10-Q 1 form10-q0301.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 March 31, 2001 [ ] 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 May 10, 2001, the number of shares of registrant's common stock, par value $.0001 per share, outstanding was 24,753,030. PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VDC COMMUNICATIONS, INC. AND SUBSIDARIES CONSOLIDATED BALANCE SHEETS
31-Mar June 30, 2001 2000 (Unaudited) Assets Current: Cash and cash equivalents $ 3,504 $ 772,125 Marketable securities - 51,213 Accounts receivable, net of allowance for doubtful accounts of $571,603 at March 31, 2001 and $504,088 at June 30, 2000 20,848 935,217 Other current assets 39,224 ------- --------- Total current assets 63,576 1,758,555 Property and equipment, less accumulated depreciation 2,940,121 4,286,707 Intangibles, net 207,217 3,643,193 Investment in MCC 140,000 140,000 Other assets 528,626 506,058 ----------- ------------ Total assets $ 3,879,540 $ 10,334,513 Liabilities and Stockholders Equity (Deficit) Current: Accounts payable and accrued expenses $ 4,057,911 $ 3,748,037 Unearned Revenue 430,199 463,585 Current portion of capitalized lease obligations 235,509 178,341 Current portion of long term debt 164,522 71,490 ------------ ---------- Total current liabilities 4,888,141 4,461,453 Long-term portion of capitalized lease obligations 332,415 521,482 Long-term portion of long term debt 88,568 224,077 ----------- --------- Total liabilities 5,309,124 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 March 31, 2001, and June 30, 2000, respectively 2,618 2,520 Additional paid-in capital 72,347,459 71,556,305 Accumulated deficit (73,549,487) (65,904,573) Treasury stock at cost, 1,958,543 and 1,875,000 shares at March 31, 2001 and June 30, 2000, respectively (230,174) (164,175) Accumulated comprehensive income (loss) - (362,576) ------------ ------------ Total stockholders equity (Deficit) (1,429,584) 5,127,501 ------------ ------------ Total liabilities and stockholders equity (Deficit) $ 3,879,540 $ 10,334,513 See accompanying notes to consolidated financial statements.
VDC COMMUNICATIONS, INC. AND SUBSIDARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) -------------------------------------------------
Three Months ended Nine-months ended March 31, March 31, 2001 2000 2001 2000 Revenue $ 880,969 $ 2,066,176 $ 4,327,597 $ 6,582,539 Operating Expenses Costs of services 647,349 1,768,593 3,908,280 6,141,530 Selling, general and administrative expenses 306,836 444,652 2,855,540 1,685,572 Depreciation and amortization 658,383 224,498 1,930,228 771,642 Impairment of goodwill 2,468,638 2,468,638 Loss on sale of fixed assets - - 239,117 - Asset impairment charges - - 63,094 - Non-cash compensation expense - - 166,250 - ----------- ---------- ---------- ---------- Total operating expenses 4,081,206 2,437,743 11,631,147 8,598,744 ------------ ---------- ---------- --------- Operating loss (3,200,237) (371,567) (7,303,550) (2,016,205) Other income (expense): Realized loss on marketable equity securities - - (347,789) - Other income (expense) (282,044) 59,038 6,425 36,488 ---------- ------ ------- ------ Total other income (expense) (282,044) 59,038 (341,364) 36,488 Net loss (3,482,281) (312,529) (7,644,914) (1,979,717) ---------- -------- ---------- ----------- Comprehensive (loss), net of tax: Unrealized gain (loss) on marketable securities - 24,101 - (57,237) ----------- ---------- ----------- ----------- Comprehensive loss (3,482,281) (288,428) (7,644,914) (2,036,954) ----------- ---------- ----------- ----------- Net loss per common share basic and diluted $ (0.13) $ (0.01) $ (0.29) $ (0.10) ----------- ---------- ----------- ----------- Weighted average number of shares outstanding 26,180,347 21,514,805 26,062,014 20,089,477
See accompanying notes to consolidated financial statements. VDC COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine-months ended March 31, 2001 2000 Cash flows from operating activities: Net loss $(7,644,914) $ (1,979,717) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,930,228 771,642 Goodwill impairment 2,468,638 - Non-cash compensation expense 166,250 - Loss (gain) on disposal of fixed asset 239,117 (54,878) Impairment of long lived assets 63,094 - Provision for doubtful accounts 67,515 243,479 Realized loss on marketable securities 347,789 - Changes in operating assets and liabilities: Resticted cash - 475,770 Accounts receivable 846,854 408,400 Other assets (61,792) 56,246 Accounts payable and accrued expenses 309,877 115,426 Unearned revenue (33,386) - ----------- -------- Net cash provided by (used) in operating activities (1,300,730) 36,368 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 81,485 (124,328) ----------- -------- Net cash flows provided by investing activities 81,485 335,669 Cash flows from financing activities: Proceeds from issuance of common stock 625,000 1,000,000 Stock Options Exercised - 37,500 Repayment of note payable (42,477) - Repayments on capital lease obligations (131,899) (408,092) Proceeds from issuance of short-term debt - 80,000 ----------- -------- Net cash flows provided by financing activities 450,624 709,408 ----------- -------- Net increase (decrease) in cash and cash equivalents (768,621) 1,081,445 ----------- -------- Cash and cash equivalents, beginning of period 772,125 317,799 Cash and cash equivalents, end of period $3,504 $ 1,399,244 ----------- --------
