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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[ X ] QUARTERTLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ________ To ________
VDC COMMUNICATIONS, INC.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-14045 061524454
-------- ------- ---------
(Jurisdiction of Incorporation) (Commission File No.) (IRS Employer
Identification No.)
75 Holly Hill Lane
Greenwich, Connecticut 06830
(Address of principal executive office)
Registrant's telephone number, including area code: (203) 869-5100
VDC CORPORATION LTD.
--------------------
(Former name, if changed since last report)
Check whether the Registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
(1) Yes X No
---------- ----------
(2) Yes X No
---------- ----------
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VDC COMMUNICATIONS, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Balance Sheets at September 30, 1998
and June 30, 1998 (Unaudited) 3
Consolidated Statements of Operations and
Comprehensive Loss for the three months ended
September 30, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the
Three Months ended September 30, 1998
and 1997 (Unaudited) 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
2
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VDC COMMUNICATIONS, INC. AND SUBSIDARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
------------------ -------------
(Unaudited)
-----------
<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 512,381 $ 2,212,111
Restricted Cash 400,000 --
Marketable securities 150,625 451,875
Accounts Receivable 192,868 --
Notes receivable - current 3,600,000 2,800,000
------------ ------------
Total current assets 4,855,874 5,463,986
------------ ------------
Property, plant and equipment, less accumulated depreciation 3,217,690 331,316
Notes receivable, less current portion -- 1,500,000
Investment in MCC 37,691,143 37,790,877
Deposits 356,963 567,775
Goodwill less accumulated amortization 1,040,003 --
Other assets 209,541 169,730
------------ ------------
Total assets $ 47,371,214 $ 45,823,684
------------ ------------
Liabilities and Stockholders' Equity
Current:
Accounts payable and accrued expenses $ 1,515,702 $ 156,185
Note payable 192,379 --
------------ ------------
Total current liabilities 1,708,081 156,185
------------ ------------
Stockholders' equity:
Convertible Preferred Stock Series A -- --
Convertible Preferred Stock Series B -- 60
Common Stock 2,008 1,545
Additional paid-in capital 75,527,329 51,234,105
Accumulated deficit (29,094,166) (4,218,035)
Stock subscriptions receivable (508,875) (1,425,951)
Accumulated comprehensive income (deficit) (263,163) 75,775
------------ ------------
Total stockholders' equity 45,663,133 45,667,499
------------ ------------
Total liabilities and stockholders' equity $ 47,371,214 $ 45,823,684
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
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VDC COMMUNICATIONS, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Revenue $ 201,394 $ 19,935
Direct costs of revenues 341,421 20,249
------------ ------------
Gross margin (140,027) (314)
------------ ------------
Selling, general and administrative 922,410 75
Depreciation and amortization 102,836 1,651
Non-cash compensation 16,146,000 --
------------ ------------
Total operating expenses 17,171,246 1,726
------------ ------------
Operating loss (17,311,273) (2,040)
------------ ------------
Other income (expense)
Loss on note restructuring (400,000)
Other income 89,142 --
------------ ------------
Total other income (expense) (310,858) --
------------ ------------
Net loss $(17,622,131) $ (2,040)
------------ ------------
Other Comprehensive income (loss), net of tax:
Unrealized loss on marketable securities (338,938) --
------------ ------------
Comprehensive loss $(17,961,069) $ (2,040)
------------ ------------
Net loss per common share - basic $ (1.01) $ (0.00)
------------ ------------
Weighted average number of shares outstanding 17,429,618 9,199,838
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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VDC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(17,622,131) $ (2,040)
Adjustments to reconcile net loss to net cash
used by operating activities
Depreciation and amortization 102,836 1,651
Noncash compensation expense 16,146,000 --
Loss on note restructuring 400,000 --
Changes in operating assets and liabilities net of effects
from purchase of subsidiary:
Cash restricted in use (400,000)
Accounts receivable (103,699) --
Prepaid expenses and other assets (107,090) --
Accounts payable and accrued expenses 1,359,517 --
------------ ------------
Net cash used by operating activities (224,567) (389)
------------ ------------
Cash flows from investing activities:
Proceeds from return of escrow in connection
with the investment in MCC 192,752
Payment for purchase of subsidiary (589,169)
Proceeds from payment of notes receivable 300,000 --
Capital expenditures (2,295,822) --
------------ ------------
Net cash flows used in investing activities (2,392,239) --
------------ ------------
Cash flows from financing activities:
Collections on stock subscription receivables 917,076 --
Capital contribution -- 2,200
------------ ------------
Net cash flows provided by financing activities 917,076 2,200
------------ ------------
Net increase (decrease) in cash and cash
equivalents (1,699,730) 1,811
------------ ------------
Cash and cash equivalents, beginning of period 2,212,111 1,430
------------ ------------
Cash and cash equivalents, end of period $ 512,381 $ 3,241
------------ ------------
Supplemental schedule of non cash investing and financing activities:
Fixed assets exchanged for note 192,379
Acquisition of subsidiary:
Fair value of assets acquired 1,290,044
Common stock issued 700,875
---------
Cash paid 589,169
</TABLE>
See accompanying notes to consolidated financial statements.
