UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From To
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VDC COMMUNICATIONS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 001-14281 061524454
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(Jurisdiction of Incorporation) (Commission File No.) (IRS Employer
Identification No.)
75 Holly Hill Lane
Greenwich, Connecticut 06830
(Address of principal executive office)
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Registrant's telephone number, including area code: (203) 869-5100
Not Applicable
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(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
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(2) Yes X No
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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 8, 2000, the number of shares of registrant's common stock, par
value $.0001 per share, outstanding was 24,398,029.
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VDC COMMUNICATIONS, INC.
INDEX
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PART I FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Consolidated balance sheets as of June 30, 2000
And September 30, 2000 3
Consolidated statements of operations and
comprehensive loss for the three-month
periods ended September 30, 2000 and 1999 4
Consolidated statements of cash flows for the three-month
periods ended September 30, 2000 and 1999 5
Notes to consolidated financial statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
PART II OTHER INFORMATION
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Item 1. Legal Proceedings 18-19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19-21
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Part 1 - Financial Information
Item 1. Financial Statements
VDC COMMUNICATIONS, INC. AND SUBSIDARIES
CONSOLIDATED BALANCE SHEETS
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September 30, June 30,
2000 2000
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(Unaudited)
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Assets
Current:
Cash and cash equivalents $ 123,207 $ 772,125
Marketable securities - 51,213
Accounts receivable, net of allowance for doubtful accounts
of $504,088 280,957 935,217
Notes receivable 172,500 -
Other current assets 218,033 -
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Total current assets 794,697 1,758,555
Property and equipment, less accumulated depreciation 3,574,648 4,286,707
Intangibles, net 3,320,747 3,643,193
Investment in MCC 140,000 140,000
Other assets 320,240 506,058
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Total assets $ 8,150,332 $ 10,334,513
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Liabilities and Stockholders' Equity
Current:
Accounts payable and accrued expenses $ 3,308,839 $ 3,748,037
Unearned revenue 412,642 463,585
Current portion of long term debt 86,652 71,490
Current portion of capitalized lease obligations 183,320 178,341
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Total current liabilities 3,991,453 4,461,453
Long-term portion of long term debt 194,876 224,077
Long-term portion of capitalized lease obligations 473,742 521,482
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Total liabilities 4,660,071 5,207,012
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 -
25,825,347 and 25,200,347 at September 30 and June 30, 2000, respectively 2,583 2,520
Additional paid-in capital 72,181,243 71,556,305
Accumulated deficit (68,463,391) (65,904,573)
Treasury stock - at cost, 1,958,543 and 1,875,000 shares
at September 30 and June 30, 2000, respectively (230,174) (164,175)
Accumulated other comprehensive income (loss) - (362,576)
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Total stockholders' equity 3,490,261 5,127,501
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Total liabilities and stockholders' equity $ 8,150,332 $ 10,334,513
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</TABLE>
See accompanying notes to consolidated financial statements.
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VDC COMMUNICATIONS, INC. AND SUBSIDARIES CONSOLIDATED STATEMENTS
OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
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<CAPTION>
Three Months ended September 30,
2000 1999
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Revenue $ 2,022,178 $ 2,312,197
Operating Expenses
Costs of services 2,372,602 2,598,857
Selling, general and administrative expenses 1,279,270 712,436
Goodwill amortization 274,293 -
Asset impairment charges 63,094 -
Loss on sale of fixed assets 239,117 -
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Total operating expenses 4,228,376 3,311,293
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Operating loss (2,206,198) (999,096)
Other income (expense):
Realized loss on marketable securities (347,789) -
Other income (expense) (4,831) 23,599
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Total other income (expense) (352,620) 23,599
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Net loss (2,558,818) (975,497)
Other comprehensive income (loss), net of tax:
Unrealized (loss) on marketable securities - (21,087)
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Comprehensive loss $ (2,558,818) $(996,584)
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Net loss per common share - basic and diluted $ (0.10) $ (0.05)
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Weighted average number of shares outstanding 25,825,347 18,173,582
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</TABLE>
See accompanying notes to consolidated financial statements.
