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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[FEE REQUIRED]
For the Fiscal Year ended: MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period from ___________ to ___________
Commission File No. 0-23172
NETWORK LONG DISTANCE, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 72-1122018
(State or Other Jurisdiction of (I.R.S. Employer Identi-
Incorporation or Organization) fication Number)
525 FLORIDA STREET
BATON ROUGE, LOUISIANA 70801
----------------------------------------
(Address of Principal Executive Offices,
Including Zip Code)
Registrant's telephone number, including area code: (504) 343-3125
Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the Act: YES
Common Stock, .0001 Par Value Per Share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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As of April 24, 1996, 3,935,183 shares of common stock were outstanding. The
aggregate market value of the common stock of Network Long Distance, Inc. (the
"Company") held by nonaffiliates as of April 24, 1996 was $11,833,569.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Documents incorporated by reference: NONE.
This Form 10-K consists of 46 pages. Exhibits are indexed at page 26.
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PART I
ITEM 1. BUSINESS.
GENERAL
Network Long Distance, Inc. ("the Company") is a provider of long distance
and other telecommunication services to end-users, independent agents, and other
long distance companies, with a primary concentration on small business and
commercial customers.
The Company is recognized as a pioneer in the U.S. telecommunications
industry, as its predecessor company was established in, and has been in
continuous operation since 1979, a full five years prior to the court-ordered
break-up of the AT&T/Bell System an event generally regarded as the "birth" of
the long distance resale industry in the U.S.
Over the past 3 years, the Company has expanded substantially through
mergers, acquisitions, and its own sales programs in its efforts to become a
nationwide, publicly-traded telecommunications provider in the U.S. The Company
transmits long distance telephone calls through and over various types of
transmission circuits leased from other telecommunications carriers at fixed or
variable rates. Calls may be routed through the Company's switching center,
which selects the least expensive among the various available transmission
alternatives to complete the call. Calls can also be completed by various
underlying carriers. The Company provides billing, customer service and other
features relative to the call. Profits are based on the Company's ability to
charge rates in excess of the Company's cost of transmitting calls over the
transmission lines selected by the switching equipment or in excess of
underlying carrier costs.
The Company's main services include MTS (Message Telecommunication
Service), which is also referred to as direct distance dialing (DDD) or 1+
dialing. Other long distance products include WATS, private line, travel
(calling cards), and 800 services for incoming toll-free calls (the called party
pays for the call). The following table shows the revenues and billable minutes
for each of the last three fiscal years:
FOR THE YEAR ENDED MARCH 31,
--------------------------------------------------------
1996 1995 1994
---- ---- ----
Revenues $30,810,016 $24,216,948 $10,621,705
BILLABLE MINUTES
(IN MILLIONS) 202.7 152.2 60.6
The long distance industry is dominated by the four largest long distance
providers. AT&T, MCI, Sprint Communications, and WorldCom, each with revenues
over $1 billion, comprise the first tier in this industry. The second level is
comprised of companies under $1 billion but in excess of $100 million in annual
revenues. The Company's goal is to establish itself as a second-level long
distance telecommunications company. The Company, will attempt to achieve this
goal through its planned acquisition of other long distance companies, increased
sales utilizing the Company's agent and retail distribution channels and the
addition of new services for its customers.
HISTORY
The Company, a Delaware corporation, was formed on December 3, 1987, under
the name Harmoney Street Capital, Inc. and was primarily in the business of
seeking business opportunities and a merger candidate. To this end, on December
19, 1990, the Company acquired 100% of the outstanding shares of M.M. Ross,
Inc., a private Louisiana corporation formed in 1979 by the
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Company's President, Michael M. Ross, and its Chief Operating Officer, Marc
I. Becker, which began providing long distance service five years prior to
the divestiture by AT&T of the Bell operating companies. Since 1990, the
Company has continued to expand its services and customer base and is now
exclusively a long distance telecommunications company. Accordingly, in
August, 1991, the Company changed its name to Network Long Distance, Inc. to
more accurately reflect its operations.
STRATEGIC APPROACH
The Company's objective is to reach a volume of revenues that would enable
it to be classified as a second-level long distance company with annual revenues
in excess of $100 million. In order to reach this level, the Company will
attempt to increase revenue, improve cash flows and increase earnings by
implementing the following business strategies:
NATIONWIDE ORIGINATION
The Company provides nationwide origination of long distance services.
This enables the Company's marketing divisions to solicit customers in any of
the 48 contiguous United States, thereby enabling expansion to occur on a
national, rather than regional basis.
BUILD CALL VOLUME
In order to reach certain economies of scale, the Company will continue to
focus on building minutes of long distance traffic by region, to defined levels,
prior to establishing an independent switching system for that region. This
strategy allows the Company to build call volumes within geographic areas
without incurring large capital expenditures for switching equipment until the
call volumes meet an acceptable predefined level. Once the Company has
established the call volumes to an acceptable level, the Company can reduce its
cost of transmission by establishing a switching system.
The management of the Company is experienced at traffic engineering,
utilized to evaluate the optimum network configuration which will reduce the
Company's costs. The Company's customers will receive the benefits of a network
configuration that provides for lower cost transmission in markets where call
volume is high and supported by the Company's switching systems. In addition,
due to the Company's large volume of traffic, the Company has negotiated long
distance facility arrangements that allow it to provide a low cost per minute in
the other areas in which it operates.
CONSOLIDATION TO SUPPORT MARKETING
The Company has a strategic plan for acquiring small and medium-size long
distance telephone companies as a method of achieving controlled growth. The
size of the acquisition targets is a key concept in the Company's acquisition
strategy. Combining small and medium-size long distance companies creates
large gains in market share and immediate operating improvements through
economies of scale. The Company's plan is to use the consolidation of other
long distance companies operating throughout the United States into a platform
to serve the sales made by its marketing divisions.
PRINCIPAL DIVISIONS
The Company has three divisions within its long distance telecommunications
marketing program; the agent, retail, and reseller/wholesale divisions. The
Company primarily focuses its efforts and expansion philosophy on the agent and
retail divisions, where the company believes it can realize greater profit
margins and has better control of the customer base.
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AGENT
Master agents sign non-exclusive contracts with the Company to represent
the Company and sell its long distance services to end-users. The agents are
paid a variable commission on each service sold. While a large number of
companies compete in the agent market, the Company believes master agents are
attracted to the Company due to the high quality of its transmission services,
commission plans, products and support of its services.
The Company provides turn-key long distance service for master agents.
These services include everything necessary for set up of end-user accounts,
transmission, billing, customer support, credit and collection and all other
services. Master agents build their own network of agents.
RETAIL
The Company's retail division currently concentrates on commercial
customers, which use long distance services more frequently on weekdays during
normal business hours, as compared to residential users who tend to place calls
more frequently at night and on weekends when rates are lower. The Company
believes that commercial customers tend to use long distance services more often
and generate more billable minutes than residential users. The Company
primarily targets commercial customers which incur monthly phone charges of
approximately $200 to $10,000.
The Company provides long distance services to retail customers who utilize
the Company's services throughout the United States. The Company offers a
variety of value-added features and options designed to attract the interest of
long distance customers. For example, the Company offers unique billing
reports, which display the calls made in number called order; an inbound "800",
which service permits the customer to be billed for all incoming long distance
calls and a travel card service, which permits customers to utilize the
Company's network from locations outside of their own service areas. The
Company primarily charges its customers on the basis of minutes of usage at
rates that vary with the time of day of call.
SWITCHLESS RESELLER/WHOLESALE
As providers of long distance services to their end-user retail customers,
switchless resellers constantly strive to reduce their variable costs of access
to long distance transmission facilities and services. Switchless resellers'
margin is the difference between the variable costs of long distance services
utilized by switchless resellers and the price at which they sell such services.
Historically, first-level interexchange carriers have provided the bulk of
transmission facilities and services to switchless resellers. However, in
recent years, such interexchange carriers have provided less favorable pricing
to switchless resellers and have not offered all of the support services
necessary, forcing them to look to other providers. While a large number of
companies compete in the switchless reseller market, the Company believes
resellers are attracted to the Company because of the range of transmission,
billing and other support services available from the Company.
The Company has emphasized this division in the past to increase its
overall billable minutes and to help achieve its goal of providing nationwide
origination of telecommunication services. During fiscal 1996, the Company made
the strategic decision to de-emphasize the reseller/wholesale division. The
Company is now utilizing the critical mass developed through this division to
expand its retail and agent programs on a national level.
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RATES AND CHARGES
Management believes that its rates generally will remain competitive with
rates charged by long distance carriers such as AT&T, MCI and Sprint and most
other common carriers. The savings realized by customers of the Company and
other long distance carriers may decrease in the future if and to the extent
AT&T further reduces its rates. See "Competition" and "Regulation."
The Company charges its customers on the basis of minutes or partial
minutes of use at rates which may vary with the distance, duration, time of day
of the call and the type of call. Rates charged for a call are not affected by
the particular transmission facilities selected by the Company's switching
system for call transmission but are affected by the type of call a user may
select. The Company performs its own billing functions for most of its customer
base, and, also uses an independent billing company to invoice certain customers
in conjunction with their local telephone bills.
FACILITIES
The Company leases digital, fiber optic transmission facilities at either
fixed rates or at rates which vary according to usage. The Company leases these
facilities at rates which are less than those charged to its customers for
connecting calls through these facilities. The continued availability of cost-
effective digital, fiber optic transmission facilities in certain of the
Company's service origination areas, as well as proper planning of the
utilization of leased transmission facilities, is critical to the Company's
ability to provide its services on a profitable basis.
Fixed cost leased facilities include intercity private line circuits
provided by other facilities based bulk carriers. Bulk carriers are also known
as "carrier's carriers" and provide large bundled transmission capacity. These
circuits represent point-to-point bulk circuits which are broken down by the
Company into retail subscriber capacity. For routes that carry high volumes of
traffic, the Company's fixed cost facilities normally cost the Company less per
minute of usage than usage sensitive facilities. Accordingly, the Company,
through use of its computerized network switching equipment and its contract
negotiations, endeavors to maximize usage of fixed cost leased facilities and
negotiated rates from its underlying carriers.
The Company contracts with other various underlying telecommunication
carriers to provide origination and terminating transmission of calls not
switched by the Company. Currently, the Company provides direct billing to end
users, billing tapes and other enhancements. The Company is dependent upon the
underlying carriers for competitive contract arrangements.
NETWORK SWITCHING
The Company's computerized network switching equipment, to which some long
distance calls are directed, routes the calls to their destinations over leased
transmission circuits then available at the least cost. In addition to
networking, the Company's switching equipment verifies the customer's
preassigned personal authorization code or the telephone number called from,
records billing data, tests transmission circuits, and monitors system quality
and performance.
The Company believes that digital switches are generally superior to all
other currently available types of switches. Digital switches are able to
interface with digital transmission facilities leased by the Company, and are
able to handle multiple transmission channels on a single line, thereby reducing
transmission costs. A digital switch also provides superior quality and ease of
maintenance.
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The Company's current switching equipment is manufactured by DSC
Communications Corporation. DSC Communications Corporation is currently the
sole supplier of the Company's switching equipment; however, the Company
believes other sources are available for digital switching equipment at
comparable prices and quality and may elect to use one or more of these vendors
in the future.
SALES AND MARKETING
The Company utilizes an in-house sales staff which consists of a sales
manager and account executives. This staff is responsible for developing and
maintaining all of the Company's marketing programs. The sales staff utilizes
various marketing techniques to solicit customers and continually monitors
existing customer accounts to insure satisfaction with the Company's services.
In addition, the Company supplements sales efforts of its independent master
agents.
The Company anticipates hiring additional in-house sales representatives,
expanding its participation in national, regional and local trade shows and
expanding its line of public information and advertising materials.
