1
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): September 20, 1996
MCLEOD, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-20763 58-421407240
- -------------------------------------- --------------- ---------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification
Number)
221 Third Avenue SE, Suite 500, Cedar Rapids, IA 52401
- ------------------------------------------------ ----------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (319) 364-0000
2
Pursuant to Items 7(a)(4) and 7(b)(2) of the Commission's
General Instructions for Form 8-K, McLeod, Inc. (the "Company") hereby amends
Item 7(a) of its Current Report on Form 8-K, which was filed with the
Commission on October 7, 1996, to file consolidated financial statements of
Telecom*USA Publishing Group, Inc., which was acquired by the registrant on
September 20, 1996, and further amends Item 7(b) of that Current Report on Form
8-K to file pro forma financial information for the registrant reflecting the
acquisition Telecom*USA Publishing Group, Inc. Item 7(c) of that Current
Report on Form 8-K is also hereby amended to reflect the accompanying Financial
Data Schedule.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS
(a) Financial Statements of Company Acquired
Included herewith are the following audited financial
statements of Telecom*USA Publishing Group, Inc.:
Consolidated balance sheets as of August 31, 1995 and 1996
Consolidated statements of income for the years ended August 31, 1994,
1995 and 1996
Consolidated statements of stockholders' equity for the years ended
August 31, 1994, 1995 and 1996
Consolidated statements of cash flows for the years August 31, 1994,
1995 and 1996
Notes to consolidated financial statements
(b) Pro Forma Financial Information
Included herewith is the following unaudited pro forma
financial information for the Company:
Pro forma condensed consolidated balance sheet as of June 30, 1996
Pro forma condensed consolidated statements of income for the year ended
December 31, 1995
Pro forma condensed consolidated statements of income for the six months
ended June 30, 1996
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3
(c) Exhibits.
2. Agreement and Plan of Reorganization, dated as of August 15,
1996, by and between Telecom*USA Publishing Group, Inc. and
the Company (incorporated by reference to the Current Report
on Form 8-K filed on August 26, 1996).
23. Consent of McGladrey & Pullen, LLP.
27. Financial Data Schedule.
99. Press Release, dated September 23, 1996, regarding the
acquisition of Telecom*USA Publishing Group, Inc.
(incorporated by reference to the Current Report on Form 8-K
filed on October 7, 1996).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Date: October 11, 1996 McLEOD, INC.
By: /s/ STEPHEN C. GRAY
--------------------------------
Stephen C. Gray
President and Chief Operating
Officer
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5
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report....................................................... F-1
Consolidated Balance Sheets as of August 31, 1995 and 1996......................... F-2
Consolidated Statements of Income for the years ended August 31, 1994,
1995 and 1996................................................................... F-3
Consolidated Statements of Stockholders' Equity for the years ended August 31,
1994, 1995 and 1996............................................................. F-4
Consolidated Statements of Cash Flows for the years ended August 31, 1994,
1995 and 1996................................................................... F-5
Notes to Consolidated Financial Statements......................................... F-7
6
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Telecom*USA Publishing Group, Inc.
Cedar Rapids, Iowa
We have audited the accompanying consolidated balance sheets of Telecom*USA
Publishing Group, Inc. and subsidiaries as of August 31, 1995 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended August 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Telecom*USA
Publishing Group, Inc. and subsidiaries as of August 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended August 31, 1996 in conformity with generally accepted
accounting principles.
McGLADREY & PULLEN, LLP
Cedar Rapids, Iowa
September 27, 1996
F-1
7
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31,
---------------------------
1995 1996
----------- -----------
ASSETS (NOTE 4)
Current Assets
Accounts receivable:
Billed........................................................................... $ 3,744,468 $ 5,543,874
Unbilled......................................................................... 6,493,122 8,555,438
----------- -----------
10,237,590 14,099,312
Less allowance for doubtful accounts and adjustments............................. 2,334,156 3,102,923
----------- -----------
7,903,434 10,996,389
Income taxes receivable............................................................ -- 54,710
Other receivables.................................................................. 553,447 828,345
Deferred expenses.................................................................. 7,896,840 9,078,470
Prepaid expenses................................................................... 723,031 380,903
Deferred income taxes, net (Note 6)................................................ 1,410,000 1,536,000
----------- -----------
TOTAL CURRENT ASSETS......................................................... 18,486,752 22,874,817
----------- -----------
Equipment and Furniture (Note 13).................................................... 5,502,530 7,129,908
Less accumulated depreciation...................................................... 2,316,912 3,433,755
----------- -----------
3,185,618 3,696,153
----------- -----------
Investments and Other Assets
Investment in Colorado Directory Company, L.L.C. (Note 3).......................... 1,000,000 --
Purchase option (Note 2)........................................................... 500,000 500,000
Deferred income taxes, net (Note 6)................................................ 920,000 704,000
Other investment................................................................... -- 100,000
----------- -----------
2,420,000 1,304,000
----------- -----------
Intangibles
Customer lists, at cost, less accumulated amortization
1995 $1,155,646; 1996 $1,489,634 (Note 12)....................................... 5,349,506 6,176,196
Noncompete agreements, at cost, less accumulated amortization 1995 $1,094,317;
1996 $1,947,662.................................................................. 6,900,246 6,955,720
Organization and loan costs, at cost, less accumulated depreciation 1995 $72,592;
1996 $109,087.................................................................... 230,597 185,947
----------- -----------
12,480,349 13,317,863
----------- -----------
$36,572,719 $41,192,833
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable, bank (Note 4)........................................................ $ 1,532,000 $ 2,773,800
Current maturities of long-term debt (Note 4)...................................... 875,050 1,224,286
Payables for intangibles acquired, due within one year............................. 1,439,846 572,528
Accounts payable................................................................... 1,573,680 2,160,855
Checks issued not yet presented for payment........................................ 21,981 219,942
Accrued payroll and payroll related expenses....................................... 1,597,745 1,920,379
Other accrued expenses............................................................. 759,925 914,053
Income taxes payable............................................................... 172,524
Customer deposits.................................................................. 6,761,668 7,534,485
----------- -----------
TOTAL CURRENT LIABILITIES.................................................... 14,734,419 17,320,328
----------- -----------
Long-Term Debt, less current maturities (Note 4)..................................... 15,511,295 16,228,889
----------- -----------
Commitments and Contingencies (Notes 5, 7, 9, 10 and 13)
Minority Interests
Redeemable preferred stock, redeemed on September 2, 1995.......................... 200,000 --
Consolidated subsidiary............................................................ 484,043 352,816
----------- -----------
684,043 352,816
----------- -----------
Redeemable common stock held by 401(k) profit-sharing plan (Note 9).................. 125,595 220,070
----------- -----------
Stockholders' Equity (Notes 4 and 14)
Capital stock, common, no par or stated value; authorized 10,000,000 shares; issued
1995 2,533,124 shares; 1996 2,719,481 shares (Notes 9, 10 and 11)................ 3,968,357 4,194,075
Retained earnings.................................................................. 1,787,855 3,209,975
----------- -----------
5,756,212 7,404,050
Less cost of treasury stock, 37,750 shares......................................... 113,250 113,250
Less maximum cash obligation related to 401(k) profit-sharing plan (Note 9)........ 125,595 220,070
----------- -----------
5,517,367 7,070,730
----------- -----------
$36,572,719 $41,192,833
=========== ===========
See Notes to Consolidated Financial Statements.
