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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO _____________
COMMISSION FILE NUMBER: 0-31341
VIASOURCE COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
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New Jersey 22-2966853
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 East Broward Boulevard, Suite 2100
Fort Lauderdale, Florida 33301
800-683-0253
(Address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filings for the
past 90 days [X] Yes [ ] No
The number of shares of common stock outstanding as of
August 14, 2001 was 42,517,404
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
VIASOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
December 30, June 30,
2000 2001
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 13,396,907 $ 1,787,779
Restricted cash .............................................. 1,348,854 2,271,536
Accounts receivable (net of allowance for doubtful accounts of
$2,460,098 and $3,307,407, respectively) ................... 36,438,835 31,636,818
Supply inventory ............................................. 4,040,137 1,370,234
Prepaid expenses and other ................................... 1,581,377 2,439,793
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Total current assets ................................. 56,806,110 39,506,160
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PROPERTY AND EQUIPMENT, net .................................... 25,063,934 25,915,041
GOODWILL AND OTHER INTANGIBLES, net ............................ 97,382,300 77,339,012
OTHER ASSETS ................................................... 2,260,899 6,107,519
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TOTAL ASSETS ................................................... $ 181,513,243 $ 148,867,732
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ............................ $ 3,046,847 $ 7,459,754
Accounts payable ............................................. 13,469,335 13,999,940
Accrued expenses ............................................. 13,549,079 8,803,556
Accrued restructuring expenses ............................... -- 4,265,711
Deferred revenue ............................................. 7,702,807 2,297,135
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Total current liabilities ............................ 37,768,068 36,826,096
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LONG-TERM DEBT ................................................. 58,200,629 56,182,594
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DEFERRED TAX PROVISION ......................................... 150,304 14,866
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 115,000,000 shares authorized,
45,516,690 and 45,561,378 shares issued and 42,472,716 and
42,517,404 outstanding, respectively ....................... 165,090,893 165,002,276
Common stock purchase warrants ............................... -- 2,770,244
Deferred compensation ........................................ (779,175) (430,214)
Accumulated other comprehensive loss ......................... (11,337) --
Accumulated deficit .......................................... (74,906,139) (107,498,130)
Treasury stock, 3,043,974 shares at cost ..................... (4,000,000) (4,000,000)
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Total shareholders' equity ........................... 85,394,242 55,844,176
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................... $ 181,513,243 $ 148,867,732
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See accompanying notes to unaudited consolidated financial statements.
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VIASOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
--------------------------------- ---------------------------------
July 1, June 30, July 1, June 30,
2000 2001 2000 2001
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REVENUES .............................. $ 45,292,515 $ 42,531,532 $ 74,390,248 $ 93,497,330
OPERATING EXPENSES:
Cost of revenues .................... 40,965,117 34,375,561 66,051,673 78,461,619
Selling, general and administrative . 6,226,565 5,715,154 11,155,394 14,145,533
Depreciation and amortization ....... 2,771,491 5,736,814 4,030,181 11,207,276
Restructuring charge ................ -- 6,715,781 -- 6,715,781
Impairment loss on intangible
assets and goodwill .............. -- 12,604,128 -- 12,604,128
Total operating expenses ........ 49,963,173 65,147,438 81,237,248 123,134,337
------------- ------------- ------------- -------------
Loss from operations .................. (4,670,658) (22,615,906) (6,847,000) (29,637,007)
------------- ------------- ------------- -------------
INTEREST INCOME ....................... 47,795 3,346 47,795 38,305
INTEREST EXPENSE ...................... 1,135,128 1,463,635 1,814,242 2,993,284
------------- ------------- ------------- -------------
Loss before income taxes .............. (5,757,991) (24,076,195) (8,613,447) (32,591,986)
INCOME TAX PROVISION .................. 154,000 -- -- --
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NET LOSS .............................. $ (5,911,991) $ (24,076,195) $ (8,613,447) $ (32,591,986)
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Basic and diluted net loss per share .. $ (0.21) $ (0.57) $ (0.31) $ (0.77)
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See accompanying notes to unaudited consolidated financial statements.
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VIASOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
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July 1, June 30,
2000 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................ $ (8,613,447) $(32,591,986)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................................. 4,030,181 11,207,276
Amortization of deferred compensation ......................... 1,721,654 255,284
Impairment loss on intangible assets and goodwill ............. -- 12,604,128
Loss on disposal of assets .................................... -- 387,258
Amortization of debt issuance costs ........................... 218,125 225,783
Provision for (benefit) deferred taxes ........................ (4,315,616) --
Stock compensation expense .................................... 292,210 --
Changes in operating assets and liabilities:
Accounts receivable ......................................... (6,572,555) 4,802,017
Supply inventory ............................................ (1,798,420) 2,669,903
Prepaid expenses and other assets ........................... (1,806,541) (1,202,940)
Accounts payable ............................................ 4,850,085 (74,900)
Accrued expenses, restructuring expenses and deferred revenue 11,201,025 (6,258,370)
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Net cash used in operating activities ................. (793,299) (7,976,547)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................. (3,827,191) (4,481,858)
Business acquisitions, net of cash acquired ..................... (1,576,236) --
Increase in restricted cash ..................................... (470,000) (922,682)
Proceeds on sale of assets ...................................... -- 179,141
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Net cash used in investing activities ................. (5,873,427) (5,225,399)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt .................................... 11,973,322 3,200,000
Repayments on long-term debt .................................... (3,873,987) (1,612,242)
Proceeds from exercise of stock options ......................... 24,700 5,060
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Net cash provided by financing activities ............. 8,124,035 1,592,818
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............. 1,457,309 (11,609,128)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................... 6,257,290 13,396,907
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CASH AND CASH EQUIVALENTS, END OF PERIOD .......................... $ 7,714,599 $ 1,787,779
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See accompanying notes to unaudited consolidated financial statements.
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VIASOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Viasource
Communications, Inc. and its subsidiaries ("Viasource" or the "Company") have
been prepared in accordance with generally accepted accounting principles for
interim financial statements and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, the financial information furnished in this
report reflects all material adjustments (including normal recurring accruals)
necessary for a fair presentation of the results for the interim periods
presented. The results of operations for the three and six months ended June 30,
2001 are not necessarily indicative of the results to be expected for the entire
year. All significant intercompany accounts have been eliminated. The unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes thereto included in
Viasource's Annual Report on Form 10-K for the year ended December 30, 2000.
2. BACKGROUND
Viasource is a nationwide enabler of broadband technologies to residential
and commercial consumers. As a technology-neutral enabler, the Company offers
comprehensive network integration services to providers in the cable,
telecommunications, satellite and wireless industries. Viasource provides
installation, integration, fulfillment, and long-term maintenance and support
services for broadband video, voice and data technologies.
The Company has grown through a number of acquisitions and has a limited
operating history as a combined company. The Company acquired two businesses in
fiscal 1999 and four businesses in the second quarter of fiscal 2000. All the
acquired businesses had been operating independently.
On August 18, 2000, the Company completed its initial public offering,
whereby it sold 5,000,000 shares of common stock at $8.00 a share for gross
proceeds of $40.0 million. In September 2000, an over allotment of 750,000
shares was sold for $8.00 a share for gross proceeds of $6.0 million. The
Company received $3.0 million of proceeds from the over allotment of 375,000
shares and a selling shareholder received the remaining proceeds for the sale of
375,000 shares. The costs associated with the initial public offering were $7.6
million.
3. GOODWILL AND OTHER INTANGIBLES
The Company amortizes, on a straight-line basis, the excess of cost over
the fair value of the net tangible and identifiable intangible assets of
acquired businesses over an estimated life of 10 to 20 years. Other identifiable
intangible assets, including agreements not-to-compete, tradenames, trained
workforce and customer relationships, are amortized on a straight-line basis
over their estimated economic lives of 1 to 20 years.
The Company continually evaluates whether events and changes in
circumstances warrant revised estimates of useful lives or recognition of an
impairment loss of unamortized goodwill. The conditions that would trigger an
impairment assessment of unamortized goodwill include a significant negative
trend in the Company's operating results or cash flows, a decrease in demand for
the Company's services, a change in the Company's competitive environment and
other industry and economic factors. The Company measures impairment of
unamortized goodwill utilizing the discounted cash flow method. The present
value of those estimated cash flows is then compared to the Company's net book
value; if the book value exceeds the present value of those cash flows, the
excess of the unamortized goodwill is written off. The discount rate used in
determining the present value of those cash flows would be based on the
Company's weighted average cost of capital commensurate with the risk involved.
As of June 30, 2001, the Company determined that there has been an
impairment of its unamortized goodwill as described in "Note 6 -- Impairment
Loss on Intangible Assets and Goodwill."
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4. IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for possible impairments of long-lived assets in
accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that
long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and long-lived assets and certain identifiable
intangibles to be disposed of be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If events or changes in circumstances indicate that the carrying
amount of an asset that the Company expects to hold and use may not be
recoverable, future cash flows (undiscounted and without interest charges)
expected to result from the use of the asset and its eventual disposition must
be estimated. If the undiscounted value of the future cash flows is less than
the carrying amount of the asset, the carrying value of the assets and related
goodwill are reduced by the amount by which the carrying value exceeds fair
value. Assets to be disposed of or are no longer available for use are reported
at the lower of carrying amount or fair value less cost to sell. Fair value is
determined based on various discounted cash flow valuation techniques.
During the three months ended June 30, 2001, the Company determined that
there has been an impairment of certain identifiable intangibles as fully
described in "Note 6 -- Impairment Loss on Intangible Assets and Goodwill."
5. RESTRUCTURING AND OTHER RELATED CHARGES
In light of the industry and economic environment and capital market trends
impacting both current operations and expected future growth opportunities, the
Company has refocused its initiatives to optimize operating results, improve
margins, and drive efficiencies by further streamlining field operations and
administrative support functions. The restructuring plan has generally included
the reduction of workforce, the reduction in divisional and regional field
offices and the consolidation of certain administrative functions within the
Company. During the three months ended June 30, 2001, the Company recorded
approximately $6.7 million in restructuring charges, which is included under the
caption "Restructuring charge" in the Consolidated Statements of Operations. The
Company executed and completed the major phases of the restructuring plan in the
three months ended June 30, 2001.