MERGERS AND ACQUISITIONS PROGRAM
It is estimated that there are currently more than 400 small and medium-
sized long distance companies operating throughout the United States which are
similar to the Company in terms of operating revenues and customer base. The
Company will evaluate several of these companies with a view to their
acquisition or purchase of their customer base. The addition of these entities
will enable the Company to increase its operating efficiency without a
significant increase in overhead by realizing economies of scale.
The Company believes that the larger long distance companies such as AT&T,
MCI, Sprint, and WorldCom are no longer actively pursuing acquisitions of small
and medium-sized long distance companies because it adds only marginally to
their market size and economies of scale. This provides an opportunity for the
Company to acquire these small and medium-sized long distance companies without
competition from the larger long distance companies.
The Company has completed the acquisition of customer bases primarily
located in Texas, New Jersey, Louisiana, New York, Nevada, Oklahoma,
California, Utah, and Illinois. The Company's goal is to establish itself as a
second-tier long distance telecommunications company, and believes through
acquisitions and the resulting economies of scale it will be able to achieve
this goal.
COMPETITION
The Company competes with numerous interexchange carriers and resellers,
some of which are substantially larger, have substantially greater financial,
technical and marketing resources, or utilize larger transmission systems than
the Company. AT&T is the dominant supplier of long distance services in the
United States InterLATA market. The Company also competes with other national
interexchange carriers, such as MCI, Sprint, WorldCom and regional long distance
telecommunications companies. The Company believes that the principal
competitive factors affecting its market share are pricing, transmission
quality, customer service, cost of underlying facilities and, to a lesser
extent, value added services. The Company believes that it competes effectively
with other interexchange carriers and resellers in its service areas on the
basis of these factors. The ability of the Company to compete effectively will
depend upon its continued ability to maintain high quality, market oriented
services at prices competitive with those charged by its competitors.
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The Company's objective is to continue to expand its customer base through
its agent and retail marketing divisions along with its mergers and acquisitions
program. The Company believes this strategy will enable it to continue to
obtain favorable contracts from its suppliers which will allow it to maintain
adequate margins while offering highly competetive prices for its services. The
Company maintains its own in-house billing and customer service operations which
along with its ability to offer competetive prices gives the Company the
flexibility to tailor its services to meet the ever changing communication needs
of its customers. However, no assurance can be given that the Company's
strategies will continue to be successful.
The Company expects to encounter increased competition from both the major
communication companies and the smaller regional companies. In addition, the
Company may be subject to additional competition due to the enactment of the
Telecommunications Act of 1996 and the development of new technologies. The
telecommunications industry is in a period of rapid evolution marked by the
introduction of new products and services and the changing regulatory
environment. The Company believes its strategies will put it in a position to
continue to effectively compete in this industry.
GOVERNMENT REGULATION
The terms and conditions under which the Company operates are subject to
government regulations. Federal laws and FCC regulations apply to interstate
and international telecommunications, while particular state regulatory
authorities have jurisdiction over intrastate telecommunications.
In February 1996, legislation was approved that: will, without limitation,
permit the local Bell operating companies to provide long distance services
upon the finding by the FCC that the Bell companies have satisfied certain
criteria for opening up their local exchange networks to competition and that
their provisioning of long distance services would further the public interest;
removes existing barriers to entry into local service markets; significantly
changes the manner in which carrier-to-carrier arrangements are regulated at the
state and federal levels; establishes procedures to revise universal service
standards; and establishes penalties for the unauthorized switching of
customers. The Company can not predict what effect this legislation will have
on the Company, but it believes that it is positioning itself to continue to
compete in the industry and pursue other business opportunities available in the
ever changing telecommunications market.
FEDERAL REGULATION
The Company is classified by the FCC as a non-dominant carrier. As such,
the Company is not required to obtain a certificate of public convenience and
necessity from the FCC for its domestic interexchange services. The FCC retains
the general regulatory jurisdiction over the sale of interstate
telecommunications services by interexchange carriers, including the requirement
that calls be charged on a nondiscriminatory, just and reasonable basis.
However, the FCC has generally not chosen to exercise its statutory power to
regulate the charges, practices, classifications or regulations of non-dominant
carriers. Currently, AT&T is the only carrier classified as a dominant carrier.
As a consequence, the FCC regulates many of its rates, charges, and services to
a greater degree than the Company's, although AT&T has requested that it be
reclassified as a non-dominant carrier and the FCC is reviewing this request.
Should AT&T be reclassified as a non-dominant carrier, it would make it easier
for AT&T to more aggressively compete with the Company for low volume long
distance customers.
STATE REGULATION
The intrastate long distance telecommunications of the Company are also
subject to various state laws and regulations, including prior certification,
notification, and registration requirements. Generally, the Company must obtain
and maintain certificates of public convenience and necessity
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from regulatory authorities in most states in which it offers intrastate long
distance services. In most of these jurisdictions the Company must also file
and obtain prior regulatory approval of tariffs for its intrastate offerings.
Currently, the Company is certified and tariffed where required to provide
intrastate service to customers in all 48 contiguous states.
There can be no assurance that the regulatory authorities in one or more of
the states will not take action having an adverse effect on the business or
financial condition of the Company.
EMPLOYEES
As of June 15, 1996, the Company had 62 full-time employees, including
Michael M. Ross, President and Chief Executive Officer. None of the Company's
employees are represented by a union.
ITEM 2. PROPERTIES.
The Company owns a 4,500 square foot building and leases three floors of a
building located at 525 Florida Street, Baton Rouge, Louisiana, 70801, which
comprises its principal offices. Its primary telephone number is (504) 343-
3125.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in legal proceedings generally incidental to its
business. While results of these various legal matters contain an element of
uncertainty, the Company believes that the probable outcome of any of these
matters, or all of them combined, should not have a material adverse effect on
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) PRINCIPAL MARKET OR MARKETS. Since February 24, 1994, the Company's
Common Stock has traded in the over-the-counter market and listed in the NASDAQ
Small-Cap Market System under the symbol "NTWK". The following table sets forth
the high and low sales prices per share of Network Common Stock as reported on
the Nasdaq Small-Cap Market System for the periods indicated.
HIGH LOW
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1995
----
FIRST QUARTER $ 8.00 $5.50
SECOND QUARTER 8.25 7.38
THIRD QUARTER 9.00 7.38
FORTH QUARTER 9.00 7.63
1996
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FIRST QUARTER $ 9.38 $7.25
SECOND QUARTER 11.25 7.63
THIRD QUARTER 11.25 9.13
FOURTH QUARTER 10.00 8.88
On June 20, 1996, the closing price for the Common Stock as reported by the
NASDAQ National Market System was $10.63 per share.
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(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The number of record
owners of the Company's common stock at April 24, 1996, was approximately 199.
This does not include shareholders who hold stock in their accounts at
broker/dealers.
(c) DIVIDENDS. Holders of common stock are entitled to receive such
dividends as may be declared by the Company's Board of Directors. No dividends
have been paid with respect to the Company's common stock and no dividends are
anticipated to be paid in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data of the Company at and
for each of the fiscal years in the three-year period ended March 31, 1996, have
been derived from consolidated financial statements audited by Arthur Andersen
LLP for the fiscal years ended March 31, 1996 and 1995 and by Faulk & Winkler
LLC, independent certified public accountants for all prior periods presented.
The consolidated financial statements from which the selected consolidated
financial data is derived is qualified by reference to, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this document.
SELECTED FINANCIAL DATA:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
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1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
Operating Results:
Revenues $30,810,016 $24,216,948 $10,621,705 $4,509,520 $4,263,284
Operating Income (loss) (254,108) 461,290 404,361 326,208 145,728
Income (loss) before
extraordinary item and
cumulative effect of a
change in accounting
principle (373,381) 490,449 206,365 119,113 97,077
Income (loss) before
cumulative effect of a
change in accounting
principle (373,381) 490,449 206,365 119,113 145,728
Net Income (loss) (373,381) 490,449 206,365 278,506 145,728
Preferred dividend
requirement - 31,984 - -
Earnings per common
share:
Income (loss) before
extraordinary item and
cumulative effect of
a change in accounting
principle $(0.14) $0.21 $0.11 $0.08 $0.07
Income (loss) before
cumulative effect of a
change in accounting
principle (0.14) 0.21 0.11 0.08 0.10
Net Income (loss) (0.14) 0.21 0.11 0.19 0.10
Weighted average shares 2,731,093 2,370,999 1,595,840 1,473,908 1,474,566
Financial Position Data:
Total assets $19,822,832 $10,156,807 7,608,164 1,811,959 1,545,253
Long-term debt
(excluding current
maturities) 2,799,571 - 43,323 427,483 730,953
Stockholders'
investment 13,005,718 7,103,416 6,243,916 369,898 91,393
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR FISCAL YEARS 1996, 1995, AND 1994.
GENERAL
The Company's operations have grown significantly over the last three years
as a result of internal growth through its three primary marketing divisions and
from its mergers and acquisitions program. Total revenues have increased to
$30,810,948 in 1996, as compared to $24,216,948 in 1995, and $10,621,705 in
1994. The Company has financed this growth primarily through cash flow from
operations, equity financing, and bank borrowings.
RESULTS OF OPERATIONS
Total revenues, including excise taxes and fees, increased to $30,810,016
in 1996, from $24,216,948 in 1995, representing a 27% increase. Total revenues
in 1995 increased by 128% from $10,621,705 in 1994.
Billable minutes were approximately 202.7 million in 1996, an increase from
approximately 152.2 million minutes in 1995, and approximately 60.6 million
minutes in 1994. Rate per minute, representing the ratio of total revenue to
total minutes, was approximately $.152, $.159 and $.175 in fiscal 1996, 1995,
and 1994, respectively. The decrease in revenue per minute reflects the rate
reductions made to remain competitive in the market and wholesale rates provided
to switchless resellers. In response to periodic rate reductions by AT&T and
other carriers in prior years, the Company has reduced its rates; the Company,
however, did not materially adjust its rates in 1996. While these rate
reductions have adversely affected the Company's revenues on a per minute basis,
billable minutes have increased by 33.2% over 1995 billable minutes, while
billable minutes from 1995 to 1994, increased approximately 151.2%.
Historically, AT&T has reduced its rates when access charges levied by the local
telephone companies have been reduced. Competitors of AT&T then lower rates to
maintain their market positions.
To maintain and improve the Company's competitive future, it may be
necessary to change the Company's rate structure. The Company is unable to
predict with accuracy whether or when AT&T or other competitors will implement
future rate reductions or the effect of any such rate reductions on the
Company's profit margins. In the future, these competitive price reductions are
anticipated to level off and prices are expected to stabilize or decline at a
slower rate. While minor price reductions are expected in fiscal year 1997, the
Company anticipates increased billable minutes from its agent and retail
divisions along with additional mergers and acquisitions to offset the effects
of any price reductions.
In addition to the switch-based network, the Company operates under
negotiated contracts with other carriers to provide a nationwide platform to
originate and terminate traffic. The Company has contracted with marketing
companies, switchless resellers and agents throughout the United States and
provides transport, billing, customer service, and other support services.
Marketing to these types of organizations will continue in the upcoming fiscal
year. Gross margin percentage, defined as the ratio of the excess of revenues
over telecommunication costs, is expected to decrease while billable minutes are
expected to rapidly increase. As of June, 1996, the Company is certified and
tariffed to provide service subject to jurisdictions as required in the 48
contiguous states and the District of Columbia.
The Company and other long distance telecommunications companies are
affected by the FCC's direct regulation of the rates and operations of AT&T and
certain other interexchange carriers with which the Company competes and from
which the Company leases or may lease transmission
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facilities or may have underlying contracts in place. Consequently,
reductions in the Company's rate structure, as well as the regulatory matters
affecting the telecommunications industry as a whole, may impact the
Company's future revenues and expenses.
