinuing
this product line in 1997.
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 sheet at December 31, 1995 or
the consolidated statements of operations for the two 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 call back 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
F-7
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
eventually become uncollectible and to provide for any disputed charges. Two
domestic telecommunications customers 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 1996 or 1995.
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 $14 million of cash and cash equivalents in excess of FDIC insured
limits at December 31, 1996. 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.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization 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 review on an annual basis the net realizable value of
its intangible assets through an assessment of the estimated future cash flows
related to such 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.
DEBT ISSUANCE COSTS
The Company defers costs incurred directly in connection with the issuance
of debt obligations and charges such costs to interest expense on a straight
line basis over the terms of the respective debt agreements.
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
F-8
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 has adopted SFAS 123 on a disclosure
basis only.
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, 1996, 1995 and 1994.
FEDERAL INCOME TAXES
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.
STATEMENT OF CASH FLOWS
Cash paid for interest for the years ended December 31, 1996, 1995 and 1994
was $1,040,840, $374,249 and $21,896, respectively.
3. ACQUISITION OF ADDTEL COMMUNICATIONS, INC.
Effective November 1, 1996, the Company acquired all of the outstanding
common stock of Addtel, a switchless reseller of long distance services located
in Glendale, California. The aggregate purchase price of $9.5 million (including
$2 million allocated to nonsolicitation agreements) was paid $8 million in cash
with the remaining $1.5 million held in escrow by the Company to offset certain
contractual adjustments or indemnity claims. The purchase price was funded in
January 1997 from the remaining proceeds of the Company's 10% Convertible Notes
issued in August 1996. Accordingly, the Company recorded an acquisition
obligation of $9,500,000 at December 31, 1996.
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 the assets acquired and liabilities assumed. The initial purchase price
allocations are based on preliminary estimates and may change based on the
ultimate determination of fair value. As a result, the final purchase price
allocations may differ from the estimates. The Company's consolidated statements
of operations include the results of operations of Addtel since November 1,
1996.
F-9
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITION OF ADDTEL COMMUNICATIONS, INC. (CONTINUED)
A summary of the Addtel excess of cost for financial reporting purposes over
net assets acquired is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 LIFE
------------- ---
<S> <C> <C>
Goodwill................................................................. $ 7,916,825 25
Nonsolicitation agreements............................................... 2,000,000 5
Customer acquisition costs............................................... 878,673 10
-------------
10,795,498
Accumulated amortization................................................. (134,043)
-------------
$ 10,661,455
-------------
-------------
</TABLE>
The following unaudited pro forma combined results of operations for the
Company assume that the acquisition of Addtel was completed at the beginning of
1995. These pro forma amounts represent historical operating results of Addtel
combined with those of the Company with appropriate adjustments which give
effect to interest expense and amortization. These pro forma amounts are not
necessarily indicative of consolidated operating results which would have
occurred had Addtel 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 operations, 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,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Revenues....................................................... $ 56,832,328 $ 33,474,021
Net loss....................................................... (6,210,115) (8,258,267)
Net loss per share outstanding................................. (0.41) (0.71)
</TABLE>
4. 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. (First Choice), a switch-based
reseller of long distance services 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 purchase price was funded
from proceeds of the Company's 10% Convertible Notes issued in August 1996.
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 and liabilities assumed. The excess of cost over net
assets acquired of $741,757 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.
F-10
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITION OF FIRST CHOICE LONG DISTANCE, INC. (CONTINUED)
The following unaudited pro forma combined results of operations of the
Company assume 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 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,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Revenues....................................................... $ 37,836,495 $ 23,293,156
Net loss....................................................... (4,457,212) (6,857,991)
Net loss per share outstanding................................. (0.29) (0.59)
</TABLE>
5. 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 switchless reseller of long distance
services 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 Company recorded the Series B Preferred Stock and
common stock purchase warrants at their respective fair values as of the date of
issuance. (See Note 10 regarding the Company's 1996 acquisition of these
securities.)