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VDC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Three Months ended
September 30,
2000 1999
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Cash flows from operating activities:
Net loss $(2,558,818) $ (975,497)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 613,081 272,122
Loss on disposal of fixed assets 239,117 -
Impairment of long-lived assets 63,094 -
Realized loss on marketable securities 347,789 -
Provision for doubtful accounts - 100,244
Changes in operating assets and liabilities:
Restricted cash - 165,905
Accounts receivable 654,260 (625,307)
Other assets (21,519) (51,145)
Accounts payable and accrued expenses (439,199) 765,763
Unearned revenue (50,943) -
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Net cash used by operating activities (1,153,138) (347,915)
Cash flows from investing activities:
Proceeds from sale of equipment 68,000 -
Proceeds from repayment of notes receivable - 205,000
Refund of fixed asset acquisition - 210,018
Fixed asset acquisition (131,980) (97,498)
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Net cash flows provided by (used) investing activities (63,980) 317,520
Cash flows from financing activities:
Proceeds from issuance of short-term debt - 80,000
Repayments on long term debt (14,039) -
Proceeds from issuance of common stock 625,000 -
Repayments on capital lease obligations (42,761) (149,656)
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Net cash flows provided by (used) in financing activities 568,200 (69,656)
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Net (decrease) in cash and cash equivalents (648,918) (100,051)
Cash and cash equivalents, beginning of period 772,125 317,799
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Cash and cash equivalents, end of period $ 123,207 $ 217,748
</TABLE>
See accompanying notes to consolidated financial statements.
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VDC Communications, Inc. and Subsidiaries
Notes to consolidated financial statements
1. General
These consolidated financial statements for the three month periods ended
September 30, 2000 and 1999 and the related footnote information are unaudited
and have been prepared on a basis substantially consistent with the audited
consolidated financial statements of VDC Communications, Inc. and its
subsidiaries (collectively, "VDC" or the "Company") as of and for the year ended
June 30, 2000 included in the Company's Form 10-K as filed with the Securities
and Exchange Commission. These financial statements should be read in
conjunction with the audited financial statements and the related notes to
consolidated financial statements of the Company as of and for the year ended
June 30, 2000 included in the Company's Form 10-K. In the opinion of management,
the accompanying unaudited consolidated financial statements contain all
adjustments (consisting of normal recurring adjustments) which management
considers necessary to present fairly the consolidated financial position of the
Company at September 30, 2000, the results of its operations for the three month
periods ended September 30, 2000 and 1999 and its cash flows for the
three-months ended September 30, 2000 and 1999. The results of operations for
the three month periods ended September 30, 2000 may not be indicative of the
results expected for any succeeding quarter or for the entire year ending June
30, 2001.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements. Actual results could
differ from those estimates.
Cost of services includes depreciation and amortization attributable to
operating equipment of $268,502 and $258,222 during the three-months ended
September 30, 2000, and 1999, respectively. Selling, general and administrative
expenses include depreciation and amortization of $70,286 and $13,900 and bad
debt expense of $0 and $100,244 during the three months ended September 30,
2000, and 1999, respectively.
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. Business Segment Information
At September 30, 2000, VDC had two business segments, retail long distance
telecommunications ("Retail") and wholesale long distance telecommunications
("Wholesale"). Retail provides domestic and international long distance services
to residential and small business customers located within the United States.
Wholesale provides domestic and international long distance services and rental
of VDC's circuit switching facilities to U.S. and foreign based
telecommunications companies. Other segments include the management of domestic
tower sites that provide transmission and receiver locations for wireless
communications companies and certain corporate assets and non-allocable
corporate expenses.
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The Company evaluates performance based on profit or loss from operations. There
were no intercompany sales among Wholesale and Retail and both segments are
currently managed separately.
Operating results and other financial data presented for the wholesale and
retail segments of the Company are as follows:
<TABLE>
<CAPTION>
Wholesale Retail
Telecommunications Telecommunications Corporate
Services Services and Other Totals
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<S> <C> <C> <C> <C>
Three Months Ended September 30, 2000
Segment Revenue 943,239 1,050,344 28,595 2,022,178
Segment Loss (622,496) (1,606,811) (329,511) (2,558,818)
Segment Assets 3,484,012 4,170,501 495,819 8,150,332
Goodwill - net of accumulated amortization - 3,017,224 - 3,017,224
Investment in MCC - - 140,000 140,000
Three Months Ended September 30, 1999
Segment Revenue 2,279,643 - 32,554 2,312,197
Segment Loss (819,024) - (156,473) (975,497)
Segment Assets 6,852,745 - 3,098,174 9,950,919
Investment in MCC - - 2,400,000 2,400,000
</TABLE>
3. Sale and/or abandonment of equipment
In August 2000, the Company recognized a loss of $126,426 on the sale of a long
distance telecommunications switch located in Colorado. The consideration
received consisted of a note receivable of $172,500 and cash of $52,500. The
note bears interest at 10% per annum and is due in full on November 25, 2000.
In September 2000, the Company recognized a loss of $112,691 on the sale of
other equipment located in Colorado. The consideration received consisted of
cash of $15,500.
During the quarter ended September 30, 2000, the Company recognized an
impairment loss of $63,094 in connection with the abandonment of the Colorado
telecommunications switch site location.
4. Capital Transactions
In July 2000, VDC sold 625,000 shares of common stock to unrelated investors at
$1.00 per share, the public market price at that time.
