SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported)
APRIL 7, 1998 (JANUARY 22,1998)
TELSCAPE INTERNATIONAL, INC.
(Exact name of registrant as specified in its Charter)
TEXAS 0-24622 75-2433637
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
4635 SOUTHWEST FREEWAY, SUITE 800, HOUSTON, TEXAS 77027
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (713) 968-0968
____________________________________________________________
(Former name or former address, if changed since last report.)
<PAGE>
As indicated in the Registrant's Form 8-K dated February 6, 1998, the
financial statements and pro forma financial information required to be filed
therewith were unavailable at the time of filing. Such financial statements and
pro forma financial information are now available. Accordingly, Item 7 of the
Form 8-K dated February 6, 1998 is hereby amended to read as follows:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
The following audited financial statements of MSN Communications, Inc., are
attached hereto and made a part hereof:
(i) Auditor's Report;
(ii) Balance Sheet;
(iii) Statement of Operations;
(iv) Statement of Stockholders' Deficit;
(v) Statement of Cash Flows; and
(vi) Notes to the Financial Statements.
(b) PRO FORMA FINANCIAL INFORMATION.
The following unaudited pro forma financial information of Telscape
International, Inc. is attached hereto and made a part hereof:
(i) Unaudited Pro Forma Consolidating Balance Sheet - As of December 31,
1997;
(ii) Unaudited Pro Forma Consolidating Statement of Operations - Year Ended
December 31, 1997;
(iii) Notes to the Unaudited Pro Forma Consolidating Financial Statements.
(c) EXHIBIT. The following exhibit is incorporated herein by reference from the
Registrant's Form 8-K dated February 6, 1998:
10.1 Stock Purchase Agreement dated January 22, 1998, by and among Telscape
International, Inc.; MSN Communications, Inc.; Stuart Newman; and Michael
Newman; together with form of Promissory Note dated January 23, 1998 in the
principal amount of $375,000 payable to Stuart Newman attached as Exhibit
B-1, form of Promissory Note dated January 23, 1998 in the principal amount
of $375,000 payable to Michael Newman attached as Exhibit B-2, form of
Employment Agreement dated January 22, 1998, by and between MSN
Communications, Inc. and Stuart Newman attached as Exhibit C-1, and form of
Employment Agreement dated January 22, 1998 by and between MSN
Communications, Inc. and Michael Newman attached as Exhibit C-2.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
TELSCAPE INTERNATIONAL, INC.
(Registrant)
April 7, 1998 /s/ TODD M. BINET
Todd M. Binet
Executive Vice President and
Chief Financial Officer
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE #
------
UNAUDITED PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS:
Introduction to Unaudited Pro Forma Consolidating ...................... F-1
Unaudited Pro Forma Consolidating Balance Sheet - As of
December 31, 1997 ...................................................... F-3
Unaudited Pro Forma Consolidating Statement of Operations -
For the Year Ended December 31, 1997 ................................... F-4
Notes to the Unaudited Pro Forma Consolidating Financial Statements .... F-5
MSN COMMUNICATIONS, INC.:
Report of Independent Certified Public Accountants ..................... F-8
Balance Sheet - As of December 31,1997 ................................. F-9
Statement of Operations and Accumulated Deficit - For the Year
Ended December 31, 1997 ................................................ F-10
Statement of Cash Flows - For the Year Ended December 31, 1997 ......... F-11
Notes to Financial Statements .......................................... F-12
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
On January 22, 1998, Telscape International, Inc. (the "Company") acquired
all of the outstanding shares of MSN Communications, Inc. ("MSN"), a California
corporation. MSN provides domestic and international long distance services
through prepaid phone cards. The acquisition is effective January 1, 1998. Under
the terms of the acquisition, the Company paid the following:
(i) the sum of $3,250,000 in cash
(ii) an aggregate of $750,000 in non-interest bearing promissory notes
payable in eight equal quarterly installments beginning April 23,
1998, and
(iii) 100,000 shares of Telscape common stock.
In connection with this acquisition, the Company entered into customary
employment and non-compete agreements with certain employees of MSN. The
consideration paid by the Company for MSN has been determined by negotiations
between the parties. The $3,250,000 paid at closing was funded from the
Company's working capital. The acquisition will be accounted for under the
purchase method of accounting for financial reporting purposes.
