SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
( ) TRANSACTION REPORT UNDER SECTION 14 OR 15(D) OF THE EXCHANGE ACT
For the transition period from ________ to _________
FDN, INC.
------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Colorado 0-25519 84-0644739
-------- ---------- ----------
(State or other jurisdiction of (Commission File (IRS Employer
incorporation or organization) No.) Identification No.)
2290 Lee Road Winter Park, FL 32789 (407) 702-2000
- --------------------------------------------------------------------------------
(Address and Telephone number of principal executive offices)
Check whether the issuer has (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, (or such
shorter period that the Registrant was required to file such report(s), and (2)
has been subject to such filing requirements for the past 90 days.
Yes(X) No( )
APPLICABLE ONLY TO CORPORATE ISSUERS
- ----------------------------------------
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the Latest practicable date: November 13, 2000
CLASS Outstanding as of November 13, 2000
- ---------------------------- --------------------------------------
Common stock $.001 Par Value 48,486,375
FDN, INC. AND SUBSIDIARIES
FORM 10-QSB - INDEX
Part Item Description
No. No. Page No.
- ---- ---- ----------- --------
I FINANCIAL INFORMATION:
1. Financial Statements
Consolidated Balance Sheets at September 30, 2000
(Unaudited) and December 31, 1999...................... 2-3
Consolidated Statements of Operations for the
Quarters and Nine Months Ended September 30, 2000
and 1999 (Unaudited)................................... 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999 (Unaudited)... 5-7
Notes to Consolidated Financial Statements (Unaudited).. 8-13
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 14-16
II OTHER INFORMATION:
1 Legal Proceedings....................................... 16
2 Changes in Securities and Use of Proceeds............... 16
3 Defaults upon Senior Securities......................... 17
6 Exhibits and Reports on Form 8-K........................ 18
SIGNATURES.............................................. 19
1
Part 1- FINANCIAL INFORMATION
Item 1: Financial Statements
FDN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2000 (Unaudited) 1999
---------------- -------------
CURRENT ASSETS
Cash $ 205,576 $ 80,482
Accounts receivable - less allowance for returns and
doubtful accounts of $929,376 and $134,368 respectively 124,539 244,129
Accounts receivable - affiliates 24,274 108,201
Accounts receivable - factored - less allowance for
doubtful accounts of $0 and $3,580 respectively - 148,888
Inventory 95,000 -
Prepaid expenses and other current assets 414,304 47,232
---------------- -------------
Total Current Assets 863,693 628,932
---------------- -------------
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment - net 885,363 1,055,144
---------------- -------------
OTHER ASSETS
Deferred charges and intangibles - net 1,145,835 3,119,071
Assets held for resale - 385,000
Security and other deposits 5,000 5,000
---------------- -------------
Total other assets 1,150,835 3,509,071
---------------- -------------
Total Assets $ 2,899,891 $ 5,193,147
================ =============
The accompanying notes are an integral part of these financial statements.
2
FDN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2000 (Unaudited) 1999
---------------- -------------
CURRENT LIABILITIES
Notes payable $ 1,148,212 $ 1,644,291
Equipment loan payable 335,000 385,000
Loans payable - affiliate 310,672 175,420
Factoring payable - 93,055
Note payable - bank 212,000 212,000
Capital lease obligations - current 112,964 80,183
Accounts payable 5,091,596 1,078,397
Payroll taxes payable 188,000 191,732
Accrued liabilities 391,064 93,778
---------------- -------------
Total Current Liabilities 7,789,508 3,953,856
LONG TERM LIABILITIES
Notes payable - net of current portion 3,869,133 5,301,766
Capital lease obligations - net of current portion 379,516 419,179
---------------- -------------
Total Liabilities 12,038,157 9,674,801
---------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.001 par value, 100,000,000 shares
authorized 48,319,709 and 39,261,735 shares issued and
outstanding for September 30, 2000 and December 31, 1999
respectively 48,319 39,261
Additional paid in capital 5,766,078 24,589
Treasury Stock, at cost, 350,620 and 0 shares respectively - -
Accumulated deficit (14,952,663) (4,545,504)
---------------- -------------
Total Shareholders' Equity (Deficit) (9,138,266) (4,481,654)
---------------- -------------
Total Liabilities and Shareholders' Equity (Deficit) $ 2,899,891 $ 5,193,147
================ =============
The accompanying notes are an integral part of these financial statements.