5. Subsequent Event
Convertible Debentures
VDC's board of directors has approved a private placement of an aggregate of
$650,000 of 8% convertible senior debentures, which we expect would, to a
limited extent, fund operating losses. The proposed investors have not yet
provided a definitive commitment for the transaction (nor can there be any
assurance that they will complete the transaction). The debentures would mature
three (3) years from the date of issuance, accrue interest at the rate of 8% per
annum payable upon maturity and be prepayable, at VDC's discretion, at any time
upon thirty (30) days written notice. The principal amount of the debentures and
all accrued interest would be convertible in the investors' discretion. The
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debentures would be secured by a first priority perfected security interest on
substantially all of the assets of VDC. The proposed investors include Frederick
A. Moran, VDC's Chairman and Chief Executive Officer, and affiliates of Mr.
Moran and family trusts associated with Mr. Moran, and one non-affiliated
investor. Any debentures issued to Mr. Moran and affiliates of Mr. Moran and
family trusts associated with Mr. Moran would be convertible at $0.1875 per
share, so long as such amount is not less than the closing market price of VDC's
common stock on the date the transaction closes. Any debentures issued to the
non-affiliated investor would be convertible at $0.145 per share. VDC's use of
any proceeds from the debentures would be restricted to, among other things,
advances to its subsidiaries to pay operational expenses other than accounts
payable outstanding as of the date of issuance. A breach of this covenant would
constitute an event of default under the debentures and would, in the investors'
discretion, result in the immediate acceleration of VDC's obligation to repay
the debentures. VDC would agree to grant piggyback registration rights to the
purchasers of the debentures to include the shares issuable upon conversion of
the debentures in a registration statement filed by VDC. The investors in this
transaction have not agreed to complete the financing at this date and are
awaiting certain conditions prior to making their final investment
determination. Even if these certain conditions are met, the investors have
reserved the right not to complete the transaction in their sole discretion.
Option Repricing
In light of the decline in market price of the Company's common stock as of
October 2000, 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 2000, 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 $0.1875 per share were
reissued with an exercise price of $0.1875 per share (or $0.20625 in the case of
the CEO and his wife), 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 2,529,000 shares of Company common stock
were affected by the repricing program. Options to purchase 1,345,000 shares of
common stock granted to executive officers and members of the Board of Directors
were affected by the repricing program.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 "Accounting for Certain Transactions involving Stock
Compensation an interpretation of APB No. 25". Among other issues, this
interpretation clarifies the accounting consequence of various modifications to
the terms of a previously fixed stock option or award. If the exercise price of
an option award is reduced, the award shall be accounted for as variable from
the date of the modification to the date the award is exercised, forfeited or
expires unexercised. The interpretation requires a charge to operations for the
difference between the quoted market value of VDC's common stock at the end of
each reporting period and the option price of unexercised, outstanding stock
options. The interpretation is effective July 1, 2000 but covers events that
occur after December 15, 1998. Thus, compensation expense may be recorded in the
future as a result of this repricing.
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6. Commitments and Contingencies
Litigation
In July 1999, a former customer filed suit against VDC asserting that VDC
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
that the former customer prevails, VDC could be liable for monetary damages in
an amount that would have a material adverse effect on VDC's assets and
operations.
VDC believes that the claims asserted are without merit and VDC 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 VDC's consolidated financial
position, results of operations or liquidity.
In addition, VDC is a defendant in another lawsuit. Management presently
believes that the disposition of this lawsuit will not have a material effect on
VDC's assets or operations.
7. Supplemental Disclosure of Cash Flow Information
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with an original maturity of three months or less to be cash
equivalents.
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Three months ended September 30
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2000 1999
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Cash paid during the quarter for:
Interest $14,911 $38,558
Schedule of non-cash financing and investing activities:
Equipment exchanged for note receivable $172,500 $-
</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," "could," "would," 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 VDC'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)
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VDC's limited capital and possible bankruptcy; (ii) VDC's ability to operate
profitably; (iii) VDC's ability to secure sufficient financing in order to fund
its operations; (iv) competitive and other market conditions, including pricing
pressure, that may adversely affect the scope of VDC's operations; (v) VDC's
dependence on certain key personnel; (vi) VDC's concentration of revenues from a
couple of larger customers; (vii) network failure or complications, including
service delays; (viii) VDC's ability to successfully integrate potential mergers
and/or acquisitions into VDC, including the retention of certain key personnel;
(ix) dependence upon a limited number of equipment vendors; (x) network capacity
constraints; (xi) uncertainty as to whether the Internet will continue to grow
as a medium for voice and facsimile communications; and, (xii) inherent
regulatory, licensing and political risks associated with operations in foreign
countries. Additional factors are in VDC's other public reports and filings with
the Securities and Exchange Commission ("SEC") including a Registration
Statement on Form S-3 (No. 333-46694) and a VDC prospectus dated October 27,
2000. 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 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 "VDC" "we" or "us") provides
long distance telecommunications services, mainly voice, but also facsimile, to
its customers. VDC has two business segments, retail long distance ("Retail")
and wholesale long distance ("Wholesale"). Retail focuses on reselling domestic
and international long distance services to residential and small business
customers in the United States. Wholesale focuses on reselling domestic and
international long distance services, and rental of our circuit switching
facilities, to U.S. and foreign based telecommunications companies. The global
wholesale network consists of owned telecommunications switching and ancillary
equipment, leased telecommunications lines and interconnect agreements with
carriers and customers. Our telecommunications equipment, currently located in
New York and Los Angeles comprises our operating facilities. We also generate
nominal revenues from the management of domestic tower sites that provide
transmission and receiver locations for wireless communications companies.
