Attached files
file | filename |
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8-K/A - Lightyear Network Solutions, Inc. | v179183_8ka.htm |
EX-16.1 - Lightyear Network Solutions, Inc. | v179183_ex16-1.htm |
EX-99.2 - Lightyear Network Solutions, Inc. | v179183_ex99-2.htm |
Exhibit
99.1
Lightyear
Network Solutions, LLC and Subsidiary
Consolidated
Financial Statements
Table
of Contents
Report
of Independent Registered Public Accounting Firm
|
1 | |||
Consolidated
Financial Statements
|
||||
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
2 | |||
Consolidated
Statements of Operations for the Years Ended December 31, 2009 and
2008
|
3 | |||
Consolidated
Statements of Member’s Deficit for the Years Ended December 31, 2009 and
2008..
|
4 | |||
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009 and
2008
|
5 | |||
Notes
to Consolidated Financial Statements
|
7 |
Report of Independent
Registered Public Accounting Firm
To the
Member of
Lightyear
Network Solutions, LLC and Subsidiary
We have
audited the accompanying consolidated balance sheets of Lightyear Network
Solutions, LLC and Subsidiary (the “Company”), a wholly-owned subsidiary of LY
Holdings, LLC, as of December 31, 2009 and 2008 and the related consolidated
statements of operations, changes in member’s deficit and cash flows for the
years then ended. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Lightyear Network
Solutions, LLC and Subsidiary as of December 31, 2009 and 2008, and the
consolidated results of their operations, and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
/s/
Marcum LLP
Marcum LLP
March 31,
2010
New York,
New York
-1-
Lightyear
Network Solutions, LLC and Subsidiary
Consolidated
Balance Sheets
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Current
Assets
|
||||||||
Cash
|
$ | 440 | $ | 440 | ||||
Accounts
receivable (net of allowance of $1,439,770 and $665,477 as of December 31,
2009 and 2008)
|
4,096,884 | 3,915,226 | ||||||
Vendor
deposits
|
916,211 | 1,170,180 | ||||||
Inventories,
net
|
214,257 | 216,513 | ||||||
Deferred
financing costs, net
|
435,520 | - | ||||||
Prepaid
expenses and other current assets
|
801,952 | 727,800 | ||||||
Total
Current Assets
|
6,465,264 | 6,030,159 | ||||||
Property
and Equipment, Net
|
306,080 | 547,933 | ||||||
Deferred
Financing Costs, Net
|
77,235 | - | ||||||
Intangible
Assets, Net
|
1,164,583 | 1,283,471 | ||||||
Other
Assets
|
282,725 | 252,614 | ||||||
Total
Assets
|
$ | 8,295,887 | $ | 8,114,177 | ||||
Liabilities
and Member's Deficit
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$ | 7,441,828 | $ | 5,323,493 | ||||
Interest
payable to Parent
|
4,546,766 | 1,084,831 | ||||||
Accrued
agent commissions
|
627,738 | 827,859 | ||||||
Deferred
revenue
|
412,901 | 475,296 | ||||||
Other
liabilities
|
1,332,686 | 1,546,385 | ||||||
Short
term borrowings
|
500,000 | - | ||||||
Due
to Parent
|
137,707 | - | ||||||
Current
portion of capital lease obligations
|
34,028 | 79,173 | ||||||
Current
portion of loans payable to Parent
|
16,016,262 | 1,250,000 | ||||||
Total
Current Liabilities
|
31,049,916 | 10,587,037 | ||||||
Capital
Lease Obligations, Non-Current Portion
|
- | 34,028 | ||||||
Loans
Payable to Parent, Non-Current Portion
|
3,000,000 | 15,416,262 | ||||||
Interest
Payable to Parent, Non-Current Portion
|
126,233 | 2,276,674 | ||||||
Total
Liabilities
|
34,176,149 | 28,314,001 | ||||||
Commitments
and Contingencies
|
- | - | ||||||
Member's
Deficit
|
(25,880,262 | ) | (20,199,824 | ) | ||||
Total
Liabilities and Member's Deficit
|
$ | 8,295,887 | $ | 8,114,177 |
See Notes
to these Consolidated Financial Statements
-2-
Lightyear
Network Solutions, LLC and Subsidiary
Consolidated
Statements of Operations
For
The
|
||||||||
Years
Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
Revenues
|
$ | 55,428,836 | $ | 57,447,889 | ||||
Cost
of Revenues
|
36,854,436 | 36,752,809 | ||||||
Gross
Profit
|
18,574,400 | 20,695,080 | ||||||
Operating
Expenses
|
||||||||
Commission
expense
|
5,116,442 | 6,573,103 | ||||||
Commission
expense - related parties
|
154,875 | 356,430 | ||||||
Depreciation
and amortization
|
464,507 | 845,617 | ||||||
Bad
debt expense
|
3,769,504 | 832,831 | ||||||
Selling,
general and administrative expenses
|
12,736,744 | 12,983,671 | ||||||
Goodwill
and intangible asset impairment charges
|
- | 52,691 | ||||||
Total
Operating Expenses
|
22,242,072 | 21,644,343 | ||||||
Loss
From Operations
|
(3,667,672 | ) | (949,263 | ) | ||||
Other
Income (Expense)
|
||||||||
Interest
income
|
83,151 | 193,106 | ||||||
Interest
(expense)
|
(10,591 | ) | (19,429 | ) | ||||
Interest
(expense) - Parent
|
(1,936,227 | ) | (2,083,241 | ) | ||||
Amortization
of deferred financing costs
|
(142,100 | ) | - | |||||
Amortization
of deferred financing costs - Parent
|
(49,064 | ) | - | |||||
Amortization
of debt discount - Parent
|
(348,087 | ) | - | |||||
Change
in fair value of derivative liabilities - Parent
|
259,445 | - | ||||||
Other
income
|
13,487 | 8,411 | ||||||
Other
Expense
|
(2,129,986 | ) | (1,901,153 | ) | ||||
Net
Loss
|
$ | (5,797,658 | ) | $ | (2,850,416 | ) |
See Notes
to these Consolidated Financial Statements
-3-
Lightyear
Network Solutions, LLC and Subsidiary
Consolidated
Statements of Changes in Member's Deficit
Member's
Deficit - December 31, 2007
|
$ | (17,328,160 | ) | |
Distributions
|
(21,248 | ) | ||
Net
loss
|
(2,850,416 | ) | ||
Member's
Deficit - December 31, 2008
|
(20,199,824 | ) | ||
Distributions
|
(1,780 | ) | ||
Stock-based
compensation - consultants
|
119,000 | |||
Net
loss
|
(5,797,658 | ) | ||
Member's
Deficit - December 31, 2009
|
$ | (25,880,262 | ) |
See Notes
to these Consolidated Financial Statements
-4-
Lightyear
Network Solutions, LLC and Subsidiary
Consolidated
Statements of Cash Flows
For
The
|
||||||||
Years
Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
Cash
Flows From Operating Activities
|
||||||||
Net
loss
|
$ | (5,797,658 | ) | $ | (2,850,416 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
464,507 | 845,617 | ||||||
Provision
for bad debt expense
|
3,769,504 | 832,831 | ||||||
Provision
for inventory reserve
|
70,000 | - | ||||||
Impairment
of goodwill and intangible assets
|
- | 52,691 | ||||||
Stock-based
compensation - consultants
|
119,000 | - | ||||||
Amortization
of deferred financing costs
|
142,098 | - | ||||||
Amortization
of deferred financing costs - Parent
|
49,066 | - | ||||||
Change
in fair value of derivative liabilities - Parent
|
(259,445 | ) | - | |||||
Amortization
of debt discount - Parent
|
348,086 | - | ||||||
Gain
on sale of equipment
|
(3,404 | ) | - | |||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(3,951,162 | ) | 59,754 | |||||
Other
assets
|
(30,111 | ) | 431,400 | |||||
Vendor
deposits
|
253,969 | (42,973 | ) | |||||
Inventories
|
(67,744 | ) | (165,255 | ) | ||||
Prepaid
expenses and other current assets
|
(74,152 | ) | (70,240 | ) | ||||
Accounts
payable
|
2,118,335 | 614,358 | ||||||
Interest
payable to Parent
|
1,311,494 | 467,859 | ||||||
Accrued
agent commissions
|
(200,121 | ) | 114,092 | |||||
Deferred
revenue
|
(62,395 | ) | 18,757 | |||||
Other
liabilities
|
(213,699 | ) | (1,012,693 | ) | ||||
Total
Adjustments
|
3,783,826 | 2,146,198 | ||||||
Net
Cash Used in Operating Activities
|
(2,013,832 | ) | (704,218 | ) | ||||
Cash
Flows From Investing Activities
|
||||||||
Purchases
of property and equipment
|
(105,284 | ) | (349,015 | ) | ||||
Proceeds
from sale of equipment
|
4,922 | - | ||||||
Net
Cash Used in Investing Activities
|
(100,362 | ) | (349,015 | ) | ||||
Cash
Flows From Financing Activities
|
||||||||
Repayments
of loans payable to Parent
|
(1,000,000 | ) | (500,000 | ) | ||||
Repayments
of capital lease obligations
|
(79,173 | ) | (82,642 | ) | ||||
Distributions
to member
|
(1,780 | ) | (21,248 | ) | ||||
Proceeds
from short term borrowings
|
500,000 | - | ||||||
Proceeds
from loans payable to Parent, net [1]
|
2,986,000 | 900,000 | ||||||
Deferred
financing costs
|
(290,853 | ) | - | |||||
Net
Cash Provided by Financing Activities
|
2,114,194 | 296,110 | ||||||
Net
Decrease In Cash
|
- | (757,123 | ) | |||||
Cash
- Beginning
|
440 | 757,563 | ||||||
Cash
- Ending
|
$ | 440 | $ | 440 |
[1]
|
Face
value of loans payable to Parent of $3,050,000 and $300,000, less selling
commissions withheld of $364,000 in
2009.
