<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1997.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________________ to __________________.
Commission File Number: 0-23172
NETWORK LONG DISTANCE, INC.
------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 77-1122018
------------------------------- -------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identi-
Incorporation or Organization) fication Number)
11817 CANON BLVD., SUITE 600
NEWPORT NEWS, VIRGINIA 23606
---------------------------------------------------------------------
Address of Principal Executive Offices, Including Zip Code
757-873-1040
-----------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
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 periods 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
----- -----
There were 13,149,600 shares of the Registrant's $.0001 par value common stock
issued and outstanding as of October 31, 1997.
<PAGE>
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 1997 and March 31, 1997. . . . . . . . . . . . . . .3
Consolidated Statements of Income
Three and six months ended September 30, 1997 and 1996 . . . . . .4
Consolidated Statements of Cash Flows
Six months ended September 30, 1997 and 1996 . . . . . . . . . . .5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . .6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . 7-10
PART II - OTHER INFORMATION
Exhibits and Current Reports on Form 8-K. . . . . . . . . . . . . . . . . . 11
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
2
<PAGE>
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
Sept. 30, 1997 March 31, 1997
-------------- ---------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 1,887,012 $ 1,962,216
Marketable securities 120,892 788,124
Accounts receivable, net of allowance for doubtful
accounts of $3,198,780 and $2,377,000 at September 30, 1997
and March 31, 1997 respectively 17,099,661 11,714,585
Other receivables 978,275 360,965
Deferred income tax asset 541,599 157,406
Other current assets 645,797 1,042,792
------------ ------------
Total current assets 21,273,236 16,026,088
Property and equipment
Land 75,000 75,000
Building and improvement 598,692 562,620
Telecommunications equipment 5,799,884 4,127,388
Furniture & Fixtures 2,906,333 1,782,252
------------ ------------
9,379,909 6,547,260
Less accumulated depreciation 4,313,163 3,704,812
------------ ------------
Total Property & Equipment, net 5,066,746 2,842,448
Customer acquisition costs, net 8,601,224 5,645,730
Goodwill, net 20,997,916 450,020
Other intangibles, net 176,124 264,221
Other assets 985,857 1,134,002
------------ ------------
Total assets $ 57,101,103 $ 26,362,509
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 11,278,743 $ 507,945
Accrued transmission cost 5,807,139 7,535,055
Accrued merger and other related charges 654,209 24,450
Other accrued liabilities 3,008,926 2,786,043
Customer deposits 134,636 128,960
Current maturities of long-term debt and capital
lease obligations 203,083 1,244,006
------------ ------------
Total Current Liabilities 21,086,736 12,226,459
Deferred income tax liability 484,004 280,866
Long-term debt and capital lease obligation 1,526,684 2,053,317
Stockholders' equity
Common Stock - $.0001 par value; 20,000,000 shares authorized;
13,149,600 and 9,837,572 shares outstanding
at September 30, 1997 and March 31, 1997, respectively 1,315 984
Additional Paid-In Capital 38,758,327 14,847,728
Retained Earnings (4,670,578) (2,942,914)
Treasury Stock (92,290) (92,290)
Unrealized holding gain (loss) on marketable securities 6,905 (11,641)
------------ ------------
Total Stockholders' Equity 34,003,679 11,801,867
------------ ------------
Total liabilities and stockholders' equity $ 57,101,103 $ 26,362,509
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
September 30, September 30,
--------------------------------- --------------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues (Including excise taxes of $2,815,000 and $ 27,390,554 $ 21,714,264 $ 52,378,444 $ 42,524,138
$2,205,000 for the six months ended Sept. 30,
1997 and 1996 respectively and $1,447,000 and
$1,153,000 for the three months ended Sept. 30,
1997 and 1996 respectively).
