<PAGE> 1
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 Quarterly Period Ended June 30, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Transition Period from __________ to ____________ .
Commission File Number: 000-26118
-----------------------------
MIDCOM COMMUNICATIONS INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1438806
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
111 THIRD AVENUE, SEATTLE WA 98101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 628-8000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at July 31, 1996
----- ----------------------------
<S> <C>
Common Stock, $0.0001 par value 15,836,202
</TABLE>
Page 1 of 21 pages.
Exhibit Index at Page 20.
<PAGE> 2
MIDCOM COMMUNICATIONS, INC.
FORM 10-Q
For the Quarterly Period Ended June 30, 1996
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 3. Defaults Upon Senior Securities 18
Item 6. Exhibits and Reports on Form 8-K 18
2
<PAGE> 3
MIDCOM COMMUNICATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands) June 30, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,434 $ 1,083
Accounts receivable, less allowance for doubtful accounts
of $8,488 and $10,581, respectively 42,497 51,814
Due from related parties 116 502
Notes receivable - 86
Prepaid expenses and other current assets 2,549 2,424
---------------------------
Total current assets 46,596 55,909
Investments in and advances to joint venture 2,000 2,000
Plant and equipment, net 11,100 13,719
Intangible assets, less accumulated amortization
of $29,341 and $12,812, respectively 27,275 60,781
Other assets and deferred charges, net 616 922
---------------------------
$ 87,587 $133,331
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 5,463 $ 7,397
Carrier accounts payable 40,898 32,534
Accrued expenses and other current liabilities 9,559 9,613
Notes payable 11,706 14,576
Current portion of long-term obligations 45,321 41,721
---------------------------
Total current liabilities 112,947 105,841
Long-term debt, less current portion 800 827
Capital lease obligations, less current portion 125 1,017
Deferred income 108 130
Other long-term liabilities 5,843 1,717
Shareholders' equity (deficit) (32,236) 23,799
---------------------------
$ 87,587 $133,331
===========================
</TABLE>
<PAGE> 4
MIDCOM COMMUNICATIONS INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------------------------------------
(In thousands, except per share data) 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue $ 40,805 $ 51,808 $ 93,860 $ 97,380
Cost of revenue 29,589 35,475 67,536 65,282
--------------------------------------------------------
Gross profit 11,216 16,333 26,324 32,098
Operating expenses:
Selling, general and administrative 15,843 14,308 32,314 27,483
Depreciation 1,323 1,090 2,674 1,938
Amortization 7,858 1,500 16,536 2,960
Settlement of contract dispute 8,800 -- 8,800 --
Restructuring charge 600 -- 2,220 --
Loss on impairment of assets 18,765 -- 18,765 --
--------------------------------------------------------
53,189 16,898 81,309 32,381
--------------------------------------------------------
Operating loss (41,973) (565) (54,985) (283)
Other expense:
Interest expense 2,544 1,799 3,910 3,346
Equity in loss of joint venture -- 113 -- 166
Other expense, net 144 210 266 228
--------------------------------------------------------
2,688 2,122 4,176 3,740
--------------------------------------------------------
Loss before income taxes (44,661) (2,687) (59,161) (4,023)
Income tax expense -- -- -- --
--------------------------------------------------------
Net loss $(44,661) $ (2,687) $(59,161) $ (4,023)
--------------------------------------------------------
Net loss per share $ (2.89) $ (0.26) $ (3.86) $ (0.39)
========================================================
Weighted average common
shares outstanding 15,445 10,269 15,321 10,246
========================================================
</TABLE>
<PAGE> 5
MIDCOM COMMUNICATIONS INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
(In thousands) 1996 1995
- --------------------------------------------------------------------------------------
(Restated)
<S> <C> <C>
Net cash provided by (used in) operating activities $ (240) $ 3,368
-----------------------
Investing activities:
Purchases of plant and equipment (1,063) (5,209)
Net assets acquired in business and customer
base acquisitions -- (1,928)
Investment in and advances to joint venture -- (1,052)
Other, net -- --
-----------------------
Net cash used in investing activities (1,063) (8,189)
-----------------------
Financing activities:
Repayment of notes payable (3,200) (2,660)
Proceeds from long-term debt 20,920 8,695
Repayment of long-term debt (18,239) (488)
Proceeds from common stock issued for stock
purchase plan and stock options 2,302 25
Distributions to shareholders of acquired companies -- (287)
Deferred financing costs (129) --
-----------------------
Net cash provided by financing activities 1,654 5,285
=======================
Net increase (decrease) in cash 351 464
Cash at beginning of period 1,083 960
-----------------------
Cash at end of period $ 1,434 $ 1,424
=======================
</TABLE>
<PAGE> 6
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of MIDCOM Communications Inc. and its wholly-owned subsidiaries,
collectively referred to as "Midcom" or the "Company." The unaudited interim
condensed consolidated financial statements and related notes have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The accompanying condensed consolidated financial statements and
related notes should be read in conjunction with the consolidated financial
statements and related notes thereto included in the Company's Form 10-K as
filed with the Securities and Exchange Commission on April 16, 1996, as
subsequently amended.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of only normal recurring items, necessary for a fair
presentation of the results for the interim periods presented. Interim results
are not necessarily indicative of results for a full year.
2. LOSS ON IMPAIRMENT OF ASSETS
The Company periodically reviews the carrying value of its intangible
assets in accordance with Statement of Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." To the extent that the estimated future cash inflows attributable to the
asset, less estimated future cash outflows, is less than the carrying amount, an
impairment loss is recognized. In connection with such a review, the Company
wrote-down certain acquired customer bases and recorded a loss on impairment of
assets totaling $18.8 million during the second quarter of 1996.