During the quarter ended September 30, 2000, we re-directed most of our
resources towards Retail. We have loaned material funds to our 100% owned
subsidiary that operates our retail long distance services. Through this
subsidiary, we have increased our retail subscribers to over 11,000, with over
8,000 currently connected to our network and over 3,000 having ordered the
service and awaiting connection to the network. At the same time, we have begun
to de-emphasize Wholesale and have limited the resources committed to Wholesale.
We expect that revenues derived from Wholesale may continue to decrease and may
be a smaller percentage of total revenues than experienced prior to October 1,
2000. We have already begun to experience this transition.
Also during the quarter ended September 30, 2000, we raised $625,000 through the
sale of unregistered common stock; and, rebranded our product segments through
the initiation of a new website. Our web address is www.vdccorp.com. In
addition, our VoIP Clearinghouse went operational during the quarter ended
September 30, 2000. We have not passed any commercial telecommunications
minutes, voice or facsimile calls, over our VoIP network to date. As a result of
our liquidity constraints and our emphasis on Retail, we have been unable to
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commit resources, beyond our website, to procuring customers for this network.
We are considering our alternatives in regards to the further development and
marketing of the VoIP network. Given our limited cash position, we have
postponed activity in regards to the VoIP program and are considering the
cancellation of the program.
Segments
1. Retail
We now have over 11,000 retail customers in the United States. The majority of
the telecommunications traffic, voice phone calls, generated by our customers is
originated and terminated domestically.
We acquire residential customers through direct marketing via the telephone. We
currently have two products that we offer to residential phone users. They
provide the customer a competitive termination rate for long distance calls
within the United States. Both of these services are paid for in advance by the
customer, which reduces our exposure to bad debt and enhances liquidity. We
currently do not utilize our own facilities to carry our retail customers'
traffic, but may in the future. We refer to these services as VDC PeopleTalkSM
on our website.
We believe that there is significant potential to achieve higher levels of
market penetration in the United States residential market. As a result, we have
committed significant resources towards the development of this subsidiary.
The Retail segment earns revenue from residential long distance services which
are paid for in advance by the customer.
The Retail segment's costs of services consist largely of telemarketing
salaries, carrier costs and customer rebates.
The Retail segment's costs also include selling, general, and administrative
expenses ("SG&A"). SG&A consists primarily of personnel costs, professional
fees, bank and credit card processing charges, office rental, advertising and
postage.
2. Wholesale
Wholesale focuses on providing services to other telecommunications companies.
The majority of the telecommunications traffic, voice or facsimile calls,
generated by these customers is terminated internationally.
The international telecommunications market consists of all telecommunications
traffic that originates in one country and terminates in another. The
implementation of a high quality international network is an important element
in enabling a carrier to compete effectively in the international long distance
telecommunications market. We have international gateway switches located in New
York and Los Angeles and a VoIP gateway in New York. The network is capable of
interconnecting and routing a voice or facsimile call to most parts of the
world. In addition, we provide use of our switch capacity and co-location of our
switch site to other carriers.
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We identify our wholesale services as those using traditional circuit switched
technology and those using VoIP technology. Traditional wholesale services are
referred to as VDC NetworkTalkSM on our website. VoIP wholesale services are
referred to as VDC BusinessTalkSM on our website. We have postponed any further
activity in regard to the VoIP network at this time.
Wholesale earns revenue from two sources. Wholesale provides 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 and are
generally due within zero to thirty days. Our second source of revenues is
derived from the rental of space and telecommunications equipment and circuits
at our telecommunications facilities to other telephone companies ("Partition").
This revenue is generated and billed on a month-to-month basis. We expect
Wholesale revenue to decrease during the quarter ending December 31, 2000 and
possibly thereafter as a result of, in part, our de-emphasis of this business
segment, which includes a reduction in the resources committed to this business
segment. Partition revenues, in particular, are expected to decrease
significantly during the quarter ending December 31, 2000, as a result of the
loss of our largest Partition customer.
Revenue derived through the per-minute transmission of voice and facsimile
telecommunications traffic 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. Further, these contracts
generally do not provide for a fixed volume of telecommunications traffic to be
sent to us and, as such, the telecommunications traffic that a customer sends to
us during any given month can vary considerably. Occasionally, however, these
contracts require payments to us if a customer does not send a fixed minimum
amount of telecommunications traffic to us.
