10-Q 1 form10-q.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended December 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ________ To ________ VDC COMMUNICATIONS, INC. ------------------------ (Exact name of registrant as specified in its charter) Delaware 001-14281 061524454 -------- --------- --------- (Jurisdiction of Incorporation) (Commission File No.) (IRS Employer Identification No.) 550 Broad Street Newark, New Jersey 07201 (Address of principal executive office) -------------------------------------------------------------------------------- Registrant's telephone number, including area code: (973) 621-6660 Not applicable (Former name, former address, and former fiscal year if changed since last report) Check whether the Registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes ____X____ No __________ (2) Yes ____X____ No __________ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of February 8, 2001, the number of shares of registrant's common stock, par value $.0001 per share, outstanding was 24,753,030. 1 VDC COMMUNICATIONS, INC. INDEX PART I FINANCIAL INFORMATION PAGE --------------------- ---- Item 1. Consolidated balance sheets as of June 30, 2000 And December 31, 2000 3 Consolidated statements of operations and comprehensive loss for the three and six month periods ended December 31, 1999 and 2000 4 Consolidated statements of cash flows for the six months ended December 31, 1999 and 2000 5 Notes to consolidated financial statements 6-9 Item 2. Management's discussion and analysis of financial condition and results of operations 9-15 Item 3. Quantitative and qualitative disclosures about market risk 15 PART II OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities and Use of Proceeds 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15-16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16-17 2 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VDC COMMUNICATIONS, INC. AND SUBSIDARIES CONSOLIDATED BALANCE SHEETS
December 31, June 30, 2000 2000 (Unaudited) Assets Current: Cash and cash equivalents $ 104,244 $ 772,125 Marketable securities - 51,213 Accounts receivable, net of allowance for doubtful accounts of $1,502 at December 31, 2000 and $504,088 at June 30, 2000 28,819 935,217 Other current assets 125,092 - ------------------------------------ Total current assets 258,155 1,758,555 Property and equipment, less accumulated depreciation 2,212,457 4,286,707 Intangibles, net 2,998,301 3,643,193 Investment in MCC 140,000 140,000 Other assets 55,789 506,058 Net assets of discontinued operations 832,522 - ------------------------------------ Total assets $ 6,497,224 $ 10,334,513 ==================================== Liabilities and Stockholders Equity Current: Accounts payable and accrued expenses $ 3,699,812 $ 3,748,037 Unearned Revenue 476,934 463,585 Current portion of capitalized lease obligations - 178,341 Current portion of long term debt 155,889 71,490 ------------------------------------ Total current liabilities 4,332,635 4,461,453 Long-term portion of capitalized lease obligations - 521,482 Long-term portion of long term debt 111,892 224,077 ------------------------------------ Total liabilities 4,444,527 5,207,012 Commitment and Contingencies Stockholders equity: Preferred stock, $0.0001 par value, authorized 10 million shares; issued and outstanding-none - - Common stock, $0.0001 par value, authorized 50 million shares issued - 26,180,347 and 25,200,347 at December 31, and June 30, 2000, respectively 2,618 2,520 Additional paid-in capital 72,347,459 71,556,305 Accumulated deficit (70,067,206) (65,904,573) Treasury stock at cost, 1,958,543 and 1,875,000 shares at December 31 and June 30, 2000, respectively (230,174) (164,175) Accumulated comprehensive income (loss) - (362,576) ------------------------------------ ------------------------------------ Total stockholders equity 2,052,697 5,127,501 ------------------------------------ ------------------------------------ Total liabilities and stockholders equity $ 6,497,224 $ 10,334,513 ====================================
See accompanying notes to consolidated financial statements. 3 VDC COMMUNICATIONS, INC. AND SUBSIDARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) -------------------------------------------------
Three Months ended Six-months ended December 31, December 31, 2000 1999 2000 1999 Revenue $ 1,030,110 $ 29,527 $ 2,109,049 $ 62,081 Operating Expenses Costs of services 950,819 12,303 2,242,431 52,028 Selling, general and administrative expenses 661,490 64,420 1,361,922 164,645 Depreciation and amortization 374,998 19,490 749,072 38,204 Non-cash compensation expense 166,250 - 166,250 - ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Total operating expenses 2,153,557 96,213 4,519,675 254,877 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Operating loss (1,123,447) (66,686) (2,410,626) (192,796) Other income (expense): Other income (expense) 289,019 (46,149) (59,320) (8,934) ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Total other income (expense) 289,019 (46,149) (59,320) (8,934) Loss from continuing operations (834,428) (112,835) (2,469,946) (201,730) ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Discontinued Operations: Loss from operations of wholesale division to be disposed of (769,387) (578,856) (1,692,687) (1,465,458) Net loss (1,603,815) (691,691) (4,162,633) (1,667,188) Other comprehensive (loss), net of tax: Unrealized (loss) on marketable securities - (12,050) - (33,137) ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Comprehensive loss (1,603,815) (703,741) (4,162,633) (1,700,325) ============================================================================== ============================================================================== Loss from continuing operations per common share basic and diluted (0.04) (0.00) (0.09) (0.01) Loss from discontinued operations per common share basic and diluted (0.04) (0.03) (0.07) (0.08) Net loss per common share basic and diluted $ (0.08) $ (0.03) $ (0.16) $ (0.09) ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Weighted average number of shares outstanding 21,180,347 20,580,990 26,002,847 19,377,286 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 4 VDC COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six-months ended December 31, 2000 1999 Cash flows from operating activities: Net loss $(4,162,633) $ (1,667,188) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 749,072 527,141 Non-cash compensation expense 166,250 - Gain on disposal of fixed asset - (54,878) Provision for doubtful accounts - 254,502 Realized loss on marketable securities 347,790 - Changes in operating assets and liabilities: Resticted cash - 475,770 Accounts receivable 92,442 (405,020) Other assets 19,096 5,560 Accounts payable and accrued expenses (3,680) 458,996 Unearned revenue 13,349 - Net assets - discontinued operations 1,327,357 - ----------------------------------- ----------------------------------- Net cash used by operating activities (1,450,957) (405,117) Cash flows from investing activities: Proceeds from repayment of notes receivable - 249,979 Refund of fixed asset acquisition - 210,018 Fixed asset (acquisition) disposals - net 185,862 (105,296) ----------------------------------- ----------------------------------- Net cash flows provided by (used) in investing activities 185,862 354,701 Cash flows from financing activities: Proceeds from issuance of common stock 625,000 1,000,000 Repayment of note payable (27,786) - Repayments on capital lease obligations - (34,849) Proceeds from issuance of short-term debt - 80,000 ----------------------------------- ----------------------------------- Net cash flows provided by financing activities 597,214 1,045,151 ----------------------------------- ----------------------------------- Net increase (decrease) in cash and cash equivalents (667,881) 994,735 Cash and cash equivalents, beginning of period 772,125 317,799 ----------------------------------- ----------------------------------- Cash and cash equivalents, end of period 104,244 $ 1,312,534 =================================== ===================================
See accompanying notes to consolidated financial statements. 5 VDC Communications, Inc. and Subsidiaries Notes to consolidated financial statements 1. General These consolidated financial statements for the three and six month periods ended December 31, 2000 and 1999 and the related footnote information are unaudited and have been prepared on a basis substantially consistent with the audited consolidated financial statements of VDC Communications, Inc. and its subsidiaries (collectively, "VDC" or the "Company") as of and for the year ended June 30, 2000 included in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission (the "Annual Report"). These financial statements should be read in conjunction with the audited financial statements and the related notes to consolidated financial statements of the Company as of and for the year ended June 30, 2000 included in the Annual Report and the unaudited quarterly consolidated financial statements and related notes to unaudited consolidated financial statements of the Company for the three month period ended September 30, 2000 included in the Company's Form 10-Q for the quarter then ended as filed with the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) which management considers necessary to present fairly the consolidated financial position of the Company at December 31, 2000, the results of its operations for the three and six month periods ended December 31, 2000 and 1999 and its cash flows for the six months ended December 31, 2000 and 1999. The results of operations for the three and six month periods ended December 31, 2000 may not be indicative of the results expected for any succeeding quarter or for the entire year ending June 30, 2001. The Company is predominantly a long distance switchless reseller, and obtains the majority of its switching and long haul transmission of its service from Qwest Communications, Inc. ("Qwest"). The Company pays Qwest bills at contractual per minute rates, which vary depending on the time, distance and type of call, for the combined usage of the Company's nationwide base of customers. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Certain prior-year amounts have been reclassified to conform to the expected year ended June 30, 2001 financial statement presentation. The most significant adjustment has been to reclassify the operating results for the three and six months ending December 31, 2000 and 1999 and balance sheet as of December 31, 2000 of VDC Telecommunications, Inc. ("Telecom") as discontinued operations. Loss per common share is calculated by dividing the loss attributable to common shares by the weighted average number of shares outstanding. Outstanding common stock options and warrants are not included in the loss per share calculation as their effect is anti-dilutive. 