3. SETTLEMENT OF CONTRACT DISPUTE
As of June 30, 1996, Midcom's minimum volume commitment under its
supply contract with AT&T, its largest supply contract, was $117.0 million. The
Company estimates that, as of the next measurement date on September 30, 1996,
it will be in shortfall of its minimum commitments to AT&T by approximately
$27.6 million based upon current contract requirements. However, on July 19,
1996, the Company and AT&T executed a letter of intent to settle this
anticipated liability as well as all other pending disputes between the Company
and AT&T, and to negotiate a new contract pursuant to which the Company's
minimum commitment to AT&T will be $17.0 million. The letter of intent also
provides for the payment by the Company to AT&T of $8.8 million payable in two
installments. The first payment of $5.0 million will be due on the earlier of
March 31, 1997 or 30 days after the Company completes a financing, and the
remaining balance of $3.8 million will be due within 30 days of Midcom
announcing quarterly gross revenue in excess of $75 million, or upon completion
of a change in control. In addition, Midcom will obtain more favorable pricing
for certain network services provided by AT&T. Pursuant to the same letter of
intent, Midcom and AT&T have negotiated a payment schedule for overdue payments
which will bring the Company's obligations to AT&T current by the middle of
October 1996. The settlement and new rate structure will not be effective until
the Company and AT&T have executed a mutually acceptable definitive agreement,
which the parties intend to pursue during August 1996; however, there can be no
assurance that a definitive agreement will be reached.
6
<PAGE> 7
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING CHARGES
In March and April 1996, the Company made announcements regarding
changes in senior management and the restructuring of its operations in order to
reduce expenses to the level of available capital. These actions included the
layoff of certain employees and contractors and the closure of 6 sales offices.
As a result, the Company recorded a charge of $1.6 million during the first
quarter 1996 and $0.6 million during the second quarter of 1996, the components
of which relate primarily to severance and lease cancellation charges. Included
in the first quarter restructuring charge is approximately $0.4 million relating
to the extension of the time period to exercise outstanding stock options. As of
June 30, 1996, $1.2 million of this restructuring charge remained in accrued
liabilities.
5. BUSINESS COMBINATIONS
In September 1995, the Company acquired all of the outstanding stock of
AdVal, Inc. ("AdVal") and in December 1995, the Company acquired all of the
outstanding stock of ADNET Telemanagement, Inc. ("ADNET") and its wholly-owned
subsidiary, Advanced Network Design in transactions accounted for as poolings of
interests. As a result, the consolidated financial statements for all periods
prior to the acquisitions have been restated to include the accounts and results
of operations of AdVal and ADNET. (See Note 7 below.)
In addition, since March 31, 1995, the Company has supplemented its
growth through several acquisitions of smaller providers of telecommunications
services. Certain of these acquisitions included the purchase of substantially
all of the operating assets of the acquired business including customer bases,
and in other situations only specific customer bases were acquired. All such
acquisitions have been accounted for using the purchase method with the excess
of the purchase costs over the net tangible assets acquired being primarily
allocated to acquired customer bases, non-competition agreements and goodwill.
Financial results from the acquired operations have been included in the
Company's results from the respective dates of acquisition. As a result, the
financial results for the 1996 and 1995 periods presented are not directly
comparable.
In connection with several of the transactions described above, the
Company has an obligation to issue or release from escrow up to a maximum of
236,193 additional shares of its common stock upon the satisfaction of certain
contingencies. Such contingencies include, among other things, maintenance of
specified revenue levels for the acquired customer base, adjustment of
liabilities assumed and receivables purchased, and satisfaction of general
representations and warranties. The contingency periods range from six months to
two years. The Company is also obligated to pay up to a maximum of $2.0 million
additional cash pursuant to a customer base purchase agreement upon attainment
of a specified revenue level for such customer base. In addition, in the event
of the sale or transfer of the majority of the voting stock of Cel-Tech
International Corp. ("Cel-Tech), a subsidiary of the Company, a payment of a
maximum of $2.0 million would become payable to the former shareholder.
In accordance with applicable accounting standards, the common stock or
other consideration payable under the contingency arrangements has not been
included in the determination of purchase price, nor have the shares been
considered outstanding for purposes of earnings per share calculations.
Additional consideration will be recorded when the outcome of a contingency is
determined.
The Company is also obligated in certain cases to issue additional
shares of its common stock in the event that the market price of such stock,
when the shares become registerable, is less than the price at the acquisition
dates. Based on a closing stock price of $11.00 as of July 31, 1996 for the
Company's common stock, approximately 199,000 additional shares would be
issuable as a result of these obligations.
7
<PAGE> 8
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common
and equivalent shares outstanding using the treasury stock method and the number
of shares issued in the Company's initial public offering whose net proceeds
were used to redeem the Series A Redeemable Preferred Stock. Common stock
equivalents are excluded from the calculation of net loss per share due to their
antidilutive effect except that pursuant to the requirements of the Securities
and Exchange Commission ("the Commission"), common and equivalent shares issued
during the twelve month period prior to the filing with the Commission of the
registration statement with respect to the Company's initial public offering
have been included in the calculation as if they were outstanding for all
periods prior to the completion of the Company's initial public offering using
the treasury stock method.
7. DISPUTES AND LITIGATION
In the third quarter of 1993, the Company was named a defendant in a
lawsuit by Discom Corporation. The allegations include unjustified customer
provisioning delays, customer rejections, improper changes in pricing policies
and failure to deal in good faith. Discom seeks compensatory damages of $3.0
million. The Company filed a counterclaim against the distributor for unfair
competition and trade name and trademark infringement. This action has been
transferred to an arbitration proceeding in New York.
The Company, its Chairman of the Board of Directors and largest
shareholder, the Company's former President, Chief Executive Officer and
director and the Company's former Chief Financial Officer are named as
defendants in a securities action filed in the U.S. District Court for the
Western District of Washington (the "Complaint"). The Complaint purports to be
filed on behalf of a class of purchasers of the Company's Common Stock during
the period beginning on July 6, 1995, the date of the Company's initial public
offering, and ending on March 4, 1996 (the "Class period"). An amended complaint
(the "Amended Complaint") was filed on July 8, 1996. The Amended Complaint
alleges, among other things, that the registration statement and prospectus
relating to the Company's initial public offering contained false and misleading
statements concerning the Company's billing software and financial condition.