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 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 Company's consolidated
statements of operations include the results of operations of USC since June 1,
1995.
F-11
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITION OF U.S. COMMUNICATIONS, INC. (CONTINUED)
A summary of the USC excess of cost for financial reporting purposes over
net assets acquired is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995 LIFE
------------- ------------- ---
<S> <C> <C> <C>
Goodwill................................................. $ 9,399,153 $ 9,325,892 25
Covenants not to compete................................. 2,400,000 2,400,000 5
Customer acquisition costs............................... 1,036,946 1,036,946 10
------------- -------------
12,836,099 12,762,838
Accumulated amortization................................. (1,519,464) (558,104)
------------- -------------
$ 11,316,635 $ 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 and amortization. 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,
----------------------------
1996 1995
------------- -------------
<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>
6. 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 switchless reseller of long
distance services 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
F-12
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. ACQUISITION OF LONG DISTANCE NETWORK, INC. (CONTINUED)
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 for financial reporting purposes over
net assets acquired is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995 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........................... (789,307) (510,729)
------------- -------------
$ 4,386,336 $ 4,664,914
------------- -------------
------------- -------------
</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
1994. 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 YEAR
ENDED
DECEMBER 31,
1994
-------------
<S> <C> <C>
Revenues....................................................... $ 11,136,615
Net loss....................................................... (2,474,726)
Net loss per share outstanding................................. (0.26)
</TABLE>
7. 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.
F-13
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DISCONTINUED OPERATIONS (CONTINUED)
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 and 1994 were
$354,892 and $142,212, respectively.
8. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995 LIFE
------------- ------------ -------------
<S> <C> <C> <C>
Land............................................. $ 49,000 $ 49,000
Buildings........................................ 717,860 605,826 30-40 Years
Switching and other network equipment............ 7,465,343 2,244,450 3-5 Years
Software......................................... 170,958 30,505 5 Years
Office equipment................................. 1,421,646 779,116 5 Years
Furniture and fixtures........................... 230,130 202,755 5-7 Years
------------- ------------
$ 10,054,937 $ 3,911,652
------------- ------------
------------- ------------
</TABLE>
Switching equipment totaling $1,001,241 and $500,701 was acquired under
capital leases in 1996 and 1995, 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, 1996, 1995 and 1994 was
$1,139,242, $449,402 and $158,612, respectively.
9. SHORT-TERM NOTES PAYABLE
Short-term notes payable consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Note payable to Addtel investor group................................. $ 772,743 $ --
Convertible subordinated debentures with interest at 8% due in June
1996................................................................ -- 450,000
Other................................................................. 9,496 25,610
---------- ----------
$ 782,239 $ 475,610
---------- ----------
---------- ----------
</TABLE>
On February 9, 1996, the convertible, subordinated debentures were converted
into 267,856 shares of the Company's Common Stock.
F-14
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. LONG-TERM OBLIGATIONS
Long-term obligations consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Subordinated Convertible Notes due on August 15, 2006 with interest
payable semi-annually at 10% per annum................................. $ 27,200,000 $ --
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
$1,732 including interest at 8.5% with the balances due in 1997........ 6,791 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.................................................... 99,376 107,994
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................................................ 94,822 181,232
Note payable to a finance company (unsecured) due in monthly installments
of $752, including interest at 7.5% with the balance due in 2000....... 26,237 33,019
Note payable to a bank (collateralized by vehicles) due in monthly
installments of $1,438 including interest at 8.5% with the balance due
in 2001................................................................ 68,009 --
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
Note payable to an individual due in monthly installments of $5,254
including interest at 8% with the balance due in 1997.................. 10,403 --
Capital lease obligations................................................ 1,543,124 823,099
------------- -------------
29,048,762 11,193,886
Less current maturities:
Long-term debt......................................................... (133,392) (3,632,035)
Capital lease obligations.............................................. (437,467) (163,181)
------------- -------------
Long-term portion........................................................ $ 28,477,903 $ 7,398,670
------------- -------------
------------- -------------
</TABLE>
F-15
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. LONG-TERM OBLIGATIONS (CONTINUED)
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, subject to adjustment under certain circumstances. 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) primarily to effect
acquisitions and strategic alliances, to make capital expenditures, and for
general corporate purposes.