2. Discontinued Operations Details of Disposal 6 In December 2000, the Company made the decision to discontinue the operations of Telecom, which historically had been unprofitable. Telecom's operations ceased effective December 2000. In accordance with generally accepted accounting principles EITF Issue 95-18, Telecom was treated as a discontinued operation for the three and six months ended December 31, 2000 and the preceding period's Consolidated Financial Statements. The Company is in the process of winding down its Telecom operations and settling certain assets and liabilities relating to the wholesale division. The Company expects that this process will be complete within twelve months and will not result in significant future operating losses. Pre-Measurement Date Operating Results and Loss per Common Share Operating results and Loss per Common Share of Telecom for the six months ended December 31, 2000 are shown separately on the accompanying statement of operations. Revenue From Telecom Telecom's net sales for the three and six months ended December 31, 2000 were $394,341 and $1,337,579, respectively. Telecom's net sales for the three and six months ended December 31, 1999 were $2,279,643 and $4,454,282, respectively. These amounts are not included in revenue in the accompanying statement of operations. Assets and Liabilities to be Disposed Of Telecom's assets and liabilities to be disposed of consisted of the following at December 31, 2000: December 31, 2000 ----------------- Accounts Receivable - net $ 37,069 Notes Receivable 172,500 Property and Equipment - net 1,063,602 Other Assets 261,550 ----------- Total Assets 1,534,721 Accounts Payable and Accruals 89,092 Capital Lease Obligations 613,107 ----------- Net Assets to be Disposed Of $ 832,522 3. Capital Transactions In July 2000, VDC sold 625,000 shares of Company common stock to unrelated investors at $1.00 per share, the public market price at that time. The Company issued 355,000 shares of Company common stock to certain member of management during the six months ended December 31, 2000. The issuance has been recorded as non-cash compensation at the fair market value of the common shares at the date of issuance. 4. Other Matters Approximately $1.1 million of the liabilities reflected in the Company's consolidated financial statements were attributable to a wholly-owned subsidiary of the Company (the "Subsidiary") and were accrued in connection with the Subsidiary's former operations. The Company has elected to reflect the potential liability within its financial statements despite the fact management has reason to believe that the Subsidiary may not be responsible for such potential 7 liability and despite the fact that the Subsidiary has limited assets and would be unable to pay this liability if it were, in fact, liable for it. Moreover, due to the fact that the potential liability would be a liability of the Subsidiary, a separate legal entity, and not of VDC Communications, Inc., the parent company, management believes that the potential liability will not impact the assets of the parent or its subsidiaries, other than the Subsidiary. 5. Commitments and Contingencies Option Repricing In light of the decline in market price of the Company's common stock as of October 2000, the Board of Directors believed that the outstanding stock options with an exercise price in excess of the actual market price were no longer an effective tool to encourage employee retention or to motivate high levels of performance. As a result, in October 2000, the Board of Directors approved an option repricing program under which certain options to acquire shares of common stock that were originally issued with exercise prices above $0.1875 per share were reissued with an exercise price of $0.1875 per share (or $0.20625 in the case of the former CEO and his wife), the fair market value of the common stock at the repricing date. These options will continue to vest under the original terms of the option grant. Options to purchase 2,529,000 shares of Company common stock were affected by the repricing program. Options to purchase 1,345,000 shares of common stock granted to executive officers and members of the Board of Directors were affected by the repricing program. In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44 "Accounting for Certain Transactions involving Stock Compensation an interpretation of APB No. 25". Among other issues, this interpretation clarifies the accounting consequence of various modifications to the terms of a previously fixed stock option or award. If the exercise price of an option award is reduced, the award shall be accounted for as variable from the date of the modification to the date the award is exercised, forfeited or expires unexercised. The interpretation requires a charge to operations for the difference between the quoted market value of VDC's common stock at the end of each reporting period and the option price of unexercised, outstanding stock options. The interpretation is effective July 1, 2000 but covers events that occur after December 15, 1998. Thus, compensation expense may be recorded in the future as a result of this repricing. Litigation In July 1999, a former customer filed suit against VDC asserting that VDC induced it to enter into an agreement through various purported misrepresentations. The suit alleges that, due to these purported misrepresentations and purported breaches of contract, the former customer has been unable to provide services to its customers. The relief sought includes monetary damages resulting from the purported breach of contract and the purported misrepresentations and the recovery of attorneys' fees. In the event that the former customer prevails, VDC could be liable for monetary damages in 8 an amount that would have a material adverse effect on VDC's assets and operations. VDC believes that the claims asserted are without merit and VDC will, if it is served with process, vigorously defend itself against them. In the opinion of management, based on the information that it presently possesses, the claims will not have a material adverse effect on VDC's consolidated financial position, results of operations or liquidity. In addition, VDC is a defendant in another lawsuit. Management presently believes that the disposition of this lawsuit will not have a material effect on VDC's assets or operations. 