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STATE OF MARYLAND APPLICATION FOR OPERATING AUTHORITY Attachment E FINANCIAL INFORMATION The Company Gateway Communications Services, Inc. (hereinafter, the “Company” or “we,” “us” or “our”) was incorporated in Delaware in December 2005. On January 9, 2006, the Company issued a private placement offering to raise funds for the company. The details of the offering are below. The Offering Gateway Communications Services, Inc, a telephone company in organization, is offering between 1,000,000 and 4,000,000 shares of common stock. We will not complete this offering unless at least 1,000,000 shares of common stock are sold. The minimum subscription for each investor is 10,000 shares. Common stock offered . . . . . . . . . . . . . Minimum total subscriptions . . . . . . . . . Minimum subscription per investor . . . . Offering price . . . . . . . . . . . . . . . . . . . . . Use of proceeds . . . . . . . . . . . . . . . . . . . . 4,000,000 shares 1,000,000 shares 10,000 shares $0.75 per share To pay up to an estimated $500,000 of organizational and pre-operations expenses and to provide working capital to support customer marketing and operations. Unless and until we receive and accept subscriptions for 1,000,000 shares of common stock, and receive regulatory approvals, all subscription proceeds will be held in an interest-bearing escrow account for the benefit of the investors. We expect to complete the sale of the common stock on or about March 31, 2006. We may elect to complete the sale earlier if we receive subscriptions for at least 1,000,000 shares. The following are pro forma financials at $750,000 and $3,000,000 investments. E-1 SELECTED FINANCIAL DATA Gateway Communications Services, Inc. ($750,000 Minimum Investment) Pro Forma Balance Sheet December 31, 2005 Assets Current Assets Cash and Cash Equivalents Accounts Receivable Allowance for Uncollectible Receivables Net Receivables Deferred Tax Asset Total Current Assets Fixed Assets Computer Software Network & Office Equipment Furniture, Fixtures and Leaseholds Leasehold Improvements Total Gross Fixed Assets Accumulated Depreciation Total Net Fixed Assets Other Assets Total Assets Liabilities and Stockholder's Equity Current Liabilities Accounts Payable Accrued Taxes 2006 2007 2008 2009 2010 $482,750 $253,303 $252,425 $519,740 $1,653,313 $2,780,193 333,151 1,319,279 2,841,404 4,726,655 6,839,361 (283,171) (1,121,358) (2,415,131) (4,017,553) (5,813,307) -------------------------------------------------------------------------------------------------------------------------------------------------------49,980 197,921 426,273 709,102 1,026,055 227,688 372,661 195,808 -------------------------------------------------------------------------------------------------------------------------------------------------------482,750 530,971 823,006 1,141,820 2,362,415 3,806,248 15,000 15,000 15,000 15,000 15,000 15,000 150,000 650,000 650,000 650,000 25,000 25,000 25,000 25,000 25,000 25,000 10,000 10,000 10,000 10,000 10,000 10,000 -------------------------------------------------------------------------------------------------------------------------------------------------------50,000 50,000 200,000 700,000 700,000 700,000 (10,000) (35,000) (125,000) (265,000) (405,000) -------------------------------------------------------------------------------------------------------------------------------------------------------50,000 40,000 165,000 575,000 435,000 295,000 50,000 50,000 50,000 50,000 50,000 50,000 -------------------------------------------------------------------------------------------------------------------------------------------------------$582,750 $620,971 $1,038,006 $1,766,820 $2,847,415 $4,151,248 ======================================================================================= Total Current Liabilities $379,753 $1,014,247 $1,477,781 $1,793,530 $1,993,332 188,454 516,994 -------------------------------------------------------------------------------------------------------------------------------------------------------379,753 1,014,247 1,477,781 1,981,984 2,510,326 Total Liabilities -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -----------------379,753 