<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
MAY 7, 1997
------------------------------------------------------
Date of Report (date of earliest event reported)
NETWORK LONG DISTANCE, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 0-23172 77-1122018
- --------------- ------------ ------------------
(State or Other (Commission (IRS Employe 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>
INDEX:
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
(a-1) Audited Financial Statements of Eastern Telecom International
(a-2) Audited Financial Statements of National TeleService, Inc.
(b) Pro Forma Financial Information
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE ELEVEN MONTH PERIOD ENDED MARCH 31, 1997 AND
THE YEARS ENDED APRIL 30, 1996 AND 1995
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Table of Contents
For the Eleven Month Period ended March 31, 1997 and
the Years ended April 30, 1996 and 1995
- -----------------------------------------------------------------------------
PAGE
Independent Auditors' Report 1
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Changes in
Redeemable Preferred Stock and Shareholders' Equity 4
Consolidated Statements of Cash Flows 5-6
Consolidated Notes to Financial Statements 7-20
- -----------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Directors and Shareholders
Eastern Telecom International Corporation:
We have audited the accompanying consolidated balance sheets of Eastern
Telecom International Corporation and subsidiaries (the "Company") as of
March 31, 1997 and April 30, 1996, and the related consolidated statements of
operations, changes in redeemable preferred stock and shareholders' equity
and cash flows for the eleven month period ended March 31, 1997 and each of
the years in the two year period ended April 30, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Eastern
Telecom International Corporation and subsidiaries as of March 31, 1997 and
April 30, 1996, and the results of their operations and their cash flows for
the eleven month period ended March 31, 1997 and each of the years in the two
year period ended April 30, 1996, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
June 5, 1997
Norfolk, Virginia
1
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
As of March 31, 1997 and April 30, 1996
<TABLE>
- -------------------------------------------------------------------------------------------------------------
March 31, April 30,
1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents (notes 3 and 4) $ 179,326 1,077,167
Marketable securities (note 2) 102,091 164,765
Accounts receivable, net of allowances of $825,542 and
$262,306 for 1997 and 1996, respectively (notes 3 and 4) 4,193,419 3,172,838
Deferred income taxes (note 5) 393,005 105,562
Other current assets 6,095 3,899
- -------------------------------------------------------------------------------------------------------------
Total current assets 4,873,936 4,524,231
Property and equipment (notes 4 and 12)
Telecommunications equipment 3,457,843 3,119,555
Furniture and fixtures 1,063,502 712,690
Leasehold improvements 89,395 83,363
- -------------------------------------------------------------------------------------------------------------
4,610,740 3,915,608
Less accumulated depreciation and amortization 2,206,818 1,592,755
- -------------------------------------------------------------------------------------------------------------
2,403,922 2,322,853
Notes receivable from related parties (note 7) - 344,107
Other assets 74,216 44,102
- -------------------------------------------------------------------------------------------------------------
Total assets $ 7,352,074 7,235,293
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Liabilities, Redeemable Preferred Stock and Shareholders' Equity:
Current liabilities:
Line of credit (note 4) - 941,132
Notes Payable (note 4) - 536,559
Obligations under capital leases, current portion (note 12) 371,285 461,591
Accounts payable 1,632,635 817,881
Accrued expenses 855,414 607,550
Accrued transmission costs 1,077,068 678,977
Income taxes payable 700,000 49,845
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 4,636,402 4,093,535
Obligations under capital leases, less current portion (note 12) 821,257 976,711
Deferred income taxes (note 5) 503,138 661,723
- -------------------------------------------------------------------------------------------------------------
Total liabilities 5,960,797 5,731,969
- -------------------------------------------------------------------------------------------------------------
Redeemable preferred stock, $10 par value; 100,000 shares authorized;
30,785 and 27,648 shares issued and outstanding
in 1997 and 1996, respectively (notes 6 and 13) 307,850 276,480
- -------------------------------------------------------------------------------------------------------------
Shareholders' equity (notes 6, 9 and 13):
Common stock, no par value; 1,000 shares authorized;
606 shares issued and outstanding 1,732 1,732
Unrealized gain on marketable securities - 13,487
Retained earnings 1,081,695 1,211,625
- -------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,083,427 1,226,844
Commitments, contingency and subsequent
events (notes 3, 6, 12 and 13)
- -------------------------------------------------------------------------------------------------------------
$ 7,352,074 7,235,293
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Eleven Month Period ended March 31, 1997 and
the Years ended April 30, 1996 and 1995
<TABLE>
- ---------------------------------------------------------------------------------------------------------
March 31, April 30, April 30,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues (including excise taxes of $691,941,
$521,242 and $441,796 in 1997, 1996 and
1995, respectively) $20,429,324 16,642,697 13,719,770
Operating expenses:
Telecommunications costs 10,161,778 8,405,548 7,120,493
Selling, general and administrative expenses 7,886,436 6,840,527 5,384,774
Provision for losses on accounts receivable 1,369,815 740,674 862,387
Depreciation and amortization 629,093 623,276 474,819
- ---------------------------------------------------------------------------------------------------------
Total operating expenses 20,047,122 16,610,025 13,842,473
- ---------------------------------------------------------------------------------------------------------
Operating income (loss) 382,202 32,672 (122,703)
- ---------------------------------------------------------------------------------------------------------
Other income (expense):
Other income (expense) 22,579 (10,725) -
Interest income 26,034 110,643 95,072
Interest expense (102,372) (337,944) (237,749)
Sublease income 120,199 240,397 -
Gain on sale of pay telephone assets (note 11) 131,198 - 3,331,641
- ---------------------------------------------------------------------------------------------------------
197,638 2,371 3,188,964
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 579,840 35,043 3,066,261
Income tax expense (note 5) 196,857 6,500 1,230,000
- ---------------------------------------------------------------------------------------------------------
Net income $ 382,983 28,543 1,836,261
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Redeemable Preferred Stock and
Shareholders' Equity
For the Eleven Month Period ended March 31, 1997 and
the Years ended April 30, 1996 and 1995
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------------
Unrealized
gain (loss)
on marketable
Redeemable ETC ETI securities Retained
Preferred Common Common (not of tax earnings
stock stock stock effect) (deficit) Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at April 30, 1994 $ - 2,000 - - (336,831) (334,831)
Net income - - - - 1,836,261 1,836,261
Unrealized loss on investments - - - (2,676) - (2,676)
- --------------------------------------------------------------------------------------------------------------------------------
Balances at April 30, 1995 - 2,000 - (2,676) 1,499,430 1,498,754
Issuance of 399 shares of common stock - - 399 - - 399
Merger on July 31, 1995 (note 6):
Issuance of 30,785 shares of preferred
stock in exchange for 99 shares
of common stock 307,850 (667) - - (307,183) (307,850)
Issuance of 201 shares of common
stock in exchange for 201 shares
of common stock - (1,333) 1,333 - - -
Redemption of redeemable preferred stock -
3,137 shares; $10 per share (note 6) (31,370) - - - - -
Redeemable preferred stock dividends (note 6) - - - - (9,165) (9,165)
Net income - - - - 28,543 28,543
Unrealized gain on investments - - - 16,163 - 16,163
- --------------------------------------------------------------------------------------------------------------------------------
Balances at April 30, 1996 276,480 - 1,732 13,487 1,211,625 1,226,844
Rescind redeemable preferred stock dividends
and redemption (note 6) 31,370 - - - 9,165 9,165
Repurchase of common stock - - - - (522,078) (522,078)
Sale of available-for-sale marketable securities - - - (13,487) - (13,487)
Net income - - - - 382,983 382,983
- --------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1997 $307,850 - 1,732 - 1,081,695 1,083,427
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Eleven Month Period ended March 31, 1997 and
the Years ended April 30, 1996 and 1995
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
March 31, April 30, April 30,
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 382,983 28,543 1,836,261
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 629,093 623,276 474,819
Gain on sale of pay telephone assets (131,198) - (3,331,641)
Purchase of trading marketable securities (815,316) - -
Proceeds from sale of trading marketable securities 718,853 - -
Loss (gain) on sale of marketable securities (20,217) 3,681 -
Provision for losses on accounts receivable 1,369,815 740,674 862,387
Notes receivable expensed 203,143 - -
Deferred income taxes (437,036) (8,330) 600,000
Changes in assets and liabilities:
Accounts receivable (2,390,396) (1,122,118) (2,022,252)
Other assets (46,039) 41,063 (3,162)
Accounts payable and other current liabilities 1,427,089 629,148 (441,818)
Income taxes payable 650,155 (498,907) 761,082
- ----------------------------------------------------------------------------------------------------------------------------
Total adjustments 1,157,946 408,487 (3,100,585)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,540,929 437,030 (1,264,324)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of marketable securities 156,875 571,828 (715,118)
Proceeds from the sale of pay telephone assets 175,869 - 4,000,000
Proceeds from the sale of property and equipment - 30,600 -
Purchase of property and equipment (592,532) (320,740) (596,164)
Notes receivable, net (153,707) (116,054) (68,345)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (413,495) 165,634 2,620,373
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings on lines of credit (941,132) (491,517) 732,649
Proceeds from issuance of notes payable - 86,813 657,358
Principal payments on notes payable (502,939) (212,875) (866,079)
Principal payments on obligations under capital leases (349,661) (427,099) (525,625)
Repurchase of common stock (272,078) - -
Preferred stock redemption and dividends (note 6) 40,535 (40,535) -
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,025,275) (1,085,213) (1,697)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (897,841) (482,549) 1,354,352
Cash and cash equivalents, beginning of year 1,077,167 1,559,716 205,364
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 179,326 1,077,167 1,559,716
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
5
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
March 31, April 30, April 30,
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 102,372 337,944 237,749
- ----------------------------------------------------------------------------------------------------------------------------
Cash paid (received) during the year for income taxes (refunds), net $ (16,262) 547,205 -
- ----------------------------------------------------------------------------------------------------------------------------
Schedule of noncash transactions:
Repurchase of common stock (note 6) $ 250,000 - -
- ----------------------------------------------------------------------------------------------------------------------------
Purchases of equipment, vehicles and telephone
equipment financed by capital leases $ 103,901 101,500 1,250,040
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Eleven Month Period ended March 31, 1997 and
the Years ended April 30, 1996 and 1995
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Eastern Telecom International Corporation and subsidiaries ("ETI" or the
"Company") is a closely-held Virginia corporation engaged in providing
commercial long distance service. These consolidated financial statements
include the results of ETI's predecessor company, Eastern Telecom Company
(ETC).