As part of the restructuring plan, the Company modified its field
operations from four geographic business divisions to two major regional
offices. As such, the Company modified its Denver, Colorado and Murfreesboro,
Tennessee facilities to accommodate the new requirements of these two major
regional offices. Corporate functions, such as Accounting and Human Resource,
were combined into the headquarters facility in Fort Lauderdale, Florida, as
part of this consolidation.
The workforce reductions charge of $1.8 million for the three months ended
June 30, 2001 was related to the cost of severance and benefits associated with
83 terminated employees. Of the employees terminated, 42 were performing field
support and division functions and 41 were corporate administrative employees.
Of the terminated employees, 6 employees had employment contracts. As of June
30, 2001, $1.0 million of the $1.8 million workforce reduction accrual had been
decreased by cash payments. The remaining accrual will be utilized by March 31,
2002.
In conjunction with the field office geographic realignment, the Company
identified a number of leased facilities, comprised of office and warehouse
space, that were no longer required. As a result, the Company recorded net lease
termination costs of $3.9 million for the three months ended June 30, 2001. The
lease costs primarily relate to future contractual obligations under operating
leases. The lease costs are partially offset by $3.7 million in expected
sublease income from existing sublease arrangements. As of June 30, 2001, the
lease costs and termination fees accrual had been decreased by cash payments of
$0.4 million. The remaining accrual is expected to be utilized by June 30, 2005.
Other exit costs related to the restructuring plan are primarily negotiated
contract settlement costs of $0.5 million. As of June 30, 2001, the other exit
cost accrual has been decreased by cash payments of $0.5 million.
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The fixed asset write-down of $0.5 million for the three months ended June
30, 2001 consists of office equipment and fixtures and leasehold improvements
associated with the exiting of the above noted leased facilities.
The following table sets forth the details and the cumulative activity
related to the restructuring plan as of June 30, 2001:
Establishment Cash Non-Cash Balance of
(in thousands) of Reserve Reductions Reductions Reserve
------------- ---------- ---------- ----------
RESTRUCTURING ACCRUALS:
Workforce reduction ...................... $1,794 $ 963 -- $ 831
Lease costs and termination fees, net .... 3,884 449 -- 3,435
Other exit costs related to implementation
of restructuring plan .................. 516 516 -- --
ASSET WRITE-DOWNS
Fixed assets, principally leasehold
improvements ........................... 522 -- $ 522 --
------ ------ ------ ------
Total ............................... $6,716 $1,928 $ 522 $4,266
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6. IMPAIRMENT LOSS ON INTANGIBLE ASSETS AND GOODWILL
In accordance with the provisions of SFAS 121, the Company recorded an
impairment loss on intangible assets of $2.2 million during the three months
ended June 30, 2001. The $2.2 million impairment loss is comprised of $1.5
million related to digital subscriber line ("DSL") installations and staffing
customer relationships that are not continuing and accordingly are no longer
available for use and a $0.7 million impairment loss to write-down the trained
workforce intangible asset to fair value. The impairment of the trained
workforce was triggered due to termination of an additional 82% of the acquired
workforce during the six month period ended June 30, 2001. The fair value of the
trained workforce was determined based upon a cost approach valuation technique
that considers time, materials and facilities that were required to develop the
intangible asset.
The Company performed an analysis by key customer of the cash inflows
expected to be generated by continuing DSL installation customer relationships
less the future cash outflows expected to be necessary to obtain those inflows.
The sum of the expected future cash flows (undiscounted and without interest
charges) was less than the carrying amount of the continuing DSL installation
customer relationship intangible assets, thus indicating that the tested asset
and related goodwill have been impaired. The fair value of the customer
relationship was determined based upon the present value of the estimated future
cash flows attributable to the intangible asset discounted over the remaining
life of the asset. The estimated cash flows were based on projections of
operating performance, historical operating performance and industry and
customer-specific growth characteristics taking into consideration the change in
the competitive environment for the Company's customers.
The Company also recognized a $10.4 impairment loss on its unamortized
goodwill due to the significant negative trends in the Company's DSL business
and the change in the competitive environment for DSL related services. The
Company measured its impairment utilizing the discounted cash flow method. The
present value of those estimated cash flows were then compared to net book
value. The excess of the book value over the estimated present value of the cash
flows was approximately $10.4 million thereby resulting in an impairment loss of
unamortized goodwill.
The total impairment loss of $12.6 million was recognized in the three
months ended June 30, 2001 and is included in the caption "Impairment loss on
intangible assets and goodwill" in the accompanying unaudited Consolidated
Statements of Operations. The Company's DSL enabling services are included in
the Telephony and Internet business segment. At June 30, 2001, the total
unamortized goodwill related to the Company's DSL business was $1.8 million.
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7. NET LOSS PER SHARE
The Company has presented basic and diluted net loss per share pursuant to
SFAS No. 128, "Earnings per Share," and the Securities and Exchange Commission
SAB No. 98. In accordance with SFAS No. 128, basic net loss per share has been
computed by dividing net loss by the weighted-average number of shares of common
stock outstanding during the period. Diluted net loss per share includes the
effect, if any, from the potential exercise or conversion of securities, such as
stock options, which would result in the issuance of shares of common stock. For
the six months ended July 1, 2000 and June 30, 2001, respectively, diluted net
loss per share is the same as basic net loss per share, as all additional
potentially diluted shares from the exercise or conversion of securities into
common stock are excluded since the result is anti-dilutive due to the Company's
losses.
The following table presents the calculation of basic and diluted net loss
per share.
Three Months Ended Six Months Ended
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July 1, June 30, July 1, June 30,
2000 2001 2000 2001
-------------- -------------- -------------- ------------
Net loss ........................ $ (5,911,991) $ (24,076,195) $ (8,613,447) $(32,591,986)
============== ============== ============== ============
Basic and diluted:
Weighted-average shares
used in computing basic and
diluted net loss per share ... 27,748,418 42,542,159 27,748,418 42,482,175
============== ============== ============== ============
Basic and diluted net
loss per share ............... $ (0.21) $ (0.57) $ (0.31) $ (0.77)
============== ============== ============== ============
Anti-dilutive shares excluded in
net loss per share calculation 2,613,867 3,950,901 1,260,880 3,661,413
============== ============== ============== ============
8. INCOME TAXES
No provision for income taxes was recorded for the three and six months
ended June 30, 2001, due to an offsetting increase in the Company's valuation
allowance, which totaled $19,433,343. Realization of the future tax benefits
related to deferred tax assets is dependent on many factors, including the
Company's ability to generate future taxable income. Management has considered
these factors in reaching its conclusions as to the need for a valuation
allowance for financial reporting purposes.
9. BUSINESS COMBINATIONS
On April 21, 2000, the Company acquired substantially all of the assets
(and assumed substantially all of the liabilities) of D.S. Cable TV Contractors,
Inc. ("D.S. Cable") for approximately $5.9 million, including transaction costs.
The purchase price consisted of $1,500,000 in cash, $750,000 in seller notes and
387,735 shares of common stock valued at $9.00 per share or $3,489,615. The
application of the purchase method resulted in $5,034,230 of excess purchase
price over the estimated fair value of the net tangible assets acquired of
$871,490. The excess purchase price was allocated to intangible assets,
consisting of $180,000 for an agreement not-to-compete, $300,000 for trained
workforce, $2,840,000 for customer relationships and $1,714,230 for goodwill.
Intangible assets are amortized on a straight-line basis over their estimated
useful lives of 6 years for the agreement not-to-compete, 7.5 years for trained
workforce, 20 years for customer relationships and 20 years for goodwill.
On May 4, 2000, the Company acquired substantially all of the assets (and
assumed substantially all of the liabilities) of Service Cable Electric, Inc.
and Service Cable Corporation (collectively "Service Cable") for approximately
$6.2 million, including transaction costs. The purchase price consisted of
$980,000 in cash, $1,960,000 in seller notes, 329,412 shares of common stock
valued at $9.00 per share or $2,964,708 and options to purchase common stock
with a fair value of $189,374. The application of the purchase method resulted
in $6,161,682 of excess purchase price over the estimated fair value of the net
tangible assets acquired of $44,637. The excess purchase price was allocated to
intangible assets consisting of $190,000 for an agreement not-to-compete,
$500,000 for trained workforce, $2,970,000 for customer relationships and
$2,501,682 for goodwill. Intangible
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assets are amortized on a straight-line basis over their estimated useful lives
of 6 years for the agreement not-to-compete, 7.5 years for trained workforce, 20
years for customer relationships and 20 years for goodwill.
On June 1, 2000, the Company acquired, via merger, all of the outstanding
stock of Excalibur Cable Communications, Ltd. ("Excalibur") for approximately
$25.4 million (subject to certain post-closing adjustments), including
transaction costs. The purchase price consisted of $4,000,000 in cash,
$4,000,000 in seller notes and 1,882,353 shares of common stock valued at $9.00
per share or $16,941,177. The application of the purchase method resulted in
approximately $24,201,592 of excess purchase price over the estimated fair value
of the net tangible assets acquired. The excess purchase price was allocated to
intangible assets consisting of $1,200,000 for an agreement not-to-compete,
$1,300,000 for trained workforce, $16,300,000 for customer relationships and
$5,401,592 for goodwill. Intangible assets are amortized on a straight-line
basis over their estimated useful lives of 5 years for the agreement
not-to-compete, 7.5 years for trained workforce, 20 years for customer
relationships and 20 years for goodwill.
