SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ________ To ________
VDC COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-14045 061524454
(Jurisdiction of Incorporation) (Commission File No.) (IRS Employer
Identification No.)
75 Holly Hill Lane
Greenwich, Connecticut 06830
(Address of principal executive office)
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code: (203) 869-5100
(Former name, if changed since last report)
Check whether the Registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
(1) Yes X No
--------- ----------
(2) Yes X No
--------- ----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of November 12, 1999, the number of shares of registrant's common stock, par
value $.0001 per share, outstanding was 21,506,917.
<PAGE>
<TABLE>
<CAPTION>
VDC COMMUNICATIONS, INC.
INDEX
-----
PART I FINANCIAL INFORMATION PAGE
--------------------- ----
<S> <C> <C>
Item 1. Consolidated balance sheets as of June 30, 1999
and September 30, 1999 3
Consolidated statements of operations and
comprehensive loss for the three months ended
September 30, 1999 and 1998 4
Consolidated statements of cash flows for the
three months ended September 30, 1999 and 1998 5
Notes to consolidated financial statements 6-8
Item 2. Management's discussion and analysis of financial
condition and results of operations 8-16
Item 3. Quantitative and qualitative disclosures about
market risk 16
PART II OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 16-17
Item 2. Changes in Securities and Use of Proceeds 17-18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18-19
</TABLE>
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
VDC COMMUNICATIONS, INC. AND SUBSIDARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
September 30, 1999 June 30, 1999
------------------ -------------
(Unaudited)
<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 217,748 $ 317,799
Restricted cash 309,865 475,770
Marketable securities 69,288 90,375
Accounts receivable, net of allowance for doubtful accounts
of $107,244 at September 30, 1999 and $7,000 at June 30, 1999 1,776,644 1,251,581
Notes receivable 44,979 249,979
----------------------------------------
Total current assets 2,418,524 2,385,504
Property and equipment, less accumulated depreciation 4,752,856 4,888,163
Investment in MCC 2,400,000 2,400,000
Other assets 379,539 328,394
----------------------------------------
Total assets $ 9,950,919 $10,002,061
========================================
Liabilities and Stockholders' Equity
Current:
Accounts payable and accrued expenses $ 2,926,602 $ 2,160,839
Note payable - officer 80,000 -
Current portion of capitalized lease obligations 437,872 426,356
----------------------------------------
Total current liabilities 3,444,474 2,587,195
Long-term portion of capitalized lease obligations 935,497 847,334
----------------------------------------
Total liabilities 4,379,971 3,434,529
Commitment and Contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value, authorized 10 million
shares; issued and outstanding-none - -
Common stock, $0.0001 par value, authorized 50 million shares issued -
20,048,582 and 20,186,462 at
September 30, and June 30,1999, respectively 2,004 2,018
Additional paid-in capital 67,392,509 67,737,195
Accumulated deficit (61,314,890) (60,339,393)
Treasury stock - at cost, 1,875,000 shares (164,175) (164,175)
Stock subscriptions receivable - (344,700)
Accumulated comprehensive income (loss) (344,500) (323,413)
----------------------------------------
Total stockholders' equity 5,570,948 6,567,532
----------------------------------------
Total liabilities and stockholders' equity $ 9,950,919 $10,002,061
========================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
VDC COMMUNICATIONS, INC. AND SUBSIDARIES CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
-----------------------------------------------------------
Three Months ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Revenue $ 2,312,197 $ 201,394
Operating Expenses
Costs of services 2,598,857 341,421
Selling, general and administrative expenses 712,436 1,025,246
Non-cash compensation expense - 16,146,000
--------- ----------
Total operating expenses 3,311,293 17,512,667
--------- ----------
Operating loss (999,096) (17,311,273)
Other income (expense):
Loss on note restructuring - (400,000)
Other income (expense) 23,599 89,142
------ ------
Total other income (expense) 23,599 (310,858)
Net loss (975,497) (17,622,131)
-------- -----------
Other comprehensive income (loss), net of tax:
Unrealized (loss) on marketable securities (21,087) (338,938)
------- --------
Comprehensive loss $ (996,584) (17,961,069)
============ ===========
Net loss per common share - basic and diluted $ (0.05) $ (1.01)
------------ -------------
Weighted average number of shares outstanding 18,173,582 17,429,618
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
VDC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
Three Months ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (975,497) $(17,622,131)
Adjustments to reconcile net loss to net cash
Provided by operating activities:
Depreciation and amortization 272,122 102,836
Non-cash compensation expense - 16,146,000
Loss on note restructuring - 400,000
Provision for doubtful accounts 100,244 -
Changes in operating assets and liabilities:
Restricted cash 165,905 (400,000)
Accounts receivable (625,307) (103,699)
Other assets (51,145) (107,090)
Accounts payable and accrued expenses 765,763 1,359,517
------- ---------