|
-5-
Lightyear
Network Solutions, LLC and Subsidiary
Consolidated
Statements of Cash Flows—Continued
For
The
|
||||||||
Years
Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
Supplemental
Disclosures of Cash Flow Information:
|
||||||||
Cash
paid during the year for:
|
||||||||
Interest
|
$ | 624,733 | $ | 1,539,182 | ||||
Supplemental
Disclosure of Non-Cash Investing and
|
||||||||
Financing
Activities
|
||||||||
Equipment
financed with capital lease obligations
|
$ | - | $ | 51,800 |
See Notes
to these Consolidated Financial Statements
-6-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note
A—Company Organization
Lightyear
Networks Solutions, LLC (the “Company” or “Lightyear”) was incorporated in 2003
for the purpose of selling
and marketing telecommunication services and solutions, and owning other
companies which sell and market telecommunication services and solutions.
The Company and its wholly-owned subsidiary, Lightyear Alliance of Puerto
Rico, LLC, provide telecommunications services throughout the United States and
Puerto Rico primarily through a distribution network of authorized independent
agents. Lightyear is a licensed local carrier in 44 states and provides long
distance service in 49 states. The Company delivers service to approximately
60,000 customer locations. In addition to long distance and local service, the
Company currently offers a wide array of telecommunications services including
internet/intranet, calling cards, advanced data, wireless, Voice over Internet
Protocol (“VoIP”) and conference calling.
The
Company is a telecommunications reseller and competes, both directly at the
wholesale level and through agents, at the retail level. The Company is subject
to regulatory requirements imposed by the Federal Communications Commission
(“FCC”), state and local governmental agencies. Regulations by the FCC as well
as state agencies include limitations on types of services and service areas
offered to the public.
The
rights and obligations of the Company’s member are governed by the Company’s
Operating Agreement (“Agreement”) dated December 2003. The Agreement provides
that the Company will continue indefinitely unless certain defined events of
dissolution occur. The Company has one member.
Note
B—Summary of Significant Accounting Policies
Basis of
Presentation
Lightyear
is a wholly-owned subsidiary of LY Holdings, LLC (“LYH” or “Parent”). LYH was
incorporated in 2003 for the purpose of becoming a holding company to acquire
certain assets from the Lightyear Holdings Inc. bankruptcy process. In addition,
LYH is a financing vehicle for Lightyear and is integral to Lightyear’s
operational activities. The Company provides working capital from its operations
to service LYH’s obligations; it was either a co-borrower with LYH or a
guarantor of the LYH notes; and its assets collateralize the LYH notes. The
funds were obtained solely for the benefit of and utilization by the
Company. As such, LYH received the funding only as a conduit for the
Company; therefore the obligations are reflected on Lightyear’s accompanying
consolidated financial statements.
Estimates
The
preparation of consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates. The Company’s significant estimates include the reserves
related to receivables, plus the recoverability and useful lives of long lived
assets.
Principles of
Consolidation
The
balance sheet, results of operations and cash flows of Lightyear Alliance of
Puerto Rico, LLC, a subsidiary with limited activity, have been included in the
consolidated financial statements of the Company. All intercompany accounts and
transactions have been eliminated.
-7-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note B—Summary of Significant
Accounting Policies—Continued
Cash and Cash
Equivalents
For
purposes of presentation in the Company’s consolidated balance sheet and
statements of cash flows, cash and cash equivalents consists of cash on deposit,
cash on hand and all highly liquid investments purchased with an original
maturity of three months or less. The Company also maintains cash in bank
accounts, which, at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts and it is not exposed to any
significant credit risk on cash. There were no cash equivalents at December 31,
2009 and 2008.
Accounts
Receivable
Accounts
receivable are shown net of an allowance for doubtful accounts of $1,439,770 and
$665,477 as of December 31, 2009 and 2008, respectively. The Company’s
management has established an allowance for doubtful accounts sufficient to
cover probable and reasonably estimable losses. The allowance for doubtful
accounts considers a number of factors, including collection experience, current
economic trends, estimates of forecasted write-offs, aging of the accounts
receivable portfolios, industry norms, regulatory decisions and other factors.
Management’s policy is to fully reserve all accounts that are 180-days past due.
Accounts are written off after use of a collection agency is deemed to be no
longer useful.
Property and
Equipment
Property
and equipment is recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization is computed on a straight-line basis
over the estimated useful lives of the assets. Improvements to leased assets or
fixtures are amortized over their estimated useful lives or lease period,
whichever is shorter. Leased property meeting certain criteria is capitalized
and the present value of the related payments is recorded as a liability.
Depreciation of capitalized leased assets is computed on the straight-line
method over the lesser of the term of the lease or its economic life. Upon
retirement or other disposition of these assets, the costs and related
accumulated depreciation and amortization of these assets are removed from the
accounts and the resulting gains or losses are reflected in the consolidated
results of operations. Expenditures for maintenance and repairs are charged to
operations as incurred. Renewals and betterments are capitalized.
Intangible
Assets
Intangible
assets with definite lives are recorded at cost less accumulated amortization.
Amortization is computed on a straight-line basis over the lives of the
intangible assets. The Company recognizes certain intangible assets acquired in
acquisitions, primarily goodwill, proprietary technology, trade names, covenants
not to compete, customer relationships, agent relationships and VoIP
licenses.
Impairment of Long-Lived
Assets
The
Company has reviewed the carrying value of intangibles and other long-lived
assets for impairment at least annually or whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of long-lived assets is measured by comparing the
carrying amount of the asset or asset group to the undiscounted cash flows that
the asset or asset group is expected to generate. If the undiscounted cash flows
of such assets are less than the carrying amount, the impairment to be
recognized is measured by the amount by which the carrying amount of the
property, if any, exceeds its fair market value.
Advertising
Costs
Advertising
costs are expensed when incurred. Advertising costs, which are included in
selling, general and administrative expenses in the accompanying consolidated
statements of operations, were approximately $69,000 and $25,000 for the years
ended December 31, 2009 and 2008, respectively.
-8-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note B—Summary of Significant
Accounting Policies—Continued
Inventories
The
Company maintains inventories consisting of wireless telephones and
telecommunications equipment which are available for sale. Inventories are
stated at the lower of cost or market. Cost is determined by the first-in,
first-out method. At December 31, 2009 and 2008, the Company had reserves for
obsolete inventory of $70,000 and $0, respectively.
The
Company continually analyzes its slow-moving, excess and obsolete
inventories. Products that are determined to be obsolete are written
down to net realizable value.
Revenue
Recognition
Telecommunications
services income such as access revenue and usage revenue are recognized on the
accrual basis as services are provided. In general, access revenue is billed one
month in advance and is recognized when earned. Wireless handheld devices are
sold at a discount when bundled with a long-term wireless service
contract. The Company recognizes the equipment revenue and associated
costs when title has passed and the equipment has been accepted by the customer.
The Company provides administrative and support services to its agents and pays
commissions based on revenues from the agents’ accounts. Amounts invoiced to
customers in advance of services are reflected as deferred
revenues.
Recognition
of agent fees and interest income on the related notes receivable is limited to
amounts recognizable under the cost-recovery method on an individual agent
basis.