1,014,247 1,477,781 1,981,984 2,510,326 Stockholder's Equity Capital Additional paid-in capital Retained Earnings (Accumulated Deficit) Total Stockholder's Equity Total Liabilities and Stockholder's Equity $ 73,750 73,750 73,750 73,750 73,750 73,750 740,000 740,000 740,000 740,000 740,000 740,000 (231,000) (572,532) (789,991) (524,711) 51,681 827,172 -------------------------------------------------------------------------------------------------------------------------------------------------------$582,750 $241,218 $23,759 $289,039 $865,431 $1,640,922 -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -----------------$582,750 $620,971 $1,038,006 $1,766,820 $2,847,415 $4,151,248 ======================================================================================= See accompanying Summary of Significant Pro Forma Assumptions. E-2 Gateway Communications Services, Inc. ($750,000 Minimum Investment) Pro Forma Income Statement For the Year Ending December 31, 2005 Revenue Recurring Revenue Non Recurring Revenue Total Revenue Cost of Services Sold Gross Margin Operating Expenses Billing and Collections Credit Verification Bad Debt Expense Marketing Sales Employee Costs Facilities Professional Fees G&A Total Operating Expenses EBITDA Other Income and Expenses Depreciation Expense Total Other Expenses Taxes Net Income (Loss) 2006 2007 2008 2009 2010 $ $3,935,036 $11,647,707 $17,978,679 $22,267,760 $24,954,355 62,778 185,824 286,826 355,253 398,114 -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -----------------$ $3,997,814 $11,833,531 $18,265,506 $22,623,013 $25,352,469 2,398,689 7,100,119 10,959,303 13,573,808 15,211,482 -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -----------------$ $1,599,126 $4,733,412 $7,306,202 $9,049,205 $10,140,988 212,751 629,744 972,034 1,203,927 1,349,180 6,340 18,767 28,967 35,877 40,206 283,171 838,187 1,293,773 1,602,422 1,795,753 35,000 159,913 473,341 730,620 904,921 1,014,099 56,000 239,869 710,012 1,095,930 1,357,381 1,521,148 25,000 1,080,000 1,946,700 2,005,101 2,065,254 2,127,212 20,000 56,000 98,000 98,000 98,000 98,000 55,000 21,898 64,817 100,048 123,916 138,866 40,000 98,404 291,276 449,596 556,853 624,037 -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -----------------$231,000 $2,158,346 $5,070,844 $6,774,069 $7,948,551 $8,708,502 (231,000) (559,220) (337,432) 532,133 1,100,654 1,432,485 10,000 25,000 90,000 140,000 140,000 -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -----------------10,000 25,000 90,000 140,000 140,000 -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -----------------(227,688) (144,973) 176,853 384,262 516,994 -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -----------------($231,000) ($341,532) ($217,459) $265,280 $576,392 $775,491 =============== =============== =============== =============== =============== ========== See accompanying Summary of Significant Pro Forma Assumptions. E-3 Gateway Communications Services, Inc. ($750,000 Minimum Investment) Pro Forma Statement of Cash Flows For the Year Ending December 31, 2005 Operating Activities Net Income (Loss) Non-Cash Expense (Increase) Decrease in Accounts Receivable (Decrease) Increase in Payables Net Cash From (Used In) Operating Activities Investing Activities (Increase) Decrease in Other Assets Purchase of Fixed Assets Net Cash From (Used In) Investing Activities Financing Activities Stockholder Capital Contributions Net Cash From (Used In) Financing Activities Net cash increase (decrease) in period Cash at beginning of period Cash at end of period $ 2006 $ 2007 $ 2010 (341,532) 65,483 (333,151) 379,753 -----------------(229,447) (217,459) 718,215 (986,128) 634,494 -----------------149,123 265,280 1,560,626 (1,522,125) 463,534 -----------------767,315 576,392 2,126,683 (1,885,251) 315,749 -----------------1,133,573 775,491 2,452,747 (2,112,706) 199,802 -----------------1,126,880 (50,000) (50,000) -----------------(100,000) ------------------ (150,000) -----------------(150,000) (500,000) -----------------(500,000) ------------------ ------------------ 813,750 -----------------813,750 -----------------482,750 -----------------$ 482,750 ========== ----------------------------------(229,447) 