SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
( ) TRANSACTION REPORT UNDER SECTION 14 OR 15(D) OF THE EXCHANGE ACT
For the transition period from ________ to _________
FDN, INC.
------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Nevada 0-25519 84-0644739
------ ---------- ----------
(State or other jurisdiction of (Commission File (IRS Employer
incorporation or organization) No.) Identification)
No.)
2290 Lee Road Winter Park, FL 32789 (407) 702-2000
--------------------------------------------------------------------------------
(Address and Telephone number of principal executive offices)
Check whether the issuer has (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, (or such
shorter period that the Registrant was required to file such report(s), and (2)
has been subject to such filing requirements for the past 90 days.
Yes(X) No( )
APPLICABLE ONLY TO CORPORATE ISSUERS
----------------------------------------
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the Latest practicable date: June 30, 2000
CLASS Outstanding as of June 30, 2000
---------------------------- ------------------------------------
Common stock $.001 Par Value 47,959
<PAGE>
<TABLE>
<CAPTION>
Part Item Description Page No.
No. No.
I FINANCIAL INFORMATION:
<S> <C> <C>
1. Financial Statements
Consolidated Balance Sheets at June 30, 2000
(Unaudited) and December 31, 1999 2 - 3
Consolidated Statements of Income for the Quarters and Six Months
Ended June 30, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and June 30, 1999 (Unaudited) 5-7
Notes to Consolidated Financial Statements (Unaudited) 8-11
2. Management's Discussion and Analysis of Financial Condition
and results of Operations 11-13
II OTHER INFORMATION:
1 Legal Proceedings 13
2 Changes in Securities and Use of Proceeds 13
3 Defaults upon Senior Securities 14
6 Exhibits and Reports on Form 8-K 15-16
SIGNATURES 17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ASSETS
June 30, 2000 December 31,
CURRENT ASSETS (Unaudited) 1999
-------------------------- ------------------
<S> <C> <C>
Cash $ 13,342 $ 80,482
Accounts receivable - less allowance for doubtful accounts 669,298 244,129
of $89,376 and $134,368 respectively
Accounts receivable - affiliates 78,042 108,201
Accounts receivable - factored - less allowance for doubtful
accounts of $1,790 and $3,580 respectively 10,144 148,888
Inventory 18,789 -
Prepaid expenses and other current assets 677,367 47,232
-------------------------- ------------------
Total Current Assets 1,466,982 628,932
-------------------------- ------------------
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment - net 944,531 1,055,144
-------------------------- ------------------
OTHER ASSETS
Deferred charges and intangibles - net 1,939,314 3,119,071
Assets held for resale - 385,000
Security and other deposits 5,000 5,000
-------------------------- ------------------
Total other assets 1,944,314 3,509,071
-------------------------- ------------------
Total Assets $ 4,355,827 $ 5,193,147
========================== ==================
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, 2000 December 31,
(Unaudited) 1999
============ ============
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 1,437,503 $ 1,644,291
Equipment loan payable 335,000 385,000
Loans payable - affiliate 748,994 145,809
Factoring payable - 93,055
Note payable - bank 212,000 212,000
Capital lease obligations - current 90,197 80,183
Accounts payable 1,209,658 1,078,397
Loan payable - shareholder - 29,611
Payroll taxes payable 189,594 191,732
Deferred revenue 453,635 -
Accrued liabilities 175,738 93,778
------------ -------------
Total Current Liabilities 4,852,319 3,953,856
LONG TERM LIABILITIES
Notes payable - net of current portion 3,455,424 5,301,766
Capital lease obligations - net of current portion 403,751 419,179
------------ -------------
Total Liabilities 8,711,494 9,674,801
------------ -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.001 par value, 100,000,000 shares
Authorized, 47,958,837 and 39,261,735 shares issued and
Outstanding for June 30, 2000 and December 31, 1999 respectively 47,959 39,261
Additional paid in capital 5,822,225 24,589