3
FDN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Quarters Nine Months
Periods Ending September 30 2000 1999 2000 1999
----------- ----------- ------------ -----------
Sales Revenue:
Net Revenues $ 2,235,740 $ 711,130 $ 2,848,625 $ 711,130
----------- ----------- ------------ -----------
Total Sales Revenue 2,235,740 711,130 2,848,625 711,130
Cost of Sales:
Cost of goods sold 5,591,135 494,844 6,701,828 495,458
----------- ----------- ------------ -----------
Gross Profit (Loss) (3,355,395) 216,286 (3,853,203) 215,672
----------- ----------- ------------ -----------
Operating Expenses:
Selling, general and administrative expenses 1,203,196 908,180 4,205,896 2,122,427
Loss from Operations (4,558,591) (691,894) (8,059,099) (1,906,755)
----------- ----------- ------------ -----------
Other (Income) Expenses:
Gain on settlement of litigation (7,500) - (92,500) -
Write down of intangible assets 768,479 - 1,876,887 -
Interest expense 47,243 76,986 563,674 143,325
----------- ----------- ------------ -----------
Total Other Expenses 808,222 76,986 2,348,061 143,325
----------- ----------- ------------ -----------
Loss Before Provision for Income Taxes (5,366,813) (768,880) (10,407,160) (2,050,080)
Income Taxes
Income taxes - currently payable - - - -
Income taxes - deferred - - - -
----------- ----------- ------------ -----------
Net Loss $(5,366,813) $ (768,880) $(10,407,160) $(2,050,080)
=========== =========== ============ ===========
Loss per Share
Basic and diluted $ (0.11) $ (0.02) $ (0.23) $ (0.05)
=========== =========== ============ ===========
Weighted average shares outstanding 46,934,436 39,261,735 45,215,698 38,023,064
=========== =========== ============ ===========
The accompanying notes are an integral part of these financial statements.
4
FDN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (10,407,160) $ (2,050,080)
Adjustments to reconcile net loss to net cash
utilized by operating activities:
Depreciation and amortization 265,590 89,648
Bad debt expense and return allowance 1,045,158 -
Loss on impairment of intangibles 1,876,887 -
Gain on litigation settlement (92,500) -
Other non cash 44 -
Stock issued for interest expense 400,680 -
Stock issued for broker fees 284,420 -
Stock issued for consultant fees and other compensation 151,352 -
Stock issued as sign-on compensation 116,998 -
Changes in operating assets and liabilities:
Accounts receivable (913,634) (539,067)
Accounts receivable - factor 136,953 -
Inventory (95,000) -
Prepaid expenses 305,637 (74,715)
Other assets (6,000) (50,120)
Accounts payable and accrued expenses 4,406,571 347,865
Other current liabilities (19,268) -
------------------ ------------------
NET CASH FLOWS (UTILIZED) IN OPERATING ACTIVITIES (2,543,272) (2,276,469)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (65,113) (4,170,632)
Sale of property and equipment - proceeds 94,283 -
Loans made to affiliates 130,159 (384,040)
------------------ ------------------
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES 159,329 (4,554,672)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans made 138,282 -
Payments on loans (233) -
Net loan from shareholder (384,610) (206,271)
Net pay down to factor (93,055) -
Proceeds from promissory notes 560,000 3,271,596
Payments on promissory notes (869,297) -
Proceeds from long-term debt 723,322 3,800,000
Payments of long-term debt (69,002) -
Payments on capital lease obligation (35,511) -
Proceeds from sale of stock 2,539,141 -
------------------ ------------------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 2,509,037 6,865,325
------------------ ------------------
5
FDN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
------------------ ------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 125,094 34,184
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 80,482 456
------------------ ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 205,576 $ 34,640
================== ==================
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid $ - $ -
Interest paid $ 69,495 $ 66,276
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES.
During the nine months ended September 30, 2000:
The Company entered into a capital lease for office equipment aggregating
$28,629.
The Company converted approximately 1,896,000 of promissory notes and related
accrued interest into 3,000,011 shares of common stock.
In the second quarter, in conjunction with the conversions above, the Company
reissued a promissory note in the amount of $51,502 and received back 92,500
shares of common stock previously issued.