On March 25, 1997, the Company completed a private placement of a $3,800,000
10% Convertible Debenture due 2006 (the Debenture) on terms effectively
identical to the terms of the Notes.
Interest on the Notes and Debenture 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 and Debenture 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
price starting at 107% of principal, plus accrued interest to the redemption
date. Upon a Fundamental Change (as defined), each holder of the Notes and
Debenture will have the right to require the Company to repurchase all of a
portion of such holder's Notes and Debenture at a price equal to 100% of the
principal amount thereof, plus accrued interest to the date of purchase. Each
holder of the Notes and Debenture will have the right to require the Company to
repurchase all or a portion of such holder's Notes and Debenture 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: (i) the Company or any of its subsidiaries incurs certain indebtedness,
(ii) the Pro Forma Interest Coverage (as defined) is less than 2.0 to 1, and
(iii) 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
and Debenture do not have the benefit of any sinking fund obligations. The Notes
and Debenture 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 and Debenture 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
and Debenture Indenture) then the holder of the Notes and Debenture would have
the right to require the Company to repurchase the Notes and Debenture.
On January 9, 1997, the Company completed a line of credit arrangement with
Greyrock Business Credit (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
F-16
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. LONG-TERM OBLIGATIONS (CONTINUED)
either party elects to terminate by giving written notice to the other not less
than 60 days prior to the next maturity date.
Borrowings under the line of credit 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 Company
initially borrowed $1.6 million principal amount on January 9, 1997 under this
facility.
The agreements regarding the line of credit contain covenants which, among
other matters, limit the ability of the Company and its subsidiaries to take the
following actions without the consent of Greyrock: (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 or acquire its capital stock.
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.
An $821,547 extraordinary loss on extinguishment of debt was recorded on this
redemption. This loss was comprised of $406,813 in unamortized debt issuance
costs attributable to the debentures and 182,706 shares of Common Stock (fair
market value of $414,734) issued to the debenture holders as consideration for
an "in the money" convertible feature of the debentures.
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 purchased by the Company consisted 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
purchase was effected through a two-step integrated transaction whereby the
Company (i) acquired the USC securities for an aggregate of $308,500 in cash and
843,023 shares of the Company's Common Stock (fair market value of $2,320,000)
on June 21, 1996 and (ii) repurchased the Common Stock on August 14, 1996 for
$2,900,000 using proceeds of the Company's 10% Convertible Notes issued in
August 1996. Pursuant to this transaction, the Company recognized an
extraordinary gain on the extinguishment of the USC debt of $2,149,191.
11. CAPITAL STOCK
At December 31, 1996, the Chairman and Chief Executive Officer of the
Company voted an aggregate 4,257,309 shares of Common Stock (21.9% 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; and to receive up to $9.00 per share
plus accrued and unpaid dividends in the event of involuntary or voluntary
liquidation. Subject to certain
F-17
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. CAPITAL STOCK (CONTINUED)
conditions in loan agreements, the Series A Preferred Stock 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.
In September 1995, the Company sold 1,100,000 shares of unregistered,
restricted Common Stock in a private placement transaction for $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.
12. STOCK OPTIONS
The Company has several stock option plans (the 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. Options under the Plans
vest and may be exercised after six months from the dates of grant, but the
shares acquired upon exercise may only be sold after periods of from eighteen to
thirty months from the vesting date. Unexercised options generally expire five
years from the dates of grant. An aggregate of 5,398,750 options had been
granted under the Plans as of December 31, 1996.
