1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): July 15, 1996
MCLEOD, INC.
-----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-20763 58-421407240
- ------------------------------- --------------- ---------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification
Number)
221 Third Avenue SE, Suite 500, Cedar Rapids, IA 52401
- ------------------------------------------------ ---------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (319) 364-0000
2
Pursuant to Items 7(a)(4) and 7(b)(2) of the Commission's
General Instructions for Form 8-K, the undersigned registrant hereby amends
Item 7(a) of its Current Report on Form 8-K, which was filed with the
Commission on July 29, 1996, to file consolidated financial statements of
Ruffalo, Cody & Associates, Inc., which was acquired by the registrant on July
15, 1996, and further amends Item 7(b) of that Current Report on Form 8-K to
file pro forma financial information for the registrant reflecting the
acquisition of Ruffalo, Cody & Associates, Inc. Item 7(c) of that Current
Report on Form 8-K is also hereby amended to reflect the accompanying
Financial Data Schedule.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS
(a) Financial Statements of Company Acquired
Included herewith are the following statements of Ruffalo,
Cody & Associates, Inc.:
Consolidated balance sheets as of December 31, 1994 and 1995 and June 30, 1996
(unaudited)
Consolidated statements of income for the years ended December 31, 1993, 1994
and 1995 and the six months ended June 30, 1995 and 1996 (unaudited)
Consolidated statements of redeemable common stock and warrants and common
stockholders' equity (deficit) for the years ended December 31, 1993, 1994 and
1995 and the six months ended June 30, 1996 (unaudited)
Consolidated statements of cash flows for the years ended December 31, 1993,
1994 and 1995 and the six months ended June 30, 1995 and 1996 (unaudited)
Notes to consolidated financial statements
(b) Pro Forma Financial Information
Included herewith is the following unaudited pro forma
financial information for the registrant:
Pro forma condensed balance sheet as of June 30, 1996
Pro forma condensed statements of income for the year ended December 31, 1995
Pro forma condensed statements of income for the six months ended June 30, 1996
- 2 -
3
(c) Exhibits.
*2. Agreement and Plan of Reorganization, dated as of July 12,
1996, by and among McLeod, Inc., Ruffalo, Cody & Associates,
Inc., and certain shareholders of Ruffalo, Cody & Associates,
Inc.
27 Financial Data Schedule.
*99. Press Release, dated July 15, 1996, regarding the agreement to
acquire Ruffalo, Cody & Associates, Inc.
*Filed as an exhibit to the Current Report on Form 8-K filed July 29, 1996.
- 3 -
4
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.
Date: September 27, 1996 McLEOD, INC.
By:/s/ Blake O. Fisher, Jr.
-------------------------
Blake O. Fisher, Jr.
Chief Financial Officer and
Treasurer
- 4 -
5
EXHIBIT INDEX
*2. Agreement and Plan of Reorganization, dated as of July 12,
1996, by and among McLeod, Inc., Ruffalo, Cody & Associates,
Inc., and certain shareholders of Ruffalo, Cody & Associates,
Inc.
27 Financial Data Schedule.
*99. Press Release, dated July 15, 1996, regarding the agreement to
acquire Ruffalo, Cody & Associates, Inc.
*Filed as an exhibit to the Current Report on Form 8-K filed July 29, 1996.
- 5 -
6
CONTENTS
- --------------------------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT F-1
- --------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheets as of December 31, 1994
and 1995 and June 30, 1996 (unaudited) F-2 - F-3
Consolidated statements of income for the years ended
December 31, 1993, 1994 and 1995 and the six months
ended June 30, 1995 and 1996 (unaudited) F-4
Consolidated statements of redeemable common stock and
warrants and common stockholders' equity (deficit) for
the years ended December 31, 1993, 1994 and 1995 and
the six months ended June 30, 1996 (unaudited) F-5 - F-6
Consolidated statements of cash flows for the years ended
December 31, 1993, 1994 and 1995 and the six months
ended June 30, 1995 and 1996 (unaudited) F-7 - F-8
Notes to consolidated financial statements F-9 - F-16
- --------------------------------------------------------------------------------------------------
7
[MCGLADREY & PULLEN, LLP LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Ruffalo, Cody & Associates, Inc.
Cedar Rapids, Iowa
We have audited the accompanying consolidated balance sheets of Ruffalo, Cody &
Associates, Inc. and subsidiary as of December 31, 1994 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
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 Ruffalo, Cody &
Associates, Inc. and subsidiary as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
/s/ MCGLADREY & PULLEN, LLP
Cedar Rapids, Iowa
February 9, 1996, except for Note 8, as to
which the date is July 15, 1996
F-1
8
RUFFALO, CODY & ASSOCIATES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------------------- June 30,
ASSETS (NOTE 2) 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Current Assets
Cash and cash equivalents $ - $ - $ 46,647
Receivables:
Trade, less allowance for doubtful accounts
1994 $88,072; 1995 and 1996 $50,000 (Note 7) 2,036,844 2,062,801 2,601,859
Income tax refund 22,163 23,900 -
Other 18,021 39,515 41,218
Deferred income taxes, net (Note 3) 115,000 70,000 70,000
Prepaid expenses 64,829 44,395 29,588
----------------------------------------------------------------
TOTAL CURRENT ASSETS 2,256,857 2,240,611 2,789,312
----------------------------------------------------------------
Equipment and Leasehold Improvements
Technical equipment 1,510,401 1,773,178 1,966,626
Office equipment 127,578 250,494 278,772
Leasehold improvements 16,552 108,724 122,976
In-house phones 59,858 67,931 78,424
----------------------------------------------------------------
1,714,389 2,200,327 2,446,798
Less accumulated depreciation 635,134 1,043,527 1,295,577
----------------------------------------------------------------
1,079,255 1,156,800 1,151,221
----------------------------------------------------------------
Intangibles, primarily software, less accumulated
amortization 1994 $18,807; 1995 $51,046;
1996 $68,277 464,789 481,928 569,094
----------------------------------------------------------------
Other Assets, deferred income taxes, net (Note 3) 13,000 6,000 6,000
----------------------------------------------------------------
$ 3,813,901 $ 3,885,339 $ 4,515,627
================================================================
See Notes to Consolidated Financial Statements.