5
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VDC Communications, Inc. and Subsidiaries
Notes to consolidated financial statements
1. Basis of Presentation
The financial statements presented are those of VDC Communications, Inc. (the
Company") which is the successor to VDC Corporation Ltd. ("VDC") by way of the
Domestication Merger (the "Domestication Merger") that occurred on November 6,
1998. The Domestication Merger was accounted for as a capital reorganization in
which 11,810,862 issued and outstanding shares of common stock of VDC, $2.00 par
value per share, were exchanged, and 8,487,500 issued and outstanding shares of
preferred stock of the Company $.0001 par value per share, were converted, on a
one for one basis, into a total of 20,298,362 shares of common stock, of the
Company $.0001 par value common stock per share.
The Domestication Merger reflects the completion of a series of transactions
entered into on March 6, 1998 pursuant to which Sky King Communications, Inc.
("Sky King") entered into a merger agreement with VDC and VDC (Delaware), Inc.
(n/k/a VDC Communications, Inc). This merger transaction was accounted for as a
reverse acquisition whereby Sky King was the acquirer for accounting purposes.
Accordingly the historical financial statements presented are those of Sky King
before the merger on March 6, 1998 and reflect the consolidated results of Sky
King and VDC, and VDC's wholly-owned subsidiaries after the merger. On November
6, 1998, the Domestication Merger, whereby VDC merged with and into the Company,
was consumated. Accordingly, the accompanying unaudited financial statements are
those of VDC and its wholly owned subsidiaries prior to the Domestication
Merger.
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instruction to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all the disclosures
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended September 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ended June 30, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended June 30, 1998, as filed with the
Securities and Exchange Commission.
The Company is engaged in the international telecommunications and wireless
communications businesses.
2. Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents.
(b) Principles of Consolidation
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The consolidated financial statements represent all companies of which
the Company directly or indirectly has majority ownership. Significant
intercompany accounts and transactions have been eliminated. The Company's
consolidated financial statements include the accounts of wholly-owned
subsidiaries VDC Telecommunications, Inc., Masatepe Communications U.S.A., L.L.C
("Masatepe"), and Voice & Data Communications (Hong Kong) Limited.
(c) Loss Per Share of Common Stock
Loss per common share is computed on the weighted average number of
shares outstanding. If dilutive, common equivalent shares (common shares
assuming exercise of options and warrants) utilizing the treasury stock method,
as well as the conversion of convertible preferred stock are considered in
presenting diluted earnings per share. Diluted loss per share is not presented
because the effect of the convertible securities is antidilutive. Warrants to
purchase 938,546 shares of common stock at prices ranging from $4.00 to $5.00
are not included in the computation of diluted loss per share because they are
antidilutive due to the net loss.
(d) Goodwill and Amortization
Goodwill is amortized using the straight-line method over its estimated
useful life.
(e) Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income as defined includes all changes in equity (net assets) during a period
from non-owner sources. Examples of items included in comprehensive income,
which are excluded from net income, include unrealized holding gains and losses
on marketable securities. The Company adopted SFAS No. 130 on July 1, 1998.
Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information" establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographical areas and major customers. SFAS No. 131 defined operating segments
as components of an enterprise about which separate financial information is
available that is evaluated regularly by management in deciding how to allocate
resources and in assessing performance. The Company is currently reviewing the
effect of SFAS 131 but has yet been unable to fully evaluate the impact, if any,
it may have on future financial statement disclosures.
In March 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". SFAS 132 significantly
changes current financial statement disclosure requirements for those that were
required under SFAS 87. The Company
7
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currently does not have a pension or other postretirement benefit plan.
Therefore, SFAS 132 was not applicable to the Company.
3. Line of Credit
In August 1998, the Company entered into a $1,000,000 revolving
conditional line of credit to be used for the purposes of issuing certain
letters of credit ("LC") to secure payment of certain activities of the Company.
Principal payments are due on demand and the interest rate is two percent above
the prime rate. The aggregate face amount of all LC's must be collateralized in
the form of cash equivalents held by the issuing bank. Collateral at September
30, 1998 consisted of $400,000 in the form of three-month U.S. Government bonds.
Each LC expires no later than one year from the date of issuance. As of
September 30, 1998, there were no advances issued under the revolving line of
credit.
4. Note Payable
In September 1998, the Company acquired long distance
telecommunications equipment it had previously been leasing under an operating
lease. The note calls for five payments of $28,000 through December 1998 with a
final payment of $54,000 in January 1999. Interest was imputed based on the
Company's assumed incremental borrowing rate of 8.0%.