The exercise price of options granted under the Plans is no less than the
market value of the stock on the dates the options are granted. Accordingly, no
compensation expense is recognized by the Company with respect to such grants.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123, and has been determined as if the Company had
accounted for its director, officer and employee stock options under the fair
value method of that statement. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1996 and 1995,
respectively: no dividend yield; expected volatility of 63.2% and 66.9%; risk
free interest rates of 6.1% and 7.0%; and expected lives of 5 years and 7.5
years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------- ----------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss.................................... $ (4,054,515) $ (5,209,618) $ (6,465,963) $ (7,768,359)
Net loss per common share................... (0.27) (0.34) (0.56) (0.67)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts as SFAS No. 123 does not apply to awards prior to
1995 and additional awards are anticipated in future years.
F-18
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTIONS (CONTINUED)
A summary of options granted and outstanding under the Plans is summarized
below:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ----------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................ 2,123,470 $ 1.60 2,114,800 $ 1.15 2,342,311 $ .70
Granted....................... 827,000 2.20 994,250 1.76 1,089,500 2.64
Exercised..................... (523,803) 1.21 (914,861) .69 (1,057,075) 1.46
Forfeited..................... (198,617) 2.14 (70,719) 1.99 (259,936) 2.13
---------- ----- ---------- ----- ----------- -----
Outstanding at end of year.... 2,228,050 1.86 2,123,470 1.60 2,114,800 1.15
Exercisable at end of year.... 2,173,050 1.87 2,123,470 1.60 1,701,800 .79
Weighted-average fair value of
options granted during the
year........................ $ 1.29 $ 1.15
</TABLE>
The following table summarizes information about options outstanding under
the Plans at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- -----------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------- ----------- --------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$ .43-$ .80 418,000 1.2 $ .70 418,000 $ .70
1.56- 2.63 1,642,550 3.1 1.99 1,587,550 2.01
3.47- 3.50 167,500 3.9 3.50 167,500 3.50
</TABLE>
As further discussed in Note 15, on March 24, 1995 the Company granted
additional options outside of the Plans to the Chairman of the Board and Chief
Executive Officer to acquire up to 1,000,000 shares of unregistered, restricted
Common Stock. These options had a fair value of $0.54 per share on the grant
date and were unexercised at December 31, 1996.
F-19
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. FEDERAL INCOME TAXES
The components of the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts................................. $ 986,990 $ 126,210
Other reserves.................................................. 140,233 123,931
Amortization on excess of cost over net assets acquired......... 276,626 100,541
Net operating loss carryforwards................................ 3,498,119 3,047,698
------------ ------------
Gross deferred tax asset...................................... 4,901,968 3,398,380
Deferred tax liabilities:
Depreciation on other assets.................................... 723,214 40,235
Other deferred costs............................................ -- 9,958
------------ ------------
Gross deferred tax liabilities................................ 723,214 50,193
------------ ------------
4,178,754 3,348,187
Valuation allowance............................................... (4,178,754) (3,348,187)
------------ ------------
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,
---------------------------------------
1996 1995 1994
------------- ----------- -----------
<S> <C> <C> <C>
Income tax benefit at federal statutory rate......... $ (1,285,221) $ (657,975) $ (618,484)
Net operating losses not benefited................... 867,509 657,975 611,117
Other................................................ 417,712 -- 7,367
------------- ----------- -----------
Income tax benefit provided.......................... $ -- $ -- $ --
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards
aggregating approximately $10,288,000 which expire in various years between 2003
and 2011. Certain changes in the Company's ownership have occurred over the
prior 3 years as defined by Internal Revenue Code Section 382, which would
result in an annual limitation on the amount of tax carryforwards which can be
utilized. A fully reserved deferred tax asset of approximately $350,000 was
acquired in connection with the Addtel purchase. This benefit when realized will
be a reduction to goodwill.