F-2
9
December 31,
LIABILITIES AND COMMON ----------------------------------- June 30,
STOCKHOLDERS' EQUITY (DEFICIT) 1994 1995 1996
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Current Liabilities
Notes payable (Note 2) $ 550,000 $ 100,000 $ 200,000
Current maturities of long-term debt 123,505 - -
Checks issued not yet presented for payment 207,773 16,376 -
Accounts payable 269,337 181,313 372,013
Accrued payroll and payroll related expenses 263,018 291,269 383,206
Accrued bonuses 215,147 227,886 268,269
Accrued commissions 104,585 128,573 190,245
Other accrued liabilities 317,065 243,349 209,507
Income taxes payable - - 36,953
Customer deposits 91,303 722,846 490,716
-------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,141,733 1,911,612 2,150,909
-------------------------------------------------------
Long-Term Debt 222,340 -
-------------------------------------------------------
Commitments (Notes 5 and 6)
Redeemable Common Stock and Warrants (Notes 4 and 8)
Common stock, no par or stated value; issued
1994, 1995 and 1996 318,182 shares 1,590,910 2,068,183 2,227,274
Common stock held by the 401(k) profit-sharing plan - 69,453 139,853
Warrants, issued 1994, 1995 and 1996 90,909 363,636 500,000 545,454
-------------------------------------------------------
1,954,546 2,637,636 2,912,581
-------------------------------------------------------
Common Stockholders' Equity (Deficit) (Notes 2, 4, 6 and 8)
Common stock, no par or stated value; authorized
5,000,000 shares; issued 1994 500,000 shares;
1995 515,685 shares; 1996 524,979 shares 500,000 558,925 618,894
Retained earnings (deficit) (1,004,718) (1,153,381) (1,026,904)
-------------------------------------------------------
(504,718) (594,456) (408,010)
Less maximum cash obligation related to 401(k)
profit-sharing plan shares (Note 4) - 69,453 139,853
-------------------------------------------------------
(504,718) (663,909) (547,863)
-------------------------------------------------------
$ 3,813,901 $ 3,885,339 $ 4,515,627
=======================================================
F-3
10
RUFFALO, CODY & ASSOCIATES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, Six Months Ended June 30,
---------------------------------------------------------------------------------------
1993 1994 1995 1995 1996
- --------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Telemarketing and other revenue
(Note 7) $ 8,370,904 $ 9,756,894 $ 13,286,146 $ 6,101,884 $ 8,278,479
--------------------------------------------------------------------------------------
Operating expenses:
Cost of service 3,811,520 4,752,031 6,618,481 2,998,585 4,225,252
Selling, general and
administrative 3,380,973 4,022,104 5,376,135 2,401,419 3,252,973
Depreciation and amortization 173,251 313,499 475,296 228,037 269,281
--------------------------------------------------------------------------------------
TOTAL OPERATING
EXPENSES 7,365,744 9,087,634 12,469,912 5,628,041 7,747,506
--------------------------------------------------------------------------------------
OPERATING INCOME 1,005,160 669,260 816,234 473,843 530,973
Financial income (expense):
Interest income 4,854 1,034 41,780 135 10,258
Interest (expense) (3,132) (45,280) (119,305) (65,626) (16,209)
--------------------------------------------------------------------------------------
INCOME BEFORE
INCOME TAXES 1,006,882 625,014 738,709 408,352 525,022
Income taxes (Note 3) 340,532 223,380 273,735 143,000 194,000
--------------------------------------------------------------------------------------
NET INCOME $ 666,350 $ 401,634 $ 464,974 $ 265,352 $ 331,022
======================================================================================
Net income (loss) attributable to
common stockholders $ 666,350 $ (416,548) $ (148,663) $ (41,467) $ 126,477
======================================================================================
Income (loss) per common and
common equivalent share $ 1.10 $ (0.83) $ (0.29) $ (0.08) $ 0.19
======================================================================================
Weighted average common and
common equivalent shares
outstanding 606,000 500,000 508,546 506,317 675,745
======================================================================================
See Notes to Consolidated Financial Statements.
