1
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Cherokee Communications, Inc.:
We have audited the accompanying balance sheets of Cherokee Communications,
Inc. (the Company) as of September 30, 1995 and 1994, and the related statements
of income, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1995. 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, such financial statements present fairly, in all material
respects, the financial position of the Company at September 30, 1995 and 1994,
and the results of its operations and its cash flows for each of the three years
in the period ended September 30, 1995, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Dallas, Texas
November 17, 1995
2
CHEROKEE COMMUNICATIONS, INC.
BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1994
1995 1994
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 668,778 $ 780,962
Short-term cash investments..................................... 150,000
Trade accounts receivable, less allowance for doubtful accounts
of $264,803 and $255,965, respectively (Notes 6 and 10)...... 4,453,192 4,251,894
Inventories (Note 6)............................................ 137,036 78,792
Prepaid expenses and other current assets (Note 10)............. 303,273 213,863
Deferred income tax benefits (Note 9)........................... 108,717 112,718
----------- -----------
Total current assets.................................... 5,670,996 5,588,229
Property and equipment -- net (Notes 2, 3 and 6).................. 12,935,453 11,334,863
Site licenses -- net (Note 1)..................................... 1,941,467 2,221,780
Investment in and advances to affiliates (Note 5)................. 164,549 30,188
Deferred income tax benefits (Note 9)............................. 93,704
Other assets -- net (Note 4)...................................... 681,754 890,856
----------- -----------
TOTAL.............................................. $21,394,219 $20,159,620
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable -- receivable financing (Note 6)................... $ 659,604 $ 1,705,174
Current portion of other notes payable (Note 6)................. 1,491,767 1,395,338
Current portion of capital lease obligations (Note 7)........... 1,094,381 1,616,814
Accounts payable................................................ 310,358 267,755
Accrued telecommunication and other expenses.................... 2,971,935 2,575,808
Income taxes payable............................................ 256,140 368,143
----------- -----------
Total current liabilities............................... 6,784,185 7,929,032
Long-term liabilities:
Notes payable, less current portion (Note 6).................... 6,605,835 5,295,294
Capital lease obligations, less current portion (Note 7)........ 780,593 2,139,216
Deferred income tax liability (Note 9).......................... 342,359
----------- -----------
Total long-term liabilities............................. 7,728,787 7,434,510
Commitments and contingencies (Notes 7 and 11)
Shareholders' equity (Note 8):
Convertible redeemable preferred stock.......................... 2,400,000 2,400,000
Common stock warrants, with mandatory redemption requirements... 1,087,000 1,087,000
Common stock, no par value; 15,000,000 shares authorized,
5,320,467 and 5,312,467 shares issued and outstanding,
respectively................................................. 351,903 343,183
Additional paid-in capital...................................... 10,630 10,630
Retained earnings............................................... 3,031,714 955,265
----------- -----------
Total shareholders' equity.............................. 6,881,247 4,796,078
----------- -----------
TOTAL.............................................. $21,394,219 $20,159,620
=========== ===========
See notes to financial statements.
3
CHEROKEE COMMUNICATIONS, INC.
STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
1995 1994 1993
----------- ----------- -----------
Telecommunications revenues:
Pay phone coin calls................................ $14,036,665 $10,797,869 $ 7,258,037
Automated operator, routed calls.................... 17,049,394 16,425,708 13,543,072
Other (Note 5)...................................... 505,581 641,899 825,694
----------- ----------- -----------
Total....................................... 31,591,640 27,865,476 21,626,803
Operating costs and expenses:
Telephone charges................................... 7,851,842 7,257,272 4,956,950
Commissions......................................... 4,909,445 4,341,260 3,258,932
Telecommunication fees and validation............... 1,821,930 1,834,389 1,843,614
Depreciation and amortization (Note 2).............. 4,298,090 4,284,734 3,218,450
Field operations personnel.......................... 2,016,935 1,610,952 1,191,829
Chargebacks and doubtful accounts................... 1,104,896 784,636 1,046,353
Selling, general and administrative (Note 10)....... 5,520,405 4,634,890 3,714,601
----------- ----------- -----------
Total....................................... 27,523,543 24,748,133 19,230,729
----------- ----------- -----------
Operating income...................................... 4,068,097 3,117,343 2,396,074
Other income (expense):
Interest expense.................................... (1,450,249) (1,682,465) (1,345,065)
Amortization of debt discount....................... (181,167) (181,167) (75,486)
Interest income..................................... 57,278 20,329 20,731
Equity in earnings (losses) of affiliates (Note
5)............................................... (34,608) (226,625) (6,948)
Gain on equipment sales and other (Note 3).......... 1,160,238 67,917 84,325
----------- ----------- -----------
Total....................................... (448,508) (2,002,011) (1,322,443)
----------- ----------- -----------
Income before income taxes............................ 3,619,589 1,115,332 1,073,631
Provision for income taxes (Note 9)................... 1,399,140 512,402 418,508
----------- ----------- -----------
Net income.................................. $ 2,220,449 $ 602,930 $ 655,123
=========== =========== ===========
See notes to financial statements.
4
CHEROKEE COMMUNICATIONS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
PREFERRED STOCK COMMON COMMON STOCK ADDITIONAL RETAINED
-------------------- STOCK -------------------- PAID-IN EARNINGS
SHARES AMOUNT WARRANTS SHARES AMOUNT CAPITAL (DEFICIT)
------- ---------- ---------- --------- -------- ---------- ----------
Balance, October 1, 1992....... -- $ -- $ -- 5,000,000 $ 5,000 $ 10,630 $ (50,788)
Issuance of preferred
stock...................... 240,000 2,400,000
Cash dividends on preferred
stock...................... (108,000)
Issuance of common stock..... 312,467 338,183
Issuance of common stock
warrant (Note 8)........... 1,087,000
Net income................... 655,123
------- ---------- ---------- --------- -------- ------- ----------
Balance, September 30, 1993.... 240,000 2,400,000 1,087,000 5,312,467 343,183 10,630 496,335
Cash dividends on preferred
stock...................... (144,000)
Net income................... 602,930
------- ---------- ---------- --------- -------- ------- ----------
Balance, September 30, 1994.... 240,000 2,400,000 1,087,000 5,312,467 343,183 10,630 955,265
Cash dividends on preferred
stock...................... (144,000)
Proceeds from exercise of
common stock options....... 8,000 8,720
Net income................... 2,220,449
------- ---------- ---------- --------- -------- ------- ----------
Balance, September 30, 1995.... 240,000 $2,400,000 $1,087,000 5,320,467 $351,903 $ 10,630 $3,031,714
======= ========== ========== ========= ======== ======= ==========
See notes to financial statements.
5
CHEROKEE COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
1995 1994 1993
----------- ----------- -----------
Operating Activities:
Net income.................................................. $ 2,220,449 $ 602,930 $ 655,123
Noncash items in net income:
Depreciation and amortization............................. 4,298,090 4,284,734 3,218,450
Amortization of debt discount............................. 181,167 181,167 75,486
Equity in earnings (losses) of affiliates................. 34,608 226,625 6,948
Deferred income taxes..................................... 440,064 88,456 (35,731)
Gain on sale of property and equipment.................... (1,136,894) (51,854) (59,491)
Cash from (used for) changes in operating working capital:
Trade accounts receivable................................. (201,298) (946,867) (1,933,366)
Inventories............................................... (58,244) 58,875 (137,667)
Prepaid expenses and other current assets................. (89,410) (56,234) (70,710)
Accounts payable and accrued liabilities.................. 438,730 619,244 424,157
Income taxes payable...................................... (112,003) 335,672 (91,743)
----------- ----------- -----------
Net cash from operating activities...................... 6,015,259 5,342,748 2,051,456
----------- ----------- -----------
Investing Activities:
Additions to property and equipment......................... (5,794,108) (4,059,111) (5,224,466)