In
addition, the Company has the right to offset commissions earned with
uncollectible accounts receivable attributed to a specific agent or with past
due notes receivable payments, up to certain specified percentages of such
uncollectible accounts receivable and up to 100 percent of past due notes
receivable payments. Management believes its allowances for doubtful accounts
and notes receivable, combined with its ability to offset agents’ commissions,
are adequate to provide for uncollectible receivables.
Cost of
revenue represents primarily the direct costs associated with the cost of
transmitting and terminating traffic on other carriers’ facilities.
Commissions
paid to acquire customer call traffic are expensed in the period when associated
call revenues are recognized.
The
Financial Accounting Standards Board (“FASB”) ratified an accounting
standard which became effective on January 1, 2007 and provides guidance
related to how taxes collected from customers and remitted to governmental
authorities should be presented in the income statement. The guidance states
that if taxes are reported on a gross basis (included as revenue) a company
should disclose those amounts, if significant. The Company does not include
excise and other sales related taxes in its revenues.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current year
presentation.
-9-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note B—Summary of Significant
Accounting Policies—Continued
Income
Taxes
The
Company is organized as a partnership for income tax purposes. No income tax
liability or benefit has been included in the consolidated financial statements
since taxable income or loss of the Company passes through to, and is reportable
by, the members of its Parent individually. The Company is subject to certain
state and local taxes.
Effective
January 1, 2009, the Company adopted accounting guidance which clarifies the
accounting for uncertainty in income taxes recognized in the Company’s
consolidated financial statements and prescribes a recognition threshold and
measurement process for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The guidance also
provides direction on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The adoption of these
provisions did not have a material impact on the Company’s consolidated
financial position and results of operations.
Management
has evaluated and concluded that there were no material uncertain tax positions
requiring recognition in the Company’s consolidated financial statements as of
December 31, 2009. In most instances, the Company is no longer subject to
federal, state and local income tax examinations by tax authorities for the
years prior to 2005. The Company files income tax returns with most
states.
The
Company’s policy is to classify assessments, if any, for tax related interest as
interest expense and penalties as selling, general and administrative
expenses.
Derivative
Liabilities
The
Company is recording amortization of debt discount, amortization of deferred
financing costs and change in fair value of derivative warrants as a result of
derivative liabilities being recorded on the books and records of LYH which
relate to debt obligations it shares with its Parent. LYH’s derivative
liabilities consist of embedded derivatives associated with convertible
promissory notes and warrants, where the conversion feature is not fixed. The
accounting treatment of derivative liabilities requires that LYH record the
derivatives at their fair values as of the inception date and at fair value as
of each subsequent balance sheet date. Any change in fair value will be recorded
as non-operating, non-cash income or expense at each reporting date. LYH
utilized an expected volatility figure based on a review of the historical
volatilities, over a period of time, equivalent to the expected life of these
convertible promissory notes and warrants, of similarly positioned public
companies within its industry. As of December 31, 2009, derivative liabilities
were valued using the Black Scholes option pricing model as follows: All -
market and exercise price of $1.80, dividend yield of 0%, annual volatility of
45.4%; Warrants – 4.4 to 4.8 years expected term and risk free interest rates
ranging from 2.44% to 2.57% and Conversion Options – 0.9 to 1.2 years expected
term and risk free interest rates of 0.47%. During 2008, there were
no such instruments outstanding.
Deferred Financing
Costs
The
Company is recording amortization of deferred financing costs as a result of
cash costs incurred by the Company and derivative liabilities on the books of
LYH. Deferred financing costs resulted from the Parent’s financing
activities. These costs are being amortized over the term of the related
debt.
-10-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note B—Summary of Significant
Accounting Policies—Continued
New Accounting
Pronouncements
In June
2009, FASB issued new accounting guidance that established the FASB
Accounting Standards Codification, (“Codification” or “ASC”) as the
single source of authoritative GAAP to be applied by nongovernmental
entities, except for the rules and interpretive releases of the SEC under
authority of federal securities laws, which are sources of authoritative
GAAP for SEC registrants. The FASB will no longer issue new standards in the
form of Statements, FASB Staff Positions, or Emerging Issues Task Force
Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting
Standards Updates will not be authoritative in their own right as they will only
serve to update the Codification. These changes and the Codification itself do
not change GAAP. This new guidance became effective for interim and annual
periods ending after September 15, 2009. Other than the manner in which new
accounting guidance is referenced, the adoption of these changes did not have a
material impact on the Company’s consolidated financial statements.
In
December 2007, the FASB issued new accounting guidance, under ASC Topic 810 on
Consolidation, which establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary (previously referred to as minority
interests). It also requires that a retained noncontrolling interest upon the
deconsolidation of a subsidiary be initially measured at its fair value. Upon
adoption, companies will be required to report noncontrolling interests as a
separate component of stockholders’ equity. Companies will also be required to
present net income allocable to noncontrolling interests and net income
attributable to stockholders separately in their statements of income.
Currently, minority interests are reported as a liability or temporary equity in
balance sheets and the related income attributable to the minority interests is
reflected as an expense in arriving at net income (loss). The guidance is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The guidance requires retroactive
adoption of the presentation and disclosure requirements for existing minority
interests. All other requirements of the guidance shall be applied
prospectively. The Company does not currently have any noncontrolling interests
in subsidiaries. The guidance would only have an impact on subsequent
acquisitions of noncontrolling interests.
In
December 2007, the FASB issued new accounting guidance, under ASC Topic 805 on
Business Combinations, which establishes principles and requirements for
determining how an enterprise recognizes and measures the fair value of certain
assets and liabilities acquired in a business combination, including
noncontrolling interests, contingent consideration, and certain acquired
contingencies. It also requires acquisition-related transaction expenses and
restructuring costs be expensed as incurred rather than capitalized as a
component of the business combination. The guidance will be applicable
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The guidance would only have an impact on accounting for
any businesses acquired after the effective date of this
pronouncement.
In March
2008, the FASB issued new accounting guidance, under ASC Topic 815 on
Derivatives and Hedging, which amends and expands existing disclosure
requirements to require qualitative disclosure about objectives and strategies
for using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative agreements. This guidance
is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged.
Adoption of this guidance did not have a material impact on the Company’s
consolidated financial statements.
In April
2008, the FASB issued new accounting guidance, under ASC Topic 350 on
Intangibles, which amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset. The guidance is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years and should be applied prospectively to intangible
assets acquired after the effective date. Early adoption is not
permitted. The guidance also requires expanded disclosure related to the
determination of useful lives for intangible assets and should be applied to all
intangible assets recognized as of, and subsequent to, the effective
date. Adoption of this guidance will impact acquisitions completed by the
Company on or after January 1, 2009.
-11-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note B—Summary of Significant
Accounting Policies—Continued
New Accounting
Pronouncements—Continued
In June
2008, the FASB issued new accounting guidance, under ASC Topic 815 on
Derivatives and Hedging, as to how an entity should determine whether an
instrument, or an embedded feature, is indexed to an entity’s own stock and
whether or not such instruments would be accounted for as equity or a derivative
liability. The adoption of this guidance can affect the accounting for warrants
and many convertible instruments with provisions that protect holders from a
decline in the stock price (or “down-round” provisions). This guidance is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 and is applicable to outstanding instruments as of the
beginning of the fiscal year it is initially applied. Early application is not
permitted. The cumulative effect, if any, of the change in accounting principle
shall be recognized as an adjustment to the opening balance of retained
earnings. Adoption of this guidance has resulted in the recording of many
new convertible notes and warrants as derivative liabilities, subject to a
market-to-market as of each reporting date. See Notes D and F.
In
November 2008, the FASB issued new accounting guidance, under ASC 323 on
Investments – Equity Method and Joint Ventures, which addresses the impact that
ASC 805 on Business Combinations and ASC 810 on Consolidation might have on the
accounting for equity method investments, including how the initial carrying
value of an equity method investment should be determined, how an impairment
assessment of an underlying indefinite lived intangible asset of an equity
method investment should be performed and how to account for a change in an
investment from the equity method to the cost method. This guidance is
effective in fiscal periods beginning on or after December 15, 2008.
Adoption of this guidance did not have a material impact on the Company’s
consolidated financial statements.
In
May 2009, the FASB issued new accounting guidance, under ASC Topic 855 on
Subsequent Events, which sets forth: (1) the period after the balance sheet date
during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements; (2) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements; and (3) the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. This guidance
was effective for interim and annual periods ending after June 15, 2009.
