<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 10 or 15(d) of the
Securities Exchange Act of 1934
JUNE 30, 1996
--------------------------------------------------
Date of Report (date of earliest event reported)
NETWORK LONG DISTANCE, INC.
-----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 0-23172 72-1122018
- ---------------- ------------- --------------------
(State or Other (Commission (IRS Employer Iden-
Jurisdiction of File Number) tification Number)
Incorporation)
525 FLORIDA STREET
BATON ROUGE, LOUISIANA 70801
---------------------------------------
(Address of Principal Executive Offices
Including Zip Code)
(504) 343-3125
-------------------------------
(Registrant's telephone number,
including area code)
<PAGE>
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Network Long Distance, Inc. and Blue Ridge Telephone,
Inc. Financial Statements.
PAGE NUMBER
-----------
NETWORK LONG DISTANCE, INC.
Report of Independent Public Accountants ................................. F-1
Independent Auditors' Report ............................................. F-2
Supplemental Consolidated Balance Sheets as of
March 31, 1996 and 1995 ............................................... F-3
Supplemental Consolidated Statements of
Operation for the Years Ended March 31, 1996, 1995
and 1994 .............................................................. F-4
Supplemental Consolidated Statements of Stockholders'
Equity for the Years Ended March 31, 1996, 1995, and 1994 ............. F-5
Supplemental Consolidated Statements of Cash Flows
for the Years Ended March 31, 1996, 1995 and 1994 ..................... F-6
Notes to Supplemental Consolidated Financial Statements .................. F-7
LONG DISTANCE TELECOM, INC. dba BLUE RIDGE
TELEPHONE (TELECOMMUNICATIONS
VENTURES LIMITED PARTNERSHIP NO. 1 T/A
BLUE RIDGE TELEPHONE)
Independent Auditors' Report ............................................. F-22
Balance Sheets as of December 31, 1994 and 1995 and
(unaudited) March 31, 1996 ............................................ F-23
Statements of Operations for the Years
Ended December 31, 1993, 1994 and 1995 and
(unaudited) for the Three Months Ended March 31, 1995 and 1996 ........ F-24
Statements of Partners' Equity (Deficit)
for the Years Ended December 31, 1993, 1994 and 1995
and (unaudited) for the Three Months Ended March 31, 1996 ............. F-25
Statements of Cash Flows for the Years
Ended December 31, 1993, 1994 and 1995 and (unaudited) for the
Three Months Ended March 31, 1995 and 1996 ............................ F-26
Notes to Financial Statements ............................................ F-27
(b) Pro Forma Financial Information
Pro Forma Combining Financial Statements ................................. F-34
Pro Forma Combining Balance Sheet as of March 31, 1996 ................... F-35
Pro Forma Combining Income Statement for the Twelve
Months Ended March 31, 1996 ............................................ F-36
Pro Forma Combining Income Statement for the Twelve
Months Ended March 31, 1995 ............................................ F-37
Notes to Pro Forma Combining Financial Statements ........................ F-38
(c) Exhibits: Filed herewith pursuant to Reg. S-K Item 601
EXHIBIT NO. PAGE DESCRIPTION
1 4 Stock Exchange Agreement between the Registrant
and Long Distance Telcom, Inc., dated June 30,
1996.*
___________________
* Previously filed.
-2-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NETWORK LONG DISTANCE, INC.
Dated: August 2, 1996 By: /s/ MARC I. BECKER
--------------------------------
Marc I. Becker,
Executive Vice President
-3-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Network Long Distance, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
Network Long Distance, Inc., (a Delaware Corporation) and subsidiaries as of
March 31, 1996 and 1995, and the related supplemental consolidated statements
of operations, stockholders' equity and cash flows for the years then ended.
The supplemental consolidated statements give effect to the merger with Long
Distance Telecom, Inc. dba Blue Ridge Telephone, on June 30, 1996, which has
been accounted for as a pooling-of-interests as described in Note 1. These
supplemental financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
supplemental financial statements based on our audits. The supplemental
consolidated financial statements of Network Long Distance, Inc., for the
year ended March 31, 1994 were audited by other auditors whose report dated
August 5, 1996 expressed an unqualified opinion on those.