The accompanying unaudited pro forma consolidating balance sheet at
December 31, 1997 was prepared by combining the audited balance sheets of the
Company as of December 31, 1997 and the audited balance sheet of MSN as of
December 31, 1997. The accompanying unaudited pro forma consolidating statement
of operations for the year ended December 31, 1997 presents the operations of
the Company as if the acquisition of MSN occurred on January 1, 1997. In
addition, the operations of Integracion de Redes, S.A. de C.V. and Lan and Wan,
S.A. de C.V. (collectively "Integracion") and N.S.I., S.A. de C.V. ("N.S.I."),
two acquisitions completed during the year ended December 31, 1997, are also
presented as if those acquisitions had occurred on January 1, 1997.
The accompanying unaudited pro forma consolidating financial statements
have been prepared based upon certain assumptions and include adjustments as
detailed in the notes to the unaudited pro forma consolidating financial
statements. The estimated fair market values reflected in the unaudited pro
forma consolidating financial statements are based on preliminary estimates and
assumptions and are subject to revision as more information becomes available.
In management's opinion, the preliminary purchase price allocation reflected
herein is not expected to be materially different from the final allocation.
The following unaudited pro forma consolidating financial statements should
be read in conjunction with the consolidated financial statements of the Company
and the related notes thereto as included in the Company's Form 10-K as of
December 31, 1997.
F-1
Such pro forma information is based on historical data with respect to the
Company, MSN, Integracion and N.S.I. The pro forma data is not necessarily
indicative of the results that might have occurred had such transactions
actually taken place at the beginning of the period specified and is not
intended to be a projection of future results. The pro forma information
presented herein is provided to comply with the requirements of the Securities
and Exchange Commission. The pro forma information does not reflect any
adjustments to reflect the manner in which the acquired entities is being or
will be operated under the control of the Company and, therefore, does not
reflect any adjustments to profitability, either negative or positive, which may
have resulted from the Company managing MSN, Integracion or N.S.I. for the
periods presented.
F-2
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
Unaudited Pro Forma Consolidating Balance Sheet
As of December 31, 1997
<TABLE>
<CAPTION>
Pro Forma
Adjustments
Telscape MSN (See Note 2) Pro Forma
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................... $ 4,733,780 $ 976,713 $(3,250,000) $ 2,460,493
Accounts receivable ................................. 6,275,923 1,041,680 -- 7,317,603
Inventories ......................................... 4,305,084 14,314 -- 4,319,398
Prepaid expenses and other current assets ........... 2,674,492 18,988 -- 2,693,480
Deferred income taxes ............................... 516,999 -- -- 516,999
------------ ----------- ----------- ------------
Total current assets ............................ 18,506,278 2,051,695 (3,250,000) 17,307,973
Property and equipment, net of accumulated
depreciation ........................................ 2,679,098 5,943 -- 2,685,041
Goodwill and other intangibles, net of
accumulated amortization ........................ 17,673,791 -- 6,062,628 23,736,419
Deferred income taxes ............................... 76,728 -- -- 76,728
Investment in affiliates ............................ 295,132 -- -- 295,132
Other assets ........................................ 404,000 52,253 -- 456,253
----------- ----------- ------------
Total Assets .................................... $ 39,635,027 $ 2,109,891 $ 2,812,628 $ 44,557,546
============ =========== =========== ============
CURRENT LIABILITIES:
Accounts payable .................................... $ 10,756,477 $ 940,256 $ 50,000 $ 11,746,733
Accrued expenses .................................... 3,302,781 382,985 -- 3,685,766
Deferred revenue .................................... -- 1,997,078 -- 1,997,078
Current portion of notes payable and
capital lease obligations ....................... 507,701 -- 281,250 788,951
Deferred income taxes ............................... 269,649 -- -- 269,649
------------ ----------- ----------- ------------
Total current liabilites ........................ 14,836,608 3,320,319 331,250 18,488,177
Notes payable and capital lease obligations ......... 2,676,451 -- 390,950 3,067,401
Minority interests .................................. 34,075 -- -- 34,075
Commitments and contingencies
Series B Non-voting preferred stock ................. 380 -- -- 380
STOCKHOLDERS' EQUITY
Common stock ........................................ 4,104 20,000 (19,900) 4,204
Additional paid-in capital .......................... 25,231,876 -- 879,900 26,111,776