Operating Expenses:
Transmission costs 16,839,509 13,830,000 32,748,482 27,983,756
Selling, general and administrative 7,213,206 5,525,225 14,001,695 10,884,983
Depreciation and amortization 1,195,237 588,968 2,129,435 1,094,933
Provision for losses on accounts receivable 992,897 381,491 1,639,009 681,794
Merger expenses and other related charges - - 2,225,067 -
Stock compensation related to merger - - 1,100,000 -
------------- ------------- ------------- -------------
Total operating expenses 26,240,849 20,325,684 53,843,688 40,645,466
Operating income (loss) 1,149,705 1,388,580 (1,465,244) 1,878,672
Interest (income) expense, net (110) (192,006) (231,958) (313,999)
Other (income) expense 11,931 (19,029) 31,536 (18,879)
------------- ------------- ------------- -------------
Income (loss) before income taxes 1,161,526 1,177,545 (1,665,666) 1,545,794
Provision (benefit) for income taxes 250,000 515,921 62,000 659,611
------------- ------------- ------------- -------------
Net income (loss) applicable to 911,526 661,624 (1,727,666) 886,183
common shareholders
Pro forma adjustment:
Income tax provision - - - 4,700
Pro forma net income applicable to $ 911,526 $ 661,624 $ (1,727,666) $ 881,483
common shareholders ------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income (loss) per share $ 0.07 $ 0.07 $ (0.14) $ 0.09
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Pro forma net income (loss) per share $ 0.07 $ 0.07 $ (0.14) $ 0.09
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended September 30,
--------------------------------------
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (1,727,664) $ 886,183
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 723,959 475,957
Amortization 1,384,645 618,976
Provision for losses on accounts receivable 821,780 681,794
Provision for deferred income taxes - (274,804)
Provision (benefit) for employee stock incentive plan (2,036) 25,374
Compensation expense related to exercise of stock options 1,100,000 -
Gain (Loss) on sale of assets (13,560) -
Changes in assets and liabilities, net of effect
of business combinations:
(Increase) Decrease in accounts receivable (2,155,919) (1,011,580)
(Increase) Decrease in other current assets (413,902) (330,152)
(Increase) Decrease in other assets 631,740 (724,201)
Increase (Decrease ) in accrued merger costs 769,761 -
Increase (Decrease) in accrued transmission costs (3,650,515) (165,744)
Increase (Decrease ) in accounts payable 8,608,812 180,322
Increase (Decrease) in accrued liabilities (1,713,923) 1,297,229
------------- -------------
Net cash provided by (used in) operating activities 4,363,178 1,659,354
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (627,502) (423,736)
Sale of short-term investments, net 669,980 -
Acquisition and related costs (2,054,737) (3,801,004)
Decrease (Increase) in other intangible assets (5,328) 15,365
Disposal of equipment (324) 764,363
------------- -------------
Net cash used in investing activities (2,017,911) (3,445,012)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit (29,438) 50,111
Principal payments on debt (2,450,098) 2,551,696
Proceeds from issuance of debt - -
Decrease in capital lease obligation (189,247) -
Common stock issued pursuant to employee stock plan 98,312 -
Equity issued pursuant to conversion of stock options 150,000 -
------------- -------------
Net cash used in financing activities (2,420,471) 2,601,807
Net increase in cash and cash equivalents (75,204) 816,149
Effect of change in fiscal year-end - 534,589
Cash and cash equivalents at beginning of period 1,962,216 1,460,232
------------- -------------
Cash and cash equivalents at end of period $ 1,887,012 $ 2,810,970
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - MERGERS
In May 1997, Network Long Distance, Inc. (the" Company") merged with
Eastern Telecom International Corporation (ETI), a provider of long distance
telecommunication services, in a transaction accounted for as a purchase. The
merger was consummated with the issuance of 3,633,272 shares of the Company's
common stock and cash payments of $1,500,000. Of the 3,633,272 shares issued,
63,492 shares are held in escrow pending resolution of purchase price
contingencies. The transaction resulted in an intangible asset of approximately
$24,795,000 of which $3,815,000 and $20,980,000 have been allocated to customer
base and goodwill, respectively. The Company is amortizing the customer base
over a useful life of 6 years and the goodwill over a useful life of 20 years.
The following represents the proforma results of operations of the Company and
ETI for the six months ended September 30, 1997 and 1996 as if the acquisition
had occurred as of the earliest date presented.
For the six months ended September 30,
1997 1996
----------- -----------
Revenues $54,975,590 $53,944,683
Net (loss) income (2,986,053) 497,279
Net income per share $ (0.23) $ 0.04
NOTE 2 - BASIS OF PRESENTATION
The financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission regulations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the financial statements reflect all adjustments (of a normal and
recurring nature) which are necessary to present fairly the financial position,
results of operations and cash flows for the interim periods.