The Amended Complaint further alleges that, throughout the Class Period, the
defendants inflated the price of the Common Stock by intentionally or recklessly
making material misrepresentations or omissions which deceived the public about
the Company's financial condition and prospects. The Amended Complaint alleges
claims under the Securities Act and the Exchange Act as well as various state
laws, and seeks damages in an unstated amount. Defendant's motion to dismiss was
filed on August 7, 1996. All discovery proceedings are stayed until defendant's
motion to dismiss is heard or otherwise acted upon by the court. An oral
argument has been requested and has been noted for the motion calendar on August
30, 1996. While the Company believes that it has substantive defenses to the
claims in the Amended Complaint, is in the process of preparing a motion to
dismiss the Amended complaint for failure to state a claim on which relief can
be granted and intends to vigorously defend this lawsuit, it is unable to
predict the outcome of this action.
The Company was informed in May 1996 that the Commission was conducting
an informal inquiry regarding the Company's initial public offering and the
restatement of its 1995 third quarter results. The Company has voluntarily
provided the documents requested by the Commission, but has not been informed
whether or not the Commission intends to commence a formal action against the
Company or any of its affiliates. The Company is, therefore, unable to predict
the ultimate outcome of the investigation. In the event that the Commission
elects to initiate a formal enforcement proceeding, the Company and its officers
could be subject to civil or criminal sanctions including monetary penalties and
injunctive measures. Any such enforcement proceeding could have a material
adverse effect on the Company's business, financial condition and results of
operations.
8
<PAGE> 9
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On July 18, 1996, a lawsuit was filed in the United States District
Court for the Northern District of Illinois, Eastern division, against the
Company by Cherry Communications. The Complaint seeks recovery of amounts owed
under two agreements between the Company and Cherry Communications. It is the
Company's position that Cherry Communications has breached its obligations under
those agreements and that the Company has substantial offsets and counterclaims.
The Company is attempting to negotiate a resolution of these disputes, and in
the event a settlement is not reached, intends to vigorously defend the lawsuit.
On April 30, 1996, a lawsuit was filed in the Superior court of the
State of Washington, King County, against the Company and certain of its
officers and directors by the former owner of Cel-Tech seeking rescission of his
sale of Cel-Tech to the Company. The complaint alleges misrepresentation of the
facts concerning the value of the Company's Common Stock and breach of contract.
In addition to rescinding the sale transaction, plaintiff seeks unspecified
damages and an injunction placing Cel-Tech under the plaintiff's control until
resolution of the dispute. The plaintiff has filed a second amended complaint in
order to seek damages in lieu of rescission. The Company believes there is no
merit to the allegations set forth in the amended complaint and plans to
vigorously defend this lawsuit and to file counterclaims on a variety of issues.
However, the Company is unable to predict the outcome of this lawsuit.
On August 1, 1996, a lawsuit was filed in the Superior Court of the
State of California for the County of Orange against the Company, the Company's
former president and chief executive officer and other defendants to be named at
a later date by David and Maria Wiegand, the former shareholders of ADNET. The
Complaint has been voluntarily dismissed by the plaintiffs without prejudice as
described below. ADNET was acquired by the Company on December 29, 1995 in
exchange for 453,250 shares of the Company's common stock, of which 45,325
shares (the "Escrow Shares") were placed in escrow to be held until December 28,
1996 for satisfaction of certain contingencies. ADNET provides long distance
services to medium-to-large businesses. The acquisition was accomplished through
the merger of ADNET into the Company and has been accounted for as a pooling of
interest. Mr. Wiegand is currently a vice president of the Company in charge of
the continuing operations of ADNET. At the date of closing of this acquisition,
the last reported sale price for the Company's Common Stock as reported by
Nasdaq National Market was $18.25. During 1996 the Common Stock has traded as
low as $6.50 per share. The complaint alleged intentional misrepresentations,
intentional concealment of facts, negligent misrepresentation, breach of
contract, breach of implied covenant of good faith and fair dealing and
violation of California Securities Laws in connection with the acquisition. The
plaintiffs sought recovery of monetary damages in an amount which the plaintiffs
describe as "not yet ascertainable, but potentially in [excess of] $10,000,000."
The plaintiffs furthermore sought recission of the Merger Agreement, restoration
of all consideration paid by the plaintiffs to the Company pursuant to the
Merger Agreement, an order enjoining the Company from undertaking any acts which
would further merge ADNET into the Company and which would prevent the
plaintiffs from being accorded full relief upon rescission of the Merger
Agreement, punitive damages in an amount to be determined at trial and
attorney's fees and other costs and expenses of suit.
The plaintiffs' claims are based in part on the restatement by the
Company of its financial results for the third quarter and nine months ended
September 30, 1995 from those reported in its Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995 as originally filed in November 1995. The
restated results, which were first announced in March 1996, reflected a $3.3
million reduction in revenue and $4.5 million reduction in accounts receivable
for the quarter and nine months ended September 30, 1995. These and other
adjustments resulted in the Company's net loss for the quarter and nine months
ended September 30, 1995 being increased from $3.8 million and $8.0 million,
respectively, to $8.3 million and $12.5 million, respectively. The Company had
represented in the merger agreement with ADNET that the financial statements
included in its filings with the Commission "fairly present the
9
<PAGE> 10
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
... financial position of Midcom... as of the dates thereof and its ...results
of operations and cash flow for the periods then ended...are correct and
complete in all respects..."
On August 8, 1996, the Company and the plaintiffs entered into an
agreement whereby the plaintiffs agreed to dismiss the compliant without
prejudice and not to re-file the complaint before August 31, 1996, and the
parties agreed to meet before August 31, 1996 to pursue a negotiated settlement
of the plaintiffs' claims. In connection with execution of this agreement, the
Company agreed to release the Escrow Shares to the plaintiffs. If the Company is
unable to reach an agreement with the plaintiffs to settle their claims, it is
likely that the complaint will be re-filed. Although the Company would
vigorously defend this action, it cannot predict the outcome of these claims.