Increase in site licenses................................... (440,220) (433,746) (753,966)
Increase in other assets.................................... (79,353) (644,428)
Proceeds from sale of property and equipment................ 2,041,310 96,905 108,700
Investments in and advances to affiliates................... (218,767) (40,591) (333,329)
Distributions from affiliates............................... 49,798 60,427 55,765
Sale (purchase) of short-term cash investments.............. 150,000 (150,000)
----------- ----------- -----------
Net cash used for investing activities.................. (4,291,340) (4,526,116) (6,791,724)
----------- ----------- -----------
Financing Activities:
Issuance of (payments on) note payable -- receivable
financing................................................. (1,045,570) 161,812 1,543,362
Issuance of other notes payable............................. 4,048,753 2,122,523 9,333,355
Payments on notes payable and capital lease obligations..... (4,704,006) (2,948,227) (7,950,674)
Issuance of common stock.................................... 8,720
Issuance of preferred stock................................. 2,400,000
Cash dividends on preferred stock........................... (144,000) (144,000) (108,000)
----------- ----------- -----------
Net cash from (used for) financing activities........... (1,836,103) (807,892) 5,218,043
Increase (decrease) in cash and cash equivalents.............. (112,184) 8,740 477,775
Cash and cash equivalents:
Beginning of year........................................... 780,962 772,222 294,447
----------- ----------- -----------
End of year................................................. $ 668,778 $ 780,962 $ 772,222
=========== =========== ===========
Supplemental information:
Interest paid............................................... $ 1,462,519 $ 1,635,052 $ 1,230,562
=========== =========== ===========
Income taxes paid........................................... $ 1,091,368 $ 23,000 $ 568,861
=========== =========== ===========
Noncash investing and financing activities:
Equipment and other assets acquired under capital lease
obligations and debt.................................... $ -- $ 367,500 $ 2,718,189
=========== =========== ===========
Common stock issued for financing costs................... $ -- $ -- $ 338,183
=========== =========== ===========
See notes to financial statements.
6
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS -- Cherokee Communications, Inc. (the Company) owns, operates and
maintains pay telephone systems connected to the network of regulated telephone
companies throughout the United States at various third-party property owner
locations. In connection with the telephone systems, the Company also derives
revenue from routing calls to operator service companies and through its own
automated operator system (AOS) installed in its telephones. A summary of owned
and managed phones at September 30 is as follows:
1995 1994 1993
------ ------ ------
Owned............................................... 9,333 8,182 6,320
Managed............................................. 276 233 235
----- ----- -----
Total..................................... 9,609 8,415 6,555
===== ===== =====
REVENUES from coin and noncoin calls are recognized at the time the calls
are made and are dependent on service provided by the long-distance carriers.
Accounts receivable primarily includes revenues generated from calls completed
through the Company's AOS and from commissions to be received from operator
service companies. An allowance for doubtful accounts is provided at the time of
revenue recognition for the estimated settlement ("true-up") for actual
chargebacks made by the telephone companies, based on historical experience. The
"true-up" for actual chargebacks is typically made within six months. Also, the
related telecommunication expenses are accrued for the costs for validating,
transmitting, and billing and collecting calls completed through the AOS, as
well as for commissions to be paid to third-party property owners.
CASH EQUIVALENTS represent highly liquid investments with initial or
remaining maturities at the date of purchase of three months or less. Short-term
cash investments consist of certificates of deposit with maturities greater than
three months.
INVENTORIES, which primarily consist of telephone booth enclosures and
related parts, are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT are stated at cost less accumulated depreciation and
amortization. Cost of telecommunications equipment includes the initial line
hook-up charges, sales commissions, labor and other charges incurred for
installing pay phones. Depreciation and amortization are provided primarily
using the double declining balance method, later switching to the straight-line
method over the following estimated useful lives of the related assets:
buildings, 20 years; leasehold improvement, 25 years; telecommunications
equipment, seven years and ten years; telecommunications software licenses, four
years; vehicles, computer equipment and software, five years; and furniture and
office equipment, five to seven years. Beginning October 1, 1993, the Company
began depreciating newly acquired telecommunications equipment over a ten-year
period using the straight-line method (see Note 2). Refurbishment, repairs and
maintenance costs are expensed as incurred.