482,750 -----------------$ 253,303 ========== ----------------------------------(877) 253,303 -----------------$ 252,425 ========== ----------------------------------267,315 252,425 -----------------$ 519,740 ========== ----------------------------------1,133,573 519,740 -----------------$ 1,653,313 ========== ----------------------------------1,126,880 1,653,313 -----------------$ 2,780,193 ========== E-4 $ 2009 (231,000) -----------------(231,000) See accompanying Summary of Significant Pro Forma Assumptions. $ 2008 $ Gateway Communications Services, Inc. Summary of Significant Pro Forma Assumptions Years Ending December 31, 2005 through 2010 This financial pro forma represents, the best of management’s knowledge and belief, The Company’s expected financial position, results of operations and cash flows for the pro forma period. Accordingly, the pro forma reflects the judgment of the expected conditions and its expected course of action. The assumptions disclosed herein are those that management believes are significant to the forecast. There will usually be differences between pro forma and actual results because events and circumstances frequently do not occur as expected and those differences may be material. Revenue. Based on a market study of demand for the Company’s services, sales are forecasted to occur at 55 lines per day in both 2006 and 2007, 40 lines per day in 2008, 30 lines per day in 2009, and 20 lines per day in 2010. The Average Revenue per Line (ARPL) is anticipated to be $47.05 for the years 2006 through 2010. Average churn is anticipated to be 4% for 2006 through 2010. Non recurring revenue, which primarily represents repair, installation, move, add change and restoral charges, is estimated at 1.6% of recurring revenue. Cost of Services Sold. Cost of services sold is estimated at 60% of revenue. Employee Costs. The Company estimates having 20 employees in 2006, and 35 employees in 2007 through 2010. Average monthly salary per employee is estimated to be $4,500 in 2006. Employee costs are anticipated to increase 3% each year, beginning in 2007 through 2010. Bad Debt Expense. Bad debt expense is estimated at 7% of total revenue. Billing and Collections. Billing and collections expense is estimated at 5.3% of total revenue. Fixed Assets. Forecasted additions to fixed assets, $50,000 in 2005 comprises principally of furniture and equipment, software and leasehold improvements. In 2007, $150,000 comprises the purchase of unified messaging and voice mail equipment. In 2008, $500,000 comprises the purchase of a switch to become a facilities-based provider. Depreciation Expense. Fixed assets are estimated to depreciate over five years. Income Taxes. The provision for income taxes is computed using a 40% tax rate. E-5 SELECTED FINANCIAL DATA Gateway Communications Services, Inc. ($3,000,000 Maximum Investment) Pro Forma Balance Sheet December 31, 2005 Assets Current Assets Cash and Cash Equivalents Accounts Receivable Allowance for Uncollectible Receivables Net Receivables Deferred Tax Asset Total Current Assets Fixed Assets Computer Software Network & Office Equipment Furniture, Fixtures and Leaseholds Leasehold Improvements Total Gross Fixed Assets Accumulated Depreciation Total Net Fixed Assets Other Assets Total Assets Liabilities and Stockholder's Equity Current Liabilities Accounts Payable Accrued Taxes 2006 2007 2008 2009 2010 $2,563,750 $3,169,637 $4,873,652 $6,399,504 $8,306,398 $10,149,640 1,035,820 2,696,510 4,866,216 7,373,143 10,082,659 (880,425) (2,291,974) (4,136,176) (6,267,010) (8,570,038) -------------------------------------------------------------------------------------------------------------------------------------------------------155,396 404,536 730,039 1,106,134 1,512,620 123,799 -------------------------------------------------------------------------------------------------------------------------------------------------------2,563,750 3,448,831 5,278,188 7,129,543 9,412,532 11,662,260 15,000 15,000 15,000 15,000 15,000 15,000 150,000 650,000 650,000 650,000 25,000 25,000 25,000 25,000 25,000 25,000 10,000 10,000 10,000 10,000 10,000 10,000 -------------------------------------------------------------------------------------------------------------------------------------------------------50,000 50,000 200,000 700,000 700,000 700,000 (10,000) (35,000) (125,000) (265,000) (405,000) -------------------------------------------------------------------------------------------------------------------------------------------------------50,000 40,000 165,000 575,000 435,000 295,000 50,000 50,000 50,000 50,000 50,000 50,000 -------------------------------------------------------------------------------------------------------------------------------------------------------$2,663,750 $3,538,831 $5,493,188 $7,754,543 $9,897,532 $12,007,260 ======================================================================================= Total Current Liabilities $1,060,778 $1,524,031 $1,967,174 $2,263,347 $2,444,357 522,163 936,150 1,113,186 1,216,762 -------------------------------------------------------------------------------------------------------------------------------------------------------1,060,778 2,046,194 2,903,324 3,376,534 3,661,119 Total Liabilities -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -----------------1,060,778 2,046,194 2,903,324 3,376,534 3,661,119 Stockholder's Equity Capital Additional paid-in capital Retained Earnings (Accumulated Deficit) Total Stockholder's Equity Total Liabilities and Stockholder's Equity $ 103,750 103,750 103,750 103,750 103,750 103,750 2,960,000 2,960,000 2,960,000 2,960,000 2,960,000 2,960,000 (400,000) (585,698) 383,244 1,787,469 3,457,248 5,282,391 -------------------------------------------------------------------------------------------------------------------------------------------------------$2,663,750 $2,478,052 $3,446,994 $4,851,219 $6,520,998 $8,346,141 -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -----------------$2,663,750 $3,538,831 $5,493,188 $7,754,543 $9,897,532 $12,007,260 ======================================================================================= See accompanying Summary of Significant Pro Forma Assumptions. E-6 Gateway Communications Services, Inc. ($3,000,000 Maximum Investment) Pro Forma Income Statement For the Year Ending December 31, 2005 Revenue Recurring Revenue Non Recurring Revenue Total Revenue Cost of Services Sold Gross Margin Operating Expenses Billing and Collections Credit Verification Bad Debt Expense Marketing Sales Customer Acquisition Costs Employee Costs Facilities Professional Fees G&A Total Operating Expenses EBITDA Other Income and Expenses Depreciation Expense Total Other Expenses Taxes Net Income (Loss) 2006 2007 2008 2009 2010 $ 12,234,656 19,615,342 25,627,609 29,610,733 32,003,609 195,188 312,937 408,855 472,400 510,576 -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -----------------$ $12,429,844 $19,928,279 $26,036,464 $30,083,133 $32,514,185 7,457,906 11,956,968 15,621,878 18,049,880 19,508,511 -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -----------------$ $4,971,938 $7,971,312 $10,414,586 $12,033,253 $13,005,674 661,478 1,060,522 1,385,580 1,600,932 1,730,305 19,712 31,604 41,291 47,708 51,564 880,425 1,411,550 1,844,202 2,130,833 2,303,029 35,000 159,913 473,341 730,620 904,921 1,014,099 225,000 239,869 710,012 1,095,930 1,357,381 1,521,148 1,800,000 25,000 1,080,000 1,946,700 2,005,101 2,065,254 2,127,212 20,000 56,000 98,000 98,000 98,000 98,000 55,000 68,084 109,156 142,613 164,778 178,094 40,000 305,954 490,524 640,874 740,480 800,319 -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -----------------$400,000 $5,271,434 $6,331,408 $7,984,211 $9,110,287 $9,823,769 (400,000) (299,496) 1,639,903 2,430,374 2,922,966 3,181,905 10,000 25,000 90,000 140,000 140,000 -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -----------------10,000 25,000 90,000 140,000 140,000 -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -----------------(123,799) 645,961 936,150 1,113,186 1,216,762 -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -----------------($400,000) ($185,698) $968,942 $1,404,225 $1,669,779 $1,825,143 =============== =============== =============== =============== =============== ========== See accompanying Summary of Significant Pro Forma Assumptions. E-7 Gateway Communications Services, Inc. ($3,000,000 