6. Supplemental Disclosure of Cash Flow Information For purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Six months ended December 31, ------------------------------- 2000 1999 ----- ----- Cash paid during the period for: Interest 16,311 $82,259 Schedule of non-cash financing and investing activities: Equipment exchanged for note receivable $172,500 $- Equipment acquired through capital lease obligation $- $249,335 Cancellation of stock subscription receivable $- $344,700 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 When used in this Report on Form 10-Q, the words "may," "will," "expect," "anticipate," "continue," "estimate," "intend," "could," "would," and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding events, conditions and financial 9 trends which may affect VDC's future plans of operations, business strategy, operating results and financial position. Such statements are not guarantees of future performance and are subject to risks and uncertainties and actual results may differ materially from those included within the forward-looking statements as a result of various factors. Such risks may relate to, among others: (i) VDC's limited capital and possible bankruptcy; (ii) VDC's ability to operate profitably; (iii) VDC's ability to secure sufficient financing in order to fund its operations; (iv) competitive and other market conditions, including pricing pressure, that may adversely affect the scope of VDC's operations; (v) VDC's dependence on certain key personnel; (vi) VDC's ability to successfully integrate potential mergers and/or acquisitions into VDC, including the retention of certain key personnel; and, (xii) inherent regulatory and licensing requirements. Additional factors are in VDC's other public reports and filings with the Securities and Exchange Commission ("SEC") including a Registration Statement on Form S-3 (No. 333-46694) and a VDC prospectus dated October 27, 2000. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publicly release the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events. General VDC Communications, Inc. (referred to herein as "VDC" "we" or "us") is a predominantly long distance switchless reseller, and obtains the majority of its switching and long haul transmission of its service from Qwest Communications, Inc. ("Qwest"). We pay Qwest bills at contractual per minute rates, which vary depending on the time, distance and type of call, for the combined usage of our nationwide base of customers. We also generate nominal revenues from the management of domestic tower sites that provide transmission and receiver locations for wireless communications companies. During the quarter ended December 2000, VDC undertook substantial expense reductions necessitated by its continuing negative cash flow, its inability to pay operating expenses, its inability to raise additional capital, and its depleted and inadequate cash position. VDC's current liquidity-constrained circumstances result primarily from: (i) the inability of VDC's recently acquired retail long distance operation to sufficiently reduce its cash losses; and , (ii)VDC's inability to raise funds. The cutbacks included an approximate 48% staff and operations reduction at the retail long distance unit, and the discontinuation of its Wholesale operations. In addition, VDC has been in talks with unsecured creditors for months in attempts to settle past due payables. VDC has experienced modest success with certain vendors by finding mutually agreeable compromises. Nevertheless, these settlements have not had a material impact on VDC's balance sheet and, as such, VDC was unable to complete the proposed financing announced on October 27, 2000. As part of its ongoing plan, VDC will continue to seek compromise of its accounts payable in the hope of settling with its creditors. VDC will continue to seek alternatives in regard to improving its balance sheet, including, but not limited to: raising capital, and/or the sale of asset(s). We have, however, thus far been unsuccessful in raising capital and it is unlikely the sale of asset(s) will satisfactorily address VDC's current liquidity situation. VDC is also considering merger and acquisition possibilities. 