Adoption of this guidance did not have a material impact on the Company’s
consolidated financial statements
In
August 2009, the FASB issued new accounting guidance, under ASC Topic 820
on Fair Value Measurements and Disclosures, on the measurement of liabilities at
fair value. The guidance provides clarification that in circumstances in which a
quoted market price in an active market for an identical liability is not
available, an entity is required to measure fair value using a valuation
technique that uses the quoted price of an identical liability when traded as an
asset or, if unavailable, quoted prices for similar liabilities or similar
assets when traded as assets. If none of this information is available, an
entity should use a valuation technique in accordance with existing fair
valuation principles. Adoption of this guidance is not expected to have a
material impact on the Company’s consolidated financial statements.
In
October 2009, the FASB issued new accounting guidance, under ASC Topic 605
on Revenue Recognition, which addresses the accounting for multiple-deliverable
arrangements to enable vendors to account for products and services
(deliverables) separately rather than as a combined unit. Specifically, this
guidance amends the criteria for separating consideration in
multiple-deliverable arrangements. This guidance establishes a selling price
hierarchy for determining the selling price of deliverables, which is based on:
(a) vendor-specific objective evidence; (b) third-party evidence; or (c)
estimates. This guidance also eliminates the residual method of allocation and
requires that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price method and also
requires expanded disclosures. This guidance was effective prospectively for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Adoption of this guidance is not
expected to have a material impact on the Company’s consolidated financial
statements.
-12-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note
C—Property and Equipment
Property
and equipment consists of the following:
December
31,
|
Range
of Estimated
|
|||||||||||
2009
|
2008
|
Useful
Lives
|
||||||||||
Furniture
and fixtures
|
$ | 68,286 | $ | 68,286 |
1 -
5 years
|
|||||||
Leasehold
improvements
|
474,279 | 474,279 | [A] | |||||||||
Equipment
and computer software
|
1,858,368 | 1,800,059 |
1 -
3 years
|
|||||||||
2,400,933 | 2,342,624 | |||||||||||
Less:
accumulated depreciation and amortization
|
(2,094,853 | ) | (1,794,691 | ) | ||||||||
Property
and Equipment, Net
|
$ | 306,080 | $ | 547,933 |
[A]
Shorter of initial lease term or estimated useful life
Depreciation
and amortization expense for the years ended December 31, 2009 and 2008 was
$345,619 and $370,062, respectively.
Property
and equipment includes capitalized leases with a cost and accumulated
depreciation of $257,947 and $228,138, respectively, at December 31, 2009. As of
December 31, 2008 the cost and accumulated depreciation for capital leases were
$257,947 and $153,496, respectively.
-13-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note
D—Intangible Assets
Intangible
assets consist of the following:
Balance
as of December 31, 2009
|
Balance
as of December 31, 2008
|
|||||||||||||||||||||||
Accumulated
|
Accumulated
|
|||||||||||||||||||||||
Cost
|
Amortization
|
Net
|
Cost
|
Amortization
|
Net
|
|||||||||||||||||||
Finite
Lives:
|
||||||||||||||||||||||||
Proprietary
technology
|
$ | 2,200,000 | $ | (2,200,000 | ) | $ | - | $ | 2,200,000 | $ | (2,090,000 | ) | $ | 110,000 | ||||||||||
Customer
relationships
|
1,300,000 | ( 1,300,000 | ) | - | 1,300,000 | ( 1,300,000 | ) | - | ||||||||||||||||
Agent
relationships
|
410,000 | ( 410,000 | ) | - | 410,000 | ( 401,112 | ) | 8,888 | ||||||||||||||||
Non-compete
agreement
|
500,000 | ( 500,000 | ) | - | 500,000 | ( 500,000 | ) | - | ||||||||||||||||
4,410,000 | ( 4,410,000 | ) | - | 4,410,000 | ( 4,291,112 | ) | 118,888 | |||||||||||||||||
Indefinite
Lives:
|
||||||||||||||||||||||||
Trade
name
|
920,000 | - | 920,000 | 920,000 | - | 920,000 | ||||||||||||||||||
VoIP
licenses
|
244,583 | - | 244,583 | 244,583 | - | 244,583 | ||||||||||||||||||
1,164,583 | - | 1,164,583 | 1,164,583 | - | 1,164,583 | |||||||||||||||||||
Total
|
$ | 5,574,583 | $ | (4,410,000 | ) | $ | 1,164,583 | $ | 5,574,583 | $ | (4,291,112 | ) | $ | 1,283,471 |
Amortization
is computed on a straight-line basis over the lives of the intangible assets
with finite lives, which ranged from eighteen months to five years. All
intangible assets with finite lives were fully amortized as of December 31,
2009. Amortization expense was $118,888 and $475,555 in 2009 and
2008, respectively.
Intangible
assets with indefinite useful lives are tested for impairment annually or more
frequently if an event indicates that the asset might be impaired. The fair
value of these intangible assets is determined based on a discounted cash flow
methodology. At December 31, 2008, certain of the Company’s VoIP licenses were
determined to be impaired, because the Company determined these voicemail
products were no longer in use. As result, the Company recorded an impairment
charge of $52,691 which represented 100% of their carrying value.
-14-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note
E—Loans Payable to Parent
Loans
payable to Parent (see Note N, Forgiveness of Intercompany Indebtedness)
consists of the following:
December
31,
|
||||||||||
2009
|
2008
|
|||||||||
Loan
payable to Parent
|
(A)
|
$ | 8,000,000 | $ | 9,000,000 | |||||
Loan
payable to Parent, variable interest rate at prime plus 1% (4.25% as of
December 31, 2009 and 2008, respectively), with interest due quarterly and
principal and unpaid interest due on July 1, 2010 (as amended). The
underlying note is collateralized by principally all of the tangible and
intangible assets of the Company.
|
(B)
|
5,045,480 | 5,045,480 | |||||||
Loans
payable to Parent, variable interest rate at prime plus 1% (4.25% as of
December 31, 2009 and 2008, respectively), with principal and unpaid
interest due on July 1, 2010 (as amended). The underlying notes are
collateralized by an interest in principally all of the tangible and
intangible assets of the Company. The underlying notes are subordinated to
the underlying notes payable above.
|
(C)
|
1,000,000 | 1,000,000 | |||||||
Loans
payable to Parent, variable interest rate at prime plus 1% (4.25% as of
December 31, 2009 and 2008), with principal and unpaid interest due on
June 30, 2011. The underlying notes are collateralized by an interest in
principally all of the tangible and intangible assets of the Company. The
underlying notes are subordinated to the underlying notes payable listed
above.
|
(D)
|
900,000 | 900,000 | |||||||
Loans
payable to Parent, variable interest rate at prime plus 1% (4.25% as of
December 31, 2009 and 2008). Principal and unpaid interest due on July 1,
2010 (as amended). The underlying notes payable are unsecured and
subordinated to the above underlying notes payable.
|
(B)
|
720,782 | 720,782 | |||||||
Loans
payable to Parent, variable interest rate at prime plus 1%, but not less
than 5% (5.00% as of December 31, 2009). Principal and unpaid interest due
on July 1, 2010. The underlying notes are unsecured and subordinated to
the above underlying notes payable.
|
(E)
|
300,000 | - | |||||||
Loans
payable to Parent, fixed interest rate of 10%, maturity is 18 months from
the inception of the note, due on various dates from December 2010 through
March 2011. The underlying notes are unsecured.
|
(F)
|
2,800,000 | - | |||||||
(Forward)
|
$ | 18,766,262 | $ | 16,666,262 |
-15-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note E—Loans Payable to
Parent—Continued
December
31,
|
||||||||||
2009
|
2008
|
|||||||||
(Forward)
|
$ | 18,766,262 | $ | 16,666,262 | ||||||
Loan
payable to Parent, fixed interest rate of 10%, maturity is 18 months from
the inception of the note (December 1, 2010). The underlying note is
unsecured.
|
(G)
|
250,000 | - | |||||||
Total
Loans Payable to Parent
|
19,016,262 | 16,666,262 | ||||||||
Less:
current portion
|
16,016,262 | 1,250,000 | ||||||||
Long-Term
Portion of Loans Payable to Parent
|
$ | 3,000,000 | $ | 15,416,262 |
Future
maturities of loans payable to Parent are as follows:
For
the year ending
|
||||
December
31,
|
Amount
|
|||
2010
|
$ | 16,016,262 | ||
2011
|
3,000,000 | |||
Total
|
$ | 19,016,262 |
The Company was either a co-borrower
with the Parent and/or a Guarantor of such obligations and its assets
collateralized the debt. The funds were obtained solely for the
benefit of and utilization by the Company. As such, the Parent received the
funding only as a conduit for the Company, therefore the obligations are
reflected on Lightyear’s accompanying consolidated financial statements.