Accumulated deficit ................................. (2,851,501) (1,230,428) 1,230,428 (2,851,501)
Treasury stock ...................................... (296,966) -- -- (296,966)
------------ ----------- ----------- ------------
Total stockholders' equity ...................... 22,087,513 (1,210,428) 2,090,428 22,967,513
------------ ----------- ----------- ------------
Total liabilities and stockholders' equity ...... $ 39,635,027 $ 2,109,891 $ 2,812,628 $ 44,557,546
============ =========== =========== ============
</TABLE>
F-3
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
Unaudited Pro Forma Consolidating Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
For the Six
For the Year Ended For the Year Ended Months Ended
December 31, 1997 December 31, 1997 June 30,1997
Telscape International MSN Integracion
---------------- --------------- -----------
<S> <C> <C> <C>
Revenues $ 36,153,584 $ 24,568,284 $ 4,646,117
Cost of revenues 24,395,656 24,241,216 3,381,618
---------------- --------------- -----------
Gross profit 11,757,928 327,068 1,264,499
Selling, general and administrative expense 8,154,034 1,246,208 523,846
---------------- --------------- -----------
Operating income (loss) before depreciation
and amortization 3,603,894 (919,140) 740,653
Depreciation and amortization 621,731 35,010 21,874
---------------- --------------- -----------
Operating income (loss) 2,982,163 (954,150) 718,779
Other income (expense) (231,908) (3,337) 50,604
---------------- --------------- -----------
Income (loss) before income taxes 2,750,255 (957,487) 769,383
and minority interests
Income tax benefit (expense) (84,465) - (290,187)
---------------- --------------- -----------
Net income (loss) before minority interests 2,665,790 (957,487) 479,196
Minority interests 5,900 - -
---------------- --------------- -----------
Net income (loss) $ 2,671,690 $ (957,487) $ 479,196
================ =============== ===========
EARNINGS PER SHARE: HISTORICAL
BASIC
Weighted average shares outstanding 3,903,470
Per share $ 0.68
DILUTED
Interest on convertible notes $ 42,255
Net income for diluted EPS calculations 2,713,945
Weighted average shares outstanding 5,152,211
Per share $ 0.53
For the Nine
Months Ended Pro Forma For the Year Ended
September 30, 1997 Adjustments December 31, 1997
N.S.I. (See Note 3) Pro Forma
---------------- -------- -----------------
Revenues $ 3,408,317 $ - $ 68,776,302
Cost of revenues 3,222,765 - 55,241,255
---------------- -------- -----------------
Gross profit 185,552 - 13,535,047
Selling, general and administrative expense 658,143 (424,328)(a) 10,157,903
---------------- -------- -----------------
Operating income (loss) before depreciation
and amortization (472,591) 424,328 3,377,144
Depreciation and amortization 4,126 505,532(b) 1,188,273
---------------- -------- -----------------
Operating income (loss) (476,717) (81,204) 2,188,871
Other income (expense) 36,419 (161,076)(c) (309,298)
---------------- -------- -----------------
Income (loss) before income taxes (440,298) (242,280) 1,879,573
and minority interests
Income tax benefit (expense) 149,701 380,311(d) 155,360
---------------- -------- -----------------
Net income (loss) before minority interests (290,597) 138,031 2,034,933
Minority interests - - 5,900
---------------- -------- -----------------
Net income (loss) $ (290,597) $138,031 $ 2,040,833
================ ======== =================
EARNINGS PER SHARE: PRO FORMA
BASIC
Weighted average shares outstanding (e) 4,003,470
Per share $ 0.51
DILUTED
Interest on convertible notes $ 84,510
Net income for diluted EPS calculations $ 2,125,343
Weighted average shares outstanding (e) 5,418,711
Per share $ 0.39
</TABLE>
F-4
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Unaudited Pro Forma Consolidating Financial Statements
1. Basis of Presentation
The unaudited pro forma consolidating statement of operations for the year
ended December 31, 1997 was prepared by combining the following:
-- the consolidated statement of operations of the Company, including the
results of Integracion and N.S.I. from the effective date of each
acquisition. Integracion was acquired effective July 1, 1997. N.S.I.
was acquired effective October 1, 1997.
-- the statement of operations of MSN for the fiscal year ended December
31, 1997. (See Note 2)
-- the statement of operations of Integracion from January 1, 1997
through June 30, 1997.
-- the statement of operations of N.S.I. from January 1, 1997 through
September 30, 1997.
The unaudited pro forma consolidating balance sheet as of December 31, 1997
combines the audited balance sheets of the Company and MSN.
The pro forma consolidating financial statements do not purport to be
indicative of the financial position of the Company or the results of operations
that might have occurred, had the acquisitions been consummated on January 1,
1997, nor are they indicative of future results.