On June 1, 2000, the Company acquired, via merger, all of the outstanding
stock of TeleCore, Inc. ("TeleCore") for approximately $86.8 million, including
transaction costs. The purchase price consisted of $16,866,481 in seller notes,
3,688,865 and 3,096,159 shares of common and preferred stock, respectively, both
valued at $9.00 per share, or a total of $61,065,216 and 1,183,196 options to
purchase common stock valued at $8,452,640. The application of the purchase
method resulted in approximately $92,048,321 of excess purchase price over the
estimated fair value of the net deficit acquired. The excess purchase price was
allocated to intangible assets consisting of $19,500,000 for agreements
not-to-compete, $3,400,000 for trained workforce, $45,000,000 for customer
relationships and $24,148,321 for goodwill. Intangible assets are amortized on a
straight-line basis over their estimated useful lives of 3.6 years for the
agreements not-to-compete, 7.5 years for trained workforce, 10 years for
customer relationships and 10 years for goodwill. Allocation of excess purchase
price over the estimated fair value at the date of acquisition does not reflect
the impairment loss on intangible assets and related goodwill of $52.9 million
recorded in the three months ended December 30, 2000 and the $12.6 million
recorded in the three months ended June 30, 2001.
The following unaudited pro forma summary combines the consolidated results
of operations of Viasource, D.S. Cable, Service Cable, Excalibur and TeleCore as
if the transactions had occurred as of the beginning of the period presented
after giving effect to certain adjustments including amortization of the
purchase price in excess of the net tangible assets acquired and interest
expense. The unaudited pro forma results are for informational purposes and are
not necessarily indicative of the results of operations that would have occurred
if Viasource, D.S. Cable, Service Cable, Excalibur and TeleCore had been
combined during such periods or the future results of operations of the Company.
Three Months Ended Six Months Ended
------------------------------------ -----------------------------------
July 1, June 30, July 1, June 30,
2000 2001 2000 2001
-------------- ------------- -------------- ------------
Revenue ............................ $ 61,512,974 $ 42,531,532 $ 109,199,796 $ 93,497,330
============== ============= ============== ============
Operating loss ..................... (14,668,833) (22,615,906) (27,462,074) (29,637,007)
============== ============= ============== ============
Net loss ........................... (16,945,669) (24,076,195) (31,356,125) (32,591,986)
============== ============= ============== ============
Basic and diluted net loss per share (0.46) (0.57) (0.85) (0.77)
============== ============= ============== ============
10. SUPPLEMENTAL CASH FLOW INFORMATION
For the three months ended July 1, 2000 and June 30, 2001, the Company made
interest payments of $0.5 million and $0.5 million, respectively, and did not
pay income taxes in either of these periods. For the six months ended July 1,
2000 and June 30, 2001, the Company made interest payments of $1.0 million and
$1.1 million, respectively, and did not pay income taxes in either of these
periods.
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For the three months ended June 30, 2001, the Company recorded certain
non-cash transactions, including: (i) a common stock redeemable warrant issued
to the Company's senior lender at a fair value of $2.7 million; (ii) a common
stock purchase warrant issued to a new client at a fair value of $0.1 million
associated with a contract executed during the three months ended June 30, 2001;
(iii) aggregate fees of $1.2 million recorded as a liability payable to the
Company's senior lender on March 31, 2002 associated with Amendment No. 6, dated
as of May 21, 2001 ("Amendment No. 6"), to the Amended and Restated Credit
Agreement, dated as of March 10, 2000, by and among the Company and its senior
lender (as amended, restated, supplemented or otherwise modified from time to
time, (the "Credit Agreement") and the Forbearance Agreement dated as of June
29, 2001 by and among the Company and its senior lender (the "Forbearance
Agreement").
11. LONG TERM DEBT
December 30, June 30,
2000 2001
-------------- --------------
Term note with principal payable in quarterly installments of $468,750
commencing on December 31, 2000, $937,500 on December 31, 2001, $3,000,000 on
March 31, 2002, and $1,406,250 on December 31, 2003; bearing interest at
prime plus 5.50% or LIBOR plus 7.00% payable quarterly, through September 7,
2004, when all remaining principal and interest is due and payable. At
December 30, 2000, and June 30, 2001, the interest rate was 10.80% and
9.45%, respectively........................................................ $ 15,000,000 $ 14,062,500
Revolving line of credit up to $25,000,000 due on September 7, 2004, bearing
interest at prime plus 5.50% or LIBOR plus 7.00% payable quarterly through
September 7, 2004. At December 30, 2000, and June 30, 2001, the interest
rate was 10.28% and 9.45%, respectively.................................... 20,031,006 23,231,006
Subordinated notes payable to shareholders of acquired companies. At December
30, 2000, and June 30, 2001, the interest rate was 9%, which represents
$818,380 and $1,625,484, respectively...................................... 22,280,194 23,087,298
Capital lease obligations.................................................... 3,936,276 3,261,544
-------------- --------------
61,247,476 63,642,348
Less -- Current maturities................................................... (3,046,847) (7,459,754)
-------------- --------------
$ 58,200,629 $ 56,182,594
============== ==============
Term Note And Revolving Credit Facilities
On April 13, 2001, the Company executed Amendment No. 5 ("Amendment No. 5")
to the Credit Agreement, which changed its financial covenants relating to
coverage ratios such as leverage, debt service and capital expenditures for
fiscal 2001. On May 21, 2001, the Company executed Amendment No. 6 to more
accurately reflect its business. Specifically, the financial coverage ratios
were deemed not meaningful and the related covenants were therefore waived by
the Company's senior lender for the remainder of fiscal 2001. In lieu thereof,
the pricing terms of the credit facility were restructured and minimum revenue
and EBITDA (as such term is defined in the Credit Agreement) requirements that
more appropriately correlate to the Company's business were included as
additional financial covenants. In addition, the Company's capital expenditures
covenant was amended to require that capital expenditures in excess of $1.0
million during the remainder of fiscal 2001 be financed with the net proceeds of
capital raised by the Company.
On June 5, 2001, the Company's senior lender issued a standby letter of
credit in the amount of $1.76 million to the Company's insurance administrator
as part of its self-insurance program. The standby letter of credit reduced the
Company's availability in the revolving credit facility by $1.76 million.
On June 29, 2001, the Company executed a Forbearance Agreement (the
"Forbearance Agreement") with its senior lender as a result of the Company's
failure to make the scheduled mandatory prepayment due June 25, 2001 in the
amount of $0.47 million under the Credit Agreement. The Forbearance Agreement
provided that the senior lender would refrain for a limited period of time from
exercising any rights and remedies available under the Credit Agreement by
virtue of the Company's failure to make the scheduled mandatory prepayment on
June 25, 2001. In addition, the senior lender advanced $1.2 million to the
Company, which represented the remaining borrowing
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availability under the Company's revolving credit facility. In consideration for
this $1.2 million advance, the Company agreed to pay the senior lender: (i) a
forbearance fee equal to 15% per each $100,000 of incremental revolving
advances, due and payable on the earlier of the termination date under the
Credit Agreement or March 31, 2002, and (ii) issue a forbearance warrant,
exercisable at $0.01 per share, to purchase 1% of the Company's then issued and
outstanding common stock for each $100,000 of incremental revolving advances. At
June 30, 2001, the Forbearance Warrant was valued at $2.7 million and was
recorded under the caption "Common Stock Purchase Warrants" in the accompanying
unaudited Consolidated Balance Sheets.
On July 5, 2001, the Company executed Amendment No. 7 ("Amendment No. 7")
to the Credit Agreement, which substantially incorporated and superceded the
Forbearance Agreement. Pursuant to Amendment No. 7, the senior lender committed
to extend an additional $2.0 million in available credit under the Company's
revolving credit facility. Amendment No. 7 also amended certain provisions for
the repayment of principal and interest pursuant to the Credit Agreement and
revised the scheduled mandatory repayments of the term note under the Credit
Agreement. Amendment No. 7 provided that the Company undertake certain
obligations including the following covenants and agreements: (i) the payment in
full by August 15, 2001, of the scheduled mandatory prepayment in the amount of
$0.47 million that was due on June 25, 2001; (ii) the repayment of $1.0 in
accrued interest in four equal weekly installments beginning on July 13, 2001;
(iii) the payment of an underwriting fee of $0.3 million, with such fee being
due on the earlier of March 31, 2002, or the termination date of the Credit
Agreement; and (iv) the issuance of a warrant to purchase 1% of Viasource's then
issued and outstanding common stock for each $100,000 advanced by the Company's
senior lender to Viasource subsequent to the date of Amendment No. 7. The
warrants have an exercise price of $0.01 per share. On each of July 29, 2001,
August 28, 2001, and September 27, 2001, if Viasource has not received proceeds
from a subordinated capital investment, either by way of debt or equity, in an
amount not less than $4.0 million, Viasource will issue additional warrants to
purchase 1% of the common stock of each $100,000 advanced to Viasource under the
Credit Agreement subsequent to the date of Amendment No. 7. In no instance will
the aggregate number of warrants received by the Company's senior lender,
together with any other warrants for the Company's common stock that Company's
senior lender may exercise, exceed the right to purchase in excess of 19.999% of
Viasource's then issued and outstanding common stock.
On July 6, 2001, the senior lender advanced Viasource an additional
$1,900,000 under the Credit Agreement. Pursuant to Amendment No. 7, Viasource
became obligated to issue additional warrants to its senior lender such that the
senior lender's total warrants would be equal to 19.999% of the Company's then
issued and outstanding common stock. These warrants are subject to reduction, as
set forth in the Second Amended Credit Agreement (as defined herein), which was
filed as an exhibit to the Company's Current Report on Form 8-K filed August 3,
2001.
On August 3, 2001, the Company executed the Second Amended and Restated
Credit Agreement (the "Second Amended Credit Agreement") with the Company's
senior lender. Also in August 2001, the Company issued $2.45 million in Term B
Convertible Notes and Term B Warrants in a private placement. These events are
further disclosed in "Note 15 - Subsequent Events."
Subordinated Notes
In addition, the Company has outstanding approximately $23.1 million of
subordinated notes, including accrued interest issued to shareholders in its
2000 acquisitions of TeleCore, Excalibur and Service Cable. These notes have
stated maturity dates in November 2001; however, the Company believes that all
of these notes are subordinate to all of the Company's obligations under the
Credit Agreement. As a result, the subordinated notes and related accrued
interest have been classified as long-term debt in the accompanying unaudited
Consolidated Balance Sheets. These notes bear interest at 9%. The Company has
received an acceleration notice from John M. Clarey, the holder of approximately
$16.9 million of the subordinated notes, which alleges that the principal and
interest is immediately due and payable under his notes. The Company disputes
the position set forth in the acceleration notice and believes that the payment
of principal and interest nonetheless remains subject to subordination to all of
the Company's obligations under the Credit Agreement. See "Note 14 - Legal
Matters."