The Company's gross margin percentage in 1996 increased over the prior year
with the cost of telecommunications services as a percent of revenues decreasing
to 74.3% OR $.113 per minute in 1996, resulting in a gross margin percentage of
25.7%. In 1995, telecommunications costs were 80.4% of revenues or $.128 PER
MINUTE, resulting in a gross margin percentage of 19.6%. The Company's costs
for telecommunications services as a percent of revenue in 1994 were 76.0% or
$.133 per minute, which resulted in a gross margin percentage of 24.0%. The
rapid growth in sales of the Company's wholesale product to switchless resellers
in 1995 decreased the gross margin because the gross margin from sales to
switchless resellers is less than that realized by the Company's agent and
retail sales. The emphasis on increased retail sales through its agent and
retail divisions along with its acquisitions of retail customer bases during
1996 attributed in the decrease in overall telecommunication costs as a percent
of revenues and the improved gross margin.
General and administrative and selling expenses were $6,068,813
representing 19.7% of revenues, $3,593,043 representing 14.8% of revenues, and
$1,715,992 representing 16.2% of revenues for the years ended March 31, 1996,
1995, and 1994, respectively. The increase in general and administrative and
selling expenses is attributable to the Company's establishment of its mergers
and acquisitions program along with increases in staff, facilities, and
technology resources to better serve its growing customer base.
Depreciation and amortization expense was $1,096,373 representing 3.6% of
revenues, $298,700 representing 1.2% of revenues, and $189,923 representing 1.8%
of revenues for the years ended March 31, 1996, 1995, and 1994, respectively.
The increase both in dollars and as a percent of revenues is primarily
associated with the amortization of the customer bases and goodwill acquired
through the Company's mergers and acquisition activities.
Provision for losses on Accounts Receivable was $1,019,754 representing
3.3% of revenues, $386,214 representing 1.6% of revenues, and $236,000
representing 2.2% of revenues for the years ended March 31, 1996, 1995, and 1994
respectively. The increase in the provision was related primarily to
reseller/wholesale accounts receivable. During fiscal year 1996, the Company
reevaluated its reseller/wholesale activities generally and , specifically its
relationship with certain resellers. As a result, the Company has chosen to de-
emphasize its resellers marketing activities by reducing the number of wholesale
customers and the related wholesale accounts receivable. In addition, certain
wholesale customers have experienced financial difficulties which impede their
ability to pay the Company on a timely basis. Wholesale customers with slow
payment histories have been placed on specific payment plans or under lock box
agreements. The Company has specifically evaluated its allowance for doubtful
accounts, which it provides for through its provision for losses on accounts
receivable, relative to its wholesale customers and believes the allowance to be
adequate to absorb probable losses on the accounts receivable at March 31, 1996.
OTHER INCOME AND EXPENSES
Operating income was ($254,108) representing (.82%) of revenue for the year
ended March 31, 1996. Operating income was $461,290 representing 1.9% of
revenues for the year ended March 31, 1995. For the year ended March 31, 1994,
operating income was $321,320 representing 3.0% of revenues.
Net interest expense for the year ended March 31, 1996 was $188,304 as
compared to net interest income for the year ended March 31, 1995 of $147,902.
Net interest expense for the year ended March 31, 1994 was $83,041. Net
interest income during fiscal year 1995 resulted primarily from the investment
of the proceeds from the Company's secondary public offering.
-11-
<PAGE>
INCOME TAXES
A benefit of $69,031 was attributed to income taxes for 1996 resulting in
net income of ($373,381). For the year ended March 31, 1995, $118,743 was
attributed to income tax resulting in net income of $490,449. As of March 31,
1995, the Company has fully used a federal income tax net operating loss
carryforward realized in prior tax years. For the year ended March 31, 1994,
$114,955 was attributed to income tax resulting in net income of $206,365.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operations for 1996 was $745,831, a decrease from net
cash provided by operations of $670,124 in 1995, and net cash used by operations
of $352,871 in 1994.
In March 1994, the Company completed a public offering of 1,380,000 shares
of common stock at $5.00 per share. The common stock is traded on the NASDAQ
Small Cap Market System under the symbol "NTWK". The net proceeds of the
offering, after deducting applicable issuance costs and expenses were
approximately $5,700,000. The proceeds were used to reduce short-term and long-
term indebtedness and for general corporate purposes, including the financing of
working capital needs, capital expenditures, redemption of Series B Convertible
Preferred Stock, and, redemption of Series A Convertible Preferred Stock,
acquisitions, network upgrades, and the expansion or improvement of office
facilities.
Cash flows used in operations resulted in a negative impact on cash during
1996 and 1994 due primarily to the impact of growth in accounts receivable that
were not offset by similar increases in accounts payable and customer deposits.
-12-
<PAGE>
The Company's accounts receivable are anticipated to continue to grow due
to higher sales volume and acquisitions. Growth will require cash disbursements
for acquisitions, installation costs on lines and equipment to expand networking
capability. In addition, the growth will require cash payments to vendors prior
to receipt of payments by its customers.
The Company's growth will also require continued expansion of the
telecommunications equipment and related capital items. The Company used net
cash of $544,912, $485,237 and $4,661,221 for investing activities for the years
1996, 1995, and 1994, respectively. The primary use of cash in 1996 and 1995
was for the acquisition of customer bases resulting in an increase of intangible
assets of $195,321 and $110,853 and related acquisition costs of $1,101,173 and
$1,781,055 respectively. Another significant use of cash was related to
acquisition of telecommunication equipment and related capital items of $806,980
in 1996 $1,344,567 in 1995, $207,746 in 1994.
Cash provided by financing activities in 1996 was $1,697,970 as compared to cash
used in financing activities of $151,117 in 1995, and cash provided by financing
activities of $5,122,904 in 1994. In 1996 the Company made principal payments
on debt of $12,187,486 and received cash of $13,885,456 from the issuance of
debt. In 1995, the Company redeemed all of its outstanding preferred stock for
$55,527, made payments against costs of the secondary public offering of
$53,585, and reduced debt principal by $42,005. In 1994, the Company made
principal payments on long-term borrowings of $544,749 and received cash of
$6,900,000 for issuance of common stock, and $300,000 for issuance of redeemable
preferred stock. The Company redeemed the preferred stock for $300,000, paid
preferred stock dividends of $31,984, and paid costs associated with stock
offerings of $1,200,363 in 1994.
The Company experienced a net cash increase of $407,227 in 1996, $33,770 in
1995, and $108,812 in 1994. Stockholders' equity was $13,005,718, and
$7,103,415 as of March 31, 1996, and 1995, respectively.
In 1996 the Company completed a series of acquisitions of the customer
bases and associated accounts receivable for cash, shares of the Company's
common stock, forgiveness of debt or a combination, thereof.
In April 1995, the Company purchased a segment of the customer base and
related accounts receivable from Prime Telecom, Inc. for cash of
approximately$10,000 and forgiveness of $47,000 owed the Company. Of the assets
acquired, approximately $30,000 was recorded as the purchase price of the
customer base.
In May 1995, the Company purchased a portion of the customer base and
related accounts receivable of Network Services, Inc. for cash of approximately
$565,000, approximately 7,300 shares of common stock valued at $55,000 and
$193,000 in notes payable. Of the assets acquired, approximately $368,000 was
recorded as the purchase price of the customer base.
In May 1995, the Company purchased a segment of the customer base and
related accounts receivable of Telecommunications Brokerage, Inc. by the
forgiveness of debt owed to the Company, amounting to approximately $130,000.
The purchase price of the customer base was approximately $97,000.
In September 1995, the Company purchased another segment of the customer
base and related accounts receivable of Telecommunications Brokerage, Inc. by
the forgiveness of debt owed to the Company amounting to approximately $108,000.
The purchase price of the customer base was approximately $94,000.
-13
<PAGE>
In October 1995, the Company purchased substantially all of the assets of
Value Tel, Inc. for approximately 891,000 shares of common stock valued at
$5,955,000, forgiveness of $608,000 owed the Company, and assumption of
liabilities of $696,000. The excess of purchase price over net tangible assets
acquired amounted to approximately $5,649,000.
In January 1996, the Company purchased a segment of the customer base and
related accounts receivable of Quantum Communications, Inc. for cash of
approximately $474,000, notes payable of $340,000 and approximately 30,000
shares of common stock valued at $590,000. The entire purchase price was
recorded as the value of the customer base.
In December 1995, the Company renewed its line of credit with a bank with
$6,000,000 being available under the renewed facility. Borrowings under the
renewed line of credit mature on April 30, 1997 and bear interest at 1% above
the prime rate (9.25% at March 31, 1996). At March 31, 1996 $2,532,235 was
outstanding under the line of credit. The line of credit is secured by certain
accounts receivable of the Company and requires compliance with certain
financial and operating covenants which include minimum leverage and fixed
charge coverage ratios. At March 31, the Company was in compliance with those
covenants.
In May 1996, the Company entered into a $14,250,000 credit facility with a
bank which includes a revolving credit facility and term loan facility.
Borrowings under the revolving credit portion of the facility may not exceed the
lessor of $11,000,000 minus any reserves the lender may deem eligible or 85% of
eligible receivables. The initial borrowings under the revolver were to payoff
the line of credit noted above. Borrowings under the revolver will bear
interest at the prime rate plus 0.75%. Borrowings and unpaid interest on the
revolving facility are repayable in full at maturity of the facility on June 1,
1999. The Company is allowed to borrow $3,250,000 under the term loan facility.
The term loan is repayable in 36 equal monthly installments of $90,278 plus
accrued interest. The term loan will bear interest at the prime rate plus 3%.
Substantially all of the assets of the Company are pledged as collateral under
the credit facility.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets to be Disposed of." This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to be
disposed of. This statement is effective for financial statements for fiscal
years beginning after December 15, 1995. The Company believes that adoption of
this standard will not have a material effect on the Company's Consolidated
Results of Operations or Financial Position.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This statement establishes financial accounting and reporting
standards for Stock-Based Employee Compensation Plans and is effective for
fiscal years beginning after December 15, 1995. The Company expects to continue
to apply The Accounting Provisions of Accounting Principles Board Opinion 25 in
determining its net income; however, additional disclosures will be made to
disclose the estimated value of compensation expense under the method
established by SFAS No. 123.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Please see pages F-1 through F-17.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
-14
<PAGE>
Arthur Andersen LLP was selected in March 1995, to replace Faulk & Winkler
LLC as the Company's principal independent public accountants and performed the
Company's audit for the year ended March 31, 1995. The decision to dismiss
Faulk & Winkler LLC was recommended by the Audit Committee of the Board of
Directors and was approved by the Board of Directors. This decision was not
based on any disagreement with Faulk & Winkler LLC on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Faulk &
Winkler LLC, would have caused it to make reference to the subject matter of the
disagreement in connection with its report. Faulk & Winkler LLC's report did
not contain an adverse or a disclaimer of opinion for neither the Company's
fiscal year ended March 31, 1994, nor March 31, 1993.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Directors and Officers of the Company as of March 31, 1996, were as
follows:
<TABLE>
<CAPTION>
Tenure as Officer
Name Age Position or Director
- ---- --- -------- -----------------
<S> <C> <C> <C>
Michael M. Ross 38 President, Chief From December 19, 1990
Executive Officer, to date
and a Director
Marc I. Becker 38 Executive Vice President, From December 19, 1990
Chief Operating Officer, to date
and a Director
Joseph M. Edelman 75 Vice President, From December 19, 1990
Corporate Secretary to date
and a Director
Leon L. Nowalsky 34 Director From May 24, 1995
to date
Russell J. Page 53 Director From October 26, 1995
to date
Timothy J. Sledz 27 Director From October 31, 1995
to date
Louis J. Resweber 33 Executive Vice President, From June 26, 1995
President Network to date
Acquisition Corp.