F-4
11
RUFFALO, CODY & ASSOCIATES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK AND
WARRANTS AND COMMON STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 6)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (Continued on page F-6)
Redeemable Common Stock and Warrants
---------------------------------------------------------------------
401(k)
Common Profit-Sharing
Stock Plan Shares Warrants Total
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 $ 1,050,000 $ - $ 300,000 $ 1,350,000
Issuance of 9,091 shares of common stock
upon the exercise of warrants 27,273 - (18,182) 9,091
Purchase of 40,909 shares of redeemable
common stock for retirement (122,727) - - (122,727)
Warrants cancelled or expired - - (100,000) (100,000)
Dividends ($.30 per share) - - - -
Net income - - - -
---------------------------------------------------------------------
Balance, December 31, 1993 954,546 - 181,818 1,136,364
Net income - - - -
Increase in estimated redemption price 636,364 - 181,818 818,182
---------------------------------------------------------------------
Balance, December 31, 1994 1,590,910 - 363,636 1,954,546
Common stock contributed to 401(k)
profit-sharing plan, 10,685 shares (Note 4) - - - -
Issuance of 5,000 shares of common stock
upon the exercise of options (Note 4) - - - -
Net income - - - -
Increase in estimated redemption price 477,273 - 136,364 613,637
Change related to 401(k) profit-sharing plan shares - 69,453 - 69,453
---------------------------------------------------------------------
Balance, December 31, 1995 2,068,183 69,453 500,000 2,637,636
Common stock contributed to 401(k) profit-sharing
plan, 10,140 shares (unaudited) (Note 4) - - - -
Issuance of 375 shares of common stock upon
the exercise of options (unaudited) (Note 4) - - - -
Purchase of 1,221 shares of common stock for
retirement (unaudited) - - - -
Net income (unaudited) - - - -
Increase in estimated redemption price (unaudited) 159,091 - 45,454 204,545
Change related to 401(k) profit-sharing plan shares
(unaudited) - 70,400 - 70,400
---------------------------------------------------------------------
Balance, June 30, 1996 (unaudited) $ 2,227,274 $ 139,853 $ 545,454 $ 2,912,581
=====================================================================
See Notes to Consolidated Financial Statements.
F-5
12
CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK AND
WARRANTS AND COMMON STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 6)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (Continued)
Common Stockholders' Equity (Deficit)
------------------------------------------------------------------------
Less Maximum
Cash Obligation
Related
Retained To 401(k)
Common Earnings Profit-Sharing
Stock (Deficit) Plan Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 $ 500,000 $ (1,108,974) $ - $ (608,974)
Issuance of 9,091 shares of common stock
upon the exercise of warrants - (91) - (91)
Purchase of 40,909 shares of redeemable
common stock for retirement - - - -
Warrants cancelled or expired - 100,000 - 100,000
Dividends ($.30 per share) - (245,455) - (245,455)
Net income - 666,350 - 666,350
------------------------------------------------------------------------
Balance, December 31, 1993 500,000 (588,170) - (88,170)
Net income - 401,634 - 401,634
Increase in estimated redemption price - (818,182) - (818,182)
------------------------------------------------------------------------
Balance, December 31, 1994 500,000 (1,004,718) - (504,718)
Common stock contributed to 401(k)
profit-sharing plan, 10,685 shares (Note 4) 53,425 - - 53,425
Issuance of 5,000 shares of common stock
upon the exercise of options (Note 4) 5,500 - - 5,500
Net income - 464,974 - 464,974
Increase in estimated redemption price - (613,637) - (613,637)
Change related to 401(k) profit-sharing plan shares - - (69,453) (69,453)
------------------------------------------------------------------------
Balance, December 31, 1995 558,925 (1,153,381) (69,453) (663,909)
Common stock contributed to 401(k) profit-sharing
plan, 10,140 shares (unaudited) (Note 4) 65,909 - - 65,909
Issuance of 375 shares of common stock upon
the exercise of options (unaudited) (Note 4) 375 - - 375
Purchase of 1,221 shares of common stock for
retirement (unaudited) (6,315) - - (6,315)
Net income (unaudited) - 331,022 - 331,022
Increase in estimated redemption price (unaudited) - (204,545) - (204,545)
Change related to 401(k) profit-sharing plan shares
(unaudited) - - (70,400) (70,400)
------------------------------------------------------------------------
Balance, June 30, 1996 (unaudited) $ 618,894 $ (1,026,904) $ (139,853) $ (547,863)
========================================================================
F-6
13
RUFFALO, CODY & ASSOCIATES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, Six Months Ended June 30,
--------------------------------------------------------------------
1993 1994 1995 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Cash Flows from Operating Activities
Net income $ 666,350 $ 401,634 $ 464,974 $ 265,352 $ 331,022
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 173,251 213,72 304,255 142,516 182,649
Amortization - 99,774 171,041 85,521 86,632
Provision for doubtful accounts - 38,072 - - -
(Gain) loss on sale of equipment - 10,761 (3,942) (3,942) -
Deferred income taxes (6,000) - 52,000 - -
Changes in assets and liabilities:
other receivables (541,671) (869,041) (47,451) 626,797 (540,761)
(Increase) decrease in income
taxes receivable (18,042) (4,121) (1,737) 22,163 23,900
(Increase) decrease in prepaid expenses (15,008) (42,726) 20,434 (158,999) 14,807
Increase (decrease) in accounts payable
and accrued expenses 253,107 411,916 (43,337) (392,739) 416,759
Increase (decrease) in income tax payable (28,452) - - 38,445 36,953
Increase (decrease) in customer deposits (42,141) 16,086 631,543 7,650 (232,130)
--------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 441,394 276,080 1,547,780 632,764 319,831
--------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from sale of equipment - 5,000 52,000 52,000 -
Purchase of equipment and leasehold improvements (146,220) (784,985) (568,660) (302,641) (246,471)
Purchase of intangibles - (483,596) (49,378) - (104,397)
--------------------------------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (146,220) (1,263,581) (566,038) (250,641) (350,868)
--------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from notes payable 1,065,000 3,510,000 6,120,000 3,080,000 3,135,000
Principal payments on notes payable (1,080,000) (2,960,000) (6,570,000) (3,480,000) (3,035,000)
Proceeds from long-term borrowings - 600,000 - 204,104 -
Principal payments on long-term borrowings (40,525) (254,155) (345,845) (58,890) -
Proceeds from issuance of common stock upon
the exercise of options - - 5,500 - 375
Proceeds from issuance of redeemable common stock 9,000 - - - -