We did not audit the financial statements of Long Distance Telecom, Inc.
included in the supplemental consolidated financial statements of Network
Long Distance, Inc. which statements reflect total assets and revenues
constituting 5.2% and 10.1%, respectively, in 1996 and 8.4% and 10.3%,
respectively, in 1995 of the related supplemental consolidated totals. These
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to
the amounts included for Long Distance Telecom, Inc., is based solely upon
the report of other auditors.
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 and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based upon our audit and the report of the other auditors, the
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Network Long Distance, Inc.,
and its subsidiaries as of March 31, 1996 and 1995, and the results of their
operations and their cash flows for each of years then ended, after given
retroactive effect to the merger with Long Distance Telecom, Inc., as described
in Note 1, all in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Jackson, Mississippi,
August 6, 1996.
F-1
<PAGE>
Independent Auditors' Report
Board of Directors
Network Long Distance, Inc.
Baton Rouge, Louisiana
We have audited the accompanying supplemental consolidated statements of
operations, stockholders' equity and cash flows of Network Long Distance,
Inc. and Subsidiaries for the year ended March 31, 1994. The supplemental
consolidated statements give retroactive effect to the merger with Long
Distance Telecom, Inc. dba Blue Ridge Telephone, on June 30, 1996, which has
been accounted for as a pooling-of-interests as described in Note 1. These
supplemental financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
supplemental financial statements based on our audits.
We did not audit the financial statements of Long Distance Telecom, Inc.
included in the supplemental consolidated financial statements of Network
Long Distance, Inc. which statements reflect total revenues constituting
15.0% in 1994 of the related supplemental consolidated totals. These
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to
the amounts included for Long Distance Telecom, Inc., is based solely upon
the report of the other auditors.
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 and the report of other auditors provides a reasonable
basis for our opinion.
In our opinion, based upon our audit and the report of the other auditors, the
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the results of operations of Network Long Distance,
Inc. and its subsidiaries and their cash flows for the year ended March 31,
1994, after giving retroactive effect to the merger with Long Distance Telecom,
Inc. as described in Note 1, all in conformity with generally accepted
accounting principles.
Faulk & Winkler LLC
Baton Rouge, Louisiana
August 5, 1996
F-2
<PAGE>
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
---------------------------------
1996 1995
------------- -------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 886,683 $ 437,501
Securities purchased under agreement to resell - 1,558,562
Accounts receivable, net of allowance for doubtful accounts of
$1,001,000 and $511,000 at March 31, 1996 and 1995, respectively 6,946,534 4,512,261
Other receivables 708,962 -
Deferred income tax asset 131,656 42,231
Other current assets 583,561 70,943
------------- -------------
Total current assets 9,257,396 6,621,498
PROPERTY AND EQUIPMENT:
Land 75,000 75,000
Building and improvements 686,470 436,568
Telecommunications equipment 2,210,908 2,020,626
Furniture and fixtures 1,341,828 786,039
------------- -------------
4,314,206 3,318,233
Less accumulated depreciation (1,661,091) (1,098,830)
------------- -------------
2,653,115 2,219,403
------------- -------------
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 218,940 367,213
------------- -------------
Total assets $ 20,902,453 $ 11,092,111
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 297,524 $ 1,031,428
Accrued telecommunications cost 2,736,999 1,481,409
Other accrued liabilities 892,716 619,622
Customer deposits 176,210 183,185
Current maturities of long-term debt 146,175 53,739
Current maturities of Capital Lease Obligation 82,855 73,873
------------- -------------
Total current liabilities 4,332,479 3,443,256
DEFERRED INCOME TAX LIABILITY 58,201 16,476
LONG-TERM DEBT 2,889,138 142,433
CAPITAL LEASE OBLIGATION 126,481 209,337
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;4,246,101 and
3,329,164 shares issued and outstanding at March 31, 1996 and 1995,
respectively 425 333
Additional paid-in capital 12,904,794 6,629,203
Retained earnings 590,935 651,073
------------- -------------
Total stockholders' equity 13,496,154 7,280,609
------------- -------------
Total liabilities and stockholders' equity $ 20,902,453 $ 11,092,111
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
SUPPLEMENTAL 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) $34,273,486 $27,006,864 $12,493,560
Operating expenses:
Telecommunications costs 24,810,691 21,147,295 9,231,807
Selling, general and administrative 7,133,456 4,481,600 2,349,043
Provision for losses on accounts receivable 1,047,151 396,814 243,590
Depreciation and amortization 1,211,717 371,688 255,381
---------- ---------- ----------