Should the Company agree or otherwise be required to pay additional
consideration to the plaintiffs, the Company may be required to account for the
acquisition of ADNET using the purchase method, which would require the Company
to restate its financial statements. The operating results of ADNET contributed
$3.7 million in revenue and $0.3 million in net income for the first six months
of 1996.
8. SUBSEQUENT EVENT
On August 2, 1996, the Company announced that it has commenced a
private offering of $75 million principal amount of convertible subordinated
notes due in 2003 (the "Offering"). The notes will be convertible, at the option
of the holder, into shares of Midcom Common Stock. The interest rate and
conversion price for the notes will be determined prior to the close of the
Offering.
If fully subscribed, the Offering is expected to close by the end of
August, 1996. The net proceeds of the Offering are expected to be used to: (i)
repay in full the bridge loan (the "Bridge Loan") with Transamerica Business
Credit Corporation ("Transamerica"), (ii) repay in full the Company's revolving
loans (the "Revolving Loans") under the Company's secured revolving credit
facility with Transamerica and certain other lenders (the "Revolving Credit
Facility"), (iii) acquire and install high capacity switches, (iv) bring current
a number of existing payment obligations and (v) make payments to satisfy past
shortfalls, and reduce the minimum commitment under, the Company's carrier
supply contract with AT&T. The balance of the proceeds will be used for
additional working capital, additional capital expenditures and general
corporate purposes.
The notes are being offered on behalf of Midcom to qualified
institutional buyers under Securities and Exchange Commission Rule 144A, to
certain accredited investors in transactions exempt from registration under the
Securities Act, and to certain non-U.S. persons in offshore transactions under
Regulation S of the Securities Act. The notes have not been registered under the
Securities Act of 1933 and may not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements.
9. GOING CONCERN AND LIQUIDITY
The Company incurred operating losses during each of the three years
ended December 31, 1995 and, as of June 30, 1996, had an accumulated deficit of
$97.7 million, a working capital deficit of $66.4 million and was in default
with regard to certain agreements with its lenders. The condensed consolidated
financial statements have been prepared assuming the Company will continue as a
going concern and do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets and liabilities that
may result from the outcome of this uncertainty.
As a result of its rapid growth, acquisition strategy, operating losses
and other factors, the Company has required substantial working capital to fund
its operations. To date, the Company has financed its operations principally
through bank borrowings, subordinated debt, a capital lease facility and the net
proceeds from its July 1995 initial public offering of common stock. The
Company's available
10
<PAGE> 11
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
sources of working capital consist of cash flow from operations and available
borrowings under a Revolving Credit Facility (to the extent permitted by the
lenders in light of existing defaults thereunder). Working capital requirements
presently exceed cash flows from operations and available borrowings.
Accordingly, the Company has sought extended payment terms from certain of its
suppliers, delayed payments to many of its suppliers and other vendors, delayed
or canceled purchases and taken other steps to conserve operating capital. As a
result, suppliers and other vendors may place the Company on credit hold or take
other actions, including the termination of their supply relationship with the
Company or the initiation of collection actions. The Company has been in default
of a number of the financial covenants under the revolving credit facility
during 1996. The report of the Company's independent auditors with respect to
the Company's Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 states that the
Company's recurring operating losses, working capital deficiency and credit
agreement defaults raise substantial doubt about the Company's ability to
continue as a going concern. The existence of the going concern paragraph in the
independent auditors' report, as well as other covenant violations, give rise to
defaults under the Company's Revolving Credit Facility. Although the lenders
have continued to permit borrowings under the facility in spite of the existence
of covenant violations, there can be no assurance that borrowings will continue
to be permitted under the facility. The events of default under the credit
facility trigger default clauses in certain capital lease obligations. All
long-term debt in default has been classified as a current liability in the
financial statements.
The Company is uncertain how long cash flow from operations and
borrowings under the Revolving Credit Facility will be sufficient to continue
operations at current levels. However, these sources are not sufficient to repay
a $15 million bridge loan due September 24, 1996 and fund remaining payments to
sellers of customer bases. The Company's ability to continue as a going concern
depends on its ability to reduce operating expenses, increase its gross margins
and obtain additional working capital. The Company has taken steps to reduce
expenses, curtail acquisition activities and reduce capital equipment
expenditures. The Company and it's lenders have entered into an amendment to
the Revolving Credit Facility which, conditioned on consummation of the Offering
of convertible subordinated notes described in Note 8 above, and repayment of
all borrowings under the Revolving Credit Facility and the Bridge Loan referred
to above, will provide for the waiver of all existing covenant defaults, modify
financial covenants to a level consistent with the Company's revised business
plan and eliminate certain other financial covenants. The amendment also
requires that the Company maintain minimum excess availability in an initial
amount of $20 million for the months of August 1996 through 1997, declining in
stages to $8 million for the months of September through November 1997.
If the Company is not able to complete the Offering described in Note 8
above or obtain substantial additional working capital pursuant to some other
financing arrangement, it will be forced to further curtail operations,
refinance all or a portion of its existing debt, sell assets or seek extended
payment terms from its vendors. There can be no assurance that the Company's
lenders will waive existing or future covenant violations or continue to make
borrowings available under the Revolving Credit Facility, that additional
financing will be available on acceptable terms or, that the Company will be
able to further reduce expenses, obtain payment terms from vendors or
successfully complete other steps necessary to continue as a going concern. Any
additional financing may involve substantial dilution to the interest of the
Company's shareholders. The failure of the Company to complete the Offering or
otherwise obtain sufficient funds to satisfy its cash requirements could force
the Company to seek protection under the federal bankruptcy laws.