Purchase of redeemable common stock for retirement (122,727) - - - -
Purchase of common stock for retirement - - - - (6,315)
Cash dividends paid - (245,455) - - -
Increase (decrease) in checks issued not yet
presented for payment - 207,773 (191,397) (127,337) (16,376)
---------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (169,252) 858,163 (981,742) (382,123) 77,684
--------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 125,922 (129,338) - - 46,647
Cash and cash equivalents:
Beginning 3,416 129,338 - - -
--------------------------------------------------------------------
Ending $ 129,338 $ - $ - $ - $ 46,647
====================================================================
F-7
14
RUFFALO, CODY & ASSOCIATES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, Six Months Ended June 30,
-------------------------------------------------------------
1993 1994 1995 1995 1996
- --------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 3,262 $ 39,183 $125,530 $61,862 $ 14,237
Income taxes 400,702 235,517 223,472 82,392 133,146
Supplemental Schedule of Noncash Investing and
Financing Activities
Common stock contributed to 401(k) profit-sharing
plan (Note 4) $ 53,425 $53,425 $ 65,909
===================================
Increase in estimated redemption price of redeemable
common stock and warrants $818,182 $613,637
======================
See Notes to Consolidated Financial Statements.
F-8
15
RUFFALO, CODY & ASSOCIATES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED.)
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: The Company provides telemarketing services and systems to
businesses and nonprofit entities throughout the United States.
Accounting estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
A summary of the Company's significant accounting policies follows:
Principles of consolidation: The accompanying consolidated financial
statements include Ruffalo, Cody & Associates, Inc. and its subsidiary,
Campus-Call, Inc., which is wholly-owned. All material intercompany
transactions and balances have been eliminated.
The results of operations of the subsidiary have been reported since the
inception date of June 2, 1994.
Cash and cash equivalents: For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Equipment and leasehold improvements and depreciation: Equipment and leasehold
improvements are carried at cost. Depreciation is computed by the
straight-line method over the following estimated useful lives:
Years
-----
Technical equipment 3-5
Office equipment 5
Leasehold improvements 5-10
In-house phones 5
Software costs: Costs incurred to develop software products are charged to
expense as research and development costs until technological feasibility for
the product is established. Thereafter, software production costs are
capitalized and, once the product is available for sale, are amortized by the
greater of (a) the ratio that current gross revenues for the product bear to
the total current and anticipated future gross revenues for that product and
(b) the straight-line method over the remaining estimated economic life of the
product including the period being reported on. If management's estimate of
the future gross revenues or the remaining economic life of the product are
reduced significantly, the carrying amount of software costs would be affected.
F-9
16
RUFFALO, CODY & ASSOCIATES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED.)
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue recognition: Fees from telemarketing contracts are recognized as
revenue in the period the services are performed.
Revenue on software license fees and sales which require installation will be
recognized upon installation. Revenue on hardware sales will be recognized
upon delivery and installation. Training and consulting fees are recognized as
the services are performed. Upon installation of the system, the Company will
record as deferred revenue the charge for software maintenance. Revenue will
then be recognized on the straight-line basis over the term of the contract.
Income taxes: Deferred taxes are provided on a liability method, whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
Stock options issued to employees and directors: Compensation expense for
stock issued through stock option plans is accounted for using the intrinsic
value based method of accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued for Employees." Under this method, compensation is measured as
the difference between the estimated market value of the stock at the date of
award less the amount required to be paid for the stock. The difference, if
any, is charged to expense over the periods of service.
The estimated market value used for the stock options granted is determined on
a periodic basis by the Company's Board of Directors.
Common stock held by 401(k) profit-sharing plan: The Company's maximum cash
obligation related to these shares is classified outside stockholders' equity
because the shares are not readily traded and could be put to the Company for
cash.
Earnings (loss) per common and common equivalent share: Earnings (loss) per
common and common equivalent share are determined by dividing net income, less
the increase in the estimated redemption price of redeemable common stock and
warrants, by the weighted average number of common and common equivalent shares
outstanding during each of the periods presented. Dilutive common stock
equivalents related to the stock options discussed in Note 4 were determined
using the treasury stock method. The estimated fair market value of the
Company's common stock used to calculate the common stock equivalents under the
treasury stock method for the periods presented has been estimated by
management or determined by an independent appraisal. Earnings (loss) per
common and common equivalent share assuming full dilution are the same as
earnings (loss) per common and common equivalent share.
F-10
17
RUFFALO, CODY & ASSOCIATES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED.)
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently issued 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," which will
require the Company to review for the impairment of long-lived assets and
certain identifiable intangibles to be held and used by the Company whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Adoption of SFAS No. 121 is required in fiscal
1996.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes a fair value based method for financial
accounting and reporting for stock-based employee compensation plans. However,
the new standard allows compensation to continue to be measured by using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," but requires
expanded disclosures. SFAS No. 123 is effective in fiscal year 1996. The
Company has elected to continue to apply the intrinsic value based method of
accounting for stock options.