Costs of services is primarily comprised of costs incurred from other domestic
and foreign telecommunications carriers to originate, transport and terminate
calls that we send to them. The majority of our cost of service is variable,
based on the number of minutes of use, with transmission and termination costs
being our most significant expense. In addition, our costs of services include
circuit expenses, the allocable personnel and overhead associated with
operations, and depreciation of telecommunications equipment. We depreciate long
distance telecommunications equipment over a period of five years.
Wholesale costs also include SG&A. SG&A consists primarily of personnel costs,
utilities and rent. We expect SG&A Wholesale costs to decrease mainly as a
result of a reduction in personnel and rent. We have closed our Colorado office.
Corporate and Other
Other segments include the management of domestic tower sites that provide
transmission and receiver locations for wireless communications companies and
certain non-allocable corporate expenses.
Nominal revenue is generated from the management of domestic tower sites that
provide transmission and receiver locations for wireless communications
companies. This revenue is also generated and billed on a month-to-month basis.
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The Consolidated Financial Statements of VDC have been prepared on the basis
that it is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities, except as otherwise disclosed, in the normal course
of business. However, because of VDC's recurring losses from operations and
significant arrearages on trade payables, such realization of assets and
satisfaction of liabilities is subject to significant uncertainties. The
Consolidated Financial Statements do not include any adjustments that might
result from the outcome of these uncertainties. Furthermore, VDC's ability to
continue as a going concern is highly dependent in the near term on its ability
to raise capital, obtain additional retail customers, achieve profitable
operations and to generate sufficient cash flow from operations and financing
sources to meet obligations.
Results of Operations
For the Three Months Ended September 30, 2000 Compared to the Three Months Ended
September 30, 1999
Revenues: Total revenues in the three months ended September 30, 2000 ("Current
Quarter") decreased to approximately $2.0 million from approximately $2.3
million for the three months ended September 30, 1999 ("Prior Period"). The
Wholesale segment generated revenue of approximately $607,000 during the Current
Quarter by the transmission of approximately 2.4 million minutes of
telecommunications traffic domestically and internationally ("Long Distance
Revenue"). The Wholesale segment generated revenue of approximately $2.1 million
during the Prior Period by the transmission of approximately 10.3 million
minutes of telecommunications traffic domestically and internationally. The
decrease is attributable, in part, to the limited resources committed to this
business segment. During the Current Quarter, the Wholesale segment also
generated revenue of approximately $289,000 from Partition and approximately
$33,000 from contractually required payments from a customer due to its failure
to provide a certain minimum level of telecommunications traffic. Wholesale
generated revenue of approximately $200,000 from Partition during the Prior
Period. We expect Partition revenues to decrease in the quarter ending December
31, 2000 as a result of the recent loss of our largest Partition customer.
The Retail segment generated revenue of approximately $1.1 million by providing
retail long distance customer services during the Current Quarter. The Retail
segment was acquired in June 2000.
Other segments generated approximately $29,000 from site tower management during
the Current Quarter as compared to approximately $33,000 during the Prior
Period.
Costs of Services: Costs of services in the Current Quarter decreased to
approximately $2.4 million from approximately $2.6 million in the Prior Period.
Wholesale costs of services were approximately $1.1 million during the Current
Quarter as compared to approximately $2.6 million during the Prior Period. The
decrease was due to decreased domestic and international minutes of
telecommunications traffic, which we purchased from other long distance carriers
and decreased operational expenses including salaries, depreciation, and circuit
costs.
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<PAGE>
Retail's costs of services were approximately $1.3 million during the Current
Quarter. The largest components of this category included telemarketing
salaries, carrier costs and customer rebates.
SG&A: SG&A expenses increased to approximately $1.3 million in the Current
Quarter from approximately $712,000 in the Prior Period. Wholesale's SG&A
expenses were approximately $340,000 during the Current Quarter as compared to
approximately $712,000 in the Prior Period. The decrease in the Current Quarter
was due to a reduction in both personnel and the allocation of corporate SG&A
costs to Wholesale.
Retail's SG&A expenses were approximately $992,000 during the Current Quarter.
The largest components of SG&A included salaries, bank and credit card
processing fees, advertising, printing, postage and the allocation of corporate
SG&A.
Goodwill amortization: The June 2000 acquisition of our current retail
subsidiary generated goodwill of approximately $3.3 million which is being
amortized over 36 months, or approximately $274,000 per quarter.
Loss on sale of fixed assets: Loss on sale of fixed assets in the Current
Quarter was approximately $239,000. The Company recognized a loss of
approximately $126,000 on the sale of a long distance telecommunications switch
located in Colorado. Additionally, VDC recognized a loss of approximately
$113,000 on the sale of other equipment located in Colorado. There was no gain
or loss on the sale of fixed assets for the three months ended September 30,
1999.