The Company issued 1,250,000 shares of common stock for all the outstanding
stock of Mercury Capital Corporation.
The Company issued stock and/or options to certain consultants for present and
future services valued in the aggregate at $682,925.
The Company issued stock to a finder related to $2,300,000 in equity raised. The
stock issued to the finder was valued at $153,408.
The Company issued 500,000 shares of restricted common stock to two employees as
sign on bonuses. The stock issued was valued at $116,998.
The Company received 567,000 shares of the Company's common stock from a
shareholder for the purchase of $388,000 of ATM machines. In addition the
Company accepted 255,000 shares of the Company's common stock from this
shareholder as settlement of monies owed to the Company in the amount of
$255,000.
The accompanying notes are an integral part of these financial statements.
6
FDN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (continued)
During the nine months ended September 30, 2000 (continued):
In the third quarter of 2000, the Company issued 200,000 shares of common stock
to two employees per their employment agreement. The common stock was valued at
$60,000.
In the third quarter of 2000, 1,500,000 shares of previously returned common
stock from a shareholder were cancelled.
In the third quarter, loans from two shareholders in the amount of $427,325 were
converted to 1,490,872 shares of the Company's common stock.
In the third quarter, distributors and master agents were issued 200,000 shares
of restricted common stock. The common stock was valued at $39,000.
The accompanying notes are an integral part of these financial statements.
7
FDN, Inc. and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2000
NOTE 1:
Current Status of Company/Going Concern:
In the opinion of management, the accompanying unaudited consolidated financial
statements of FDN, Inc. and its subsidiaries contain all adjustments necessary
to present fairly the Company's financial position as of September 30, 2000 and
the results of its operations and cash flows for all periods presented.
The results of operations for the interim periods are not necessarily indicative
of the results to be expected for the full year.
For a summary of significant accounting policies and additional financial
information, see the financial statements incorporated in the May 1, 2000 Form
8-KA, for the years ended December 31, 1999 and 1998 including the notes thereto
which should be read in conjunction with these financial statements.
The Company has been experiencing negative cash flow on a short-term basis,
which would become materially adverse if sustained on a long-term basis. During
October 2000 due to a dispute with its telecommunications carrier, underlying
service to the prepaid phone-cards was temporarily suspended. The Company needs
to obtain both additional short term and long term financing to reinstate its
prepaid calling card operations. There can be no guarantee that additional
financing will be available to reinstate and continue such operations, which are
material. Also, see Note 4 below regarding Defaults on Promissory Notes.
To alleviate some of the drain on Company assets that can be tracked to the
operating of American Tel Enterprises, Inc. the Company is considering winding
down its operations at its subsidiary and will consolidate certain resources and
functions at its corporate office. The Company is working with its attorney to
return American Tel. Enterprises Inc. to the bankruptcy court. The Company may
incur an expense associated with the return of American Tel. Enterprises Inc. to
the bankruptcy court. The Company has determined that such an expense would be
justified by the savings on operational an other expenses associated with trying
to continue that operation.
8
FDN, Inc. and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2000
NOTE 2: DESCRIPTION OF BUSINESS, ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization/Description of Business:
FDN, Inc., the Company, (formerly Ultrafit Centers, Inc.) was incorporated in
the State of Colorado on May 27, 1987. After being administratively dissolved on
November 1, 1997 by the Colorado Secretary of State, the Company was reinstated
and a certificate of good standing was issued on February 18, 1999. In
anticipation of the reverse acquisition with FON Digital Network, Inc. (a
Florida corporation) discussed below, the Company officially changed its name to
FDN, Inc. on February 18, 1999. Before the reverse acquisition, FDN, Inc
(formerly Ultrafit Centers, Inc.) had operated a series of geriatric
rehabilitation facilities. Prior to December 31, 1999 FDN, Inc. ceased operating
these facilities and had in fact divested itself of all assets related to the
rehabilitation business.
FDN Inc., through its subsidiaries, is an emerging provider of advanced,
integrated telecommunications services primarily to residential and small
business customers. The Company offers long-distance, prepaid and operator
assisted telephone services integrated with enhanced communications features.
The Company is broadening its business strategy as an Integrated Communications
Provider (ICP), which will provide broadband data, voice and video
telecommunications services primarily throughout the United States and
terminating internationally. Additionally, service presently and offered and
planned are: traditional 1 plus, 0 plus (operator assisted), travel card, toll
free 800, Voice over Internet (VoIP), and Internet Service Provider (ISP)
telecommunication services.