The amounts
reported as loans payable to Parent, arose from the following financing
activities of LYH, the Parent:
(A)
|
On
December 31, 2004, a member of LYH provided LYH with a $10,000,000 loan
that allowed LYH to retire previous debt. The loan was for a term of three
years with the initial interest payment due March 31, 2005 and initial
principal payment due in June 2005. The Company repaid $1,500,000 and
$1,000,000 during 2005 and 2006, respectively. In April and July 2007, the
member made additional loans to LYH of $1,300,000 and $1,700,000,
respectively. On October 24, 2007, the terms of the loan were amended to
allow for annual principal payments of $1,000,000 in 2007 and 2008 with
the remaining balance due on March 31, 2009. The Company repaid $1,000,000
in 2007 and $500,000 in 2008. LYH made an additional principal
payment of $250,000 in January 2009. On March 25, 2009, the terms of the
loan were amended to allow for quarterly principal payments of $250,000
plus accrued interest beginning March 31, 2009, with final payment of all
outstanding principal and interest due July 1, 2010. The loan bears
interest at a rate of LIBOR plus 4.75% (4.98% and 5.19% as of December 31,
2009 and 2008, respectively) on all amounts owed up to $7,000,000 (not to
exceed 10% per annum), and LIBOR plus 7.75% on all amounts owed in excess
of $7,000,000 (7.98% and 8.19% as of December 31, 2009 and 2008,
respectively). The outstanding balance on the loan at December 31, 2009
and 2008 was $8,000,000 and $9,000,000,
respectively.
|
-16-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note E—Loans Payable to
Parent—Continued
As
part of this loan, the Parent is obligated to pay an annual commitment fee
each January 10th until the note is paid in full. The commitment fee
equals five percent (5%) of the outstanding principal balance of the note.
During the years ended December 31, 2009 and 2008, the Company recorded
$437,500 and $462,500 of commitment fee expense, respectively, which is
included in interest expense – Parent in the statements of operations. As
of December 31, 2009 and 2008, the Company had accrued $1,262,500 and
$825,000, respectively, of commitment fees which represents the unpaid
fees recorded. These fees are included in interest payable to Parent on
the balance sheet. On January 10, 2010 and 2009, the Company recorded
additional fees payable of $400,000 and $437,500.
The
$10,000,000 note and the $5,250,000 note described in (B) are
collateralized by principally all of the tangible and intangible assets of
the Company, are guaranteed by certain of the Parent’s members’ membership
interests and are collateralized by certain life insurance policies. In
addition, these notes, which are from the same member, have first priority
over other Company debt.
|
||
(B)
|
In
June 2003, the same member of LYH described in (A) loaned LYH an
additional $5,250,000 and two additional LYH members loaned LYH $750,000
(“Original Notes”) that were originally due in June 2005. The Original
Notes were amended several times, the last of which was executed on March
25, 2009, extending the maturity date until July 1, 2010. The Original
Notes have a variable interest rate of prime plus 1% with interest due
quarterly and principal and unpaid interest due at maturity. The Original
Notes require a termination fee be paid at the retirement of the loan. As
a result of the termination fee, the effective interest rate is
approximately 14%, and the Company is currently accruing the difference
between the stated rate above and effective interest rates as interest
payable to Parent. The outstanding balances on these Original
Notes at December 31, 2009 were $5,045,480 and $720,782. The $5,045,480
note is collaterized by all of the tangible and intangible assets of the
Company and together with the note described in (A) has a first priority
over other Company debt.
|
|
(C)
|
In July 2004, an additional $1,000,000 was borrowed from members of the Parent and a director of the Parent for working capital purposes with an original maturity date of July 2006. The notes were amended several times, the last of which was executed on March 25, 2009, extending the maturity date until July 1, 2010. The Notes have a variable interest rate of prime plus 1% with interest due quarterly and principal and unpaid interest due at maturity. As part of this additional borrowing, the Parent granted the members letter agreements giving them revenue participation rights totaling an aggregate of 4% of monthly revenue from the sale of VoIP products and services. The revenue participation rights have a term of the earlier of ten years or a sale transaction, unless the successor-in-interest consents to the continued payment of the VoIP revenue payments. If the successor-in-interest does not consent to the continued payment, the Parent shall pay the note holders the termination fee in the amount of the VoIP revenue payments for the immediately preceding twelve month period. For the year ended December 31, 2008, the Company was charged approximately $229,000 for VoIP revenue participation rights which is included in commission expense – related parties in the consolidated statement of operations. Holders of the VoIP revenue participation rights, waived their rights to receive revenue payments from the sales of VoIP services during calendar year 2009. The notes are unsecured and subordinated to the other notes. | |
(D)
|
In
July 2008, an additional $900,000 was borrowed from certain of the
Parent’s members and is due June 2011. As part of this additional
borrowing, the Parent granted the members’ letter agreements, giving them
revenue participation rights totaling an aggregate of 3% of monthly
revenue from the sale of wireless service, excluding equipment and
accessories, but including service activation, from the Company’s wireless
service. The revenue participation rights have a term of the
earlier of ten years or a sale transaction, unless the
successor-in-interest consents to the continued payment of the wireless
revenue payments. If the successor-in-interest does not consent to the
continued payment, the Parent shall pay the note holders the termination
fee in the amount of the wireless revenue payments for the immediately
preceding twelve month period. For the year ended December 31, 2008, the
Company was charged approximately $19,000 for wireless services revenue
participation rights. Holders of the wireless revenue participation
rights, waived their rights to receive revenue payments from the sales of
wireless services during calendar year 2009. The notes are
unsecured and subordinated to the other
notes.
|
-17-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note E—Loans Payable to
Parent—Continued
(E)
|
On
January 1, 2009, a member of the Parent provided the Parent with a loan of
$100,000. On February 1, 2009, the same member provided the Parent with an
additional loan of $200,000. Both notes payable bear interest at the prime
rate plus 1%, with a minimum of 5%. All outstanding principal and interest
on both loans is due July 1, 2010. The notes are unsecured and are
subordinated to the note obligations described
above.
|
(F) Private Placement –
Commencing May 2009
In May
2009, LYH commenced a private placement offering and beginning in June 2009 and
continuing through September 30, 2009, LYH provided the Company with loans
totaling $2,800,000 from proceeds of this offering. The notes bear simple
interest at a rate equal to 10% per annum and are payable eighteen months from
the date of the respective closings. The Company incurred fees associated with
these loans aggregating $501,354. These costs are capitalized as deferred
financing costs. The Company recorded amortization of the deferred financing
costs from these cash transactions totaling $142,100 for the year ended December
31, 2009. Also, during the year ended December 31, 2009, LYH charged the Company
$49,064 of deferred financing costs for other non-cash costs LYH incurred in
connection with the financing transactions. In addition, during the year ended
December 31, 2009, LYH charged the Company $307,508 of debt discount costs
related to non-cash expenses LYH incurred in connection with the financing
transactions. The amounts, reported as loans payable to Parent, arose from the
following financing activity of LYH:
LYH
issued Investor Units each consisting of a Senior Subordinated Convertible
Promissory Note (the “Initial Convertible Notes”) in the principal amount of
$50,000 and a five year warrant. These Initial Convertible Notes bear simple
interest at a rate equal to 10% per annum and are payable eighteen months from
the date of the respective closings. Furthermore, upon the consummation of an
additional financing pursuant to which aggregate gross proceeds of at least
$5,000,000 are raised (“Next Round Financing”; see Note N – Loan Payable to
Parent – Proceeds from Private Placement – Commencing November 2009), including
gross proceeds from the sale of Initial Convertible Notes, then the entire
principal amount of the Initial Convertible Notes and all accrued and unpaid
interest thereon, were expected to be mandatorily convertible into shares of the
Next Round Financing Securities at a conversion price equal to $1.80 per
share.
LYH sold
Initial Convertible Notes with an aggregate face value of $2,800,000 in this
private placement offering. Investor warrants to purchase 777,779 shares of Next
Round Financing Securities have been issued and have been valued at $617,154.