See accompanying notes to consolidated financial statements. VDC Communications, Inc. and Subsidiaries Notes to consolidated financial statements 1. General These consolidated financial statements for the three and nine-month periods ended March 31, 2001 and 2000 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 periods ended September 30, 2000 and December 31, 2000 included in the Company's Forms 10-Q for the quarters 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 March 31, 2001, the results of its operations for the three and nine month periods ended March 31, 2001 and 2000 and its cash flows for the nine-months ended March 31, 2001 and 2000 (see goodwill impairment below). The results of operations for the three and nine month periods ended March 31, 2001 may not be indicative of the results expected for any succeeding quarter or for the entire year ending June 30, 2001. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. The Company is predominantly a long distance switchless reseller, and obtains its switching and long haul transmission of its service from major telecommunications carriers. The Company pays its carriers 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. Certain prior-year amounts have been reclassified to conform to the expected year ended June 30, 2001 financial statement presentation. Loss per common share is calculated by dividing the loss attributable to common shares by the weighted average number of shares outstanding. Outstanding common stock options and warrants are not included in the loss per share calculation as their effect is anti-dilutive. 2. Business Segment Information In December 2000, the Company announced the decision to discontinue the operations of VDC Telecommunications, Inc. ("Telecom" or "Wholesale"), which historically had been unprofitable. Based on recent developments, VDC has decided not to discontinue the operations of the wholesale business. The company is currently negotiating contracts with vendors from several countries to carry traffic into these countries at favorable rates. Revenues from Telecom, however, are not expected until July 2001. At March 31, 2001, VDC had two business segments, retail long distance telecommunications ("Retail") and wholesale long distance telecommunications ("Wholesale"). Retail provides domestic and international long distance services to residential and small business customers located within the United States. Wholesale provides domestic and international long distance services and rental of VDC's circuit switching facilities to U.S. and foreign based telecommunications companies. Other segments include the management of domestic tower sites that provide transmission and receiver locations for wireless communications companies and certain corporate assets and non-allocable corporate expenses. The Company evaluates performance based on profit or loss from operations. There were no intercompany sales among Wholesale and Retail and both segments are currently managed separately. Operating results and other financial data presented for the wholesale and retail segments of the Company are as follows:
------------------------------- --------------------- --------------------------- ---------------- ------------------- Wholesale Telecommunications Retail Telecommunications Corporate Totals Services Services and Other ------------------------------- --------------------- --------------------------- ---------------- ------------------- ------------------------------- --------------------- --------------------------- ---------------- ------------------- Nine months Ended March 31, 2001 ------------------------------- --------------------- --------------------------- ---------------- ------------------- Segment Revenue 1,359,702 2,882,190 85,705 4,327,597 ------------------------------- --------------------- --------------------------- ---------------- ------------------- Goodwill impairment (2,468,638) (2,468,638) ------------------------------- --------------------- --------------------------- ---------------- ------------------- Segment Loss (1,779,152) (5,444,829) (420,933) (7,644,914) ------------------------------- --------------------- --------------------------- ---------------- ------------------- Investment in MCC 140,000 140,000 ------------------------------- --------------------- --------------------------- ---------------- ------------------- Segment Assets 2,530,716 870,370 478,454 3,879,540 ------------------------------- --------------------- --------------------------- ---------------- ------------------- Wholesale Telecommunications Retail Telecommunications Corporate Totals Services Services and Other ------------------------------- --------------------- --------------------------- ---------------- ------------------- ------------------------------- --------------------- --------------------------- ---------------- ------------------- Nine months Ended March 31, 2000 ------------------------------- --------------------- --------------------------- ---------------- ------------------- Segment Revenue 6,490,874 - 91,665 6,582,539 ------------------------------- --------------------- --------------------------- ---------------- ------------------- Segment Loss (1,898,066) - (81,651) (1,979,717) ------------------------------- --------------------- --------------------------- ---------------- ------------------- Investment