12. SEGMENTS
The Company follows SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company classifies its operations into
four segments: Cable; Telephony and Internet; Satellite and Wireless;
11
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and Premise Networking, Staffing and Other. The operating segments are managed
separately because each operating segment represents a strategic business unit
that offers different services. The accounting policies of the operating
segments are the same, as described in the summary of significant accounting
policies. The business segments are described in further detail below:
The Cable segment includes traditional and advanced cable installation,
disconnect, equipment recovery, collection and system audit services.
The Telephony and Internet segment includes installation and
maintenance of DSL services, cable telephony and high-speed data services and
other broadband services, as well as traditional telephony services for
commercial and residential consumers. For the three months and six months ended
June 30, 2001, the Telephony and Internet segment operating loss included an
impairment loss on intangible assets and goodwill of $6,315,540.
The Satellite and Wireless segment includes installation, equipment
conversion and maintenance services of direct broadcast satellite and other
wireless technologies.
The Premise Networking, Staffing and Other segment includes
installation and maintenance of local area and wide area networking services and
other communication systems for commercial and residential consumers, as well as
provision of installation technicians to commercial customers. For the three
months and six months ended June 30, 2001, the Premise Networking, Staffing and
Other segment operating loss included an impairment loss on intangible assets
and goodwill of $6,288,588.
Corporate operations include senior management activities, professional
services and headquarters facility support and employee benefits costs, not
allocated to the other segments.
Segment assets include amounts specifically identified to Cable,
Telephony and Internet, Satellite and Wireless, and Premise Networking, Staffing
and Other segments. Corporate assets consist primarily of cash and cash
equivalents, marketable securities, and capitalized financing costs.
Business segment information is as follows (in thousands):
Three Months Ended Six Months Ended
------------------------- -------------------------
July 1, June 30, July 1, June 30,
2000 2001 2000 2001
-------- -------- -------- --------
REVENUES
Cable ...................... $ 21,193 $ 22,356 $ 40,318 $ 45,845
Telephony and Internet ..... 9,547 6,476 15,032 16,767
Satellite and Wireless ..... 13,001 11,519 17,361 25,815
Premise Networking, Staffing
and Other .................. 1,552 2,181 1,679 5,070
-------- -------- -------- --------
$ 45,293 $ 42,532 $ 74,390 $ 93,497
======== ======== ======== ========
OPERATING LOSS
Cable ...................... $ 708 $ 1,040 $ 1,935 $ 761
Telephony and Internet ..... (520) (6,834) 280 (8,712)
Satellite and Wireless ..... (2,462) 2,896 (3,771) 5,050
Premise Networking, Staffing
and Other .................. 341 (7,908) 275 (8,843)
Restructuring charges ...... -- (6,716) -- (6,716)
Corporate .................. (2,738) (5,094) (5,566) (11,177)
-------- -------- -------- --------
$ (4,671) $(22,616) $ (6,847) $(29,637)
======== ======== ======== ========
13. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133, as amended, is effective for fiscal years beginning
12
13
after June 15, 2000. SFAS 133 requires that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair value. Changes in the derivative's fair value will be recognized in income
unless specific hedge accounting criteria are met. The Company adopted SFAS 133,
as amended, beginning December 31, 2000, and SFAS 133 did not have a material
impact on the Company's unaudited Consolidated Financial Statements, as the
Company does not have any derivative financial instruments as of June 30, 2001.
On June 30, 2001 the Financial Accounting Standards Board (FASB) finalized
and issued Statements of Financial Accounting Standards No. 141 "Business
Combinations" ("SFAS 141") and No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142").
SFAS 141 requires all business combinations initiated after June 30, 2001
to be accounted for using the purchase method, eliminating the pooling of
interests method.
SFAS 142, upon adoption, eliminates goodwill amortization over its
estimated useful life. However, goodwill will be subject to at least an annual
assessment for impairment by applying a fair-value based test. Additionally,
acquired intangible assets should be separately recognized if the benefit of the
intangible asset can be sold, transferred, licensed, rented or exchanged
regardless of the acquirer's intent to do so. Intangible assets with definitive
lives will need to be amortized over their useful lives.
Goodwill and intangible assets with definitive lives existing at June 30,
2001 will continue to be amortized until December 31, 2001. Effective January 1,
2001 such amortization will cease, as companies are required to adopt the new
rules on such date. By the end of the first quarter calendar year 2002 companies
must begin to perform an impairment analysis of intangible assets. Furthermore,
companies must complete the first step of the goodwill transition impairment
test by June 30, 2002. Any impairment noted must be recorded at the date of
adoption restating first quarter results, if necessary. Impairment charges, if
any, that result from the application of the above tests would be recorded as a
cumulative effect of a change in accounting principle in the first quarter of
the year ended December 31, 2002.
The Company will not be able to determine the ultimate impact of these
proposed statements on its consolidated financial statements until such time as
it applies their provisions. Amortization of goodwill for the year ended
December 31, 2000 was $1.9 million; however, this is not intended to be
indicative of the expected impact on its future results of operations.
14. LEGAL MATTERS
On June 15, 2001, the Company was served with a complaint in the lawsuit
captioned Konrad Eric Poth v. Viasource Communications, Inc. The lawsuit, which
was brought in the United States District Court for the Eastern Division of
Virginia, makes breach of contract claims for unspecific damages in connection
with the Company's June 1, 2000 merger with Excalibur. The Company believes that
these claims are without merit and intends to vigorously defend against this
lawsuit.
In addition, on July 20, 2001, the Company was served with a complaint in
the lawsuit captioned John M. Clarey and Christy Clarey v. Viasource
Communications, Inc. The lawsuit, which was brought in the Superior Court of the
State of California, County of Orange, makes breach of contract and certain
equitable claims for unspecified damages in connection with the Company's June
1, 2000 merger with TeleCore. The Company believes that these claims are without
merit and intends to vigorously defend this lawsuit.
The Company occasionally is party to legal proceedings incidental to its
ordinary business operations. The Company is not currently party to any pending
legal proceedings that it believes will have a material adverse effect on its
business, financial condition or results of operations.
15. SUBSEQUENT EVENTS
Two capital raising transactions have occurred since June 30, 2001: (i) the
execution of Amendment No. 7 and the Second Amended Credit Agreement with
Company's senior lender, which collectively increased by $2.45
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million the amount available to the Company under its Revolving Credit Facility
(as defined herein); and (ii) the private placement of Term B Convertible Notes
and Term B Warrants in the amount of $2.45 million.
On August 3, 2001, the Company entered into the Second Amended Credit
Agreement with the Company's senior lender. The Second Amended Credit Agreement
provides for: (i) a term loan in a principal amount of $22,565,500 (the "Term
Loan"), (ii) an $18,950,000 aggregate revolving loan commitment (the "Revolving
Credit Facility"), subject to an availability calculation based on the Eligible
Accounts Borrowing Base (as defined in the Second Amended Credit Agreement), and
(iii) the Term B Convertible Notes.
The Term Loan and the Revolving Credit Facility will terminate not later
than September 7, 2004. The Second Amended Credit Agreement contains amended
financial and other covenants, mandatory prepayment events, events of default
and other provisions. At August 3, 2001, Viasource was in compliance in all
material respects with all covenants of the Second Amended Credit Agreement. The
Second Amended Credit Agreement is secured by a lien on substantially all of the
assets of Viasource and its subsidiaries. At August 3, 2001, the outstanding
balances under the Term Loan and Revolving Credit Facility were $22,562,500 and
$18,441,274, respectively.
On August 3, 2001, the Company also issued the Term B Convertible Notes and
the Term B Warrants for an aggregate purchase price of $2.45 million. The Term B
Convertible Notes bear interest at a rate of 15%, which will be calculated
semi-annually beginning on February 1, 2002, and added to principal, and mature
not later than August 3, 2006, unless the holders of the Term B Convertible
Notes demand payment earlier (but in no event prior to March 7, 2005).
Outstanding adjusted principal of the Term B Convertible Notes may be converted,
at the holder's option, into the common stock of Viasource at a price equal to
the lesser of (1) $0.75 per share or (2) the average closing price of
Viasource's common stock for the ten trading days prior to October 1, 2001,
subject to adjustment.
The purchasers of the Term B Convertible Notes were also issued Term B
Warrants to purchase 1,975,806 shares of the Company's common stock. The Term B
Warrants, which expire on August 3, 2006, entitle the holder to purchase common
stock at a price of $0.31 per share, the closing price of Viasource's common
stock on the date immediately prior to the issuance of the Term B Warrants,
subject to adjustment. The Term B Warrants may not be exercised prior to
February 3, 2002. Viasource has agreed to use its best efforts to register for
resale the shares of common stock underlying the Term B Convertible Notes and
the Term B Warrants. The Company had associated legal fees in connection of the
Term B Convertible Notes and Warrants of $0.39 million.
For a more complete description of Amendment No. 7, the Second Amended
Credit Agreement and the Term B Convertible Notes and Term B Warrants, see the
Company's Current Reports on Form 8-K filed on July 13, 2001 and August 8, 2001.
14
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SOME OF THE STATEMENTS IN THIS REPORT, INCLUDING STATEMENTS REGARDING
VIASOURCE'S BUSINESS STRATEGY AND EXPECTATIONS, PLANS FOR GROWTH AND BUSINESS
RELATIONSHIPS, ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS ARE
SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, WHICH COULD CAUSE VIASOURCE'S
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH STATEMENTS.
FACTORS THAT COULD CAUSE SUCH RESULTS TO DIFFER INCLUDE VIASOURCE'S LIMITED
OPERATING HISTORY, COMPETITIVE PRICING PRESSURES IN VIASOURCE'S INDUSTRY,
PROVISIONS IN VIASOURCE'S AGREEMENTS WITH CLIENTS THAT PERMIT CANCELLATION ON
SHORT NOTICE AND OTHER FACTORS DISCUSSED IN VIASOURCE'S FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION ("SEC"), INCLUDING THE "RISK FACTORS" SECTION
INCLUDED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 30, 2000.
