<PAGE> 1
CONFORMED COPY
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the period ended March 31, 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.)
1111 Third Avenue, Seattle WA 98101
(Address of principal executive offices) (Zip Code)
(206) 628-8000
(Registrant's telephone number, including area code)
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 April 30, 1996
- ------------------------------- -----------------------------
<S> <C>
Common Stock, $0.0001 par value 15,500,694
</TABLE>
Page 1 of XX pages.
Exhibit Index at Page___.
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MIDCOM COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,124 $ 1,083
Accounts receivable, less allowance for doubtful accounts
of $9,732 and $10,581 47,917 51,814
Due from related parties 323 502
Notes receivable 83 86
Prepaid expenses and other current assets 3,542 2,424
-------- --------
Total current assets 52,989 55,909
Investments in and advances to joint venture 2,000 2,000
Plant and equipment, net 13,056 13,719
Intangible assets, less accumulated amortization of
$21,490 and $12,812 53,245 60,781
Other assets and deferred charges, net 652 922
-------- --------
Total assets $121,942 $133,331
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MIDCOM COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,742 $ 7,397
Carrier accounts payable 29,173 32,534
Accrued expenses and other current liabilities 10,373 9,613
Notes payable 11,508 14,576
Current portion of long-term obligations 48,997 41,721
--------- ---------
Total current liabilities 107,793 105,841
Long-term debt, less current portion 811 827
Capital lease obligations, less current portion 793 1,017
Deferred income 119 130
Other long-term liabilities 1,757 1,717
Shareholders' equity:
Common stock, $.0001 par value (stated at amounts paid
in); 90,000,000 shares authorized, 15,494,000 and
15,129,000 shares issued and outstanding 63,757 62,400
Deferred compensation -- (13)
Accumulated deficit (53,088) (38,588)
--------- ---------
Total shareholders' equity 10,669 23,799
--------- ---------
Total liabilities and shareholders' equity $ 121,942 $ 133,331
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MIDCOM COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
-------- --------
(Restated)
<S> <C> <C>
Revenues $ 53,055 $ 45,572
Cost of revenues 37,947 29,807
-------- --------
Gross profit 15,108 15,765
Operating expenses:
Selling, general and administrative 16,471 13,175
Depreciation 1,351 848
Amortization 8,678 1,460
Restructuring charges 1,620 --
-------- --------
Total operating expenses 28,120 15,483
-------- --------
Operating income (loss) (13,012) 282
-------- --------
Other expenses
Interest Expense 1,366 1,547
Equity in loss of joint venture -- 53
Other expense, net 122 18
-------- --------
Total other expenses 1,488 1,618
-------- --------
Loss before income taxes (14,500) (1,336)
Income tax expense -- --
-------- --------
Net loss $(14,500) $ (1,336)
======== ========
Net loss per share $ (0.95) $ (0.14)
======== ========
Pro forma net loss per share $ (0.95) $ (0.13)
======== ========
Shares used in computing per share data 15,199 9,420
======== ========
Shares used in computing pro forma
per share data 15,199 10,260
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 5
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MIDCOM COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1995
------- -------
(Restated)
<S> <C> <C>
Net cash provided by (used in) operating activities $(3,829) $ 760
------- -------
Investing Activities:
Purchases of plant and equipment (709) (2,709)
Net assets acquired in business and customer
base acquisitions -- (1,878)
Investment in and advances to joint venture -- (243)
Decrease (increase) in notes receivable 3 (30)
------- -------
Net cash used in investing activities (706) (4,860)
------- -------
Financing Activities:
Repayment of notes payable (3,068) (2,424)
Proceeds from long-term debt 17,168 7,222
Repayment of long-term debt (10,132) (236)
Proceeds from common stock issued for stock purchase plan
and stock options 608 --
Distributions to shareholders of acquired companies -- (39)
------- -------
Net cash provided by financing activities 4,576 4,523
Net increase in cash 41 423
------- -------
Cash at beginning of period 1,083 960
------- -------
Cash at end of period $ 1,124 $ 1,383
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 6
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements include the accounts of
MIDCOM Communications Inc. and its wholly-owned subsidiaries
(collectively referred to as the "Company"). All significant intercompany
accounts and transactions have been eliminated.