Asset impairment charges: During the three-months ended September 30, 2000, VDC
recognized an impairment loss of approximately $63,000 in connection with the
abandonment of the Colorado telecommunications switch site location. There were
no asset impairment charges for the three months ended September 30, 1999.
Other income (expense): Other income (expense) was approximately $(353,000) for
the three months ended September 30, 2000 compared with approximately $24,000
for the Prior Period. Other income (expense) in the Current Quarter was mostly
due to the write down of VDC's investment in Portacom Wireless, Inc.
("Portacom"). Management felt that the significant decline in value of the
Portacom investment was other than temporary. Other income in the Prior Period
was mostly due to an overestimation of prior years reserves for professional
fees offset by interest expense incurred in connection with capital lease
obligations.
Liquidity and Capital Resources
Net cash used by operating activities was approximately $1.2 million in the
three months ended September 30, 2000, or Current Period. We collected
approximately $2.7 million from customers while paying approximately $3.9
million to carriers, other vendors and employees. Net cash used by operating
activities was approximately $348,000 in the three months ended September 30,
1999. In that period, we collected approximately $1.8 million from customers
while paying approximately $2.1 million to carriers, other vendors and
employees.
Net cash used by investing activities was approximately $64,000 in the three
months ended September 30, 2000. Cash was used for the acquisition of fixed
assets and provided by proceeds from the sale of equipment. Net cash provided by
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<PAGE>
investing activities was approximately $318,000 in the three months 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 less fixed asset acquisitions.
Net cash provided by financing activities was approximately $568,000 in the
three months ended September 30, 2000. This reflects proceeds from the issuance
of common stock less repayments on capital lease obligations and long term debt.
Proceeds used by financing activities of approximately $70,000 during the three
months ended September 30, 1999 reflect repayments of capital lease obligations
less proceeds from the issuance of short term debt.
As part of the June 30, 2000 audit, 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,
working capital deficiency and cash needs. A significant amount of capital has
been expended towards operations and in connection with certain acquisitions and
the establishment of our programs. These expenditures have been incurred in
advance of the realization of gross profit that may occur as a result of such
programs.
The American Stock Exchange ("AMEX") has notified us that we fall below certain
of AMEX's continued listing qualifications. As such, there can be no assurances
of continued listing.
Our liquidity requirements arise primarily from cash used in operating
activities. To date, we have financed ourselves mostly through equity financing.
As of November 9, 2000, we had approximately $100,000 in cash, on a consolidated
basis. As of the date of this filing, our cash is not sufficient to pay one
month of operating expenses. These funds are not sufficient to support either
our business plans or our current rate of operating losses and we may have to
file for bankruptcy. In order to continue developing our plans and operations,
we need to find a source of funding. We hope to meet short term liquidity
requirements by raising additional funds through equity financings or the sale
of assets and we are currently exploring several financing alternatives.
Liquidity and capital resources could improve within the short term by a
combination of any one or more of the following factors: (i) an increase in
revenues and gross profit from operations; (ii) a sale of asset(s); and (iii)
debt or equity financing. An inability to generate cash from any of these
factors within the short term could have an adverse material affect on our
operations and plans for future growth.
We are currently exploring several options in an attempt to address our
liquidity concerns. These alternatives include, but are not limited to:
significant cost cutting measures, which may impair VDC's ability to grow
revenues, debt or equity financing, the sale of significant assets, settling
accounts payable arrearages at a fraction of their current carrying value,
and/or filing for bankruptcy protection.
VDC's board of directors has approved a private placement as described below.
However, as is also described below, the proposed investors have not yet
provided a definitive commitment for the transaction (nor can there be any
assurance that they will complete such transaction). VDC's board of directors
has approved a private placement of an aggregate of $650,000 of 8% convertible
senior debentures, which we expect would, to a limited extent, fund operating
losses. The debentures would mature three (3) years from the date of issuance,
accrue interest at the rate of 8% per annum payable upon maturity and be
prepayable, at VDC's discretion, at any time upon thirty (30) days written
notice. The principal amount of the debentures and all accrued interest would be
convertible in the investors' discretion. The debentures would be secured by a
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<PAGE>
first priority perfected security interest on substantially all of the assets of
VDC. The proposed investors include Frederick A. Moran, VDC's Chairman and Chief
Executive Officer, and affiliates of Mr. Moran and family trusts associated with
Mr. Moran, and one non-affiliated investor. Any debentures issued to Mr. Moran
and affiliates of Mr. Moran and family trusts associated with Mr. Moran would be
convertible at $0.1875 per share, so long as such amount is not less than the
closing market price of VDC's common stock on the date the transaction closes.
