UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 1997
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
-------- --------
Commission File Number 0-18048
-------------------
SA TELECOMMUNICATIONS, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 75-2258519
- --------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1600 PROMENADE CENTER, 15TH FLOOR, RICHARDSON, TEXAS 75080
----------------------------------------------------------
(Address of principal executive offices)
(972) 690-5888
---------------------------
(Issuer's telephone number)
N/A
------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
------- -------
There were 15,668,835 shares of the registrant's common stock outstanding as of
May 13, 1997.
Transitional Small Business Disclosure Format (Check One:)
Yes No X
------- -------
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information PAGE
----
Item 1. - Financial Statements
Consolidated Balance Sheets 1-2
Consolidated Statements of Operations 3
Consolidated Statements of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-7
Item 2. - Management's Discussion and Analysis or
Plan of Operation 8-15
Part II. Other Information
Item 1. - Legal Proceedings 15-16
Item 2. - Changes in Securities 16
Item 3. - Defaults Upon Senior Securities 16
Item 4. - Submission of Matters to a Vote of Security Holders 16
Item 5. - Other Information 17
Item 6. - Exhibits and Reports on Form 8-K 17
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
March 31, December 31,
1997 1996
------------ ------------
Current assets:
Cash and cash equivalents $ 2,588,280 $ 14,360,466
Accounts and notes receivable:
Trade, net of allowance for doubtful
accounts of $2,309,721 and $2,796,946,
respectively 6,434,079 7,035,710
Other, net of allowance for doubtful
accounts of $31,479 1,699,921 1,481,072
Inventory 136,875 136,875
Prepaid expenses and other 785,719 594,081
------------ ------------
Total current assets 11,644,874 23,608,204
------------ ------------
Property and equipment 10,770,668 10,054,937
Less accumulated depreciation and amortization (1,726,928) (1,380,307)
------------ ------------
Net property and equipment 9,043,740 8,674,630
------------ ------------
Excess of cost over net assets acquired, net of
accumulated amortization of $3,176,801 and
$2,591,529, respectively 27,397,512 27,902,634
------------ ------------
Other assets:
Debt issuance cost, net 2,109,641 2,083,843
Other 362,775 409,758
------------ ------------
Total other assets 2,472,416 2,493,601
------------ ------------
Total assets $ 50,558,542 $ 62,679,069
============ ============
- Continued -
The accompanying notes are an integral part
of these consolidated financial statements.
1
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
1997 1996
------------ ------------
Current liabilities:
Accounts payable $ 1,309,994 $ 2,023,955
Accrued telecommunications expenses 7,277,782 11,360,002
Other accrued expenses 1,654,101 2,382,504
Acquisition obligation 1,500,000 9,500,000
Revolving line of credit 2,055,242 -
Short-term notes payable - 782,239
Current maturities of long-term obligations 536,322 570,859
------------ ------------
Total current liabilities 14,333,441 26,619,559
------------ ------------
Long-term obligations, less current maturities 32,001,334 28,477,903
------------ ------------
Commitments and contingencies
Series A Redeemable Preferred Stock, $.00001 par
value, 250,000 shares authorized; 180,000 shares
issued 1,350,514 1,330,303
------------ ------------
Shareholders' equity:
Common Stock, $.0001 par value, 50,000,000
shares authorized; 16,866,353 and 16,858,053
issued, respectively 1,687 1,686
Additional paid-in capital 26,407,406 26,402,671
Retained deficit (19,681,825) (16,299,038)
Treasury stock (1,197,518 shares) at cost (3,854,015) (3,854,015)
------------ ------------
Total shareholders' equity 2,873,253 6,251,304
------------ ------------
Total liabilities and shareholders' equity $ 50,558,542 $ 62,679,069
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
2
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months
ended March 31,
---------------------------
1997 1996
----------- -----------
Telecommunications revenues:
Retail $ 9,379,658 $ 6,932,950
Wholesale 3,735,613 94,441
----------- -----------
Total telecommunications revenues 13,115,271 7,027,391
Cost of Revenues:
Retail 6,452,060 4,269,760
Wholesale 3,575,688 75,553
----------- -----------
Total cost of revenues 10,027,748 4,345,313
----------- -----------
Gross Profit 3,087,523 2,682,078
----------- -----------
Operating expenses:
General and administrative 3,349,940 2,248,100
Depreciation and amortization 1,202,797 535,944
Nonrecurring integration costs 1,097,780 -
----------- -----------
Total operating expenses 5,650,517 2,784,044
----------- -----------
Loss from operations before other income (expense) (2,562,994) (101,966)