These financial statements have been prepared without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission.
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. These condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements and 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 financial information included herein reflects all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary to a fair presentation of the results
for interim periods. The results of operations for the three month period
ended March 31, 1996 are not necessarily indicative of the results to be
expected for the full year.
2. 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. and its
wholly-owned subsidiary, Advanced Network Design ("ADNET"), 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.
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
<PAGE> 7
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
2. BUSINESS COMBINATIONS (CONT'D)
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 $2,000 additional cash in connection with a customer base
purchase agreement upon the maintenance 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, Inc., a subsidiary of the
Company, a payment of a maximum of $2,000 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 the Company's closing stock price of $7.25 on
April 30, 1996, approximately 504,000 additional shares would be issuable
as a result of these obligations.
3. 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. Common
stock equivalents are excluded from the calculation of net loss per share
due to their antidilutive effect except that pursuant to Securities and
Exchange Commission (SEC) requirements, common and equivalent shares
issued during the twelve month period prior to the filing with the SEC 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 presented using the treasury stock method.
Pro forma net loss per share is computed based on the historical net loss
per share adjusted for the shares of common stock issued by the Company
in its initial public offering which net proceeds were used to redeem the
Series A preferred stock.
4. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
------ -------
(Restated)
<S> <C> <C>
Noncash investing and financing activities:
Issuance of note payable and assumption of liabilities
for acquisition of customer bases $ 487 $13,261
Capital lease obligation for equipment -- 66
Issuance of notes payable for equipment 310
Issuance of common stock for acquisitions 329 2,776
Issuance of note payable for settlement of carrier accounts
payable -- 3,500
Cash paid for interest 1,259 527
</TABLE>
5. CONTINGENCIES
On April 19, 1996, the Company received notice of the filing of a lawsuit in the
U.S. District Court for the Western District of Washington (Seattle) naming the
Company and two of its directors and the Company's former chief financial
officer as defendants. The lawsuit alleges violations of various securities laws
arising from alleged misstatements and omissions in the Company's initial public
offering and subsequent public filings. The Plaintiff seeks certification as a
class action. On April 23rd, a second shareholder joined the case. The
plaintiffs seek compensatory damages of an undetermined amount. The Company
believes the case to be without any merit and it plans to vigorously defend the
lawsuit.
On April 30, 1996, a lawsuit was filed in the Superior Court for the State of
Washington, King County, against the company and certain of its officers and
directors by the former owner of Cel-Tech International Corp., seeking recision
of his sale of Cel-Tech to the Company. The Complaint alleges misleading
representations were made about the financial status of the Company. The
Company believes there is no merit to the allegations, it plans to file
counterclaims on a variety of issues, and it fully intends to defend the case.
The Company has been notified by the sellers of AdNet that they believe the
Company made material misrepresentations about its financial condition and as a
result the sellers are requesting additional consideration for AdNet. The
Company is evaluating this request including the impact that issuing additional
consideration may have on the accounting for this acquisition as a pooling of
interests. As of the filing of this report the Company has not committed to
issue additional consideration and is continuing discussions with the sellers
about possible resolutions.
There can be no assurance that the ultimate resolution of the issues described
above will not have a material impact on the Company's liquidity, financial
position and results of operations, and with respect to the AdNet issue,
previously reported amounts.