S. David Rosenfeld 36 Executive Vice President From July 6, 1994
to date
</TABLE>
-15-
<PAGE>
MICHAEL M. ROSS
FOUNDER, DIRECTOR
PRESIDENT & CHIEF EXECUTIVE OFFICER
Mr. Ross founded the Company along with Mr. Becker in 1979, and has served as a
Director and Officer of Network and its predecessor company, M.M. Ross, Inc.,
since its inception. Mr. Ross has been active in every facet of the
telecommunications industry on an industry-wide level. He previously managed
responsibilities for a wide range of functions including design and
implementation of call route optimization, traffic engineering and switching
programs. Mr. Ross is a former Director of Telecom Management, Inc. (1984 to
1985) and Direct Communications, Inc., (1985 to 1990) both of which were merged
into Network. He is a charter member in the Telecommunications Resellers
Association ("TRA"). Currently, he is responsible for all global strategic
activities, corporate affairs, long range planning and administrative functions,
and he has direct oversight over all national sales and marketing activities,
business development, customer service and support functions, and tariff and
regulatory matters. He is a graduate of Louisiana State University in Baton
Rouge.
MARC I. BECKER
CO-FOUNDER, DIRECTOR
EXECUTIVE VICE PRESIDENT, CHIEF OPERATING OFFICER
Mr. Becker was a co-founder of Network's predecessor company, and has served as
a Director of the Company since its formation. He has previously served as
Chief Financial Officer and Controller, managing all financial, accounting and
SEC reporting activities. Mr. Becker has experience in every aspect of the
Company -- including technical, administrative, facilities management systems
networking, human resources, information services, customer service and customer
support. He is a former Director of Telecom Management, Inc. (1984 to 1985) and
Direct Communications, Inc. (1985 to 1990). Mr. Becker currently has
responsibility for all nationwide operational and management functions,
including accounting systems design and implementation of related software. He
is also engaged in all networking, traffic engineering, analysis and routing,
and is active in developing specialized micro-processor automated dialing system
applications. Mr. Becker is a graduate of Louisiana State University in Baton
Rouge.
JOSEPH M. EDELMAN M.D.
DIRECTOR
VICE PRESIDENT, SECRETARY, TECHNICAL/SYSTEMS APPLICATIONS/RESEARCH &
DEVELOPMENT
Dr. Edelman has been a Director and Officer of Network and its predecessor
company, since 1981, and had previously served as an independent consultant to
the Company since 1980. Prior to joining the Company, Dr. Edelman was active in
the area of computer automation and systems applications since the early 1960s,
and developed one of the nation's first word processing systems for mini-
computers. After a career specializing in neurosurgery, Dr. Edelman founded and
served as Chairman, President and Chief Executive Officer of Edelman Systems,
Inc., a developer of computer hardware and software for the medical field and
industry which grew to become one of the nation's leading provider of systems
for standardization of record documentation, billing, scheduling, form
preparation, and related administrative processing for more than 100 medical
clinics across the country. In the late 1970's, Dr. Edelman wrote Network's
proprietary customized billing system, and developed other in-house management
and control systems still in use today. Currently, he is active in all aspects
of Network's operations, including switching systems, nationwide electronic
networking, data processing, management information services, call processing,
customized billing and invoicing, customer data base management, facilities
management and traffic engineering. He also directs the Company's research and
development efforts. He holds a bachelors degree from Louisiana State
University, and earned his doctorate in Medicine from the Louisiana State
University School of Medicine in New Orleans.
-16-
<PAGE>
LEON L. NOWALSKY
DIRECTOR
Mr. Nowalsky has served as independent legal counsel to the Company since 1992,
and has been a Director since 1995. Since 1990, he has been a senior partner in
the law firm of Nowalsky & Bronston, LLP, a New Orleans-based law practice
specializing in telecommunications regulatory matters and mergers and
acquisitions and serves as counsel to over 40 independent telecom firms
nationwide. From 1985 to 1986, he served as in-house counsel for a Louisiana-
based long distance company which was acquired by Advanced Telecommunications
Corp. ("ATC"). Mr. Nowalsky served ATC as chief regulatory counsel with
responsibility for all compliance issues in a 15-state region, and in 1987, he
was promoted to interim general counsel of ATC, where he managed the legal
aspects of the company's telecommunications operations. Mr. Nowalsky holds a
bachelors degree from Tulane University in New Orleans and earned his Juris
doctorate from Loyola University School of Law in New Orleans. He serves on the
Boards of Receivables Funding Corp., an Ohio-based financial concern, and J.C.
Dupont, Inc., a Louisiana-based energy company.
RUSSELL J. (RUSTY) PAGE
DIRECTOR
Mr. Page has served as a Director of the Company since 1995. Since April of
1996, Mr. Page has served as a principal of Capital Markets Access Corp. For
the prior 15 years he served as Senior Vice President of NationsBank
Corporation, the fourth largest U.S. bank holding concern, and a primary lending
institution to a number of telecommunications corporations. Mr. Page joined
NationsBank in 1981, where he assisted the bank in fulfilling its growth
strategy, primarily through acquisitions, which resulted in the bank growing
from a regional retail banking business to one of the nation's largest
diversified financial institutions. As Equity Marketing Executive, he has had
direct responsibility for all investor relations for NationsBank. In addition
to his role at NationsBank, Mr. Page has served as an independent equity
markets/investor relations consultant to a number of public companies including
United Companies Financial Corporation. Mr. Page serves on the national
Marketing Committee of The NASDAQ Stock Market, and is a member of the Board of
Directors and the Executive Committee of the National Investor Relations
Institute, and he is Chairman of NIRI's International Committee. He is also a
member of the National Security Traders Association. He is an alumnus of the
University of North Carolina at Charlotte, and has served on the 1994 Charlotte
Organizing Committee Executive Board for the National Collegiate Athletic
Association ("NCAA").
TIMOTHY J. SLEDZ
DIRECTOR
Mr. Sledz has served as a Director of the Company since 1995. He is the
President and Chief Operating Officer of Value Tel, Inc., ("Value Tel") a
nationwide diversified telecommunications corporation based in Chicago,
Illinois. Mr. Sledz joined Value Tel's predecessor company, Discount Network
Services, Inc. ("DNS") in 1992 to assist in DNS's aggressive growth and
expansion plan. He served as a Director, Chief Financial Officer and Corporate
Secretary of DNS until its May, 1995 merger into Value Tel, at which time Mr.
Sledz became President of the combined companies. In November, 1995, Value Tel
sold a significant base of its nationwide telecommunications business and long
distance customer base to Network Long Distance, and since that time, Mr. Sledz
has overseen the transition of its previous customer base to Network. In
addition, Mr. Sledz currently oversees all of Value Tel's independent
operational and administrative functions. He is experienced in all areas of
computer and management information systems, including programming, networking,
and telecommunications provisioning and billing. Mr. Sledz is the former
President and Chief Executive Officer of Computer Document Imaging, Inc., a
Chicago-based computer consulting firm.
-17-
<PAGE>
LOUIS J. RESWEBER
EXECUTIVE VICE PRESIDENT
PRESIDENT & CHIEF EXECUTIVE OFFICER, NETWORK ACQUISITION CORPORATION
SENIOR ADVISOR TO THE BOARD
Mr. Resweber has served as an Executive officer of the company since joining
Network in 1995. Previously, Mr. Resweber gained more than 15 years experience
in mergers and acquisitions, capital markets, strategic planning and corporate
finance as a member of the executive management teams of a number of NYSE-
listed, Fortune 500 Concerns. From 1992 to 1995, he was Senior Vice President,
Equity Markets for United Companies Financial Corporation. From 1991 to 1992,
he was Vice President, Business Development of Hill & Knowlton International,
Inc. Where he served as senior counsel to T.F. McLarty (President Clinton's's
former chief-of-staff) and served several corporate clients including Exxon USA,
Inc and Cabot Oil Corp under the direction of Craig Fuller (President Bush's
former chief-of-staff). From 1988 to 1991, he was an officer of NorAm Entergy
Corp (formerly Arkla, Inc.), where he served as Vice President of Entex, Inc.
(which merged into NorAm in 1991). From 1983 to 1988, he was with the Goodyear
Tire & Rubber Co., most recently as Director of Communications for Celeron Corp.
(which merged into Goodyear in 1983). He began his career in print and
broadcast communications from 1978 to 1983. Mr. Resweber currently serves on
the Boards of Directors of a number of other technology and communications
companies, and has also served on the Board of the National Investor Relations
Institute in Houston. Mr. Resweber is primarily engaged in the strategic
planning, corporate finance and capital markets activities of the company, and
also heads Network Acquisition Corp., a wholly-owned subsidiary of the Company
engaged in targeting mergers and/or acquisitions of other telecommunication
concerns. He graduated cum laude from the University of Louisiana at Lafayette.
S. DAVID ROSENFELD
EXECUTIVE VICE PRESIDENT
SENIOR ADVISOR TO THE BOARD
Mr. Rosenfeld joined Network in 1981, and has served the Company in a wide range
of sales, marketing, operations and management areas. a 15-year veteran of the
telecommunications industry, Mr. Rosenfeld was promoted to Executive Vice-
President as a means of utilizing his unique base of experience to implement a
strategy to accelerate growth of the Company through the mergers and/or
acquisitions of other telecom companies. Immediately prior to this move, Mr.
Rosenfeld served Network as Vice President and Director of Sales, where he had
direct responsibility for all the Company's marketing programs. He developed
and implemented Network's first nationwide wholesale and agent resellers
program, and directed all market development, industry association and
agent/wholesaler training functions. Prior to that, Mr. Rosenfeld served as
Manager of Operations, where he oversaw all technical, customer service and
customer support functions; as well as the development, negotiation and ongoing
management of the Company's primary underlying carrier agreements with
nationwide fiber-optic providers. Mr. Rosenfeld is active in local and
industry-wide trade associations and business organizations, and served as
President of the Greater Baton Rouge Business Network. He is a graduate of
Louisiana State University.
The Officers of the Company are elected by the Board of Directors at the
first meeting after each annual meeting of the Company's shareholders, and hold
office until their death, or until they shall resign or have been removed from
office. The date of the next annual meeting of the Company will be determined
by the Company's Board of Directors in accordance with Delaware law. Such
meeting is expected to be held in September, 1996.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has two standing committees. The Audit Committee is
responsible for reviewing audit procedures and supervising the relationship
between the Company and its independent auditors. The Remuneration and Stock
Option/Warrant Committee is
-18-
<PAGE>
responsible for approving compensation arrangements for senior management of
the Company and administering the Company's stock option plans.
During fiscal year ending 1996, there were three regular and ten special
meetings of the Board of Directors of the Company. Each member of the Board of
Directors attended all the meetings of the Board of Directors and of each
Committee of which he was a member during the year.
COMPLIANCE WITH SECTION 16(A) OF SECURITIES EXCHANGE ACT OF 1934
To the Company's knowledge, during the fiscal year ended March 31, 1996, the
Company's Officers and Directors complied with all applicable Section 16(a)
filing requirements except Mr. Sledz inadvertently failed to file a Form 3
Statement of Beneficial Ownership of Securities. This statement is based solely
on a review of the copies of such reports furnished to the Company by its
Officers and Directors and their written representations that such reports
accurately reflect all reportable transactions.
FAMILY RELATIONSHIPS
There is no family relationship between any director, executive or person
nominated or chosen by the Company to become a director or executive officer.