Net cash used in operating activities (347,915) (224,567)
Cash flows from investing activities:
Proceeds from return of escrow in connection
with the investment in MCC - 192,752
Payment for purchase of subsidiary - (589,169)
Proceeds from repayment of notes receivable 205,000 300,000
Refund of fixed asset acquisition 210,018 -
Fixed asset acquisition (97,498) (2,295,822)
------- ----------
Net cash flows provided by (used) in investing activities 317,520 (2,392,239)
Cash flows from financing activities:
Collections on stock subscription receivables - 917,076
Proceeds from issuance of short-term debt 80,000 -
Repayments on capital lease obligations (149,656) -
-------- --------
Net cash flows (used) in provided by financing activities (69,656) 917,076
------- -------
Net (decrease) in cash and cash equivalents (100,051) (1,699,730)
Cash and cash equivalents, beginning of period 317,799 2,212,111
------- ---------
Cash and cash equivalents, end of period $ 217,748 $ 512,381
========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
VDC Communications, Inc. and Subsidiaries
Notes to consolidated financial statements
1. General
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results for the three-month period ended September 30, 1999
are not necessarily indicative of the results that may be expected for the year
ended June 30, 2000 ("Fiscal 2000"). For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended June 30, 1999, as filed
with the Securities and Exchange Commission.
Certain prior-year amounts have been reclassified to conform to the Fiscal 2000
financial statement presentation.
Cost of services includes depreciation attributable to operating equipment of
$258,222 during the three-months ended September 30, 1999. Selling, general and
administrative expenses include depreciation of $13,900 and bad debt expense of
$100,244 during the three-months ended September 30, 1999. Selling, general and
administrative expenses include depreciation of $102,836 during the three-months
ended September 30, 1998.
Loss per common share is calculated by dividing the loss attributable to common
shares by the weighted average number of shares outstanding. Outstanding common
stock options and warrants are not included in the loss per share calculation as
their effect is anti-dilutive.
2. Note Payable-Officer
In September 1999, the Chairman and CEO of the Company loaned the Company
$80,000. The note bears interest at 8% per annum and is due in September 2000.
3. Commitments and Contingencies
Litigation
In July 1999, a former customer filed suit against the Company asserting that
the Company induced it to enter into an agreement through various purported
misrepresentations. The suit alleges that, due to these purported
misrepresentations and purported breaches of contract, the former customer has
been unable to provide services to its customers. The relief sought includes
monetary damages resulting from the purported breach of contract and the
purported misrepresentations and the recovery of attorneys' fees. In the event
6
<PAGE>
that the former customer prevails, the Company could be liable for monetary
damages in an amount that would have a material adverse effect on the Company's
assets and operations.
The Company believes that the claims asserted are without merit and the Company
will, if it is served with process, vigorously defend itself against them. In
the opinion of management, based on the information that it presently possesses,
the claims will not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.
4. Subsequent Events
In October 1999, the Company sold 666,667 shares of its common stock to
unrelated investors and 666,667 shares to an adult son of the Chief Executive
Officer at $0.75 per share.
In October 1999, a condition for the release from escrow of 2 million shares of
the Company's common stock to the seller of the investment in Metromedia China
Corporation ("MCC"), which consists of 2 million shares of MCC common stock and
warrants to purchase 4 million shares of MCC common stock at $4 per share, was
satisfied. The shares will be released pursuant to a condition in a settlement
agreement which provides for the release of the escrowed shares in the event
that the Company's stock price closed below $5.00 for 40 trading days during the
120 consecutive trading days subsequent to August 31, 1999. For financial
statement purposes, the shares became issued and outstanding in October 1999.
In light of the substantial decline in market price of the Company's common
stock, the Board of Directors believed that the outstanding stock options with
an exercise price in excess of the actual market price were no longer an
effective tool to encourage employee retention or to motivate high levels of
performance. As a result, in October 1999, the Board of Directors approved an
option repricing program under which options to acquire shares of common stock
that were originally issued with exercise prices above $1.25 per share were
reissued with an exercise price of $1.25 per share, the fair market value of the
common stock at the repricing date. These options will continue to vest under
the original terms of the option grant. Options to purchase 757,500 shares of
Company common stock were affected by the repricing program including options to
purchase 567,500 shares of common stock issued under the Company's 1998 Stock
Incentive Plan, as amended (the "Plan") and options to purchase 190,000 shares
of common stock issued outside of the Plan.