Treasury Stock, at cost, 2,052,620 and 0 shares (640,000) -
Accumulated deficit (9,585,851) (4,545,504)
------------ -------------
Total Shareholders' Equity (Deficit) (4,355,667) (4,481,654)
------------ -------------
Total Liabilities and Shareholders' Equity $ 4,355,827 $ 5,193,147
============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quarters Six Months
Periods Ending June 30 2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales Revenue:
--------------
Net Revenues $ 304,519 $ - $ 612,885 $ -
------------ ------------ ------------ ------------
Total Sales Revenue 304,519 - 612,885 -
------------ ------------ ------------ ------------
Cost of Sales:
Cost of goods sold 693,241 - 1,110,693 -
------------ ------------ ------------ ------------
Gross Profit (Loss) (388,722) - (497,808) -
------------ ------------ ------------ ------------
Operating Expenses:
Selling, general and administrative expenses 1,552,564 604,114 3,002,700 1,214,246
Loss from Operations (1,941,286) (604,114) (3,500,08) (1,214,246)
------------ ------------ ------------ ------------
Other (Income)/Expenses:
Gain on settlement of litigation (85,000) - (85,000) -
Write down of intangible assets 1,108,408 - 1,108,408 -
Interest expense 100,325 61,207 516,431 66,338
------------ ------------ ------------ ------------
Total Other Expenses 1,123,733 61,207 1,539,839 66,338
------------ ------------ ------------ ------------
Loss Before Provision for Income Taxes (3,065,019) (665,321) (5,040,347) (1,280,584)
Income Taxes
Income taxes - currently payable - - - -
Income taxes - deferred - - - -
------------ ------------ ------------ ------------
Net Loss $(3,065,019) $ (665,321) $(5,040,347) $(1,280,584)
============ ============ ============ ============
Loss per Share
Basic and diluted $ (0.07) $ (0.02) $ (0.12) $ (0.03)
Weighted average shares outstanding 45,892,858 39,261,735 43,501,762 37,383,083
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,040,347) $ (1,280,584)
Adjustments to reconcile net loss to net
cash utilized by operating activities:
Depreciation and amortization 181,422 19,831
Bad debt expense 195,014 -
Loss on impairment of intangibles 1,108,408 -
Gain on litigation settlement (85,000) -
Other non cash 53 -
Stock issued for interest expense 400,680 -
Stock issued for broker fees 284,420 -
Stock issued for consultant fees 59,860 -
Stock issued as sign-on compensation 116,998 -
Changes in operating assets and liabilities:
Accounts receivable (618,393) -
Accounts receivable - factor 136,953 -
Inventory (18,790) -
Prepaid expenses 23,968 -
Other assets - (230,750)
Accounts payable and accrued expenses 286,268 31,924
Deferred income 453,635 -
Other current liabilities (2,137) -
---------------- ----------------
NET CASH FLOWS (UTILIZED) IN OPERATING ACTIVITIES (2,516,988) (1,459,579)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (65,113) (400,443)
Sale of property and equipment - proceeds 94,283 -
Loans made to affiliates 130,159 (291,590)
---------------- ----------------
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES 159,329 (692,033)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net loan from shareholder (384,610) (1,062,364)
Net pay down to facto0r (93,055) -
Proceeds from promissory notes 500,000 3,284,279
Payments on promissory notes (858,300) -
Proceeds from long-term debt 723,322 -
Payments of long-term debt (55,137) -
Payments on capital lease obligation (34,042) -
Proceeds from sale of stock 2,492,341 -
---------------- ----------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 2,290,519 2,221,915
---------------- ----------------
Six months ended Six months ended
June 30, 2000 June 30, 1999
---------------- ----------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 2,290,519 2,221,915
---------------- ----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (67,140) 70,303
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 80,482 452
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,342 $ 70,755
================ ================
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid $ - $ -
Interest paid $ 58,862 $ 25,852
</TABLE>
<PAGE>
Supplemental Schedule of Non-cash Investing and Financing Activities.