-19-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth all compensation paid or accrued by the
Company for services of Michael M. Ross, Marc I. Becker and S. David Rosenfeld
during the fiscal year ended March 31, 1996 and the two prior fiscal years. No
other officer has received cash payments in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Long Term Compensation
-----------------------------
Annual Compensation Awards Payouts
- ----------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Other Restricted All
and Annual Stock Options/ LTIP Other
Principal Year Salary Bonus Compensation Awards SARs Payouts Compensation
Position (1) ($) ($) ($)(2) ($) (#) ($) ($)(3)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael M. Ross 1996 $ 99,386 $0 $ 221 N/A 0 N/A $9,155
President and 1995 $ 94,846 $0 $ 2,316 N/A 0 N/A $8,822
Chief Executive 1994 $ 81,213 $0 $ 2,422 N/A 0 N/A $5,362
Officer
Marc I. Becker 1996 $103,073 $0 $ 221 N/A 0 N/A $5,455
Executive Vice 1995 $99,022 $0 $ 884 N/A 0 N/A $5,449
President and 1994 $82,900 $0 $ 884 N/A 0 N/A $5,362
Chief Operating
Officer
S. David Rosenfeld 1996 $60,234 $0 $63,666 N.A 0 N/A $3,739
Executive Vice 1995 $45,061 $0 $75,907 $2,800 0 N/A $3,383
President 1994 $44,500 $0 $34,081 N/A 0 N/A $3,192
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Periods presented are for the years ended March 31.
(2) Represents a $500 monthly allowance less health insurance, and for Mr.
Rosenfeld, sales commissions. For fiscal year 1996, the $500 monthly
allowance was terminated July 1, 1995.
(3) Represents employer contributions for insurance, disability and a car
allowance.
(4) The following officers' salaries are anticipated in excess of $100,000 for
the fiscal year 1997:
Michael M. Ross, President and Chief Executive Officer
Marc I. Becker, Executive Vice President and Chief Operating Officer.
S. David Rosenfeld, Executive Vice President
-20-
<PAGE>
Louis J. Resweber, Executive Vice President
COMPENSATION OF DIRECTORS
Two (2) non-employee Directors of the Company, Mr. Russell J. Page and
Mr. Leon L. Nowalsky have been authorized Warrants under Directorship
Agreements. In addition, Mr. Nowalsky also currently receives $1,333.00 per
month for serving as a Director. All Directors receive expenses to attend
board meetings and expenses related to board duties assigned.
OPTIONS AND WARRANTS
The Company issued to its principal underwriting firm, Barron Chase
Securities, Inc. on February 24, 1994, warrants to purchase 120,000 shares of
the Company's Common Stock for a five (5) year period for $7.50 per share.
On April 29, 1995, Mr. Leon L. Nowalsky, in consideration for accepting a
directorship, was authorized to receive warrants to purchase 225,000 shares
of the Company's Common Stock for a ten (10) year period for $7.75 per share.
Also on this date, Mr. David Rosenfeld, an Officer, and Dr. Joseph M.
Edelman, an Officer and Director, were authorized to receive warrants to
purchase 100,000 share each of the Company's Common Stock for a ten (10) year
period for $7.88 per share. On May 23, 1995, Mr. Louis J. Resweber, an
Officer of the Company, was authorized to receive warrants to purchase
250,002 shares of the Company's Common Stock for a ten (10) year period for
$7.75 per share. On October 26, 1995, Mr. Russell J. Page, in consideration
of accepting a directorship, was authorized to receive warrants to purchase
225,000 shares of the Company's Common Stock for a ten (10) year period for
$9.13 per share.
EMPLOYMENT AGREEMENTS
On January 1, 1994 the Company entered into employment agreements with
Mr. Michael M. Ross and Mr. Marc I. Becker, Officers and Directors of the
Company. The employment agreements extend to December 31, 1997 and provide
for a minimum salary of $96,000 to each individual. On May 23, 1995, the
Company entered into a employment agreement with Mr. Louis J. Resweber, an
Officer of the Company, for a three (3) year period beginning on June 2, 1995
and extending through May 31, 1998. The contract calls for a minimum of
annual salary of $144,000. On March 12, 1996, the board authorized
employment agreements with Mr. S. David Rosenfeld, an Officer of the Company
and Dr. J. M. Edelman, an Officer and Director of the Company, for a period
of two (2) years from January 1, 1996 with minimum annual salaries of
$120,000 and $80,000, respectively. A discretionary bonus may be paid to any
of the above individuals based on factors deemed relevant by the Board of
Directors, such as the Company's performance and/or other objective criteria.
-21-
<PAGE>
OPTION GRANTS IN 1996
The following table sets forth certain information regarding options to
purchase shares of Common Stock granted to the Executive Officers of the
Company listed in the Executive Compensation Table during the Company's 1996
fiscal year:
OPTION GRANTS IN 1996
- ---------------------------------------------------------------------------
(a) (b) (c) (d) (e)
% of Total
Options
Granted to
Options Employees Exercise Expiration
Name Granted in 1996 Price Date
- ------------------ -------- ---------- -------- ----------
Michael M. Ross None N/A N/A N/A
Marc I. Becker None N/A N/A N/A
S. David Rosenfeld 100,000 11.73% 7.88 4/29/2005
- ---------------------------------------------------------------------------
AGGREGATE OPTIONS EXERCISED IN 1996 AND OPTION VALUES AT MARCH 31, 1996
The following table sets forth certain information regarding options to
purchase shares of Common Stock exercised during the Company's 1995 fiscal
year and the number and value of exercisable and unexercisable options to
purchase shares of Common Stock held as of the end of the Company's 1995
fiscal year by the Executive Officers of the Company named in the Summary
Compensation Table:
<TABLE>
<CAPTION>
AGGREGATE OPTIONS EXERCISED IN 1996 AND OPTION VALUES AT MARCH 31, 1996
(a) (b) (c) (d) (e)
- ----------------------------------------------------------------------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
03/31/96 03/31/96
Shares Acquired Exercisable/ Exercisable/ Exercisable
Name on Exercise Value Realized(1) Unexercisable Unexercisable(2)
- ------------------ --------------- ----------------- ------------- ----------------
<S> <C> <C> <C> <C>
Michael M. Ross 0 0 0/0 $0/$0
Marc I. Becker 0 0 0/0 $0/$0
S. David Rosenfeld 0 0 100,000/0 $137,000/$0
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Value realized is equal to the difference between the fair market value per
share of Common Stock on the date of exercise and the option exercise price
per share multiplied by the number of shares acquired upon exercise of an
option.
(2) Value of exercisable/unexercisable in-the-money options is equal to the
difference between the fair market value per share of Common Stock at March
31, 1996 and the option exercise price per share multiplied by the number
of shares subject to options.
-22-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 31, 1996, the stock
ownership of each person known by the Company to be the beneficial owner of
five percent or more of the Company's Common Stock, each Officer and Director
individually and all Directors and Officers of the Company as a group:
-23-
<PAGE>
Amount and
Name and Address Nature of Bene- Percent
of Beneficial Owner ficial Ownership of Class
- --------------------- ---------------- --------
Michael M. Ross 600,691(2) 12.94%
13929 Woodland Ridge
Baton Rouge, LA 70816
Marc I. Becker 611,691(3) 13.17%
3847 Broussard
Baton Rouge, LA 70808
Joseph M. Edelman, M.D. 111,000(4) 2.39%
525 Florida Street
Baton Rouge, LA 70801
Leon L. Nowalsky 265,000(5) 5.71%
3900 Causeway Boulevard, Suite 1275
Metairie, LA 70002
Russell J. Page 100,000(6) 2.15%
822 Queens Road
Charlotte, NC 28207
Timothy J. Sledz 879,055(7) 18.93%
1841 Centre Point Drive, Suite 135
Naperville, IL 60563
S. David Rosenfeld 109,133(8) 2.35%
8972 Tallyho Avenue
Baton Rouge, LA 70806
Louis J. Resweber 183,834(9) 3.96%
828 High Lake Drive
Baton Rouge, LA 70810
Value Tel, Inc. 879,055 18.93%
1841 Centre Point Drive, Suite 135
Naperville, IL 60563
All Directors and 2,859,404(10) 61.58%
Officers as a Group
(8 Persons)
____________________________
* Less than 1%
(1) The percentages indicated are based on outstanding options for each
individual, exercisable within 60 days, and 3,935,183 shares of Common
Stock issued and outstanding on April 24, 1996.
(2) Mr. Ross is the record and beneficial owner of 600,691 shares of the
Company's Common Stock and 0 options to purchase 0 shares of the Company's
Common Stock, exercisable within the next 60 days. Includes the shares
held in escrow noted in "ITEM 13" below.
-24-
<PAGE>
(3) Mr. Becker is the record and beneficial owner of 611,691 shares of the
Company's Common Stock including 10,000 owned by his wife and 1,000 shares
owned by the Becker/Edelman Investment Partnership and record and
beneficial owner of 0 options to purchase 0 shares of the Company's Common
Stock, exercisable within the next 60 days. Includes the shares held in
escrow noted in "ITEM 13" below.
(4) Dr. Edelman is the record and beneficial owner of 11,000 shares of the
Company's Common Stock which includes 1,000 shares held in the
Becker/Edelman Investment Partnership and 100,000 options to purchase
100,000 shares of the Company's Common Stock, exercisable within the next
60 days.
(5) Mr. Nowalsky is the record and beneficial owner of 40,000 shares of the
Company's Common Stock and 225,000 options to purchase 225,000 shares of
the Company's Common Stock, exercisable within the next 60 days.
(6) Mr. Page is the record and beneficial owner of 0 shares of the Company's
Common Stock and 100,000 options to purchase 100,000 shares of the
Company's Common Stock, exercisable within the next 60 days.
(7) Mr. Sledz is an indirect beneficial owner of 879,055 shares of Common Stock
owned by Value Tel by virtue of Mr. Sledz being an Officer and Director of
Value Tel, Inc.
(8) Mr. Rosenfeld is the record and beneficial owner of 9,133 shares of the
Company's Common Stock and 100,000 options to purchase 100,0000 shares of
the Company's Common Stock, exercisable within the next 60 days.
(9) Mr. Resweber is the record and beneficial owner of 500 shares of the
Company's Common Stock and 183,834 options to purchase 183,834 shares of
the Company's Common Stock, exercisable within the next 60 days.
(10) Includes 879,055 shares of Common Stock owned indirectly by Mr. Sledz, a
Director of Value Tel, Inc.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mr. Michael M. Ross and Mr. Marc I. Becker, Officers and Directors of the
Company, owe to the Company $199,471 and $146,500 as of March 31, 1996 and 1995
respectively. The amounts represent advances to these individuals from the
Company, which are unsecured, and bear interest at 8% Interest income with
respect to these notes for 1996, 1995 and 1994 was $11,720, $11,240 and $9,800,
respectively.
Mr. Louis J. Resweber, an Officer of the Company, owes the Company $55,259 at
March 31, 1996. The amount represents an advance from the Company, which is
unsecured and non-interest bearing.
Mr. Michael M. Ross and Mr. Marc I. Becker have entered into an agreement with
the Company and its escrow agent whereby approximately 50% of their shares are
to be released over a period of time based upon certain objective performance
levels. In order for the shares to be released, the Company's net income per
share on a fully diluted basis, as defined in the agreement, must be as follows:
-25-
<PAGE>
Fiscal Net Income Per Share Amount of Shares to
Year-End (Fully-Diluted) be Released
- -------- -------------------- -------------------
March 31, 1995 $.375 per share 208,897 shares
March 31, 1996 $0.60 per share 208,897 shares
March 31, 1997 $1.00 per share 208,897 shares
If in any of those years the Company achieves the following years' earnings
levels, all prior years shares and the additional shares for such earnings level
will be released. The escrow agreement terminates on January 27, 2000.