Other income (expense):
Interest expense (789,782) (345,267)
Other, net 20,200 15,103
----------- -----------
Total other income (expense) (769,582) (330,164)
----------- -----------
Net loss (3,332,576) (432,130)
Preferred dividend requirements,
including accretion (50,211) (75,209)
----------- -----------
Net loss applicable to common shareholders $(3,382,787) $ (507,339)
=========== ===========
Loss per weighted average common share
outstanding:
Net loss per share $ (0.21) $ (0.03)
=========== ===========
Net loss applicable to common shareholders $ (0.22) $ (0.04)
=========== ===========
Weighted average number of common shares
outstanding 15,665,792 13,745,321
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Series B Additional
Preferred Stock Common Stock paid-in Retained Treasury
Shares Amount Shares Amount capital deficit Stock Total
------- -------- ---------- ------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 125,000 $575,280 13,462,120 $1,346 $20,855,099 $(11,996,179) $ (456,601) $ 8,978,945
Private placements of common
stock - - 251,700 25 369,975 - - 370,000
Issuance of common stock for:
Exercise of options - - 118,200 12 150,368 - - 150,380
Conversion of debt - - 267,856 27 449,973 - - 450,000
Other - - 79,258 8 104,698 - - 104,706
Preferred dividend requirements,
Including accretion - - - - - (75,209) - (75,209)
Net loss for the period - - - - - (432,130) - (432,130)
------- -------- ---------- ------ ----------- ------------ ----------- -----------
Balances at March 31, 1996 125,000 $575,280 14,179,134 $1,418 $21,930,113 $(12,503,518) $ (456,601) $ 9,546,692
======= ======== ========== ====== =========== ============ =========== ===========
Balances at December 31, 1996 - $ - 16,858,053 $1,686 $26,402,671 $(16,299,038) $(3,854,015) $ 6,251,304
Issuance of common stock for
exercise of options - - 8,300 1 4,735 - - 4,736
Preferred dividend requirements,
including accretion - - - - - (50,211) - (50,211)
Net loss for the period - - - - - (3,332,576) - (3,332,576)
------- -------- ---------- ------ ----------- ------------ ----------- -----------
Balances at March 31, 1997 - $ - 16,866,353 $1,687 $26,407,406 $(19,681,825) $(3,854,015) $ 2,873,253
======= ======== ========== ====== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months
ended March 31,
------------------------
1997 1996
------------ ---------
Cash flows from operating activities:
Net loss $ (3,332,576) $(432,130)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,202,797 535,944
Provision for losses on accounts receivable 364,080 109,839
(Increase) decrease in:
Accounts and notes receivable 18,702 (637,472)
Prepaid expenses and other (201,090) (135,024)
Other assets 5,000 -
Increase (decrease) in:
Accounts payable and accrued expenses (5,554,564) (5,538)
------------ ---------
Net cash used in operating activities (7,497,651) (564,382)
------------ ---------
Cash flows from investing activities:
Additions to property and equipment (451,025) (367,220)
Additional cost of Addtel purchase (112,436) -
Acquisition obligation-Addtel (8,000,000) -
Sale of assets 69,433 -
------------ ---------
Net cash used in investing activities (8,494,028) (367,220)
------------ ---------
Cash flows from financing activities:
Borrowings 3,230,000 600,000
Revolving line of credit 2,055,242 -
Proceeds from exercise of options 4,736 150,380
Principal payments on long-term obligations (988,812) (371,988)
Debt issuance cost (81,673) -
------------ ---------
Net cash provided by financing activities 4,219,493 378,392
------------ ---------
Decrease in cash (11,772,186) (553,210)
Cash at beginning of period 14,360,466 823,738
------------ ---------
Cash at end of period $ 2,588,280 $ 270,528
============ =========
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated financial statements are those of SA
Telecommunications, Inc. and subsidiaries (the "Company"). These interim
consolidated financial statements are prepared pursuant to the requirements
for reporting on Form 10-QSB. The December 31, 1996 consolidated balance
sheet data was derived from audited consolidated financial statements but
does not include all disclosures required by generally accepted accounting
principles. The interim consolidated financial statements and notes
thereto should be read in conjunction with the consolidated financial
statements and notes included in the Company's latest annual report on Form
10-KSB. In the opinion of management, the interim consolidated financial
statements reflect all adjustments (consisting only of a normal recurring
nature) necessary for a fair presentation of the consolidated financial
position and consolidated results of operations for interim periods. The
current period consolidated results of operations are not necessarily
indicative of results which ultimately will be reported for the full fiscal
year ending December 31, 1997.