The Company was formed on July 31, 1995 through the merger of Eastern
Telecom Acquisition Corporation (ETAC), a company formed to acquire 100% of
the stock of ETC. All employee common shareholders of ETC at the date of
the merger received one share of ETAC common stock for each share of ETC
common stock. The nonemployee common shareholder of ETC received preferred
stock of ETAC in exchange for ETC common stock (see note 6). ETAC
subsequently changed its name to ETI.
DESCRIPTION OF BUSINESS
The Company provides long distance telecommunications services to
commercial and residential customers by transmitting calls to U.S. or
international locations. 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 with
various long distance products including, among other services, 1+ dialing,
private line, travel cards, prepaid (debit) cards, internet access and 800
services.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Eastern Telecom International Corporation and its two wholly owned
subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
(Continued)
7
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(1) CONTINUED
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.
At March 31, 1997 and April 30, 1996, cash and cash equivalents include
$179,326 and $1,077,167, respectively, related to securities repurchased
under agreements to resell and certificates of deposit that mature in three
months or less.
MARKETABLE SECURITIES
Marketable securities consist of corporate debt and equity securities. The
Company classifies its debt and equity securities in one of three
categories: trading, available-for-sale, or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling them
in the near term. Held-to-maturity securities are those securities in
which the Company has the ability and intent to hold the security until
maturity. All other securities not included in trading or held-to-maturity
are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for
the amortization or accretion of premiums or discounts. Unrealized holding
gains and losses on trading securities are included in earnings.
Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported
as a separate component of shareholders' equity until realized. Realized
gains and losses from the sale of available-for-sale securities are
determined on a specific identification basis.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed to be other than temporary results in a
reduction in carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established. Premiums
and discounts are amortized or accreted over the life of the related held-
to-maturity security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned.
(Continued)
8
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(1) CONTINUED
ACCOUNTS RECEIVABLE
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 collectability of the receivable is unlikely. The
allowance, which is based on evaluations of the collectability 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. Write-
offs during the eleven month period ended March 31, 1997 and the fiscal
years ended April 30, 1996 and 1995 were approximately $686,000, $632,000
and $157,000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated on
the straight-line method over the estimated useful lives of the respective
assets. Amortization of equipment under capital leases and leasehold
improvements is calculated on a straight-line basis over the lesser of the
estimated useful life of the related asset or the lease term.
Estimated useful lives of property and equipment are:
Telecommunications equipment 5-6 years
Office equipment 5-10 years
Leasehold improvements 5 years
RECOGNITION OF REVENUE
Customer long distance calls are routed through switching centers owned by
the Company or others over long distance telephone lines. 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.
(Continued)
9
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(1) CONTINUED
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Company to make
estimates and judgments that affect the reported amounts of assets and
liabilities and the disclosures of contingencies at the date of the
financial statements and income and expenses recognized during the
reporting period. Actual results could differ from those estimates.
Estimates are primarily used when accounting for allowances for doubtful
accounts, depreciation, amortization, certain accruals and taxes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires the disclosure of the fair value of each class of financial
instruments. Fair value is defined as the amount at which the instrument
could be exchanged in a current transaction between willing parties.
Management has determined that the carrying amounts of the financial
instruments approximates their fair values because of the short maturity of
those instruments.
EFFECT OF RECENT ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF, which is effective for years beginning after December 15, 1995. This
pronouncement was adopted for periods beginning May 1, 1996 and did not
have a material impact on the Company's consolidated financial statements.
(Continued)
10
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(1) CONTINUED
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES. SFAS No. 125 is effective for transfers
and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996 and is to be applied prospectively. It
distinguishes transfers of financial assets that are sales from transfers
that are secured borrowings. Certain provisions of SFAS No. 125 were
deferred until December 31, 1997. This pronouncement was adopted January
1, 1997 and did not have a material impact on the Company's consolidated
financial statements.
RECLASSIFICATIONS
Certain amounts from the 1995 and 1996 consolidated financial statements
have been reclassified to conform with the 1997 financial statement
presentation.
(2) INVESTMENT SECURITIES
The cost, gross unrealized holding gains, gross unrealized holding losses
and fair value for trading and available-for-sale securities by major
security type and class of security at March 31, 1997 and April 30, 1996
were as follows:
<TABLE>
Gross Gross
unrealized unrealized
holding holding
Cost gains losses Fair value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At March 31, 1997 -
Trading Marketable Securities $114,452 - (12,361) 102,091
- -----------------------------------------------------------------------------------------
At April 30, 1996 -
Available-for-sale -
Marketable Securities $142,285 22,480 - 164,765
- -----------------------------------------------------------------------------------------
</TABLE>
During the eleven months ended March 31, 1997, the Company transferred
certain securities previously classified as available for sale to trading
resulting in approximately $1,000 of unrealized losses being recognized in
the current period's earnings.
(Continued)
11
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(3) RECEIVABLES SOLD WITH RECOURSE
During the eleven month period ended March 31, 1997 and years ended April
30, 1996 and 1995, ETI sold, under an agreement with Zero Plus Dialing,
Inc. (ZPDI), its accounts receivable related to long distance services
available in hotels where the patron of the hotel can choose to use ETI
long distance service instead of the hotel's standard long distance service
(0+ long distance traffic). The Company reports these as sales with
recourse transactions. In 1997, 1996 and 1995, the proceeds to the Company
under this arrangement were $1,374,224, $1,791,590 and $2,089,692,
respectively. Included in operating expenses for 1997, 1996 and 1995 are
fees under this agreement totaling $139,137, $227,256 and $301,316,
respectively. At March 31, 1997 and April 30, 1996, the uncollected
balance of receivables subject to recourse under this agreement were
$205,202 and $358,270, respectively.
On May 2, 1996, the Company entered into a 19 month agreement to sell
certain receivables to a third party servicer. The Company reports these
sales as sales with recourse transactions. The third party servicer has a
security interest in all receivables not purchased to secure the payment of
all amounts due under the agreement. The third party servicer maintains a
lockbox where all of the Company's accounts receivable receipts are
deposited. The Company has $368,773 included in accounts receivable
related to deposits in the lock box which have not yet been remitted to the
Company. For the eleven month period ended March 31, 1997, the proceeds to
the Company under this agreement totaled $7,708,043. Included in operating
expenses for the eleven month period ended March 31, 1997, are $152,873 of
fees expensed under this agreement. At March 31, 1997, the uncollected
balance of receivables subject to recourse under this agreement was
$1,054,610.