During the six months ended June 30, 2000:
The Company entered into a capital lease for office equipment aggregating
$28,629.
The Company converted approximately 1,896,000 of promissory notes and related
accrued interest into 3,000,011 shares of common stock.
In the second quarter, in conjunction with the conversions above, the Company
reissued a promissory note in the amount of $51,502 and received back 92,500
shares of common stock previously issued.
The Company issued 1,250,000 shares of common stock for all the outstanding
stock of Mercury Capital Corporation.
The Company issued stock and/or options to certain consultants for present and
future services valued in the aggregate at $682,925.
The Company issued stock to a finder related to $2,300,000 in equity raised.
The stock issued to the finder was valued at $153,408.
The Company issued 500,000 shares of restricted common stock to two employees as
sign on bonuses. The stock issued was valued at $116,998.
The Company received 567,000 shares of the Company's common stock from a
shareholder for the purchase of $388,000 of ATM machines. In addition the
Company accepted 255,000 shares of the Company's common stock from this
shareholder as settlement of monies owed to the Company in the amount of
$255,000.
NOTE 1:
In the opinion of management, the accompanying unaudited consolidated financial
statements of FDN, Inc. and its subsidiaries contain all adjustments necessary
to present fairly the Company's financial position as of June 30, 2000 and the
results of its operations and cash flows for all periods presented.
The results of operations for the interim periods are not necessarily indicative
of the results to be expected for the full year.
For a summary of significant accounting policies and additional financial
information, see the financial statements incorporated in the May 1, 2000 Form
8-KA, for the years ended December 31, 1999 and 1998 including the notes thereto
which should be read in conjunction with these financial statements.
NOTE 2: DESCRIPTION OF BUSINESS, ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization/Description of Business:
FDN, Inc., the Company, (formerly Ultrafit Centers, Inc.) was incorporated in
the State of Colorado on May 27, 1987. After being administratively dissolved on
November 1, 1997 by the Colorado Secretary of State, the Company was reinstated
and a certificate of good standing was issued on February 18, 1999. In
anticipation of the reverse acquisition with FON Digital Network, Inc. (a
Florida corporation) discussed below, the Company officially changed its name to
FDN, Inc. on February 18, 1999. Before the reverse acquisition, FDN, Inc
(formerly Ultrafit Centers, Inc.) had operated a series of geriatric
rehabilitation facilities. Prior to December 31, 1999 FDN, Inc. ceased
operating these facilities and had in fact divested themselves of all assets
related to the rehabilitation business.
FDN Inc., through its subsidiaries, is an emerging provider of advanced,
integrated telecommunications services primarily to residential and small
business customers. The Company offers long-distance, prepaid and operated
assisted telephone services integrated with enhanced communications features.
The Company is broadening its business strategy as an Integrated Communications
Provider (ICP), which will provide broadband data, voice and video
telecommunications services primarily throughout the United States and
terminating internationally. Additionally, products presently and planned to be
offered are: traditional 1 plus, 0 plus (operator assisted), travel card, toll
free 800 service, Voice over Internet (VoIP), and Internet Service Provider
(ISP).
FON Digital Network, Inc "FON" was incorporated on August 5, 1998 in the state
of Florida. FON Digital Network changed its name on March 11, 2000 to
ClearPoint Communications, Inc. On February 23, 1999, the FON shareholders
agreed to exchange all their shares of common stock for 32,881,409 shares of
FDN, Inc. in a transaction reflected as a reverse acquisition. FDN, Inc.
remains the legal acquirer, although FON is considered the accounting acquirer,
and as such, the financial statements, present the results of operations for the
accounting acquirer, FON. The only historical information of FDN (Ultrafit
Centers, Inc.) presented is the outstanding liabilities and related deficit.
On July 15, 1999, FON purchased substantially all the assets of American
Telecommunications Enterprises, Inc., (out of bankruptcy). The acquisition was
accounted for under the purchase method of accounting and as such, the financial
statements include the operations from the date of acquisition. American Tel
Enterprises, Inc. (TEL) was incorporated in the State of Florida on July 1, 1999
to effectuate this transaction.