All significant intercompany accounts and transactions have been
eliminated. Certain prior period amounts have been reclassified for
comparative purposes.
NOTE B - REVOLVING LINE OF CREDIT
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 a 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 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 bear interest at a
floating rate of 2.5% above the reference rate of Bank of America NT & SA,
with a minimum interest rate of 9% per annum and a minimum interest amount
of $10,000 per month. The borrowings are secured by all 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 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.
Outstanding borrowings under the revolving line of credit at March 31, 1997
were $2,055,242.
6
<PAGE>
NOTE C - STOCK OPTIONS
On April 8, 1997, the Board of Directors granted options under the 1994
Employee Stock Option Plan to purchase up to 275,000 shares of the
Company's Common Stock to employees at a price of $1.53 per share (market
value on the date of grant) and 150,000 shares of Common Stock at a price
of $1.69 (110% of market value on date of grant). After a six-month
waiting period, the shares acquired upon exercise may not be sold earlier
than periods varying from eighteen to thirty months.
NOTE D - LONG TERM OBLIGATIONS
On March 25, 1997, the Company completed a private placement of a
$3,800,000 10% Convertible Debenture due 2006 for a net of $3,230,000 on
terms effectively identical to the terms of the Company's 10% Convertible
Notes due 2006.
NOTE E - NONRECURRING CHARGES
The Company incurred an aggregate of $1,097,780 in nonrecurring integration
charges in the first quarter of 1997 comprised of two components. The
first component is $197,600 in principally employee associated costs and
settlements on discontinuance of the Company's international call back
product line. For the three months ended March 31, 1997, revenues and cost
of revenues attributable to the Company's discontinued international
product line were $433,109 and $370,826, respectively. While such amounts
are also nonrecurring, they have not been separately identified as
nonrecurring in the statement of operations. The second component is
$900,180 in principally payroll and related costs to be eliminated in the
integration of the Addtel acquisition.
7
<PAGE>
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION REFORM
ACT OF 1995
This report contains forward looking statements regarding the Company's business
and future financial condition and results of operations that involve risks and
uncertainties. Such statements are based on an assessment of a variety of
factors, contingencies and uncertainties deemed relevant to management,
including the Company's current negative cash flow position, the Company's
historical operating losses, the need for integration of the Company's
acquisitions, the Company's liquidity position, the regulatory environment, and
other risks indicated in this and the 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following is a discussion of the consolidated financial conditions and
results of operations of the Company for the three month periods ended March 31,
1997 and 1996. It should be read in conjunction with the Company's latest
annual report on Form 10-KSB/A.
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 the "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 authorized to resell 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 call back long distance
service 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. In addition, effective in 1996, the Company acquired the
assets of Economy Communications, Inc. ("Economy"), a switchless reseller of
long distance telephone services located in McKinney, Texas, acquired Uniquest
Communications, Inc. ("Uniquest"), a company engaged in third party customer
verification services and outbound telemarketing, and purchased all of the stock
of AddTel Communications, Inc. ("Addtel"), a switchless reseller of long
distance services based in Glendale, California. The growth of the
Company's initial customer base has been largely the result of these
acquisitions.