FON Digital Network, Inc "FON" was incorporated on August 5, 1998 in the state
of Florida. FON Digital Network changed its name on March 11, 2000 to ClearPoint
Communications, Inc. On February 23, 1999, the FON shareholders agreed to
exchange all their shares of common stock for 32,881,409 shares of FDN, Inc. in
a transaction reflected as a reverse acquisition. FDN, Inc. remains the legal
acquirer, although FON is considered the accounting acquirer, and as such, the
financial statements, present the results of operations for the accounting
acquirer, FON. The only historical information of FDN (Ultrafit Centers, Inc.)
presented is the outstanding liabilities and related deficit.
On July 15, 1999, FON purchased substantially all the assets of American
Telecommunications Enterprises, Inc., (out of bankruptcy) (see also Note 1 -
above). The acquisition was accounted for under the purchase method of
accounting and as such, the financial statements include the operations from the
date of acquisition. American Tel. Enterprises, Inc. (TEL) was incorporated in
the State of Florida on July 1, 1999 to effectuate this transaction.
9
FDN, Inc. and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2000
NOTE 2: DESCRIPTION OF BUSINESS, ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued
In March 2000, the Company entered into an exchange agreement with Mercury
Capital Corporation, an inactive Colorado corporation, whereby all the
outstanding shares of common stock of Mercury Capital (4,000,000) were exchanged
for 1,250,000 shares of common stock of the Company. This transaction, in which
the Company acquired 100% of the issued and outstanding common stock of Mercury,
also enabled the Company to become the parent corporation of Mercury. No pro
forma information has been presented do to the fact that it is immaterial, since
Mercury was a non-operating entity.
NOTE 3: WRITE DOWN ON INTANGIBLES
During the third quarter of 2000 in accordance with SFAS-121 (Accounting for the
impairment of long-lived assets and for long-lived assets to be disposed of) the
Company wrote down the remaining value of its customer lists and goodwill to $0
due to the fact that the Company expects no further cash flows from these
assets. The write down aggregated $768,479. During the second quarter the
Company had previously written down $1,108,408. The total write down aggregated
$1,876,887 for the nine months ended September 30, 2000.
NOTE 4: PROMISSORY NOTES
During September 2000, the Company has renegotiated certain promissory notes
that had been in default. A holder of a $544,995 note, which includes accrued
interest, has agreed to an eighteen-month extension. In addition seven note
holders whose notes aggregated $177,652 at September 30 2000, agreed to new
repayment terms for their notes ranging from three to eight months.
During the third quarter, loans from two shareholders aggregating $427,325 were
converted to 1,490,872 shares of the Company's common stock.
The Company has a dispute with one of its carriers for its American Tel.
subsidiary. During the second quarter the Company, pursuant to a settlement
agreement, reflected the initial promissory note of $635,145 and through
September 30, 2000, has paid $235,000 against this note. Despite a previous
settlement agreement, the carrier has since sent a letter of default to the
Company in a larger amount of $2,742,487. The Company has disputed this claim
and intends to take legal action for damages incurred as a result of the carrier
terminating service.
10
FDN, Inc. and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2000
NOTE 4: PROMISSORY NOTES (Continued)
In September of 2000, the Company defaulted on a $100,000 90-day note from a
company affiliated with a shareholder. As collateral against the note the
Company pledged 200,000 shares of common stock. In addition a surety bond
secures the loan. The note accrues annual interest at 12%. The Company is
currently negotiating with the note holder to cure the default
In July of 2000, the Company defaulted on a $100,000 note payable to a
consultant in connection with the acquisition of Mercury Capital Corporation.
The Company is currently negotiating with the note holder to cure the default.
During the third quarter the Company defaulted on another note payable in the
amount of $100,000. The note is accruing interest at an annual rate of 14%. The
collateral pledged includes 100,000 shares of the Company's common stock, owned
by a shareholder. The Company is responsible for the balance of the value of the
note, if the fair market value of the pledged stock is insufficient to satisfy
the note in full. The Company is currently negotiating with the note holder who
is seems willing to negotiate the terms of repayment.