in MCC - - 2,400,000 2,400,000 ------------------------------- --------------------- --------------------------- ---------------- ------------------- Segment Assets 5,874,297 - 2,841,146 8,715,443 Wholesale Telecommunications Retail Telecommunications Corporate Totals Services Services and Other ------------------------------- --------------------- --------------------------- ---------------- ------------------- ------------------------------- --------------------- --------------------------- ---------------- ------------------- Three months Ended March 31, 2001 ------------------------------- --------------------- --------------------------- ---------------- ------------------- Segment Revenue - 852,706 28,263 880,969 ------------------------------- --------------------- --------------------------- ---------------- ------------------- Goodwill impairment - (2,468,638) - (2,468,638) ------------------------------- --------------------- --------------------------- ---------------- ------------------- Segment Loss (452,367) (2,968,951) (60,963) (3,482,281) ------------------------------- --------------------- --------------------------- ---------------- ------------------- Wholesale Telecommunications Retail Telecommunications Corporate Totals Services Services and Other ------------------------------- --------------------- --------------------------- ---------------- ------------------- ------------------------------- --------------------- --------------------------- ---------------- ------------------- Three months Ended March 31, 2000 ------------------------------- --------------------- --------------------------- ---------------- ------------------- Segment Revenue 2,036,592 - 29,584 2,066,176 ------------------------------- --------------------- --------------------------- ---------------- ------------------- Segment Loss (117,877) - (194,652) (312,529)
3. Goodwill impairment Financial Accounting Standards No. 121, requires that long lived assets and certain identifiable intangibles be reviewed for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. Based on the historical performance of the Retail subsidiary and the fact that previous projections have not come to fruition, management believes that the goodwill associated with the Retail acquisition has been permanently impaired. As a result, VDC recorded an impairment write-down of $ 2,468,638 in the quarter ended March 31, 2001. 4. Sale and/or abandonment of equipment In August 2000, the Company recognized a loss of $126,426 on the sale of a long distance telecommunications switch located in Colorado. The consideration received consisted of a note receivable of $172,500 and cash of $52,500. The note bears interest at 10% per annum and was due in full on November 25, 2000. VDC has thus far been unsuccessful in attempting to collect on the note. In September 2000, the Company recognized a loss of $112,691 on the sale of other equipment located in Colorado. The consideration received consisted of cash of $15,500. During the quarter ended September 30, 2000, the Company recognized an impairment loss of $63,094 in connection with the abandonment of the Colorado telecommunications switch site location. 5. 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 common stock to certain member of management during the nine months ended March 31, 2001. The issuance has been recorded as non-cash compensation at the fair market value of the common shares at the date of issuance. 6. 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 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., parent company, management believes that the potential liability will not impact the assets of the parent or its subsidiaries, other than the Subsidiary. 7. 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 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. 8. Subsequent Events In April 2001, VDC sold telemarketing equipment to an offshore company, ("Telemarketer") for approximately $228,000. Additionally, we entered into an agreement with Telemarketer to market our product in the U.S.. Commissions payable to Telemarketer will be $40 per customer acquired and a 10% residual commission on recurring monthly charges net of rebates. As a result of this agreement, we recently terminated the employment of our in-house telemarketers, marketing management, and certain other sales support personnel. We also recently entered into an agreement with a telecommunications provider to carry our retail traffic. The agreement calls for more competitive rates and a minimum monthly traffic volume of $50,000. 9. 