(4) LINE OF CREDIT AND NOTES PAYABLE
LINE OF CREDIT
In May 1996, certain proceeds from the sale of receivables were used to pay
off the Company's line of credit with First Union Bank, thereby terminating
the line of credit agreement which was otherwise due in August 1996.
Outstanding borrowings on the line of credit at April 30, 1996 and 1995
were $941,132 and $1,432,649, respectively. Interest on the line of credit
was at prime plus .25%. The line of credit was collateralized by $850,000
of certificates of deposit (a $583,400 certificate of deposit cross
collateralizes the note payable), substantially all equipment, accounts
receivable and intangibles of the Company and was guaranteed by the
President of the Company.
(Continued)
12
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(4) CONTINUED
NOTES PAYABLE
Notes payable consist of the following at April 30, 1996:
Note payable to First Union Bank, interest payable monthly
at prime minus .25%, paid in full in 1996 $ 438,246
Other 98,313
--------------------------------------------------------------------------
$ 536,559
--------------------------------------------------------------------------
(5) INCOME TAXES
Income tax expense is comprised of:
1997 1996 1995
--------------------------------------------------------------------------
Current $ 633,893 14,830 630,000
Deferred (437,036) (8,330) 600,000
--------------------------------------------------------------------------
Total income taxes $ 196,857 6,500 1,230,000
--------------------------------------------------------------------------
The following is a reconciliation of income tax expense to the expected
amounts which are derived by applying the U.S. federal income tax rate of
34% to reported pretax income.
1997 1996 1995
--------------------------------------------------------------------------
Expected statutory amount $ 197,146 11,914 1,042,529
Effect of progressive tax rate - (6,658) -
State tax net of federal benefit 22,962 1,787 121,424
Utilization of alternative minimum
tax carryforward (27,000) - -
Other 3,749 (543) 66,047
--------------------------------------------------------------------------
$ 196,857 6,500 1,230,000
--------------------------------------------------------------------------
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.
(Continued)
13
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(5) CONTINUED
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities:
<TABLE>
March 31, 1997 April 30, 1996
------------------------ ----------------------
Assets Liabilities Assets Liabilities
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $ 330,217 - 105,562 -
Fixed assets - (503,138) - (597,028)
Shareholder accrued compensation 56,556 - - -
Unrealized gain on investments - - - (8,990)
Capital loss carryforward 6,232 - - -
Cumulative partnership losses - - - (55,705)
------------------------------------------------------------------------------------
Total $ 393,005 (503,138) 105,562 (661,723)
------------------------------------------------------------------------------------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. Based on its assessments, management believes it is more
likely than not that the Company will realize the future benefits of these
deductible differences.
(6) REDEEMABLE PREFERRED STOCK AND COMMON STOCK
REDEEMABLE PREFERRED STOCK
The redeemable preferred stock is nonvoting, accrues cumulative dividends
at the U.S. Government Treasury Bond rate, upon dissolution has first right
to par value plus accrued dividends without interest, and is redeemable by
the Company at any time at par value plus accrued dividends. The Company
paid dividends totaling $9,165 for the third and fourth quarters of 1995 in
accordance with the dividend terms. The Board of Directors elected to
redeem a total of 3,137 shares of the outstanding preferred stock at its
par value in accordance with the redemption terms.
14
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(6) CONTINUED
On May 3, 1996, ETI entered into a settlement and redemption agreement with
the preferred shareholder to pay $1,131,316 plus interest at 6% in 34
unequal quarterly installments beginning with a $150,000 payment (less
$56,458 in promissory notes and interest owed the Company by the former
officer) on May 3, 1996. The first 25 payments relate to a restrictive
covenant not to compete and the remaining nine payments, beginning August
3, 2002, relate to the redemption of the $307,850 of preferred stock. In
addition, the Company is obligated to this former shareholder to pay 3% of
the net proceeds received in the event of the sale of all, or substantially
all, of the capital stock and/or the assets of the Company. In conjunction
with this settlement, the dividends paid and the partial redemption of the
preferred stock during fiscal year 1996 were rescinded and future dividend
rights were forfeited. Subsequent to March 31, 1997 (note 13) the total
payments required under this agreement were paid.
COMMON STOCK
On July 5, 1995, the Company was initially capitalized by issuing 399
shares of no par value common stock for $1 per share. During 1995, the
Company restructured its legal capital by exchanging 1 share of its common
stock for each of the 201 shares of outstanding ETC common stock held by
employees of ETC. The nonemployee common shareholder of ETC received
30,785 shares of $10 par value preferred stock in exchange for his 99
shares.
In August 1993, the president of the Company entered into an agreement with
a certain shareholder to purchase his shares of the Company's common stock.
Payments through May 1996 totaled $250,000 when the Company, the president,
and the shareholder renegotiated the original purchase agreement. The
Company acquired the shares by paying the president $250,000 in the form of
cancellation of his note payable to the Company and accrued interest
totaling $205,415 and creating a note payable of $44,585; and entering into
a secured note agreement totaling $300,000 to the former shareholder.
In March of 1997, the Company paid the remaining amount due under the
secured note agreement.
(Continued)
15
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(6) CONTINUED
In accordance with provisions of the Executive Stock Ownership Agreement
(note 9), the percentage ownership by those, other than the majority
shareholder, shall remain unchanged in the event of a fluctuation of the
issued and outstanding shares of the Company's common stock between the
shareholders. The repurchase of the shares by the Company changed this
percentage ownership, therefore, additional shares were issued to the
president for no consideration.
(7) TRANSACTIONS WITH RELATED PARTIES
The Company had the following receivables, including unsecured, demand
notes receivables and interest receivable at April 30, 1996 with certain
related parties:
Note receivable from President of the Company $205,415
Note receivable from a shareholder 56,143
Other 82,549
-----------------------------------------------------------------------
Total notes receivable from related parties $344,107
-----------------------------------------------------------------------
(8) SIGNIFICANT CUSTOMER AND SUPPLIER
Sales to a major customer during the eleven months ended March 31, 1997 and
the years ended April 30, 1996 and 1995 totaled approximately $1,975,000,
$1,250,000 and $354,000, respectively. The Company has receivables related
to this customer of approximately $640,000 and $121,000 at March 31, 1997
and April 30, 1996, respectively. Amounts paid to significant suppliers
during 1997, 1996 and 1995 totaled approximately $7,176,000, $5,413,000 and
$6,204,000, respectively.
(9) RESTRICTED STOCK AWARD
In November 1994, ETC issued 36 shares of common stock to executives
pursuant to an Executive Stock Ownership Agreement. These shares were
issued at no cost to the recipients. The stock award was made solely at
the discretion of the Company's Board of Directors. On March 4, 1996, the
Company issued six additional shares to an executive under a similar
agreement.
(Continued)
16
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(9) CONTINUED
The shares may not be sold, assigned, given, mortgaged, pledged or
otherwise disposed in part or in whole without the approval of the Board of
Directors. Vesting as it relates to termination of employment is over five
years; retirement, death, disability or sale of assets or stock by the
Company is after two years.
The Company has the option to redeem these shares upon the occurrence of
certain events, including termination of employment of the recipient or the
sale of the Company. The redemption proceeds paid to the recipients will
be equal to the difference between the value of the shares at the
redemption date using a valuation formula that is defined in the Agreement
and the current market value established at the issuance date.
(10) PENSION PLAN
On June 3, 1995, the Company adopted a Company-sponsored qualified employee
savings plan (the Plan) under Section 401(k) of the Internal Revenue Code.
All full-time employees who have worked a minimum of 90 days are eligible
to participate in the Plan. Employee contributions to the Plan are at the
election of the participants and are limited to 15% of their compensation.
The Company makes no matching contributions to the Plan; however,
administrative expenses relating to the Plan are paid by the Company.
(11) SALE OF PAY PHONE ASSETS
In September 1994, the Company sold, to a third party, substantially all of
the assets used in delivering pay telephone services. The sales proceeds
received from the transaction of approximately $4,000,000 resulted in a
gain for financial reporting purposes of $3,331,641. The revenue and
operating income before allocation of any overhead expenses for the pay
telephone operation for fiscal 1995 through the date of disposition were
$1,455,032 and $933,811, respectively.
During the eleven month period ended March 31, 1997, in accordance with the
terms of a consulting agreement which terminated during this period, an
additional $175,869 was paid to the Company.