While the Company does not know precisely the impact that will result from
adopting SFAS No. 121 and SFAS No. 123, the Company does not expect the
adoption of SFAS No. 121 or SFAS No. 123 to have a material effect on the
Company's consolidated financial statements.
Fair value of financial instruments: The carrying amount of current notes
payable approximates fair value because these obligations bear interest at
current rates.
Interim financial information (unaudited): The financial statements and notes
related thereto as of June 30, 1996, and for the six-month periods ended June
30, 1995 and 1996, are unaudited, but in the opinion of management include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations. The
operating results for the interim periods are not indicative of the operating
results to be expected for a full year or for other interim periods. Not all
disclosures required by generally accepted accounting principles necessary for
a complete presentation have been included.
F-11
18
RUFFALO, CODY & ASSOCIATES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED.)
- --------------------------------------------------------------------------------
NOTE 2. PLEDGED ASSETS, CURRENT NOTES PAYABLE AND LONG-TERM DEBT
At June 30, 1996, the Company had a line of credit agreement with a bank under
which they may borrow up to 80% of eligible trade receivables up to a maximum
of $2,500,000. The Company has $200,000 outstanding under this agreement at
June 30, 1996. Borrowings under this agreement are collateralized by
substantially all of the Company's assets and bear interest at the bank's prime
rate (the current effective rate is 8.25%). The agreement contains a covenant
requiring the Company to maintain a certain amount of tangible net worth. The
covenant was waived as of June 30, 1996. Additional available borrowings under
the agreement totaled approximately $2,300,000 at June 30, 1996. The agreement
expires May 2, 1997.
NOTE 3. INCOME TAX MATTERS
Net deferred tax assets consist of the following components as of December 31,
1994 and 1995:
1994 1995
---------------------------------
Deferred tax assets:
Receivable allowances $ 35,000 $ 20,000
Equipment and leasehold improvements 5,000 17,000
Intangibles 21,000 9,000
Accrued expenses 32,000 50,000
Deferred rent 35,000 -
---------------------------------
128,000 96,000
Deferred tax liabilities:
Capitalized software costs - 20,000
---------------------------------
$ 128,000 $ 76,000
=================================
The deferred income tax amounts mentioned above have been classified on the
accompanying balance sheets as of December 31, 1994 and 1995 as follows:
1994 1995
---------------------------------
Current assets $ 115,000 $ 70,000
Noncurrent assets 13,000 6,000
---------------------------------
$ 128,000 $ 76,000
=================================
F-12
19
RUFFALO, CODY & ASSOCIATES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED.)
- --------------------------------------------------------------------------------
NOTE 3. INCOME TAX MATTERS (CONTINUED)
Income tax expense is composed of the following:
Year Ended December 31,
-------------------------------------------------
1993 1994 1995
-------------------------------------------------
Current tax expense $ 346,532 $ 223,380 $ 221,735
Deferred tax expense (6,000) - 52,000
-------------------------------------------------
$ 340,532 $ 223,380 $ 273,735
=================================================
The income tax provision differs from the amount of income tax determined by
applying the U. S. Federal income tax rate to pretax income for 1993, 1994 and
1995 due to the following:
Year Ended December 31,
-------------------------------------------------
1993 1994 1995
-------------------------------------------------
Computed "expected" tax $ 342,340 $ 212,505 $ 251,161
Increase (decrease) in income taxes resulting from:
Nondeductible expenses 1,674 6,072 9,774
State income taxes, net of federal income tax
benefit 1,393 1,864 4,691
Other (4,875) 2,939 8,109
-------------------------------------------------
$ 340,532 $ 223,380 $ 273,735
=================================================
NOTE 4. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) profit sharing plan for eligible employees.
Contributions to the plan are at the discretion of the Company's Board of
Directors. The amount of contribution included in operating expenses for the
years ended December 31, 1993, 1994 and 1995 is $30,802, $52,473 and $59,494,
respectively. The contributions for 1994 and 1995 have been made with company
stock.
In the event a terminated plan participant desires to sell his or her shares of
the Company stock, or if certain employees elect to diversify their account
balances, the Company may be required to purchase the shares from the
participant at their fair market value. To the extent that shares of common
stock held by the 401(k) profit-sharing plan are not readily traded, a sponsor
must reflect the maximum cash obligation related to those securities outside of
stockholders' equity. As of June 30, 1996, 19,979 shares held by the 401(k)
profit-sharing plan, at a fair value of $7.00 per share, have been reclassified
from stockholders' equity to liabilities.
F-13
20
RUFFALO, CODY & ASSOCIATES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED.)
- --------------------------------------------------------------------------------
NOTE 4. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company pays bonuses to its officers at the discretion of the Board of
Directors. The amount of these bonuses charged to operating expenses for the
years ended December 31, 1993, 1994 and 1995 is $288,665, $179,165 and
$186,466, respectively.
The Company has established employee and director stock option plans for the
benefit of eligible employees and directors under which options for the
issuance of up to 295,000 shares of common stock may be granted. Under the
employee and director plans, all options vest over a period of up to ten years
as determined by the Board of Directors at the time of grant.