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. Nine months ended March 31, ------------------------------- 2001 2000 ---- ---- Cash paid during the period for Interest $22,419 $108,458 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 Release of investment banking shares $- $127,500 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 When used in this Report on Form 10-Q, the words "may," "will," "expect," "anticipate," "continue," "estimate," "intend," "could," "would," and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding events, conditions and financial trends which may affect VDC's future plans of operations, business strategy, operating results and financial position. Such statements are not guarantees of future performance and are subject to risks and uncertainties and actual results may differ materially from those included within the forward-looking statements as a result of various factors. Such risks may relate to, among others: (i) 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") provides long distance telecommunications services, mainly voice, but also facsimile, to its customers. VDC has two business segments, long distance switchless reselling ("Retail") and wholesale long distance ("Wholesale"). Retail focuses on reselling domestic and international long distance services to residential and small business customers in the United States. Wholesale focuses on reselling domestic and international long distance services, and rental of our circuit switching facilities, to U.S. and foreign based telecommunications companies. The global wholesale network consists of owned telecommunications switching and ancillary equipment, leased telecommunications lines and interconnect agreements with carriers and customers. Our telecommunications equipment, currently located in New York and Los Angeles comprises our operating facilities. We also generate nominal revenues from the management of domestic tower sites that provide transmission and receiver locations for wireless communications companies. During the quarter ended September 30, 2000, we re-directed most of our resources towards Retail. Although in our December 2000 Form 10-Q, we announced the decision to discontinue Wholesale, based on recent developments we have decided not to abandon the Wholesale market. We are currently negotiating contracts with vendors from several countries to carry traffic into these countries at favorable rates. We do not expect to generate revenues from Wholesale until July 2001. Segments 1. Retail We currently have approximately 5,000 active retail customers running traffic in the United States. The majority of the telecommunications traffic, voice phone calls, generated by our customers is originated and terminated domestically. Management believes the goodwill associated with the acquisition of the Retail segment has been permanently impaired. The Retail segment has incurred significant historical losses and has not yet met projected cash flows. As a result, we recorded a goodwill impairment of $2,468,638 in the quarter ended March 31, 2001. We acquire residential customers through direct marketing via the telephone. We have recently entered into an agreement in which an offshore company ("Telemarketer") which will market our product in the United States. Commissions payable to Telemarketer will be $40 per customer acquired and a 10% residual commission on recurring monthly charges net of rebates. As a result of this agreement, we recently terminated the employment of our in-house telemarketers and our marketing management. We also expect the agreement to increase customer retention for the following reasons: (i) commissions are payable after the 30 day money back guarantee period (ii) Telemarketer has assisted in revising our sales script and (iii) Telemarketer's sales reps are paid hourly with no commission and are evaluated regularly for customers acquired and retained. We have recently entered into an agreement with another telecommunications provider to carry our retail traffic. The agreement calls for more competitive rates and a minimum monthly traffic volume of $50,000. Currently, 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. We currently do not utilize our own facilities to carry our retail customers' traffic, but may in the future. The Retail segment's costs of services consist largely of carrier costs, sales commissions and customer rebates. The Retail segment's costs also include selling, general, and administrative expenses ("SG&A"). SG&A consists primarily of personnel costs, professional fees, bank and credit card processing charges, office rental, printing and postage. 2. Wholesale Although we announced the discontinuance of the Wholesale segment in the December 2000 Form 10Q, due to the development of recent opportunities, we have decided not to abandon this market. There can be no assurances, however, that continuation of operations in this segment will generate positive earnings and/or cash flow. Additionally, we do not expect to generate Wholesale revenue until July 2001. Wholesale focuses on providing services to other telecommunications companies. The majority of the telecommunications traffic, voice or facsimile calls, generated by these customers is terminated internationally. We did not generate revenue from the Wholesale segment in the three months ended March 31, 2001. The international telecommunications market consists of all telecommunications traffic that originates in one country and terminates in another. The implementation of a high quality international network is an important element in enabling a carrier to compete effectively in the international long distance telecommunications market. We have international gateway switches located in New York and Los Angeles. The network is capable of interconnecting and routing a voice or facsimile call to most parts of the world. In addition, we provide use of our switch capacity and co-location of our switch site to other carriers. Revenue derived through the per-minute transmission of voice and facsimile