14. NONRECURRING CHARGES
The Company incurred an $806,436 nonrecurring charge in the fourth quarter
of 1996 related to the Company's reconfiguration of a portion of its network
including (i) the deployment of two additional switches to enhance the
efficiency of the network, (ii) the addition of a number of new circuits
throughout the Company's service area, and (iii) the planned expansion of the
network to the west coast. As a result of this combination of factors, the
Company was required to take its network down for a period of time and incur
nonrecurring incremental expenses to carry traffic outside its network.
F-20
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. NONRECURRING CHARGES (CONTINUED)
The Company incurred an aggregate of $2,015,506 in nonrecurring
restructuring and integration charges in 1996 comprised of (i) $227,201 in
payroll and related costs eliminated in a restructuring of the Company's sales
organization, (ii) $543,794 in principally payroll and related costs to be
eliminated on full integration of the First Choice and Addtel acquisitions, and
(iii) $1,244,511 in principally payroll and related costs and reserves for
uncollectible accounts receivable to be eliminated on the discontinuance of the
Company's international call back product line. 1996 revenues and cost of
revenue attributable to the Company's discontinuing international call back
product line were $1,937,807 and $1,478,797, respectively. While such amounts
are also nonrecurring, they have not been separately identified as nonrecurring
in the statement of operations.
The Company incurred $143,399 in nonrecurring costs in 1995 related to its
discontinued Russian ventures.
15. 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 Employment
Agreement with Mr. Matz, which was later amended, currently expires on March 23,
2001, provides for an annual salary of $275,000 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 condition for Mr. Matz's agreement to release any
and all claims under his previous Employment Agreement, Mr. Matz was granted an
option to acquire up to 1,000,000 shares of unregistered, restricted Common
Stock at an exercise price of $1.25 per share, the fair market value of the
underlying stock on the settlement date. This stock option vested as to 200,000
shares on the date of grant, March 24, 1995, 160,000 on March 24, 1996 and vests
as to an additional 160,000 shares 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 equal to 500,000 plus all
vested but unexercised options then outstanding, but in no event in excess of
1,000,000 shares.
F-21
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. LEASES
The Company leases certain office facilities and equipment under capital
leases and noncancellable operating leases expiring through 2001. Minimum annual
rentals under these leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
- ------------------------------------------------------------------ ------------ ------------
<S> <C> <C>
1997.............................................................. $ 581,464 $ 511,949
1998.............................................................. 581,464 350,264
1999.............................................................. 395,432 267,415
2000.............................................................. 308,077 228,519
2001.............................................................. -- 192,776
------------ ------------
Total minimum lease payments...................................... 1,866,437 $ 1,550,923
------------
------------
Amounts representing interest..................................... (323,313)
------------
Present value of net minimum lease payments....................... $ 1,543,124
------------
------------
</TABLE>
The total rent expense incurred during the years ended December 31, 1996,
1995 and 1994 was $425,665, $319,758 and $165,429, respectively.
17. 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 1996, 1995 or 1994.
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.
A $195,904 note receivable due from an officer and director bearing interest
at 10% is reflected on the consolidated balance sheet in other notes receivable
at December 31, 1995. Effective April 11, 1996, the Company entered into a
settlement agreement with this officer under which (i) the officer's employment
was terminated, (ii) the officer entered a covenant not to compete with the
Company for three years, and (iii) the officer agreed to provide ongoing
consulting services to the Company through March 31, 1999. In consideration for
the agreement, the Company issued to the officer 142,534 shares of unregistered,
restricted Common Stock (fair market value of $249,120) and released the officer
from his obligations to the Company under the note receivable in a principal sum
of $195,904, plus accrued but unpaid interest of $39,179. The Company
capitalized the consideration given for the agreement and charges the amount to
operating expenses on a straight line basis over the term of the agreement. The
unamortized balance of $394,888 related to the agreement is included in other
noncurrent assets at December 31, 1996.
F-22
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. 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.