LYH determined the value of the warrants utilizing the Black Scholes pricing
model with the following assumptions; market and exercise price of $1.80,
expected life of 5 years, volatility of 47.3%, dividend yield of 0%, and a risk
free interest rate ranging from 2.31% to 2.74%. The Convertible Notes have a
conversion option which has been valued at $653,334. LYH determined the value of
the conversion option utilizing the Black Scholes pricing model with the
following assumptions; market and exercise price of $1.80, expected life of 1.5
years, volatility of 47.3%, and a risk free interest rate ranging from 0.68% to
0.85%. The conversion option and the warrants are deemed to be derivative
liabilities, due to the lack of a fixed conversion feature, and will be marked
to market at each reporting date. The initial value of the conversion options
and the initial value of the warrants have been recorded as a debt discount and
are being amortized over the duration of the Initial Convertible Notes on LYH’s
financial statements and are being amortized to Lightyear over the debt discount
period.
In
addition to the deferred financing costs recognized by Lightyear, selling agent
warrants, to purchase 233,333 shares of Next Round Financing Securities have
been earned and have been valued at $185,146. The Company determined the value
of the warrants utilizing the Black Scholes pricing model with the following
assumptions; market and exercise price of $1.80, expected life of 1.5 years,
volatility of 47.3%, dividend yield of 0% and a risk free interest rate ranging
from 0.68% to 0.85%. This amount was capitalized as deferred financing costs on
the books of LYH and is being amortized on the books of Lightyear over the
eighteen month life of the Initial Convertible Notes.
-18-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note E—Loans Payable to
Parent—Continued
(G) Note Payable Proceeds – June
2009
In June
2009, LYH provided the Company with a loan of $250,000. The loan bears simple
interest at a rate equal to 10% per annum and is payable eighteen months from
the date of the closing. During the year ended December 31, 2009, LYH charged
the Company $40,579 of debt discount costs related to non-cash expenses LYH
incurred in connection with the financing transactions.
Investor
warrants to purchase 69,445 shares of Next Round Financing Securities have been
issued and have been valued at $54,862. LYH determined the value of the warrants
utilizing the Black Scholes pricing model with the following assumptions; market
and exercise price of $1.80, expected life of 5 years, dividend yield of 0%,
volatility of 47.3%, and a risk free interest rate of 2.55%. The subordinated
convertible promissory note has a conversion option which has been valued
at $58,333. LYH determined the value of the conversion option utilizing the
Black Scholes pricing model with the following assumptions; market and exercise
price of $1.80, expected life of 1.5 years, dividend yield of 0%, volatility of
47.3%, and a risk free interest rate of 0.73% The conversion option and the
warrants are deemed to be derivative instruments on the books of LYH, due to the
lack of a fixed conversion feature, and will be marked to market at each
reporting date. The initial value of the conversion option and the initial value
of the warrants have been recorded as debt discount on the books of LYH and are
being amortized on the books of Lightyear over the duration of the
subordinated convertible
promissory note. During the year ended December 31, 2009, the Company
recorded amortization of the debt discount related to the subordinated
convertible promissory note of $40,579.
Due to
their relationship and variable interest rates, the carrying value of the loans
payable to Parent approximate fair value, as determined by comparison to rates
currently available for obligations with similar terms and
maturities.
Note
F—Short Term Borrowings
In
December 2009, as amended in January 2010, the Company entered into a short term
revolving secured factoring agreement to provide an advance to the Company of up
to $500,000. In
conjunction with this agreement, the principal note holder of the Company signed
a subordination agreement which grants the factor a first priority interest
in the Company’s accounts receivable, intangible assets and deposit
accounts. As of
December 31, 2009, the Company had outstanding borrowings of $500,000 under the
facility. The Company entered into an agreement to repay the advances
under the factoring agreement from the proceeds of the private placement that
commenced during November 2009 until the advance is repaid in full. 50% of the
proceeds received from the offering in excess of the initial $1,000,000 were
used to repay part of the obligation. Because the offering was not sufficient to
repay the obligation by January 22, 2010, the Company was required to begin
repayment on a weekly basis, from its available funds, until February 8, 2010
when the agreement was repaid in full from the final
closing of the Private Placement that commenced in November 2009. (See Note N -
Loans Payable to Parent – Proceeds from Private Placement – Commencing
November 2009)
-19-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note
G—Other Liabilities
Other
liabilities consist of the following:
December
31, 2009
|
December
31, 2008
|
|||||||
Excise,
state and local taxes payable
|
$ | 541,907 | $ | 664,749 | ||||
Other
accrued expenses
|
412,642 | 505,736 | ||||||
Payroll,
payroll taxes and bonuses
|
224,898 | 282,627 | ||||||
Customer
security deposits
|
153,239 | 93,273 | ||||||
Totals
|
$ | 1,332,686 | $ | 1,546,385 |
Note
H—Warrants
In May
2009, the Parent commenced a $2,800,000 private placement under which it issued
Initial Convertible Notes and five year warrants to purchase an aggregate of
777,779 shares of the Next Round Financing Securities. In connection
with the private placement, the selling agent earned a five year warrant to
purchase 233,333 shares of the Next Round Financing Securities. See Note E
for additional details.
In June 2009, the Parent issued a subordinated convertible
promissory note in the amount of $250,000 and a five year warrant to purchase
69,445 shares of Next Round Financing Securities. See Note E for additional
details.
In August
2009, the Company entered into two consulting agreements and as compensation for
the services being rendered, LYH issued warrants to purchase an aggregate of
350,000 shares of the Next Round Financing Security with an exercise price
based on the price per security in which the Next Round Financing securities are
sold. The warrants have an exercisable term of one
year. The warrant value of $119,000, determined using the Black
Scholes pricing model with the following assumptions; market and exercise price
of $1.80, expected life of 1 year, volatility of 47.3%, dividend yield of 0% and
risk free interest rate of 0.45%, was recorded as selling, general and
administrative expense on the books of Lightyear and the contribution of the
warrant was reflected as a credit to member’s deficit. The warrant is deemed to
be a derivative instrument on the books of LYH, due to the lack of a fixed
conversion feature, and will be marked to market on the books of Lightyear at
each reporting date. As of the date of the Exchange Transaction, LYH assumed
full responsibility for the derivative liabilities associated with these
warrants.
In
September 2009, the Parent entered into an agreement with a selling agent
in contemplation of a new private placement offering (see Note E, Loans Payable
to Parent). Pursuant to this agreement, the Company issued a five year warrant
to the selling agent to purchase 900,000 shares of the Next Round Financing
Securities with an exercise price based on the price per security in which the
Next Round Financing securities are sold, in addition to certain cash fees and
five year warrants to be earned in conjunction with closings of the Next Round
Financing Securities. The warrants have an exercisable term of five
years. The warrant value of $711,000, determined using the Black
Scholes pricing model with the following assumptions; market and exercise price
of $1.80, expected life of 5 years, dividend yield of 0%, volatility of 47.3%
and risk free interest rates ranging from 2.31% was recorded on the balance
sheet of LYH as deferred financing costs, which will be amortized on Lightyear’s
books. The warrant is deemed to be a derivative instrument on the books of LYH,
due to the lack of a fixed conversion feature, and will be marked to market on
the books of Lightyear at each reporting date.
-20-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note
H—Warrants—Continued
A summary
of the warrants issued in connection with financing Lightyear for the year ended
December 31, 2009 is as follows:
Number
of
Warrants
|
Weighted
Average Exercise Price
|
Weighted
Average
Remaining
Contractual
Life
|
|||||||
(years)
|
|||||||||
Outstanding
at January 1, 2009
|
- | $ | - | ||||||
Granted
|
2,330,557 | 1.80 | |||||||
Exercised
|
- | - | |||||||
Outstanding
at December 31, 2009
|
2,330,557 | $ | 1.80 |
4.0
|
All of
the above warrants, except the consultant warrants, were cancelled at the time
of the Exchange Transaction (see Note N, Subsequent Events).
Note
I—Telecommunications Services and Payment Agreements
Telecommunications
Services Agreement – MCI (formerly WorldCom) Agreement
The
Company and its predecessor have maintained certain telecommunication service
agreements with MCI since 1994 (the “MCI Agreements”), for switched services,
data services, and other associated services. A modified service agreement (the
“MSA”) was entered into on November 5, 2003 and it along with the MCI Agreements
were subsequently assigned to and assumed by the Company effective April 1,
2004. MCI is currently doing business as Verizon Business Services (successor
in-interest to MCI).
The MSA
terminates upon the later to occur of the following: December 31, 2006 or as
soon as Lightyear has paid MCI at least $140 million for services (the “Payment
Obligation”) under the MCI Agreements. As of December 31, 2009, total payments
to MCI are approximately $132,500,000. Under the MSA, Lightyear agrees to obtain
at least 70% of specified telecommunication services available from MCI under
certain agreements related to long distance, voice, and data services (as
defined in the MSA) (the “Requirements Obligation”) from MCI. If Lightyear
defaults under the Requirements Obligations, it has a 90-day cure period. If
such failure is not cured, MCI has the right to immediately modify Lightyear’s
rates and charges on a prospective basis to the rates and charges generally
offered to its wholesale customers. The Requirements Obligation is null and void
upon the date the Company satisfies the Payment Obligation. Management is not
aware of any violations under the MSA.