VIASOURCE DOES NOT ASSUME ANY OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING
STATEMENTS.
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS CONTAINS STATEMENTS OF A
FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR OUR FUTURE FINANCIAL
PERFORMANCE. THIS MANAGEMENT'S DISCUSSION AND ANALYSIS SHOULD BE READ IN
CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES THAT APPEAR
ELSEWHERE HEREIN. THIS REPORT MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS
IMPORTANT TO YOU. THIS SECTION SHOULD BE READ TOGETHER WITH THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000.
OVERVIEW
We derive revenues from providing installation, integration, fulfillment,
and long-term maintenance and support services to broadband service providers on
both a residential and commercial basis. We design, install and maintain
LANs/WANs and other network applications on a commercial and residential basis.
We operate in four reportable segments:
- CABLE, which includes traditional and advanced cable television
installation, disconnect, equipment recovery, account collection and
system audit services.
- TELEPHONY AND INTERNET, which includes installation and maintenance of
digital subscriber line, or DSL services, cable telephony and
high-speed data services and other broadband services, as well as
traditional telephony services for commercial and residential
consumers. For the three months and six months ended June 30, 2001, the
Telephony and Internet segment operating loss included an impairment
loss on intangible assets and goodwill of $6,315,540.
- SATELLITE AND WIRELESS, which includes installation, equipment
conversion and maintenance services for direct broadcast satellite, or
DBS, and other wireless technologies.
- PREMISE NETWORKING, STAFFING AND OTHER, which includes design,
installation and maintenance of LANs/WANs and other network
applications for commercial and residential consumers, as well as the
provision of installation technicians to commercial customers For the
three months and six months ended June 30, 2001, the Premise
Networking, Staffing and Other segment operating loss included an
impairment loss on intangible assets and goodwill of $6,288,588.
We provide services to our clients pursuant to service contracts, most of
which are cancelable on short notice. Under the terms of such contracts, the
client can typically terminate the contract with 30 to 90 days prior written
notice. Historically, these service contracts have been awarded through a
competitive bidding process, but recently we have experienced trends toward
securing such contracts by negotiations. These service contracts provide for
payment based on the installations or other services we provide. Revenues are
generally recognized as services are
15
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performed, except that a portion of our satellite and wireless revenues has been
deferred, as discussed elsewhere herein.
Cost of revenues is our principal expense and it consists mostly of
labor-related expenses. The cost of revenues includes all costs of field service
technicians, supervisory and quality control personnel, subcontractor costs, all
costs related to the operation and maintenance of vehicles and equipment, cost
of materials not supplied by the client, field office occupancy costs and
insurance costs. Cost of revenues includes all direct costs of providing
services under our contracts, other than depreciation on vehicles and equipment
owned or utilized by us under capital leases. Typically, newly hired field
technicians attend various Viasource developed and Viasource sponsored technical
and safety training courses during the initial 30 days of employment. Viasource
also provides a variety of continuing education programs designed to assist our
employees in maintaining technical competence and professional certifications.
Costs associated with operating and maintaining safety and training centers,
including educational training and safety manuals, materials and supplies,
occupancy costs and staffing costs, are charged to the cost of revenues.
Included in cost of revenues are non-cash compensation charges associated with
the amortization of unearned compensation related to certain stock and stock
option grants issued during fiscal 1999 and the first six months of 2000 to
certain employees and consultants for services rendered to us.
Selling, general and administrative costs include all costs of executive
personnel, certain clerical and administrative support personnel, occupancy
costs, travel and entertainment costs, provision for doubtful accounts and
accounting, legal, consulting and other professional fees. Included in selling
general and administrative costs are compensation charges identified as special
compensation charges as discussed above.
Depreciation and amortization expenses include depreciation of property and
equipment and amortization of goodwill and other intangibles. The goodwill and
other intangibles are being amortized over periods ranging from one to twenty
years with a weighted average life of 11 years.
We have included EBITDA in our Management's Discussion and Analysis of
Financial Condition and Results of Operations. We have presented EBITDA to
enhance the reader's understanding of our operating results. EBITDA consists of
net loss excluding net interest, taxes, depreciation, amortization,
restructuring charges and impairment loss on intangible assets and goodwill.
EBITDA is provided because it is an important measure of financial performance
commonly used in the telecommunications industry to determine the value of
companies within the industry and to define standards for borrowing from
institutional lenders. The reader should not construe EBITDA as an alternative
to operating income, as an indicator of our operating performance or as an
alternative to cash flows from operating activities as a measure of our
liquidity, determined in accordance with generally accepted accounting
principles. We may calculate EBITDA differently than other companies.
For further information, see our unaudited consolidated financial
statements and notes thereto included under "Item 1. Financial Statements."
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RESULTS OF OPERATIONS
The following table presents certain operating and other unaudited
financial data for the three months ended July 1, 2000 and June 30, 2001, as
well as for the six months ended July 1, 2000 and June 30, 2001.
Three Months Ended Six Months Ended
----------------------------- -----------------------------
July 1, June 30, July 1, June 30,
2000 2001 2000 2001
--------- --------- --------- ---------
(Dollars in thousands)
OPERATING DATA:
Revenues ............................. $ 45,293 $ 42,532 $ 74,390 $ 93,497
Operating expenses:
Cost of revenues .................. 40,965 34,376 66,052 78,462
Selling, general and administrative 6,227 5,715 11,155 14,146
Depreciation and amortization ..... 2,771 5,737 4,030 11,207
Restructuring charge .............. -- 6,716 -- 6,716
Impairment loss on intangible
assets and goodwill ............. -- 12,604 -- 12,604
--------- --------- --------- ---------
Total operating expenses ...... 49,963 65,147 81,237 123,134
Loss from operations ................. (4,671) (22,616) (6,847) (29,637)
--------- --------- --------- ---------
Interest income ...................... 48 3 48 38
Interest expense ..................... 1,135 1,464 1,814 2,993
--------- --------- --------- ---------
Loss before income taxes ............. (5,758) (24,076) (8,613) (32,592)
Income tax provision ................. 154 -- -- --
--------- --------- --------- ---------
Net loss ............................. $ (5,912) $ (24,076) $ (8,613) $ (32,592)
========= ========= ========= =========
OTHER FINANCIAL DATA:
EBITDA ............................... $ (1,899) $ 2,441 $ (2,817) $ 889
========= ========= ========= =========
The following table presents certain selected financial data for our
operating segments, as well as our corporate expenses (which include certain
financing costs, employee benefit costs and other selling, general and
administrative expenses), for the three and six months ended July 1, 2000 and
June 30, 2001.
Three Months Ended Six Months Ended
----------------------------- -----------------------------
July 1, June 30, July 1, June 30,
2000 2001 2000 2001
--------- --------- --------- ---------
(Dollars in thousands)
REVENUES
Cable ................................ $ 21,193 $ 22,356 $ 40,318 $ 45,845
Telephony and Internet ............... 9,547 6,476 15,032 16,767
Satellite and Wireless ............... 13,001 11,519 17,361 25,815
Premise Networking, Staffing and
Other .............................. 1,552 2,181 1,679 5,070
-------- -------- -------- --------
$ 45,293 $ 42,532 $ 74,390 $ 93,497
======== ======== ======== ========
OPERATING LOSS
Cable ................................ $ 708 $ 1,040 $ 1,935 $ 761
Telephony and Internet ............... (520) (6,834) 280 (8,712)
Satellite and Wireless ............... (2,462) 2,896 (3,771) 5,050
Premise Networking, Staffing
and Other ......................... 341 (7,908) 275 (8,843)
Restructuring charges ................ -- (6,716) -- (6,716)
Corporate ............................ (2,738) (5,094) (5,566) (11,177)
-------- -------- -------- --------
$ (4,671) $(22,616) $ (6,847) $(29,637)
======== ======== ======== ========
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THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JULY 1, 2000
REVENUES. Total revenues for the three months ended June 30, 2001 were
$42.5 million, a decrease of $2.8 million, or 6%, as compared to total revenues
of $45.3 million for the three months ended July 1, 2000. This decrease is the
result of the decline in the demand for overall broadband installation services
during the three months ended June 30, 2001.
In the three months ended June 30, 2001, we recognized $22.4 million of
revenue from our Cable segment, as compared to $21.2 million in the prior year
three month period, an increase of 6%. This increase resulted primarily from
internal growth. Our Cable segment represented 53% and 47% of total revenue for
the three months ending June 30, 2001 and July 1, 2000, respectively.
We recognized $6.5 million of revenue for the three months ended June 30,
2001 from our Telephony and Internet segment, as compared to $9.6 million in
2000, a decrease of 33%. Telephony and Internet revenues represented 15% of our
total revenue in the three months ended June 30, 2001 as compared to 21% of
total revenue in the three months ended July 1, 2000. During the three months
ended June 30, 2001, DSL revenues declined $2.3 million or 76% to $0.7 million
as compared to the $2.5 million for the same period last year. The decline in
DSL revenue comes as a result of a significant fundamental shift, in the three
months ended December 30, 2000, where the competitive environment has given the
regional bell operating companies an advantage over the Viasource data local
exchange carrier customers. Consequently, many of our DSL customers have
experienced financial difficulty resulting in a permanent erosion of our DSL
customer base and revenue source. In addition, cable telephony and high-speed
data revenues decreased $1.5 million or 21% to $5.8 million during the three
months ended June 30, 2001, as compared to $6.8 million for the same period in
fiscal 2000. Generally, the decrease is the result of lower than expected demand
for cable telephony installation services.