F-2
8
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 31, 1994, 1995 AND 1996
1994 1995 1996
----------- ----------- -----------
Revenue......................................... $31,438,605 $38,620,274 $52,117,929
----------- ----------- -----------
Operating expenses:
Production and distribution................... 12,568,411 15,022,983 22,340,587
Market sales.................................. 9,244,961 10,940,711 13,798,321
Sales and marketing administrative............ 1,761,103 2,279,484 2,294,370
General and administrative.................... 4,322,338 5,020,000 7,249,349
Depreciation and amortization................. 1,167,458 1,891,198 2,348,490
Restructuring loss (Note 11).................. 524,670 -- --
----------- ----------- -----------
TOTAL OPERATING EXPENSES.............. 29,588,941 35,154,376 48,031,117
----------- ----------- -----------
OPERATING INCOME...................... 1,849,664 3,465,898 4,086,812
----------- ----------- -----------
Nonoperating (income) expense:
Interest income............................... (1,707) (93,997) (251,000)
Interest expense.............................. 843,961 1,497,699 1,767,309
Loan inducement fee payoff (Note 7)........... -- 1,330,000 --
Loss on disposal of investment (Note 3)....... -- -- 500,000
----------- ----------- -----------
842,254 2,733,702 2,016,309
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY.......................... 1,007,410 732,196 2,070,503
Federal and state income taxes (Note 6)......... 137,190 302,586 975,610
----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST IN NET
(LOSS) IN CONSOLIDATED SUBSIDIARY... 870,220 429,610 1,094,893
Minority interest in net (loss) of consolidated
subsidiary.................................... -- (15,959) (327,227)
----------- ----------- -----------
NET INCOME............................ $ 870,220 $ 445,569 $ 1,422,120
=========== =========== ===========
Earnings per common and common equivalent shares
outstanding:
Primary....................................... $ 0.27 $ 0.14 $ 0.43
=========== =========== ===========
Fully diluted................................. $ 0.26 $ 0.14 $ 0.36
=========== =========== ===========
Weighted average common and common equivalent
shares outstanding:
Primary....................................... 3,198,776 3,271,497 3,332,659
=========== =========== ===========
Fully diluted................................. 4,510,864 3,289,720 4,678,549
=========== =========== ===========
See Notes to Consolidated Financial Statements.
F-3
9
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED AUGUST 31, 1994, 1995 AND 1996
LESS MAXIMUM
CASH OBLIGATION
RELATED TO
LESS 401(k)
COMMON RETAINED TREASURY PROFIT-SHARING
STOCK EARNINGS STOCK PLAN SHARES TOTAL
---------- ---------- --------- --------------- ----------
Balance, August 31, 1993............... $3,868,400 $ 472,066 $(113,250) $ -- $4,227,216
Common stock contributed to 401(k)
profit-sharing plan, 15,179 shares
(Note 9)........................... 53,126 -- -- (53,126) --
Issuance of 925 shares of common
stock upon the exercise of options
(Note 10).......................... 925 -- -- -- 925
Purchase of 775 shares of common
stock for retirement............... (2,713) -- -- -- (2,713)
Net income........................... -- 870,220 -- -- 870,220
---------- ---------- --------- --------- ----------
Balance, August 31, 1994............... 3,919,738 1,342,286 (113,250) (53,126) 5,095,648
Common stock contributed to 401(k)
profit-sharing plan, 12,945 shares
(Note 9)........................... 57,307 -- -- (57,307) --
Issuance of 14,175 shares of common
stock upon the exercise of options
(Note 10).......................... 19,775 -- -- -- 19,775
Purchase of 6,325 shares of common
stock for retirement............... (28,463) -- -- -- (28,463)
Change related to 401(k) profit-
sharing plan shares................ -- -- -- (15,162) (15,162)
Net income........................... -- 445,569 -- -- 445,569
---------- ---------- --------- --------- ----------
Balance, August 31, 1995............... 3,968,357 1,787,855 (113,250) (125,595) 5,517,367
Common stock contributed to 401(k)
profit-sharing plan, 10,363 shares
(Note 9)........................... 57,470 -- -- (57,470) --
Issuance of 182,300 shares of common
stock upon the exercise of options
(Note 10).......................... 208,850 -- -- -- 208,850
Purchase of 6,306 shares of common
stock for retirement............... (40,602) -- -- -- (40,602)
Change related to 401(k) profit-
sharing plan shares................ -- -- -- (37,005) (37,005)
Net income........................... -- 1,422,120 -- -- 1,422,120
---------- ---------- --------- --------- ----------
Balance, August 31, 1996............... $4,194,075 $3,209,975 $(113,250) $(220,070) $7,070,730
========== ========== ========= ========= ==========
See Notes to Consolidated Financial Statements.