Any debentures issued to the non-affiliated investor would be convertible at
$0.145 per share. VDC's use of any proceeds from the debentures would be
restricted to, among other things, advances to its subsidiaries to pay
operational expenses other than accounts payable outstanding as of the date of
issuance. A breach of this covenant would constitute an event of default under
the debentures and would, in the investors' discretion, result in the immediate
acceleration of VDC's obligation to repay the debentures. VDC would agree to
grant piggyback registration rights to the purchasers of the debentures to
include the shares issuable upon conversion of the debentures in a registration
statement filed by VDC.
As referenced above, the investors in this transaction have not agreed to
complete the financing at this date and are awaiting certain conditions prior to
making their final investment determination. One condition is that creditors
accept final payments in an amount that is a fraction of current payables. We
have contacted most of our creditors in an effort to reduce payables. We have
told creditors that if they refuse to settle, we will cease operations and
probably file for bankruptcy. Due to certain regulatory rules and requirements,
another condition of the investors is a closing market price of VDC of $0.1875
or below on the date of closing. Even if these certain conditions are met, the
investors have reserved the right not to complete the transaction in their sole
discretion.
If the transaction discussed above is completed, it would provide us with a
maximum of $650,000 of cash. Even with this additional cash, we expect that we
would still not have sufficient funds to support either our business plans or
our current rate of operating losses and we might have to file for bankruptcy.
We would hope to find further financing at a later date if our business model
succeeds and have identified certain investors who may, or may not, provide
financing, given those circumstances. There can be no assurances that we will be
successful in raising cash now or in the future.
During the year ending June 30, 2001 to date, we have implemented cost-cutting
measures in order to decrease our losses in the short term. These measures
include the following:
(1) Reduced personnel costs, including the release of two
executive officers. There was no cash component included in
the severance package for these two former officers.
(2) Ceased all Colorado operations and are attempting to terminate
our office lease for our Colorado area location. We have also
reduced Colorado area personnel from four to zero individuals.
(3) Undertook significant cost cutting measures at our retail long
distance subsidiary in order to reduce losses and increase
efficiency. We believe these reductions have had little, if
any, negative effects on the growth of our subscriber base.
We expect to cut costs further if our cash position does not improve.
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We are projecting capital expenditures of approximately $0 to $10,000 during the
remainder of calendar 2000. The capital expenditures, if any, are expected to be
mainly associated with the further development of our residential services. We
expect to fund these purchases through capital lease financing or proceeds from
equity financing and cash flow from operations, if any.
Funds may become available to us, through the monetization of certain
non-strategic assets. For example, we have sold the telecommunications switch
that we formerly owned and operated in Colorado. We have sold this switch for
cash and a promissory note. The full amount of the promissory note, which is
$172,500, is due November 25, 2000.
To meet liquidity requirements in the long term, we need to increase our
revenues and gross profit, which will most likely occur as a result of growth in
the retail long distance business. There are no assurances, however, that these
long term objectives will transpire.
In order to meet these long term objectives, we believe we have to build our
retail customer base to the point of critical mass. If we reach critical mass,
our ongoing gross profit would likely be sufficient to pay our overhead and
other expenses. Reaching critical mass is mostly a function of our marketing
efforts. Maintaining our customers is also a priority and depends mostly on the
competitiveness of our long distance services.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
VDC 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.
VDC's carrying value of cash and cash equivalents, accounts receivable, accounts
payable, and long term debt are a reasonable approximation of their fair value.
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<PAGE>
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 VDC and is now a wholly-owned subsidiary of VDC. The
relief sought by Worldstar included: (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 VDC acquired an
interest in the Nicaraguan Project was void.
Certain of the defendants, including VDC, filed a Motion to Dismiss. In an order
dated July 12, 2000, the Court dismissed Worldstar's claims against VDC
demanding monetary damages arising out of purported interference with
Worldstar's profit participation and ownership in the Nicaraguan Project. The
Court denied VDC's Motion to Dismiss Worldstar's declaratory judgment claim
against VDC.
In the event that the plaintiff prevails in the Action, the value of VDC's
interest in Masatepe, Masacom and/or the Nicaraguan Project could be diluted.
Additionally, VDC could be held liable for certain value that may be deemed to
have been derived from the operation of Masatepe and/or the Nicaraguan Project,
and for related damages. However, pursuant to the Purchase Agreement through
which VDC acquired Masatepe (the "Purchase Agreement"), Activated has an
obligation to indemnify and hold VDC 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 VDC all or part of VDC's equity interest
in Masatepe. Furthermore, the defendants are vigorously defending the Action. In
view of the foregoing, VDC does not believe that the claims asserted in the
Action will have a material adverse effect on VDC'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
VDC induced it to enter into an agreement with VDC 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 VDC's purported misrepresentations and purported
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breaches of contract. In the event that StarCom prevails in the StarCom Action,
VDC could be liable for monetary damages in an amount that would have a material
adverse effect on VDC's assets and operations.