SITE LICENSES are stated at the cost of site licenses acquired in asset
acquisitions, less accumulated amortization of $2,690,403 and $2,224,277 at
September 30, 1995 and 1994, respectively. Amortization is provided using the
straight-line method over the terms of the related site license agreements,
generally two to seven years.
OTHER ASSETS are amortized using the straight-line method over the
following periods: deferred financing costs over the life of the respective
financing agreement; and noncompete agreements and patents, five years.
7
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
DEFERRED FEDERAL INCOME TAXES are provided under the asset and liability
method for temporary differences in the recognition of income and expense for
tax and financial reporting purposes and for the expected benefit of tax credit
carryforwards.
2. CHANGE IN DEPRECIABLE LIFE
Effective October 1, 1993, the Company increased the estimated useful life
of its telecommunications equipment acquired after that date from seven to ten
years. This was to more appropriately reflect the anticipated useful service
period for newly acquired equipment. The effect of this change in accounting
method reduced depreciation expense by approximately $293,000 and increased net
income during the 1994 period by approximately $193,000.
3. PROPERTY AND EQUIPMENT
Property and equipment at September 30 consist of the following:
1995 1994
----------- -----------
Telecommunications equipment:
Owned................................................... $12,577,986 $ 9,312,536
Under capital leases.................................... 5,725,587 6,328,695
Telecommunications software licenses...................... 2,214,455 1,880,832
Vehicles.................................................. 2,184,227 1,630,211
Furniture and office equipment............................ 686,820 491,401
Machinery................................................. 30,005 30,005
Land and buildings........................................ 75,747 73,787
----------- -----------
Total........................................... 23,494,827 19,747,467
Less accumulated depreciation and amortization............ 10,559,374 8,412,604
----------- -----------
Property and equipment -- net............................. $12,935,453 $11,334,863
=========== ===========
In October 1994, the Company sold approximately 760 telephones, certain
other assets and related site agreements for approximately $1.7 million, which
resulted in a gain on the sale of assets of approximately $1 million.
4. OTHER ASSETS
Other assets at September 30 consist of the following:
1995 1994
---------- ----------
Deferred financing costs.................................... $1,113,451 $1,034,098
Patents..................................................... 46,009 46,009
Noncompete agreements....................................... 252,500 252,500
---------- ----------
Total............................................. 1,411,960 1,332,607
Less accumulated amortization............................... 730,206 441,751
---------- ----------
Other assets -- net......................................... $ 681,754 $ 890,856
========== ==========
In connection with the subordinated debt financing in May 1993, the Company
paid certain investment banking fees of $365,992 in cash and $338,183 in common
stock of 312,467 shares (at $1.08 per share). These amounts were accounted for
as deferred financing costs.
8
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
5. INVESTMENT IN AND ADVANCES TO AFFILIATES
The Company has a 50% investment in a partnership, Cherokee Public Phones
(CPP), which owns pay phones. The Company provides certain management and
recordkeeping services to CPP.
During 1993, the Company invested $80,000 for a 49% investment in a
corporate joint venture in Mexico, Corporaciones Interamericana De Desarrollo
Comunicaciones, S.A. de C.V. (CID), which owns and operates pay phones primarily
in Monterrey, Mexico. During the year ended September 30, 1994, the Company made
additional cash advances of $69,839. Total advances at September 30, 1994, of
$323,168 were converted to the investment in CID. In July 1994, an outside
investor invested $250,000 in CID, which reduced the Company's ownership
interest in CID to 33% as of September 30, 1994.
In March 1995, the Company invested $25,000 to acquire an additional 17%
interest in CID, increasing its ownership percentage to 50% as of September 30,
1995. Additional cash advances of $193,767 made to CID during the year are
included in the investment.