F-4
10
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1994, 1995 AND 1996
1994 1995 1996
------------ ------------ ------------
Cash Flows from Operating Activities
Net income.......................................... $ 870,220 $ 445,569 $ 1,422,120
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation..................................... 551,531 802,428 1,116,508
Amortization..................................... 615,927 1,088,770 1,231,982
Deferred income taxes............................ (171,512) (813,000) 90,000
Provision for loan inducement fee payable
(Note 7)....................................... -- 1,330,000 --
Restructuring loss (Note 11)..................... 524,670 -- --
Loss on disposal of investment (Note 3).......... -- -- 500,000
Minority interest in net (loss) of consolidated
subsidiary..................................... -- (15,959) (327,227)
Provision for doubtful accounts and
adjustments.................................... 1,340,069 1,669,478 2,636,421
Change in assets and liabilities:
(Increase) in accounts receivable.............. (2,235,749) (2,539,025) (5,729,376)
(Increase) in income taxes receivable.......... -- -- (54,710)
(Increase) in deferred expenses................ (1,454,860) (1,769,831) (1,181,630)
Increase (decrease) in accounts payable and
accrued expenses............................ 345,414 887,580 (163,439)
Increase in customer deposits.................. 1,609,118 1,469,140 772,817
Increase (decrease) in income taxes payable.... 209,224 115,524 (172,524)
Other.......................................... (67,702) (94,998) 67,230
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES... 2,136,350 2,575,676 208,172
------------ ------------ ------------
Cash Flows from Investing Activities
Purchase of equipment and furniture................. (809,908) (1,483,881) (1,598,290)
Purchase of customer lists.......................... (583,522) (3,121,804) (457,276)
Purchase of noncompete agreements................... (684,828) (3,681,801) (204,692)
Investment in Colorado Directory Company, L.L.C.
(Note 3)......................................... -- (1,000,000) --
Proceeds received on disposal of investment......... -- -- 500,000
Purchase option (Note 2)............................ -- (500,000) --
Organization and loan costs......................... -- (158,332) --
Purchase of other investment........................ -- -- (100,000)
------------ ------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES..... (2,078,258) (9,945,818) (1,860,258)
------------ ------------ ------------
F-5
11
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
1994 1995 1996
------------ ------------ ------------
Cash Flows from Financing Activities
Increase (decrease) in checks issued not yet
presented for payment............................ $ (3,493) $ (83,223) $ 197,961
Borrowings on revolving credit agreements........... 12,906,000 10,109,500 21,211,000
Payments on revolving credit agreements............. (12,853,000) (9,103,500) (17,733,200)
Proceeds from long-term debt........................ -- 9,330,500 --
Principal payments on long-term debt................ (105,811) (3,374,447) (2,187,923)
Proceeds from issuance of common stock upon the
exercise of options.............................. 925 19,775 208,850
Purchase of common stock for retirement............. (2,713) (28,463) (40,602)
Payment on redemption of preferred stock............ -- -- (200,000)
Capital contribution received from minority owner in
consolidated subsidiary.......................... -- 500,000 196,000
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................ (58,092) 7,370,142 1,652,086
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS... -- -- --
Cash and cash equivalents:
Beginning........................................... -- -- --
------------ ------------ ------------
Ending.............................................. $ -- $ -- $ --
============ ============ ============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest......................................... $ 793,609 $ 1,247,048 $ 1,767,309
Income taxes, net of refunds..................... 99,478 1,000,062 1,115,250
Supplemental Schedules of Noncash Investing and
Financing Activities
Customer list acquired by issuance
payables......................................... $ 669,000 $ 464,923 $ 829,022
Noncompete agreement acquired by issuance
payables......................................... 669,000 974,923 578,506
Common stock contributed to 401(k) profit-sharing
plan (Note 9).................................... 53,126 57,307 57,470
Reclassification of intangibles to deferred income
taxes (Note 6)................................... 1,188,488
Equipment acquired by contracts payable............. 552,612 28,753
Current note payable converted to long-term debt
(Note 4)......................................... 2,236,000
See Notes to Consolidated Financial Statements.
F-6
12
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: Telecom*USA Publishing Group, Inc. and subsidiaries
(the "Company") are publishers of telephone directories in a fifteen-state area
primarily in the midwestern United States. Revenues are principally derived from
advertising in such publications.
Accounting estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount 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. Actual results could differ from those estimates.
A summary of the Company's significant accounting policies follows:
Principles of consolidation: The consolidated financial statements include
the accounts of Telecom*USA Publishing Group, Inc. and its wholly-owned
subsidiaries, Telecom*USA Publishing Company and Telecom*USA Neighborhood
Directories, Inc. (liquidated in January 1996) and its 51% owned subsidiary,
OakTel Directory, L.C. (OakTel). All significant intercompany accounts and
transactions have been eliminated in consolidation.
OakTel was formed to publish a directory for the Lincoln, Nebraska area and
its first publication was in November 1995. The Company provides directory
services to OakTel at specified prices.
Revenue and expense recognition: Revenue and expenses are recognized on
the accrual basis. Revenues are recorded upon publication of directories.
Deferred expenses consist of production and selling costs on unpublished
directory advertising orders. They are expensed when the related directory is
published and the related revenue of the directory is recognized.
Customer deposits consist of cash received from customers at the time a
sales contract is signed. They are recorded as revenue when the related
directory is published.
Advertising revenue and market sales expense includes contracts for trading
advertising space with various other media companies. These revenues are
recognized in the month of publication and the related prepaid expenses are
recorded at estimated net realizable value. These revenues totaled approximately
$548,000, $600,000, and $950,000 for the years ended August 31, 1994, 1995, and
1996, respectively.
Accounts receivable: In accordance with industry practice, accounts
receivable includes certain unbilled revenue from installment contracts. It is
anticipated that a substantial portion of all such amounts at August 31, 1996
will be collected within one year.
Equipment and furniture and depreciation: Equipment and furniture is
carried at cost. Depreciation expense is computed by the straight-line method
over primarily five or seven years.
Investment in Colorado Directory Company, L.L.C. ("CDC"): The Company is
accounting for its 12.5% investment in CDC by the cost method.
Income tax matters: Deferred taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be
F-7
13
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Intangible assets: Intangible assets are being amortized by the
straight-line method over the following periods:
YEARS
-----
Customer lists (See Note 13)......................... 15
Noncompete agreements................................ 3-10
Organization and loan costs.......................... 1-6
Intangible assets are periodically reviewed for impairment based upon an
assessment of future operations to ensure that they are appropriately valued.
The Company entered into noncompete agreements and acquired customer lists
for forty and eight directories during the years ended August 31, 1995 and 1996,
respectively.
Stock options: Compensation expense for stock issued through stock options
plans is accounted for using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Under this method, compensation is measured as the difference between the
estimated market value of the stock at the date of award less the amount
required to be paid for the stock. The difference, if any, is charged to expense
over the periods of service.