19. BENEFIT PLAN
The Company adopted a 401K Retirement Plan (the 401K Plan) effective January
1, 1996. Employees may elect to reduce their compensation and contribute to the
401K Plan provided they have completed 6 months of employment eligibility,
reached the age of twenty and completed at least 1,000 hours of service during
any 12 consecutive month period following their first day of work. Each employee
may defer up to 15% of their salary not to exceed the limit allowable by law in
any one year. Vesting is 20% per year of service and the employee is credited
with a year of service if they have completed at least 1,000 hours of service.
The Company may, at its option, make discretionary matching contributions to the
401K Plan. An employee must meet all the service requirements of participation
and be active on December 31 to be eligible for any Company matching
contributions. The Company made a 50% matching contribution of $30,599 for the
1996 plan year. Distributions from the Plan are not permitted before the age of
65 except in the event of death, disability, or termination of employment.
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
----------------------------------------------------------
MARCH 31, JUNE 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues......................... $ 7,027,391 $ 2,309,227 $ 7,210,554 $ 4,004,348
Income (loss) from continuing
operations..................... (432,130) (241,562) 87,384 (545,418)
Loss from discontinued
operations..................... -- -- -- (250,000)
Net income (loss)................ (432,130) (241,562) 2,236,575 (795,418)
Income (loss) per share.......... (0.03) (0.02) 0.12 (0.07)
<CAPTION>
FOR THE QUARTERS ENDED
----------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
---------------------------- ----------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues......................... $ 7,961,784 $ 7,459,367 $ 13,468,773 $ 6,975,079
Loss from continuing
operations..................... (835,405) (950,965) (4,202,008) (197,275)
Loss from discontinued
operations..................... -- (225,000) -- (4,055,742)
Net loss......................... (1,167,218) (1,175,965) (4,691,742) (4,253,017)
Loss per share................... (0.07) (0.10) (0.30) (0.36)
</TABLE>
F-23
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
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<C> <S>
3.1 Certificate of Incorporation of the Company, as amended through December 31, 1994 (filed as Exhibit 3.1
to the Company'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 Company'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 Company'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 Company'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 Company'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 Company filed with the Delaware
Secretary of State on July 9, 1996 (filed as Exhibit 3.2 to the Company'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 Company (filed as Exhibit 3.5 to the Company'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 Company and United States Trust Company of New York as
Trustee (filed as Exhibit 4.1 to the Company'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 Company, Furman Selz LLC and Rauscher Pierce
Refsnes, Inc. (filed as Exhibit 10.1 to the Company'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 Company, Furman Selz LLC and Rauscher
Pierce Refsnes, Inc. (filed as Exhibit 10.2 to the Company'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 Company'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)
4.5 Form of Certificate Evidencing Common Stock (filed as Exhibit 4.19 to the Company's Registration
Statement on Form S-3 (Registration No. 33-64271) and incorporated herein by reference)
</TABLE>
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EXHIBIT
NO. DESCRIPTION
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9.1 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and ITEX Corporation, dated June 30, 1992
(filed as Exhibit 9.1 to the Company's Form 10-KSB for the year ended December 31, 1994 and incorporated
herein by reference)
9.2 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Terry Houston, dated April 12, 1994
(filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated May 16, 1994 and incorporated
herein by reference)
9.3 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Scott Moster, dated April 12, 1994 (filed
as Exhibit 2.2 to the Company's Current Report on Form 8-K dated May 16, 1994 and incorporated herein by
reference)
9.4 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Roy D. Duckworth, dated April 12, 1994
(filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated May 16, 1994 and incorporated
herein by reference)
9.5 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Daniel J. Dziuba, dated April 12, 1994
(filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated May 16, 1994 and incorporated
herein by reference)
9.6 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Paul R. Miller, dated April 12, 1994
(filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated May 16, 1994 and incorporated
herein by reference)
9.7 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and David L. Hover, dated April 12, 1994
(filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated May 16, 1994 and incorporated
herein by reference)
9.8 Form of Voting Agreement, executed as of September 20, 1995 between the Company, Jack W. Matz, Jr. and
each of Seth Joseph Antine, Fred Rudy, Jules Nordlicht, Moses Elias, Harry Adler, Dr. Seymour Huberfeld,
Connie Lerner, Mueller Trading L.P., Jack Ehrenhaus, Cong. Ahavas Tzedach Vachsed and Laura
Huberfeld/Naomi Bodner Partnership (the "Investors") filed as Exhibit 4.15 to the Company's Registration
Statement on Form S-3 (Registration No. 33-64271) and incorporated herein by reference)