Other pertinent information related to the plan is as follows:
Shares Option Price
-----------------------------
Outstanding at January 1, 1993 154,000 $1.00-$1.10
Granted 67,000 3.00- 3.30
Forfeited (15,000) 1.00- 3.00
-------------
Outstanding at December 31, 1993 206,000 1.00- 3.30
Granted 32,500 6.00
-------------
Outstanding at December 31, 1994 238,500 1.00- 6.00
Excercised (5,000) 1.10
-------------
Outstanding at December 31, 1995 233,500 1.00- 6.00
Granted 26,500 6.50
Exercised (375) 1.00
Forfeited (1,875) 1.00- 6.00
-------------
Under option, June 30, 1996 257,750 $1.00-$6.50
=============
December 31,
------------------------------------------------ June 30,
1993 1994 1995 1996
---------------------------------------------------------------
Number of Shares
---------------------------------------------------------------
Available for grant, end of year 69,000 56,500 56,500 31,875
===============================================================
Options exercisable, end of year - 72,500 135,500 170,000
===============================================================
F-14
21
RUFFALO, CODY & ASSOCIATES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED.)
- --------------------------------------------------------------------------------
NOTE 5. LEASE COMMITMENTS AND TOTAL RENT EXPENSE
The Company leases its main office space under an agreement which expires on
April 30, 2005. This lease requires monthly rent payments totaling $29,851 and
increasing to $32,429 in later years plus the payment of property taxes and
maintenance.
The Company also leases other office space and office equipment under various
leases which require various minimum rental payments through July 1997.
The total minimum lease commitment at December 31, 1995 under the operating
leases mentioned above is $3,620,229 which is due as follows:
During the year ending December 31:
1996 $ 438,644
1997 399,992
1998 358,215
1999 358,215
2000 378,839
Later years 1,686,324
-------------
$ 3,620,229
=============
The total rent expense for the years ended December 31, 1993, 1994 and 1995 is
approximately $241,500, $293,200 and $353,800, respectively.
NOTE 6. REDEEMABLE COMMON STOCK AND WARRANTS
In connection with an Investment Agreement covering the issuance of 350,000
shares of the Company's common stock, warrants were issued which entitle the
holders to purchase one share of common stock in exchange for $1 and one
warrant. At December 31, 1995 and June 30, 1996, a total of 90,909 warrants
are outstanding. All of the outstanding warrants expire on October 2, 2001.
At anytime after October 2, 1997, the shareholders covered by the Investment
Agreement may, at their option, put the common stock and warrants to the
Company and require the Company to immediately pay in cash, in the case of the
common stock, the fair market value of the common stock as determined by an
independent appraiser and, in the case of the warrants, the fair market value
of the common stock less the exercise price of the warrants.
The Company is increasing the carrying amount of the redeemable common stock
and warrants so that the carrying amount will equal the estimated redemption
amount. The estimated redemption amount at each year end was determined by an
independent appraiser. For interim periods, the amount was estimated by
management.
F-15
22
RUFFALO, CODY & ASSOCIATES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED.)
- --------------------------------------------------------------------------------
NOTE 7. MAJOR CUSTOMER
Telemarketing revenue for the years ended December 31, 1993, 1994 and 1995
includes approximately $2,750,000, $3,465,000 and $5,600,000, respectively,
from a major customer. Trade receivables from this customer totaled $382,928,
$579,943 and $522,544 at December 31, 1993, 1994 and 1995, respectively.
NOTE 8. EVENTS SUBSEQUENT TO DECEMBER 31, 1995
On July 15, 1996, McLeod, Inc. consummated the acquisition (the
"Acquisition") of Ruffalo, Cody & Associates, Inc., ("Ruffalo, Cody"), from the
shareholders of Ruffalo, Cody by means of a forward triangular merger pursuant
to an Agreement and Plan of Reorganization, dated as of July 12, 1996 (the
"Agreement"), by and among McLeod, Inc., Ruffalo, Cody and certain shareholders
of Ruffalo, Cody. Pursuant to the Agreement, (i) McLeod Merging Co., a newly
incorporated Iowa corporation and a wholly-owned subsidiary of McLeod, Inc.,
was merged with and into Ruffalo, Cody, with McLeod Merging Co. (which has been
renamed "Ruffalo, Cody & Associates, Inc.") being the surviving corporation,
(ii) the outstanding shares of Ruffalo, Cody common stock were converted into
the right to receive cash and/or shares of McLeod, Inc.'s Class A Common Stock
(the "Class A Common Stock"), and (iii) the outstanding options to purchase
shares of Ruffalo, Cody common stock were converted into options to purchase
shares of the Class A Common Stock (the "Substitute Options"). Under the
Agreement, each issued and outstanding share of Ruffalo, Cody common stock was
converted into the right to receive a maximum of approximately 0.7 of a share
of the Class A Common Stock.
McLeod, Inc. agreed to purchase Ruffalo, Cody for a maximum aggregate
purchase price of approximately $21 million (based on the average market price
of the Class A Common Stock during the five business days before and after the
Acquisition). The purchase price consisted of approximately $4.9 million in
cash, 474,807 shares of Class A Common Stock issuable in exchange for Ruffalo,
Cody common stock, and 158,009 shares of Class A Common Stock issuable upon the
exercise of the Substitute Options. On July 15, 1996, McLeod, Inc. paid an
aggregate of approximately $4.8 million in cash and issued 361,420 shares of
Class A Common Stock to the shareholders of Ruffalo, Cody, and granted to the
Ruffalo, Cody option holders Substitute Options to purchase 158,009 shares of
Class A Common Stock. An additional $50,782 in cash and 113,387 shares of
McLeod, Inc.'s Class A Common Stock were placed into escrow and will be
delivered (if at all) to the shareholders of Ruffalo, Cody over a period of 18
months, contingent upon certain conditions relating to Ruffalo, Cody's ongoing
revenues.