During the third quarter of 2000, the Company was issued a demand for payment
from a shareholder and former employee/officer of the Company, in the amount of
$22,517. The balance accrues interest at 18%. The shareholder is willing to
accept a payment plan for this amount and the Company intends to arrange a
satisfactory repayment plan.
In July of 2000, the Company defaulted on a $335,000 note payable in conjunction
with the purchase of ATM machines. The initial note agreement calls for an
increase in the liability to $450,000 in the event of default. The Company has
scheduled, through its attorneys, a settlement conference with the note holder
to attempt to revise the terms of payment. The potential increase of the
liability to $450,000 has not been reflected in these financial statements.
In July of 2000, the Company defaulted on a payment of $75,000 as called for as
part of the payment of the $3,800,000 note for the purchase for American Tel
Enterprises Inc. Due to the fact that the assets were purchased out of
bankruptcy, several vendors who do business with the new American Tel. were owed
monies by the bankrupt entity. These vendors refused to perform services to the
new entity unless their old obligations were satisfied. To that end, the Company
paid $119,576 of the bankrupt company's expenses. The trustee to the bankruptcy
has stated that he will allow the Company to apply these payments against the
$3,800,000 although it has not been determined as to when such offsets will be
applied. The Company will petition the trustee to apply the offset to the first
payment due. The Company is working with its attorneys to significantly reduce
the amount of the note obligation to the bankruptcy court because the Company
feels material misrepresentations were made by the prior owners. In addition the
Company is working with its attorney to return American Tel Enterprises to the
bankruptcy court. The Company may incur an expense associated with the return of
American Tel Enterprises to the court. However the Company has determined that
the savings of operational and other expenses associated with trying to continue
that operation will justify such an expense.
11
FDN, Inc. and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2000
NOTE 4: PROMISSORY NOTES (Continued)
As mentioned in the Company's 10QSB for the first quarter, the Company had an
agreement providing for the issuance of 250,000 shares of common stock to a
consultant associated with the Mercury Capital transaction. These shares are
subject to registration by the Company. As at September 30, 2000, these shares
had not yet been issued. The Company is attempting to negotiate an alternative
resolution and payment.
NOTE 5: SHAREHOLDERS' EQUITY
During the third quarter of 2000, the Company entered into several transactions,
which affect shareholders' equity. These transactions are detailed below:
In the third quarter the Company issued 200,000 shares of common stock to two
employees as per their employment agreements. The common stock was valued at
$60,000.
In the third quarter 1,500,000 shares of common stock previously obtained from a
shareholder and being held in Treasury were retired.
During the second quarter the Company had received loans from two shareholders
in exchange for promissory notes. In the third quarter these notes in the amount
of $427,325 were converted into 1,490,872 shares of the Company's common stock.
In the third quarter six distributors and two master agents were issued a total
of 200,000 shares of restricted common stock. The restricted common stock was
valued at $39,000. An additional 250,000 shares of common stock shall vest and
be delivered to the distributors and master agents after 360 days from the date
of their agreements provided the Company and the distributors and master agents
are conducting business with one another.
In July of 2000, the Company reissued from treasury 260,000 shares of common
stock for proceeds of $46,800.
In July of 2000, the Company reissued 34,500 shares of common stock from
Treasury in settlement of a liability of $12,000.
NOTE 6: LITIGATION SETTLEMENTS
During the third quarter, the Company settled litigation with Dr. Philip Minton
resulting from the operations of Ultrafit Centers, Inc. The settlement was for
$55,000, $7,500 less than had previously been recorded by the Company as a
liability. The resulting gain on the settlement in the amount of $7,500 has been
recorded as other income. As at September 30, 2000, the Company had paid $20,000
of the settlement amount.
12
FDN, Inc. and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2000
NOTE 7: SUBSEQUENT EVENTS/ COMMITMENTS AND CONTINGENCIES
During the fourth quarter two Members of the Board of Directors resigned. The
Company has not replaced these Board Members but has been in conversation with
two individuals highly respected in the industry.
During the fourth quarter the Company sent to certain shareholders a Notice of
Stock Cancellation and Rescission. The action is to rescind certain ownership of
the Company's common stock by those persons who the Company feels did not
acquire the stock properly. The Company is evaluating the responses from these
certain shareholders before further action.