<PAGE>
Pro forma Information
-----------------------
The following unaudited pro forma consolidated income statement data presents
the consolidated results of operations of the Company had the transactions
involving American Telecommunications Enterprises, Inc. occurred at the
beginning of the period presented:
Period Ended June 30, 1999
Quarter Six months
------- -----------
Net sales $ 738,597 $ 1,452,444
Net income (loss) $ (1,155,613) $ (2,302,013)
Basic and
Diluted earning
per share $ (0.03) $ (0.06)
The above pro forma information does not purport to be indicative of what would
have occurred had the acquisition been made as of such date or of the results
which may occur in the future.
Organization/Description of Business (Continued):
In March 2000, the Company entered into an exchange agreement with Mercury
Capital Corporation, an inactive Colorado corporation, whereby all the
outstanding shares of common stock of Mercury Capital (4,000,000) were exchanged
for 1,250,000 shares of common stock of the Company. This transaction, in which
the Company acquired 100% of the issued and outstanding common stock of Mercury,
also enabled the Company to become the parent corporation of Mercury. No pro
forma information has been presented do to the fact that it is immaterial, since
Mercury was a non-operating entity.
Revenue Recognition:
Revenue for prepaid phone cards is recognized based upon the actual usage by the
customer, not the full value of the card at the date of purchase. The balance
of the minute usage still remaining on the cards is therefore recorded as
deferred revenue and current liability on the balance sheet.
NOTE 3: OPERATING RESULTS AND MANANGEMENT PLANS
The accompanying financial statements reflect continuing operating losses and a
large accumulated deficit, as well as negative working capital and negative cash
flows from operations. At June 30, 2000, the Company was also in default on
certain promissory notes and additionally had taken a partial write down on its
intangible assets.
Management has taken a proactive approach to reversing the negative operating
results in an attempt to improve cash flow during the first six months of the
year. To that end, the Company has implemented its prepaid phone card
operations and has commenced sales. In addition the Company successfully
negotiated the conversion of approximately $1,844,000 of promissory notes to
equity during the six months ended June 30, 2000. During the six months ended
June 2000 the Company has raised in a combination of debt and equity financing
$3,315,663.
The Company has begun to streamline operations at its subsidiary (American Tel
Enterprises Inc.) and consolidate certain resources and functions at its
corporate office.
Management is continuing discussions for significant additional potential equity
financing. Management is confident that the Company will continue to receive
sufficient funds for operations from equity and/or financing sources, until they
achieve profitability.
NOTE 4: WRITE DOWN ON INTANGIBLES
During the second quarter of 2000 in accordance with SFAS-121 (Accounting for
the impairment of long-lived assets and for long-lived assets to be disposed of)
the Company wrote down the value of its licenses, customer lists and goodwill.
The write down aggregated $1,108,408.
NOTE 5: PROMISSORY NOTES
The Company has a dispute with one of its carriers. The former CEO entered into
a release and settlement agreement with the carrier. During the second quarter
the Company reflected the initial promissory note of $635,145 and through June
30, 2000, has paid $235,000. The Company's believes the original amount of the
promissory note is overstated and is awaiting the appropriate adjustments from
the carrier.
<PAGE>
On June 1, 2000, the Company received $100,000 from a company affiliated with a
shareholder in exchange for a promissory note. The promissory note calls for
interest to be paid at the rate of 12% per annum and is payable in 90 days. As
collateral against this note the Company has pledged 200,000 shares of its
common stock. In addition a surety bond secures the loan.
On April 13, 2000, the Company received $198,000 each from two shareholders in
exchange for promissory notes. Each note is payable within 360 days from the
date of the note and shall accrue interest at a rate of 12% per annum. 550,000
shares of the Company's common stock collateralize each note. In addition
during the quarter these same two shareholders each loaned the Company $15,662
with interest at 12%. These loans are payable on demand.
During the second quarter a director/shareholder loaned the Company $70,000.