F-16
23
PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma financial information set forth below presents the pro
forma condensed balance sheet of McLeod, Inc. ("McLeod") and Ruffalo, Cody &
Associates, Inc. ("Ruffalo, Cody") as of June 30, 1996, as if the acquisition
by McLeod of Ruffalo, Cody (the "Acquisition") had been consummated at such
date. In addition, the unaudited pro forma condensed statements of income of
McLeod and Ruffalo, Cody for the year ended December 31, 1995 and the six
months ended June 30, 1996, are presented as if the Acquisition had been
consummated as of the beginning of the respective periods.
The following unaudited pro forma financial information has been prepared from,
and should be read in conjunction with, the financial statements, including
notes thereto, of McLeod and Ruffalo, Cody, respectively.
The unaudited pro forma financial information presented below has been prepared
using the purchase method of accounting, whereby the total cost of the
Acquisition was allocated to the tangible and intangible assets acquired and
liabilities assumed based upon their respective fair values at the effective
date of the Acquisition.
The total net purchase price for the Acquisition presented in the unaudited pro
forma financial information does not include the additional consideration (the
"Additional Consideration") which McLeod must pay upon the occurrence of
certain conditions relating to Ruffalo, Cody's ongoing revenues (the
"Conditions"). McLeod has placed into escrow an additional $50,782 in cash and
113,387 shares of McLeod common stock, all or a portion of which will be
delivered to the shareholders of Ruffalo, Cody over a period of 18 months upon
the fulfillment of certain of the Conditions. The Additional Consideration
will be allocated to intangible assets, common stock and additional paid-in
capital, as the case may be, at such time as the Conditions are met.
The unaudited pro forma financial information is provided for informational
purposes only and is not necessarily indicative of the financial position or
operating results that would have occurred had the Acquisition been consummated
on the dates indicated, or at the beginning of the period for which the
consummation of such transaction is being given effect, nor is it necessarily
indicative of future operating results or financial position.
F-17
24
MCLEOD, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED BALANCE SHEET (UNAUDITED)
JUNE 30, 1996
ADJUSTMENTS
RUFFALO, CODY & FOR
MCLEOD, INC. ASSOCIATES, INC. ACQUISITION (1) AS ADJUSTED
----------------- --------------- ---------------- -----------------
ASSETS
Current Assets
Cash $ 232,019,068 $ 46,647 $ (4,807,898)(2) $ 227,347,816
89,999 (5)
Trade receivables, net 12,975,005 2,601,859 -- 15,576,864
Inventory 3,075,351 -- -- 3,075,351
Prepaid expenses and other 1,458,181 140,806 (70,000)(4) 1,528,987
----------------- -------------- ---------------- -----------------
Total current assets 249,527,605 2,789,312 (4,787,899) 247,529,018
----------------- -------------- ---------------- -----------------
Property and Equipment, net 35,222,557 1,151,221 (63,618)(2) 36,310,160
----------------- -------------- ---------------- -----------------
Intangibles and Other Assets
Goodwill, net 2,436,333 -- 13,346,976 (2) 15,783,309
Customer list -- -- 1,600,000 (2) 1,600,000
Other 2,112,998 575,094 (208,215)(2) 2,473,877
(6,000)(4)
----------------- -------------- ---------------- -----------------
4,549,331 575,094 14,732,761 19,857,186
----------------- -------------- ---------------- -----------------
$ 289,299,493 $ 4,515,627 $ 9,881,244 $ 303,696,364
================= ============== ================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 14,848,252 $ 372,013 $ -- $ 15,220,265
Other current liabilities 4,759,561 1,778,896 -- 6,538,457
----------------- -------------- ---------------- -----------------
Total current liabilities 19,607,813 2,150,909 -- 21,758,722
----------------- -------------- ---------------- -----------------
Long-Term Debt -- -- -- --
----------------- -------------- ---------------- -----------------
Deferred Revenue, less current portion 3,762,281 -- -- 3,762,281
----------------- -------------- ---------------- -----------------
Redeemable Common Stock and Warrants
Capital stock, common -- 2,227,274 (2,227,274)(3) --
Common stock held by the 401(k) profit
sharing plan -- 139,853 (139,853)(3) --
Warrants -- 545,454 (545,454)(3) --
----------------- -------------- ---------------- -----------------
-- 2,912,581 (2,912,581) --
----------------- -------------- ---------------- -----------------
Common Stockholders' Equity (Deficit)
Capital stock, common 458,364 618,894 (618,894)(3) 461,978
3,614 (2)
Additional paid-in capital 299,833,502 -- 12,242,348 (2) 312,075,850
Accumulated deficit (34,362,467) (1,026,904) 1,026,904 (3) (34,362,467)
----------------- -------------- ---------------- -----------------
265,929,399 (408,010) 12,653,972 278,175,361
Less maximum cash obligation related to
401(k) profit sharing plan shares -- (139,853) 139,853 (3) --
----------------- -------------- ---------------- -----------------
265,929,399 (547,863) 12,793,825 278,175,361
----------------- -------------- ---------------- -----------------
$ 289,299,493 $ 4,515,627 $ 9,881,244 $ 303,696,364
================= ============== ================ =================
(1) Assumes the Conditions for the payment of the Additional Consideration are
not met and the total net purchase price is $17,053,860, which is
computed as follows, assuming all option shares will be exercised upon
vesting:
Cash $ 4,807,898
361,420 shares of common stock at $24.75 per share 8,945,145
158,009 option shares at $24.75 per option share 3,910,723
Less cash to be received upon exercise of vested options (609,906)
------------------
Total net purchase price $ 17,053,860
==================
(2) To record the preliminary allocation of the net purchase price to
Ruffalo, Cody assets acquired, including goodwill and customer list,
and issuance of McLeod common stock and options to acquire McLeod
common stock at $24.75 per share, the average market price during the
five business days before and after the Acquisition date.