The Company has three letters of credit issued to various carriers for a total
amount of $351,000. Certain shareholders and/or their affiliates have personally
secured these Letters of Credits. During the fourth quarter a carrier made a
partial draw down on a $100,000 letter of credit in the amount of $70,623. The
obligation to the shareholder is reflected in the fourth quarter. One of the
shareholders has agreed to take shares of the Company's common stock in lieu of
the repayment of the collateral underlying the Letter of Credit.
On October 8, 2000, the Company filed an S-8 to register the 500,000 shares
underlying a previous option agreement to a consultant.
Employment Agreements:
In July 2000, the Company formalized the employment agreements with its Vice
President of Prepaid Sales and Vice President of Operations. Each agreement is
for a period of twelve months and calls for annual compensation of $100,000. In
addition the employees had already been issued 300,000 and 200,000 shares of
restricted common stock, respectively and their agreements call for the
additional issuance of 500,000 shares each (400,000 restricted and 100,000 free
trading) over a two-year period. In July 2000, the two employees were each
issued 100,000 shares of free trading stock as per their agreements. (see Note
5)
Carrier Dispute
The Company incurred significant losses for the quarter concerning prepaid
cards, which was the result of the Company falling behind in the weekly payments
to the carrier. As a result of this, the carrier in turn increased the rates to
the Company causing excessive and unexpected losses. The Company is seeking
legal remedy against the carrier due to failure of the carrier to properly
notify the Company of the increased rates. The Company believes the rates are
between 20% and 30% too high. The Company believes this would decrease the loss
for the nine-month period of 2000 between $1,069,000 and $1,604,000. The Company
has taken a conservative approach and has recorded the full liability on the
books.
13
Part I - Item 2:
Managements Discussions and Analysis of Financial Condition and Results of
Operations
FINANCIAL CONDITION
FDN Inc., through its subsidiaries, is an emerging provider of advanced,
integrated telecommunications services primarily to residential and small
business customers. The Company offers long distance, prepaid and operator
assisted telephone services integrated with enhanced communications features.
During the third quarter the Company began an aggressive campaign concerning its
prepaid card program through its distribution network in which prepaid phone
cards have been distributed throughout the United States. (see Liquidity and
Capital Resources)
RESULTS OF OPERATIONS:
The Company records sales of prepaid phone cards by matching income against the
actual amount of minutes of usage incurred per card. The actual wholesale dollar
amount of use on the card is recorded as revenue on the income statement,
whereas the wholesale dollar amount of usage still remaining on the card is
recorded as deferred revenue on the balance sheet. The total wholesale value of
the card is recorded as accounts receivable at time of sale. Due to the
discontinuance of carrier service the Company has set up a significant reserve
for return of prepaid calling cards.
The Company recorded net sales for the quarter and nine months ending September
30, 2000 of $2,235,740 and $2,848,625 as compared to $711,130 and $711,130
revenue for the same periods in 1999. During the quarter, gross revenue for
prepaid phone cards prior to returns amounted to $2,498,281. The third quarter
revenue also includes the operations of American Tel. in the amount of $28,718.
In order to provide for returned prepaid cards from the Distributors, as a
result of the interruption in service, the Company has recorded as an additional
expense a return allowance in the amount of $349,432 during the quarter ended
September 30, 2000, as compared to $0 for the same quarter in 1999. This has
been recorded as a reduction to net sales.
Gross profit (loss) was $(3,355,395) and $(3,853,203) for the third quarter and
the first nine months of 2000 as compared to $216,286 and $215,672 for the same
periods in 1999. The Company experienced a loss on One Plus sales caused by the
decline in sales for American Tel. due to the cancellation of service from a
carrier and moving its switch location. The Company incurred significant losses
for the quarter concerning prepaid cards, which was the result of the Company
falling behind in the weekly payments to the carrier. As a result of this, the
carrier in turn increased the rates to the Company causing excessive and
unexpected losses. The Company is seeking legal remedy against the carrier due
to failure of the carrier to properly notify the Company of the increased rates.
The Company believes the rates are between 20% and 30% too high. The Company
believes this would decrease the loss for the nine-month period of 2000 between
$1,069,000 and $1,604,000. The Company has taken a conservative approach and has
recorded the full liability on its books. In addition the minute usage per
prepaid call was longer than had been anticipated by the Company resulting in
increased wholesale costs.