telecommunications traffic is normally in accordance with contracts with other telecommunications companies. These contracts are often for a year or more, but can generally be amended with a few days notice. Further, these contracts generally do not provide for a fixed volume of telecommunications traffic to be sent to us and, as such, the telecommunications traffic that a customer sends to us during any given month can vary considerably. Occasionally, however, these contracts require payments to us if a customer does not send a fixed minimum amount of telecommunications traffic to us. Costs of services are primarily comprised of costs incurred from other domestic and foreign telecommunications carriers to originate, transport and terminate calls that we send to them. The majority of our cost of service is variable, based on the number of minutes of use, with transmission and termination costs being our most significant expense. In addition, our costs of services include circuit expenses, the allocable personnel and overhead associated with operations. Wholesale's costs also include SG&A which consists primarily of personnel costs, utilities and rent. Corporate and Other Other segments include the management of domestic tower sites that provide transmission and receiver locations for wireless communications companies and certain non-allocable corporate expenses. Nominal revenue is generated from the management of domestic tower sites that provide transmission and receiver locations for wireless communications companies. This revenue is also generated and billed on a month-to-month basis. 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. 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 opportunities in the hope of settling its accounts payable 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. 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. VDC's Board of Directors appointed Anthony DeJesus, C.P.A., as Chairman, CEO and CFO. 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. 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. The Consolidated Financial Statements of VDC have been prepared on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities, except as otherwise disclosed, in the normal course of business. However, because of VDC's recurring losses from operations and significant arrearages on trade payables, such realization of assets and satisfaction of liabilities is subject to significant uncertainties. The Consolidated Financial Statements do not include any adjustments that might result from the outcome of these uncertainties. Furthermore, VDC's ability to continue as a going concern is highly dependent in the near term on its ability to raise capital, obtain additional retail customers, achieve profitable operations and generate sufficient cash flow from operations and financing sources to meet obligations. Results of Operations For the Three Months Ended March 31, 2001 Compared to the Three Months Ended March 31, 2000 Revenues: VDC began providing retail long distance services in June 2000. We generated revenue of approximately $881,000 in the three months ended March 31, 2001 ("Current Quarter"). VDC generated approximately $853,000 by providing retail long distance services during the Current Quarter. Additional revenue of approximately $28,000 was generated from domestic site tower management during the Current Quarter. VDC generated approximately $2.1 million in the three months ended March 31, 2000 ("Prior Period Quarter"). Wholesale generated revenue of approximately $1.7 million by the transmission of approximately 5.8 million minutes of telecommunications traffic domestically and internationally. We also generated revenue of approximately $343,000 from switch equipment rental ("Partition"), approximately $12,000 from contractually required payments from a customer due to its failure to provide a certain minimum level of telecommunications traffic and approximately $30,000 from site tower management. Costs of Services: Retail costs of services were approximately $647,000 during the Current Quarter, or approximately 73% of revenues. 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. Wholesale's costs of services in the Prior Period Quarter were approximately $1.8 million. These costs were due to domestic and international minutes of telecommunications traffic which we purchased from other long distance carriers and other operational expenses including salaries, and circuit costs. Costs of services as a percentage of revenues were approximately 86% in the Prior Period Quarter. SG&A: SG&A expenses were approximately $307,000 during the Current 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, printing and postage. SG&A expenses were approximately $445,000 in the Prior Period Quarter. This was primarily the result of personnel costs and professional fees. Depreciation and Amortization ("D&A"): D&A expenses were approximately $658,000 in the Current Quarter as compared to $225,000 in the Prior Period Quarter. The June 2000 acquisition of the retail subsidiary generated goodwill of approximately $3.3 million, which was being amortized over 36 months, or approximately $274,000 per quarter. As discussed below, the balance of goodwill at March 31, 2001 is being written off in the Current Quarter. Other D&A in the Current Quarter 