The loan is payable after 180 days and bears no interest. The Company pledged
200,000 shares of restricted common stock as collateral.
NOTE 5: PROMISSORY NOTES (CONTINUED)
During April 2000, the Company converted $90,000 of promissory notes into common
stock. In addition, promissory notes were increased in the amount of $51,502,
which represented an adjustment during the quarter to account for a note holder
who previously had converted, however notified the Company of his desire to
remain a note holder.
In connection with the $90,000 of principal conversion and as a result of the
adjustment for the increase in notes payable in the amount of $51,502, the
Company has recorded additional income associated with the two transactions in
the amount of $55,765, which represents the difference in the fair value of the
stock issued as compared to the book value of the debt converted.
At June 30, 2000, $597,503 of promissory notes was in default. Additionally, a
note holder has granted an eighteen-month extension. The total note is for
$545,782, which includes the promissory note in the amount of $407,500, and
accrued interest in the amount of $138,282. The terms of payment are as follows:
$2,500 for the first month, $5,000 per month for the following five months,
$10,000 per month for the following six months, $15,000 per month for the
following six months and the final balance due in month eighteen.
On March 31, 2000, the Company received $100,000 in exchange for a promissory
note, due 180 days there from. As collateral to the promissory note a
shareholder pledged 100,000 shares of their common stock in the Company.
Interest will accrue at the highest rate permissible by law and be paid at
maturity.
NOTE 6: SHAREHOLDERS' EQUITY
During the second quarter of 2000, the Company entered into several transactions
which effect shareholders' equity. These transactions are detailed below:
During April, the Company sold its assets held for resale aggregating $385,000
to a shareholder of the Company in exchange for the return of 567,000 shares of
Company common stock owned by the shareholder. These shares are reflected as
treasury stock at June 30, 2000. The Company also received 255,000 shares in
full payment for loans receivable from this shareholder at March 31, 2000.
These shares are also reflected as treasury stock at June 30, 2000.
During April, the Company sold 103,628 shares of common stock for $90,674. The
Company had received these shares upon settlement of an Ultrafit liability. The
shares had been used as collateral towards the debt and had been issued in the
name of the creditor prior to their release back to the Company
During May the Company sold 212,500 shares of restricted common stock for
$85,000.
During May the Board of Directors revised the employment agreements for two
employees as pertains to their issuance of restricted stock. The agreements
call for the issuance in the aggregate of 500,000 shares of restricted stock as
sign on bonuses for joining the Company. These shares were valued at $116,998
and have been expensed as additional compensation.
During the quarter a consultant exercised 166,666 of his 500,000 options and
acquired 166,666 shares of the Company's common stock.
As a result of litigation the Company recovered 552,620 shares from two former
shareholders of Ultrafit. These shares have been reflected as treasury shares
at no cost as at June 30, 2000.
NOTE 7: LITIGATION SETTLEMENTS
During April, the Company settled litigation with HEB Retirement and Investment
Plan Trust resulting from the operations of Ultrafit Centers, Inc and reduced
its liability by $200,000. The Company settled this obligation by a combination
of cash and proceeds from the sale of Ultrafit equipment. The resulting gain on
the settlement in the amount of $85,000 was recorded as other income.
<PAGE>
NOTE 8: SUBSEQUENT EVENTS/ COMMITMENTS AND CONTINGENCIES
Distribution Agreements:
During the quarter the Company entered into agreements with certain distributors
for the distribution of the Company's products. Pursuant to said agreements the
Company issued 200,000 shares of common stock. The terms of the agreements are
for one year.
Employment Agreements:
In July 2000, the Company formalized the employment agreements with its Vice
President of Prepaid Sales and Vice President of Operations. Each agreement is
for a period of twelve months and calls for annual compensation of $100,000. In
addition the employees had already been issued 300,000 and 200,000 shares of
restricted common stock, respectively and their agreements call for the
additional issuance of 500,000 shares each (400,000 restricted and 100,000 free
trading) over a two-year period. In July 2000, the two employees were each
issued 100,000 shares of free trading stock out of treasury as per their
agreements.