8
<PAGE>
Also, during 1995 and 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 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 the second quarter of 1997, the Company upgraded
and moved the Amarillo switch to Los Angeles, California, and during the
third quarter the Company currently plans 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 "USC," "USI,"
"First Choice Long Distance," "Southwest Long Distance Network," and "Addtel"
trade names. 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 subject to the availability of capital.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's Consolidated
Statements of Operations as a percentage of its operating revenues for the three
month period ended March 31, 1997 and 1996.
For the three
months ended
March 31,
---------------------------
1997 1996
----------- ---------
Revenue 100 % 100 %
Cost of revenue 76 62
----------- ---------
Gross profit 24 38
Operating expenses:
General and administrative 26 32
Depreciation and amortization 9 7
Nonrecurring integration costs 8 -
----------- ---------
Loss from operations before other income
(expense) (19) (1)
Other income (expense) (6) (5)
----------- ---------
Net loss (25)% (6)%
=========== =========
EBITDA (loss)(1), as defined $ (324,700) $ 433,978
Net cash used in operating activities $(7,497,651) $(564,382)
Net cash used in investing activities $(8,494,028) $(367,220)
Net cash provided by financing activities $ 4,219,493 $ 378,392
=========== =========
- -------------------
(1) Earnings (loss) before interest, taxes, depreciation, amortization,
nonrecurring items, and other income (expense) or "EBITDA" (as defined),
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 financial
results of operations or for cash flows from operations (as presented
according to GAAP).
9
<PAGE>
THREE MONTHS ENDED MARCH 31, 1997 VERSUS THREE MONTHS ENDED MARCH 31, 1996
Revenues increased by $6,087,880, or 87%, from $7,027,391 for the three months
ended March 31, 1996 to $13,115,271 for the three months ended March 31, 1997.
Revenue minutes increased approximately 39,000,000 or 111%, from approximately
35,000,000 during the first quarter of 1996 to approximately 74,000,000 in the
first quarter of 1997. The Addtel acquisition contributed $3,215,020 in retail
revenue and $3,189,070 in wholesale revenue, and the FCLD acquisition
contributed $577,779 in retail revenue. 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 and international call back business which are less profitable product
lines.
In May 1997, the Company began an internal analysis of first quarter escalating
line costs, which management initially believed were attributable to programming
errors related to its billing software procedures. Upon further review and
analysis by the Company and its professional advisors, the determination was
made that the escalation in line costs was due to network inefficiencies
and not related to unbilled and unbillable revenue to any significant extent.
Accordingly, the $522,141 previously reported as "Nonrecurring unbillable
revenue costs" has been reclassified as cost of revenues.
In connection with its analysis, management strived to identify and correct the
inefficiencies in the Company's network and implemented corrective measures.
However, to date, management has not completed its line cost analysis and may
implement further corrective measures if other inefficiencies are identified.
While management of the Company currently believes that the Company's gross
profit margins will be positively impacted somewhat during the third quarter
from such analysis and corrections, there can be no assurance that such
measures will result in any significant positive impact.
Gross profit on retail revenues increased by $264,408 from $2,663,190 for the
three months ended March 31, 1996 to $2,927,598 for the same quarter in 1997.
The gross profit margin on these retail revenues decreased by 7% from 38% for
the three months ended March 31, 1996 to 31% for the three months ended March
31, 1997 due to network inefficiencies.
Gross profit on wholesale revenue increased by $141,037 from $18,888 for the
three months ended March 31, 1996 to $159,925 for the same quarter in 1997.
The gross profit margin on these wholesale revenues decreased by 16% from 20%
for the three months ended March 31, 1996 to 4% for the three months ended
March 31, 1997 due to the lower margins associated with the Addtel wholesale
business.