10 In December, 2000, Frederick A. Moran, VDC's former Chairman and C.E.O and Clayton F. Moran, VDC's former CFO resigned in order to maximize expense reductions. Anthony DeJesus, C.P.A., was appointed Chairman, CEO and CFO by VDC's Board of Directors. Mr. DeJesus joined VDC in July 1998. Since then, he has been an integral part of VDC's management team. The employment agreements of Frederick A. Moran and Clayton F. Moran provide for severance payments of approximately $145,000. We may attempt to renegotiate any such payments as part of severance agreements. We are currently uncertain whether we will be obligated to make such payments and whether any eventual payments will have a material adverse effect on our liquidity and capital resources. In January 2001, another executive officer, Edwin B. Read, resigned. His severance agreement did not include a material cash component. It is management's hope that this large cutback in operating expenses will prove sufficient to permit VDC to achieve positive operating cash flow. In order to maximize expense reductions, VDC has curtailed its marketing staff by approximately 57%. Our recent marketing staff cuts will likely have a material adverse effect on our customer base. In addition, in light of our liquidity position, among other things, we may further reduce our marketing staff and rely upon commissioned agents. We are uncertain about the effect this might have on our marketing efforts and customer base. We acquire residential customers through direct marketing via the telephone. We currently have over 10,000 retail subscribers with over 8,500 currently connected to our network and over 1,500 having ordered service and awaiting connection to the network. We have two products that we offer to residential phone users. They provide the customer a competitive termination rate for long distance calls within the United States. Both of these services are paid for in advance by the customer, which reduces our exposure to bad debts and enhances liquidity. In December 2000, we made the decision to discontinue the operations of our wholesale segment whose operations were conducted through our wholly-owned subsidiary, VDC Telecommunications, Inc. ("Telecom"). Telecom had historically been unprofitable and its prospects diminished in the low-growth, margin squeezed international wholesale market as it accumulated significant arrearages. Additionally, we cancelled all plans related to the VoIP program and are attempting to return the equipment to the respective vendors. Telecom's operations ceased effective December 2000. Telecom was treated as a discontinued operation for the three and six months ended December 31, 2000 and the preceding period's Consolidated Statement of Operations. We earn revenue from residential long distance services which are paid for in advance by the customer. Nominal revenue is generated from the management of domestic tower sites that provide transmission and receiver locations for wireless communications companies. This revenue is generated and billed on a month-to-month basis. Our costs of services consist largely of telemarketing salaries, carrier costs and customer rebates. Selling, general, and administrative expenses ("SG&A") consist primarily of personnel costs, professional fees, bank and credit card processing charges, office rental, printing and postage. The Consolidated Financial Statements of VDC have been prepared on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities, except as otherwise disclosed, in the normal course of business. However, because of VDC's recurring losses from operations and significant arrearages on trade payables, such realization of assets and satisfaction of liabilities is subject to significant uncertainties. 11 The Consolidated Financial Statements do not include any adjustments that might result from the outcome of these uncertainties. Furthermore, VDC's ability to continue as a going concern is highly dependent in the near term on its ability to raise capital, obtain additional retail customers, achieve profitable operations and to generate sufficient cash flow from operations and financing sources to meet obligations. Results of Operations For the Three Months Ended December 31, 2000 Compared to the Three Months Ended December 31, 1999 Revenues: We began providing retail long distance services in June 2000. We generated revenue of approximately $1.0 million in the three months ended December 31, 2000 ("Current Quarter"). We generated the majority of our revenue by providing retail long distance services during the Current Quarter. Additional revenue of approximately $29,000 was generated from domestic site tower management during the Current Quarter as compared to approximately $30,000 during the three months ending December 31, 1999 ("Prior Period Quarter"). Costs of Services: Our costs of services were approximately $950,000 during the Current Quarter. Telemarketing salaries and carrier costs accounted for approximately 46% and 32% of these costs, respectively. Other less significant costs included customer rebates, telemarketing phone costs, and FCC mandated independent verification procedures. Prior Period costs of services of approximately $12,000 were attributable to site rental costs associated with domestic site tower management. SG&A: SG&A expenses were approximately $661,000 during the Current Quarter as compared to approximately $64,000 during the Prior Period Quarter. Salaries accounted for approximately 70% of these costs in the Current Quarter. Other less significant SG&A expenses included bank and credit card processing fees, rent, advertising, printing and postage. Prior Period Quarter SG&A costs were mostly attributable to salaries. Depreciation and Amortization ("D&A"): D&A expenses were approximately $375,000 in the Current Quarter. The June 2000 acquisition of the retail subsidiary generated goodwill of approximately $3.3 million, which is being amortized over 36 months, or approximately $274,000 per quarter. Other D&A consists of amortization of