(Continued)
17
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(12) COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has acquired certain telecommunications equipment through
various capital lease agreements which expire over the next seven years.
The cost of the telecommunications equipment and related accumulated
amortization recorded under capital leases were as follows:
March 31, April 30,
1997 1996
--------------------------------------------------------------------------
Telecommunications equipment $2,264,921 2,178,507
Less accumulated amortization 977,639 643,218
--------------------------------------------------------------------------
$1,287,282 1,535,289
--------------------------------------------------------------------------
The Company leases office facilities and certain equipment through
noncancelable operating lease agreements with initial or remaining lease
terms of more than one year.
Future minimum lease payments under capital leases and noncancelable
operating leases at March 31, 1997 are as follows:
Capital Operating
leases leases
--------------------------------------------------------------------------
1998 $ 469,803 377,728
1999 455,961 153,983
2000 364,328 120,920
2001 92,681 71,624
2002 69,511 69,440
--------------------------------------------------------------------------
1,452,284 793,695
-------
Less amounts representing interest (at rates
ranging from 8.26% to 15.78%) 259,742
------------------------------------------------------------
Present value of future minimum lease payments
including current portion of $371,285 $1,192,542
------------------------------------------------------------
During the eleven month period ended March 31, 1997, and the years ended
April 30, 1996 and 1995, the Company received $120,198, $240,396 and $0,
respectively, under a noncancelable operating sublease for certain office
space and telecommunications equipment.
(Continued)
18
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(12) CONTINUED
Rent expense for the eleven month period ended March 31, 1997 and years
ended April 30, 1996 and 1995 was $410,305, $425,432 and $316,341,
respectively. Rent expense includes $161,353, $179,823 and $162,493 in
1997, 1996 and 1995, respectively, related to the rental of office space in
a building in which the Company owns a 15% limited partnership interest.
At March 31, 1997, the Company was committed under noncancelable,
noncapitalizable agreements for transmission facilities that require total
payments of $514,000 by September 1998. In addition, the Company has
certain other agreements which require minimum monthly usage. Based on the
current and expected future activities, management expects to meet all
purchase and usage commitments.
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.
19
<PAGE>
EASTERN TELECOM INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
(13) SUBSEQUENT EVENTS
In May of 1997, the shareholders of the Company agreed to exchange all of
their shares in the Company with a third party for $30,000,000 of the
acquiring company's parent's common stock plus $1,500,000 of cash less
certain adjustments for working capital. As a result of the sale, all
of the outstanding shares of the Company's common stock will be retired
and canceled.
In accordance with the May 3, 1996 settlement and redemption agreement with
the preferred shareholder (note 6) which required full payment upon sale of
the Company, the Company made a lump sum payment of $913,768 to this
shareholder. Proceeds from the sale of receivables (note 3) were used to
fund this payment. In addition, pursuant to the redemption agreement, the
preferred shareholder is entitled to 3% of the net proceeds, as defined by
the settlement agreement, of any sale of the Company. This obligation has
been personally assumed by the president of the Company.
20
<PAGE>
NATIONAL TELESERVICE, INCORPORATED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED SEPTEMBER 30, 1994, 1995, AND 1996
AND FOR THE SIX MONTHS ENDED MARCH 31, 1996, AND
1997 (UNAUDITED) AND INDEPENDENT AUDITORS' REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
National TeleService, Incorporated
Winona, Minnesota
We have audited the accompanying consolidated balance sheets of National
TeleService, Inc. (the Company) as of September 30, 1995 and 1996 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended September 30, 1996.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our 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 consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of National TeleService, Inc. at
September 30, 1995 and 1996 and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1996, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
December 6, 1996
(May 12, 1997 as to Note 10)
Minneapolis, MN
<PAGE>
NATIONAL TELESERVICE, INCORPORATED
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1996, AND
MARCH 31, 1997 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
SEPTEMBER 30
--------------------------- MARCH 31
1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 324,822 $ 772,754 $ 1,307,076
Marketable securities 1,039,972 788,124
Accounts receivable, net of allowances
for uncollectible accounts of $15,752,
$23,738, and $21,606, respectively 2,674,403 2,881,286 3,073,025
Prepaid expenses 101,378 68,930 268,395
Deferred tax asset (Note 5) 2,893 9,676 1,723
------------ ---------- -----------
Total current assets 3,103,496 4,772,618 5,438,343
INVESTMENTS 66,667
PROPERTY AND EQUIPMENT, net (Notes 2, 3, and 4) 1,540,467 1,418,464 1,217,937
LAND, carried at lower of cost or market 1,152,627 807,987 807,987
OTHER ASSETS 70,034 168,007 147,603
------------ ---------- -----------
$ 5,933,291 $ 7,167,076 $ 7,611,870
------------ ---------- -----------
------------ ---------- -----------
LIABILITIES
CURRENT LIABILITIES:
Accounts payable $ 1,435,650 $ 1,588,495 $ 1,801,841
Accrued compensation 446,143 583,986 449,988
Due to related party (Note 7) 217,500 318,000 236,800
Accrued liabilities (Note 5) 143,568 281,575 314,746
Long-term debt - current portion (Note 4) 416,700 52,552 35,797
------------ ---------- -----------
Total current liabilities 2,659,561 2,824,608 2,839,172
LONG-TERM DEBT (Note 4) 662,896 609,095 599,061
DEFERRED TAX LIABILITY (Note 5) 306,568 317,491 277,160
COMMITMENTS (Note 6)
SHAREHOLDERS' EQUITY (Note 8):
Common stock, no par value; authorized
25,000 shares; issued and outstanding 940 shares 20,000 20,000 20,000
Unrealized holding loss on marketable securities (2,007) (11,641)
Retained earnings 2,284,266 3,397,889 3,888,118
------------ ---------- -----------
Total shareholders' equity 2,304,266 3,415,882 3,896,477
------------ ---------- -----------
$ 5,933,291 $ 7,167,076 $ 7,611,870
------------ ---------- -----------
------------ ---------- -----------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
NATIONAL TELESERVICE, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1994, 1995, AND 1996
AND SIX MONTHS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30 MARCH 31
------------------------------------------ ----------------------------
1994 1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $ 16,136,106 $ 19,425,838 $ 23,154,899 $ 11,098,509 $ 12,535,731
COST OF TRANSMISSIONS 10,384,860 12,726,622 14,802,550 7,222,699 8,089,385
------------ ------------ ------------ ------------ ------------
GROSS PROFIT 5,751,246 6,699,216 8,352,349 3,875,810 4,446,346
OPERATING EXPENSES:
Selling expenses 1,451,356 1,934,073 2,180,853 1,141,162 1,108,960
General and administrative
expenses 2,403,490 3,103,539 3,454,692 1,700,941 2,039,591
Related party expenses (Note 7) 534,000 573,000 761,000 367,100 491,900
------------ ------------ ------------ ------------ ------------
4,388,846 5,610,612 6,396,545 3,209,203 3,640,451
------------ ------------ ------------ ------------ ------------
OPERATING INCOME 1,362,400 1,088,604 1,955,804 666,607 805,895
NONOPERATING INCOME (EXPENSE):
Income 76,627 82,078 47,870 16,086 50,107
Expense (53,448) (99,882) (184,053) (128,115) (65,429)
------------ ------------ ------------ ------------ ------------
23,179 (17,804) (136,183) (112,029) (15,322)
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 1,385,579 1,070,800 1,819,621 554,578 790,573
INCOME TAX EXPENSE (Note 5) 587,996 525,469 705,998 225,717 300,344
------------ ------------ ------------ ------------ ------------
NET INCOME $ 797,583 $ 545,331 $ 1,113,623 $ 328,861 $ 490,229
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
NATIONAL TELESERVICE, INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
LOSS ON
COMMON COMMON MARKETABLE RETAINED
SHARES STOCK SECURITIES EARNINGS
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1993 940 $ 20,000 $ 941,352
Net income 797,583
------ --------- ----------
BALANCE AT SEPTEMBER 30, 1994 940 20,000 1,738,935
Net income 545,331
------ --------- ----------
BALANCE AT SEPTEMBER 30, 1995 940 20,000 2,284,266
Net income 1,113,623
Unrealized loss on
marketable securities $ (2,007)
------ --------- --------- ----------
BALANCE AT SEPTEMBER 30, 1996 940 20,000 (2,007) 3,397,889
Net income (unaudited) 490,229
Unrealized loss on marketable
securities (unaudited) (9,634)
------ --------- --------- ----------
BALANCE AT MARCH 31, 1997 (unaudited) 940 $ 20,000 $(11,641) $3,888,118
------ --------- --------- ----------
------ --------- --------- ----------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
NATIONAL TELESERVICE, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1994, 1995, AND 1996
AND SIX MONTHS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30 MARCH 31
------------------------------------- -------------------------