Telecommunication
Service Agreement – Local Services
The
Company maintains several interconnection agreements and commercial agreements
on a state-by-state basis with SBC Communications (now AT&T), BellSouth
Communications, Qwest Communications, Verizon and Sprint Communications, which
allows the Company to sell local services.
Note
J—Employee Benefits
The
Company maintains a profit-sharing plan qualified under Section 401(k) of the
Internal Revenue Code. The Company may make discretionary matching contributions
to the profit-sharing plan, subject to certain limitations. The Company
contributed approximately $87,000 and $146,000, which is included in
selling, general and administrative expenses in the accompanying statements of
operations for the years ended December 31, 2009 and 2008,
respectively.
-21-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note
K—Related Party Transactions
The
Company has significant transactions with its Parent and members of its Parent
and deals with certain companies or individuals which are related parties either
by having owners in common or because they are controlled by members of the
Parent, directors, and/or officers of the Company or by relatives of members of
its Parent, directors and/or officers of the Company.
The
following is a summary of related party balances and transactions:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Due
to Parent
|
$ | 137,707 | $ | - | ||||
Loans
payable to Parent
|
19,016,262 | 16,666,262 | ||||||
Interest
payable to Parent
|
4,672,999 | 3,361,505 | ||||||
For
the Years Ended
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
Commission
expense - related parties
|
$ | 154,875 | $ | 356,430 | ||||
Interest
expense - Parent
|
1,936,227 | 2,007,041 | ||||||
Amortization
of deferred financing costs - Parent
|
49,064 | - | ||||||
Amortization
of debt discount - Parent
|
348,087 | - | ||||||
Change
in fair value of derivative liabilities - Parent
|
(259,445 | ) | - |
See Note
E for discussion of loans payable to Parent and interest payable to
Parent.
An
officer of the Company owns an indirect interest in a Lightyear agency. The
agency has a standard Lightyear agent agreement and it earned approximately
$26,000 and $41,000 in commissions from Lightyear in 2009 and 2008,
respectively.
Beginning
in 2008, an employee (and son of an officer) of the Company, has maintained a
representative position in a direct selling entity which earned approximately
$129,000 and $67,000 in commissions from Lightyear in 2009 and 2008,
respectively.
Commission
expense – related parties includes certain VoIP and wireless revenue
participation amounts. See Note E for additional details.
Pursuant
to an officer’s employment agreement, the Company provides him with life
insurance coverage consisting of $3,000,000 under a whole life policy and
$3,000,000 under a term life insurance policy. The Company also maintains
$5,000,000 in key man life insurance with the Company listed as the beneficiary.
The proceeds from the key man life insurance have been assigned to the Parent’s
principal note holder as collateral for the debt owed by the Parent. Aggregate
insurance premium expense for these policies was approximately $102,000 for each
of the years 2009 and 2008.
Note
L—Supplier Concentration
The
Company acquired approximately 48% and 10% during the year 2009 from two
suppliers and 52% during the year 2008 from one supplier, of the
telecommunications services used in its operations. Although there are
other suppliers of this service, a change in suppliers could have an adverse
effect on the business which could ultimately affect operating
results.
-22-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note
M—Commitments and Contingencies
Operating
Lease
The
Company leases its office space in Louisville, Kentucky under terms classified
as an operating lease. In April
2009, the Company entered into a new lease agreement, which replaces the
Company’s expiring lease of office space located in Louisville, Kentucky.
The term of the lease is for six years, ending on March 31, 2015. The
Company also leased additional office space in Atlanta, Georgia under terms
classified as an operating lease. This lease expired in March 2009 and was not
renewed by the Company. The Company leases equipment under a printing service
agreement. The service agreement expired in June 2008 and the Company continues
to lease the printing equipment on a month to month basis. Rent expense related
to these operating lease agreements, which is included in selling, general and
administrative expenses in the accompanying statements of operations, was
$869,304 and $1,203,796 for the years ended December 31, 2009 and 2008,
respectively.
Future
minimum payments under these operating lease agreements are as
follows:
For
the Years Ending
|
||||
December
31,
|
Amount
|
|||
2010
|
800,088 | |||
2011
|
800,088 | |||
2012
|
800,088 | |||
2013
|
800,088 | |||
2014
and thereafter
|
1,000,110 | |||
Total
|
$ | 4,200,462 |
Capital Lease
Obligations
The
Company leases certain assets under terms classified as capital leases. The
Company has recorded the assets and the current and long-term portion of the
liabilities in the accompanying balance sheets. The leases are collateralized by
the underlying equipment. The leases expire at various dates through 2010 and
bear interest rates ranging from 10% to 14%.
Future
minimum payments under these capital lease agreements are as
follows:
Amount
|
||||
Total
minimum lease payments - 2010
|
$ | 36,254 | ||
Less:
amounts representing interest
|
2,226 | |||
Present
value of minimum lease payments
|
34,028 | |||
Less:
current maturities
|
34,028 | |||
Capital
lease obligations, non-current portion
|
$ | - |
-23-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note M—Commitments and
Contingencies—Continued
Employment
Agreement
The
Company has an employment agreement (the “Agreement”) with an officer of the
Company. The initial terms of the Agreement were from March 31, 2004 through
December 31, 2008. At the end of the initial term, the Agreement was
automatically renewed for an additional one year term, and shall be
automatically renewed for successive additional one-year terms, unless within
180 days prior to the end of the initial term or any additional term either
party gives the other written notice of the Company’s or the officer’s intent
not to renew the agreement. Under the Agreement, the officer is to receive a
base salary, adjusted annually consistent with increases given to other
executives of the Company, plus other fringe benefits and is eligible for
various bonuses. During the employment term, the base salary has been
periodically amended.
Litigation
As of
December 31, 2009, claims have been asserted against the Company which arose in
the normal course of business and from the Lightyear Holdings’ bankruptcy
proceedings. While there can be no assurance, management believes that the
ultimate outcome of these legal claims will not have a material adverse effect
on the consolidated financial statements of the Company.
Letter of
Credit
The
Company has provided irrevocable standby letters of credit, aggregating
approximately $125,000 to five states and one vendor, which automatically renew
for terms not longer than one year, unless notified otherwise. As of
December 31, 2009, these letters of credit have not been drawn
upon.
Note
N—Subsequent Events
Loans Payable to Parent –
Proceeds from Private Placement – Commencing November 2009
In
November 2009, LYH commenced a private placement offering and beginning in
January 2010 and continuing through February 8, 2010, LYH provided the Company
with loans totaling approximately, $2,100,000 from proceeds of this offering.
The notes bear simple interest at a rate equal to 10% per annum and are payable
eighteen months from the date of the respective closings. The Company incurred
fees associated with these loans aggregating $520,800. These costs are
capitalized as deferred financing costs on the books of Lightyear. The loans
payable to Parent arose from the following financing activity of
LYH:
LYH will
issue Investor Units (“Units”) each consisting of a Senior Subordinated
Convertible Promissory Note (the “Next Convertible Notes”) in the principal
amount of $50,000. The Next Convertible Notes bear simple interest at a rate
equal to 10% per annum to be accrued until the Next Convertible Notes (i) are
converted into Class B Preferred Units, (ii) is exchanged for shares of common
stock and warrants to purchase shares of common stock, (iii) reaches the
maturity date, when interest will be payable in cash or Class B Preferred Units,
at the option of the Next Convertible Notes holder.
-24-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note
N—Subsequent Events
Loans Payable to Parent –
Proceeds from Private Placement – Commencing November
2009—Continued
In the
event that LYH consummates (i) an offering or series of related offerings,
whether in the form of debt, equity or a combination thereof, that results in
gross proceeds to LYH of at least $5,000,000 (see Note N – Exchange
Transaction), inclusive of the proceeds from the Initial Convertible Notes and
the Next Convertible Notes, and (ii) a merger, share exchange, sale or
contribution of all substantially all of Lightyear’s assets or other business
combination with a publicly-traded shell company, as a result of which the
members of Lightyear immediately prior to such transaction, directly or
indirectly, beneficially own more than 50% of the voting power of the surviving
or resulting entity (the “Reverse Merger”), the holders of the Next Convertible
Notes shall be required to exchange their notes for (i) such number of shares of
common stock equal to the number of Class B Units for which such Notes are
convertible (ii) and new five year warrants to purchase up to 50% of the number
of shares of Class B Units for which such Next Convertible Notes are converted,
issued at an exercise price of $1.80 per share. The transaction calls for the
holders of Initial Convertible Notes and warrants from the prior note to be
treated in a substantially similar manner as the holder of the Next Convertible
Notes and warrants in this offering.