<PAGE> 8
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FORWARD LOOKING INFORMATION
Statements in this report concerning future results, performance, achievements,
expectations or trends if any, are forward-looking statements. Actual results,
performance, achievements, events or trends could differ materially from those
expressed or implied by such forward-looking statements as a result of known and
unknown risks, uncertainties and other factors including those described below
and those identified by the Company in its Annual Report on Form 10-K and from
time to time in other filings with the Securities and Exchange Commission, press
releases and other communications.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, the
percentages that certain items bear, except as noted, to total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1995
----- -----
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of revenues 71.5 65.4
----- -----
Gross profit 28.5 34.6
Selling, general and administrative expenses 31.0 28.9
Depreciation 2.6 1.9
Amortization 16.3 3.2
Restructuring charges 3.1 --
----- -----
Operating income (loss) (24.5) 0.6
Interest expense (2.6) (3.4)
Other expense, net (0.2) (0.1)
----- -----
Net loss (27.3) (2.9)
===== =====
</TABLE>
Revenues. Revenues for the quarter ended March 31, 1996 increased by
16% over the same period in 1995. The increase is primarily attributable to
incremental telecommunications services revenues resulting from acquisitions
completed during the second half of 1995, and, to a lesser extent, new sales
through the Company's combined sales channels, offset by the impact of
attrition. The Company expects quarterly revenues through the remainder of 1996
to continue to decline due to the loss of a significant wholesaler, Telco
Communications, in March 1996, attrition, seasonality and other factors. Due to
the predominantly commercial nature of its customer base, the Company
experiences general decreases in customer usage and revenue around national
holidays and traditional vacation periods. Accordingly, the Company anticipates
revenues from existing customers during the last two quarters of the year to
be somewhat lower than during the first two quarters. Historically, results have
been affected more significantly by the addition of groups of new customers in
connection with acquisitions and growth through wholesale, direct and other
sales channels.
<PAGE> 9
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS (CONT'D)
Gross Margin. The Company's cost of revenues consists of the cost of
services provided by local and interexchange carriers. Cost of revenues for the
quarter ended March 31, 1996 increased by 27% from the same period in 1995. The
increase is primarily attributable to the increase in revenues as discussed
above. The gross margin percentage for the first quarter of 1996 was 28.5%
versus 34.6% for the same period in 1995. The decline in gross margin is
attributable to several factors, including an increase in wholesale revenues
as a percentage of total revenues, 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 as a result
of increased traffic volume.
Selling, General and Administrative Expenses. The Company's 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. SG&A expenses for the
first quarter of 1996 increased 25% over the first quarter of 1995. As indicated
in the table above, SG&A expenses increased as a percentage of revenues during
the 1996 period as well. The increase was due to several factors, including an
increase in bad debt expense, an increase in personnel and contractor costs due
to the Company's decision to discontinue the capitalization of software
development costs relating to its existing information systems effective
January 1, 1996, 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 387 and 420 persons on a
full-time basis as of March 31, 1996 and 1995, respectively.
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 80 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, the components of which relate to
severance and lease cancellation charges. As of March 31, 1996 $1.1 million
remained in accrued liabilities. Included in the restructuring charge is
approximately $0.4 million relating to the extension of the time period to
exercise outstanding stock options. The Company expects these actions to
result in annualized cost savings of approximately $3.5 million.
Depreciation. Depreciation expense increased as a percentage of
revenues to 2.6% in the first quarter of 1996 from 1.9% 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 16.3% in the first quarter of 1996 from 3.2% in 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 estimated useful life and amortization of customer bases, non-
competition agreements and goodwill resulting from acquisitions completed in
the second half of 1995.
Other Expenses. Interest expense increased year-over-year primarily due
to an increase in average borrowings outstanding offset by a decrease in
average interest rates. At March 31, 1996, the Company had outstanding interest-
bearing obligations of $62.1 million, up from $58.1 million outstanding as of
December 31, 1995 and $51.5 million as of March 31, 1995. The increase in debt
from year end 1995 was primarily due to the use of cash for operating
requirements 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.
<PAGE> 10
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has experienced rapid growth, which has
required substantial working capital to finance receivables, capital
expenditures and acquisitions. 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 and cash flow from
operations.