An accounting pronouncement is expected to be issued regarding how to account
for a change to the exercise price or the number of shares of a stock option
that was being accounted for as a fixed award (that is, option repricing). The
pronouncement is expected to be effective upon issuance (expected to be in the
spring of 2000) but generally would cover events that occur after December 15,
1998. It is anticipated that the pronouncement will require a charge to
operations for the difference between the market price of the Company's stock
and the exercise price of unexercised, outstanding stock options at the end of
each reporting period.
7
<PAGE>
5. Supplemental Disclosure of Cash Flow Information
For purposes of the statement of cash flows, the Company considers all liquid
investments with an original maturity of three months or less to be cash
equivalents.
<TABLE>
<CAPTION>
Three-months ended September 30,
1999 1998
---- ----
<S> <C> <C>
cash paid during the quarter for:
interest $38,558 $-
schedule of non-cash investing and financing activities:
equipment acquired through capital lease obligation - -
equipment exchanged for note - 192,379
acquisition of subsidiary:
fair value of assets acquired - 1,290,044
common stock issued - 700,875
-------
cash paid $- $589,169
--------
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
When used in this Report on Form 10-Q, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "intend," and similar expressions are
intended to identify forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 regarding events, conditions and financial trends which may affect the
Company's future plans of operations, business strategy, operating results and
financial position. Such statements are not guarantees of future performance and
are subject to risks and uncertainties and actual results may differ materially
from those included within the forward-looking statements as a result of various
factors. Such risks may relate to, among others: (i) the Company's ability to
secure the various international licenses, approvals and other authorizations
needed to commence operations in foreign countries; (ii) the Company's ability
to otherwise develop and implement certain segments of its intended business
that are subject to normal start-up risks and uncertainties; (iii) the Company's
ability to secure sufficient financing in order to fund its proposed operations;
(iv) inherent regulatory, licensing and political risks associated with
operations in foreign countries; (v) the Company's dependence on certain key
personnel; and (vi) competitive and other market conditions that may adversely
affect the scope of the Company's operations. Additional factors are described
in the Company's other public reports and filings with the Securities and
Exchange Commission including Amendment No. 1 to a Registration Statement on
Form S-1 (Registration Number 333-80107). Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date made. The Company undertakes no obligation to publicly release the result
8
<PAGE>
of any revision of these forward-looking statements to reflect events or
circumstances after the date they are made or to reflect the occurrence of
unanticipated events.
GENERAL
VDC Communications, Inc. (referred to herein as the "Company," or "we") owns
telecommunications equipment and lease telecommunications lines to provide
domestic and international long distance telecommunications services. In
addition, we connect to other telephone companies and resell their services to
destinations where we do not own equipment or lease lines. Our customers are
other long distance telephone companies that resell our services to their retail
customers or other telecommunications companies. In the future, we anticipate
offering our services directly to retail customers in addition to our current
wholesale customers. We currently employ digital switching and transmission
technology. This equipment, located in New York and Los Angeles comprises our
operating facilities. Our facilities and industry agreements allow us to provide
voice and facsimile telecommunications services to most countries in the world.
We believe the telecommunications industry is attractive given its current size
and future growth potential. Furthermore, we believe the international
telecommunications market provides greater opportunity for growth than the
domestic market, due to the relatively limited capacity in certain markets and
potentially greater gross margin per minute of traffic. Our objective is to
become an international telecommunications company with strategic assets and
transmission capability in many attractive markets worldwide. Management
believes that in order to achieve this goal, we must provide our customers with
long distance and international voice and facsimile transmission at competitive
prices. We strive to provide competitive rates, while maintaining carrier grade
toll quality to destinations worldwide. We believe that our current facilities
are sufficient to handle significantly more traffic than we are currently
experiencing. In order to make better use of this capacity, we need to build a
reputation for high quality transmission within our industry and provide
competitive pricing.
We began the development of our long-distance telecommunications business on
March 6, 1998 and have since developed our infrastructure and industry
relations. During pre-operating phases we focused upon: fund raising; developing
a strategic business plan; purchasing telecommunications switches; developing
corporate infrastructure; and developing and commencing marketing programs.
Effectively, operations began when our telecommunications network was activated
and our marketing efforts commenced in January 1999. Since then we have had
modest success generating traffic over our infrastructure.
We earn revenue from three sources. The main source is from our domestic and
international telecommunications long distance services which is earned based on
the number of minutes billable to our customers, which are other telephone
companies. These minutes are generally billed on a monthly basis. Bills are
generally due within three to thirty days. Our second source of revenues is
derived from the rental of space and telecommunications equipment at our
telecommunications facilities and telecommunications circuits to other telephone
companies. This revenue is generated and billed on a month-to-month basis.