2. Acquisition of MSN
Effective January 1, 1998, the Company acquired 100% of the common stock of
MSN. The acquisition of MSN has been accounted for using the purchase method of
accounting. The purchase price of the acquisition has been allocated as follows:
Purchase Fair
Price Value
--------------------------------
Cash $ 3,250,000 $ 3,250,000
Promissory Notes 750,000 672,200
Common Stock (shares) 100,000 880,000
Transaction Costs 50,000 50,000
----------------
Purchase consideration $ 4,852,200
Excess of liabilities
assumed over fair value
of net assets acquired (1,210,428)
----------------
Goodwill 6,062,628
================
F-5
<PAGE>
(a) The present value of the non-interest bearing Promissory Notes was
determined using the Company's incremental borrowing interest rate of 10
percent.
(b) The 100,000 shares of the Company's common stock were valued at fair value
at the date of acquisition.
(c) The fair value of net assets acquired was determined as follows:
(i) Receivables - were recorded at amounts to be recovered less allowances
for uncollectible amounts;
(ii) Fixed assets - were stated at historical cost which approximate
current replacement costs;
(iii) Other assets - were recorded at cost which were assessed to
approximate fair value; and
(iv) Accounts payable and accrued liabilities - were recorded at the
present value of amounts to be paid.
(d) The pro forma balance sheet adjustment to record the purchase as of
December 31, 1997 follows:
DR/(CR)
--------------------
Cash $(3,250,000)
Goodwill 6,062,628
Accounts payable (50,000)
Notes payable (672,200)
Stockholders' equity (2,090,428)
F-6
<PAGE>
(3) Pro forma adjustments to the consolidating statement of operations:
(a) Two officers of MSN signed employment agreements with the Company in
connection with the acquisition. An adjustment was recorded to reflect
a reduction of salaries and bonuses to which they have agreed to
prospectively.
(b) Amortization of goodwill recognized on the acquisition of MSN has been
recorded based on the purchase price as discussed in Note 2 above.
Additionally, amortization of goodwill recognized on the acquisitions
of Integracion and N.S.I. from January 1, 1997 to the effective date
of the acquisitions has also been recorded as an adjustment. Goodwill
is amortized over a 15 year life.
(c) Imputed interest is recorded on the non-interest bearing promissory
notes, issued in connection with the MSN and Integracion acquisitions,
using the Company's incremental borrowing rate of 10%.
(d) Due to the fact that the amounts recorded in the financial statements
of MSN were considered to approximate fair value and no fair value
adjustments were made, no adjustments were made to reconcile any
differences between book value and tax value as a result of the
purchase transaction. Prior to its acquisition by the Company, MSN was
an S corporation. An adjustment was made to reflect income tax
benefits as if MSN were a C corporation and from the deductibility of
additional interest expense recorded in (c) above.
(e) Basic and diluted earnings per share are calculated in accordance with
Statement of Financial Accounting Standards No. 128 "Earnings Per
Share". A pro forma adjustment has been made to reflect the 100,000
shares of common stock issued for MSN. Additionally, an adjustment was
made to the diluted weighted average share calculations and to the
interest expense added to net income for diluted EPS calculations to
reflect the convertible debt issued in connection with the Integracion
acquisition as if that debt was issued (and converted) on January 1,
1997.
F-7
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
MSN Communications, Inc.
We have audited the accompanying balance sheet of MSN Communications,
Inc. as of December 31, 1997, and the related statements of operations and
accumulated deficit and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents
fairly, in all material respects, the financial position of MSN Communications,
Inc., at December 31, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
BDO SEIDMAN, LLP
Houston, Texas
March 6, 1998
F-8
<PAGE>
MSN COMMUNICATIONS, INC.