11
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD LOOKING INFORMATION
Statements in this Quarterly Report on Form 10-Q concerning future
events, trends or expectations constitute forward-looking statements which are
subject to a number of known and unknown risks and uncertainties which might
cause actual results, performance or achievements of the Company or its industry
to differ materially from those expressed or implied by such forward-looking
statements. These include risks and uncertainties described under the caption
"Risk Factors" identified by the Company from time to time in filings with the
Commission, press releases and other communications. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date of such statement. The Company undertakes no obligation to publicly
release results of any revisions of such forward looking statements that may be
made to reflect events or circumstances after the date of any such statement or
to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages that certain items bear, except as noted, to total revenue:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------------------------
1996 1995 1996 1995
- -------------------------------------------------------------------------------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 72.5 68.5 72.0 67.0
----------------- ----------------
Gross margin 27.5 31.5 28.0 33.0
Operating expenses:
Selling, general and administrative 38.8 27.6 34.4 28.3
Depreciation 3.2 2.1 2.8 2.0
Amortization 19.3 2.9 17.6 3.0
Settlement of contract dispute 21.6 -- 9.4 --
Restructuring charges 1.5 -- 2.4 --
Loss on impairment of assets 46.0 -- 20.0 --
----------------- ----------------
Operating loss (102.9) (1.1) (58.6) (0.3)
Other expense:
Interest expense (6.1) (3.5) (4.1) (3.4)
Other expense, net (0.4) (0.6) (0.3) (0.4)
----------------- ----------------
(6.5) (4.1) (4.4) (3.8)
----------------- ----------------
Net loss (109.4) (5.2) (63.0) (4.1)
================= ================
</TABLE>
REVENUE. For the second quarter of 1996, the Company reported a 21.2%
decrease in revenue to $40.8 million from $51.8 million reported in the second
quarter of 1995. Year-to-date revenue of $93.9 million represents a 3.6%
decrease from the $97.4 million reported for the same period in 1995. Second
quarter 1996 revenue decreased $12.3 million from the first quarter 1996 revenue
of $53.1 million due to customer attrition, the loss of a major reseller, and a
dispute with the seller of an acquired customer base. The decrease in 1996
periods as compared to the year earlier periods is primarily attributable to
customer attrition principally with respect to the Company's acquired customer
bases.
The Company expects that, over the next nine to twelve months, revenue
will continue to decline due to customer attrition, seasonality and other
factors. Due to its predominantly commercial customer base, the Company tends to
experience decreases in customer usage and revenue around national holidays and
traditional vacation periods. The Company anticipates revenue from existing
customers during the last two quarters of the year to be lower than during the
first two quarters. Historically, however, results have been affected more
significantly by acquisitions of customer bases and growth through wholesale,
direct and other sales channels than by seasonal factors.
GROSS MARGIN. The Company's cost of revenue consists of the cost of
services provided by local and interexchange carriers. Gross margin was 27.5%
and 28.0% as a percent of total revenue for the quarter and six month periods in
1996, respectively, versus 31.5% and 33.0% for the same periods in 1995. Gross
margin in the second quarter of 1996 decreased 1% from the 28.5% reported for
the first quarter of 1996.
The decline in gross margin is attributable to several factors,
including an increase in wholesale revenue as a percentage of total revenue,
which carry a lower gross margin percentage, and a decrease in revenue per
minute as a result of changes in the mix of customers. These factors were offset
in part by negotiation of price reductions with some of the Company's
interexchange suppliers.
12
<PAGE> 13
<PAGE> 14
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of payroll and related expenses for
administrative, customer support and marketing personnel, compensation costs for
direct sales personnel, commissions and other costs related to indirect
distribution and bad debt expense. Selling, general and administrative expenses
increased 10.7% and 17.6%, respectively, in the second quarter and six month
periods ended June 30, 1996 as compared to the corresponding 1995 periods.
Selling, general and administrative expenses increased as a percentage of
revenue during both 1996 periods as well. The increase in spending was due to
several factors, including an increase in bad debt expense, an increase in
legal, accounting and other professional fees and an increase in fees paid to
third party billing agents. These increases were offset, in part, by reductions
in commission expenses, marketing expenses and facilities-related costs. The
Company employed 335 and 445 persons on a full-time basis as of June 30, 1996
and 1995, respectively.
DEPRECIATION. Depreciation expense increased to $1.3 million in the
second quarter of 1996 from $1.1 million in the same period of 1995. For the six
months ended June 30, 1996, depreciation was $2.7 million versus $1.9 million
in the same period of 1995. The increase is primarily attributable to the
depreciation of computer systems and equipment related to the Company's billing
and management information system which was placed into service in the second
quarter of 1995. The increase was partially offset by the reduction in
depreciation of telephone switching equipment due to the write-off of such
equipment in the fourth quarter of 1995.
AMORTIZATION. Amortization expense increased as a percentage of
revenues to 19.3% in the second quarter of 1996 from 2.9% in the same period of
1995. Year-to-date amortization was $16.5 million in 1996 versus $3.0 million
for the same period of 1995. In conjunction with the preparation of the first
quarter financial statements, the Company completed a review of its accounting
policies and practices, including those relating to intangible assets. Based on
certain changes in circumstances that occurred in the first quarter, including
turnover in personnel, reduction in sales force and continuing attrition of
acquired customer bases, the Company determined that effective January 1,1996, a
reduction in the estimated useful life of acquired customer bases from 5 years
to 3 years was appropriate. The increase in amortization expense is a result of
the change in the estimated useful life and amortization of customer bases,
non-competition agreements and goodwill resulting from acquisitions completed in
the second half of 1995.
CHARGE RELATED TO ANTICIPATED SETTLEMENT OF CONTRACT DISPUTE. On July
19, 1996, the Company and AT&T executed a letter of intent to settle anticipated
shortfalls of minimum commitments under the Company's supply contract with AT&T
as well as all other pending disputes between the Company and AT&T and to
negotiate a new contract pursuant to which the Company's minimum commitment to
AT&T will be reduced from approximately $117 million to $17 million. The letter
of intent also provides for the payment by the Company to AT&T of $8.8 million
in two installments. The Company has recorded a charge of $8.8 million in the
second quarter of 1996 with respect to this anticipated settlement. The
settlement and other terms of the letter of intent will not be effective until
the Company and AT&T have executed a mutually acceptable definitive agreement,
which the parties intend to pursue during August 1996; however, there can be no
assurance that a definitive agreement will be reached. See "--Liquidity and
Capital Resources."