The Company currently plans on phasing out the wholesale business obtained in
the Addtel acquisition by the end of the third quarter of 1997. The wholesale
business is substantially less profitable than the retail business and bears a
higher credit risk. Addtel wholesale revenues for the quarter ended March 31,
1997 were $3,189,070.
Gross profit on total revenues increased by $405,445 from $2,682,078 for the
three months ended March 31, 1996 to $3,087,523 for the same quarter in 1997.
The overall gross profit margin decreased by 14% from 38% for the three
months ended March 31, 1996 to 24% for the three months ended March 31, 1997.
The overall decline in gross profit margin is due to the lower margin
wholesale revenue acquired in the Addtel acquisition and the network
inefficiencies previously discussed.
10
<PAGE>
General and administrative expense increased by $1,101,840 from $2,248,100 for
the three months ended March 31, 1996 to $3,349,940 for the same quarter in
1997, and as a percentage of revenue, decreased from 32% in 1996 to 26% in 1997.
The increase in total general and administrative expense is primarily
attributable to the Addtel acquisition. The full impact of general and
administrative expense reductions from the continuing integration of Addtel will
not be realized until this process is completed, which is currently expected to
occur during the third quarter. The decrease as a percentage of revenues
reflects management's continued focus on cost containment.
Depreciation and amortization expense increased by $666,853 from $535,944 for
the three months ended March 31, 1996 to $1,202,797 for the same quarter in
1997, and, as a percentage of revenues, increased from 7% in 1996 to 9% in 1997.
This increase resulted from higher depreciation and amortization charges arising
from the acquisitions of FCLD and Addtel and increased depreciation from the
acquisition of switching and other network equipment.
EBITDA (loss) decreased by $758,678 from a positive $433,977 for the three
months ended March 31, 1996 to a negative $324,700 for the same quarter in
1997. EBITDA (loss) was negatively impacted by lower gross profit margins
and by the increase in general and administrative expenses.
During the three months ended March 31, 1997, the Company incurred a $1,097,780
nonrecurring integration charge to operations comprised of (i) $197,600 for
discontinuing the Company's international call back product line and (ii)
$900,180 for integration of the Addtel acquisition from 1996.
The $197,600 charge for discontinuing the Company's international call back
product line is principally comprised of employee associated costs and
settlements. The $900,180 charge for integration of the Addtel acquisition is
principally comprised of costs associated with excess and duplicate personnel
reductions. The integration of Addtel is currently expected to be completed
during the third quarter.
The Company incurred a loss from operations before other income (expense) of
$101,966 for the three months ended March 31, 1996 versus a loss from continuing
operations before other income (expense) of $2,562,994 for the same quarter in
1997. This increase was primarily attributable to the lower gross profit
margins, increased general and administrative and depreciation and amortization
expense, and the nonrecurring charges.
The Company had net other expense of $330,164 for the three months ended March
31, 1996 compared to other net expense of $769,582 for the same quarter in 1997.
This increase was primarily due to an increase in interest expense from $345,267
to $789,782 related to the offering of the Company's 10% Convertible Notes due
2006 in August 1996 (the "Notes").
The Company incurred a net loss of $432,130 for the three months ended March 31,
1996 as compared to a net loss of $3,332,576 for the same quarter in 1997.
This increase is primarily attributable to the lower gross profit margins, the
nonrecurring charges, increased general and administrative expenses and
depreciation and amortization and increased interest expense incurred in
connection with the Notes.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On August 12, 1996, the Company completed a $27.2 million private placement of
the Notes, which are generally convertible at any time prior to maturity at a
conversion price of $2.55 per share, subject to adjustments in certain
circumstances. The Notes are redeemable at the option of the Company in whole or
in part at any time on or after August 15, 1999 at annual redemption prices
starting at 107% of principal, plus accrued interest to the redemption date.
Each holder of the Notes has the right to require the Company to repurchase the
Notes in the event that all three of the following events occur: (i) the Company
incurs certain indebtedness, (ii) the Pro-Forma Interest Coverage (as defined in
the Indenture with respect to the Notes) 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 "$2 Minimum Threshold"). Semi-annual
cash interest payments of $1.6 million will be due on the Notes and the
Company's 10% Convertible Debenture Due 2006 (the "Debenture") during each
February and August until August 2006. As a result, a substantial portion of
the Company's cash flow is and 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. If losses from operations do not improve, the
Company will have to borrow additional funds or sell debt or equity securities
to make such interest payments. There can be no assurances that such sources of
financing will be available to the Company.