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Selling, general and administrative expense ("SG&A") was $1,203,196 and
$4,205,896 for the third quarter and the first nine months of 2000, compared to
$908,180 and $2,122,427 for the same periods in 1999, an increase of 33% and
98%. For the quarter ended September 30, 2000 prepaid expenses were amortized in
the amount of $224,008, as compared to $0 for the comparable 1999 quarter.
Other (income) and expense ("OIE") was $808,222 for the quarter ended September
30, 2000, compared to $76,986 for the comparable quarter of 1999. OIE for the
first nine months of 2000 was $2,348,061 compared to $143,325 for the first nine
months of 1999. The additional write down of intangible assets of American Tel
during the quarter in the amount of $768,479 accounted for 95% of OIE. During
the third quarter of 2000 interest expense was $47,243 compared to $76,986 for
the same quarter in 1999. During the third quarter the Company wrote down the
intangible assets of its subsidiary, American Tel., in the amount of $768,479 to
reflect the estimated value of these assets. Previously, during the second
quarter of 2000, $1,108,408 had been written-down.
Net loss was $(5,366,813) and $(10,407,160) for the third quarter and the first
nine months of 2000, compared to $(768,880) and $(2,050,080) for the same
periods in 1999. The increase in the net loss for the third quarter and the
first nine months of 2000 reflects the net loss on operations of American Tel in
the amount of $(1,017,844) and $(3,269,573), respectively. American was not
acquired in the comparable period of 1999 until July 15, 1999. Various money
raising costs including interest expense, finders fees, brokerage fees, etc.,
accounted for the majority of the remaining increased losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a working capital deficit of $6,925,815 at September 30, 2000 as
compared to a working capital deficit of $3,324,924 as at December 31, 1999. The
Company has been experiencing negative cash flow on a short-term basis, which
would become materially adverse if sustained on a long-term basis. During
October 2000 due to a dispute with its telecommunications carrier, underlying
service to the prepaid phone-cards was temporarily suspended. The Company needs
to obtain both additional short term and long term financing to reinstate its
prepaid calling card operations. There can be no guarantee that additional
financing will be available to reinstate and continue such operations, which are
material.
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe
harbor for forward-looking statements made by or on behalf of the Company. The
Company and its representatives may from time to time make written or oral
statements that the Company believes are "forward-looking", including statements
contained in this report and other filings with the Securities and Exchange
Commission and in reports to the Company's stockholders.
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The Company believes that all statements that expresses expectations and
projections with respect to future matters, including but not limited to the
launching or prospective development of new business initiatives, are
forward-looking within the meaning of the Act. These statements are made on the
basis of management's views and assumptions, as of the time the statements are
made, regarding future events and business performance. There can be no
assurance, however, that management's expectations will necessarily come to
pass.
Part II - Other Information
1. LEGAL PROCEEDING
Refer to financial statements filed May 1, 2000 with Form 8-KA.
During the quarter, the Company agreed to settlement of its litigation with Dr.
Philip Minton. The Company had originally recorded $62,500 as a potential
liability as at December 31, 1999. The Company directly paid $20,000 during the
quarter. As part of the settlement, the liability was written down by $7,500.
The remaining balance of $35,000 is due in the fourth quarter.
2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the third quarter of 2000, the Company entered into several transactions,
which affect shareholders' equity. These transactions are detailed below:
In the third quarter, the Company issued 200,000 shares of common stock to two
employees as per their employment agreements. The common stock was valued at
$60,000.
In the third quarter, 1,500,000 shares of common stock previously obtained from
a shareholder and being held in Treasury were retired.
During the second quarter the Company had received loans from two shareholders
in exchange for promissory notes. In the third quarter these notes in the amount
of $427,325 were converted into 1,490,872 shares of the Company's common stock.
In the third quarter six distributors and two master agents were issued a total
of 200,000 shares of restricted common stock. The restricted common stock was
valued at $39,000. An additional 250,000 shares of common stock shall vest and
be delivered to the distributors and master agents after 360 days from the date
of their agreements provided the Company and the distributors and master agents
are conducting business with one another.
In July of 2000, the Company reissued from treasury 260,000 shares of common
stock for proceeds of $46,800.
In July of 2000, the Company reissued 34,500 shares of common stock from
Treasury in settlement of a liability.
The above transactions resulted in minimal proceeds to the Company, which was
used for operations.