RESTRUCTURING CHARGES. In March and April 1996, the Company made
announcements regarding changes in senior management and the restructuring of
its operations in order to reduce expenses to the level of available capital.
These actions included the layoff of certain employees and contractors and the
closure of 6 sales offices. As a result, the Company recorded a charge of $1.6
million during the first quarter 1996 and $0.6 million during the second quarter
of 1996, the major components of which relate to severance and lease
cancellation charges. Included in the restructuring charge is approximately $0.4
million relating to the extension of the time period to exercise outstanding
stock options. As of June 30, 1996 $1.2 million of this restructuring charge
remained in accrued liabilities to cover payments to be made in the future.
13
<PAGE> 15
LOSS ON IMPAIRMENT OF ASSETS. The Company periodically reviews the
carrying value of its intangible assets in accordance with Statement of
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." Based on certain changes in
circumstances that occurred in 1996, including turnover in personnel, reduction
in sales force and continuing attrition of acquired customer bases, the Company
determined that effective January 1, 1996, a reduction in the estimated useful
life of acquired customer bases from 5 years to 3 years was appropriate.
Additionally, to the extent that the estimated future cash inflows attributable
to the asset, less estimated future cash outflows, is less than the carrying
amount, an impairment loss is recognized. In connection with such a review, the
Company wrote-down certain acquired customer bases and recorded a loss on
impairment of assets totaling $18.8 million during the second quarter of 1996.
OTHER EXPENSES. Interest expense increased year-over-year primarily due
to an increase in average borrowings outstanding, an increase in average
interest rates, and $1.1 million in fees paid in connection with the Bridge
Loan. At June 30, and March 31, 1996, the Company had outstanding
interest-bearing obligations of $58.0 million and $62.1 million, respectively,
as compared to $58.1 million as of December 31, 1995. The decrease in debt at
June 30, 1996 was primarily due to steps taken to conserve operating capital and
repayment of notes payable. The Company discontinued recording its share of the
income or losses of the Russian joint venture as of December 31, 1995 as the
investment was written down as of that date to its estimated current value of
$2.0 million.
INCOME TAXES. The Company has incurred losses for all periods
presented. No tax benefit has been recorded with respect to these losses due to
the uncertainty as to the utilization of Company's net operating loss
carryforward.
NET LOSS. The substantial increase in net loss in 1996 periods over the
corresponding periods in 1995 is attributable to the declines in gross margin,
the increases in operating expenses, the $18.8 million loss on impairment of
assets related to acquired customer bases, the restructuring charges and
anticipated settlement payments described above.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has experienced rapid growth, which has
required substantial working capital to finance receivables, capital
expenditures and acquisitions and service indebtedness. Given the Company's
billing and collection cycle with its customers and suppliers, Midcom generally
pays its underlying suppliers from thirty to forty-five days prior to the time
it is paid by its customers for the same services. The Company has financed its
growth with the proceeds from its July 1995 initial public offering, bank
borrowings, subordinated debt, vendor financing, loans from shareholders,
capital leases, cash flow from operations, and the issuance of Common Stock and
assumption of indebtedness in connection with acquisitions of businesses and
customer bases.
The Company's cash balances were $1.4 million at June 30, 1996 versus
$1.1 million at March 31, 1996 and December 31, 1995. Net cash used in
operations was $0.2 million for the first six months of 1996 versus $3.4 million
generated by operations in the first half of 1995. During the first six months
of 1996, the Company experienced operating losses and incurred interest expenses
which resulted in a use of cash in operating activities. The Company reduced its
unbilled receivables balances from $28.0 million as of December 31, 1995 to
$10.7 million as of June 30, 1996. This was primarily attributable to a
reduction in the backlog of billings which built up during the second half of
1995, and a reduction in the run rate of monthly revenue.
During the first six months of 1996, the Company invested $1.1 million
to purchase property, plant and equipment compared to $5.2 million for the same
period the prior year. In 1995, the Company used $1.9 million in business and
customer base acquisitions and $1.1 million in advances to a joint venture. In
1996, no similar investments were made. For the first six months of 1996, the
Company
14
<PAGE> 16
received $2.3 million in proceeds in connection with the exercise of stock
options and the purchase of shares under the Company's stock purchase plan
versus $25,000 received in the first six months of 1995.
The Company has experienced significant losses since its inception. As
a result of these losses, the billing and collection cycle with its customers,
acquisition strategy and other factors, the Company has required substantial
external working capital. At the date of this report, the Company's available
sources of working capital consisted of cash flows from operations and expected
available borrowings under its Revolving Credit Facility. Working capital
requirements currently exceed cash flows from operations and available
borrowings. Accordingly, the Company has sought extended payment terms from
certain of its suppliers, delayed payments to many of its suppliers and other
vendors, delayed or canceled purchases and taken other steps to conserve
operating capital. As a result, suppliers may place the Company on credit hold
or take other actions.
In connection with the resignation of Ashok Rao, the Company's former
President and Chief Executive Officer, the Company has elected to repurchase
885,360 shares of common stock held by Mr. Rao and certain trusts established by
Mr. Rao at a price equal to the fair market value of such common stock on the
date of Mr. Rao's resignation, as determined by arbitration, to be paid ratably
over a period of 36 months. The Company's election to repurchase such shares of
common stock will adversely affect the Company's liquidity. In addition, the
unpaid balance of a promissory note delivered to Cherry Communications in
connection with the acquisitions of two customer bases is approximately $10.2
million, of which $9.0 million may be paid in cash or by delivery of shares of
the Company's common stock, as the Company may elect, and the remaining $1.2
million is subject to certain hold-back arrangements. The acquired customer
bases have not generated required minimum revenue levels and Cherry
Communications has failed to remit to the Company collections received by Cherry
Communications from a portion of the acquired customers. Accordingly, the
Company has withheld the final three installment payments for the second of the
two acquisitions, payment of the invoices for carrier services for the acquired
bases (approximately $7.5 million through June 30, 1996) and accrued customer
service charges through June 30, 1996 of $720,000. Negotiations between Cherry
Communications and the Company failed to produce a settlement of these disputes
and Cherry Communications has filed suit against the Company seeking to recover
the alleged past due amounts. See "Note 7 -- Disputes and Litigation" in Item 1
of Part I. The Company is also obligated to pay up to $2.0 million additional
cash pursuant to a customer base purchase agreement upon attainment of specified
revenue levels by such customer base, and a payment of a maximum of $2.0 million
to the former shareholder of Cel-Tech in the event that the Company sells or
transfers a majority of Cel-Tech's voting stock.