Common stock held by 401(k) profit-sharing plan: The Company's maximum
cash obligation related to these shares is classified outside stockholders'
equity because the shares are not readily traded and could be put to the Company
for cash.
Earnings per common and common equivalent share: Earnings per common and
common equivalent share, assuming no dilution, are determined by dividing net
income by the weighted average number of common and common equivalent shares
outstanding during each of the periods presented. Dilutive common stock
equivalents related to the stock options and warrants discussed in Note 10 were
determined using the treasury stock method. The convertible debentures are not
common stock equivalents. The estimated fair market value of the Company's
common stock used to calculate the common stock equivalents under the treasury
stock method for the periods presented has been estimated by management or
determined by an independent appraisal. Earnings per common and common
equivalent share, assuming full dilution, assumes conversion of the dilutive
convertible debentures since the date of issuance.
Recently issued accounting standards: In March 1995, the Financial
Accounting Standards Board (FASB) issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of,"
which will require the Company to review for the impairment of long-lived assets
and certain identifiable intangibles to be held and used by the Company whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Adoption of SFAS No. 121 is required in fiscal 1997.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes a fair value based method for financial
accounting and reporting for stock-based employee compensation plans. However,
the new standard allows compensation to continue to be measured by using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," but requires
F-8
14
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
expanded disclosures. SFAS No. 123 is effective in fiscal year 1997. The Company
has elected to continue to apply the intrinsic value based method of accounting
for stock options.
While the Company does not know precisely the impact that will result from
adopting SFAS No. 121 and SFAS No. 123, the Company does not expect the adoption
of SFAS No. 121 or SFAS No. 123 to have a material effect on the Company's
consolidated financial statements.
Fair value of financial instruments: The carrying amount of long-term debt
approximates fair value because these obligations bear interest at current
rates.
NOTE 2. OPTION TO PURCHASE DIRECTORIES
The Company loaned $500,000 to another directory publisher in consideration
of an option to purchase nine of its directories. The note is noninterest
bearing, nonrecourse, and collateralized by the publishing rights to one of the
directories. The option price of the directories is determined based on revenue
of the directories at the time of exercise and other factors. The Company may
exercise the option anytime between June 1, 1997 and June 1, 1999. If the
Company does not exercise its option, the loan is forgiven. If the option is
exercised, the amount of the loan is applied to the option price.
NOTE 3. INVESTMENT IN COLORADO DIRECTORY COMPANY L.L.C.
The Company's investment in Colorado Directory Company, L.L.C. (CDC), a
Colorado limited liability company that publishes directories in Denver and
Boulder, Colorado, consists of the following:
1995 1996
---------- ----------
Convertible debenture which is noninterest bearing, due
December 1, 2004, and collateralized by the publishing
rights to the Boulder directory....................... $ 500,000 $ --
Members' equity, represents 12.5% ownership in CDC...... 500,000 --
---------- ----------
$1,000,000 $ --
========== ==========
In June 1996, the Company recognized a $500,000 loss on the disposition of
the CDC investment as a result of selling all of its interest in CDC to an
affiliate of another member of CDC for $500,000.
NOTE 4. PLEDGED ASSETS, CURRENT NOTES PAYABLE AND LONG-TERM DEBT
The Company has a $9,764,000 revolving line of credit with a bank, which
expires January 31, 1997. As of August 31, 1995 and 1996, the Company had
$1,532,000 and $2,773,800, respectively, outstanding on the line of credit. The
borrowings bear interest at prime (current effective rate is 8.25% at August 31,
1996), and are collateralized by substantially all of the Company's assets. If
borrowings are in excess of $6,000,000 the interest rate is prime plus 3/4%. To
the extent that the line of credit is used to finance acquisitions that cost
more than $1,000,000, the amount borrowed for the acquisition is converted to a
term loan. The amount of the term loan reduces the line of credit on a dollar
for dollar basis. The term loan will be repaid in quarterly installments of
principal and monthly installments of interest over a five-year period and will
bear interest at prime, unless over $6,000,000 is borrowed, then the rate shall
be prime plus 3/4%. The other terms and conditions of the term loan are the
same as the line of credit. As of August 31, 1996, there is a $2,012,400 term
loan outstanding under this agreement.
F-9
15
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PLEDGED ASSETS, CURRENT NOTES PAYABLE AND LONG-TERM DEBT -- (CONTINUED)
The loan agreement contains covenants concerning various financial ratios,
additional acquisition and debt restrictions, and prohibition of any cash
dividends. As of August 31, 1996, the Company was either in compliance with the
restrictive covenants or had obtained waivers for noncompliance.
Long-term debt consists of:
1995 1996
----------- -----------
The Company has convertible unsecured debentures payable to
various individuals and corporations. The convertible
debentures are payable in quarterly payments of interest only
until maturity at which time the debentures will be converted
to common stock of the Company or paid in full, at the option
of the holder. The debentures may be converted to common
stock of the Company, at the option of the holder, upon the
earlier of (i) the expiration of two years from the date of
issuance (applies only to debentures issued April 1992), (ii)
upon a public offering of common stock of the Company, or
(iii) upon receipt of notice of redemption from the Company.
The Company may only redeem the convertible debentures in
connection with or as a precondition to a public offering of
common stock of the Company. The terms of these debentures
are due as follows:
9%, due April 1998, convertible at $4.00 per share of common
stock, issued April 1992.* ............................... $ 5,214,000 $ 5,214,000
11%, due November 2000 through January 2001, convertible at
$8.00 per share of common stock, issued November 1994
through January 1995.* ................................... 8,450,000 8,450,000
Note payable, bank, principal due in quarterly payments of
$111,800 through January 31, 2001, interest is due monthly at
prime (currently 8.25% at August 31, 1996), collateralized by
substantially all of the Company's assets. .................. -- 2,012,400
Noncompete agreement, due in monthly payments of $5,250,
including interest at 8 5/8%, through May 1996. ............. 41,980 --
Note payable, due $500,000 on January 1, 1996 and 1997,
including interest at 6 5/8%. Collateralized by a second lien
on publishing rights to purchased directories. .............. 905,377 465,377
Note payable, due in annual installments of $123,000 to
$189,000, including interest at 8.25%, through 2006.