Resignation of Board members:
During the quarter two Members of the Board of Directors resigned which included
the CEO of the Company. The Company replaced the resigned Board members.
Default on Notes Payable:
During July of 2000, the Company defaulted on a $100,000 note payable to a
consultant in connection with the acquisition of Mercury Capital Corporation.
The Company is currently in negotiations with the note holder to cure the
default.
As mentioned in the Company's 10QSB for the first quarter, the Company had an
agreement providing for the issuance of 250,000 shares of common stock to a
consultant associated with the Mercury Capital transaction. These shares are
subject to registration by the Company. As at June 30, 2000, these shares had
not yet been issued. The Company is attempting to negotiate an alternative
resolution and payment.
During July the Company defaulted on a $335,000 note payable in conjunction with
the purchase of ATM machines. The initial note agreement calls for an increase
in the liability to $450,000 in the event of default. The Company has
scheduled, through its attorneys, a settlement conference with the note holder
to revise the terms of payment.
During July the Company defaulted on its first payment of $75,000 as called for
as part of the payment of the $3,800,000 note for the purchase for American Tel
Enterprises Inc. Due to the fact that the assets were purchased out of
bankruptcy, several vendors who do business with the new American Tel. were owed
monies by the bankrupt entity. These vendors refused to perform services to the
new entity unless their old obligations were satisfied. To that end, the
Company paid $119,576 of the bankrupt company's expenses. The trustee to the
bankruptcy has stated that he will allow the Company to apply these payments
against the $3,800,000 although it has not been determined as to when such
offsets will be applied. The Company will petition the trustee to apply the
offset to the first payment due.
Part I - Item 2:
Managements Discussions and Analysis of Financial Condition
And Results of Operations
FINANCIAL CONDITION
FDN Inc., through its subsidiaries, is an emerging provider of advanced,
integrated telecommunications services primarily to residential and small
business customers. The Company offers long distance, prepaid and operator
assisted telephone services integrated with enhanced communications features.
The Company is broadening its business strategy as an Integrated Communications
Provider (ICP), providing voice and telecommunications services throughout the
United States and terminating internationally. Products offered are:
traditional 1 plus, o plus (operator assisted), prepaid phone cards travel card,
and toll free 800 service. Future products to be offered are, Voice over
Internet (VoIP), and Internet Service Provider (ISP).
<PAGE>
During the second quarter the Company launched its prepaid card program through
its distribution network in which prepaid phone cards have been distributed
throughout the United States.
RESULTS OF OPERATIONS:
The Company records sales of prepaid phone cards by matching income against the
actual dollar amount of minutes of usage incurred per card. The actual dollar
amount of use by the card is recorded as revenue on the income statement,
whereas the dollar amount of usage still remaining on the card is recorded as
deferred revenue on the balance sheet. The total value of the sale of the card
is recorded as accounts receivable.
Actual activation and usage of prepaid cards commenced during the month of June
and as such the Company invoiced and recorded as accounts receivable $522,024.
The actual usage for the month amounted to $68,389 and was recorded as income.
The difference of $453,635 was recorded as deferred revenue. For the month of
July actual usage increased to $527,719 and will be recorded as revenue for the
month.
The Company recorded net sales for the quarter and six months ending June 30,
2000 of $304,519 and $612,885 as compared to zero revenues for the same periods
in 1999. During the quarter, revenue recognition for prepaid phone cards
amounted to $68,389. During the same period, the Company recorded deferred
revenue for prepaid cards sales in the amount of $453,635, which was
subsequently recognized as revenue during July 2000, based on customer usage.
The 2000 revenue also includes the operations of American Tel. which was not
included in the 1999 period, since it was acquired in July 1999. The increase
resulted form customer recognition of the prepaid phone cards and the timing of
revenue recognition based on minute usage.