In the event the Company is acquired or merged into another entity prior to
March 31, 1997, at a price equivalent to at least $10 per share, all of the
escrowed shares shall be released from escrow. Alternatively, in the event the
Company is acquired or merged into another entity prior to March 31, 1997, at a
price equivalent of less than $10 per share, all of the escrowed shares still
remaining in the escrow account at the time of any such acquisition or merger
shall be forfeited and all such shares shall be placed in the Company's treasury
for cancellation thereof as a contribution to capital.
The staff of the Securities Exchange Commission may view the placement of shares
in escrow similar to a recapitalization by management. The agreement to release
shares upon the achievement of certain objective criteria is presumed to be a
separate compensatory arrangement between the Company and management. The
effect is that the fair value of the shares released from escrow is charged to
income in that period. Accordingly the Company's profitability could be
significantly effected in any period the shares held in escrow are released.
Mr. Leon L. Nowalsky, a Director of the Company, is a partner of Nowalsky &
Bronston, LLP. The law firm performed legal services for the Company during the
last fiscal year and was paid approximately $120,000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K.
(a) 1. The following Financial Statements are filed as part of this Report:
Page
----
Index to Financial Statements
Independent Auditors' Report F-1
Financial Statements
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
(a) 3. Exhibits: None.
-26-
<PAGE>
(b) Current report on Form 8-K, dated March 15,1995, reporting under item 4, a
change in independent public accountants from Faulk & Winkler LLC to Arthur
Andersen LLP.
-27-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Network Long Distance, Inc.:
We have audited the accompanying consolidated balance sheets of Network Long
Distance, Inc., (a Delaware corporation) and subsidiaries as of March 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits. The financial statements of Network Long Distance, Inc., for
the year ended March 31, 1994 were audited by other auditors whose report
dated June 3, 1994 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of Network Long Distance, Inc.,
and subsidiaries as of March 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDRESEN LLP
Jackson, Mississippi,
May 24, 1996.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Network Long Distance, Inc.
Baton Rouge, Louisiana
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Network Long Distance, Inc. and
Subsidiaries for the year ended March 31, 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Network Long Distance, Inc. and Subsidiaries for the year ended
March 31, 1994 in conformity with generally accepted accounting principles.
June 3, 1994
Baton Rouge, Louisiana.
FAULK & WINKLER, LLC
F-1a
<PAGE>
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 755,980 $ 348,753
Securities purchased under agreement to resell - 1,558,562
Accounts receivable, net of allowance for doubtful accounts
of $985,000 and $500,000 at March 31, 1996
and 1995, respectively 6,549,856 4,123,954
Other receivables 708,962 -
Deferred income tax asset 131,656 42,231
Other current assets 561,014 37,801
----------- -----------
Total current assets 8,707,468 6,111,301
PROPERTY AND EQUIPMENT:
Land 75,000 75,000
Building and improvements 629,683 382,315
Telecommunications equipment 1,685,651 1,640,315
Furniture and fixtures 1,180,916 671,640
----------- -----------
3,571,250 2,769,270
Less accumulated depreciation 1,437,158 968,766
----------- -----------
2,134,092 1,800,504
----------- -----------
CUSTOMER ACQUISITION COSTS, NET 5,501,559 1,626,441
GOODWILL, NET 2,079,433 22,666
OTHER INTANGIBLES, NET 1,192,010 234,890
OTHER ASSETS 208,270 361,005
----------- -----------
Total assets $19,822,832 $10,156,807
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 154,982 $ 871,893
Accrued telecommunications cost 2,736,999 1,481,409
Other accrued liabilities 815,373 500,428
Customer deposits 176,210 183,185
Current maturities of long-term debt 75,778 -
----------- -----------
Total current liabilities 3,959,342 3,036,915
DEFERRED INCOME TAX LIABILITY 58,201 16,476
LONG-TERM DEBT 2,799,571 -
COMMITMENTS AND CONTINGENCIES
Series A convertible preferred stock - $.01 par value;
25,000,000 shares authorized; no shares issued and
outstanding at March 31, 1996 and 1995 (redemption
value $3 per share) - -
STOCKHOLDERS' EQUITY
Common stock - $.0001 par value; 20,000,000 shares
authorized; 3,909,043 and 2,992,106 shares issued
and outstanding at March 31, 1996 and 1995, respectively 391 299
Additional paid-in capital 12,758,616 6,483,025
Retained earnings 246,711 620,092
----------- -----------
Total stockholders' equity 13,005,718 7,103,416
----------- -----------
Total liabilities and stockholders' equity $19,822,832 $10,156,807
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended March 31,
----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues (including excise taxes of $250,000, $219,000 and
$148,000 in 1996, 1995 and 1994, respectively) $30,810,016 $24,216,948 $10,621,705
Operating expenses:
Telecommunications costs 22,879,184 19,477,701 8,075,429
Selling, general and administrative 6,068,813 3,593,043 1,715,992
Provision for losses on accounts receivable 1,019,754 386,214 236,000
Depreciation and amortization 1,096,373 298,700 189,923
----------- ----------- -----------
Total operating expenses 31,064,124 23,755,658 10,217,344
----------- ----------- -----------
Operating income (254,108) 461,290 404,361
Interest (income) expense, net 188,304 (147,902) 83,041
----------- ----------- -----------
Income (loss) before income taxes (442,412) 609,192 321,320
Provision (benefit) for income taxes (69,031) 118,743 114,955
----------- ----------- -----------
Net income (loss) (373,381) 490,449 206,365
Preferred dividend requirement - - 31,984
----------- ----------- -----------
Net income (loss) applicable to common stockholders $ (373,381) $ 490,449 $ 174,381
----------- ----------- -----------
----------- ----------- -----------
Earnings per common share $ (0.14) $ 0.21 $ 0.11
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
$.0001 Par Value Additional
-------------------- Paid-in Retained
Number Amount Capital Earnings
------ ------ ------- --------
<S> <C> <C> <C> <C>
BALANCE, MARCH 31, 1993 1,459,566 $ 146 $ 114,490 $ 255,262
Issuance of common stock through public
offering (net of offering costs of $1,200,363) 1,380,000 138 5,699,499 -
Issuance of common stock to former holders of
Series B Convertible Preferred Stock 60,000 6 299,994 (300,000)
Dividends on preferred stock, $0.39 per share - - - (31,984)
Net income - - - 206,365
--------- ------- ----------- ---------
BALANCE, MARCH 31, 1994 2,899,566 290 6,113,983 129,643
Issuance of common stock to former holders of
Series A Convertible Preferred Stock 63,502 6 190,500 -
Issuance of common stock for acquisitions 29,038 3 232,126 -
Direct costs incurred in connection with
issuance of common stock through public
offering - - (53,584) -
Net income - - - 490,449
--------- ------- ----------- ---------
BALANCE, MARCH 31, 1995 2,992,106 299 6,483,025 620,092
Issuance of common stock for acquisitions 916,937 92 6,275,591 -
Net loss - - - (373,381)
--------- ------- ----------- ---------
BALANCE, MARCH 31, 1996 3,909,043 $ 391 $12,758,616 $ 246,711
--------- ------- ----------- ---------
--------- ------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended March 31,
----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (373,381) $ 490,449 $ 206,365
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 473,392 218,430 155,139
Amortization 622,981 80,270 34,784
Provision for losses on accounts receivable 1,019,754 386,214 236,000
Provision (benefit) for deferred income taxes (47,700) (47,487) 114,955
Provision for employee stock incentive plan 50,752 42,350 -
Changes in assets and liabilities, net of effect of
business combinations:
Accounts receivable (2,215,586) (2,357,721) (1,570,924)
Other current assets (1,232,175) (14,580) 47,197
Accounts payable and other current liabilities 803,397 1,914,678 332,338
Other 152,735 (42,479) 91,275
----------- ----------- -----------
Net cash provided by (used in) operating activities (745,831) 670,124 (352,871)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (806,980) (1,344,567) (207,746)
Sale (purchase) of short-term investments, net 1,558,562 2,751,238 (4,309,800)
Acquisitions and related costs (1,101,173) (1,781,055) -
Increase in intangible assets (195,321) (110,853) -
Other - - (143,675)
----------- ----------- -----------
Net cash used in investing activities (544,912) (485,237) (4,661,221)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (12,187,486) (42,005) (544,749)
Proceeds from issuance of debt 13,885,456 - -
Proceeds from issuance of common stock - - 6,900,000
Proceeds from sale of redeemable preferred stock - - 300,000
Redemption of preferred stock - (55,527) (300,000)
Dividends on preferred stock - - (31,984)
Offering costs - (53,585) (1,200,363)
----------- ----------- -----------
Net cash provided by (used in) financing activities 1,697,970 (151,117) 5,122,904
----------- ----------- -----------
Net increase in cash and cash equivalents 407,227 33,770 108,812
Cash and cash equivalents at beginning of period 348,753 314,983 206,171
----------- ----------- -----------
Cash and cash equivalents at end of period $ 755,980 $ 348,753 $ 314,983
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Network Long Distance, Inc. (a Delaware corporation) through its wholly-owned
subsidiaries, M.M. Ross, Inc., Network Advanced Services, Inc., and Network
Acquisition Corp., provides long distance and related services to customers
in 48 states. Hereinafter, Network Long Distance, Inc., and subsidiaries are
referred to as the "Company."
The Company provides long distance telecommunications services to commercial
and residential customers by transmitting calls to U.S. or international
locations. The Company provides these services primarily through three
customer service divisions - retail division, switchless reseller division
and agent division. The retail division involves the sale of long distance
services directly to end-users. The switchless reseller division involves
the sale of long distance services to other entities who resell the services
to end-users. The agent division involves the sale of long distance services
directly to end-users through master agents of the Company.
Calls are transmitted over circuits leased from other telecommunications
carriers at fixed or variable rates. Calls are switched through the
Company's switching center or by other carriers on the Company's behalf. The
Company furnishes its end user customers, as well as its reseller customers,
with various long distance products including 1+ dialing, WATS, private line,
calling cards and 800 services. Billing, collection and customer service are
available, at additional costs, to reseller customers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
All significant intercompany balances have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the period reported. Actual results could
differ from those estimates. Estimates are used primarily when accounting
for allowance for doubtful accounts, depreciation and amortization and taxes.
See "Accounts receivable" and "Intangible assets."
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash, accounts receivable, other receivables,
accounts payable, accrued liabilities and long-term debt approximate their
fair value.
F-6
<PAGE>
2
SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
The Company invests excess funds in short-term, interest-bearing obligations.
Due to the short-term nature of these investments, the Company does not take
possession of the securities which are held in safekeeping.
The Company does not enter into hedge and/or other transactions to limit the
risk of loss that may result from a decline in market value of the underlying
assets in the event of default by the counterparty. However, the counterparty
sells the Company securities with a market value in excess of the funds
invested.
ACCOUNTS RECEIVABLE
Accounts receivable represent amounts due on monthly billings for long distance
and other telecommunications costs incurred by customers.
The allowance for doubtful accounts is established through a provision for
losses on accounts receivable which is charged to expense. Accounts
receivable are charged against the allowance for doubtful accounts when
management believes the collectibility of the receivable is unlikely. The
allowance, which is based on evaluations of the collectibility of the
receivables and prior bad debt experience, is an amount that management
believes will be adequate to absorb probable losses on accounts receivable
existing at the reporting date. The evaluations take into consideration such
factors as changes in the aging and volume of the accounts receivable,
overall quality, review of specific problem receivables and current industry
conditions that may affect a borrower's ability to pay. Actual results could
differ from management's estimates. Charge-offs during the fiscal years 1996,
1995 and 1994 were approximately $758,000, $171,000 and $31,000, respectively.