Total operating expenses 34,203,015 26,397,397 12,079,821
---------- ---------- ----------
Operating income 70,471 609,467 413,739
Interest (income) expense, net 239,855 (91,875) 130,651
Other (income) loss (40,215) 30,142 18,569
---------- ---------- ----------
Income (loss) before income taxes (129,169) 671,200 264,519
Provision (benefit) for income taxes (69,031) 118,743 114,955
---------- ---------- ----------
Net income (loss) (60,138) 552,457 149,564
Preferred dividend requirement - - 31,984
---------- ---------- ----------
Net income (loss) applicable to common stockholders (60,138) 552,457 117,580
Pro forma adjustment (Note 1):
Blue Ridge income tax provision (benefit) 126,375 28,685 (16,481)
Pro forma net income (loss) applicable to common
stockholders $ (186,513) $ 523,772 $ 101,099
---------- ---------- ----------
---------- ---------- ----------
Earnings (loss) per common share $ (0.02) $ 0.20 $ 0.06
---------- ---------- ----------
---------- ---------- ----------
Pro forma earnings (loss) per common share $ (0.06) $ 0.20 $ 0.05
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
SUPPLEMENTAL 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 1,733,907 $ 174 $ 114,462 $ 281,036
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 - - - 149,564
---------- ------- ----------- ---------
BALANCE, MARCH 31, 1994 3,173,907 318 6,113,955 98,616
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 -
Issuance of common stock (net of direct costs of $69,872) 62,717 6 92,622 -
Net income - - - 552,457
---------- ------- ----------- ---------
BALANCE, MARCH 31, 1995 3,329,164 333 6,629,203 651,073
Issuance of common stock for acquisitions 916,937 92 6,275,591 -
Net loss - - - (60,138)
---------- ------- ----------- ---------
BALANCE, MARCH 31, 1996 4,246,101 $ 425 $12,904,794 $ 590,935
---------- ------- ----------- ---------
---------- ------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
SUPPLEMENTAL 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) $ (60,138) $ 552,457 $ 149,564
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 588,736 291,418 220,597
Amortization 622,981 80,270 34,784
Provision for losses on accounts receivable 1,047,151 396,814 243,590
Provision (benefit) for deferred income taxes (47,700) (47,487) 114,955
Provision for employee stock incentive plan 50,752 42,350 -
(Gain) loss on disposal of equipment (17,000) 62,319 19,476
Changes in assets and liabilities, net of effect of
business combinations:
Accounts receivable (2,251,354) (2,484,088) (1,676,814)
Other current assets (1,221,580) (25,292) 42,467
Accounts payable and other current liabilities 744,553 2,008,286 390,828
Other 152,735 (38,499) 134,339
---------- ---------- ----------
Net cash provided by (used in) operating activities (390,864) 838,548 (326,214)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,001,200) (1,385,390) (248,473)
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) -
Proceeds from sale of equipment 17,000 - -
Other (4,462) (4,179) (145,704)
---------- ---------- ----------
Net cash used in investing activities (726,594) (530,239) (4,703,977)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (12,405,569) (245,891) (620,992)
Proceeds from issuance of debt 13,972,209 23,000 11,331
Proceeds from issuance of common stock - 146,212 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 1,566,640 (185,791) 5,057,992
---------- ---------- ----------
Net increase in cash and cash equivalents 449,182 122,518 27,801
Cash and cash equivalents at beginning of period 437,501 314,983 287,182
---------- ---------- ----------
Cash and cash equivalents at end of period $ 886,683 $ 437,501 $ 314,983
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. MERGER:
On June 30, 1996, Network Long Distance, Inc. (Network), merged with Long
Distance Telecom, Inc. dba Blue Ridge Telephone (Blue Ridge) and in
connection therewith issued 337,058 shares of common stock for all of Blue
Ridge's common stock (the Merger). The Merger was accounted for as a
pooling-of-interests and, accordingly, the Network financial statements for
periods prior to the Merger have been restated to include the results of Blue
Ridge for all periods presented. Separate and combined results of operations
are as follows:
For the year ended March 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
Revenues:
Network $30,810,016 $24,216,948 $10,621,705
Blue Ridge 3,463,470 2,789,916 1,871,855
----------- ----------- -----------
Combined $34,273,486 $27,006,864 $12,493,560
----------- ----------- -----------
----------- ----------- -----------
Income (loss) before income tax:
Network $ (442,412) $ 609,192 $ 321,320
Blue Ridge 313,243 62,008 (56,801)
----------- ----------- -----------
Combined $ (129,169) $ 671,200 $ 264,519
----------- ----------- -----------
----------- ----------- -----------
Prior to the Merger, Blue Ridge operated in the form of a partnership under the
name "Telecommunications Ventures Limited Partnership No. 1 T/A Blue Ridge
Telephone." On June 17, 1996, Blue Ridge changed to a corporate form of
organization. Blue Ridge did not recognize income tax expense for the periods
presented because its tax attributes flowed to its partners. The supplemental
consolidated statements of operations include a pro forma adjustment to reflect
the results Blue Ridge as if it had been subject to income tax.