6
<PAGE>
NOTE 3 - NET INCOME (LOSS) PER SHARE
Net income (loss) per share was calculated based on the following number of
common and common equivalent shares outstanding: 13,166,454 and 9,544,254 for
the three months ended September 30, 1997 and 1996, respectively, 12,188,526 and
9,458,594 and for the six months ended September 30, 1997 and 1996,
respectively.
NOTE 4 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the six months ended September 30, 1997 and 1996, interest paid
amounted to $328,000 and $255,000, respectively. Income taxes paid by the
Company during the six months ended September, 1997 and 1996 were $62,000 and
$228,000, respectively.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the three and six months ended
September 30, 1997 and 1996. The information should be read in conjunction with
the Company's Consolidated Financial Statements and the Notes thereto.
Certain statements set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations, which are not historical facts,
are forward-looking statements under the Private Securities Litigation Reform
Act of 1995 that are subject to risks and uncertainties that could cause actual
results to differ materially from those set forth in the forward-looking
statements. Among the factors that could cause actual future results to differ
materially are competitive pressures, the timing and technique used in marketing
by third-party distributors and the market acceptance of certain services.
RESULTS OF OPERATIONS
The Company has expanded rapidly as an ongoing result of its dual focus on
internal sales growth complemented by the addition of calling volume generated
through mergers and acquisitions. As a consequence, revenues, which are
principally derived from the number of minutes of use billed by the Company,
have increased.
For the second fiscal quarter of 1998, revenues, inclusive of excise taxes
and fees, were $27,390,554, compared to $21,714,264 for the second fiscal
quarter of 1997, an increase of 26.1%. For the six month periods ended
September 30, 1997 and 1996, revenues, inclusive of excise taxes and fees, were
$52,378,444 and $42,524,138, respectively. This represents a 23.2% increase.
The increase in revenues is primarily the result of the Company's acquisition of
ETI in May of 1997.
7
<PAGE>
The acquisition of ETI was accounted for as a purchase and therefore its results
are not included in the three and six month periods ended September 30, 1996.
Cost for telecommunications for the three months ended September 30, 1997
and 1996 were $16,839,509 and $13,830,000, respectively. This represented
approximately 61.5% of revenues for the three month period ended September 30,
1997 and 63.7% for the same period in 1996. For the six months ended September
30, 1997 and 1996, cost of telecommunications was $32,748,482 and $27,983,756,
respectively. This represented approximately 62.5% of revenues for the six
months ended September 30, 1997 and 65.8% for the same period in 1996. The
reduction in telecommunication costs as a percent of revenues is associated with
the Company's consolidation of its facilities and from the increased calling
volume related to its acquisitions of NTI and ETI during the six months ended
September 30, 1997.
Selling, general and administrative expenses were $7,213,206 and $5,525,225
for the three months ended September 30, 1997 and 1996, respectively. This
represented approximately 26.3% of revenues for the three months ended September
30, 1997 and 25.4% of revenues for the same period in 1996. For the six months
ended September 30, 1997 and 1996, SG&A expenses were $14,001,695 and 10,884,983
or approximately 26.7% and 25.6% of revenues, respectively. The increases in
SG&A are primarily due to increases in personnel costs, commissions, taxes, and
professional fees associated with the Company's continued growth and expanded
mergers and acquisitions program.
Depreciation and amortization expense for the three months ended September
30, 1997 was $1,195,237 or 4.4% of revenues. This compared to $588,968 or 2.7%
of revenues for the same period in 1996. For the six month period ended
September 30, 1997, depreciation and amortization was $2,129,435 or 4.1% of
revenues compared to $1,094,933 or 2.6% of revenues for the same period in 1996.
These increases are primarily associated with the amortization of the customer
base and goodwill resulting from the Company's acquisition of ETI in May of
1997.
The provision for losses on accounts receivable for the three month period
ended September 30, 1997 was $992,897 or 3.6% of revenues. This compared to
$381,491 or 1.8% of revenues for the same period in 1996. For the six month
period ended September 30, 1997, the provision for losses on accounts receivable
was $1,639,009 or 3.1% of revenues compared to $681,794 or 1.6% of revenues for
the same period in 1996. These increases are associated with the Company's
continued growth in revenues and accounts receivable.