As of June 30, 1996, Midcom's minimum volume commitment under its
supply contract with AT&T, its largest supply contract, was $117.0 million. The
Company estimates that, as of the next measurement date on September 30, 1996,
it will be in shortfall of its minimum commitments to AT&T by approximately
$27.6 million based upon current contract requirements. However, on July 19,
1996, the Company and AT&T executed a letter of intent to settle this
anticipated liability as well as all other pending disputes between the Company
and AT&T, and to negotiate a new contract pursuant to which the Company's
minimum commitment to AT&T will be $17.0 million. The letter of intent also
provides for the payment by the Company to AT&T of $8.8 million payable in two
installments. The first payment of $5.0 million will be due on the earlier of
March 31, 1997 or 30 days after the Company completes a financing, and the
remaining of balance of $3.8 million will be due within 30 days of Midcom
announcing quarterly gross revenue in excess of $75 million, or upon completion
of a change in control. In addition, Midcom will obtain more favorable pricing
for certain network services provided by AT&T. Pursuant to the same letter of
intent, Midcom and AT&T have negotiated a payment schedule for overdue payments
which will bring the Company's obligations to AT&T current by the middle of
October 1996. The
15
<PAGE> 17
settlement and new rate structure will not be effective until the Company and
AT&T have executed an mutually acceptable definitive agreement, which the
parties intend to pursue during August 1996; however, there can be no assurance
that a definitive agreement will be reached.
The Company has a Revolving Credit Facility under which borrowings of
up to $43 million are available, subject to a borrowing base limitation of 85%
of eligible accounts receivable and other financial ratios. As of the date of
this report, the Company's lenders were continuing to permit borrowings under
the Revolving Credit Facility in spite of the existence of financial and other
covenant violations. As of August 12, 1996, revolving loans in the aggregate of
approximately $23.0 million were outstanding and approximately $3.0 million was
available based on the borrowing base at such date. Available borrowings
fluctuate from day to day based on the timing of cash collections and payments.
Pursuant to an amendment to be effective on consummation of the Offering
described in Note 8 - Subsequent Event in Item 1 of Part I above, and
conditioned upon the repayment of the Bridge Loan referred to below and all
borrowings under the Revolving Credit Facility, borrowings under this facility
will be subject to a borrowing base limitation of 85% of the Company's eligible
accounts receivable less minimum excess availability requirements of $20.0
million for the months of August 1996 through February 1997 which decline in
stages to $8.0 for the months of September through November 1997. This facility
expires on November 8, 1997. As of August 12, 1996, assuming completion of the
Offering and repayment in full all of the Revolving Credit Facility and the
Bridge Loan, and after giving effect to the amendment, the Company would have
had a borrowing base of approximately $26.0 million and maximum borrowing
availability, net of the minimum excess availability requirements, of
approximately $6.0 million. There can be no assurance that the Offering will be
completed.
On March 28, 1996, Transamerica, one of the lenders under the Revolving
Credit Facility, provided the Bridge Loan to the Company of $15.0 million in
consideration of a loan fee of $500,000. Although the Bridge Loan was originally
due in full on April 27, 1996, the Company has the right to extend the due date
for additional 30-day periods upon payment of an additional fee of $200,000 for
each such extension, with final payment of the Bridge Loan due by September 24,
1996. Four 30-day extension have been exercised by the Company
The Company also is in default under certain other equipment lease
facilities having outstanding balances of approximately $3.7 million at June 30,
1996. As a result, the capitalized lease obligations under these facilities have
been classified as short-term obligations on the Company's balance sheet at June
30, 1996. As a result of these defaults, the Company is not permitted to incur
additional obligations under these facilities and could be required to repay all
amounts outstanding under these facilities. The Company is currently in the
process of attempting to resolve these defaults. There can be no assurance,
however, that a resolution favorable to the Company will be obtained.
The report of the Company's independent auditors with respect to the
Company's Consolidated Financial Statements for the year ended December 31, 1995
states that the Company's recurring operating losses, working capital deficiency
and past defaults under the Revolving Credit Facility raise substantial doubt
about the Company's ability to continue as a going concern. The Company's
Consolidated Financial Statements have been prepared assuming that the Company
will continue as a going concern and do not include any adjustments that might
result from the outcome of this uncertainty. The nature of this opinion itself
constitutes a default under the Revolving Credit Facility. Subject to
consummation of the Offering and the application of the net proceeds therefrom
to the repayment in full of the Bridge Loan and the Revolving Loans, the lenders
under the Revolving Credit Facility have agreed, to waive all existing defaults
and amend all financial covenants to be consistent with the Company's revised
business plan.
Midcom anticipates that the net proceeds from the Offering, if
completed, will be used as follows: (i) $15.0 million to repay in full the
Bridge Loan, (ii) approximately $23.0 million to repay in full the Revolving
Loans (based on the aggregate principal amount of Revolving Loans outstanding as
of August
16
<PAGE> 18
12, 1996), (iii) approximately $22.0 million to acquire and install high
capacity switches, (iv) approximately $7.0 million to bring current a number of
existing payment obligations and (v) $5.0 million to pay the first installment
of an $8.8 million payment in connection with the satisfaction of past shortfall
and reduction of the minimum commitment under the Company's carrier supply
contract with AT&T. The balance of the proceeds will be used for additional
working capital, additional capital expenditures and general corporate purposes.