Net cash provided by (used in) operations was ($3.8) million and $0.8
million for the first three months of 1996 and 1995, respectively. During the
first quarter of 1996, to 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 $14.6 million as of March 31, 1996. This was primarily
attributable to a reduction in the backlog of billings which built up during the
second half of 1995, and, to a lesser extent, a reduction in the run rate of
monthly revenues.
Net cash used in investing activities decreased during 1996 due to the
substantial reduction of acquisition activities and investment in capital
equipment and software development.
During the first quarter of 1996, the Company funded operating and
investing cash needs through proceeds from its revolving credit facility and a
bridge loan (see below).
On November 9, 1995, the Company obtained a secured revolving credit
facility which provided for borrowings of up to $50.0 million, subject to a
limitation of 85% of eligible accounts receivable and other financial ratios.
This line expires on November 9, 1997. In March 1996, the maximum amount
available under this facility was reduced to $43.0 million in connection with
the withdrawal of one of the participating lenders. As of May 9, 1996, the
borrowings under this line aggregated $31.3 million and approximately $2.3
million was available. These numbers fluctuate from day to day based on the
timing of cash collections and payments. On March 28, 1996, one of the lenders
for this facility provided an additional bridge loan of $15 million in
consideration of a loan fee of $500,000. The bridge loan was due in full on
April 27, 1996, although 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.
The first extension has been exercised by the Company. The bridge lender also
received a warrant to purchase shares of the Company's Common Stock in an
initial amount of 815,470, subject to adjustment in connection with a variety of
dilutive events, which warrant is not exercisable until September 24, 1996 and
will expire if the bridge loan is repaid in full on or before September 24,
1996. If the warrant becomes exercisable, it will be exercisable for a period of
seven years for nominal consideration. Both the revolver and the bridge loan are
collateralized by substantially all of the assets of the Company and its
subsidiaries. Advances under the revolving credit facility bear interest at
the higher of three lenders' prime rates plus 0.5% or the LIBOR rate plus 2.5%.
Borrowings under the bridge loan bear interest at 12%.
Under the terms of the revolving credit facility, as amended, the
Company is required to meet certain operating and financial covenant
requirements and the negative covenants place certain limitations on, among
other things, investments (including a preclusion on any further cash
investments in the Company's Russian joint venture), additional debt and changes
in capital structure, prohibit payment of cash dividends except in
<PAGE> 11
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
certain limited circumstances and require the Company to obtain the lenders'
written consent prior to making any acquisition. The financial covenants limit
the Company's capital expenditures and capital lease expenses and also require
the Company to increase minimum quarterly EBITDA, to maintain a minimum fixed
charge ratio and to maintain a minimum ratio of EBITDA to interest expense.
These covenants included the requirement that the Company achieve EBITDA of at
least $4.0 million for the quarter ended December 31, 1995, which the Company
failed to achieve. 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 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
Company's revolving credit agreement. Although the EBITDA covenant violation at
December 31, 1995 was waived by the lenders and at the date of this report the
lenders were continuing to permit borrowings under the credit facility and were
engaged in discussions with the Company concerning adjustments to financial
covenants, the Company has not yet obtained a formal waiver of certain other
violations under the credit agreement.
The Company is also in default under certain other equipment lease
facilities. As a result of these defaults the Company is not permitted to incur
additional obligations under these facilities.
The Company's working capital requirements include (i) funds needed to
finance day to day operations, (ii) interest payments on the credit facility and
the bridge loan, (iii) equipment and real property lease obligations and (iv)
payments to sellers of customer bases due on demand or during September 1996 and
which the Company believes will not exceed approximately $2.7 million. Payments
aggregating approximately $9.0 million to another seller of a customer base are
payable, at the option of the Company, either in cash or with shares of the
Company's Common Stock, although the Company's credit agreement prohibits the
Company from paying any portion of this obligation in cash without the lenders'
prior written consent. Based on the Company's stock price on April 30, 1996, it
would be necessary for the Company to issue 1,241,379 shares of its Common Stock
to satisfy this obligation.