BALANCE SHEET
December 31,
1997
-----------
ASSETS
Current Assets:
Cash .......................................................... $ 976,713
Accounts receivable ........................................... 1,041,680
Inventories ................................................... 14,314
Prepaid expenses and other .................................... 18,988
-----------
Total current assets ............................................ 2,051,695
Property and equipment, less accumulated depreciation ........... 5,943
Other assets .................................................... 52,253
-----------
Total assets .................................................... $ 2,109,891
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable .............................................. $ 940,256
Deferred revenue .............................................. 1,997,078
Excise tax payable ............................................ 283,256
Commissions Payable ........................................... 99,729
-----------
Total current liabilities ....................................... 3,320,319
-----------
Commitments and Contingencies
Stockholders' deficit:
Common stock, no par; 100,000 shares authorized,
10,000 shares issued and outstanding ........................ 20,000
Accumulated deficit ......................................... (1,230,428)
-----------
Total stockholders' deficit ..................................... (1,210,428)
-----------
Total liabilities and stockholders' deficit ..................... $ 2,109,891
===========
See accompanying notes to financial statements
F-9
<PAGE>
MSN COMMUNICATIONS, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
Year ended
December 31,
1997
------------
Revenues .................................................. $ 24,568,284
Cost of revenues .......................................... 24,241,216
------------
Gross profit .............................................. 327,068
Selling, general and administrative expenses .............. 1,281,218
------------
Operating loss ............................................ (954,150)
Other expense:
Interest expense ........................................ (1,269)
Other ................................................... (2,068)
------------
Total other expense, net .................................. (3,337)
------------
Net Loss .................................................. $ (957,487)
------------
ACCUMULATED DEFICIT, beginning of year .................... (272,941)
------------
ACCUMULATED DEFICIT, end of year .......................... $ (1,230,428)
============
Loss per share
Basic .................................................. $ (95.75)
Diluted ................................................ n/a
WEIGHTED average shares outstanding:
Basic .................................................. 10,000
Diluted ................................................ n/a
See accompanying notes to financial statements
F-10
<PAGE>
MSN COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
Year ended
December 31,
1997
----------
Cash Flows From Operating Activities:
Net loss....................................................... $ (957,487)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Bad debt expense............................................ 12,739
Depreciation and amortization............................... 35,010
Changes in assets and liabilities:
Accounts receivable........................................ (1,006,588)
Inventories................................................ (14,314)
Prepaid expenses and other assets.......................... 5,198
Accounts payable........................................... 987,964
Deferred revenue........................................... 1,497,078
Excise tax payable......................................... 283,256
Commissions payable........................................ 99,729
----------
Net cash provided by operating activities............... 942,585
----------
Net Cash Flows Used In Investing Activities:
Purchases of fixed assets...................................... (24,929)
----------
Net Cash Flows Used In Financing Activities:
Repayment of related party debt................................ (55,847)
----------
Net increase in cash............................................ 861,809
Cash at beginning of year....................................... 114,904
----------
Cash at end of year............................................. $ 976,713
==========
Supplemental Cash Flow Disclosures:
Interest paid.................................................. $ 5,071
==========
See accompanying notes to financial statements
F-10
<PAGE>
MSN COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
MSN Communications, Inc. ("the Company") was incorporated in the state of
California on May 6, 1996. The Company's operations consist of sales of
international and domestic long distance telecommunications services, primarily
through the marketing of prepaid phone cards. The Company targets mainly the
Hispanic community and markets its cards to a network of distributors who sell
the cards in over one hundred cities throughout the United States. The Company's
primary markets are located in Texas, California, and Illinois.
SIGNIFICANT ACCOUNTING POLICIES
FEDERAL INCOME TAX
The stockholders of the Company elected to be taxed under the "S"
Corporation provision of the Internal Revenue Code, whereby the Company's
operating results are reported in the individual tax returns of the
stockholders. Therefore, no provision has been made for federal income taxes in
the financial statements. Ordinarily presented in connection with the
acquisition of an S-corporation by an SEC reporting entity, see Note 7, proforma
disclosures to reflect the Company's results of operations as if the Company was
a C corporation for federal income tax purposes are not necessary as the Company
operated at a loss for the year. A valuation allowance would have been recorded
on deferred tax assets resulting from net operating loss carryforwards resulting
in a net income tax provision of zero.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The accompanying financial statements are prepared in conformity with
generally accepted accounting principles which requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The Company reviews all significant estimates
affecting the financial statements on a recurring basis and records the effect
of any necessary adjustments prior to their issuance. The actual results could
differ from those estimates.
REVENUE RECOGNITION AND DEFERRED REVENUE
The Company recognizes revenue from long distance telecommunications
services at the time of customer usage. The Company recognizes deferred revenue
as its prepaid phone cards are shipped. The primary costs associated with
revenue-producing activities are carrier costs for transport of traffic
generated by use of the prepaid phone cards. The Company has entered into an
arrangement with a third party whereby this party provides the long distance
telecommunications services for the cards the Company sells at a fixed cost. The
Company recognizes revenues from the sale of cards under this agreement at time
of shipment.
ANALYSIS FOR IMPAIRMENT
In accordance with SFAS 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF," management reviews
long-lived assets for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be fully recoverable.