Additionally, we derive minimal revenues from the management of domestic tower
sites that provide transmission and receiver locations for wireless
9
<PAGE>
communications companies. This revenue is also generated and billed on a
month-to-month basis.
Revenue derived through the per-minute transmission of voice and facsimile is
normally in accordance with contracts with other telecommunications companies.
These contracts are often for a year or more, but can generally be amended with
a few days notice.
Costs of services include:
(1) terminating domestic long distance traffic in the United
States;
(2) terminating overseas-originated traffic in the United States
and internationally; and
(3) terminating domestic originated, international traffic outside
the United States.
We use other telecommunications companies' services in the same manner that they
use ours. Therefore, our costs include significant payments to other
telecommunications companies, including variable per minute costs for them to
provide voice and facsimile services to us, which we resell to our customers. In
addition, our costs of services include:
(4) circuit expenses, the allocable personnel and overhead
associated with operations; and,
(5) depreciation of telecommunications equipment. We depreciate
long distance telecommunications equipment over a period of
five years.
Our costs also include selling, general, and administrative expenses ("SG&A").
SG&A consists primarily of personnel costs, professional fees, travel, office
rental and business development related costs. We incur costs associated with
international market research and due diligence regarding potential projects
inside and outside of the U.S.
We are the successor to our former parent, VDC Corporation Ltd., a Bermuda
company ("VDC Bermuda") by virtue of a domestication merger. On November 6,
1998, VDC Bermuda merged with and into the Company (the "Domestication Merger").
The effect of the Domestication Merger was that members/stockholders of VDC
Bermuda became stockholders of the Company. The primary reason for the
Domestication Merger was to reorganize VDC Bermuda as a publicly traded United
States corporation domesticated in the State of Delaware.
The Domestication Merger reflects the completion of a series of transactions
that commenced on March 6, 1998, when the Company (then a wholly-owned
subsidiary of VDC Bermuda) acquired Sky King Communications, Inc., a Connecticut
corporation ("Sky King Connecticut") by merger. This merger transaction was
accounted for as a reverse acquisition whereby Sky King Connecticut was the
acquirer for accounting purposes.
10
<PAGE>
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues: Total revenues in the three months ended September 30, 1999 ("Current
Period") increased to approximately $2.3 million from approximately $201,000 for
the three months ended September 30, 1998 ("Prior Period"). Revenue of
approximately $2.1 million was generated during the Current Period by the
transmission of approximately 10.3 million minutes of telecommunications traffic
domestically and internationally ("Long Distance Revenue"). We also generated
revenue of approximately $200,000 from the rental of space and
telecommunications equipment at our telecommunications facilities and
approximately $33,000 from site tower management. Revenue of approximately
$149,000 was generated during the Prior Period by the transmission of
approximately 434,000 minutes of telecommunications traffic internationally. We
also generated revenue of $30,000 from telecommunications consulting services
and approximately $22,000 from site tower management during the Prior Period.
The average Long Distance Revenue per minute decreased to $0.204 in the Current
Period from $0.343 in the Prior Period. Current Period Long Distance Revenues
were generated from carrying traffic worldwide, whereas in the Prior Period,
Long Distance Revenue was generated exclusively from a direct route into Central
America.
Costs of Services: Costs of services in the Current Period increased to
approximately $2.6 million from approximately $341,000 in the Prior Period. This
increase is due to increased domestic and international minutes of
telecommunications traffic which we purchased from other long distance carriers
and increased operational expenses including salaries, depreciation, and circuit
costs. Costs of services as a percentage of revenues decreased from 170% in the
Prior Period to 112% in the Current Period. The decrease was mostly attributable
to improved rates on costs of carriage for international telecommunications
traffic.
Selling, general & administrative expenses ("SG&A"): SG&A expenses decreased to
approximately $712,000 in the Current Period from approximately $1.0 million in
the Prior Period. This decrease was primarily the result of reductions in
personnel costs and professional fees. Current Period personnel expenses have
been reduced as a part of cost-cutting measures implemented to increase overall
efficiencies. Prior period professional fees included legal and accounting
expenses associated with the redeployment of the Company's assets.
Non-cash Compensation Expense: Non-cash compensation charge was $0 for the three
months ended September 30, 1999 compared to approximately $16.1 million for the
Prior Period. During the three-months ended September 30, 1998, 3.9 million
shares of a former series of preferred stock (the "Preferred Stock"), were
released from escrow based upon the achievement of performance criteria which
included the deployment of telecommunications equipment in service areas with an
aggregate population of greater than 3.9 million people. Of the 3.9 million
shares of Preferred Stock released, 2.7 million shares were considered
compensatory for accounting purposes. These compensatory shares were owned by
management, their family trusts, minor children, and an employee. The non-cash
11
<PAGE>
expense reflected on the Company's financial statements was developed based on
the deemed value of the shares released from escrow, which in turn, was based on
the trading price of the Company's common stock on the date of release.