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 was utilized to effect the Addtel and FCLD acquisitions and for
network expansion and working capital.
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 ("RBOC"),
a Bell operating company, a local exchange company, a credit card company, or a
provider of local telephone services. The borrowings are secured by all of the
assets of the Company and its subsidiaries and the stock of the Company's
subsidiaries. The line of credit matures December 31, 1997 and automatically
renews for successive additional one year terms unless either party elects to
terminate by giving written notice to the other not less than 60 days prior to
the next maturity date.
The borrowings bear interest at a floating rate of 2.5% above the reference rate
of Bank of America NT & SA, provided that the interest rate is not less than 9%
per annum. Interest is payable monthly and to the extent that accrued interest
does not equal $10,000 per month, the Company is required to pay an unused line
of credit fee of such difference. The initial borrowing by the Company under
this facility aggregated $1.6 million principal amount on January 9, 1997, and
as of March 31, 1997, the Company had $2,055,242 principal amount of
indebtedness under such facility. Proceeds from this line were used to make the
$1,382,667 interest payment on the Notes on February 14, 1997.
12
<PAGE>
In order to improve the Company's working capital position and help mitigate
shortfalls, the Company reached an oral agreement with Greyrock to expand the
borrowing base of eligible accounts receivable to include both unbilled and
billed receivables. Although loan balances fluctuate daily based on the amounts
of accounts receivable and collection, the Company has generally reached the
maximum borrowing amount available based on the calculation of eligible amounts
receivable.
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 private placement of $3.8 million
principal amount of the Debenture, which is generally convertible at any time
prior to maturity at a conversion price of $2.55 per share, subject 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
purchase 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 (as defined in the Debenture the same as such term is defined in the
Indenture with respect to the Notes) is less than 2.0 to 1, and (iii) the $2
Minimum Threshold is not met. The Company used approximately $1.5 million of
the $3.2 million of net proceeds received from the sale of the Debenture to
reduce indebtedness outstanding from time to time under the Greyrock Facility,
and used the remaining $1.7 million for working capital.
Since October 22, 1996, the $2 Minimum Threshold has not been met. Additionally,
the Company's Pro Forma Interest Coverage remains less than 2.0 to 1. Therefore,
if the Company incurs additional indebtedness (other than as permitted under the
Indenture and the Debenture), then the holder of the Notes and the Debenture
would have the right to require the Company to repurchase the Notes and the
Debenture. Should holders of the Notes or the Debenture ever have the ability
to cause the Company to repurchase the Notes or the Debenture, there can be no
assurance that the Company would have sufficient liquidity to effect such
repurchase.
The Company experienced negative cash flow from operating activities of
$7,497,651 for the three months ended March 31, 1997 as compared to $564,382
for the like period in 1996. These negative cash flows include approximately
$412,000 of claims for the three months ended March 31, 1997 and
approximately $495,000 of claims for the three months ended March 31, 1996,
each related to amounts 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. Total claims receivable at
March 31, 1997 are approximately $1,463,000. The Company has been and intends
to continue to vigorously pursue settlement of these disputed charges by
demanding cash repayment or credit against future billings. In addition, the
Company has offset approximately $1,067,000 on invoiced amounts from its long
line carriers regarding on-going dispute over credit amounts. Any failure of the
Company to ultimately obtain such repayments or credit against future
billings would have a material adverse effect on the Company's cash flow and
results of operations.
The overall deterioration in cash flow used in operating activities is
principally attributable to increased operating losses and the significant
decrease in accounts payable and accrued expenses due to payment of contractual
obligations with Addtel's line cost vendors. In order to have sufficient
working capital for operations and to
13
<PAGE>
make semi-annual cash interest payments on the Notes and the Debenture of
$1.6 million, the Company must expand its available borrowings under the
Greyrock credit facility, obtain a moratorium on vendor obligations, borrow
other additional funds or sell debt or equity securities or a combination of
the foregoing.