5. Noncash Compensation
Sky King entered into a merger agreement with VDC and the Company
effective March 6, 1998. This transaction was accounted for as a reverse
acquisition whereby Sky King was the acquirer for accounting purposes. Since the
assets and liabilities of VDC Corporation, Ltd. acquired were monetary in
nature, the merger was recorded at the value of the net monetary assets.
The consideration paid to the former Sky King shareholders in the
merger consisted of the issuance of 10 million newly-issued shares of preferred
stock of the Company which was convertible, in the aggregate, into 10 million
shares of common stock of the Company. Of the consideration paid to the Sky
King shareholders, preferred stock of the Company convertible in the aggregate
into 4.5 million shares of common stock of the Company (the "Escrow Shares") was
placed in escrow to be held and released from time to time as the Company
achieved certain performance criteria. As of September 30, 1998, all of the
performance criteria had been met. Accordingly, 4.5 million shares have been
released from escrow.
During the three months ended September 30, 1998, 3.9 million shares
were released from escrow. Of the shares released, approximately 2.7 million
shares were considered compensatory to the extent of the trading value of the
shares on the date of the release. This resulted in noncash compensation of
$16,146,000 for the three months ended September 30, 1998. Compensatory shares
are related to members of the Company's management, their family trusts and
minor children and an employee. Noncompensatory shares released related to
former SKY King shareholders who are non employee shareholders and non minor
children of employee shareholders where beneficial ownership does not exist. The
non compensatory shares have been accounted for as a stock dividend in which the
isuued stock is recorded at fair value on the date of release through a charge
to accumulated deficit.
6. Metromedia China Corporation Investment
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On June 22, 1998 the Company acquired from PortaCom Wireless, Inc.
("PortaCom") 2 million shares of the common stock of Metromedia China
Corporation ("MCC") and warrants to purchase 4 million shares of common stock of
MCC at an exercise price of $4.00 per share. The MCC shares and warrants
represent an approximate 8.7% interest in the outstanding common stock of MCC.
MCC operates joint ventures in China under the direction of its majority owner,
Metromedia International Group. The joint ventures invest in network
construction and development of telephony networks in China and participate in
project cooperation contracts with local partners that enable the joint ventures
to receive certain percentages of distributable cash flows. The Company
evaluated the MCC investment based on: (i) the population of the Chinese markets
where MCC has licenses to provide wireless and wireline telecommunications
service, which the Company estimates at 116,000,000; (ii) the understanding that
MCC would receive additional licenses in the future; and (iii) the possible
synergy should the Company ever do business in China. The investment has been
recorded based on the consideration given which consisted of 4,943,438 common
shares valued at $6.98125, $2,489,245 in cash, the elimination of a loan
receivable of $390,522 and 50,000 investment advisory shares valued at $6.00 per
share.
In March 1998, PortaCom filed a voluntary petition for bankruptcy
relief under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court District of Delaware. During the course of the
bankruptcy proceedings, the acquisition was amended to provide that the Company
will fund an escrow account in the amount of up to $2,682,000 for the benefit of
holders of priority unsecured claims and general unsecured claims against
PortaCom's bankruptcy estate. The escrow fund and 5,300,000 VDC shares were
placed in escrow pending the resolution of the disputed claims against
PortaCom's bankruptcy estate. To the extent that the cash escrow is used by
PortaCom, it will receive fewer VDC shares. PortaCom had used $123,412 of the
escrow funds as of September 30, 1998.
In October 1998, the Company filed a motion in the United States
Bankruptcy Court to block the distribution of escrowed assets in connection with
the bankruptcy of PortaCom. The Company filed the motion to permit it to
undertake discovery relative to certain aspects of its investment in MCC prior
to the distribution of escrowed assets. Following the submission of that motion,
the Company, PortaCom, and certain other interested parties, agreed on a
stipulation postponing the distribution of certain Company shares to PortaCom's
shareholders. This postponement will afford the Company an opportunity to
undertake an investigation to determine whether PortaCom, or certain individuals
associated with PortaCom of the MCC transaction, made fraudulent representations
to induce the Company to enter into the Asset Purchase Agreement for the
purchase of the MCC shares and warrants. The Company plans to fully investigate
this matter and seek appropriate legal recourse as warranted by its findings.
7. Restructured Note Receivable
In September, 1998, the Company restructured a note receivable from a
debtor by reducing the principal due thereunder from $800,000 to $400,000. The
Company believes this step will maximize the recovery of its investment. The
debt will be repaid in monthly installments through March 1999.