The Company has the following balances with these affiliates at September
30:
1995 1994
-------- --------
CID -- Investment, at equity................................... $179,020 $ 44,659
CPP -- Equity interest in (net advances from) the
partnership.................................................. (14,471) (14,471)
-------- -------
Total................................................ $164,549 $ 30,188
======== =======
Equity in earnings (losses) of affiliates consist of the following:
1995 1994 1993
-------- --------- --------
CID............................................... $(84,406) $(287,052) $(62,713)
CPP............................................... 49,798 60,427 55,765
--------- ---------- ---------
Total................................... $(34,608) $(226,625) $ (6,948)
========= ========== =========
Transactions in the Company's financial statements arising from the above
arrangement with CPP are as follows:
1995 1994 1993
-------- --------- --------
Other revenue -- management fees.................. $ 47,637 $ 50,525 $ 39,559
Distributions from affiliates..................... 49,798 60,427 55,765
6. NOTES PAYABLE
Notes payable to Zero Plus Dialing Inc. (ZPDI) of $659,604 and $1,705,174
at September 30, 1995 and 1994, respectively, are due on demand and bear
interest at prime plus 3% (11.75% at September 30, 1995). These notes represent
advances on trade accounts receivable being collected by ZPDI on behalf of the
Company, under an agreement which expires July 1, 1996, and are collateralized
by accounts receivable of $3,651,571 at September 30, 1995.
9
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Long-term notes payable at September 30 consist of the following:
1995 1994
---------- ----------
Equipment notes:
Notes payable, Comerica Bank:
Revolving capital expenditure facility.................... $ 906,200 $ --
Revolving acquisition facility............................ 1,636,582
Note payable, Paycom, Inc. -- due in monthly installments
through July 1997 of $39,015, including interest at 15.0%,
collateralized by equipment, paid in 1995................. 1,038,157
Note payable, G.E. Capital -- due in monthly installments
through July 1995 of $58,141, including interest at 12.0%,
collateralized by equipment............................... 550,673
Notes payable, Tri Con Capital Corp. due in monthly
installments through May 1995, collateralized by
equipment................................................. 13,363
Other equipment notes payable............................... 131,327
---------- ----------
Total equipment notes............................. 2,674,109 1,602,193
Vehicle notes:
Notes payable, FMCC -- due in monthly installments of
$18,104, including interest ranging from 2.9% to 16.75%,
maturing through November 1998, collateralized by
automobiles............................................... $ 902,726 $ 743,407
Notes payable, GMAC -- due in monthly installments of
$1,210, including interest ranging from 7.0% to 9.0%,
maturing through October 1997, collateralized by
automobiles............................................... 22,630 32,070
Note payable, Lone Oak Bank -- due in monthly installments
through July 1996 of $475, including interest at 10.0%,
collateralized by an automobile........................... 9,521
---------- ----------
Total vehicle notes......................................... 925,356 784,998
Subordinated and other notes:
Subordinated note payable, Banc One Capital Partners
Corporation -- bearing interest at 12% payable quarterly
beginning July 1993, with principal due at maturity in May
1999, net of $649,181 and $830,347, respectively, of
unamortized debt discount assigned to common stock warrant
(see Note 8). Borrowings under this $5 million financing
commitment are unsecured and subject to certain financial
covenants and ratios...................................... 4,350,819 4,169,653
Notes payable insurance companies -- due in monthly
installments through June 1996, including interest,
unsecured................................................. 147,318 133,788
---------- ----------
Total subordinated and other notes payable.................. 4,498,137 4,303,441
---------- ----------
Total............................................. 8,097,602 6,690,632
Less current portion........................................ 1,491,767 1,395,338
---------- ----------
Long-term notes payable, less current portion............... $6,605,835 $5,295,294
========== ==========
Notes payable to Comerica Bank consist of revolving credit loans under
which the Company may borrow up to $5 million under each credit facility ($10
million under the acquisition facility effective November 1, 1995 -- see Note
12), or the collateral base amount, which is equal to $1,200 per telephone. The
notes are collateralized by substantially all assets, subject to the preferences
of other notes payable, and the personal guaranty of the Company's majority
shareholder for $1 million. Outstanding principal on the capital expenditure
facility is payable in 48 equal monthly payments of $19,700 beginning August 1,
1995. Borrowings under the acquisition facility are payable in 36 and 48 equal
monthly payments beginning the month after
10
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
advances are made. Interest is payable monthly at the prime rate plus 1% to 3%.