Prior to the Merger, Blue Ridge utilized a December 31 fiscal year end. For
purposes of the supplemental consolidated balance sheets, the March 31, 1996 and
1995, consolidated balance sheets of Network have been consolidated with the
balance sheets of Blue Ridge as December 31, 1995 and 1994. For purposes of the
supplemental consolidated statements of operations, stockholders' equity and
cash flows, the results of Network for each of the years in the three year
period ended March 31, 1996 have been combined with the results of Blue Ridge
for each of the years in the three year period ended December 31, 1995. There
were no significant intercompany transactions between Network and Blue Ridge.
The combined companies of Network and Blue Ridge are hereinafter referred to as
the "Company."
F-7
<PAGE>
2. DESCRIPTION OF BUSINESS:
The Company provides long distance telecommunications services to commercial and
residential customers in 48 states. 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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The supplemental consolidated financial statements of Network have been prepared
to give retroactive effect to the merger with Blue Ridge on June 30, 1996.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation;
however, they will become the historical consolidated financial statements of
the Company after financial statements covering the date of consummation of the
business combination are issued.
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-8
<PAGE>
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 customer's ability
to pay. Actual results could differ from management's estimates. Charge-offs
during the fiscal years 1996, 1995 and 1994 were approximately $780,000,
$179,000 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.
F-9
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided for
financial reporting purposes using primarily the straight-line method over the
following estimated useful lives:
Building 30 years
Building improvements 7-39 years
Telecommunications equipment 5-10 years
Office equipment 5-7 years
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 non-compete 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.
F-10
<PAGE>
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 .
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
3,068,151, 2,708,057 and 1,870,187, 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.
F-11
<PAGE>
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.
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
F-12
<PAGE>
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.
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.
4. 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.
(NSI) May-95 564,802 - 192,500 7,349 55,335
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-13
<PAGE>
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. Apr.-95 26,712 30,354 - 11 -
(PTI)
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.
5. 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.
F-14
<PAGE>
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 $ 39,654,000 $ 27,503,000
Loss applicable to common shareholders (329,000) (339,000)
Loss per share (0.11) (0.13)
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.
6. 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. The expected statutory amount does not consider income
(loss) related to Blue Ridge because Blue Ridge was a partnership prior to the
merger.
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
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
---------- --------- ---------
---------- --------- ---------
</TABLE>
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-15
<PAGE>
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>
7. 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.
The Company maintains another line of credit with a bank, which expires May 31,
1996 and provides short-term credit up to $130,000. Interest is payable monthly
at the rate of prime plus 1.5% with a 30-day pay-out required. The line of
credit is secured by accounts receivable of the Company. The line of credit
requires compliance with certain financial covenants. No borrowings were
outstanding under this facility at March 31, 1996. At March 31, 1995, $75,000
was outstanding under this facility.
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.
The Company has other notes payable to banks with aggregate outstanding balances
of $109,280 and $117,932 at March 31, 1996 and 1995, respectively. Borrowings
under these notes mature in periods ranging from September 1996 to July 1999 and
bear interest at rates ranging from 7% to 10.5%. The notes are collateralized
by telecommunications and other equipment.
F-16
<PAGE>
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.
Future maturities of long-term debt are as follows:
1997 $ 146,175
1998 134,155
1999 87,895
2000 2,606,833
2001 60,255
-----------
$ 3,035,313
-----------
-----------
8. 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.