We recognized $11.5 million of revenues for the three months ended June 30,
2001 from Satellite and Wireless, as compared to $13.0 million for the three
months ended July 1, 2000, a decrease of $1.5 million or 12%. Satellite and
Wireless revenue represented 28% of our total revenue in the three months ended
June 30, 2001, as compared to 28% of our total revenue in the three months ended
July 1, 2000. In fiscal 2000, we experienced a dramatic increase in demand for
our Satellite and Wireless installation services as result of the 1999 merger of
our clients DirecTV and PrimeStar. After the merger, DirecTV initiated a program
to convert the PrimeStar subscribers to the DirecTV technology platform. This
conversion program increased the demand for our services from the program's
inception in 1999 to its conclusion by the end of fiscal 2000. Of the Satellite
and Wireless revenue derived in fiscal year 2000, approximately $7.7 million was
subject to potential charge-back resulting from subscriber cancellations within
twelve months of activation or conversion, and accordingly was recorded as
deferred revenue. We recognize the deferred revenue as the right of cancellation
expires over a sixteen-month period. During the three months ended June 30,
2001, we recognized $2.3 million of the previously deferred revenue.
Since the completion of the conversion program, we signed a new five-year
installation and maintenance services contract with DirecTV, which contains
certain installation minimums. We believe that none of the revenues associated
with the new contract is subject to subscriber cancellation and would not
require additional deferral of revenue. We do not expect to reach the same level
of installations during the three months ending September 30, 2001 as we had
completed in the same period last year.
We recognized revenue of $2.2 million of Premise Networking, Staffing and
Other revenue in the three months ended June 30, 2001 as compared to $1.6
million in the three months ended July 1, 2000, an increase of $0.5 million or
41%. This increase comes primarily as a result of the acquisition of TeleCore
and Service Cable during fiscal 2000.
COST OF REVENUES. Cost of revenues for the three months ended June 30, 2001
was $34.4 million, a decrease of $6.6 million, or 16%, as compared to cost of
revenues of $41.0 million in the three months ended July 1, 2000. The decrease
in cost of revenues directly relates to the decreased revenue discussed above,
as well as the direct effects of the restructuring plan implemented during three
months ended June 30, 2001. See Note 5 in "Item 1. Financial Statement,"
regarding the restructuring plan.
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SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the three months ended June 30, 2001 were $5.7 million, a decrease
of $0.5 million, or 8% as compared to $6.2 million for the three months ended
July 1, 2000. This decrease comes as a result of the restructuring plan
implemented during the three months ended June 30, 2001. In addition, provisions
for doubtful accounts amounted to $0.7 million, and special compensation charges
amounted to $0.2 million in the three months ended June 30, 2001. The increased
provision for doubtful accounts relates to the over all extension of our
client's payment cycles.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for
the three months ended June 30, 2001 was $5.7 million, an increase of $2.8
million, or 107%, as compared to depreciation and amortization expense of $2.8
million for the three months ended July 1, 2000. The increase reflects
additional depreciation resulting from capital expenditures incurred in the
ordinary course of business and assets acquired in the acquisitions completed in
fiscal 2000. As discussed in greater detail in Viasource's Annual Report on Form
10-K for the fiscal year ended December 30, 2000, we incurred an impairment loss
on intangible assets and related goodwill of $52.9 million during the three
months ended December 30, 2000. If we had not recorded the impairment loss,
goodwill amortization for the three months ended June 30, 2001 would have been
approximately $1.4 million higher.
RESTRUCTURING CHARGE. For the three months ended June 30, 2001, we
recognized a restructuring charge of $6.7 million that came as a direct result
of the restructuring plan that was announced in early May and executed during
the course of the three months ended June 30, 2001. The plan generally included
the reduction of divisional and regional offices, and the consolidation of
certain business functions within the Company. See Note 5 in "Item 1. Financial
Statements" for more information.
IMPAIRMENT LOSS ON INTANGIBLE ASSETS AND GOODWILL. For the three months
ended June 30, 2001, we recorded an impairment loss on intangible assets and
goodwill of $12.6 million. The impairment loss on intangible assets and goodwill
is comprised of $10.6 million of goodwill and $1.5 million related to the DSL
installations and staffing customer relationships that are not continuing and
accordingly, are no longer available for use. We also recognized a $0.7 million
impairment loss to write-down the trained workforce intangible asset to fair
value during the three months ended June 30, 2001. The impairment of the trained
workforce was triggered due to termination of an additional 82% of the acquired
workforce during the six months ended June 30, 2001. The fair value of the
trained workforce was determined based upon a cost approach valuation technique
that considers time, materials and facilities that were required to develop the
intangible asset.
OPERATING LOSS. For the three months ended June 30, 2001, we recognized an
operating loss of $22.6 million, as compared to an operating loss of $4.7
million for the same period in fiscal 2000. Included in the operating loss for
the three months ended June 30, 2001 are $6.7 million and $12.6 million of
restructuring charges and impairment loss on intangible assets and goodwill,
respectively. If the restructuring charge and the impairment loss on intangible
assets and goodwill had not been recorded, the operating loss for the three
months ended June 30, 2001 would have been $3.3 million.
Operating income from Cable was $1.0 million for the three months ended
June 30, 2001 as compared to operating income of $0.7 million for the same
period in fiscal 2000. Telephony and Internet operating loss was $6.8 million
for the three months ended June 30, 2000, as compared to operating loss of $0.5
million for the three months ended July 1, 2000. Operating income from Satellite
and Wireless was $2.9 million for the three months ended June 30, 2001 as
compared to an operating loss of $2.5 million for the same period in fiscal
2000, representing an increase of $5.4 million. Premise Networking, Staffing and
Other segments resulted in an operating loss of $7.9 million, as compared to
operating income of $0.3 million for the three months ended July 1, 2000.
INTEREST EXPENSE. For the three months ended June 30, 2001, interest
expense was $1.5 million, an increase of $0.3 million as compared to interest
expense of $1.1 million for the same period in fiscal 2000. The increased
interest expense was due to higher debt levels incurred in connection with the
fiscal 2000 acquisitions and the amortization of financing transaction costs and
fees.
INCOME TAX PROVISION. We did not incur a provision for income taxes for the
three months ended June 30, 2001 due to an offsetting increase in the Company's
valuation allowance, which totaled $19.4 million. Realization of the future tax
benefits related to deferred tax assets is dependent on many factors, including
the Company's ability to generate future taxable income. Management has
considered these factors in reaching its
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conclusions as to the need for a valuation allowance for financial reporting
purposes. For the same period in fiscal 2000, we had an income tax provision of
$0.2 million.
NET LOSS. We recognized a net loss of $24.1 million for the three months
ended June 30, 2001, as compared to a net loss of $5.9 million for the same
period in fiscal 2000. The net loss in the three months ended June 30, 2000 was
primarily related to the one time restructuring charge and impairment loss on
intangible assets and related goodwill of $6.7 million and $12.6 million,
respectively.
EBITDA. For the three months ended June 30, 2001, EBITDA was $2.4 million,
an increase of $4.3 million, as compared to a negative EBITDA of $1.9 million
for the same period in fiscal 2000. This resulting increase came despite the
decrease in the overall revenue base and was substantially due to the effects of
the restructuring plan as outlined fully in Note 5 in "Item 1. Financial
Statements."
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JULY 1, 2000
REVENUES. Total revenues for the six months ended June 30, 2001 were $93.5
million, an increase of $19.1 million, or 26%, as compared to total revenues of
$74.4 million for the six months ended July 1, 2000. Of this increase, $22.4
million was attributable to the companies acquired in fiscal 2000.
As a result of our diversification strategy implemented during fiscal 2000,
we are no longer dependent on one primary revenue source.
For the six months ending June 30, 2001, we recognized $45.9 million of
revenue from our Cable segment, as compared to $40.3 million in the prior year
period, an increase of 14%. This increase resulted primarily from internal
growth. Our Cable segment represented 49% and 54% of total revenue for the six
months ending June 30, 2001 and July 1, 2000, respectively.
We recognized $16.8 million of revenue for the six months ended June 30,
2001 from our Telephony and Internet segment, as compared to $15.0 million in
2000, an increase of 12%. This increase partly results from the acquisition of
our DSL business in June 2000 that contributed $1.2 of this increase. Telephony
and Internet revenues represented 18% of our total revenue for the six months
ended June 30, 2001 as compared to 20% of total revenue for the same period in
2000.
We recognized $25.8 million of revenues for the six months ended June 30,
2001 from Satellite and Wireless, as compared to $17.4 million for the six
months ended July 1, 2000, an increase of $8.4 million or 49%. This increase
comes as a result of the acquisition during the second quarter of 2000 of
Excalibur. Satellite and Wireless revenue represented 28% of our total revenue
for the six months ended June 30, 2001, as compared to 23% of our total revenue
for the same period in 2000. In fiscal year 2000, we experienced a dramatic
increase in demand for our Satellite and Wireless installation services as
result of the 1999 merger of our clients DirecTV and PrimeStar. After the
merger, DirecTV initiated a program to convert the PrimeStar subscribers to the
DirecTV technology platform. This conversion program increased the demand for
our services it inception in 1999 to the programs conclusion by the end of
fiscal 2000. Of the Satellite and Wireless revenue derived in fiscal year 2000,
approximately $7.7 million was subject to potential charge-back resulting from
subscriber cancellations with twelve months from activation or conversion, and
accordingly was recorded as deferred revenue. We recognize the deferred revenue
as the right of cancellation expires over a sixteen-month period. During the six
months ended June 30, 2001, we recognized $5.4 million of the previously
deferred revenue.
We recognized revenue of $5.1 million of Premise Networking, Staffing and
Other revenue for the six months ended June 30, 2001, as compared to $1.7
million for the same period in fiscal 2000, an increase of $3.4 million. This
increase comes primarily as a result of the acquisition of TeleCore and Service
Cable during fiscal 2000.