internally developed billing software, amortization attributable to the costs of acquiring tariffs and licenses necessary to provide retail long distance services nationally and the depreciation of office equipment and furniture. D&A expense of approximately $19,000 for the Prior Period Quarter was mostly attributable to office equipment and furniture. Non-Cash Compensation: Non-cash compensation of approximately $166,000 was attributable to the issuance of stock awards to certain members of our management. We issued 355,000 shares of common stock which has been recorded as non-cash compensation at the fair market value of the common shares at the date of issuance. Other income (expense): Other income (expense) was approximately $289,000 for the three months ended December 31, 2000, which was mostly attributable to 12 settlement with certain vendors and/or prior period overaccruals. Other income (expense) of approximately $(46,000) for the three months ended December 31, 1999 was due to miscellaneous charges and interest expense offset by interest income. For the Six Months Ended December 31, 2000 Compared to the Six Months Ended December 31, 1999 Revenues: We generated revenue of approximately $2.1 million in the six months ended December 31, 2000 ("Current Period") as compared to approximately $62,000 for the six months ended December 31, 1999 ("Prior Period"). We generated the majority of our revenue by providing retail long distance customer services during the Current Quarter. Additional revenue of approximately $57,000 was generated from domestic site tower management during the Current Period as compared to approximately $62,000 during the Prior Period. Costs of Services: Our costs of services were approximately $2.2 million during the Current Period. In the Current Period telemarketing salaries and carrier costs accounted for approximately 56% and 20% of these costs, respectively. Other less significant costs included customer rebates, telemarketing phone costs, and FCC mandated independent verification procedures. Prior Period costs of services of $52,000 were attributable to salaries and site rental costs associated with domestic site tower management. SG&A: SG&A expenses were approximately $1.4 million during the Current Period. Salaries accounted for approximately 67% of these costs. Other less significant SG&A expenses included bank and credit card processing fees, rent, advertising, printing and postage. Prior Period SG&A costs of approximately $165,000 were mostly attributable to salaries. Depreciation and Amortization : D&A expenses were approximately $749,000 in the Current Period. The June 2000 acquisition of the retail subsidiary generated goodwill of approximately $3.3 million, which is being amortized over 36 months. Other D&A consists of amortization of internally developed billing software, amortization attributable to the costs of acquiring tariffs and licenses necessary to provide retail long distance services nationally and the depreciation of office equipment and furniture. Prior Period D&A of approximately $38,000 is mostly attributable to office furniture and equipment. Non-Cash Compensation: Non-cash compensation of approximately $166,000 in the Current Period was attributable to stock awards to certain members of the Company's management. Other income (expense): Other income (expense) was approximately $(59,000) for the six months ended December 31, 2000, which was mostly attributable to settlement with certain vendors and/or prior period overaccruals. Other (expense) of $(8,934) was mostly due to interest expense offset by interest income. Liquidity and Capital Resources Net cash used by operating activities was approximately $(1,450,957) in the six months ended December 31, 2000, or Current Period. Most of the cash was used to fund the net loss which was reduced by non-cash charges and the net assets of the discontinued operations. Net cash used by operating activities was approximately $(405,000) in the Prior Period. We collected approximately $4.1 million from customers while paying approximately $4.5 million to carriers, other vendors and employees. 13 Net cash provided by investing activities was approximately $186,000 in the six months ended December 31, 2000. Cash was provided by proceeds from the sale of equipment. Net cash provided by investing activities of approximately $356,000 in the six months ended December 31, 1999 was from the collection of notes receivable and a sales tax refund on previously acquired switching equipment less cash used for the acquisition of fixed assets. Net cash provided by financing activities was approximately $597,000 in the six months ended December 31, 2000. This reflects proceeds from the issuance of common stock less repayments on long term debt. Net cash provided by financing activities was approximately $1 million during the six months ended December 31, 1999. This reflects proceeds from the issuance of common stock and short-term borrowings less repayments on capital lease obligations. As part of the June 30, 2000 audit, our auditors raised the issue that we may not be able to continue as a going concern as a result of a lack of profits, working capital deficiency and cash needs. A significant amount of capital has been expended towards operations and in connection with certain acquisitions. In December 2000, the American Stock Exchange (the "Exchange") notified us that they intended to proceed with the filing of an application with the Securities and Exchange Commission to strike