1994 1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 797,583 $ 545,331 $ 1,113,623 $ 328,861 $ 490,229
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 473,577 453,291 481,449 239,575 259,226
Loss on write-down of land 178,000
Deferred income taxes 96,304 90,521 4,140 2,070 (32,378)
Gain on acquisition of minority interest (60,878)
Loss on write-down of investments 66,667 66,667
Loss on disposal of property 32,587 50,669
Noncash compensation expense 40,739
Increase in accounts receivable (580,323) (491,451) (206,883) (265,956) (191,739)
Decrease (increase) in prepaid expenses 841 (96,878) 32,448 (27,225) (199,465)
Increase (decrease) in accounts payable 9,151 (108,783) 152,845 121,741 213,346
Increase (decrease) in accrued compensation 183,926 (21,059) 137,843 (47,031) (133,998)
Increase (decrease) in due to related party 100,000 7,000 100,500 (50,000) (81,200)
Increase (decrease) in accrued liabilities 227,067 (291,613) 138,007 53,824 33,171
Other (18,902) (25,137) (139,565) (42,792) (7,125)
---------- --------- ---------- --------- ---------
Net cash provided by operating activities 1,260,933 289,891 1,881,074 379,734 390,806
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (650,758) (232,897) (317,854) (88,622) (31,170)
Purchase of land (208,578)
Purchase of marketable securities (1,041,979) (497,496)
Purchase of equity securities (66,667)
Repayment of advances to shareholders 598,971
Maturity of marketable security 100,000
---------- --------- ---------- --------- ---------
Net cash (used in) provided by
investing activities (717,425) (441,475) (1,359,833) (88,622) 170,305
CASH FLOWS FROM FINANCING ACTIVITIES -
Payments on long-term debt (190,079) (65,742) (73,309) (48,273) (26,789)
---------- --------- ---------- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 353,429 (217,326) 447,932 242,839 534,322
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 188,719 542,148 324,822 324,822 772,754
---------- --------- ---------- --------- ---------
CASH AT END OF PERIOD $ 542,148 $ 324,822 $ 772,754 $ 567,661 $ 1,307,076
---------- --------- ---------- --------- ---------
---------- --------- ---------- --------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes $ 307,000 $ 512,000 $ 562,000 342,000 655,000
Cash paid for interest 13,000 55,000 61,000 46,000 33,000
Transfers of marketable securities to officers 1,440,739
Transfers of marketable securities from officers 801,029
Relinquishment of title to land in exchange for
extinquishment of debt 344,640 344,640
Issuance of debt to purchase land 600,000
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
NATIONAL TELESERVICE, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1994, 1995, AND 1996
AND SIX MONTHS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
- ------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
National TeleService, Inc. (the Company) is a telecommunications
company providing intrastate and interstate long distance services in
various states to both commercial and residential customers.
BASIS OF PRESENTATION - The consolidated financial statements include
the accounts of the Company, LaQuinta Partnership (LaQuinta), and Palmview
Partnership (Palmview). The only activity of the partnerships has been to
purchase tracts of land for investment purposes or future use as
transmission sites. During 1994, the Company acquired the remaining 33%
that it did not own of Palmview and recorded a gain of approximately
$61,000.
In 1996, Palmview relinquished title to the land it had originally
purchased in exchange for cancellation of the outstanding debt of
$344,640. Palmview was subsequently dissolved. There was no gain or loss
associated with the transaction, as the land had been written down to loan
value at September 30, 1995 with a resulting loss of $178,000 recorded in
the 1995 consolidated statement of operations.
PROPERTY AND EQUIPMENT - Property and equipment are carried at cost.
Depreciation of property and equipment is provided using the straight-line
method over the estimated useful lives of the related assets, generally
five to ten years.
CASH EQUIVALENTS - The Company considers highly liquid investments
with original maturities of three months or less to be cash equivalents.
MARKETABLE SECURITIES - The Company accounts for marketable securities
in accordance with Statement of Financial Accounting Standards (SFAS) No.
115 ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. The
Company has classified all of its marketable securities as available-for-
sale, and has established a $2,007 unrealized holding loss allowance in
shareholders' equity as the fair market value of its investments is less
than their carrying value as of September 30, 1996. The Company's
investment in marketable securities consists entirely of U.S. Government
securities. These securities have maturity dates ranging from December 12,
1996 to May 31, 2001. The Company utilizes the specific identification
method in computing realized gains or losses.
INCOME TAXES - The Company accounts for income taxes in accordance
with SFAS No. 109, ACCOUNTING FOR INCOME TAXES. The statement requires the
use of an asset and liability approach for financial accounting and
reporting for income taxes, with deferred income taxes being provided for
all differences between the financial statement and tax bases of assets and
liabilities.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS - The Company records
marketable securities at fair value based on market prices or dealer
quotes. The carrying value of the Company's long-term debt approximates
its fair value due to the variable rate of interest. The carrying values
of all other financial instruments approximate their fair value given the
short-term nature of the financial instruments.
6
<PAGE>
LINE INSTALLATION COSTS - The Company makes payments to various phone
carriers for the installation of lines to service customers in certain
regions. These one-time payments are capitalized and amortized on a
straight-line basis over a five-year period and are included in other
assets.
INVESTMENTS - The Company accounts for investments in less than 20%-
owned entities at cost. During 1995, the Company wrote its investment down
to estimated net realizable value.
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 at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Major areas
involving estimates include allowances for uncollectible accounts
receivable, income taxes, and determination of impairment of long-lived
assets. Actual results could differ from these estimates.
The nature of the Company's operations exposes it to certain business
risks. Such business risks include a concentration of costs of
transmissions with three vendors, which accounted for approximately
59%, 58%, and 58% of costs of transmissions in 1994, 1995, and 1996,
respectively.
NEW ACCOUNTING STANDARDS - In March 1995, the Financial Accounting
Standards Board (FASB) issued SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No.
121 requires that assets to be held and used be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. An impairment loss should be
recognized when the estimated undiscounted future cash flows from the asset
are less than the carrying value of the asset. Assets to be disposed of
should be reported at the lower of their carrying amount or fair value less
cost to sell. SFAS No. 121 is effective for the Company's financial
statements for the fiscal year beginning October 1, 1996. The adoption of
this statement did not have a material impact on results of operations or
financial position of the Company.
REVENUE RECOGNITION - Revenue is recognized at the time of customer
usage. The Company regularly accrues sales for any unbilled receivables
that exist at each month-end.
UNAUDITED INTERIM FINANCIAL STATEMENTS - The balance sheet as of
March 31, 1997, the statements of operations and cash flows for the
six-month periods ended March 31, 1996 and March 31, 1997, and the
statement of shareholders' equity for the six-month period ended March 31,
1997 have been prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results
of operations, cash flows, and changes in shareholders' equity at
March 31, 1997 and for the six months ended March 31, 1996 and March 31,
1997 have been made. Interim results are not necessarily indicative of
the results that will be achieved for the year.
7
<PAGE>
2. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
September 30
--------------------------------
1995 1996
Equipment $ 1,856,514 $ 2,149,737
Dialers 345,977 369,464
Furniture and fixtures 194,925 196,069
Leasehold improvements 94,317 94,317
------------ ------------
2,491,733 2,809,587
Less accumulated depreciation 951,266 1,391,123
------------ ------------
$ 1,540,467 $ 1,418,464
------------ ------------
------------ ------------
The Company leases equipment under a capital lease. Equipment under
the capital lease was recorded at $235,929 and related accumulated
depreciation was $117,965, and $165,151 at September 30, 1995, and 1996,
respectively.
3. LINE OF CREDIT
The Company has a $2,000,000 line of credit with a bank, due on demand,
which expires on April 1, 1998. Terms of the agreement limit the amount
advanced to the lesser of $2,000,000 or the sum of 80% of the Company's
eligible billed accounts receivable, 50% of its unbilled accounts
receivable, and 50% of its equipment. Borrowings are secured by the
Company's equipment, accounts receivable, and general intangibles. The
interest rate on the line of credit is prime plus 0.5%. The Company had
no outstanding balances under the line of credit agreement as of
September 30, 1995 and 1996.