Collateralized by publishing rights to purchased
directories.................................................. -- 990,000
Contracts payable, to finance company, due in various monthly
payments, including interest at 8.5% to 8 5/8%, through
November 1998, collateralized by equipment with a depreciated
cost of $348,053. ........................................... 444,988 321,398
Loan inducement fee payable (See Note 8)....................... 1,330,000 --
----------- -----------
16,386,345 17,453,175
Less current maturities........................................ 875,050 1,224,286
----------- -----------
$15,511,295 $16,228,889
=========== ===========
- ---------------
* All debentures were converted into Common Stock prior to the acquisition of
the company by McLeod, Inc. on September 20, 1996. (See Note 14)
F-10
16
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PLEDGED ASSETS, CURRENT NOTES PAYABLE AND LONG-TERM DEBT -- (CONTINUED)
Principal payments required on the long-term debt at August 31, 1996 are as
follows:
1997.................................................. $ 1,224,286
1998.................................................. 5,874,780
1999.................................................. 573,309
2000.................................................. 550,200
2001.................................................. 8,773,600
Later years........................................... 457,000
-----------
$17,453,175
===========
NOTE 5. LEASE COMMITMENTS AND TOTAL RENT EXPENSE
The Company has an operating lease for its corporate headquarters, which
expires August 31, 2005. In addition to minimum annual rentals, the lease
requires the payment of operating costs of the building based on its pro rata
share of the building. The Company also leases other office facilities and
equipment under various operating leases.
The total minimum rental commitment at August 31, 1996 under the operating
leases is as follows:
During the year ending August 31:
1997................................................ $ 1,412,000
1998................................................ 1,290,000
1999................................................ 1,130,000
2000................................................ 1,078,000
2001................................................ 891,000
Thereafter.......................................... 5,631,000
-----------
$11,432,000
===========
The total rental expense for 1994, 1995, and 1996 was approximately
$1,225,000, $1,312,000, and $1,528,000, respectively.
F-11
17
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. INCOME TAXES
Net deferred tax assets consist of the following components as of August
31, 1995 and 1996:
1995 1996
---------- ----------
Deferred tax assets:
Accounts receivable..................................... $ 934,000 $1,219,000
Intangibles............................................. 679,000 664,000
Deferred expenses....................................... 101,000 --
Accrued expenses........................................ 444,000 513,000
Capital loss carryforward............................... -- 200,000
Loan inducement fee payable............................. 532,000 --
---------- ----------
2,690,000 2,596,000
Less valuation allowance................................ -- --
---------- ----------
2,690,000 2,596,000
---------- ----------
Deferred tax liabilities:
Equipment and furniture................................. 191,000 185,000
Accounts receivable..................................... 169,000 171,000
---------- ----------
360,000 356,000
---------- ----------
$2,330,000 $2,240,000
========== ==========
The components giving rise to the net deferred tax assets described above
have been included in the accompanying balance sheets as of August 31, 1995 and
1996 as follows:
1995 1996
---------- ----------
Current assets............................................ $1,410,000 $1,536,000
Noncurrent assets......................................... 920,000 704,000
---------- ----------
$2,330,000 $2,240,000
========== ==========
No valuation allowance is required on the deferred tax assets as of August
31, 1996 and 1995. The valuation allowance for deferred tax assets decreased
$1,110,000 during 1994, due to the utilization of the acquired operating loss
carryforwards and management's belief that deferred tax assets will ultimately
be realized.
The provision for income taxes charged to operations for 1994, 1995, and
1996 consists of the following:
1994 1995 1996
--------- ---------- --------
Current tax expense........................... $ 308,702 $1,115,586 $885,610
Deferred tax expense.......................... (171,512) (813,000) 90,000
--------- ---------- --------
$ 137,190 $ 302,586 $975,610
========= ========== ========
F-12
18
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. INCOME TAXES -- (CONTINUED)
The income tax provision differs from the amount of income tax determined
by applying the U.S. Federal income tax rate to pretax income for 1994, 1995,
and 1996 due to the following:
1994 1995 1996
------------------ ------------------ -----------------
% OF % OF % OF
DOLLAR PRETAX DOLLAR PRETAX DOLLAR PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
--------- ------ --------- ------ -------- ------
Computed "expected" federal
income tax expense........ $ 352,593 35% $ 256,269 35% $724,676 35%
Increase (decrease) in
income taxes resulting
from:
State income taxes, net of
federal tax benefit.... 60,445 6 96,866 13 71,656 3
Meals and entertainment... 20,920 2 59,767 8 74,724 4
Minority interest in net
loss of consolidated
limited liability
subsidiary............. -- -- 5,586 1 114,529 6
Additional deferred income
taxes after
reclassification of
intangibles to deferred
income taxes........... (396,907) (39) -- -- -- --
Other.................. 100,139 10 (115,902) (16) (9,975) (1)
--------- --- --------- --- -------- --
$ 137,190 14% $ 302,586 41% $975,610 47%
========= === ========= === ======== ==
NOTE 7. LOAN INDUCEMENT FEE
The Company had previously agreed to pay a fee of 1/2% of cash revenues to
three individuals on a monthly basis as compensation for previous financing
provided such individuals. Two of these individuals are stockholders of the
Company and one of these individuals is on the Company's Board of Directors. The
fee was to be paid through October 31, 2000. For 1994, 1995, and 1996, the loan
inducement fee expense was approximately $153,000, $190,000, and none,
respectively, which is included in interest expense.
In August 1995, the Company's Board of Directors adopted a resolution to
prepay the fee according to a formula contained in the original agreement.
Therefore, the remaining liability of $1,330,000 was recorded at August 31,
1995. The payment of the remaining liability was made during the year ended
August 31, 1996.
NOTE 8. STOCKHOLDER AGREEMENTS
The common stockholders of the Company have entered into a stockholder
agreement that provides for the following:
- The stockholders may not sell, transfer, or pledge their stock without
first offering it to the Company, and secondly to the other stockholders,
at fair market value.
F-13
19
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. STOCKHOLDER AGREEMENTS -- (CONTINUED)
- Any gift of the stock must be approved by the Company and will be subject
to the terms of the stockholder agreement. The gift may be made to a
spouse, child of the stockholder or to a charitable organization or
private foundation.
- Upon the death of a stockholder, any transferee of the stock will be
subject to the terms of the stockholder agreement.
- Each stockholder has co-sale rights.
- Each stockholder has piggyback rights upon a registration of the stock.
- Written action of 51% of the stock may amend or cancel the agreement.