COST OF REVENUES. Cost of revenues for the six months ended June 30, 2001
was $78.5 million, an increase of $12.4 million, as compared to cost of revenues
of $66.1 million for the six months ended July 1, 2000. This increase in cost of
revenues directly relates to the increased revenue discussed above, and our
recent acquisitions and increased demand for our services. This increase,
however, includes the direct effects of the
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restructuring plan implemented during the three months ended June 30, 2001. See
"Note 5 -- Item 1. Financial Statements," regarding the restructuring plan.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the six months ended June 30, 2001 were $14.2 million, an increase
of $3.0 million, or 27% as compared to $11.2 million for the six months ended
July 1, 2000. This increase comes partially as a result of the acquisitions that
occurred during 2000. In addition, provisions for doubtful accounts amounted to
$1.5 million, and special compensation charges amounted to $0.4 million for the
six months ended June 30, 2001. The increased provision for doubtful accounts
relates to the delinquencies and bankruptcies or pending bankruptcies associated
with certain of our DSL and staffing customers, and the overall extension our
client's payment cycles.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for
the six months ended June 30, 2001 was $11.2 million, an increase of $7.2
million, as compared to depreciation and amortization expense of $4.0 million
for the same period in 2000. The increase reflects additional depreciation
resulting from capital expenditures incurred in the ordinary course of business
and assets acquired in the acquisitions completed in 2000. As discussed in
greater detail in Viasource's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000, we incurred an impairment loss on intangible assets and
related goodwill of $52.9 million during the three months ended December 30,
2000. If we had not recorded the impairment loss, goodwill amortization for the
six months ended June 30, 2001 would have been approximately $2.8 million
higher.
RESTRUCTURING CHARGE. For the six months ended June 30, 2001, we recognized
a restructuring charge of $6.7 million that came as a direct result of the
restructuring plan that was announced in early May and executed during the
course of the three months ended June 30, 2001. The plan generally included the
reduction of divisional and regional offices, and the consolidation of certain
business functions within the Company. See "Note 5 -- Item 1. Financial
Statements," for more information.
IMPAIRMENT LOSS ON INTANGIBLE ASSETS AND GOODWILL. For the six months ended
June 30, 2001, we recorded an impairment loss on intangible assets and goodwill
of $12.6 million. The impairment loss on intangible assets and goodwill is
comprised of $10.6 million of goodwill and $1.5 million related to the DSL
installations and staffing customer relationships that are not continuing and
accordingly, are no longer available for use. We also recognized a $0.7 million
impairment loss to write-down the trained workforce intangible asset to fair
value. The impairment of the trained workforce was triggered due to termination
of an additional 82% of the acquired workforce during the six months ended June
30, 2001. The fair value of the trained workforce was determined based upon a
cost approach valuation technique that considers time, materials and facilities
that were required to develop the intangible asset.
OPERATING LOSS. For the six months ended June 30, 2001, we recognized an
operating loss of $29.6 million, as compared to an operating loss of $6.8
million for the same period in fiscal 2000. Included in the operating loss for
the six months ended June 30, 2001 are $6.7 million and $12.6 million of
restructuring charges and impairment loss on intangible assets and goodwill,
respectively. If the restructuring charge and the impairment loss on intangible
assets and goodwill had not been recorded, the operating loss for the three
months ended June 30, 2001 would have been $10.6 million.
Operating income from Cable was $0.8 million for the six months ended June
30, 2001 as compared to operating income of $1.9 million for the same period in
fiscal 2000. Telephony and Internet operating loss was $8.7 million for the six
months ended June 30, 2001 as compared to operating income of $0.3 million for
the six months ended July 1, 2000. Operating income from Satellite and Wireless
was $5.1 million for the six months ended June 30, 2001 as compared to an
operating loss of $3.8 million for the same period in fiscal 2000, representing
an increase of $8.9 million. Premise Networking, Staffing and Other segments
resulted in an operating loss of $8.8 million, as compared to operating income
of $0.3 million for the six months ended July 1, 2000.
INTEREST EXPENSE. For the six months ended June 30, 2001, interest expense
was $3.0 million, an increase of $1.2 million as compared to interest expense of
$1.8 million for the same period in fiscal 2000. The increased interest expense
was due to higher debt levels incurred in connection with the fiscal 2000
acquisitions and the amortization of financing transaction costs and fees.
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INCOME TAX PROVISION. We did not incur a provision for income taxes for the
six months ended June 30, 2001 due to an offsetting increase in our valuation
allowance, which totaled $19.4 million. Realization of the future tax benefits
related to deferred tax assets is dependent on many factors, including the
Company's ability to generate future taxable income. Management has considered
these factors in reaching its conclusions as to the need for a valuation
allowance for financial reporting purposes. For the same period last year, we
incurred no income tax benefit or provision.
NET LOSS. We recognized a net loss of $32.6 million for the six months
ended June 30, 2001, as compared to a net loss of $8.6 million for the same
period in fiscal 2000. The six months ended June 30, 2001 net loss was partially
related to the restructuring charge and impairment loss on intangible assets and
goodwill of $6.7 million and $12.6 million, respectively.
EBITDA. For the six months ended June 30, 2001, EBITDA was $1.0 million, an
increase of $3.8 million, as compared to a negative EBITDA of $2.8 million for
the same period in fiscal 2000. This resulting increase came despite the
decrease in the overall revenue base and was substantially due to the effects of
the restructuring plan as outlined fully in "Note 5 -- Item 1. Financial
Statements."
LIQUIDITY AND CAPITAL RESOURCES
We have funded our working capital requirements, capital expenditures and
acquisitions to date through a combination of internally generated funds,
operating and capital lease financing arrangements, long-term revolving credit
and term note facilities, private equity contributions and the proceeds from our
initial public offering. We intend to continue to finance these expenditures
through internally generated funds, and, to the extent available, long-term
credit facilities and equity financings. As of June 30, 2001, we had an
accumulated deficit of $107.5 million and cash and cash equivalents of $1.8
million.
For the six months ended June 30, 2001, net cash used in operating
activities was $8.0 million. The net cash used in operating activities related
to a net loss of $32.6 million, partially offset by non-cash charges of $12.6
million for impairment loss on intangible assets and goodwill, $11.2 million for
depreciation and amortization and $0.9 million of other non-cash charges. After
excluding those particular non-cash charges, we used $8.8 million to fund our
operations. Net cash used in operating activities was $0.8 million for the six
months ended July 1, 2000, which consisted of a net loss of $8.6 million, offset
by depreciation and amortization charges of $4.0 million.
Our cash flow from operations was negatively impacted by a lengthening of
our accounts receivable collections cycle, as our days sales outstanding has
risen from 59 days at the end of fiscal 2000 to approximately 75 days
outstanding at June 30, 2001. We believe this comes not a result of a decline of
the overall credit worthiness of our client-base, except for those clients
experiencing financial difficulty in the DSL and staffing sector, but rather an
overall extension of our client's payment cycles. As a result of our longer
accounts receivable collection cycle, we have lengthened the payment period for
purchased materials, equipment and tools and other services provided to us by
our vendors and suppliers. The continued deterioration in our receivable
collection and vendor payable cycles, will have a material adverse effect on our
future operating results and financial condition.
For the six months ended June 30, 2001, net cash used in investing
activities for capital expenditures was $4.5 million as compared to $3.8 million
for the same period in fiscal 2000. We believe that the capital expended during
the first six months in fiscal 2001 has, in effect, primarily funded the capital
expenditure requirements for the next three to six months. In addition, we
invested $1.0 million in implementing our financial and management operating
systems.
We disclosed in the three months ended March 31, 2001 our intention to
implement a workforce automation software platform during the latter part of
fiscal 2001. Subsequent to this, we have postponed such plans for fiscal 2001
due to the fact that the project was contingent upon the Company securing
adequate financing, which to date has not been material enough to warrant
investment in this project.
During the three months ended June 30, 2001, we issued $2.76 million in
standby letters of credit issued as collateral to our insurance carrier as part
of a self-insurance program. Of the standby letters of credit issued, $1.76
million was funded with our senior lender as a reduction in availability under
our revolving credit facility and $1.0
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million was funded with our commercial bank supported by a certificate of
deposit. The total collateral requirement of our self-insurance program is $4.8
million. In August 2001, we completed the remaining collateral requirement by
increasing the letter of credit funded with our commercial bank and the related
the certificate of deposit by $2.04 million.
For the six months ended June 30, 2001, net cash provided by financing
activities was $1.6 million, which consisted of additional borrowings of $3.2
million on our revolving credit facility, partially offset by payments on our
term note facility and capital lease obligations of $1.6 million. For the same
period in fiscal 2000, net cash provided by financing activities amounted to
$8.1 million.
On June 25, 2001, we failed to make a scheduled mandatory prepayment in the
amount of $468,750 (the "June Term Loan Payment"), as required by the Credit
Agreement. On June 29, 2001, our senior lender agreed to refrain, until July 16,
2001, from exercising any rights or remedies available under the Credit
Agreement by virtue of Viasource's failure to make the June Term Loan Payment on
a timely basis. On July 5, 2001, we entered into Amendment No. 7 to the Credit
Agreement, which, among other things, reset the due date of the June Term Loan
Payment to August 15, 2001. On August 3, 2001, we entered into the Second
Amended Credit Agreement with our senior lender and the other lenders named
therein. The Second Amended Credit Agreement, among other things, reset the due
date of the June Term Loan Payment to October 15, 2001. For a complete
description of these matters, see our Current Reports on Form 8-K filed on each
of July 13, 2001 and August 8, 2001.
As of June 30, 2001, we had fully utilized our borrowing availability under
the then current revolving credit facility. Pursuant to Amendment No. 7 to our
Credit Agreement, the senior lender committed to extend an additional $2.0
million in available credit under the revolving credit facility, of which $1.9
million was advanced to us on July 6, 2001. The Second Amended Credit Agreement
provides for an $18,950,000 aggregate revolving loan commitment, subject to
availability calculation based on Eligible Accounts receivables. On August 3,
2001, the outstanding balance under the revolving credit facility was
$18,441,774.
We have outstanding approximately $23.1 million of subordinated notes
issued to shareholders in our fiscal 2000 acquisitions of TeleCore, Excalibur
and Service Cable. The notes payable to former stockholders have stated maturity
dates in November 2001, however, all of these notes are subordinate to the
Company's senior lender term note and revolving credit facility and all
principal and interest payments are contingent upon the repayment of our senior
lender's term note and revolving credit facility. As a result, the subordinated
notes and related accrued interest are classified as long term debt in the
accompanying unaudited Consolidated Balance Sheets.
During the three months ended June 30, 2001, we implemented our
restructuring plan that became part of our overall strategy to improve our
financial condition. The plan generally included the reduction of divisional and
regional offices, and the consolidation of certain business functions within
Viasource. As a result of the plan, we recorded a restructuring charge of $6.7
million, a portion of which is a cash obligation of Viasource going forward
totaling an estimate of $1.4 million for the six months ending December 29,
2001, and an estimated $1.1 million for 2002.