The Company had a $400,000 letter of credit with a bank which expired
June 1, 1997. The interest rate on this letter of credit was prime plus
0.5%. The Company was also required to pay a yearly service fee equal to
2.0% of the face amount of the letter. The Company had no drawings on
this letter of credit as of September 30, 1995 and 1996.
4. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
September 30
-----------------
1995 1996
<S> <C> <C>
Note payable with interest payable monthly at 1.5% above prime
(prime was 8.25% at September 30, 1996) and principal due in
full on December 7, 1998, collateralized by land $ 600,000 $ 600,000
Note payable with interest payable quarterly at 7.5% extinguished
in 1996 344,640
Note payable, principal and interest at the prime rate plus 1.0%
paid in 1996 24,056
Capital lease 110,900 61,647
---------- ---------
1,079,596 661,647
Less current maturities 416,700 52,552
---------- ---------
$ 662,896 $609,095
---------- ---------
---------- ---------
</TABLE>
8
<PAGE>
Long-term debt maturities at September 30, 1996 are as follows:
Years ending September 30:
1997 $ 52,552
1998 9,095
1999 600,000
--------
$661,647
--------
--------
The note payable due on December 7, 1998 and the capital lease are
secured by the assets purchased under the agreements with a net book value
of approximately $879,000 at September 30, 1996.
5. INCOME TAXES
The components of income tax expense are as follows:
Year Ended September 30
--------------------------------------
1994 1995 1996
Current:
State $ 112,366 $ 91,363 $ 123,267
Federal 379,326 343,585 578,591
--------- --------- ---------
491,692 434,948 701,858
Deferred 96,304 90,521 4,140
--------- --------- ---------
$ 587,996 $ 525,469 $ 705,998
--------- --------- ---------
--------- --------- ---------
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets
and liabilities. Deferred tax assets (liabilities) comprising the net
deferred taxes shown on the balance sheet are as follows:
September 30
-------------------------
1995 1996
Current -
Bad debt expense $ 2,893 $ 9,676
---------- ----------
Current deferred tax asset $ 2,893 $ 9,676
---------- ----------
---------- ----------
Noncurrent:
Accelerated depreciation on equipment (201,218) (190,686)
Accelerated amortization
on line installation costs (29,617) (68,480)
Accelerated depreciation on
dialer equipment (75,733) (58,325)
---------- ----------
Noncurrent deferred tax liability $ (306,568) $ (317,491)
---------- ----------
---------- ----------
9
<PAGE>
The provisions for income taxes are calculated as follows:
<TABLE>
Year Ended September 30
-----------------------------------------
1994 1995 1996
<S> <C> <C> <C>
Tax provision computed at federal statutory
rate of 35% $ 484,953 $ 374,780 $ 636,867
Effect of graduated rate (13,856) (10,708) (18,196)
State income taxes, net of federal benefit 86,594 60,207 80,124
Capital loss on investment in Palmview 75,591
Meals and entertainment 4,162 15,554 19,585
Other 26,143 10,045 (12,382)
---------- ---------- -----------
$ 587,996 $ 525,469 $ 705,998
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
At September 30, 1996, the Company had a $178,000 capital loss
carryforward related to the Palmview loss, which expires in 2001. The
benefit from this loss has not been recorded, as it is uncertain whether or
not there will be future capital gains to utilize the loss carryforward.
6. COMMITMENTS
The shareholders of the Company have entered into an agreement which
requires any selling shareholder to offer such shares first to the Company
and then to other shareholders at the same price and on the same terms
offered in good faith by the third party offering to purchase such shares.
The agreement also provides that for the remainder of the fiscal year
in which the Chairman of the Board or the President dies, and for the two
fiscal years thereafter, the Company shall pay to the decedent's personal
representative, for the benefit of the decedent's heirs and/or legal
beneficiaries, an annual distribution of $200,000. This $200,000 is
increased each fiscal year, beginning with fiscal 1994, by an inflation
index. In addition, for the remainder of the fiscal year in which the
Chairman of the Board or the President dies and the two fiscal years
thereafter, the survivor shall also receive an annual cash bonus of
$200,000 as compensation for the additional services that will be required
to be performed during that period. Such amount shall also be increased by
an inflation factor beginning in 1994. These amounts may be reduced, as
described in such agreement, if the survivor determines that payment would
not be advisable due to the Company's financial condition.
Following the death of the Chairman or the President, and for the
remainder of the fiscal year in which the Chairman or the President dies
and the two fiscal years thereafter, the Company shall make quarterly
distributions to its shareholders which aggregate not less than 25% of the
Company's pretax income for such fiscal year. For each fiscal year
thereafter, the Company shall make quarterly distributions to its
shareholders that aggregate not less than 50% of the Company's pretax
income for such year.
Effective April 30, 1997, and as is referred to in Note 10, this
agreement was terminated.
10
<PAGE>
The Company leases office space under noncancelable operating leases.
Minimum annual rental obligations are summarized as follows:
Years ending September 30:
1997 $ 78,000
1998 67,000
1999 51,000
---------
$ 196,000
---------
---------
The Company is also obligated to pay certain occupancy costs as
defined in the leases. Rental expense charged to operations for office
space and equipment in 1994, 1995, and 1996 was approximately $76,000,
$106,000 and $129,000, respectively.
7. RELATED PARTIES
The Company makes various payments to, and on the behalf of, Waldon
Financial Corporation (WFC) and Kirkland Consultants (KC), under separate
consulting agreements. The Company's chairman also serves as the president
of both WFC and KC.
8. SHAREHOLDERS' EQUITY
On December 10, 1992, the Company granted an option to an officer of
the Company to purchase all or any part of the number of shares of the
Company's common stock which, when issued, would equal 5% of the total
number of shares of common stock outstanding. The exercise price is
$150,000, or the pro-rata amount in the event of partial exercise of the
option. The option is exercisable only upon (i) a sale of the Company by
merger or other business combination in which the Company is not the
surviving corporation, or (ii) a sale of all or substantially all of the
Company's assets, or (iii) a sale of 80% or more of the outstanding common
stock of the Company to a person or group of persons who are not then
shareholders, or (iv) the filing by the Company with the Securities and
Exchange Commission for a registration statement providing for a public
offering of the Company's stock. Compensation expense, if any, will be
recorded at the time the condition for exercisability is met.
9. EMPLOYEE BENEFIT PLANS
In fiscal 1994, the Company had a Simplified Employee Pension Plan
(the SEP Plan) which covered substantially all full-time employees employed
for at least one year who had reached the age of 21. The Company's
contributions to the SEP Plan were discretionary as determined by
management of the Company. Employee contributions were permitted if (1)
the Company had no more than 25 employees during the preceding plan year,
and (2) 50% of such employees made elective contributions. Amounts charged
to operations under the SEP Plan were approximately $71,000 in 1994.
Effective October 1, 1994, the Company terminated the SEP Plan and
implemented a defined contribution 401(k) plan (the 401(k) Plan).
Employees are eligible to become participants in the 401(k) Plan after
completing six months of service and after attaining the age of 21.
Participants may contribute an amount equal to 1% to 12% of their
compensation. The 401(k) Plan provides for a matching contribution by the
Company in an amount equal to 50% of the participants' contribution, not to
exceed 6% of the participants' compensation. Amounts charged to operations
under the 401(k) Plan were approximately $32,000 and $43,000 in 1995 and
1996, respectively.
11
<PAGE>
10. SUBSEQUENT EVENTS
The stock agreement between the Company and its shareholders referred
to in Note 6 was terminated as of April 30, 1997.
Effective May 12, 1997, all of the common stock of the Company was
acquired by Network Long Distance.
12
<PAGE>
PRO FORMA COMBINING FINANCIAL STATEMENTS
The following unaudited Pro Forma Combining Balance Sheet as of March 31, 1997
and unaudited Pro Forma Combining Income Statements for the years ended March
31, 1997, 1996 and 1995, illustrate the effect of Network Long Distance, Inc.'s
(the Company) merger with National Teleservice, Incorporated (National). The
merger with National (the National Merger), which is being accounted for as a
pooling-of-interests, was consummated on May 12, 1997 through the issuance of
approximately 3,274,000 shares of the Company's common stock for all of the
outstanding common stock of National. Approximately 155,000 of the shares
issued are being held in escrow pending resolution of certain purchase price
contingencies.