There can be no assurance that the Offering will be completed. The Company
expects that it will require between $40.0 million and $50.0 million during the
next two years in order to fund (i) operating losses, (ii) working capital
requirements and (iii) capital expenditures, including the amount indicated
above to acquire and install high capacity switches. The Company expects that
funds available to it after the application of the net proceeds from the
Offering, together with funds available under the Revolving Credit Facility and
cash flows from operations, will be sufficient to fund these requirements for
the next 18 to 24 months. However, the exact amount and timing of these capital
requirements will be determined by numerous factors, including the level of, and
gross margin on, future sales, the outcome of outstanding contingencies and
disputes such as pending lawsuits and payment terms obtained from the Company's
suppliers and the timing of capital expenditures associated with the planned
installation of new switching facilities. Further, there can be no assurance
that the Revolving Credit Facility will continue to be available to the Company
or that the net proceeds from the Offering together with funds available under
the Revolving Credit Facility and cash flows from operations will be sufficient
to fully implement the Company's new operating strategy or meet its other
capital requirements. If (i) the Company experiences greater than anticipated
capital requirements, (ii) the Offering is not completed in the near future,
(iii) the Company is determined to be liable for, or otherwise agrees to settle
or compromise, any material claim against it, (iv) it is unable to make future
borrowings under the Revolving Credit Facility for any reason or (v) the
implementation of the Company's new operating strategy fails to produce the
anticipated cash flows from operations, the Company may be required to refinance
all or a portion of its existing debt, sell assets or obtain additional equity
financing. There can be no assurance that any such refinancing or asset sales
would be possible or that the Company will be able to obtain additional equity
or debt financing, if and when needed, on terms that the Company finds
acceptable. Any additional equity or debt financing may involve substantial
dilution to the interests of the Company's shareholders. The failure of the
Company to complete the Offering, one or more of such alternatives or otherwise
obtain sufficient funds to satisfy its cash requirements could prevent the
Company from implementing its operating strategy and, ultimately, could force
the Company to seek protection under the federal bankruptcy laws. Such events
would materially and adversely affect the value of the Company's debt and equity
securities.
ADOPTION OF ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation." This pronouncement
establishes accounting and reporting standards for stock-based employee
compensation plans, including stock purchase plans, stock options and stock
appreciation rights. This standard defines a fair value based method of
accounting for these equity instruments. This method measures compensation cost
based on the value of the award and recognizes that cost over the service
period. Companies may elect to adopt this standard or to continue accounting for
these types of equity instruments under current guidance, APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Companies which elect to continue
using the rules of APB Opinion No. 25 must make pro forma disclosures of net
income and earnings per share as if this new statement had been applied.
Effective January 1, 1996, the Company adopted Statement 123 and elected to
continue following the guidance of APB Opinion No. 25.
17
<PAGE> 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See "Note 7 -- Disputes and Litigation" in Item 1 of Part I above.
Item 3. Defaults Upon Senior Securities
See "Liquidity and Capital Resources" in Item 2 of Part I above.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11: Computation of Net Loss Per Share.
(b) Reports on Form 8-K
1) Current report on Form 8-K and Amendments Nos. 1 and 2 to
Form 8-K filed with the Commission on January 11, 1996,
March 13, 1996 and April 1, 1996, respectively, regarding
the Company's acquisition of ADNET Telemanagement, Inc.
2) Report on Form 8-K filed with the Commission on August 2,
1996 reporting preliminary results for the quarter ended
June 30, 1996 and other matters.
3) Report on Form 8-K filed with the Commission on August 9,
1996 regarding the complaint filed by the former
shareholders of ADNET Telemanagement.
18
<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDCOM Communications Inc.
(Registrant)
/s/ Robert J. Chamberlain
-----------------------------
Date: August 14, 1996 Robert J. Chamberlain
--------------- Senior Vice President &
Chief Financial Officer
19
<PAGE> 21
MIDCOM COMMUNICATIONS INC.
EXHIBIT INDEX
Exhibit No. Description
11 Computation of Net Loss Per Share
27 Financial Data Schedule
20
<PAGE> 1
MIDCOM COMMUNICATIONS INC.
COMPUTATION OF NET LOSS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(In thousands, except per share data) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss $(44,661) $ (2,687) $ (59,161) $ (4,023)
===================== ========================
Weighted average common shares outstanding 15,445 8,454 15,321 8,431
Net effect of stock options and warrants granted during the
twelve months prior to the filing of the registration
statement with respect to the Company's initial public
offering at less than the $11.00 offering price calculated
using the treasury stock method and treated as outstanding
for all periods prior to the closing of the Company's
initial public offering. -- 975 -- 975
Weighted average common shares giving effect to the
redemption of Series A Redeemable Preferred Stock,
calculated assuming net proceeds at the $11.00 offering
price. -- 840 -- 840
--------------------- ------------------------
Weighted average shares outstanding 15,445 10,269 15,321 10,246
===================== ========================
Net loss per share $ (2.89) $ (0.26) $ (3.86) $ (0.39)
===================== ========================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 1434000
<SECURITIES> 0
<RECEIVABLES> 50985000
<ALLOWANCES> 8488000
<INVENTORY> 0
<CURRENT-ASSETS> 45596000
<PP&E> 19391000
<DEPRECIATION> 8291000
<TOTAL-ASSETS> 87587000
<CURRENT-LIABILITIES> 112947000
<BONDS> 0
0
0
<COMMON> 65513000
<OTHER-SE> (97749000)
<TOTAL-LIABILITY-AND-EQUITY> 87587000
<SALES> 0
<TOTAL-REVENUES> 93860000
<CGS> 67536000
<TOTAL-COSTS> 81309000
<OTHER-EXPENSES> 266000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3910000
<INCOME-PRETAX> (59161000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (59161000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (59161000)
<EPS-PRIMARY> (3.86)
<EPS-DILUTED> (3.86)
</TABLE>