our common stock from the Exchange. On January 26, 2001, we announced the decision not to appeal the Exchange's decision to delist and consented to the removal of our common stock from the Exchange. This action became necessary because we no longer fully satisfied all the guidelines of the Exchange for continued listing. Our common stock is now qualified for trading on the OTC Bulletin Board under the symbol "VDCI." Our liquidity requirements arise primarily from cash used in operating activities. To date, we have financed ourselves mostly through equity financing. Since the quarter ending September 30, 2000, we have financed operations primarily through: (i) revenues from operations, and (ii) extending payables to vendors and certain other parties beyond payment terms. The retail business is currently operating at approximately $20,000 loss per month from a cash flow perspective. To address our short term liquidity issue, we are pursuing the sale of certain of our assets not associated with the retail long distance business. There can be no assurance that any such transaction will be consummated. Additionally, one of our wholly-owned subsidiaries has filed lawsuits against certain of its debtors to collect indebtedness of approximately $625,000 plus certain other fees, claims and costs. Even if we are successful in these lawsuits, however, our ability to collect on the indebtedness at issue is uncertain because certain of the defendants have limited assets. Moreover, even if we are successful in selling certain assets and in our lawsuits, the issue remains that we have significant arrearages. Additionally, real estate leases and other less significant expenses associated with the discontinued operations of Telecom and our former Connecticut administrative office location need to be addressed. We will continue to work with creditors in an attempt to settle its significant arrearages and contingencies. Additionally, VDC will continue to explore merger and acquisition possibilities and opportunities to raise capital. Recent efforts along these lines have been unsuccessful. If we are unable to resolve these liquidity issues, we may have to file for bankruptcy protection. Our long term objective is to build our retail customer base to the point of critical mass. To accomplish this, however, we will most likely need funding from outside sources. We are currently pursuing funding and thus far, have been unsuccessful. If we reach critical mass, our ongoing gross profit should be sufficient to generate sufficient cash flow to settle arrearages, address 14 contingencies and grow through strategic acquisitions. Reaching critical mass is mostly a function of our marketing efforts. Our recent sales staff cuts, however, will likely have a material adverse effect on our customer base. Maintaining our customers is also a priority and depends mostly on the competitiveness of our long distance services. Item 3. Quantitative and Qualitative Disclosures About Market Risk VDC is currently not exposed to material future earnings or cash flow exposures from changes in interest rates on long-term debt obligations since our long-term debt obligations are at fixed rates. VDC's carrying value of cash and cash equivalents, accounts receivable, accounts payable, and long term debt are a reasonable approximation of their fair value. Part II - Other Information Item 1. Legal Proceedings Worldstar Suit On or about July 30, 1999, Worldstar Communications Corporation ("Worldstar") commenced an action in the Supreme Court of New York entitled Worldstar Communications Corporation v. Lindemann Capital L.P., Activated Communications, L.P., Marc Graubart, Michael Mazzone, VDC Corporation and ING Baring Furman Selz, LLC (Index No. 603621/99) (the "Action"). Worldstar asserts in the Action that, under the terms of a purported joint venture arrangement with Lindemann Capital LP ("Lindemann") and Activated Communications, LP ("Activated"), Worldstar acquired certain rights to share in the profits and ownership of a telecommunications project in Nicaragua (the "Nicaraguan Project") owned by Masatepe Comunicaciones S.A., a Nicaraguan company ("Masacom"). Masatepe Communications U.S.A., L.L.C. ("Masatepe"), which owns a 49% equity interest in Masacom, was acquired by VDC and is now a wholly-owned subsidiary of VDC. The relief sought by Worldstar included: (1) monetary damages arising out of purported interference with Worldstar's profit participation and ownership in the Nicaraguan Project; and (2) a declaratory judgment that among other things: (a) Worldstar is entitled to share in the profits and ownership of the Nicaraguan Project; and (b) the transaction pursuant to which VDC acquired an interest in the Nicaraguan Project was void. Certain of the defendants, including VDC, filed a Motion to Dismiss. In an order dated July 12, 2000, the Court dismissed Worldstar's claims against VDC demanding monetary damages arising out of purported interference with Worldstar's profit participation and ownership in the Nicaraguan Project. The Court denied VDC's Motion to Dismiss Worldstar's declaratory judgment claim against VDC. The parties to the Action are presently in settlement negotiations. Based upon the negotiations, VDC does not expect that any settlement agreement would have a material adverse effect on VDC's assets or operations. However, there can be no assurance that any settlement agreement will be executed. In the event that the plaintiff prevails in the Action, the value of VDC's interest in