The following unaudited Pro Forma Combining Balance Sheet as of March 31, 1997
and unaudited Pro Forma Combining Income Statement for the year ended March 31,
1997, also illustrate the effect of the Company's acquisition of Eastern Telecom
International Corporation (Eastern). The acquisition of Eastern (the Eastern
Acquisition), which is being accounted for as a purchase, was consummated on May
5, 1997 through the issuance of approximately 3,633,000 shares of the Company's
common stock and cash payments of approximately $1,500,000. Approximately
63,000 of the shares issued are being held in escrow pending resolution of
certain purchase price contingencies.
On May 31, 1996, the Company acquired substantially all of the customer base of
Universal Network Services, Inc. (UniNet) in a transaction accounted for as a
purchase. Results of operations of UniNet for the period from April 1, 1996
through May 31, 1996 are included in the Pro Forma Combining Income Statement
for the year ended March 31, 1997. Results for UniNet after May 31, 1996 are
included in the Company's historical results of operations.
These Pro Forma Combining Financial Statements should be read in conjunction
with the historical financial statements of the Company, Eastern and National.
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.
<PAGE>
Network Long Distance, Inc.
Pro Forma Combining Balance Sheet (1)
As of March 31, 1997
<TABLE>
Network/
National
Network National Pro Forma Pro Forma
Historical(2) Historical Adjustments Combined
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Current assets $10,478,515 $5,320,999 $ -- $15,799,514
Property and equipment, net 1,624,511 1,365,538 -- 2,990,049
Customer base acquisition costs, net 5,645,730 -- -- 5,645,730
Goodwill, net 450,020 -- -- 450,020
Other intangibles, net 264,221 -- -- 264,221
Land, carried at lower of cost or market -- 807,987 -- 807,987
Other assets 490,715 117,348 -- 608,063
----------- ---------- -------- -----------
Total assets $18,953,712 $7,611,872 $ -- $26,565,584
=========== ========== ======== ===========
Current liabilities $ 9,387,287 $2,803,375 $ -- $12,190,662
Deferred income tax -- 277,160 -- 277,160
Long-term debt 1,454,256 599,061 -- 2,053,317
Capital lease obligation -- 35,799 -- 35,799
Redeemable preferred stock -- -- -- --
Stockholders' equity:
Series A preferred stock -- -- -- --
Common stock 672 20,000 (19,688)(3) 984
Additional paid-in-capital 14,828,040 -- 19,688 (3) 14,847,728
Unrealized holding loss on
marketable securities -- (11,641) -- (11,641)
Retained earnings (6,624,253) 3,888,118 -- (2,736,135)
Treasury stock (92,290) -- -- (92,290)
----------- ---------- -------- -----------
Total stockholders' equity 8,112,169 3,896,477 -- 12,008,646
----------- ---------- -------- -----------
Total liabilities and
stockholders' equity $18,953,712 $7,611,872 $ -- $26,565,584
=========== ========== ======== ===========
<CAPTION>
Network/
National/
Eastern
Eastern Pro Forma Pro Forma
Historical Adjustments Combined
---------- ----------- -----------
<S> <C> <C> <C>
Current assets $4,873,936 $ (307,850)(7) $20,365,600
Property and equipment, net 2,403,922 -- 5,393,971
Customer base acquisition costs, net -- 11,296,916 (4) 16,942,646
Goodwill, net -- 11,296,916 (4) 11,746,936
Other intangibles, net -- -- 264,221
Land, carried at lower of cost or market -- -- 807,987
Other assets 74,216 -- 682,279
---------- ----------- -----------
Total assets $7,352,074 $22,285,982 $56,203,640
========== =========== ===========
Current liabilities $4,636,402 $ -- $16,827,064
Deferred income tax 503,138 -- 780,298
Long-term debt -- 1,500,000 (5) 3,553,317
Capital lease obligation 821,257 -- 857,056
Redeemable preferred stock 307,850 (307,850)(7) --
Stockholders' equity:
Series A preferred stock -- -- --
Common stock 1,732 (1,732)(6) 1,341
357 (5)
Additional paid-in-capital -- 22,176,902 (5) 37,024,630
Unrealized holding loss on
marketable securities -- -- (11,641)
Retained earnings 1,081,695 (1,081,695)(6) (2,736,135)
Treasury stock -- -- (92,290)
---------- ----------- -----------
Total stockholders' equity 1,083,427 21,093,832 34,185,905
---------- ----------- -----------
Total liabilities and
stockholders' equity $7,352,074 $22,285,982 $56,203,640
========== =========== ===========
</TABLE>
<PAGE>
Network Long Distance, Inc.
Pro Forma Combining Income Statement (1)
For the year ended March 31, 1997
<TABLE>
Network
Network UniNet Pro Forma Adjusted National
Historical(2) Historical(8) Adjustments Historical Historical
------------ ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue $59,690,135 $2,375,000 $(791,659) (9) $61,273,476 $26,315,480
Operating expenses:
Transmissions costs 40,717,419 1,775,000 (591,661) (9) 41,900,758 15,340,400
Selling, general and administrative 15,770,990 827,000 - 16,597,990 8,189,185
Provision for losses on accounts receivable 3,041,617 49,000 (16,333) (9) 3,074,284 208,932
Depreciation and amortization 1,902,942 148,000 (148,000) (9) 1,993,927 491,361
90,985 (10)
Provision to reduce carrying
value of certain assets 6,291,000 - - 6,291,000 -
----------- ---------- --------- ----------- -----------
Total 67,723,968 2,799,000 (665,009) 69,857,959 24,229,878
----------- ---------- --------- ----------- -----------
Operating income (loss) (8,033,833) (424,000) (126,650) (8,584,483) 2,085,602
Interest income (expense), net (517,596) 76,000 (76,000) (9) (572,596) 16,356
(55,000)(11)
Other income (loss) - - - - (134,848)
----------- ---------- --------- ----------- -----------
Income before taxes (8,551,429) (348,000) (257,650) (9,157,079) 1,967,110
(Provision) benefit for income taxes 697,000 - - 697,000 (786,844)
----------- ---------- --------- ----------- -----------
Net income (loss) $(7,854,429) $ (348,000) $(257,650) $(8,460,079) $ 1,180,266
----------- ---------- --------- ----------- -----------
----------- ---------- --------- ----------- -----------
Number of shares issued
and outstanding: (14)
Primary 6,060,164 6,092,220
----------- -----------
----------- -----------
Fully diluted 6,060,164 6,092,220
----------- -----------
----------- -----------
Earnings per share:
Primary $ (1.30) $ (1.39)
----------- -----------
----------- -----------
Fully diluted $ (1.30) $ (1.39)
----------- -----------
----------- -----------
Eastern Network/National
Network/National Historical - Eastern
Pro Forma 11 months end Pro Forma Pro Forma
Combined March 31, 1997(12) Adjustments Combined
---------------- ----------------- ------------ ----------------
Revenue $87,588,956 $20,429,324 $ - $108,018,280
Operating expenses:
Telecommunications costs 57,241,158 10,161,778 - 67,402,936
Selling, general and administrative 24,787,175 7,886,436 - 32,673,611
Provision for losses on accounts receivable 3,283,216 1,369,815 - 4,653,031
Depreciation and amortization 2,485,288 629,093 1,990,000 (10) 5,104,381
-
Provision to reduce carrying
value of certain assets 6,291,000 - - 6,291,000
----------- ----------- ----------- ------------
Total 94,087,837 20,047,122 1,990,000 116,124,959
----------- ----------- ----------- ------------
Operating income (loss) (6,498,881) 382,202 (1,990,000) (8,106,679)
Interest income (expense), net (556,240) (76,338) (135,000)(11) (767,578)
Other income (loss) (134,848) 273,976 - 139,128
----------- ----------- ----------- ------------
Income before taxes (7,189,969) 579,840 (2,125,000) (8,735,129)
(Provision) benefit for income taxes (89,844) (196,857) 286,701 (13) -
----------- ----------- ----------- ------------
Net income (loss) $(7,279,813) $ 382,983 $(1,838,299) $ (8,735,129)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Number of shares issued
and outstanding: (14)
Primary 9,210,884 12,780,664
----------- ------------
----------- ------------
Fully diluted 9,210,884 12,780,664
----------- ------------
----------- ------------
Earnings per share:
Primary $ (0.79) $ (0.68)
----------- ------------
----------- ------------
Fully diluted $ (0.79) $ (0.68)
----------- ------------
----------- ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Network Long Distance, Inc.