Merger expenses and other related charges for the six month period ended
September 30, 1997 were $2,225,067 or 4.2% of revenues for that same period.
These expenses consisted of $505,000 related to severance payments to former
officers and various other employees of the Company, $330,000 related to
integration, relocation and facilities related charges, $350,000 related to
certain legal
8
<PAGE>
and regulatory matters and contingencies, $1,040,000 related to financial
advisory, legal, accounting and other professional services incurred in
connection with consummating the ETI and NTI acquisitions.
Non-recurring stock compensation expense related to the NTI merger was
$1,100,000 or 2.1% of revenues for the six month period ended September 30,
1997. This was a non-cash charge related to the exercise of stock options by an
officer of NTI.
Net income for the three months ended September 30, 1997 was $911,526,
compared to $661,624 for same period in 1996. For the six month period ended
September 30, 1997, the Company had a net loss of $(1,727,666) compared to net
income of $886,183 for the same period in 1996. The increase in net income for
the three months ended September 30, 1997 as compared to the same period in 1996
is primarily attributable to the decrease in telecommunication costs as a
percent of revenues. The decrease in net income for the six month period ended
September 30, 1997 as compared to the same period in 1996 is due to the merger
expenses and other related charges and the stock compensation charge both of
which were taken during the first fiscal quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended September 30, 1997, the Company's cash flow
provided by operating activities was $4,363,178 compared to cash flow provided
by operating activities of $1,659,354 for the six months ended September 30,
1996. For the six months ended September 30, 1997, the Company's cash used in
investing activities was $2,017,911, compared to $3,445,012 of cash used in
investing activities for the six months ended September 30, 1996. The primary
use of cash in investing activities during both the six months ended September
30, 1997 and 1996 was related to the Company's acquisition program. During the
six months ended September 30, 1997, the Company merged with ETI and NTI and
during the six months ended September 30, 1996, the Company acquired a customer
base from Universal Network Services. Net cash used in financing activities
during the six months ended September 30, 1997 were $2,420,471 compared to net
cash provided by financing activities during the same period of 1996 of
$2,601,807. During the six months ended September 30, 1997, the Company paid
off the remaining balance owed under a term loan entered into during May of
1996.
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 75% of
eligible receivables. 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
was allowed to borrow $3,250,000 under the term loan facility. The term loan
was repayable in 36 equal
9
<PAGE>
monthly installments of $90,278 plus accrued interest. The term loan bore
interest at the prime rate plus 3%. During the three months ended September 30,
1997, the Company repaid the remaining balance due under the term loan.
Substantially all of the assets of the Company are pledged as collateral under
the credit facility.
10
<PAGE>
PART II
OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS
None
Item 2: CHANGES IN SECURITIES
None
Item 3: DEFAULT UPON SENIOR SECURITIES
None
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5: OTHER INFORMATION
None
Item 6: EXHIBITS AND CURRENT REPORTS ON FORM 8-K
(a) Exhibits - None.
11
<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, thereunto duly authorized.
NETWORK LONG DISTANCE, INC.
Dated: November 13, 1997 By: /s/Thomas G. Keefe
-------------------------------
Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,887,012
<SECURITIES> 120,892
<RECEIVABLES> 20,298,441
<ALLOWANCES> 3,198,780
<INVENTORY> 0
<CURRENT-ASSETS> 21,273,236
<PP&E> 9,379,909
<DEPRECIATION> 4,313,163
<TOTAL-ASSETS> 57,101,103
<CURRENT-LIABILITIES> 21,086,736
<BONDS> 1,526,684
0
0
<COMMON> 1,315
<OTHER-SE> 34,002,364
<TOTAL-LIABILITY-AND-EQUITY> 57,101,103
<SALES> 52,378,444
<TOTAL-REVENUES> 52,378,444
<CGS> 32,748,482
<TOTAL-COSTS> 32,748,482
<OTHER-EXPENSES> 19,456,197
<LOSS-PROVISION> 1,639,009
<INTEREST-EXPENSE> (231,958)
<INCOME-PRETAX> (1,665,666)
<INCOME-TAX> 62,000
<INCOME-CONTINUING> (1,727,666)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,727,666)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