F-12
<PAGE>
EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings Per Share. SFAS 128 is effective for the year ended
December 31, 1997. SFAS 128 simplifies the standards required under current
accounting rules for computing earning per share and replaces the presentation
of primary earnings per share and fully diluted earnings per share with a
presentation of basic earnings per share ("basic EPS") and diluted earnings per
share ("diluted EPS"). A diluted earnings per share presentation is not required
because MSN has not issued any dilutive potential securities.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "REPORTING
COMPREHENSIVE INCOME," establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
Statement of Financial Accounting Standards No. 131, "DISCLOSURE ABOUT
SEGMENTS OF A BUSINESS ENTERPRISE," establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available that are evaluated regularly by the chief operating decision makers in
deciding how to allocate resources and in assessing performance.
SFAS 130 and 131 are effective for financial statements for the periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Adoption of these statements are not expected to
have a material affect on the Company's financial statement disclosures.
NOTE 2 - PROPERTY AND EQUIPMENT
Major classes of property and equipment at December 31, together with
their estimated useful lives, consisted of the following:
ESTIMATED
USEFUL
LIVES
AMOUNT (YEARS)
------ -------
Equipment............................................. $ 27,653 5
Furniture and fixtures................................ 476 7
--------
28,129
Less accumulated depreciation......................... (22,186)
--------
Net property and equipment............................ $ 5,943
========
F-13
<PAGE>
NOTE 3 - OTHER ASSETS
Other Assets consists of capitalized organizational costs and design
costs. These costs are being amortized over 5 years utilizing the straight line
method. At December 31, 1997, organizational costs totaled $36,158, net of
accumulated amortization of $14,535 and design costs totaled $16,095, net of
accumulated amortization of $4,023. For the year ended December 31, 1997,
amortization expense for the year ended December 31, 1997 totaled $16,024.
NOTE 4 - CONCENTRATION OF CREDIT RISK
At December 31, 1997, the Company's cash in a financial institution
exceeded the federally insured deposit limit by $856,601. The Company's credit
risks primarily consist of accounts receivable from its distributors. Management
performs ongoing credit valuations of its distributors and provides allowances
for credit losses when necessary. Significant customers are those that represent
greater than 10% of the Company's revenue. For the year ended December 31, 1997,
three customers represented 21%, 20% and 13% of the Company's revenues,
respectively. At December 31, 1997, the outstanding receivables from these
customers were $233,400, $374,476 and $236,000, respectively.
NOTE 5 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 1997, the Company paid commissions to
its two shareholders totaling $388,328. At December 31, 1997, an additional
$99,728 of commissions were accrued.
During the year ended December 31, 1997, the Company repaid notes payable
and accrued interest to shareholders totaling $52,045 and $5,071, respectively.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company leases certain automobiles and office space under
noncancellable operating leases. Future minimum rental payments follow:
YEAR ENDED
DECEMBER 31, AMOUNT
1998 ............................................................ $35,277
1999 ............................................................ 34,152
2000 ............................................................ 25,872
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Total ............................................................ $95,301
=======
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<PAGE>
For the year ended December 31, 1997, rent expense totalled approximately
$50,000.
The Company is subject to regulation by various government agencies and
jurisdictions and believes it is in compliance with all applicable laws and
regulations. However, implementation and interpretation of the
Telecommunications Act of 1996 (the Act) is ongoing and subject to litigation by
various Federal and state agencies and courts. As a result, the impact of the
Act on the Company is not yet completely determinable and future interpretations
and rulings may impact the financial position and results of operations of the
Company.
The taxation of prepaid phone cards is evolving and is not specifically
addressed by many of the states in which the Company does business. While the
Company believes it has adequately provided for any such excise taxes it may
ultimately be required to pay, certain states may enact legislation which
specifically provide for taxation of such cards or may interpret current laws in
a manner resulting in additional tax liabilities.
During the fourth quarter 1997, the Internal Revenue Service issued a
ruling stating that sellers of prepaid phone cards are subject to a 3% federal
excise tax on the gross amount of cards sold. The Company accrued $283,256
relating to excise taxes for cards sold from the date of the ruling.
NOTE 7 - SUBSEQUENT EVENTS
On January 22, 1998, the shareholders of the Company entered into a
transaction whereby they sold all of the Company's outstanding stock in exchange
for $3,250,000 in cash, $750,000 in non-interest bearing promissory notes, and
100,000 shares of stock in the acquiring company. The sale became effective as
of January 1, 1998.
F-15