NOTE 9. RETIREMENT AND BONUS PLAN
The Company has a 401(k) Profit Sharing Plan for those employees who have
completed one year of service and who are at least 18 years of age. The plan
provides for contributions in such amounts as the Board of Directors may
annually determine. The amount charged to expense during 1994, 1995, and 1996
was approximately $56,000, $80,000, and $117,500, respectively. The
contributions for 1994 and 1995 have been made with the Company's common stock.
The Company plans to make the 1996 contribution with cash.
In the event a terminated plan participant desires to sell his or her
shares of the Company's stock, or if certain employees elect to diversify their
account balances, the Company may be required to purchase the shares from the
participant at their fair market value. To the extent that shares of common
stock held by the 401(k) profit-sharing plan are not readily traded, a sponsor
must reflect the maximum cash obligation related to those securities outside of
stockholders' equity. As of August 31, 1996, 38,273 shares held by the 401(k)
profit-sharing plan, at a fair value of $5.75 per share, have been reclassified
from stockholder's equity to liabilities.
The Company has bonus plans for substantially all of its nonsales personnel
based on obtaining certain profitability goals. These bonuses totaled
approximately $362,000, $471,000, and $720,000 for 1994, 1995, and 1996,
respectively.
NOTE 10. STOCK OPTION PLAN AND STOCK PURCHASE WARRANTS
The Company has adopted a qualified stock option plan with 800,000 shares
of common stock reserved for the grant of options to key employees and
directors. Option prices will be the fair market value of the common stock on
the date options are granted. The options primarily vest over a
F-14
20
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. STOCK OPTION PLAN AND STOCK PURCHASE WARRANTS -- (CONTINUED)
54-month period and must be exercised within seven years from the date of grant.
The following table summarizes the options to purchase shares of the Company's
common stock:
SHARES OPTION PRICE
-------- ------------
Outstanding, August 31, 1993.................... 490,800 $1.00-$3.00
Granted 18,900 1.00- 3.30
Exercised..................................... (925) 1.00
Cancelled..................................... (9,925) 1.00- 3.00
--------
Outstanding, August 31, 1994.................... 498,850 1.00- 3.50
Granted....................................... 265,600 4.50- 4.95
Exercised..................................... (14,175) 1.00- 3.00
Cancelled..................................... (20,775) 1.00- 4.50
--------
Outstanding, August 31, 1995.................... 729,500 1.00- 4.95
Granted....................................... 28,050 5.75
Exercised..................................... (182,300) 1.00- 4.50
Cancelled..................................... (21,400) 3.00- 5.75
--------
Outstanding, August 31, 1996.................... 553,850 1.00- 5.75
========
1994 1995 1996
------- ------- -------
Options exercisable, end of year.... 245,325 384,300 251,900
======= ======= =======
Available for grant, end of year.... 625 55,400 48,750
======= ======= =======
In connection with previous financing provided by three individuals (see
Note 7), the Company issued three stock purchase warrants enabling the holders
to purchase 488,650 shares of common stock at an exercise price of $.01 per
share. The stock purchase warrants are exercisable through November 20, 2000.
All vested options and stock purchase warrants were exercised prior to the
acquisition of the Company by McLeod, Inc. on September 20, 1996. (See Note 14).
NOTE 11. RESTRUCTURING LOSS
In January 1994, the Company restructured Telecom*USA Neighborhood
Directories, Inc. Previously it published eleven neighborhood directories in the
Chicago, Illinois area. The Company has decided to keep certain market areas and
produce two directories similar to the Company's other products. The expense
included in 1994 includes previously deferred expenses on books which will no
longer be published and a write-down of the purchased customer list and
agreement not-to-compete.
NOTE 12. CHANGE IN ACCOUNTING ESTIMATE
During the year ended August 31, 1996, the Company evaluated the turnover
of its customer lists and determined that a 15-year life was more appropriate
than the 3-10 year life it was presently using. The effect of this change was to
increase net income for 1996 by approximately $781,000, equal to $0.23 per
average common share outstanding.
F-15
21
TELECOM*USA PUBLISHING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. COMMITMENT TO PURCHASE EQUIPMENT
During the year ended August 31, 1996, the Company has capitalized
approximately $200,000 related to a telephone sales force automation project.
The Company estimates it will cost approximately $1,100,000 to complete the
project.
NOTE 14. REORGANIZATION OF COMPANY AND SUBSEQUENT EVENTS
On September 20, 1996 the Company was acquired by McLeod, Inc. pursuant to
an Agreement and Plan of Reorganization. Under the Agreement, the Company was
merged into McLeod Reverse Merging Co., a wholly owned subsidiary of McLeod, Inc
with the Company as the surviving corporation. Immediately after the merger each
share of the Company was converted into the right to receive $12.75 in cash.
This acquisition resulted in a total purchase price of approximately $75.7
million. This purchase price consisted of approximately $74.1 million in cash
and $1.6 million resulting from McLeod, Inc. entering into a deferred
compensation program with all holders of non-vested options to purchase shares
of the Company's common stock. Prior to the acquisition all debentures discussed
in Note 4 were converted into common stock and all vested stock options and
stock purchase warrants discussed in Note 10 were exercised.
F-16
22
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial information has been prepared to
give effect to the acquisitions of MWR Telecom, Inc. ("MWR"), Ruffalo, Cody &
Associates, Inc. ("Ruffalo, Cody") and Telecom*USA Publishing Group, Inc.
("Telecom*USA Publishing") by McLeod, Inc. (the "Company") in April 1995, July
1996 and September 1996, respectively. The unaudited pro forma financial
statements reflect such acquisitions using the purchase method of accounting,
assuming, for the pro forma statements of operations data, that such
acquisitions were consummated at the beginning of the periods presented. The
unaudited pro forma financial information is derived from and should be read in
conjunction with the Consolidated Financial Statements of the Company, Ruffalo,
Cody and Telecom*USA Publishing and the Financial Statements of MWR and the
related Notes thereto. The pro forma adjustments are based upon available
information and certain assumptions that management believes to be reasonable.
Final purchase adjustments may differ from the pro forma adjustments herein.
The unaudited pro forma financial information is provided for informational
purposes only and is not necessarily indicative of the financial position or
operating results that would have occurred had the acquisitions been consummated
on the date presented or at the beginning of the periods presented, nor is it
necessarily indicative of future operating results or financial position.