9. 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:
F-17
<PAGE>
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
--------- -------------
--------- -------------
10. 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 $301,000, $41,000 and $30,000,
for the years ended March 31, 1996, 1995 and 1994, respectively. Approximate
minimum lease payments under these operating leases are as follows:
1997 $ 287,000
1998 336,000
1999 331,000
2000 333,000
2001 365,000
Thereafter 90,000
Certain telecommunications equipment is leased under a capital lease agreement
expiring May 1998. The following is an analysis of the equipment under capital
lease included in property and equipment:
March 31,
-----------------------------
1996 1995
----------- ------------
Communication equipment $ 367,862 $ 367,862
Less accumulated depreciation (110,039) (58,526)
----------- ------------
$ 257,823 $ 309,336
----------- ------------
----------- ------------
F-18
<PAGE>
The following is a schedule by years of the future minimum lease payments under
capital lease together with the present value of the minimum lease payments as
of March 31, 1996.
1997 $ 102,794
1998 102,794
1999 34,535
----------
Total minimum lease payments 240,123
Amounts representing interest (30,787)
----------
Present value of net minimum
lease payments 209,336
Less current portion (82,855)
----------
Long-term portion $ 126,481
----------
----------
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.
11. 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.
12. 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%.
The Company is indebted to shareholders under two notes payable aggregating
$53,010 and $23,360, respectively, at March 31, 1996 and 1995. These notes
payable bear interest at rates of 8% and mature in October 1997 and December
1997. The notes are secured by shares in the Company and a life insurance
policy on a shareholder. At March 31, 1996, the current portion of these notes
payable was $27,324 with the remaining portion of $23,360 maturing in the year
ending March 31, 1998.
F-19
<PAGE>
The Company leases office space and a retail facility from shareholders under
two operating leases. Annual rentals under the leases totaled $37,200, $36,300
and $30,000, respectively, for the years ended March 31, 1996, 1995 and 1994.
13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid by the Company during the years ended March 31, 1996, 1995 and
1994 amounted to $240,000, $58,000 and $154,000, respectively. Income taxes
paid during the years ended 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, 1996, noncash transactions also included debt
incurred for purchase of equipment of $29,320 and other noncash transactions of
$8,072. For the year ended March 31, 1995, noncash transactions included
capital lease obligations incurred of $66,940, other noncash transactions of
$12,437 and redemption of preferred stock of $190,506. For the year ended March
31, 1994, noncash transactions included capital lease obligations incurred of
$300,921 and debt incurred in lieu of salary payment of $43,064.
14. CONCENTRATIONS OF CREDIT RISK:
Four of the Company's switchless customers accounted for approximately 18% of
revenues 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.
F-20
<PAGE>
15. 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 9% of gross revenues for the year ended March 31,
1996, notified the Company that it is discontinuing its relationship with the
Company.
F-21
<PAGE>
(b) Pro forma financial information:
ITEM 7(b)
PRO FORMA COMBINING FINANCIAL STATEMENTS
The following unaudited Pro Forma Combining Balance Sheet as of March 31,
1996, and unaudited Pro Forma Combining Income Statements for the years ended
March 31, 1996 and 1995, illustrate the effect of the acquisition of a
segment of the customer base and related accounts receivable of Universal
Network Services, Inc. (UniNet) as of May 31, 1996 and the merger with Long
Distance Telecom, Inc. dba Blue Ridge Telephone (Blue Ridge) as of June 30,
1996. Network Long Distance, Inc. (the Company) acquired the UniNet customer
base and accounts receivable for cash of approximately $3,628,000 and the
issuance of approximately 244,000 shares of restricted common stock, of which
approximately 49,000 shares are held in escrow, in a transaction accounted
for as a purchase of a business. The Company exchanged approximately 337,000
shares of common stock for all of the outstanding shares of Blue Ridge in a
transaction accounted for as a pooling-of-interests. Both the UniNet and Blue
Ridge acquisitions are collectively referred to as the "Acquisitions". The
Pro Forma Combining Balance Sheet assumes that the Acquisitions occurred on
the date the balance sheet is presented. The Pro Forma Combining Income
Statements assume that the Acquisitions occurred at the beginning of the
earliest period presented.
Prior to the Acquisitions, UniNet and Blue Ridge utilized a December 31 fiscal
year end. For purposes of the Pro Forma Combining Financial Statements for the
years ended March 31, 1996 and 1995, the UniNet and Blue Ridge amounts reflect
the historical financial position for these entities as of December 31, 1995 and
the historical results of operations for these entities for the years ended
December 31, 1995 and 1994.
The Pro Forma Combining Financial Statements are presented for comparative
purposes only and are not intended to be indicative of actual results had the
transaction occurred as of the dates indicated above nor do they purport to
indicate results which may be attained in the future.