The interest rate margin is adjustable monthly based on a certain financial
ratio under the terms of the agreement. Interest rates on these notes were 9.75%
at September 30, 1995. Borrowings under the acquisition facility may occur
through January 24, 1997.
Maturities of long-term notes payable at September 30, 1995 (before
reduction for the $649,181 unamortized debt discount), are as follows:
1996............................................................. $1,491,767
1997............................................................. 1,171,235
1998............................................................. 760,757
1999............................................................. 5,323,024
----------
Total.................................................. $8,746,783
==========
7. LEASE COMMITMENTS
The Company is leasing telecommunications equipment under capital leases,
and all of its operating facilities through operating leases. The Company leases
its primary office facility under an operating lease with a related party, as
discussed in Note 10. Rental expense for all operating leases was $174,808,
$116,009 and $111,890 for the years ended September 30, 1995, 1994 and 1993,
respectively. Future minimum rental payments required under these noncancelable
leases at September 30, 1995, are as follows:
CAPITAL OPERATING
---------- ---------
Year ending September 30:
1996............................................... $1,305,115 $ 135,361
1997............................................... 841,827 64,172
1998............................................... 0 35,696
1999............................................... 0 4,180
---------- --------
2,146,942 $ 239,409
========
Amount representing interest......................... 271,968
----------
Present value of minimum lease payments.............. 1,874,974
Less current portion................................. 1,094,381
----------
Capital lease obligations, less current portion...... $ 780,593
==========
8. CAPITAL STOCK
DIVIDEND RESTRICTIONS -- Certain note payable agreements and preferred
stock instruments restrict the Company's ability to pay cash dividends on its
common stock.
CONVERTIBLE REDEEMABLE PREFERRED STOCK -- The Company has authorized and
issued 240,000 shares of nonvoting, cumulative convertible redeemable preferred
stock ($1.00 par value) for $2,400,000. Each share of preferred stock is
convertible into approximately 9.24 shares of common stock, subject to
adjustments in certain events, prior to December 31, 2000. The preferred stock
will be automatically converted in the event of an initial public offering.
Holders of the preferred stock are entitled to receive cumulative cash
dividends payable quarterly, at an annual rate of $.60 per share commencing
March 31, 1993, through January 1, 2003, and at an annual rate of $1.10 per
share commencing April 1, 2003. In liquidation, the preferred stock is entitled
to $10 per share.
11
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Beginning on December 30, 2000, or at any time thereafter, the Company may,
at its option, redeem any number of outstanding shares of preferred stock at $10
per share, plus all accrued and unpaid dividends. At any time after December 31,
2002, and prior to December 31, 2010, holders of the preferred stock have the
option to sell, and the Company has the obligation to purchase, any number of
outstanding shares at the then-determined fair market value.
COMMON STOCK WARRANTS -- In connection with the subordinated debt financing
in May 1993, the Company issued warrants exercisable for 1,562,338 shares of
common stock at $1.08206 per share through May 1999. Upon certain occurrences or
after May 1998, the warrant holder may require the Company to redeem the
warrants at a specified price, which generally is a multiple of defined cash
flow. A fair value of $1,087,000 was assigned to the warrants when issued and is
accounted for as debt issue discount (see Note 6).