The unaudited historical information as of and for the six month period
ended June 30, 1996 may not be indicative of the results of operations for a
full year. Specifically, due primarily to seasonal factors generally resulting
in higher revenues during the first six months of a given year, the unaudited
historical information presented for Telecom*USA Publishing for such periods is
not indicative of the results of operations for a full year.
F-17
23
MCLEOD, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(IN THOUSANDS)
TELECOM*USA ADJUSTMENTS PRO FORMA
RUFFALO, CODY & PUBLISHING FOR FOR
MCLEOD, INC. ASSOCIATES, INC. GROUP, INC. ACQUISITIONS ACQUISITIONS
--------------- ---------------- ----------- ----------- ------------
ASSETS
Current Assets
Cash and cash equivalents.................... $ 232,019 $ 47 $ 207 $(4,808)(1) $154,111
90 (2)
616 (3)
(74,060)(4)
Trade receivables, net....................... 12,975 2,602 12,877 -- 28,454
Inventory.................................... 3,075 -- -- -- 3,075
Deferred expenses............................ -- -- 7,635 4,288 (4) 11,923
Prepaid expenses and other................... 1,458 141 3,079 (2,170)(5) 2,508
-------- ------- ------- ------- --------
Total current assets....................... 249,527 2,790 23,798 (76,044) 200,071
-------- ------- ------- ------- --------
Property and Equipment, net................... 35,223 1,151 3,830 (64)(1) 40,140
-------- ------- ------- ------- --------
Intangibles, net.............................. 2,436 -- 13,518 14,947 (1) 83,363
52,462 (4)
-------- ------- ------- ------- --------
Other assets.................................. 2,113 575 1,340 (208)(1) 3,074
(746)(5)
-------- ------- ------- ------- --------
$ 289,299 $ 4,516 $42,486 $(9,653) $326,648
======== ======= ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable................................ $ -- $ 200 $ 2,959 $ -- $ 3,159
Current maturities of long-term debt......... -- -- 1,764 -- 1,764
Accounts payable............................. 14,848 372 2,958 -- 18,178
Other current liabilities.................... 4,760 1,579 10,356 1,610 (4) 18,305
-------- ------- ------- ------- --------
Total current liabilities.................. 19,608 2,151 18,037 1,610 41,406
-------- ------- ------- ------- --------
Long-Term Debt, less current maturities....... -- -- 16,623 (13,664)(3) 2,959
-------- ------- ------- ------- --------
Deferred Revenue, less current portion........ 3,762 -- -- -- 3,762
-------- ------- ------- ------- --------
Minority interest in consolidated subsidiary.. -- -- 346 -- 346
-------- ------- ------- ------- --------
Redeemable Common Stock and Warrants
Capital stock, common........................ -- 2,227 -- (2,227)(6) --
Common stock held by the 401(k) profit
sharing plan............................... -- 140 220 (360)(6) --
Warrants..................................... -- 546 -- (546)(6) --
-------- ------- ------- ------- --------
-- 2,913 220 (3,133) --
-------- ------- ------- ------- --------
Common Stockholders' Equity (Deficit)
Capital stock, common........................ 458 619 4,202 (19,101)(6) 462
4 (1)
14,280 (3)
Additional paid-in capital................... 299,833 -- -- 12,242 (1) 312,075
Accumulated earnings (deficit)............... (34,362) (1,027) 3,391 (2,364)(6) (34,362)
-------- ------- ------- ------- --------
265,929 (408) 7,593 5,061 278,175
Less treasury stock........................... -- -- (113) 113 (6) --
Less maximum cash obligation related to
401(k) profit sharing plan shares............ -- (140) (220) 360 (6) --
-------- ------- ------- ------- --------
265,929 (548) 7,260 5,534 278,175
-------- ------- ------- ------- --------
$ 289,299 $ 4,516 $42,486 $(9,653) $326,648
======== ======= ======= ======= ========
(Footnotes on following page)
F-18
24
- ---------------
(1) To record the preliminary allocation of the net purchase price for the
acquisition of Ruffalo, Cody by the Company to assets acquired, including
goodwill and customer lists, and to record the issuance of the Company's
Class A Common Stock and options to purchase Class A Common Stock valued at
$24.75 per share, the average closing sales prices of the Class A Common
Stock on the Nasdaq National Market during the five business days before and
after July 15, 1996, the date the Company acquired Ruffalo, Cody. Assumes
none of the conditions for the payment of certain additional consideration
are met and that the total net purchase price for the Ruffalo, Cody
acquisition is $17,053,860, which is computed as follows, assuming all
options to purchase shares of Class A Common Stock granted in connection
with the acquisition will be exercised upon vesting:
Cash................................................................................ $ 4,807,898
361,420 shares of Class A Common Stock valued at $24.75 per share................... 8,945,145
Options to purchase 158,009 shares of Class A Common Stock valued at $24.75 per
share............................................................................. 3,910,723
Less cash to be received upon exercise of vested options............................ (609,906)
-----------
Total net purchase price............................................................ $ 17,053,860
===========
If all of the conditions for the payment of the additional consideration
were met, the total net purchase price would include additional cash of
$50,782 and 113,387 additional shares of Class A Common Stock valued at the
market price at the time of issuance. This additional consideration would be
allocated to intangible assets, common stock and additional paid-in capital.
See "Business -- Recent Transactions."
(2) To record cash received for conversion of Ruffalo, Cody warrants to common
stock.
(3) To record the conversion of Telecom*USA Publishing convertible debentures
into shares of Telecom*USA Publishing common stock and the exercise of
options and warrants to purchase Telecom*USA Publishing common stock.
(4) To record the preliminary allocation of the purchase price for the
acquisition of Telecom*USA Publishing by the Company to assets acquired,
including intangibles. The Company paid $74,060,427 in cash to the
shareholders of Telecom*USA Publishing and established an incentive plan for
the holders of non-vested options to purchase shares of Telecom*USA
Publishing common stock.
(5) To record a valuation allowance on deferred tax assets acquired due to the
uncertainty of realizing the benefit of the Company's loss carryforwards.
(6) To eliminate Ruffalo, Cody and Telecom*USA Publishing equity components,
including common stock, warrants, additional paid-in capital, accumulated
earnings (deficit) and treasury stock. This adjustment includes the
elimination of the additional Telecom*USA Publishing Common Stock issued
upon conversion of convertible debentures and the exercise of warrants and
options to purchase Telecom*USA Publishing common stock.