During fiscal year 1996, the Company reevaluated reseller activities
generally and, specifically its relationship with certain resellers. As a
result, the Company has chosen to de-emphasize its reseller marketing
activities by reducing the number of wholesale customers and the related
wholesale accounts receivable. In addition, certain wholesale customers have
experienced financial difficulties which impede their ability to pay the
Company on a timely basis. Wholesale customers with slow payment histories
have been placed on specific payment plans or under lock box agreements.
Management has specifically evaluated its allowance for doubtful accounts
relative to its wholesale customers and believes the allowance to be adequate
to absorb probable losses on the accounts receivable at March 31, 1996.
However, the actual losses on wholesale accounts receivable could differ from
management's evaluation at March 31, 1996 and such difference could be
material.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided for
financial reporting purposes using the straight-line method over the following
estimated useful lives:
Building 30 years
Building improvements 7-10 years
Telecommunications equipment 5-7 years
Office equipment 5-7 years
F-7
<PAGE>
3
Maintenance and repairs are expensed as incurred. Replacements and betterments
are capitalized. The cost and related reserves of assets sold or retired are
removed from the property accounts, and any resulting gain or loss is reflected
in results of operations.
INTANGIBLE ASSETS
The Company's intangible assets include customer acquisition costs and
non-compete agreements incurred as a result of purchased customer bases;
goodwill, customer acquisition costs and noncompete agreements resulting
from acquisitions of businesses; and software development costs attributable
to telecommunications service activities.
In allocating the excess of the purchase price over tangible assets acquired
in business combinations, the Company utilizes cash flow models and projected
attrition rates to quantify the values allocated to the various intangibles
as well as the related useful lives. While management believes that the cash
flow models are achievable and the attrition rates are reasonable, management
regularly reassesses the realization of the acquisition-related intangibles
through periodic updates of the cash flow models. The amounts allocated to
the various intangibles and the estimated useful lives could change based on
these periodic updates.
Customer acquisition costs are recorded based upon the estimated value of the
customer base acquired. Customer acquisition costs are amortized over 6 to
12 years using the straight-line method. Accumulated amortization, at March 31,
1996 and 1995, was approximately $412,000 and $23,000, respectively.
The Company allocates goodwill to business acquisitions based on a series of
projections of cash flows of the acquired entity. Goodwill is amortized over
30 to 40 years using the straight-line method. Accumulated amortization at
March 31, 1996 and 1995, was approximately $55,000 and $24,000, respectively.
Other intangibles include software development costs and non-compete
agreements. The Company capitalizes external costs related to the
development of software while internal costs are expensed. Other
intangibles are amortized using the straight-line method over lives ranging
from one to five years. Accumulated amortization at March 31, 1996 and 1995,
was approximately $259,000 and $56,000, respectively.
OTHER RECEIVABLES
Other receivables consist of current amounts due from customers and entities
providing billing and collection services for a portion of the Company's
customer base.
OTHER CURRENT ASSETS
At March 31, 1996 and 1995, other current assets consisted of costs of direct
response advertising and other prepaid expenses. Direct response advertising
costs are capitalized and amortized over the expected life of the customer.
The Company has determined that the expected life of a customer obtained
through direct response advertising is one year. At March 31, 1996,
approximately $183,000, net of accumulated amortization of approximately
$194,000, was included in other current assets related to direct response
advertising.
F-8
<PAGE>
4
OTHER ASSETS
Other assets include long-term notes receivable from employees of approximately
$208,000 and $188,000 at March 31, 1996 and 1995, respectively.
INCOME TAXES
Income taxes are provided using an asset and liability approach. The current
provision for income taxes represents actual or estimated amounts payable or
refundable on tax returns filed or to be filed for each year. Deferred tax
assets and liabilities are recorded for the estimated future tax effects of
(a) temporary differences between the tax basis of assets and liabilities and
amounts reported in the balance sheets, and (b) operating loss and tax credit
carryforwards. The overall change in deferred tax assets and liabilities for
the period measures the deferred tax expense for the period. Effects of
changes in enacted tax laws on deferred tax assets and liabilities are
reflected as adjustments to tax expense in the period of adjustment. The
measurement of deferred tax assets may be reduced by a valuation allowance
based on judgmental assessment of available evidence if deemed more likely
than not that some of all of the deferred tax assets will not be realized.
RECOGNITION OF REVENUE
Customer long distance calls are routed through switching centers owned by
the Company or others over long distance telephone lines provided by others.
The Company records revenues at the time of customer usage primarily on a
measured time basis.
TELECOMMUNICATIONS EXPENSE
Telecommunications expense includes all payments to local exchange carriers
and interexchange carriers primarily for access and transport charges. The
Company mainly utilizes long-term fixed cost contracts with other carriers in
order to carry customer calls.
EARNINGS PER SHARE
For the year ended March 31, 1996, earnings per share were based on the
weighted average number of shares outstanding during the period. No common
stock equivalents were utilized in the calculation as their effect would be
anti-dilutive. For the years ended March 31, 1995 and 1994, earnings per
share were calculated based on the weighted average number of shares outstanding
during the year plus the dilutive effect of stock options and warrants
determined using the treasury method. Average common and common equivalent
shares utilized were 2,731,093; 2,370,999; and 1,595,840, respectively, for the
years ended March 31, 1996, 1995 and 1994. In each year, there were no
differences in primary and fully diluted earnings per share.
Dividends of $31,984 for the year ended March 31, 1994 on convertible
preferred stock were deducted from net income to determine net income
available to common stockholders for earnings per share computations.
F-9
<PAGE>
5
COMMON STOCK ESCROW AGREEMENT
As part of its public offering of common stock in March 1994, the Company
transferred 626,691 shares of common stock, owned by officers, into an escrow
account. The common stock will be released from escrow in three annual
increments of 208,897 shares if the Company either meets earnings per share
requirements, on a fully diluted basis as defined in the agreement, or
consummates a public offering of the Company's common stock considering
certain conditions defined in the agreement. The stipulated earnings per
share (EPS) amounts are as follows:
March 31 EPS
-------- ---
1995 $ 0.375
1996 0.60
1997 1.00
If the Company fails to meet EPS requirements, the common stock held in
escrow will be forfeited and canceled to the Company's treasury. However, if
the Company meets the EPS requirement in the second or third fiscal year, any
shares forfeited in a prior year(s) will be considered earned and released to
the officers in the subsequent year. If the EPS requirements are attained,
the appropriate compensation expense will be recorded by the Company.
All of the escrowed shares will be released from escrow in the event the
Company is acquired or merged into another entity prior to March 31, 1997 at
a price per common share of at least $10. If the Company is acquired or
merged into another entity prior to March 31, 1997 at a price of less than
$10 per common share, all of the escrowed shares remaining in escrow at the
time of the transaction will be forfeited.
The escrow agreement terminates on January 27, 2000. The escrowed shares
have been excluded from the weighted average number of shares outstanding for
the years ended March 31, 1996 and 1995.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, cash on hand and on deposit are
considered to be cash and cash equivalents.
RECLASSIFICATIONS
Certain items for 1995 and 1994 have been reclassified to conform with the
1996 presentation.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In 1993, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 114 "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 116 "Accounting for Contributions Received
and Contributions Made." In 1994, the FASB issued SFAS No. 118 "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures."
These statements were adopted by the Company in the year ended March 31,
1996. Adoption of these statements did not have a material effect on the
financial position or results of operations of the Company.
F-10
<PAGE>
6
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This
statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets
to be held and used for long-lived assets and certain identifiable
intangibles to be disposed of. This statement is effective for years
beginning after December 15, 1995. Management believes that adoption of this
standard will not have a material effect on the Company's consolidated
results of operations or financial position.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation." This statement establishes financial accounting and reporting
standards for stock-based employee compensation plans and is effective for
fiscal years beginning after December 15, 1995. The Company expects to
continue to apply the accounting provisions of Accounting Principles Board
Opinion 25 in determining its net income; however, additional disclosures
will be made to disclose the estimated value of compensation expense under
the method established by SFAS No. 123.
3. CUSTOMER BASE ACQUISITIONS:
The Company has completed a series of acquisitions of segments of other long
distance providers' customer bases. Such acquisitions have been accomplished
through the purchase of the customer base and related accounts receivable for
cash, shares of the Company's common stock, issuance of notes payable and
forgiveness of accounts receivable or a combination thereof. All
acquisitions have been accounted for as purchases and resulted in an excess
of the purchase price over the net tangible assets acquired.
The table below sets forth information concerning consideration given in
connection with the customer base acquisitions by the Company:
<TABLE>
<CAPTION>
Purchase Price
---------------------------------------------------------------
Forgiveness Shares Issued
Acquisition of Notes -----------------
Acquired Entity Date Cash Receivables Payable Number Value
- ---------------------- ----------- ---------- ----------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Quantum
Communications, Inc.
(Quantum) Jan-96 $ 474,226 - $339,570 29,756 $590,355
Network Services, Inc. May-95 564,802 - 192,500 7,349 55,335
(NSI)
Telecommunications
Brokerage, Inc. (TBI) May-95 - 238,465 - - -
Prime Telecom, Inc. (PTI) Apr-95 10,191 46,875 - - -
Westover Communication
Corp. (WCC) Dec-94 63,090 - - - -
Colorado River
Communications (CRC) Nov-94 1,741,977 - - 29,038 232,129
First Choice
Network (FCN) Mar-94 131,695 - - - -
</TABLE>
F-11
<PAGE>
7
The table below sets forth information concerning assets acquired in connection
with the customer base acquisitions by the Company:
<TABLE>
<CAPTION>
Assets Acquired Amortization Period (Years)
-------------------------------------- ---------------------------
Acquisition Accounts Customer Other Customer Other
Acquired Entity Date Receivable Base Intangibles Base Intangibles
- ------------------------ ----------- ---------- -------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Quantum
Communications, Inc.
(Quantum) Jan-96 $191,250 $826,765 $ - 7.5 -
Network Services, Inc.
(NSI) May-95 259,286 368,438 - 12 -
Telecommunications
Brokerage, Inc. (TBI) May-95 39,811 191,154 - 11 -
Prime Telecom, Inc. (PTI) Apr-95 26,712 30,354 - 11 -
Westover Communication
Corp. (WCC) Dec-94 35,170 11,120 - 12 -
Colorado River
Communications (CRC) Nov-94 336,210 692,000 870,000 6 2 - 40
First Choice
Network (FCN) Mar-94 56,287 76,289 - 12 -
</TABLE>
The initial purchase price allocations for the fiscal year 1996 acquisitions
were based on estimates pending development of more detailed information
concerning the current values of certain assets and liabilities. As a
result, the final purchase price allocations may differ from the presented
estimates.
4. BUSINESS COMBINATION:
On October 31, 1995, the Company acquired substantially all of the assets of
ValueTel, Inc., (ValueTel), a long distance reseller whose customer base was
located primarily in Illinois, in a transaction accounted for as a purchase.
Results of operations of ValueTel are included in current year results of
operations of the Company from the date of acquisition. As consideration for
the purchase, the Company issued 890,915 shares of its common stock with an
assigned value of approximately $5,955,000, assumed liabilities of ValueTel
of approximately $696,000 and forgave a ValueTel payable to the Company of
approximately $608,000. The Company acquired substantially all of ValueTel's
accounts receivable which were valued at $1,610,000. Intangible assets
acquired were allocated to customer base at approximately $3,334,000,
non-compete agreements at approximately $845,000 and goodwill at
approximately $1,470,000. Of the 890,915 shares of the Company's common
stock issued, 16,500 shares are held in escrow pending resolution of purchase
price contingencies. The escrowed shares have not been considered as part of
the purchase price.
The following unaudited pro forma combined results of operations for the
Company assume that the ValueTel acquisition was completed on April 1, 1995.