STOCK OPTIONS -- The stock option plan provides for granting incentive
stock options to key employees. Incentive stock options must have an exercise
price of at least the fair market value on the date of grant. Options may be
exercised in whole or in installments over ten years after the grant. All
options would become exercisable upon a public offering. The total aggregate
number of the Company's common stock that may be granted under this plan cannot
exceed 12.7% of the common stock, determined on a fully diluted basis, not to
exceed 1,471,000 shares. The Company has granted the following options which
vest over three years:
OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
----------- --------------
Granted:
December 1992............................................. 376,344 $ 1.09
March 1994................................................ 108,333 $ 1.09
Forfeited:
February 1994............................................. (26,882) $ 1.09
Exercised:
December 1994............................................. (8,000) $ 1.09
-------
Total options outstanding at September 30, 1995............. 449,795
=======
Options exercisable at September 30, 1995................... 261,087 $ 1.09
=======
A summary of the Company's common shares reserved for future conversions or
issuances is as follows:
Convertible preferred stock............................................... 2,218,000
Common stock warrants..................................................... 1,562,338
Common stock options granted.............................................. 449,795
---------
Total shares contingently issuable........................................ 4,230,133
Common stock options available for future grants.......................... 986,323
---------
Total common shares reserved.................................... 5,216,456
=========
12
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
9. INCOME TAXES
Deferred income taxes under SFAS No. 109 represent the net tax effects of
(a) temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes
and (b) tax credit carryforwards. The tax effects of significant items
comprising the Company's net deferred tax benefits (liability) as of September
30, 1995 and 1994, are as follows:
1995 1994
--------- ---------
Allowance for doubtful accounts, not currently deductible.... $ 90,033 $ 86,868
Accrued expenses, not currently deductible................... 18,684 17,108
All other.................................................... 8,742
--------- ---------
Total current asset.......................................... 108,717 112,718
Accelerated depreciation and amortization for tax purposes... (348,391) (253,457)
Alternative minimum tax (AMT) credit carryforwards........... 6,032 340,135
Other........................................................ 7,026
--------- ---------
Total noncurrent asset (liability)........................... (342,359) 93,704
--------- ---------
Net deferred tax asset (liability)................. $(233,642) $ 206,422
========= =========
Components of the provision for income taxes are as follows:
1995 1994 1993
---------- -------- --------
Current........................................... $ 959,076 $423,946 $454,239
Deferred.......................................... 440,064 88,456 (35,731)
---------- -------- --------
$1,399,140 $512,402 $418,508
========== ======== ========
A reconciliation between income taxes computed at the federal statutory
rate and income tax expense is shown below:
1995 1994 1993
---------- -------- --------
Income taxes computed at federal statutory rate... $1,230,661 $379,213 $365,034
State income taxes................................ 103,210 34,000 33,911
Expenses not deductible for tax purposes.......... 13,585 5,578 5,920
Nondeductible loss of foreign affiliate........... 28,590 67,642
Other............................................. 23,094 25,969 13,643
---------- -------- --------
Total................................... $1,399,140 $512,402 $418,508
========== ======== ========
10. RELATED PARTY TRANSACTIONS
The Company leases its primary office facilities from a shareholder on a
monthly basis. The Company also conducts certain other transactions with this
shareholder and affiliated corporations which are 100%
13
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
owned by the shareholder. Transactions and balances in the Company's financial
statements arising from the above arrangements are as follows:
1995 1994 1993
------- ------- -------
During the period:
Rent expense........................................ $49,200 $43,200 $43,200
Airplane charter expense............................ 96,470
Management and consulting fees expense.............. 3,750
Other operating expenses............................ 32,483 37,717
Note receivable from an employee at September 30, due
on demand (included in other current assets)........ 2,193 4,944
Accounts receivable from employees.................... 12,428 18,039 23,558
Trade accounts receivable include $385,146 at September 30, 1995, due from
an operator service company, which is a co-owner in the Mexican joint venture
(Note 5) and is a significant lender to the Company's majority shareholder, who
has pledged approximately 20% of his common stock as collateral on the related
debt.
11. CONTINGENCIES
The Company is a defendant in various legal proceedings arising in the
ordinary course of business. Although the results of these matters cannot be
predicted with certainty, management believes the outcome will not have a
material adverse effect on the Company's financial position.
12. SUBSEQUENT TELEPHONE PURCHASE AND FINANCING
On November 1, 1995, the Company purchased approximately 1,600 telephones
and related assets and agreements for approximately $3.5 million. The purchase
was financed through the Company's revolving acquisition facility, which was
increased from $5 million to $10 million effective November 1, 1995.
* * * * * *