F-19
25
MCLEOD, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE INFORMATION)
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------------------------
MWR TELECOM*USA ADJUSTMENTS PRO FORMA
MCLEOD, TELECOM, RUFFALO, CODY & PUBLISHING FOR FOR
INC.(1) INC.(2) ASSOCIATES, INC. GROUP, INC. ACQUISITIONS ACQUISITIONS
--------- -------- ---------------- ----------- ------------ ------------
Operations Statement Data:
Revenue.............................. $ 28,998 $873 $ 13,286 (3) $43,319 $ -- $ 86,476
--------- ------ -------- ------- -------- --------
Operating expenses:
Cost of service.................... 19,667 376 6,619 18,226 2,573 (4) 47,461
Selling, general and
administrative................... 18,054 98 5,376 20,362 1,715 (4) 45,605
Depreciation and amortization...... 1,835 220 475 2,104 3,396 (5) 8,018
(12)(6)
--------- ------ -------- ------- -------- --------
Total operating expenses....... 39,556 694 12,470 40,692 7,672 101,084
--------- ------ -------- ------- -------- --------
Operating income (loss).............. (10,558) 179 816 2,627 (7,672) (14,608)
Interest income (expenses), net...... (771) (55) (77) (1,546) 1,400 (7) (1,049)
Other non-operating expenses......... -- -- -- (997) -- (997)
Income taxes......................... -- (51) (274) (34) 359 (8) --
--------- ------ -------- ------- -------- --------
Net income (loss).................... $ (11,329) $ 73 $ 465 $ 50 $ (5,913) $(16,654)
========= ====== ======== ======= ======== ========
Loss per common and common equivalent
share.............................. $ (0.31) $ (0.45)
========= ========
Weighted average common and common
equivalent shares outstanding...... 37,055 37,416
========= ========
Other Financial Data:
EBITDA (9)........................... $ (8,723) $399 $ 1,291 $ 4,731 $ (4,288) $ (6,590)
SIX MONTHS ENDED JUNE 30, 1996
-----------------------------------------------------------------------
RUFFALO, CODY
& TELECOM*USA ADJUSTMENTS PRO FORMA
MCLEOD, ASSOCIATES, PUBLISHING FOR FOR
INC. INC. GROUP, INC. ACQUISITIONS ACQUISITIONS
-------- ------------- ----------- ------------ ------------
Operations Statement Data:
Revenue.......................................... $ 26,406 $ 8,278 (3) $30,262 $ -- $ 64,946
-------- ---------- ------- -------- --------
Operating expenses:
Cost of service................................ 18,724 4,225 11,218 2,205 (4) 36,372
Selling, general and administrative............ 13,976 3,253 13,137 1,470 (4) 31,836
Depreciation and amortization.................. 2,573 269 1,184 1,699 (5) 5,725
-------- ---------- ------- -------- --------
Total operating expenses................... 35,273 7,747 25,539 5,374 73,933
-------- ---------- ------- -------- --------
Operating income (loss).......................... (8,867) 531 4,723 (5,374) (8,987)
Interest income (expenses), net.................. (16) (6) (817) 700 (7) (139)
Other non-operating expenses..................... -- -- (483) -- (483)
Income taxes..................................... -- (194) (1,360) 1,554 (8) --
-------- ----------- ------- -------- --------
Net income (loss)................................ $ (8,883) $ 331 $ 2,063 $ (3,120) $ (9,609)
======== ========== ======= ======== ========
Loss per common and common equivalent share...... $ (0.23) $ (0.25)
======== ========
Weighted average common and common equivalent
shares outstanding............................. 38,512 38,873
======== ========
Other Financial Data:
EBITDA (9)....................................... $ (6,294) $ 800 $ 5,907 $ (3,675) $ (3,262)
(Footnotes on following page)
F-20
26
- ---------------
(1) Includes operations of MWR from April 29, 1995 to December 31, 1995.
(2) Includes operations of MWR from January 1, 1995 to April 28, 1995.
(3) Includes revenue from an agreement with a major long distance carrier to
provide telemarketing services. Over 40% of Ruffalo, Cody's revenues in 1995
and a significant portion of its revenues in 1996 were derived from this
agreement. The major long distance carrier has informed the Company that it
intends to terminate this agreement effective December 31, 1996.
(4) To recognize the costs associated with the directories in progress at the
time of the Company's acquisition of Telecom*USA Publishing.
(5) To adjust depreciation and amortization to include amortization of
intangibles acquired in the Company's acquisitions of Ruffalo, Cody and
Telecom*USA Publishing. Intangibles acquired in these acquisitions will be
amortized over periods ranging from 5 years to 25 years. These adjustments
assume that none of the conditions for the payment of certain additional
consideration in the Ruffalo, Cody acquisition are met. If all such
conditions were met, amortization of the intangibles would be increased over
their estimated remaining lives.
(6) To adjust depreciation and amortization to include amortization of
intangibles and to reflect the estimated depreciation of the purchase price
allocated to MWR's property and equipment from January 1, 1995 to April 28,
1995, the date of the Company's acquisition of MWR. Intangibles acquired in
the Company's acquisition of MWR are being amortized over 15 years.
(7) To eliminate the interest expense recorded on Telecom*USA Publishing
convertible debentures that were converted to shares of Telecom*USA
Publishing common stock immediately prior to the acquisition of Telecom*USA
Publishing by the Company.
(8) Net income (loss) does not include a pro forma adjustment for income taxes
due to the availability of net operating loss carryforwards and a valuation
allowance.
(9) EBITDA consists of operating loss before depreciation and amortization. The
Company has included EBITDA data because it is a measure commonly used in
the industry. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered an
alternative to net income as a measure of performance or to cash flows as a
measure of liquidity.
F-21
27
EXHIBIT INDEX
2. Agreement and Plan of Reorganization, dated as of August 15,
1996, by and between Telecom*USA Publishing Group, Inc. and
the Company (incorporated by reference to the Current Report
on Form 8-K filed on August 26, 1996).
23. Consent of McGladrey & Pullen, LLP.
27. Financial Data Schedule.
99. Press Release, dated September 23, 1996, regarding the
acquisition of Telecom*USA Publishing Group, Inc.
(incorporated by reference to the Current Report on Form 8-K
filed on October 7, 1996).