Gross profit (loss) was $(388,722) and $(497,808) for the second quarter and the
first six months of 2000. The Company experienced a loss on one plus sales
relating to the decline in sales from American Tel. due to an increasingly
competitive small hotel business market and higher carrier cost relating to
those sales. The Company has taken steps to cut overhead and intends to target
new sales markets for this subsidiary.
Selling, general and administrative expense ("SG&A") was $1,552,564 for the
second quarter of 2000, compared to $604,114 for the second quarter of 1999, an
increase of 157%. SG&A for the first six months of 2000 was $3,002,700 compared
to $1,214,246 for the first six months of 1999, an increase of 147%. For the
second quarter ended June 30, 2000 prepaid expenses were amortized to consulting
expense in the amount of $302,168, as compared to $0 for the second quarter of
1999. Dad debts of $179,433 from American Tel. were expensed during the quarter
ended June 30, 2000, as compared to $0 for the same quarter in 1999. The
remainder of the increase in SG&A was a result of the Company gearing up its
phone card operations.
Other (income) and expense ("OIE") was $1,123,733 for the quarter ended June 30,
2000, compared to $61,207 for the second quarter of 1999. OIE for the first six
months of 2000 was $1,539,839 compared to $66,338 for the first six months of
1999. The write down of intangible assets of American Tel of $1,108,408
accounted for 72% and interest expense of $516,431 accounted for 34% of OIE for
the six months ended June 30, 2000. During the second quarter of 2000 interest
expense was $100,325 compared to $61,207 for the same quarter in 1999. During
the second quarter the Company wrote down the intangible assets of its
subsidiary, American Tel., in the amount of $1,108,408 to reflect the estimated
value of these assets. This was in accordance with SFAS-121 (Accounting for the
impairment of long-lived assets and for long-lived assets to be disposed of).
Previously, no write-downs had occurred.
For the first six months of 2000 the net loss was $5,040,347 compared to a net
loss of $1,280,584 for the same period in 1999. The increase in the net loss for
the six months ended June 2000 reflects the net loss on operations of American
Tel in the amount of $2,251,728. As stated earlier this company was acquired in
July of 1999 and no loss is reflected for the six months ended June 30, 1999.
Also as previously stated the majority of American Tel.'s loss was related to
the write down of intangible assets of $1,108,408 and the adjustment to carrier
costs. Various money raising costs including interest expense, finders fees,
brokerage fees, etc., accounted for the majority of the remaining increased
losses.
LIQUIDITY AND CAPITAL RESOURCES
Although the Company has a working capital deficit of $3,385,337 at June 30,
2000, it has taken actions during the second quarter to help its cash
requirements. During the second quarter, the Company commenced sales of its
prepaid calling cards. In the month of June revenue recorded amounted to
$68,389. For the month of July revenue recorded amounted to $527,719.
The Company is currently negotiating for additional financing however nothing
has been finalized to date. The Company expects that its expected cash flows
from operations and additional borrowing will be sufficient to meet its current
financial requirements.
<PAGE>
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe
harbor for forward-looking statements made by or on behalf of the Company. The
Company and its representatives may from time to time make written or oral
statements that the Company believes are "forward-looking", including statements
contained in this report and other filings with the Securities and Exchange
Commission and in reports to the Company's stockholders.
The Company believes that all statements that expresses expectations and
projections with respect to future matters, including but not limited to the
launching or prospective development of new business initiatives, are
forward-looking within the meaning of the Act. These statements are made on the
basis of management's views and assumptions, as of the time the statements are
made, regarding future events and business performance. There can be no
assurance, however, that management's expectations will necessarily come to
pass.
Part II - Other Information
1. LEGAL PROCEEDING
Refer to financial statements filed May 1, 2000 with Form 8-KA.
During April, the Company agreed to settlement of its litigation with HEB
Investment & Retirement Plan Trust. The Company had originally recorded
$200,000 as a potential liability as at December 31, 1999. The Company directly
paid $115,000. In addition the Company sold Ultrafit's equipment previously
recorded at zero value for $60,000 that had been recorded at no book value. The
proceeds were used as payment towards the HEB obligation. As part of the
settlement HEB wrote down the remaining $25,000 as payment in full.