Masatepe, Masacom and/or the Nicaraguan Project could be diluted. Additionally, VDC could be held liable for certain value that may be deemed to have been derived from the operation of Masatepe and/or the Nicaraguan Project, and for related damages. However, pursuant to the Purchase Agreement through which VDC acquired Masatepe (the "Purchase Agreement"), Activated has an obligation to indemnify and hold VDC and Masatepe harmless from any loss, liability, claim, damage and expense arising out or resulting from the Action. In addition, under certain circumstances, Activated has an obligation under the Purchase Agreement to repurchase from VDC all or part of VDC's equity interest in Masatepe. Furthermore, the defendants are vigorously defending the Action. In view of the foregoing, VDC does not believe that the claims asserted in the Action will have a material adverse effect on VDC's assets or operations. StarCom Suit On or about July 12, 1999, StarCom Telecom, Inc. ("StarCom") commenced an action in the District Court of Harris County, Texas, in the 127th Judicial District entitled StarCom Telecom, Inc. vs. VDC Communications, Inc. (Civil Action No. 1999-35578) (the "StarCom Action"). StarCom asserts in the StarCom Action that VDC induced it to enter into an agreement with VDC through various purported misrepresentations. StarCom alleges that, due to these purported misrepresentations and purported breaches of contract, it has been unable to provide services to its customers. The relief sought by StarCom includes monetary damages arising out of VDC's purported misrepresentations and purported breaches of contract. In the event that StarCom prevails in the StarCom Action, VDC could be liable for monetary damages in an amount that would have a material adverse effect on VDC's assets and operations. VDC does not believe that the claims asserted in the StarCom Action are either meritorious or will have a material adverse effect on VDC's assets or operations. To date, despite the fact that the StarCom Action was filed over a year and a half ago, opposing counsel in the StarCom Action has refused to have VDC served with process. Moreover, opposing counsel filed a Motion to Withdraw as Attorney in Charge of the StarCom Action. In the event that VDC is served in the StarCom Action, it intends to defend itself vigorously. Item 2. Changes in Securities and Use of Proceeds Item not applicable. Item 3. Defaults Upon Senior Securities Item not applicable. Item 4. Submission of Matters to a Vote of Securities Holders VDC's annual meeting of stockholders was held on December 11, 2000. The following table sets forth information regarding the number of votes for, against, withheld, or abstaining and broker non-votes, with respect to each matter presented at the meeting. 1. The nominee for Class II director was elected as follows: NOMINEES FOR WITHHOLD Dr. Leonard Hausman 20,010,973 245,823 2. The proposal to amend the Company's 1998 Stock Incentive Plan, as amended to increase the number of shares of common stock VDC is authorized to issue under the 1998 Plan from 5,000,000 to 8,000,000 shares was approved as follows: BROKER FOR AGAINST ABSTAIN NON-VOTE 15 10,733,018 665,402 92,810 8,765,566 3. The selection of BDO Seidman, LLP as VDC's independent auditors for the fiscal year ending June 30, 2001 was approved as follows: BROKER FOR AGAINST ABSTAIN NON-VOTE 19,972,248 162,008 122,540 0 Item 5. Other Information Item not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits
Exhibit No. Description Method of Filing 10.65 Form of Promissory Note executed by Rare Telephony, Inc. for (1) November and December 2000, and January and February 2001 10.66 Settlement, Release and Separation Agreement by and between VDC (1) Communications, Inc. and Edwin B. Read, dated January 5, 2001 10.67 Amendment to Employment Agreement by and between VDC (1) Communications, Inc. and Frederick A. Moran, dated November 14, 2000 10.68 Form of Amendment to Employment Agreement for November 2000 (1) 27.1 Financial Data Schedule (1)
(1) Filed herewith. (b) Reports on Form 8-K Report on Form 8-K dated January 26, 2001 reporting VDC Communications, Inc. consenting to removal of its common stock from the American Stock Exchange. Report on Form 8-K dated December 29, 2000 reporting the initiation by VDC Communications, Inc. of massive expense reductions, including the resignation of the CEO and CFO. 16 Report on Form 8-K dated December 7, 2000 reporting the commencement by the American Stock Exchange of the process to strike VDC Communications, Inc. common stock from listing and registration on the American Stock Exchange. 17 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized. VDC COMMUNICATIONS, INC. By:/s/ Anthony F. DeJesus Dated: February 12, 2001 -------------------------------------------------- Anthony F. DeJesus Chairman, Chief Financial Officer, Chief Executive Officer, and Director 18
Exhibit Index Exhibit Number Page Number in (Referenced to Rule 0-3(b) Item 601 of Sequential Reg. S-K Numbering System Where Exhibit Can Be Found 10.65 Form of Promissory Note executed by Rare Telephony, Inc. for November and December 2000, and January and February 2001 10.66 Settlement, Release and Separation Agreement by and between VDC Communications, Inc. and Edwin B. Read, dated January 5, 2001 10.67 Amendment to Employment Agreement by and between VDC Communications, Inc. and Frederick A. Moran, dated November 14, 2000 10.68 Form of Amendment to Employment Agreement for November 2000 27.1 Financial Data Schedule