(3) To eliminate Ruffalo, Cody's common stock, warrants, and accumulated
deficit.
(4) To record a valuation allowance on deferred tax assets acquired due to
the uncertainty of realizing the benefit of McLeod's loss carryforwards.
(5) To record cash received for conversion of Ruffalo, Cody warrants to
common stock.
F-18
25
MCLEOD, INC. AND SUBSIDIARIES
PROFORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1995
ADJUSTMENTS
RUFFALO, CODY & FOR
MCLEOD, INC. ASSOCIATES, INC. ACQUISITION (1) AS ADJUSTED
--------------- ----------------- ------------------ ----------------
Telecommunications and telemarketing
revenue $ 28,997,880 $ 13,286,146 $ -- $ 42,284,026
--------------- ----------------- ------------------ ----------------
Operating expenses:
Cost of service 19,667,138 6,618,481 -- 26,285,619
Selling, general and administrative 18,053,431 5,376,135 -- 23,429,566
Depreciation and amortization 1,835,127 475,296 773,454 (2) 3,083,877
--------------- ----------------- ------------------ ----------------
Total operating expenses 39,555,696 12,469,912 773,454 52,799,062
--------------- ----------------- ------------------ ----------------
Operating income (loss) (10,557,816) 816,234 (773,454) (10,515,036)
Interest income (expense), net (771,123) (77,525) -- (848,648)
Income taxes -- (273,735) 273,735 (3) --
--------------- ----------------- ------------------ ----------------
Net income (loss) $ (11,328,939) $ 464,974 $ (499,719) $ (11,363,684)
=============== ================= ================== ================
Loss per common and common equivalent share $ (0.31) $ (0.30)
=============== ================
Weighted average common and common
equivalent shares outstanding 37,054,744 37,416,164
=============== ================
(1) Assumes the Conditions for the payment of the Additional Consideration are
not met and the total net purchase price is $17,053,860, which is
computed as follows, assuming all option shares will be exercised upon
vesting:
Cash $ 4,807,898
361,420 shares of common stock at $24.75 per share 8,945,145
158,009 option shares at $24.75 per option share 3,910,723
Less cash to be received upon exercise of vested options (609,906)
-------------------
Total net purchase price $ 17,053,860
===================
(2) To record amortization of intangibles acquired. Goodwill and customer
list are being amortized over 25 years and 5 years, respectively.
(3) Net income (loss) does not include a pro forma adjustment for income
taxes due to the availability of net operating loss carryforwards and a
valuation allowance.
F-19
26
MCLEOD, INC. AND SUBSIDIARIES
PROFORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996
ADJUSTMENTS
RUFFALO, CODY & FOR
MCLEOD, INC. ASSOCIATES, INC. ACQUISITION (1) AS ADJUSTED
--------------- ---------------- --------------- ----------------
Telecommunications and telemarketing revenue $ 26,405,823 $ 8,278,479 $ -- $ 34,684,302
---------------- --------------- -------------- ----------------
Operating expenses:
Cost of service 18,723,990 4,225,252 -- 22,949,242
Selling, general and administrative 13,976,310 3,252,973 -- 17,229,283
Depreciation and amortization 2,572,849 269,281 386,727 (2) 3,228,857
---------------- --------------- -------------- ----------------
Total operating expenses 35,273,149 7,747,506 386,727 43,407,382
---------------- --------------- -------------- ----------------
Operating income (loss) (8,867,326) 530,973 (386,727) (8,723,080)
Interest income (expense), net (15,789) (5,951) -- (21,740)
Income taxes -- (194,000) 194,000 (3) --
---------------- --------------- -------------- ----------------
Net income (loss) $ (8,883,115) $ 331,022 $ (192,727) $ (8,744,820)
================ =============== ============== ================
Loss per common and common equivalent share $ (0.23) $ (0.22)
================ ================
Weighted average common and common equivalent
shares outstanding 38,511,720 38,873,140
================ ================
(1) Assumes the Conditions for the payment of the Additional Consideration are
not met and the total net purchase price is $17,053,860, which is
computed as follows, assuming all option shares will be exercised upon
vesting:
Cash $ 4,807,898
361,420 shares of common stock at $24.75 per share 8,945,145
158,009 option shares at $24.75 per option share 3,910,723
Less cash to be received upon exercise of vested options (609,906)
-----------------
Total net purchase price $ 17,053,860
=================
(2) To record amortization of intangibles acquired. Goodwill and customer
list are being amortized over 25 years and 5 years, respectively.
(3) Net income (loss) does not include a pro forma adjustment for income
taxes due to the availability of net operating loss carryforwards and a
valuation allowance.
F-20