F-34
<PAGE>
PRO FORMA COMBINING BALANCE SHEET (1)
AS OF MARCH 31, 1996
<TABLE>
<CAPTION>
Network/ Network/UniNet
UniNet Blue Ridge
Network UniNet (2) Pro Forma Pro Forma Blue Ridge (6) Pro Forma Pro Forma
Historical Historical Adjustments Combined Historical Adjustments Combined
----------- ------------ ----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets $ 8,707,468 $ 1,975,300 $ (1,199,255) (3) $ 9,483,513 $ 549,928 $ - $ 10,033,441
Property and equipment, 2,134,092 1,304,300 (1,304,300) (3) 2,134,092 519,023 - 2,653,115
net
Customer acquisition
costs, net 5,501,559 1,405,100 (1,405,100) (3) 7,592,264 - - 7,592,264
2,090,705 (4)
Goodwill, net 2,079,433 - 2,555,306 (4) 4,634,739 - - 4,634,739
Other intangibles,
net 1,192,010 - - 1,192,010 - - 1,192,010
Other assets 208,270 24,700 (24,700) (3) 208,270 10,670 - 218,940
----------- ------------ ------------ ------------ ---------- ------------- -----------
Total assets $19,822,832 $ 4,709,400 $ 712,656 $ 25,244,888 $1,079,621 $ - $ 26,324,509
=========== ============ ============ ============ ========== ============= ===========
Current liabilities $ 3,883,564 $ 12,941,800 $(12,941,800) (3) $ 7,511,564 $ 373,137 $ - $ 7,884,701
3,628,000 (5)
Deferred Tax Liability 58,201 1,109,400 (1,109,400) (3) 58,201 - - 58,201
Long-term debt 2,875,349 170,200 (170,200) (3) 2,875,349 216,048 - 3,091,397
Stockholders' equity:
Common stock 391 25,000 (25,000) (3) 411 728,561 (728,527)(7) 445
20 (5)
Additional paid-in
capital 12,758,616 2,438,400 (2,438,400) (3) 14,552,652 - 728,527 (7) 15,281,179
1,794,036 (5)
Retained earnings 246,711 (10,951,600) 10,951,600 (3) 246,711 (238,125) - 8,586
Treasury Stock - (1,023,800) 1,023,800 (3) - - - -
----------- ----------- ----------- ----------- --------- ---------- -----------
Total stockholders'
equity 13,005,718 (9,512,000) 11,306,056 14,799,774 490,436 - 15,290,210
----------- ----------- ----------- ----------- --------- ---------- -----------
Total liabilities and
stockholders'
equity $19,822,832 $ 4,709,400 $ 712,656 $25,244,888 $1,079,621 $ - $26,324,509
=========== ============ ============ =========== ========== =========== ===========
</TABLE>
F-35
<PAGE>
PRO FORMA COMBINING INCOME STATEMENT (1)
For the Twelve Months Ended March 31, 1996
<TABLE>
<CAPTION>
Network/ Network/UniNet
UniNet Blue Ridge Blue Ridge
Network UniNet (8) Pro Forma Pro Forma (8) Pro Forma Pro Forma
Historical Historical Adjustments Combined Historical Adjustments Combined
------------- ----------- ------------ ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $30,810,016 $ 9,307,000 $(3,102,302) (9) $37,014,714 $3,463,470 $ - $ 40,478,184
Operating expenses: (9)
Telecommunications costs 22,879,184 10,888,500 (3,629,464) (9) 30,138,220 1,931,507 - 32,069,727
Selling, general and
administrative 6,068,813 5,055,300 - 11,124,113 1,064,643 - 12,188,756
Provision for losses on
accounts receivable 1,019,754 489,100 (163,017) (9) 1,345,837 27,397 - 1,373,234
Depreciation and
amortization 1,096,373 815,000 (815,000) (9) 1,460,312 115,344 - 1,575,656
363,939 (10)
----------- ----------- ----------- ----------- --------- ------------ ----------
Total 31,064,124 17,247,900 (4,243,542) 44,068,482 3,138,891 - 47,207,373
----------- ----------- ----------- ----------- --------- ------------ -----------
Operating income (loss) (254,108) (7,940,900) 1,141,240 (7,053,768) 324,579 - (6,729,189)
Interest income (expense), net (188,304) (451,700) 451,700 (9) (532,964) (51,551) (584,515)
(344,660) (11)
Other income (loss) - (305,300) 305,300 (9) - 40,215 - 40,215
----------- ---------- ---------- ---------- --------- --------- ----------
Income (loss) before income
taxes (442,412) (8,697,900) 1,553,580 (7,586,732) 313,243 - (7,273,489)