The Company currently plans on phasing out Addtel's wholesale business by the
end of the third quarter of 1997. Management anticipates that this phase out
will have an immaterial effect on the Company's overall gross profit margin.
However, management expects that cash flow will be negatively impacted during
and after the phase out because wholesale accounts receivable are generally
collected in 30 days after customer billing and related line costs are generally
payable in 60 to 90 days from carrier invoice date.
Management believes an additional factor negatively impacting cash flow during
the second and third quarters of 1997 will be the various network inefficiencies
previously discussed.
Cash used in investing activities was $8,494,028 for the first quarter of 1997
versus $367,220 for the like quarter in 1996. Of the total in the first quarter
of 1997, $8,112,436 was utilized in the acquisition of Addtel. $451,025 of the
total in first quarter of 1997 versus $367,220 in the first quarter of 1996 was
attributable to expenditures for property and equipment primarily related to
switching equipment and network associated costs.
Cash provided by financing activities was $4,219,493 for the first quarter of
1997 versus $378,292 for the first quarter of 1996. The majority of the increase
in 1997 is attributable to the sale of the Debenture in March 1997.
At March 31, 1997, the Company had $32,537,656 of long term debt of which
$536,322 was the current portion. Of such long term debt, $27,200,000
principal amount is attributable to the Notes and $3,800,000 principal amount
is attributable to the Debenture. Although management of the Company
currently believes that cash flows generated from operations will improve
with the integration of Addtel and expansion of the Company's
telecommunications network, the Company's working capital is not sufficient
to meet current obligations without an infusion of additional working
capital. Also, in order for the Company to continue its aggressive
acquisition program, the Company must either use equity securities as
consideration or raise additional debt or equity. 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 March 31, 1997, the Company had a cash and cash equivalent balance of
$2,588,280 as compared to $14,360,466 at December 31, 1996. The decline in cash
was principally attributable to (i) the $8 million purchase price of Addtel,
(ii) $7.5 million cash used in operating activities, and (iii) $1 million and
$500,000 for principal payments and capital expenditures, respectfully. The
decline was partially offset by $3.2 million net proceeds from the sale of the
Debenture and $2,000,000 under the Greyrock line of credit. As of March 31,
1997, working capital was a negative $2,688,567 as compared to a negative
$3,011,355 at December 31, 1996.
The Company is required to continue to accrue or pay annual dividends in cash or
in kind on the Company's Series A Cumulative Convertible Preferred Stock of
$129,600 on July 31, 1997.
CAPITAL EXPENDITURES
Capital expenditures for the three months ended March 31, 1997 totaled $916,492,
of which $465,467 was financed. The majority of these capital expenditures
relate to switching equipment acquired by means of capital
14
<PAGE>
leases and network costs. Other than additional fixed facilities, such as
switching equipment requirements as the network expands and peripheral
equipment and software 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.
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 4, 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, the lawsuit in Dallas was dismissed on
June 10, 1997 and the criminal complaint filed by Mr. Avyam in Guatemala City,
Guatemala against NATC, the Company's former President and Chief Operating
Officer 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 presently being rescheduled for trial.
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
15
<PAGE>
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
while the parties are engaged in negotiations aimed at resolving these
matters. A case management conference is currently scheduled on August 26,
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 2. CHANGES IN SECURITIES
(a) None.
(b) None.
(c) On March 25, 1997, the Company sold the Debenture to an accredited investor
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 1,490,146 shares of Common
Stock), subject to adjustment in certain circumstances. The transaction
was effected in reliance upon Section 4(2) of the Securities Act of 1933,
as amended (the "Securities Act"). The purchaser was provided with access
to all relevant information regrading the Company. The purchaser
represented to the Company that it was an "accredited investor" as defined
under the Securities Act and that the Debenture was purchased for
investment purposes only and not with a view toward distribution.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) None.