Other income (expense): Other income (expense) was approximately $23,600 for the
three months ended September 30, 1999 compared with approximately $(311,000) for
the Prior Period. Other income was mostly due to an overestimation of prior year
reserves for professional fees offset by interest expense incurred on capital
lease obligations. Other (expense) in the Prior Period was due to a $400,000
loss on note restructuring offset by approximately $89,000 in interest and
dividend income on notes receivable and cash on hand.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended June 30, 1999, our auditors raised the issue that we may not
be able to continue as a going concern as a result of a lack of profits. A
significant amount of capital has been expended towards building corporate
infrastructure and operating and capital expenditures in connection with certain
acquisitions and the establishment of our programs. These expenditures have been
incurred in advance of the realization of revenue that may occur as a result of
such programs. As a result, our liquidity and capital resources have diminished
significantly.
An inability to generate cash within the short term could adversely affect our
operations and plans for future growth. To address these issues, we have: (i)
introduced certain cost-cutting measures such as reductions in personnel,
certain circuit expenses and general corporate overhead; (ii) raised $1,000,000
in an October 1999 private placement; and (iii) borrowed $80,000 in September
1999 from an officer of the Company. In addition, two executive officers, Robert
E. Warner and William H. Zimmerling, resigned in October 1999, further reducing
expenses. In addition, we may implement further cost-cutting measures in the
short term.
In connection with a recent cost-benefit analysis we ascertained that our Denver
switch would continue to operate at a loss. As a result, we have deactivated
this switch. We are currently considering strategic alternatives, including but
not limited to: (i) the sale of the switch; or (ii) the redeployment of the
switch.
We anticipate that we will continue to operate at a cash loss in the short term.
We anticipate that recent cost-cutting measures and the funds recently raised
should be sufficient to sustain us in the short term. In the long term, however,
we need to increase our revenues and gross profit through: (i) the initiation of
services for new customers and/or increased capacity available to existing
customers and additional utilization thereof by these customers; and (ii) the
development and operation of direct telecommunications route(s). There are no
assurances, however, that these long term objectives will transpire.
In order to meet these long term objectives, we believe we have developed a
network that provides competitive telecommunications services. We will continue
to operate and market the network to build our customer base. Additionally, we
will pursue new opportunities in the domestic and international
telecommunications industry through: (i) reinvestment of future profits, if any;
and/or (ii) mergers and acquisitions.
12
<PAGE>
We are currently contemplating capital expenditures of approximately $200,000
during Fiscal 2000. The capital expenditures represent telecommunications
equipment that could potentially be located in foreign countries. We expect to
fund these purchases through debt and/or equity financing and cash flow from
operations, if any.
Net cash used in operating activities was approximately $348,000 for the quarter
ended September 30, 1999. We collected approximately $1.8 million from customers
while paying approximately $2.1 million to carriers, other vendors and
employees. Net cash used by operating activities was approximately $225,000 for
the Prior Period. We collected approximately $98,000 from customers and
approximately $132,000 in interest and dividends, while paying approximately
$454,000 to vendors and employees.
Net cash provided by investing activities was approximately $318,000 for the
quarter ended September 30, 1999. Cash flows provided by investing activities
included the collection of notes receivable and a sales tax refund on previously
acquired switching equipment. Cash was used for fixed asset acquisitions. Net
cash used by investing activities was approximately $2.4 million for the Prior
Period. This was the result of fixed asset acquisitions and the acquisition of a
subsidiary net of collections on notes receivable and proceeds from the return
of escrow in connection with the Company's investment in MCC.
Cash used in financing activities was approximately $70,000 for the quarter
ended September 30, 1999. This reflects repayments of capital lease obligations
less proceeds from the issuance of short-term debt. Proceeds provided by
financing activities of approximately $917,000 for the Prior Period were from
the collection of stock subscription receivables.
We are currently funding operations through existing cash and accounts
receivable collections. We do not know how long it will take before we will be
able to operate profitably and, therefore, sustain our business without outside
funding.
ACQUISITIONS
We expect to continue to explore acquisition opportunities. Such acquisitions
may have a significant impact on our need for capital. In the event of a need
for capital in connection with an acquisition, we would explore a range of
financing options, which could include public or private debt, or equity
financing. There can be no assurances that such financing will be available, or
if available, will be available on favorable terms. We also consider
acquisitions using our common stock.