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, the depreciation of Wholesale long distance telecommunications equipment, and office equipment and furniture. D&A expenses in the Prior Period Quarter were mostly attributable to depreciation on Wholesale long distance switching equipment. Impairment of Goodwill: We recorded a $2.5 million charge for the impairment of goodwill in the Current Quarter. The Retail segment has incurred significant historical losses and has not yet met projected cash flows. As a result, management believes the goodwill associated with the acquisition of the Retail segment has been permanently impaired. Other income (expense): Other income (expense) was approximately $(282,000) for the three months ended March 31, 2001, which was mostly attributable to prior period underaccruals. Other income of approximately $59,000 for the three months ended March 31, 2000 was due to miscellaneous income and interest income offset by interest expense. For the Nine months Ended March 31, 2001 Compared to the Nine months Ended March 31, 2000 Revenues: We generated revenue of approximately $4.3 million in the nine months ended March 31, 2001 ("Current Period") as compared to approximately $6.6 million for the nine months ended March 31, 2000 ("Prior Period"). The Retail segment generated revenue of approximately $2.9 million by providing retail long distance customer services during the Current Period. The Retail segment was acquired in June 2000. The Wholesale segment generated revenue of approximately $1.4 million during the Current Period by the transmission of approximately $1.1 million in domestic and international telecommunications traffic and approximately $300,000 from Partition. The Wholesale segment generated revenue of approximately $6.5 million during the Prior Period by the transmission of approximately $5.4 million in domestic and international telecommunications traffic and approximately $819,000 from Partition, approximately $253,000 from contractually required payments from a customer due to its failure to provide a certain minimum level of telecommunications traffic. The decrease is attributable to the limited resources committed to this business segment through December 2000. Subsequent to December 2000, the Wholesale segment generated no revenue. We have decided not to discontinue the operations of this segment although we don't expect the wholesale segment to generate revenue until July 2001. Other segments generated approximately $86,000 from site tower management during the Current Period as compared to approximately $89,000 during the Prior Period. Costs of Services: Costs of services in the Current Period decreased to approximately $3.9 million from approximately $6.1 million in the Prior Period. In the Current Period the Retail segment incurred costs of services of approximately $2.7 million, or approximately 93% of revenues. Telemarketing salaries, carrier costs and rebates accounted for approximately 49%, 25% and 13% of these costs, respectively. Other less significant costs included telemarketing phone costs, and FCC mandated independent verification procedures. Wholesale costs of services were approximately $1.1 million during the Current Period, or approximately 79% of Wholesale revenues. Wholesale costs of services were approximately $6.1 million during the Prior Period. The decrease was due to decreased domestic and international minutes of telecommunications traffic, which we purchased from other long distance carriers and decreased operational expenses including salaries, and circuit costs. SG&A expenses increased to approximately $2.9 million in the Current Period from approximately $1.7 million in the Prior Period. Retail's SG&A expenses were approximately $1.7 million during the Current Period. The largest components of SG&A included salaries, bank and credit card processing fees, printing, postage and the allocation of corporate SG&A. Wholesale's SG&A expenses were approximately $375,000 during the Current Period as compared to approximately $712,000 in the Prior Period. The decrease in the Current Period was due to a reduction in both personnel and the allocation of corporate SG&A costs to Wholesale. Depreciation and Amortization : D&A expenses were approximately $1.9 million in the Current Period. Retail's D&A expenses were approximately $1.1 million. The June 2000 acquisition of the retail subsidiary generated goodwill of approximately $3.3 million, which was being amortized over 36 months, or approximately $823,000 for the Current Period. As discussed below, the balance of goodwill at March 31, 2001 is being written off in the Current Period. Other Retail 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 telemarketing and office equipment and furniture. Wholesale's D&A expenses were approximately $833,000 in the Current Period. These costs were mostly attributable to depreciation on long distance switching equipment. Prior period D&A expenses of approximately $772,000 was mostly due to depreciation on wholesale long distance equipment. Impairment of Goodwill: We recorded a $2.5 million charge for the impairment of goodwill in the Current Period. The Retail segment has incurred significant historical losses and has not yet met projected cash flows. As a result, management believes the goodwill associated with the acquisition of the Retail segment has been permanently impaired. 