LYH has
sold Next Convertible Notes with an aggregate face value of approximately
$2,100,000 in this private placement offering. Prior to the Exchange Transaction
(see Note N, Exchange Transaction), the holders rescinded their purchase of the
Next Convertible Notes and instead received a term note with the same interest
rate and duration as the Next Convertible Notes.
Revenue Participation
Rights
Holders
of the VoIP and Wireless revenue participation rights waived their rights to
receive revenue payments from sales of VoIP and Wireless services during
calendar year 2009. The eventual publicly-traded holding company has agreed to
negotiate the terms of the purchase of the revenue participation rights from the
holders following consummation of the exchange (see Note N, Exchange
Transaction), whereby Lightyear becomes a wholly-owned subsidiary of the
publicly-traded holding company.
Insurance
Policy
In
contemplation of the Exchange Transaction, on February 4, 2010, an officer of
the Company assigned the ownership of a split-dollar life insurance policy to
the Company and the Company has been made the owner and beneficiary under this
policy.
Forgiveness of Intercompany
Indebtedness
In
contemplation of the Exchange Transaction, on February 12, 2010, LYH forgave the
Company’s intercompany indebtedness.
-25-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note N—Subsequent
Events—Continued
Exchange
Transaction
Master
Transaction Agreement
On
February 12, 2010, LYH entered into a master transaction agreement (the
“Exchange Transaction”) with Libra Alliance Corporation (“Libra”), a Nevada
Corporation, and holders of LYH’s convertible promissory notes (the “Convertible
Debtholders”), comprised of a Securities Exchange Agreement, a Securities
Modification Agreement, a Securities Rescission and Issuance Agreement, and a
Securities Contribution Agreement. The transactions under the Master Transaction
Agreement are deemed to be a merger intended to qualify as a tax-free unified
exchange of property for stock under Section 351 of the Internal Revenue Code of
1986.
As of
February 12, 2010, Libra was authorized to issue 20,000,000 shares of Libra
common stock and had no preferred stock authorized. As of immediately before the
Exchange Transaction, there were 6,400,000 shares of Libra common stock issued
and outstanding. The issuances of Libra stock under the Securities Exchange
Agreement and the Contribution Agreements are intended to be exempt from
registration under the Securities Act of 1933, as amended (the “Securities
Act”), pursuant to Section 4(2) thereof and Regulation D promulgated
thereunder.
The
transaction will be accounted for as a “reverse merger” and recapitalization
since the sellers of Lightyear will control the combined company immediately
following the completion of the transaction. Lightyear will be deemed to be the
accounting acquirer in the transaction and, consequently, the transaction is
treated as a recapitalization of Lightyear. Accordingly, the assets and
liabilities and the historical operations that are reflected in the financial
statements will be those of Lightyear and will be recorded at the historical
cost basis of Lightyear. Libra’s assets, liabilities and results of operations
will be consolidated with the assets, liabilities and results of operations of
Lightyear after consummation of the acquisition. Such transaction was
finalized on February 12, 2010
Securities
Exchange Agreement
On
February 12, 2010, LYH and Libra entered into the Securities Exchange Agreement,
which provided for LYH’s exchange of its 100% membership interest in Lightyear
for 10,000,000 shares of Libra common stock to be issued at closing and an
additional 9,500,000 shares of Libra’s preferred stock after Libra increases its
authorized shares. In addition, certain existing Libra shareholders
agreed to cancel approximately 895,000 of their outstanding shares of Company
common stock. After LYH receives the preferred stock, it is expected
that LYH will own approximately 69% of the Libra outstanding common stock on a
fully-diluted, as-converted basis.
Securities
Modification Agreement
Immediately
before the closing of the Exchange Transaction, LYH entered into securities
modification agreements or securities rescission and issuance agreements (the
“Securities Modification Agreement”) with its Convertible Debtholders with
respect to LYH’s convertible promissory notes (the “Convertible Notes”). On the
condition that LYH and its Convertible Debtholders would subsequently execute
the Securities Contribution Agreement and close the transactions contemplated by
both the Contribution Agreement and the Master Transaction Agreement, the
convertible promissory notes were amended and modified (the “Modified Notes”)
to: (1) waive and delete the conversion features of the Convertible Notes; (2)
waive any interest accrued and modify the interest provisions to provide for a
five percent interest rate; (3) release the guaranty of Lightyear; (4) waive the
events of default defined in the Convertible Notes; (5) extend the maturity date
of the Modified Notes to December 31, 2011; and, (6) terminate the warrants and
the rights to obtain warrants that were issued concurrently with the Convertible
Notes. These modifications became effective on the execution of the Securities
Contribution Agreements.
-26-
Lightyear Network Solutions, LLC
and Subsidiary
Notes
to Consolidated Financial Statements
Note N—Subsequent
Events—Continued
Securities
Contribution Agreement
On
February 12, 2010, Libra and LYH’s Convertible Debtholders entered into the
Securities Contribution Agreements, which provided for the contribution by LYH’s
Convertible Debtholders of the Modified Notes to Libra. In exchange for the
aggregate of approximately $5,150,000 of Modified Notes (originally $2,800,000
of Initial Convertible Notes; $2,100,000 of Next Convertible Notes and the
$250,000 June 2009 convertible promissory note), Libra issued an aggregate of
3,242,533 shares of Libra common stock to LYH’s former Convertible Debtholders.
LYH’s Convertible Debtholders are expected to be the holders of approximately
11.5% of Libra common stock on a fully diluted basis after the issuance of the
Libra preferred stock to LYH.
Amendment to Libra’s
Articles of Incorporation
On
February 25, 2010, Libra’s stockholders approved an amendment to the Articles of
Incorporation (1) changing the name of Libra to Lightyear Network Solutions,
Inc., (2) increasing the number of authorized shares of common stock to
70,000,000 and (3) authorizing 9,500,000 shares of preferred stock. The
preferred stock was designated to (a) vote as a single class with shares of
common stock; (b) have a stated value of $2.00 per share; (c) have dividends of
5% of the stated value, when and if declared; (d) have conversion rights into
one share of common stock; (e) have the right to elect a majority of the board
of directors for so long as the originally issued preferred stock is
outstanding; (f) have a liquidation preference equal to the sum of the stated
value and all accrued but unpaid dividends; (g) have a premium upon a change of
control transaction equal to the liquidation preference; and (h) have
certain negative covenants regarding the declaration of dividends, the issuance
of additional preferred stock and the issuance of debt. The
Company expects to issue the 9,500,000 shares of covenanted preferred stock to
LYH during the second quarter of 2010, following the effectiveness to the
Amendment to the Articles of Incorporation.
Credit
Facility
On March
17, 2010, the Company entered into a closed end credit facility (“the Note”)
with a limited future multiple advance feature, representing an arrangement that
allows the Company to obtain advances without giving the bank a separate note
for each advance. The Company shall be entitled to borrow up to the
full principal amount of $1,000,000 of the Note from time to time, but only up
through, and not after, June 16, 2010, subject to some
limitations. The Note bears interest at the prime rate plus 4% but
not less than 7.25% per annum. Beginning on April 30, 2010 through
June 30, 2010, the Company shall pay, all accrued but unpaid
interest. Beginning on July 30, 2010, the Company shall make monthly
payments of all accrued but unpaid interest plus monthly principal payments in
the amount of $111,112 each, unless and until the outstanding principal balance
of the Note is paid in full. In addition to the payments described
above, the Company shall apply to payment of the principal balance of the Note,
50% of all net proceeds in excess of $1,000,000 and up to $2,000,000 from the
sale of equity securities in the Company’s parent company, Libra Alliance
Corporation, unless and until the outstanding principal balance of the Note is
paid in full. The Note matures on March 30,
2011. The Note is secured by a security interest in all tangible and
intangible assets of the Company, including lockbox accounts and its operating
account, and by the personal guaranties of an officer and a
director.
Subsequent
Events
The
Company evaluates events that have occurred after the balance sheet date but
before the financial statements are issued. Based upon the
evaluation, the Company did not identify any recognized or non-recognized
subsequent events that would require adjustments or disclosures in the
consolidated financials, other than the disclosures above.
-27-