1996 1995
----------- -----------
Revenues $36,191,000 $24,713,000
Loss applicable to common shareholders (642,000) (401,000)
Loss per share (0.20) (0.12)
F-12
<PAGE>
8
These pro forma amounts represent the historical operating results of the
acquired entity combined with those of the Company with appropriate
adjustments which give effect to interest expense, amortization and common
shares issued. These pro forma amounts are not necessarily indicative of
operating results which would have occurred if ValueTel had been operated by
current management during the periods presented because these amounts do not
reflect full network optimization and the synergistic effect on operating,
selling, general and administrative expenses.
The initial purchase price allocation for the ValueTel acquisition was based
on estimates pending development of more detailed information concerning the
current values of certain assets and liabilities. As a result, the final
purchase price allocation may differ from the presented estimates.
5. INCOME TAXES:
The (benefit) provision for income taxes is composed of the following:
1996 1995 1994
--------- --------- --------
Current $(21,331) $166,230 $ -
Deferred (47,700) (47,487) 114,955
--------- -------- --------
Total (benefit) provision for income taxes $(69,031) $118,743 $114,955
--------- -------- --------
--------- -------- --------
The following is a reconciliation of the actual provisions for income taxes
to the expected amounts which are derived by applying the statutory rate to
reported pretax income.
1996 1995 1994
--------- --------- --------
Expected statutory amount $(150,419) $207,125 $112,462
Usage of net operating loss carryforwards - (75,409) -
Effect of officer's life insurance 1,681 (9,652) 1,632
Reclassification from current taxes payable 68,732 - -
Other 10,975 (3,321) 861
--------- -------- --------
Actual tax provision $ (69,031) $118,743 $114,955
--------- -------- --------
--------- -------- --------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes.
F-13
<PAGE>
9
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of March 31, 1996 and 1995:
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------
1996 1995
------------------------- -----------------------
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $418,557 $ - $ 96,806 $ -
Depreciation - 119,508 - 52,680
Amortization 40,846 - - -
Effect of conversion from cash basis
for income tax purposes - 239,586 - 118,986
Prepaid expenses - 80,775 - -
Accrued liabilities 70,335 - 100,850 -
Other - 16,414 900 1,135
-------- -------- -------- --------
Total $529,738 $456,283 $198,556 $172,801
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
6. LONG-TERM DEBT:
In December 1995, the Company renewed its line of credit with a bank with
$6,000,000 being available under the renewed facility. Borrowings under the
renewed line of credit mature on April 30, 1997 and bear interest at 1% above
the prime rate (9.25% at March 31, 1996). At March 31, 1996, $2,532,235 was
outstanding under the line of credit. The line of credit is secured by
certain accounts receivable of the Company and requires compliance with
certain financial and operating covenants which include minimum leverage and
fixed charge coverage ratios. At March 31, 1996, the Company was in
compliance with those covenants.
At March 31, 1996, $343,114 remained outstanding on notes payable primarily
to acquired entities incurred in connection with acquisition of customer
bases. Borrowings under these notes payable are unsecured, bear interest at
8% and mature in February 2001.
In May 1996, the Company entered into a $14,250,000 credit facility with a
bank which includes a revolving credit facility and term loan facility.
Borrowings under the revolving credit portion of the facility may not exceed
the lesser of $11,000,000 minus any reserves the lender may deem eligible or
85% of eligible receivables. Borrowings under the revolving facility will
bear interest at the prime rate plus 0.75%. Borrowings and unpaid interest
on the revolving facility are repayable in full at maturity of the facility
on June 1, 1999. The Company is allowed to borrow $3,250,000 under the term
loan facility. The term loan is repayable in 36 equal monthly principal
installments of $90,278 plus accrued interest. The term loan will bear
interest at the prime rate plus 3%. Substantially all of the assets of the
Company including tangible assets, receivables and general intangibles, the
definition of which includes but is not limited to intellectual property,
business plans, business records and licenses, are pledged as collateral
under the credit facility.
F-14
<PAGE>
10
Future maturities of long-term debt are as follows:
1997 $ 75,778
1998 63,602
1999 68,881
2000 2,606,833
2001 60,255
-----------
$ 2,875,349
-----------
-----------
7. EMPLOYEE BENEFIT PLAN:
In May 1994, the Company adopted a stock incentive plan (the Plan) under
which certain employees are eligible to receive 100 shares of the Company's
common stock upon completion of their first anniversary of service. All
shares issued under the Plan are held by the Company for a period of three
years from the issue date, at which time the employee vests if they are still
employed with the Company. In the event the Company is sold, all employees
vest immediately. Approximately 19,300 and 17,600 shares of common stock had
been awarded under the Plan at March 31, 1996 and 1995, respectively.
Compensation expense of $50,752 and $42,350 was recognized in the years ended
March 31, 1996 and 1995, respectively, related to the Plan.
In March 1996, the Company adopted a Defined Contribution Retirement Plan for
all eligible employees which qualifies under the provisions of Section 401(k)
of the Internal Revenue Code and will be retroactively effective to January
1, 1996.
8. STOCK WARRANTS:
The Company grants warrants to various directors, officers, employees and
nonemployees from time to time. The warrants vest in periods ranging from
immediately following grant date to ten years from grant date. Terms and
conditions of the Company's warrants, including exercise price and the period
warrants are exercisable, generally are at the discretion of the Company's
Board of Directors. Each warrant granted allows for the purchase of one
share of the Company's common stock. No warrants are exercisable for a period
of more than ten years. No compensation expense has been recognized on
granting these warrants because the exercise price for warrants granted
equaled or exceeded the fair market value of the Company's common stock at
the grant date. The following summarizes information related to warrants
granted by the Company:
Number of Exercise
Warrants Price
-------- ------
Balance, March 31, 1994 - $ -
Granted 120,000 7.50
--------- -------------
Balance, March 31, 1995 120,000 7.50
Granted 1,077,002 7.50 - 9.875
Canceled (70,000) 9.875
--------- -------------
Balance, March 31, 1996 1,127,002 $7.50 - 9.125
--------- -------------
--------- -------------
F-15
<PAGE>
11
9. COMMITMENTS:
At March 31, 1996, the Company was committed under noncancellable,
noncapitalizable agreements for fixed cost transmission facilities that
require minimum payments of approximately $13,500,000 in 1997, $9,450,000 in
1998, $8,100,000 in 1999 and $1,350,000 in 2000.
The Company leases office facilities and certain equipment under
noncancellable operating leases having initial or remaining terms of more
than one year. Rent expense related to these leases was approximately
$264,000 and $4,400, for the years ended March 31, 1996 and 1995,
respectively. Approximate minimum lease payments under these operating leases
are as follows:
1997 $256,000
1998 306,000
1999 301,000
2000 303,000
2001 335,000
Certain of the Company's facility leases include renewal options and all
leases include provisions for rent escalation to reflect increased operating
costs and/or require the Company to pay certain maintenance and utility costs.
10. CONTINGENCIES:
On February 8, 1996, President Clinton signed legislation that will, without
limitation, permit Bell Operating Companies (BOC) to provide domestic and
international long distance services upon a finding by the Federal
Communications Commission that the petitioning BOC has satisfied certain
criteria for opening up its local exchange network to competition and that
its provision of long distance services would further the public interest;
removes existing barriers to entry into local service markets; significantly
changes the manner in which carrier-to-carrier arrangements are regulated at
the federal and state level; establishes procedures to revise universal
service standards; and establishes penalties for unauthorized switching of
customers. The Company cannot predict the effect such legislation will have
on the Company or the industry. However, the Company believes that it is
positioned to take advantage of business opportunities in the
rapidly-changing telecommunications market.
The Company is involved in legal proceedings generally incidental to its
business. While the results of these various legal matters contain an
element of uncertainty, the Company believes that the probable outcome of any
of these matters, or all of them combined, should not have a material adverse
effect on the Company's consolidated results of operations or financial
position.
11. RELATED PARTY TRANSACTIONS:
The Company held notes receivable and related accrued interest from various
employees of $261,898 and $187,751 as of March 31, 1996 and 1995,
respectively. These notes, which are unsecured, include non-interest bearing
notes and notes bearing interest at a rate of 8%.
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid by the Company during the years ended March 31, 1996, 1995 and
1994 amounted to $188,304, $2,648, and $105,900, respectively. Income taxes
paid during the years ended
F-16
<PAGE>
12
March 31, 1996 and 1995, were $49,000 and $25,000, respectively. No income
taxes were paid, and no refunds were received during the year ended March 31,
1994.
In conjunction with business combinations and customer base acquisitions
during the years ended March 31, 1996 and 1995, assets acquired and non-cash
consideration issued were as follows:
March 31,
---------
1996 1995
------------ -----------
Fair value of tangible assets acquired $ 2,134,675 $ 437,667
Excess of cost over intangible assets acquired 7,329,764 1,771,185
Accounts receivable forgiven (892,935) (195,668)
Liabilities assumed (649,478) -
Notes payable issued (532,070) -
Common stock issued (6,288,783) (232,129)
------------ -----------
Cash paid $ 1,101,173 $ 1,781,055
------------ -----------
------------ -----------
For the year ended March 31, 1995, noncash transactions also included the
redemption of preferred stock of $190,506.
13. CONCENTRATIONS OF CREDIT RISK:
Four of the Company's switchless customers accounted for approximately 20% of
net sales in 1996 and approximately 18% of gross accounts receivable at March
31, 1996. The Company performs initial and ongoing credit evaluations of its
customers and maintains an allowance for doubtful accounts. Customers may be
asked to provide personal guarantees and/or security deposits. If the
financial condition and operations of these switchless customers deteriorate
below critical levels, the Company's operating results could be adversely
affected.
14. SUBSEQUENT EVENTS:
In May 1996, the Company purchased customer base and related accounts
receivable from Universal Network Services, Inc., a switchless reseller whose
customer base is located primarily in Nevada. The purchase price consisted
of approximately $2,852,000 in cash and issuance of 188,373 shares of common
stock of the Company tentatively valued at $2,166,000. In addition to the
issuance of the 188,373 common shares, the Company issued 55,385 common
shares which are to be held in escrow pending certain purchase price
adjustments. The Company acquired tangible assets (receivables) valued at
approximately $776,000.
Subsequent to March 31, 1996, a switchless customer of the Company, which
accounted for approximately 10% of gross revenues for the year ended March 31,
1996, notified the Company that it is discontinuing its relationship with the
Company.
F-17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NETWORK LONG DISTANCE
Dated: June 28, 1996 By /s/ Michael M. Ross
------------------------------
Michael M. Ross, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/Michael M. Ross
- ---------------------------- President Chief June 28, 1996
Michael M. Ross Executive Officer,
and Director
/s/Marc I. Becker
- ---------------------------- Executive Vice President, June 28, 1996
Marc I. Becker Chief Operating Officer
and Director
/s/Joseph M. Edelman
- ---------------------------- Vice President June 28, 1996
Joseph M. Edelman Secretary,
and Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES AS OF
MARCH 31, 1996, AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS,
STOCKHOLDERS' EQUITY AND CASH FLOWS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 756
<SECURITIES> 0
<RECEIVABLES> 8,244
<ALLOWANCES> 985
<INVENTORY> 0
<CURRENT-ASSETS> 8,707
<PP&E> 3,571
<DEPRECIATION> 1,437
<TOTAL-ASSETS> 18,823
<CURRENT-LIABILITIES> 3,959
<BONDS> 2,800
0
0
<COMMON> 0
<OTHER-SE> 13,006
<TOTAL-LIABILITY-AND-EQUITY> 19,823
<SALES> 30,810
<TOTAL-REVENUES> 30,810
<CGS> 22,879
<TOTAL-COSTS> 22,879
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,020
<INTEREST-EXPENSE> 188
<INCOME-PRETAX> (442)
<INCOME-TAX> (69)
<INCOME-CONTINUING> (373)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (373)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