In addition, we have contracted with Cloyses Partners and Ernst & Young
Capital Advisors, LLC through September 30, 2001, to assist with further
restructuring efforts. Related fees, payable by us on 20-30 day terms, will be
approximately $150,000 per month, plus all out-of-pocket travel expenses. The
retention of Cloyses Partners comes as a direct result of the Forbearance
Agreement executed with our senior lender. The engagement of Cloyses Partners
and Ernst & Young Capital Advisors, LLC may be extended by mutual agreement
between our senior lender and us.
Although we have increased our capital resources by $4.5 million since June
30, 2001 (consisting of the $2.05 million in net proceeds from the private
placement of Term B Convertible Notes and the $2.45 million in increased
availability under our revolving credit facility), we estimate that, unless we
are able to raise additional capital or are able to significantly reduce our
accounts receivable collection cycle, our capital resources will likely sustain
our operations only through the remainder of fiscal 2001, assuming that we
continue to generate revenues and use cash at the same rates as during the three
months ended June 30, 2001. In any event, our business will be adversely
affected prior to the end of fiscal year 2001 if our revenue production and cash
use experience of the three months ended June 30, 2001 does not continue during
the six months ended December 31, 2001.
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Although our restructuring efforts have shown favorable results, as
discussed above, we recognize that we will likely be required to raise
additional capital to fund our future operations. Our ability to raise such
capital in amounts and on terms which are satisfactory to us is uncertain,
especially in light of the current market conditions. If we are unable to raise
additional capital or are required to raise capital on terms and conditions that
are less satisfactory, it could have a material adverse effect on our financial
condition, which could result in additional operational restructuring and/or a
sale or liquidation of Viasource.
On July 23, 2001, we received a standard notice of delisting from the
NASDAQ Stock Market, because of our common stock's failure to maintain a minimum
criteria of continued listing on the NASDAQ National Market. We have scheduled
an oral hearing on September 7, 2001 with NASDAQ Listing Qualifications Panel to
appeal this decision and to seek continued listing. The delisting of our common
stock will be stayed pending the outcome of this hearing. There are no
assurances that our request for continued listing will be granted. A delisting
could have a material adverse effect on our financial condition and inhibit our
future capital raising efforts.
SEASONALITY; FLUCTUATIONS OF QUARTERLY RESULTS
Our operations are seasonal, generally resulting in higher revenues and
operating profits in the second and third quarters compared to the first and
fourth quarters of the year, except that our Satellite and Wireless segment
experiences higher revenue during the fourth quarter. Quarterly variations in
operating results may result from many factors, including fluctuations in demand
for services, a change in the mix of clients, the timing and volume of work
under new agreements, the termination of existing agreements, variations in the
profitability of projects performed during any particular quarter, the length of
sales cycles, costs incurred to support growth internally, the timing of
expansion in new markets, the timing of acquisitions, the costs associated with
integrating businesses, and adverse weather conditions that interfere with the
ability to provide services. As a result, our operating results in any
particular quarter may not be indicative of the results that can be expected for
any other quarter or the entire year.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting For Derivative Instruments And Hedging Activities" ("SFAS 133").
SFAS 133, as amended, is effective for fiscal years beginning after June 15,
2000. SFAS 133 requires that every derivative instrument be recorded in the
balance sheet as either an asset or liability measured at its fair value.
Changes in derivative's fair value will be recognized in income unless specific
hedge accounting criteria are met. We adopted SFAS 133, as amended, beginning
December 31, 2000, and it did not have a material impact on our unaudited
Consolidated Financial Statements, as we did not have any derivative financial
instruments as of June 30, 2001.
On June 30, 2001 the Financial Accounting Standards Board finalized and
issued Statements of Financial Accounting Standards No. 141 "Business
Combinations" ("SFAS 141") and No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142").
SFAS 141 requires all business combinations initiated after June 30, 2001
to be accounted for using the purchase method, eliminating the pooling of
interests method.
SFAS 142, upon adoption, eliminates goodwill amortization over its
estimated useful life. However, goodwill will be subject to at least an annual
assessment for impairment by applying a fair-value based test. Additionally,
acquired intangible assets should be separately recognized if the benefit of the
intangible asset can be sold, transferred, licensed, rented or exchanged
regardless of the acquirer's intent to do so. Intangible assets with definitive
lives will need to be amortized over their useful lives.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our senior revolving credit facility and term note facility with our senior
lender bear interest at floating rates. Accordingly, we are exposed to potential
losses related to changes in interest rates. We do not enter into derivatives or
other financial instruments for trading or speculative purposes. As of June 30,
2001, approximately 59% of our outstanding borrowings are exposed to interest
rate risk. Assuming a 100 basis point increase in interest rates, based on our
indebtedness outstanding on that date, our annual interest expense would
increase by approximately $0.4 million.
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PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On June 15, 2001, we were served with a complaint in the lawsuit captioned
Konrad Eric Poth v. Viasource Communications, Inc. The lawsuit, which was
brought in the United States District Court for the Eastern Division of
Virginia, makes breach of contract claims for unspecific damages in connection
with our June 1, 2000 merger with Excalibur. We believe that these claims are
without merit and intend to vigorously defend against this lawsuit.
In addition, on July 20, 2001, we were served with a complaint in the
lawsuit captioned John M. Clarey and Christy Clarey v. Viasource Communications,
Inc. The lawsuit, which was brought to the Superior Court of the State of
California, County of Orange, makes breach of contract and certain equitable
claim for unspecified damages in connection with our June 1, 2001 merger with
TeleCore. We believe that these claims are without merit and intend to
vigorously defend this lawsuit.
We occasionally are a party to legal proceedings incidental to our ordinary
business operations. We are not currently party to any pending legal proceedings
that we believe will have a material adverse effect on our business, financial
condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a.) None
(b.) None
(c.) None
(d.) None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On June 25, 2001, we failed to make a scheduled mandatory prepayment in the
amount of $468,750 (the "June Term Loan Payment"), as required by the Amended
and Restated Credit Agreement dated as of March 10, 2000, by and among our
senior lender and us (as amended, restated, supplemented or otherwise modified
from time to time, the "Credit Agreement"). On June 29, 2001, our senior lender
agreed to refrain, until July 16, 2001, from exercising any rights or remedies
available under the Credit Agreement by virtue of our failure to make the June
Term Loan Payment on a timely basis. On July 5, 2001, we entered into Amendment
No. 7 to the Credit Agreement, which, among other things, deferred the due date
of the June Term Loan Payment to August 15, 2001. On August 3, 2001, we entered
into the Second Amended and Restated Credit Agreement with our senior lender and
the other lenders named therein (the "Second Amended Credit Agreement"). The
Second Amended Credit Agreement, among other things, deferred the due date of
the June Term Loan Payment to September 25, 2001. For a complete description of
these matters, see our Current Reports on Form 8-K filed on each of July 13,
2001 and August 8, 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Shareholders was held on June 14, 2001 in Fort
Lauderdale, Florida. The following proposals were voted upon by our
shareholders.
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Proposal 1. Election of Directors
Our three Class 1 directors, whose terms expired at the 2001 Annual
Meeting, were nominated and re-elected. The tabulation of the results of the
voting is as follows:
Name Votes for Votes Withheld
---- --------- --------------
Randall L. Lunn 27,925,068 65,094
Bruce A. Nassau, Ph.D. 27,907,302 82,860
Roy D. Tartaglia 27,928,968 61,194
Proposal 2. Amendment of the Viasource 2000 Stock Option Plan
The Viasource 2000 Stock Option Plan was amended at the 2001 Annual Meeting
to increase by 2,000,000 shares the number of shares of Viasource common stock,
no par value per share, which are issuable upon the exercise of stock options
granted or to be granted under the 2000 Stock Option Plan. The tabulation of the
results of the voting is as follows:
For: 23,698,158 Against: 1,105,628 Withheld or Abstained: 3,186,376
Proposal 3: Ratification of Auditors
The appointment of Arthur Andersen LLP, as our independent auditor for the
fiscal year ending December 29, 2001, was ratified at the 2001 Annual Meeting.
The tabulation of the results of the voting is as follows:
For: 27,967,111 Against: 19,894 Withheld or Abstained: 3,157
ITEM 5. OTHER INFORMATION
On July 27, 2001, Ron Cooper tendered his resignation from our Board of
Directors, effective August 3, 2001. Mr. Cooper indicated in his letter of
resignation that he was resigning to devote his attention to his other business
interests.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 License and Support and Maintenance Agreement,
effective March 31, 2001, by and between ViryaNet,
Inc. and Viasource Communications, Inc.
Exhibit 10.2 Amendment No. 6 dated May 31, 2001, to the Amended
and Restated Credit Agreement between General Electric
Capital Corporation and Viasource Communications, Inc.
Exhibit 10.3 Amended and Restated Service Agreement, dated as of
June 12, 2001, by and between Viasource
Communications, Inc. and Gateway Companies, Inc.
Exhibit 10.4 Amendment to Service Agreement, dated as of June 29,
2001, between Viasource Communications, Inc. and
Gateway Companies, Inc.
Exhibit 10.5 Common Stock Warrant, dated June 29, 2001, issued by
Viasource Communications, Inc. to General Electric
Capital Corporation.
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Exhibit 10.6 Common Stock Warrant, dated June 29, 2001, issued by
Viasource Communications, Inc. to Gateway Companies,
Inc.
(b) No reports on Form 8-K were filed by us during the three months ended
June 30, 2001. Subsequent to June 30, 2001, however, we filed Current
Reports on Form 8-K on July 13, 2001, July 25, 2001 and
August 8, 2001.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized:
VIASOURCE COMMUNICATIONS, INC.
Date: August 20, 2001 By: /s/ Craig A. Russey
-------------------------------------
Craig A. Russey
President and Chief Executive Officer
(President and Director, Principal
Executive Officer)
Date: August 20, 2001 By: /s/ Douglas J. Betlach
-------------------------------------
Douglas J. Betlach
Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary (Principal Financial and
Accounting Officer)
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