The Company's available sources of working capital consist of cash flow
from operations and expected available borrowings under its revolving credit
facility. Although, at the date of this report, the Company's lenders were
continuing to permit borrowings under the credit facility in spite of the
existence of certain covenant violations, there can be no assurance that
borrowings will continue to be permitted under this facility. At the date of
this report, the Company was uncertain how long cash flow from operations and
borrowings under the credit facility would be sufficient to continue operations
at current levels. However, these sources are not sufficient to repay the bridge
loan when due 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 and has
curtailed acquisition activities and capital equipment procurement. The Company
is also actively pursuing possible sources of additional working capital through
the issuance of subordinated debt or equity securities and has engaged
investment bankers to assist it with this process and to investigate strategic
alternatives to maximize shareholder value, including the possible sale or
merger of the Company. The Company has received
<PAGE> 12
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
proposals from investors which would provide additional working capital,
although each of these proposals is subject to a number of conditions. The
qualified auditors' report described above could complicate the Company's
ability to complete a financing. If the Company is not able to secure
additional sources of working capital, it will be forced to further curtail
operations, dispose of assets, or seek extended payment terms from its vendors
in order to continue as a going concern. 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 credit agreement, that
additional financing will be available on acceptable terms or at all, or that
the Company will be able to reduce expenses, obtain payment terms from vendors
or take other steps necessary to continue as agoing concern. Any additional
financing may involve substantial dilution to the interests of the Company's
shareholders.
<PAGE> 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See "Note 5 -- Contingencies" in Item 1 of Part I.
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
11 Statement re Computation of Per Share Earnings.
(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.
<PAGE> 14
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: May 15, 1996 Robert J. Chamberlain
------------ Senior Vice President &
Chief Financial Officer
<PAGE> 15
MIDCOM COMMUNICATIONS INC.
EXHIBIT INDEX
Exhibit No. Description
11 Computation of Per Share Earnings
27 FINANCIAL DATA SCHEDULE
<PAGE> 1
EXHIBIT 11
MIDCOM COMMUNICATIONS INC.
COMPUTATION OF HISTORICAL AND PRO FORMA NET LOSS PER SHARE
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1996 1995
----------- --------
<S> <C> <C>
Net loss $ (14,500) $ (1,336)
=========== ========
Shares outstanding
Weighted average common shares outstanding 15,199 8,445
Net effect of stock options and warrants granted
during the 12 months prior to the filing of the registration statement
with respect to the Company's initial public offering at less than the
$11 offering price calculated using the treasury stock method and treated
as outstanding for all periods presented -- 975
----------- --------
Historical weighted average shares outstanding 15,199 9,420
Weighted average common shares giving effect to the redemption of Series A
Redeemable Preferred Stock, calculated assuming net proceeds at the $11 -- 840
offering price ----------- --------
Pro forma weighted average shares outstanding 15,199 10,260
=========== ========
Historical net loss per share $ (0.95) $ (0.14)
=========== ========
Pro forma net loss per share $ (0.95) $ (0.13)
=========== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,124,000
<SECURITIES> 0
<RECEIVABLES> 48,323,000
<ALLOWANCES> 9,732,000
<INVENTORY> 0
<CURRENT-ASSETS> 52,989,000
<PP&E> 13,056,000
<DEPRECIATION> 7,968,000
<TOTAL-ASSETS> 121,942,000
<CURRENT-LIABILITIES> 108,213,000
<BONDS> 0
0
0
<COMMON> 63,337,000
<OTHER-SE> (53,088,000)
<TOTAL-LIABILITY-AND-EQUITY> 121,942,000
<SALES> 0
<TOTAL-REVENUES> 53,055,000
<CGS> 0
<TOTAL-COSTS> 37,947,000
<OTHER-EXPENSES> 28,120,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,366,000
<INCOME-PRETAX> (14,500,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,500,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,500,000)
<EPS-PRIMARY> (0.95)
<EPS-DILUTED> (0.95)
</TABLE>