CHANGES IN SECURITIES AND USE OF PROCEEDS
During the second quarter of 2000, the Company entered into several transactions
which effect shareholders' equity. These transactions are detailed below:
During April the Company sold its assets held for resale aggregating $385,0000
to a shareholder of the Company in exchange for the return of 567,000 shares of
Company common stock owned by the shareholder. These shares are reflected as
treasury stock at June 30, 2000. The Company also received 255,000 shares in
full payment for loans receivable from this shareholder at March 31, 2000.
These shares are reflected as treasury stock at June 30, 2000.
During April the Company sold 103,628 shares of common stock for $90,674. The
Company had received these shares upon settlement of an Ultrafit liability. The
shares had been used as collateral towards the debt and had been issued in the
name of the creditor prior to their release back to the Company
During May the Company sold 212,500 shares of restricted common stock for
$85,000.
During May the Board of Directors revised the employment agreement for two
employees as it pertains to their issuance of restricted stock. The agreements
call for the issuance in the aggregate of 500,000 shares of restricted stock as
sign on bonuses for joining the Company. These shares were valued at $116,998
and have been expensed as additional compensation.
During the quarter a consultant exercised 166,666 of his 500,000 options and
acquired 166,666 shares of the Company's common stock.
As a result of litigation the Company recovered 552,620 shares from two former
shareholders of Ultrafit. These shares have been reflected as treasury shares
at no cost as at June 30, 2000.
In July the Company issued 260,000 shares out of treasury stock for $46,800.
For those sales of securities that involve the receipt of funds, the Company
used such proceeds for operations.
DEFAULTS UPON SENIOR SECURITIES:
At June 30, 2000 $597,503 of promissory notes were in default. Additionally, a
note holder has granted an eighteen-month extension. The total note is for
$545,782, which includes the promissory note in the amount of $407,500, and
accrued interest in the amount of $138,282. The terms of payment are as follows:
2,500 for the first month, $5,000 per month for the following five months,
$10,000 per month for the following six months, $15,000 per month for the
following six months and the final balance due on month eighteen.
<PAGE>
During July of 2000 the Company defaulted on a $100,000 note payable to a
consultant in connection with the acquisition of Mercury Capital Corporation.
The Company is currently in negotiations with the note holder to cure the
default.
As mentioned in the Company's 10Q for the first quarter the Company had an
agreement providing for the issuance of 250,000 shares of common stock to a
consultant associated with the Mercury Capital transaction. These shares are
subject to registration by the Company. As at June 30, 2000, these shares had
not yet to be issued. The Company is attempting to negotiate an alternative
resolution and payment.
During July the Company defaulted on a $335,000 note payable in conjunction with
the purchase of the ATM machines. The initial note agreement calls for an
increase in the liability to $450,000 in the event of default. The Company has
scheduled through its attorneys a settlement conference with the note holder to
revise the terms of payment.
During July the Company defaulted on its first payment of amount of $75,000 as
called for as part of payment of the $3,800,000 note for the purchase for
American Tel Enterprises Inc. Due to the fact that the assets were purchased
out of bankruptcy, several vendors who do business with the new American Tel.
were owed monies by the bankrupt entity. These vendors refused to perform
services to the new entity unless their old obligations were satisfied. To that
end, the Company paid $119,576 of the bankrupt company's expenses. The trustee
to the bankruptcy has stated that he will allow the Company to apply these
payments against the $3,800,000 although it has not been determined as to when
such offsets will be applied. The Company will petition the trustee to apply
the offset to the first payment due.
EXHIBITS AND REPORTS ON FORM 8-K:
a) Exhibit 11: The Earnings Per Share computation, is submitted below as
Exhibit 11
b) Exhibit 27.1: The Financial Data Schedule for the six` months ended
June 30, 2000 is submitted below as Exhibit 27.1
<PAGE>