INVESTMENT IN MCC
We own 2.0 million shares and warrants to purchase 4.0 million shares of MCC
common stock, a private telecommunications company. We have held this asset for
over one year. We originally valued the asset based on the value of our shares
and cash exchanged for the investment. Our current financial position does not
allow us to exercise the warrants without the liquidity of a public market for
13
<PAGE>
MCC stock. Therefore, in performing a review for current recoverability of our
investment, we have not attributed a value to the warrants.
MCC has been operating joint ventures in China. Metromedia International Group
("MMG") is the majority owner of MCC. Currently, legal restrictions in China
prohibit foreign ownership and operations in the telecommunications sector.
MCC's investments in joint ventures have been made through a structure known as
Sino-Sino-Foreign ("SSF") joint venture. This has been a widely used method for
foreign investment in the Chinese telecommunications industry. The SSF venturer,
in this case MCC, is a provider of telecommunications equipment, financing and
technical services to telecommunications operators and not a direct provider of
telephony service. The joint ventures invest in telecommunications system
construction and development networks being undertaken by the local partner,
China Unicom. The completed systems are operated by China Unicom. MCC has
received payments from China Unicom based on revenues and profits generated by
the systems in return for their providing financing, technical advice,
consulting and other services.
Based on MMG's Form 10-Q for its quarter ended June 30, 1999 (the "June 10-Q"),
two of the four joint ventures (the one Ningbo Ya Mei Telecommunications Co.,
Ltd. and the other Ningbo Ya Lian Telecommunications, Co., Ltd.) were notified
by China Unicom that the supervisory department of the Chinese government had
requested that China Unicom terminate the projects. The notification requested
that negotiations begin immediately regarding the amounts to be paid to the
joint ventures, including return of investment made and appropriate compensation
and other matters related to winding up the Ningbo joint ventures' activities as
a result of this notice. Negotiations regarding the termination have begun. The
content of the negotiations includes determining the investment principal of the
joint ventures, appropriate compensation and other matters related to
termination of contracts. MCC has not announced, and may not know, the amount of
compensation the joint ventures will receive. While MCC has not announced that
it has received notification regarding the termination of its other two joint
ventures (the one Sichuan Tai Li Feng Telecommunications Co., Ltd. and the other
Chongqing Tai Le Feng Telecommunications Co., Ltd.), the majority owner, MMG,
expects that these will also be the subject of project termination negotiations.
MMG has disclosed in its June 10-Q that depending on the amount of compensation
it receives, it will record a non-cash charge equal to the difference between
the sum of the carrying values of its investment and advances made to joint
ventures plus goodwill less the cash compensation it receives from the joint
ventures which China Unicom has paid.
MMG has represented to us that it owns approximately 33 million MCC shares, or
56% (33 million/59 million shares). As such, our 2 million shares represents
approximately a 3.4% interest (2 million/59 million shares).
We are currently carrying our interest in MCC at $2.4 million, an amount
relative to MMG's carrying amount, excluding MMG's goodwill attributable to the
investment in MCC. During Fiscal 1999, we wrote down our investment in MCC $21.3
million. Given the uncertainty regarding the outcome of the negotiations of the
project terminations, it is reasonably possible that our investment in MCC could
be reduced further in the near term.
14
<PAGE>
Additionally, 2 million shares of Company common stock will be released from
escrow to the seller of the MCC shares and warrants in connection with the
satisfaction of a condition in a settlement agreement pursuant to which those
shares were escrowed. The additional shares are to be released because the
Company's stock closed below $5.00 per share during 40 trading days during the
120 consecutive trading days subsequent to August 31, 1999.
THE YEAR 2000 READINESS DISCLOSURE
We are continuing to evaluate the year 2000 readiness of our computer systems,
software applications and telecommunications equipment. We are sending year 2000
compliance inquiries to certain third parties (i.e. vendors, customers, outside
contractors) with whom we have a relationship. These inquiries include, among
other things, requests to provide documentation regarding the third party's year
2000 programs, and questions regarding how the third party specifically examined
the year 2000 effect on their computers and what remedial actions will be taken
with regard to these problems.
Our key processing systems have recently been implemented. Most of the vendors
of such systems have represented to us that their systems are compliant with the
year 2000 issues without any modification. We will, however, continue to require
confirmation of year 2000 compliance in our future requests for proposals from
equipment and software vendors. The failure of our computer systems and software
applications to accommodate year 2000 issues, could have a material adverse
effect on our business, financial condition and result of operations.