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. The Company 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. Loss on sale of fixed assets: Loss on sale of fixed assets in the Current Period was approximately $239,000. The Company recognized a loss of approximately $126,000 on the sale of a long distance telecommunications switch located in Colorado. Additionally, VDC recognized a loss of approximately $113,000 on the sale of other equipment located in Colorado. Asset impairment charges: During the Current Period, VDC recognized an impairment loss of approximately $63,000 in connection with the abandonment of the Colorado telecommunications switch site location. Other income (expense): Other (expense) was approximately $(341,000) for the nine months ended March 31, 2001, which was mostly due to the write down of VDC's investment in Portacom Wireless, Inc. ("Portacom"). Management felt that the significant decline in value of the Portacom investment was other than temporary. Other income of $36,000 in the Prior Period was mostly due to interest income and other miscellaneous income offset by interest expense incurred on capital lease obligations Liquidity and Capital Resources Net cash used by operating activities was approximately $1.3 million in the nine months ended March 31, 2001, or Current Period. Most of the cash was used to fund the net loss which was reduced by non cash charges for the impairment of goodwill, depreciation and amortization, realized loss on marketable securities, loss on disposal of fixed assets, non-cash compensation charges, and changes in accounts receivable and payable. Net cash provided by operating activities was approximately $36,000 in the Prior Period. In that period, we collected approximately $7.0 million from customers while paying approximately $6.9 million to carriers, other vendors and employees. Net cash provided by investing activities was approximately $81,000 in the nine months ended March 31, 2001. Cash was provided by proceeds from the sale of equipment less the acquisition of fixed assets. Net cash provided by investing activities of approximately $336,000 in the nine months ended March 31, 2000 included the collection of notes receivable and a refund on previously acquired switching equipment less fixed asset purchases. Net cash provided by financing activities was approximately $451,000 in the nine months ended March 31, 2001. This reflects proceeds from the issuance of common stock less repayments on long term debt and capital lease obligations. Net cash provided by financing activities was approximately $709,000 during the nine months ended March 31, 2000. This reflects proceeds from the issuance of common stock, the exercise of common stock options 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. 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 through: (i) revenues from operations and (ii) extending payables to vendors and tax authorities beyond payment terms. In April 2001, a potential buyer of our New York switching equipment decided against acquiring the equipment for $500,000 and the elimination of approximately $170,000 in payables. The failure to consummate this transaction further jeopardizes our business. Additionally, Telecom 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 Wholesale segment and our former Connecticut administra tive office location need to be addressed. We will continue to work with creditors in an attempt to settle its significant arrearages and contingencies. If we are unable to resolve these liquidity issues, we may have to file for bankruptcy protection. Our long-term objective is to build the Retail segment's customer base to the point of critical mass and generate cash flow from the Wholesale segment by strategically obtaining direct routes to certain destinations. To accomplish Retail's objective, however, we will rely heavily on Telemarketer for customer acquisition. To accomplish Wholesale's objective, we will need to finalize certain contracts, hire the appropriate technical personnel and settle arrearages with strategic vendors needed to provide connectivity to our switches. 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. In March 2001, VDC settled all the claims asserted and/or could have been asserted in the Action. The Action was dismissed with prejudice and with VDC not having to pay any cash. Other than as reported above and in Part II - Item 1 "Legal Proceedings" of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, there have been no material developments to any of the matters that require reporting under this Item. 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 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 10.69 Sales Agent Agreement entered into between Rare Telephony, (1) Inc. and Jamaica Call Center Limited (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 expense reductions, including the resignation of the CEO and CFO. 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. 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: May 15, 2001 -------------------------------------------------- Anthony F. DeJesus Chairman, Chief Executive Officer, Chief Financial Officer, and Director 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 10.69 Sales Agent Agreement entered into between Rare Telephony, Inc. and Jamaica Call Center Limited