9.9 Voting Agreement dated as of April 11, 1996 among the Company, Terry R. Houston and Jack W. Matz, Jr.
(filed as Exhibit 9.1 to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31,
1996 and incorporated herein by reference)
9.10 Form of Voting Agreement dated as of May 7, 1996 among the Company, Jack W. Matz, Jr. and each of Laura
Huberfeld/Naomi Bodner Partnership, Fred Rudy, Seth Joseph Antine, Harry Adler, Dr. Seymour Huberfeld and
Jules Nordlicht (the "1996 Investors") and schedule of differences thereto (filed as Exhibit 9.1 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996 and incorporated herein by
reference)
9.11 Pledge Agreement dated January 10, 1997 between Charles Tony Lonstein, Agent, U.S. Communications, Inc.
and the Company (Filed as Exhibit B to Exhibit 2.1 to the Company's Current Report on Form 8-K for the
event occurring on January 10, 1996, filed with the Commission on January 22, 1997 and incorporated
herein by reference)
10.1 Share Purchase Agreement, dated as of July 31, 1995, by and between the Company and Jesup & Lamont
Capital Markets, Inc. (filed as Exhibit 4.3 to the Company'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)
</TABLE>
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EXHIBIT
NO. DESCRIPTION
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10.2 Warrant Purchase Agreement, dated as of July 31, 1995, by and between the Company and Jesup and Lamont
Capital Markets, Inc. (filed as Exhibit 4.4 to the Company'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 Company'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 Company and Jesup & Lamont Capital Markets, Inc.
(filed as Exhibit 4.18 to the Company'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 Company and each of the Investors (filed as
Exhibit 4.16 to the Company'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 Company'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 Company and each of
the Investors and schedule of differences thereto pursuant to General Instructions to Item 601 (filed as
Exhibit 4.13 to the Company'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 Company and Jack Matz (filed as Exhibit 10.8
to the Company'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 Company and Jack Matz
(filed as Exhibit 10.19 to the Company'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 Company and Paul R. Miller (filed as Exhibit
10.20 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995 and incorporated
herein by reference)
10.11 Employment Agreement dated April 1, 1994 by and between LDN and Terry Houston (filed as Exhibit 2.2 to
the Company'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 Company and Terry Houston (filed as Exhibit
10.3 to the Company'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 Company and Terry Houston (filed as
Exhibit 10.13 to the Company's Form S-2 Registration Statement (Registration No. 333-17547) and
incorporated herein by reference)
10.14 Severance Agreement dated as of March 18, 1996 by and between the Company and J. David Darnell (filed as
Exhibit 10.22 to the Company'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 Company (Non-Employee Director Plan")(filed as
Item 2 of the Company's Proxy Statement dated June 29, 1994 and incorporated herein by reference)
</TABLE>
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<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ---------------------------------------------------------------------------------------------------------
<C> <S>
10.16 Form of Stock Option Agreement used in connection with Non-Employee Director Plan (filed as Exhibit 10.12
to the Company'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 Company'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 Company'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 Company'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 Company and Jesup & Lamont Capital Markets, Inc.