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3. DEFAULTS UPON SENIOR SECURITIES:
The Company has a dispute with one of its carriers for its American Tel.
Enterprises Inc. subsidiary. During the second quarter the Company, pursuant to
a settlement agreement, reflected the initial promissory note of $635,145 and
through September 30, 2000, has paid $235,000 against this note. Despite a
previous settlement agreement, the carrier has since sent a letter of default to
the Company in a larger amount of $2,742,487. The Company has disputed this
claim and intends to take legal action for damages incurred as a result of the
carrier terminating service.
In September of 2000, the Company defaulted on a $100,000 90-day note from a
company affiliated with a shareholder. As collateral against the note the
Company pledged 200,000 shares of common stock. In addition a surety bond
secures the loan. The note accrues annual interest at 12%. The Company is
currently negotiating with the note holder to cure the default
In July of 2000, the Company defaulted on a $100,000 note payable to a
consultant in connection with the acquisition of Mercury Capital Corporation.
The Company is currently negotiating with the note holder to cure the default.
During the third quarter, the Company defaulted on another note payable in the
amount of $100,000. The note is accruing interest at an annual rate of 14%. The
collateral pledged includes 100,000 shares of the Company's common stock, owned
by a shareholder. The Company is responsible for the balance of the value of the
note, if the fair market value of the pledged stock is insufficient to satisfy
the note in full. The Company is currently negotiating with the note holder who
is seems willing to negotiate the terms of repayment.
During the third quarter of 2000, the Company was issued a demand for payment
from a shareholder and former employee/officer of the Company, in the amount of
$22,517. The balance accrues interest at 18%. The shareholder is willing to
accept a payment plan for this amount and the Company intends to arrange a
satisfactory repayment plan.
In July of 2000, the Company defaulted on a $335,000 note payable in conjunction
with the purchase of ATM machines. The initial note agreement calls for an
increase in the liability to $450,000 in the event of default. The Company has
scheduled, through its attorneys, a settlement conference with the note holder
to attempt to revise the terms of payment. The potential increase of the
liability to $450,000 has not been reflected in these financial statements.
In July of 2000, the Company defaulted on a payment of $75,000 as called for as
part of the payment of the $3,800,000 note for the purchase for American Tel
Enterprises Inc. Due to the fact that the assets were purchased out of
bankruptcy, several vendors who do business with the new American Tel. were owed
monies by the bankrupt entity. These vendors refused to perform services to the
new entity unless their old obligations were satisfied. To that end, the Company
paid $119,576 of the bankrupt company's expenses. The trustee to the bankruptcy
has stated that he will allow the Company to apply these payments against the
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$3,800,000 although it has not been determined as to when such offsets will be
applied. The Company will petition the trustee to apply the offset to the first
payment due. The Company is working with its attorneys to significantly reduce
the amount of the note obligation to the bankruptcy court because the Company
feels material misrepresentations were made by the prior owners. In addition the
Company is working with its attorney to return American Tel Enterprises to the
bankruptcy court. The Company may incur an expense associated with the return of
American Tel Enterprises to the court. However the Company has determined that
the savings of operational and other expenses associated with trying to continue
that operation will justify such an expense.
As mentioned in the Company's 10QSB for the first quarter, the Company had an
agreement providing for the issuance of 250,000 shares of common stock to a
consultant associated with the Mercury Capital transaction. These shares are
subject to registration by the Company. As at September 30, 2000, these shares
had not yet been issued. The Company is attempting to negotiate an alternative
resolution and payment.
6. EXHIBITS AND REPORTS ON FORM 8-K:
a) Exhibit 11: The Earnings Per Share computation is submitted herewith as
Exhibit 11
b) Exhibit 27.1: The Financial Data Schedule for the nine months ended
September, 2000 is submitted herewith as Exhibit 27.1
c) No Form 8-K Current Report was filed during the fiscal quarter for which
this Form 10-Q report is filed. A Form 8-K Current Report was made under
Item 5 for October 7, 2000 concerning a certain stock rescission request by
the Company and filed prior to this Form 10-Q and no financial statements
were filed
d) No contracts entered into during the quarter are deemed by management to be
material in the light of the registrant's operating results, financial
condition and other factors.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FDN, INC.
By: /s/ Paul Matthews
--------------------------
Paul Matthews
Acting CEO
Date: November 13, 2000
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