Maximum Investment) Pro Forma Statement of Cash Flows For the Year Ending December 31, 2005 Operating Activities Net Income (Loss) Non-Cash Expense (Increase) Decrease in Accounts Receivable (Decrease) Increase in Payables Net Cash From (Used In) Operating Activities Investing Activities (Increase) Decrease in Other Assets Purchase of Fixed Assets Net Cash From (Used In) Investing Activities Financing Activities Stockholder Capital Contributions Net Cash From (Used In) Financing Activities Net cash increase (decrease) in period Cash at beginning of period Cash at end of period $ 2006 $ 2007 2008 2009 (400,000) -----------------(400,000) (185,698) 766,627 (1,035,820) 1,060,778 -----------------605,887 968,942 2,082,510 (1,660,690) 463,253 -----------------1,854,015 $ 1,404,225 2,870,353 (2,169,705) 443,143 -----------------2,025,852 $ 1,669,779 3,384,019 (2,506,928) 296,173 -----------------1,906,894 1,825,143 3,659,791 (2,709,515) 181,009 -------------------1,843,242 (50,000) (50,000) -----------------(100,000) ------------------ (150,000) -----------------(150,000) (500,000) -----------------(500,000) ------------------ -------------------- 3,063,750 -----------------3,063,750 -----------------2,563,750 -----------------$ 2,563,750 ========== ----------------------------------605,887 2,563,750 -----------------$ 3,169,637 ========== ----------------------------------1,704,015 3,169,637 -----------------$ 4,873,652 ========== ----------------------------------1,525,852 4,873,652 -----------------$ 6,399,504 ========== ----------------------------------1,906,894 6,399,504 -----------------$ 8,306,398 ========== --------------------------------------1,843,242 8,306,398 -------------------$ 10,149,640 ============ See accompanying Summary of Significant Pro Forma Assumptions. E-8 $ 2010 $ Gateway Communications Services, Inc. Summary of Significant Pro Forma Assumptions Years Ending December 31, 2005 through 2010 This financial pro forma represents, the best of management’s knowledge and belief, The Company’s expected financial position, results of operations and cash flows for the pro forma period. Accordingly, the pro forma reflects the judgment of the expected conditions and its expected course of action. The assumptions disclosed herein are those that management believes are significant to the forecast. There will usually be differences between pro forma and actual results because events and circumstances frequently do not occur as expected and those differences may be material. Revenue. Based on a market study of demand for the Company’s services, sales are forecasted to occur at 55 lines per day in both 2006 and 2007, 40 lines per day in 2008, 30 lines per day in 2009, and 20 lines per day in 2010. The Average Revenue per Line (ARPL) is anticipated to be $47.05 for the years 2006 through 2010. Average churn is anticipated to be 4% for 2006 through 2010. Non recurring revenue, which primarily represents repair, installation, move, add change and restoral charges, is estimated at 1.6% of recurring revenue. Cost of Services Sold. Cost of services sold is estimated at 60% of revenue. Customer Acquisition Costs. The Company estimates that it will purchase 15,000 lines from various telecommunications providers at an average rate of $120 per line. Employee Costs. The Company estimates having 20 employees in 2006, and 35 employees in 2007 through 2010. Average monthly salary per employee is estimated to be $4,500 in 2006. Employee costs are anticipated to increase 3% each year, beginning in 2007 through 2010. Bad Debt Expense. Bad debt expense is estimated at 7% of total revenue. Billing and Collections. Billing and collections expense is estimated at 5.3% of total revenue. Fixed Assets. Forecasted additions to fixed assets, $50,000 in 2005 comprises principally of furniture and equipment, software and leasehold improvements. In 2007, $150,000 comprises the purchase of unified messaging and voice mail equipment. In 2008, $500,000 comprises the purchase of a switch to become a facilities-based provider. Depreciation Expense. Fixed assets are estimated to depreciate over five years. Income Taxes. The provision for income taxes is computed using a 40% tax rate. E-9