Provision (benefit) for income
taxes (69,031) 20,000 (20,000) (12) (69,031) - 126,375 (13) 57,344
----------- ----------- ----------- ----------- ---------- ---------- ------------
Net income (loss) $(373,381) $(8,717,900) $ 1,573,580 $(7,517,701) $ 313,243 $(126,375) $ (7,330,833)
=========== =========== =========== =========== ========== ========== ============
Number of shares issued
and outstanding (14):
Primary 2,731,093 2,926,099 3,263,157
=========== ========== ===========
Fully Diluted 2,731,093 2,926,099 3,263,157
=========== ========== ===========
Earnings (loss) per share:
Primary $(0.14) $(2.57) $(2.25)
=========== ========== ===========
Fully Diluted $(0.14) $(2.57) $(2.25)
=========== ========== ==========
</TABLE>
F-36
<PAGE>
PRO FORMA COMBINING INCOME STATEMENT (1)
For the Twelve Months Ended March 31, 1995
<TABLE>
<CAPTION>
Network/
Network/ UniNet
UniNet Blue Ridge
Network UniNet (8) Pro Forma Pro Forma Blue Ridge (8) Pro Forma Pro Forma
Historical Historical Adjustments Combined Historical Adjustments Combined
----------- ----------- ------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $24,216,948 $ 4,170,300 $(1,390,086) (9) $26,997,162 $2,789,916 $ - $29,787,078
Operating expenses: (9)
Telecommunications costs 19,477,701 2,543,000 (847,658) (9) 21,173,043 1,669,594 - 22,842,637
Selling, general and
administrative 3,593,043 2,251,400 - 5,844,443 888,557 - 6,733,000
Provision for losses on
accounts receivable 386,214 327,400 109,122 (9) 822,736 10,600 833,336
Depreciation and amortization 298,700 864,500 (864,500) (9) 662,639 72,988 - 735,627
363,939 (10)
----------- ----------- ----------- ----------- ---------- ----------- -----------
Total 23,755,658 5,986,300 (1,239,097) 28,502,861 2,641,739 - 31,144,600
----------- ----------- ----------- ----------- ---------- ----------- -----------
Operating income (loss) 461,290 (1,816,000) (150,989) (1,505,699) 148,177 - (1,357,522)
Interest income (expense), net 147,902 (230,200) 230,200 (9) (196,759) (56,027) - (252,786)
(344,661)(11)
Other income (expense) - (1,338,700) 1,338,700 (9) - (30,142) - (30,142)
----------- ----------- ----------- ----------- ---------- ----------- -----------
Income (loss) before income taxes 609,192 (3,384,900) 1,073,250 (1,702,458) 62,008 - (1,640,450)
Provision (benefit) for income
taxes 118,743 8,000 (8,000)(12) 118,743 - 28,685 (13) 147,428
----------- ----------- ----------- ----------- ---------- ----------- -----------
Net income (loss) $ 490,449 $(3,392,900) $ 1,081,250 $(1,821,201) $ 62,008 $(28,685) $(1,787,878)
=========== =========== =========== =========== ========== =========== ===========
Number of shares issued
and outstanding (14):
Primary 2,370,999 2,540,146 2,877,204
=========== =========== ===========
Fully Diluted 2,370,999 2,540,146 2,877,204
=========== =========== ===========
Earnings (loss) per share:
Primary $0.21 $ (0.72) $ (0.62)
=========== =========== ===========
Fully Diluted $0.21 $ (0.72) $ (0.62)
=========== =========== ===========
</TABLE>
F-37
<PAGE>
NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS
1. The adjustments to the unaudited Pro Forma Combining Financial Statements
do not give effect to direct transaction costs or any resulting
restructuring costs associated with the consummation of the Acquisitions
nor do these statements give effect to any potential costs savings and
synergies that could result from the Acquisitions. The unaudited Pro Forma
Combining Financial Statements are not necessarily indicative of the
operating results or financial position that would have occurred had the
Acquisitions been consummated at the dates indicated nor necessarily
indicative of future operating results or financial position.