Further, if the networks and systems of those on whose services we depend and
with whom our networks and systems must interface are not year 2000 functional,
it could have a material adverse effect on the operation of our networks and, as
a result, have a material adverse effect on us. Most major domestic carriers
have announced that they expect all of their network and support systems to be
year 2000 functional by the middle of 1999. However, other domestic and
international carriers may not be year 2000 functional. We intend to continue to
monitor the performance of our accounting, information and processing systems
and software applications and those of our third-party constituents to identify
and resolve any year 2000 issues.
Currently, through our discovery process, we have identified and remedied
$84,000 worth of expenditures associated with updating our systems to be
compliant with the year 2000. However, we expect to find additional expenses
pending the finalization of our year 2000 investigation. We have not made an
estimate of what those additional expenditures might be. Although, we do expect
they will be less than the initial $84,000. We believe there is significant risk
in that carriers in other countries with whom we may do business may not be year
2000 compliant, possibly having an adverse impact upon our ability to transmit
or terminate telecommunications traffic and therefore, a material adverse effect
on business financial condition and results.
We believe that the most reasonably likely worst case scenario resulting from
the century change could be the inability to route telecommunications traffic at
market rates to desired locations for an indeterminable period of time, which
could have a material adverse effect on our results of operations and liquidity.
In order to handle our perceived worst case scenario, we believe we would have
15
<PAGE>
to test alternative routing options and possibly re-route significant amounts of
telecommunications traffic. Re-routing to certain destinations may not be
readily available. We do not currently have a completed contingency plan.
However, we anticipate having our year 2000 compliance procedures completed
prior to the end of calendar 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is currently not exposed to material future earnings or cash flow
exposures from changes in interest rates on long-term debt obligations since our
long-term debt obligations are at fixed rates. Our primary debt is in the form
of long term equipment leases. We may be exposed to interest rate risk, as
additional financing may be required due to the operating losses and capital
expenditures associated with establishing and expanding our facilities. The
interest rate that we will be able to obtain on additional financing will depend
on market conditions at that time, and may differ from the rates we have secured
on our current debt. We do not currently anticipate entering into interest rate
swap and/or similar instruments.
The Company's carrying values of cash and cash equivalents, accounts and notes
receivable, accounts payable, and marketable securities-available for sale are a
reasonable approximation of their fair value.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Worldstar Suit
On or about July 30, 1999, Worldstar Communications Corporation ("Worldstar")
commenced an action in the Supreme Court of New York entitled Worldstar
Communications Corporation v. Lindemann Capital L.P., Activated Communications,
L.P., Marc Graubart, Michael Mazzone, VDC Corporation and ING Baring Furman
Selz, LLC (Index No. 603621/99) (the "Action"). Worldstar asserts in the Action
that, under the terms of a purported joint venture arrangement with Lindemann
Capital LP ("Lindemann") and Activated Communications, LP ("Activated"),
Worldstar acquired certain rights to share in the profits and ownership of a
telecommunications project in Nicaragua (the "Nicaraguan Project") owned by
Masatepe Comunicaciones S.A., a Nicaraguan company ("Masacom"). Masatepe
Communications U.S.A., L.L.C. ("Masatepe"), which owns a 49% equity interest in
Masacom, was acquired by the Company and is now a wholly-owned subsidiary of the
Company. The relief sought by Worldstar includes: (1) monetary damages arising
out of purported interference with Worldstar's profit participation and
ownership in the Nicaraguan Project; and (2) a declaratory judgment that among
other things: (a) Worldstar is entitled to share in the profits and ownership of
the Nicaraguan Project; and (b) the transaction pursuant to which the Company
acquired an interest in the Nicaraguan Project was void.
16
<PAGE>
In the event that the plaintiff prevails in the Action, the value of the
Company's interest in Masatepe, Masacom and/or the Nicaraguan Project could be
diluted. Additionally, the Company could be held liable for certain profits
associated with the operation of Masatepe and/or the Nicaraguan Project and for
related damages. However, pursuant to the Purchase Agreement through which the
Company acquired Masatepe (the "Purchase Agreement"), Activated has an
obligation to indemnify and hold the Company and Masatepe harmless from any
loss, liability, claim, damage and expense arising out or resulting from the
Action. In addition, under certain circumstances, Activated has an obligation
under the Purchase Agreement to repurchase from the Company all or part of the
Company's equity interest in Masatepe. Furthermore, defendants are vigorously
defending the Action and certain of the defendants including the Company, have
filed a Motion to Dismiss. In view of the foregoing, the Company does not
believe that the claims asserted in the Action will have a material adverse
effect on the Company's assets or operations.
StarCom Suit
On or about July 12, 1999, StarCom Telecom, Inc. ("StarCom") commenced an action
in the District Court of Harris County, Texas, in the 127th Judicial District
entitled StarCom Telecom, Inc. vs. VDC Communications, Inc. (Civil Action No.