(b) None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
<PAGE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 Third Amendment to Employment Contract between Jack W. Matz, Jr.
and SA Telecommunications, Inc.*
10.2 Second Amendment to Employment Contract between Paul R. Miller
and SA Telecommunications, Inc.*
10.3 Letter dated May 20, 1997 from Jack W. Matz, Jr. and Paul R.
Miller to the Compensation Committee of the Board of Directors
of SA Telecommunications, Inc.*
27.1 Financial Data Schedule**
- -------------------
* Filed previously
** Filed herewith
(b) REPORTS ON FORM 8-K
The Company filed on January 22, 1997 a Current Report on Form 8-K dated
January 10, 1997 announcing the purchase by the Company of all of the issued
and outstanding capital stock of AddTel Communications, Inc., a California
corporation ("Addtel"). The Company also reported the completion of a Line
of Credit arrangement with Greyrock Business Credit, a division of
NationsCredit Commercial Corporation. No financial statements were filed.
The Company filed on February 6, 1997 a Current Report on Form 8-K/A dated
January 10, 1997 with the following financial statements with respect to the
Addtel acquisition:
Audited Balance Sheet of AddTel Communications, Inc. as of May 31, 1996 and
the related Statements of Income and Accumulated Deficit and Cash Flows for
the year then ended.
Unaudited Condensed Balance Sheets of AddTel Communications, Inc. as of
September 30, 1996 and 1995 and the related Unaudited Condensed Statements of
Income and Retained Earnings (Deficit) and Cash Flows for the nine months
then ended.
Unaudited Pro Forma Combined Statement of Operations of SA
Telecommunications, Inc. and Subsidiaries for the year ended December 31,
1995.
Unaudited Pro Forma Combined Balance Sheet of SA Telecommunications, Inc. and
Subsidiaries as of September 30, 1996 and the related Unaudited Pro Forma
Combined Statement of Operations for the nine months then ended.
The Company filed on July 7, 1997 a Current Report on Form 8-K dated
July 3, 1997 announcing the replacement of the Company's President and
Chief Operating Officer. No financial statements were filed.
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed by the undersigned, thereunto duly
authorized.
Date: July 8, 1997 SA TELECOMMUNICATIONS, INC.
By: /s/ JOHN H. NUGENT
---------------------------------
John H. Nugent
President and Chief Operating Officer
By: /s/ J. DAVID DARNELL
---------------------------------
J. David Darnell
Vice President-Finance and Chief
Financial Officer
18
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 Third Amendment to Employment Contract between Jack W. Matz, Jr.
and SA Telecommunications, Inc.*
10.2 Second Amendment to Employment Contract between Paul R. Miller
and SA Telecommunications, Inc.*
10.3 Letter dated May 20, 1997 from Jack W. Matz, Jr. and Paul R.
Miller to the Compensation Committee of the Board of Directors
of SA Telecommunications, Inc.*
27.1 Financial Data Schedule**
- -------------------
* Filed previously
** Filed herewith
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF SA TELECOMMUNICATIONS, INC. AND
SUBSIDIARIES FOR THE QUARTER ENDED MARCH 31, 1997, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,588,280
<SECURITIES> 0
<RECEIVABLES> 8,743,800
<ALLOWANCES> 2,309,721
<INVENTORY> 136,875
<CURRENT-ASSETS> 11,644,874
<PP&E> 10,770,668
<DEPRECIATION> 1,726,928
<TOTAL-ASSETS> 50,558,542
<CURRENT-LIABILITIES> 14,333,441
<BONDS> 32,001,334
1,350,514
0
<COMMON> 1,687
<OTHER-SE> 2,871,566
<TOTAL-LIABILITY-AND-EQUITY> 50,558,542
<SALES> 13,115,271
<TOTAL-REVENUES> 13,115,271
<CGS> 10,027,748
<TOTAL-COSTS> 16,447,847
<OTHER-EXPENSES> 769,582
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 789,782
<INCOME-PRETAX> (3,332,576)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,332,576)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,332,576)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> 0.00
</TABLE>