VDC does not believe that the claims asserted in the StarCom Action are either
meritorious or will have a material adverse effect on VDC's assets or
operations. To date, despite the fact that the StarCom Action was filed over one
year ago, opposing counsel in the StarCom Action has refused to have VDC served
with process. Moreover, opposing counsel filed a Motion to Withdraw as Attorney
in Charge of the StarCom Action. In the event that VDC is served in the StarCom
Action, it intends to defend itself vigorously.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
In July 2000, VDC sold 625,000 shares of VDC 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:
<TABLE>
<CAPTION>
Shareholder Number of Shares Consideration ($)
----------- ---------------- -----------------
<S> <C> <C>
Alan B. Snyder 375,000 375,000
Alan B. Snyder, IRA 125,000 125,000
Merl Trust 43,125 43,125
The Lucien I. Levy Revocable Living Trust 17,500 17,500
The Elvire Levy Revocable Living Trust 10,000 10,000
O.T. Finance, SA 54,375 54,375
------ ------
Total 625,000 625,000
</TABLE>
No commissions were paid in connection with the foregoing transaction.
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>
10.46 Form of Securities Purchase Agreement for June 2000 (1)
10.47 Form of Amendment to Securities Purchase Agreement for July 2000 (1)
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10.48 Form of Registration Rights Agreement for June 2000 (1)
10.49 1998 Stock Incentive Plan, as Amended Through August 9, 2000 (1)
10.50 Incentive Stock Option Agreement between Frederick A. Moran and VDC Communications, (1)
Inc., dated August 9, 2000
10.51 Incentive Stock Option Agreement between Clayton F. Moran and VDC Communications, (1)
Inc., dated August 9, 2000
10.52 Purchase and Sale Agreement, by and between Omnetrix International, Inc. and VDC (1)
Telecommunications, Inc., dated August 26, 2000
10.53 Promissory Note, dated August 26, 2000, made by Omnetrix International, Inc. in (1)
favor of VDC Telecommunications, Inc.
10.54 Security Agreement, dated August 26, 2000, made by Omnetrix International, Inc. in (1)
favor of VDC Telecommunications, Inc.
10.55 Promissory Note, dated June 14, 2000, made by Voice & Data Communications (Latin (1)
America), Inc. in favor of VDC Communications, Inc.
10.56 Promissory Note, dated June 14, 2000, made by Voice & Data Communications (Latin (1)
America), Inc. in favor of VDC Communications, Inc.
10.57 Form of Promissory Note executed by Rare Telephony, Inc. (1)
10.58 Form of Restricted Stock Agreement for September 2000 (2)
10.59 Form of Non-Qualified Stock Option for October 2000 (2)
10.60 Form of Incentive Stock Option for October 2000 (2)
10.61 Form of Stock Option Amendment for October 2000 (2)
10.62 Incentive Stock Option Agreement, dated October 16, 2000, by and between Frederick (2)
A. Moran and VDC Communications, Inc.
10.63 Contract of Sale, dated October 30, 2000, by and between VDC Telecommunications, (2)
Inc. and VDC Communications.
10.64 Form of Promissory Note executed by Rare Telephony, Inc. for September, October and (2)
November 2000
27.1 Financial Data Schedule (2)
</TABLE>
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(1) Filed as an Exhibit to VDC Communications, Inc.'s Form 10-K for the
year ended June 30, 2000 and incorporated herein by reference.
(2) Filed herewith.
(b) Reports on Form 8-K
Report on Form 8-K dated June 14, 2000 reporting acquisition of Rare
Telephony, Inc;
An Amendment to Form 8-K (Form 8-K/A) filed with the Securities and
Exchange Commission on August 25, 2000 amending a previously filed Form 8-K
dated as of June 14, 2000 relative to VDC's acquisition of Rare Telephony, Inc;
and
Report on Form 8-K dated October 16, 2000 reporting an exploration of
alternatives to address liquidity concerns and a stock option repricing.
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/ Clayton F. Moran Dated: November 13, 2000
-----------------------------------------
Clayton F. Moran
Chief Financial Officer and Authorized Signatory
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<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>
10.58 Form of Restricted Stock Agreement for September 2000
10.59 Form of Non-Qualified Stock Option for October 2000
10.60 Form of Incentive Stock Option for October 2000
10.61 Form of Stock Option Amendment for October 2000
10.62 Incentive Stock Option Agreement, dated October 16, 2000, by
and between Frederick A. Moran and VDC Communications, Inc.
10.63 Contract of Sale, dated October 30, 2000, by and between VDC
Telecommunications, Inc. and VDC Communications, Inc.
10.64 Form of Promissory Note executed by Rare Telephony, Inc. for
September, October and November 2000
27.1 Financial Data Schedule
</TABLE>
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