1999-35578) (the "StarCom Action"). StarCom asserts in the StarCom Action that
the Company induced it to enter into an agreement with the Company through
various purported misrepresentations. StarCom alleges that, due to these
purported misrepresentations and purported breaches of contract, it has been
unable to provide services to its customers. The relief sought by StarCom
includes monetary damages arising out of the Company's purported
misrepresentations and purported breaches of contract. In the event that StarCom
prevails in the StarCom Action, the Company could be liable for monetary damages
in an amount that would have a material adverse effect on the Company's assets
and operations.
The Company does not believe that the claims asserted in the StarCom Action are
either meritorious or will have a material adverse effect on the Company's
assets or operations. To date, despite the fact that the StarCom Action was
filed approximately four months ago, opposing counsel in the StarCom Action has
refused to have the Company served with process. Moreover, opposing counsel
filed a Motion to Withdraw as Attorney in Charge of the StarCom Action. In the
event that the Company is served in the StarCom Action, it intends to vigorously
defend itself.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
In October 1999, the Company sold 1,333,334 shares of Company common stock to
accredited investors in a non-public offering exempt from registration pursuant
to Section 4(2) and Rule 506 of Regulation D of the Securities Act of 1933, as
amended, as follows:
17
<PAGE>
<TABLE>
<CAPTION>
Shareholder Number of Shares Consideration ($)
----------- ---------------- -----------------
<S> <C> <C>
Adase Partners, L.P. 140,000 105,000.00
The Lucien I. Levy Revocable Living Trust 10,000 7,500.00
Frederick W. Moran (1) 666,667 500,000.25
Merl Trust 28,000 21,000.00
O.T. Finance, SA 22,000 16,500.00
Alan B. Snyder 266,667 200,000.25
Eric M. Zachs 200,000 150,000.00
------- ----------
Total 1,333,334 1,000,000.50
</TABLE>
(1) An adult son of Frederick A. Moran.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Item not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Item not applicable.
ITEM 5. OTHER INFORMATION
Item not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
----------- ----------- ----------------
<S> <C> <C>
10.1 1998 Stock Incentive Plan, as Amended (1)
10.2 Settlement, Release and Separation Agreement by and among VDC (1)
Communications, Inc. and William H. Zimmerling, dated October
1, 1999
10.3 Settlement, Release and Separation Agreement by and among VDC (1)
Communications, Inc. and Robert E. Warner, dated October 18,
1999
18
<PAGE>
10.4 Form of Non-Qualified Stock Option Agreement (1)
10.5 Incentive Stock Option Agreement between Frederick A. Moran and (1)
VDC Communications, Inc., dated October 1, 1999
10.6 Form of Incentive Stock Option Agreement (1)
10.7 Form of Incentive Stock Option Agreement (1)
10.8 Form of Securities Purchase Agreement for October 1999 (1)
10.9 Form of Registration Rights Agreement for October 1999 (1)
27.1 Financial Data Schedule (2)
</TABLE>
(1) Filed as an Exhibit to Registrant's Amendment No. 1 to Registration
Statement on Form S-1, filed with the SEC on November 8, 1999, and
incorporated by reference herein.
(2) Filed herewith.
(b) Reports on Form 8-K
Item not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
VDC COMMUNICATIONS, INC.
By:/s/ Frederick A. Moran Dated: November 15, 1999
-------------------------------------------
Frederick A. Moran
Chairman, Chief Executive Officer,
Chief Financial Officer and Director
19
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit Number Page Number in
(Referenced to Rule 0-3(b)
Item 601 of Sequential
Reg. S-K Numbering System
Where Exhibit Can
Be Found
<S> <C>
27.1 Financial Data Schedule
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains Summary Financial information extracted from the
financial statements for the three months ended September 30, 1999 and is
qualified in its entirety by reference to such statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> SEP-30-1999
<CASH> 528
<SECURITIES> 69
<RECEIVABLES> 1929
<ALLOWANCES> 107
<INVENTORY> 0
<CURRENT-ASSETS> 2419
<PP&E> 5621
<DEPRECIATION> 868
<TOTAL-ASSETS> 9951
<CURRENT-LIABILITIES> 3444
<BONDS> 1373
0
0
<COMMON> 2
<OTHER-SE> 5569
<TOTAL-LIABILITY-AND-EQUITY> 9951
<SALES> 0
<TOTAL-REVENUES> 2312
<CGS> 0
<TOTAL-COSTS> 2599
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 51
<INCOME-PRETAX> (975)
<INCOME-TAX> 0
<INCOME-CONTINUING> (975)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (975)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