Pro Forma Combing Income Statement (1)
For the year ended March 31, 1996
Network/National
Network National Pro Forma
Historical (2) Historical Combined
-------------- ---------- --------
<S> <C> <C> <C>
Revenue $ 45,083,191 $ 22,501,077 $ 67,584,268
Operating expenses:
Transmissions costs 32,548,221 13,122,672 45,670,893
Selling, general and administrative 9,420,273 7,358,547 16,778,820
Provision for losses on accounts receivable 1,112,151 95,302 1,207,453
Depreciation and amortization 1,246,826 588,093 1,834,919
------------- ------------- -------------
Total 44,327,471 21,164,614 65,492,085
------------- ------------- -------------
Operating income (loss) 755,720 1,336,463 2,092,183
Interest income (expense), net (198,897) (59,558) (258,455)
Other income (loss) 40,947 (266,630) (225,683)
------------- ------------- -------------
Income before taxes 597,770 1,010,275 1,608,045
(Provision) benefit for income taxes (223,273) (416,974) (640,247)
------------- ------------- -------------
Net income (loss) $ 374,497 $ 593,301 $ 967,798
------------- ------------- -------------
------------- ------------- -------------
Number of shares issued
and outstanding: (14)
Primary 5,079,938 8,198,602
------------- -------------
------------- -------------
Fully diluted 5,079,938 8,198,602
------------- -------------
------------- -------------
Earnings per share:
Primary $ 0.07 $ 0.12
------------- -------------
------------- -------------
Fully diluted $ 0.07 $ 0.12
------------- -------------
------------- -------------
</TABLE>
<PAGE>
Network Long Distance, Inc.
Pro Forma Combining Income Statement (1)
For the year ended March 31, 1995
<TABLE>
Network/National
Network National Pro Forma
Historical (2) Historical Combined
-------------- ------------- ----------------
<S> <C> <C> <C>
Revenue $ 29,374,853 $ 18,943,684 $ 48,318,537
Operating expenses:
Transmissions costs 21,823,645 11,504,075 33,327,720
Selling, general and administrative 5,652,103 5,590,222 11,242,325
Provision for losses on accounts receivable 403,314 55,439 458,753
Depreciation and amortization 396,661 333,438 730,099
------------- ------------ --------------
Total 28,275,723 17,483,174 45,758,897
------------- ------------ --------------
Operating income (loss) 1,099,130 1,460,510 2,559,640
Interest income (expense), net 65,480 (30,585) 34,895
Other income (loss) (30,142) (3,620) (33,762)
------------- ------------ --------------
Income before taxes 1,134,468 1,426,305 2,560,773
(Provision) benefit for income taxes (266,954) (656,100) (923,054)
------------- ------------ --------------
Net income (loss) $ 867,514 $ 770,205 $ 1,637,719
------------- ------------ --------------
------------- ------------ --------------
Number of shares issued
and outstanding: (14)
Primary 4,587,620 7,706,284
------------- --------------
------------- --------------
Fully diluted 4,587,620 7,706,284
------------- --------------
------------- --------------
Earnings per share:
Primary $ 0.19 $ 0.21
------------- --------------
------------- --------------
Fully diluted $ 0.19 $ 0.21
------------- --------------
------------- --------------
</TABLE>
<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, non-recurring charges or
any resulting restructuring costs associated with the consummation of the
National Merger or Eastern Acquisition nor do these statements give effect
to any potential cost savings and synergies that could result from the
National Merger or Eastern Acquisition. The unaudited Pro Forma Combining
Financial Statements are not necessarily indicative of the operating
results or financial position that would have occurred had the National
Merger or Eastern Acquisition been consummated at the dates indicated nor
necessarily indicative of future operating results or financial position.
2. On June 30, 1996, the Company merged with Long Distance Telecom, Inc. dba
Blue Ridge Telephone (Blue Ridge) and in connection therewith issued
337,079 shares of common stock for all of Blue Ridge's common stock. On
November 15, 1996, the Company merged with United Wats, Inc. (United Wats)
and in connection therewith issued 2,277,780 shares of common stock for all
of United Wats' common stock. Both the Blue Ridge and United Wats mergers
(the Prior Mergers) were accounted for as pooling-of-interests. Because
each of these mergers was accounted for as a pooling-of-interests, the
Company's historical results presented in the Pro Forma Combining Income
Statements include the results of both Blue Ridge and United Wats. Before
the Prior Mergers, both Blue Ridge and United Wats utilized a December 31
fiscal year end. For purposes of the Pro Forma Combining Income Statements
for the years ended March 31, 1996 and 1995, amounts included related to
these entities reflect the historical results of operations for the years
ended December 31, 1995 and 1994. The Pro Forma Combining Financial
Statements for the year ended March 31, 1997, reflect a change in fiscal
year end to March 31 for Blue Ridge and United Wats.
3. This adjustment reflects the issuance of approximately 3,274,000 shares of
the Company's restricted common stock for all of the outstanding common
stock of National.
4. This adjustment reflects the excess of cost over net tangible assets
acquired in the Eastern Acquisition. 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
<PAGE>
NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS (CONT.)
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 may change. The acquisition agreement calls for
approximately 63,000 shares of the Company's common stock to be held in
escrow for the sellers pending resolution of certain purchase price
contingencies. This stock has not been included in the purchase price.
See Note 5.
5. This adjustment represents the payment of approximately $1,500,000 in cash
obtained through the Company's credit facility and the issuance of
approximately 3,570,000 shares of the Company's restricted common stock
valued for purposes of the pro forma financials at approximately
$22,180,000. In addition to the cash and issuance of restricted common
stock, the Company issued approximately 63,000 shares of its common stock
to be held in escrow pending resolution of certain purchase price
contingencies 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. The escrowed shares will be
recorded as additional consideration, if and when, the shares are released
from escrow.
6. This adjustment represents the elimination of Eastern's equity accounts.
7. This adjustment represents the redemption of Eastern's preferred stock at
acquisition.
8. This column represents the historical results of operations of UniNet from
April 1, 1996 through the date of acquisition, May 31, 1996.
9. This adjustment represents the elimination of UniNet's revenues and
expenses for that portion of UniNet's business not acquired by the Company.
The Company purchased a portion of UniNet's customer base which accounted
for approximately 67% of UniNet's monthly revenues and telecommunications
costs at the date of the acquisition. For purposes of the Pro Forma
Combining Income Statement for the year ended March 31, 1997, 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.
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 and 30 years, respectively, for the excess allocated to
customer base acquisition costs and goodwill.
<PAGE>
NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS (CONT.)
11. This adjustment represents the interest expense on the borrowings from the
Company's credit facility to pay the cash portion of the purchase price for
the UniNet and Eastern acquisitions. The Company's incremental borrowing
rate on the credit facility is prime plus 0.75%. For purposes of the Pro
Forma Combining Financial Statements, the Company is assuming an annual
rate of 9.0%.
12. This column represents the historical results of operations of Eastern for
the eleven-month period ended March 31, 1997. Eastern utilized an April 30
fiscal year end prior to its acquisition by the Company. Upon consummation
of the Eastern Acquisition, Eastern conformed its fiscal year end to that
of the Company. Historical results of operations for Eastern for April
1996, which are not included in the Pro Foma Combining Income Statement for
the year ended March 31, 1997, include revenues of approximately
$1,470,000, operating expenses of approximately $1,475,000, net other
income of approximately $15,000 and net income of approximately $10,000.
13. This adjustment eliminates the tax provision previously recorded by
National and Eastern. For purposes of the Pro Forma Combining Income
Statement for the year ended March 31, 1997, additional tax benefits are
not reflected for the losses sustained by the combined operations as
utilization of such losses would not be deemed realizable under a "more
likely than not" scenario.
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
issuance of approximately 195,000 restricted common shares in connection
with the UniNet Acquisition, approximately 3,274,000 restricted common
shares in connection with the National Merger and 3,570,000 restricted
common shares in connection with the Eastern Acquisition. Pro Forma share
data excludes approximately 49,000 common shares issued in connection with
the UniNet Acquisition, 156,000 common shares issued in connection with the
National Merger and 63,000 common shares issued in connection with the
Eastern Acquisition because these shares are not considered as part of the
purchase price.
<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: June 25, 1997 By: /s/ Thomas G. Keefe
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Thomas G. Keefe
Chief Financial Officer