(filed as Exhibit 10.38 to the Company'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 Company and each of the 1996 Investors
and schedule of differences thereto pursuant to General Instruction 601 (filed as Exhibit 10.4 to the
Company'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 1996 Investors and
schedule of differences thereto pursuant to General Instruction 601 (filed as Exhibit 10.5 to the
Company'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 Company and John Nugent (Filed as Exhibit
10.23 to the Company's Form S-2 Registration Statement (Registration No. 333-17547) and incorporated
herein by reference)
10.24 Lease Agreement effective as of October 11, 1995 between Telecommunications Finance Group and Long
Distance Network, Inc. (Filed as Exhibit 10.24 to the Company's Form S-2 Registration Statement
(Registration No. 333-17547) and incorporated herein by reference)
10.25 Stock Purchase Agreement dated as of January 10, 1997 among the Company, Addtel Communications, Inc.,
Charles Tony Lonstein, Aviram Lonstein, Daniel G. Lonstein and David R. Lonstein (filed as Exhibit 2.1 to
the Company'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 Company, U.S.
Communications, Inc., Long Distance Network, Inc., and Southwest Long Distance Network, Inc. (filed as
Exhibit 10.1 to the Company'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
Company, U.S. Communications, Inc., Long Distance Network, Inc. and Southwest Long Distance Network, Inc.
(filed as Exhibit 10.2 to the Company'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 Company, U.S. Communications, Inc.,
Long Distance Network, Inc., and Southwest Long Distance Network, Inc. (filed as Exhibit 10.3 to the
Company's Current Report on Form 8-K, dated January 10, 1997, and incorporated herein by reference)
</TABLE>
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EXHIBIT
NO. DESCRIPTION
- ---------- ---------------------------------------------------------------------------------------------------------
<C> <S>
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 Company'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 Company (filed as
Exhibit 10.5 to the Company'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 Company'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 Company'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 Company and Lynn H. Johnson (filed as
Exhibit 10.33 to the Company's Form S-2 Registration Statement (Registration No. 333-17547) and
incorporated herein by reference)
10.34 Assumption Agreement and Amendment to Loan Agreement dated February 12, 1997 between Greyrock Business
Credit and AddTel Communications, Inc., the Company, Long Distance Network, Inc., U.S. Communications,
Inc. and Southwest Long Distance Network, Inc.*
10.35 Pledge Agreement dated February 12, 1997 between Greyrock Business Credit and the Company*
10.36 Cross-Corporate Continuing Guaranty dated February 12, 1997 of AddTel Communications, Inc.*
10.37 Cross-Corporate Continuing Guaranty dated February 12, 1997 of the Company, U.S. Communications, Inc.,
Long Distance Network, Inc., and Southwest Long Distance Network, Inc.*
10.38 Continuing Guaranty dated February 12, 1997 of AddTel Communications, Inc.*
10.39 Second Amendment to Employment Contract dated March 26, 1997 between the Company and Jack W. Matz, Jr.*
10.40 Amendment to Employment Contract dated March 26, 1997 between the Company and Paul R. Miller*
10.41 Purchase Agreement dated March 25, 1997 between the Company and Northstar High Total Return Fund*
10.42 Registration Rights Agreement dated March 25, 1997 between the Company and Northstar High Total Return
Fund*
10.43 Severance Agreement dated March 26, 1997 between the Company and John Nugent*
10.44 The Company's 10% Convertible Debenture Due 2006*
21.1 Subsidiaries of the Company*
23.1 Consent of Price Waterhouse LLP**
27.1 Financial Data Schedule*
</TABLE>
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* Previously filed
** Filed herewith
I-5
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 dated February 21, 1992 (No. 33-45911), December 3,
1992 (No. 33-55308), January 27, 1993 (No. 33-57712), June 10, 1993 (No.
33-64102), September 22, 1993 (No. 33-69196), March 7, 1996 (No. 333-01549)
and March 7, 1996 (No. 333-01547) and in the Registration Statement on Form
S-3 dated January 3, 1996 (No. 33-64271) of SA Telecommunications, Inc. of
our report dated March 25, 1997, which appears on page F-2 of this Form
10-KSB/A.
PRICE WATERHOUSE LLP
Dallas, Texas
April 18, 1997