2. Represents the historical carrying value of the assets and liabilities of
UniNet as of December 31, 1995.
3. These adjustments represent the elimination of the assets and liabilities
not acquired by the Company as well as the elimination of UniNet's equity
in the net assets acquired. The Company acquired approximately $776,000 in
accounts receivable.
4. This adjustment reflects the excess of cost over net tangible assets
acquired. For purposes of allocating the acquisition costs among the
various assets acquired, the Company has tentatively considered the
carrying value of the acquired assets to approximate their fair value, with
all of the excess of such acquisition costs being attributed to customer
base and goodwill. It is the Company's intention to more fully evaluate
the acquired assets and, as a result, the allocation of the acquisition
costs among the tangible and intangible assets acquired may change. The
acquisition agreement calls for approximately 49,000 shares of the
Company's common stock to be held in escrow for the sellers. This stock
has not been included in the purchase price. See Note 5.
5. These adjustments represent the payment of approximately $3,628,000 in cash
obtained through the Company's credit facility and the issuance of
approximately 195,000 shares of the Company's restricted common stock
valued at approximately $1,794,000. In addition to the cash and issuance
of restricted common stock, the Company issued approximately 49,000 shares
of its common stock to be held in escrow until a specified period of time
passes while retaining a certain level of the customer base. This level is
currently being achieved; however, the customer base is not guaranteed to
remain at this level until the end of the restricted period. As the
outcome of this contingency is not determinable beyond reasonable doubt,
the stock has been excluded from the purchase price. The value of the
escrowed shares will be recorded as additional consideration upon release
of the restrictions surrounding the stock.
6. Represents the historical carrying value of the assets and liabilities of
Blue Ridge as of December 31, 1995.
F-38
<PAGE>
7. These adjustments represent the restatement of common stock and additional
paid in capital to reflect the merger of the Company with Blue Ridge. The
Company issued approximately 337,000 shares of common stock in connection
with the merger.
8. Represents the historical results of operations of the applicable entity
for the period presented. Prior to the purchase of UniNet and the merger of
Blue Ridge, each of these entities utilized a December 31 fiscal year end.
For purposes of the Pro Forma Combining Financial Statements for the years
ended March 31, 1996 and 1995, the UniNet and Blue Ridge amounts reflect
historical results of operations for these entities for the years ended
December 31, 1995 and 1994.
9. Represents the elimination of UniNet's revenue and expenses for that
portion of the business not acquired by the Company. The Company purchased
a portion of UniNet's customer base which accounts for approximately 67% of
UniNet's monthly revenues and telecommunications costs at the time of the
acquisition. For purposes of the Pro Forma Combining Financial Statements,
the Company has assumed that certain selling, general and administrative
costs are directly attributable to the customer base, and as such, are
reflected as acquired by the Company. The Company has estimated that the
same percentage of revenues and direct costs purchased is applicable for
all periods presented.
10. Represents the amortization expense of the incremental excess of cost over
net tangible assets acquired which is amortized using the straight-line
method over 7.5 and 30 years, respectively, for the excess allocated to
customer acquisition costs and goodwill.
11. This adjustment represents the interest expense on the borrowings from the
Company's credit facility to pay the cash portion of the UniNet purchase
price. The Company's incremental borrowing rate on the credit facility is
prime plus .75%. For purposes of the Pro Forma Combining Income
Statements, the Company is assuming an annual rate of 9.5% for both periods
presented.
12. This adjustment eliminates the taxes previously recorded by UniNet. For
purposes of the Pro Forma Combining Financial Statements, no additional tax
benefit will be reflected for the losses sustained by the UniNet operation.
13. At December 31, 1995 and 1994, Blue Ridge was a partnership. On June 17,
1996, prior to the Merger, Blue Ridge became a corporation by exchanging
its partnership units for shares of common stock. This adjustment reflects
the approximate income taxes that would have been paid by Blue Ridge for
the periods presented if it had been a taxable entity.
F-39
<PAGE>
14. The pro forma share data are based on the Company's historical weighted
average shares outstanding as calculated for primary and fully diluted
earnings per share with pro forma amounts being adjusted to reflect the
effect of the issuance of approximately 195,000 and 337,000 restricted
common shares in connection with the Acquisitions. Pro forma share data
excludes approximately 49,000 common shares held in escrow as part of the
UniNet acquisition because these shares are not considered as part of the
purchase price.
F-40