8. Subsequent Event
On November 6, 1998, the Company completed the Domestication Merger
with VDC. The effect of the Domestication Merger was that members of VDC became
stockholders of the Company. In connection with the Domestication Merger,
11,810,862 issued and outstanding shares of common stock of VDC, $2.00 par value
per share, were exchanged, and 8,487,500 issued and outstanding shares of
preferred stock of the Company, $.0001 par value per share, were converted, on a
one-for-one basis, into an aggregate 20,298,362 shares of common stock of the
Company, $.0001 par value per share. The Domestication Merger was accounted for
as a capital reorganization which has been given retroactive effect in the
financial statements for all periods presented.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In connection with the Domestication Merger, 11,810,862 issued and
outstanding shares of common stock of VDC, $2.00 par value per share, were
exhanged, and 8,487,500 issued and outstanding shares of preferred stock of the
Company, $.0001 par value per share, were converted, on a one-for-one basis,
into an aggregate 20,298,362 shares of common stock of the Company, $.0001 par
value per share. The Domestication Merger was accounted for as a capital
reorganization which has been given retroactive effect in the financial
statements for all periods presented. When used in this Report on Form 10-Q, the
words "may," "will," "expect," "anticipate," "continue," "estimate," "intend,"
and similar expressions are intended to identify forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 regarding events, conditions and
financial trends which may affect the Company's future plans of operations,
business strategy, operating results and financial position. Such statements are
not guarantees of future performance and are subject to risks and uncertainties
and actual results may differ materially from those included within the
forward-looking statements as a result of various factors. Such risks may relate
to, among others: (i) the Company's ability to secure the various international
licenses, approvals and other authorizations needed to commence operations in
Eastern Europe, Asia, Latin America, China or other foreign countries; (ii) the
Company's ability to otherwise develop and implement certain segments of its
intended business that are subject to normal start-up risks and uncertainties;
(iii) the Company's ability to secure sufficient financing in order to fund its
proposed operations; (iv) inherent regulatory, licensing and political risks
associated with operations in foreign countries; (v) the Company's dependence on
certain key personnel; and (vi) competitive and other market conditions that may
adversely affect the scope of the Company's operations. Additional factors are
described in the Company's other public reports and filings with the Securities
and Exchange Commission. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date made. The
Company undertakes no obligation to publicly release the result of any revision
of these forward-looking statements to reflect events or circumstances after the
date they are made or to reflect the occurrence of unanticipated events.
General
VDC Communications, Inc. (the "Company") is an international telecommunications
company, focused on international telecommunications gateways and long distance
services. The Company expects that the implementation of its new
telecommunications services will provide new sources of revenue and that current
results are not indicative of future results, given the expected increase in
scope and diversity of the Company's business.
Through its wholly-owned subsidiary, Masatepe Communications U.S.A., L.L.C., a
Delaware limited liability company ("Masatepe"), the Company carries
telecommunications traffic to Managua, Nicaragua from the United States. The
Company currently has three switches strategically placed in the United States:
New York, Los Angeles, and Denver. The New York and Denver switches are now
operational and the
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Company expects that telecommunications traffic will flow through these
facilities and the Company's network during the second quarter of the fiscal
year ended June 30, 1999. The Company also derives modest revenues from site
tower management.
The Company's costs include long distance charges for transmission services,
terminating overseas-originated traffic in the United States and terminating
domestic originated international traffic outside the United States. In
addition, the Company incurs costs associated with selling, general and
administration.
Merger
On November 6, 1998, VDC Corporation Ltd., a Bermuda company ("VDC"), merged
with and into the Company (the "Domestication Merger"). The effect of the
Domestication Merger was that members of VDC became stockholders of the Company.
The primary reason for the Domestication Merger was to reorganize VDC as a
publicly traded U.S. corporation domesticated in the State of Delaware. The
Company believes that the Domestication Merger will increase the Company's
ability to meet its future equity and debt financing, enhance the marketability
of the Company's securities by raising the Company's profile in the U.S. capital
markets, allow investors to assess the Company on a more comparable footing with
its competitors domiciled in the United States and, over time, have a positive
effect on the trading of the Company's securities. Additionally, becoming a
Delaware corporation is expected to simplify the Company's tax and securities
filings, accounting and operations, and reduce both the cost and burden of these
reporting obligations.
In connection with the Domestication Merger, 11,810,862 issued and outstanding
shares of common stock of VDC, $2.00 par value per share, were exchanged, and
8,487,500 issued and outstanding shares of preferred stock of the Company,
$.0001 par value per share, were converted, on a one-for-one basis, into an
aggregate 20,298,362 shares of common stock of the Company, $.0001 par value per
share. The Domestication Merger was accounted for as a capital reorganization.
Results of Operations
Revenues: Total revenues in the three months ended September 30, 1998 increased
910% to $201,394 from $19,935 in the three months ended September 30, 1997. This
reflects consulting fees of $30,000 and revenues derived from telecommunications
traffic for August and September 1998.
Gross Margin: Negative gross margins were mostly attributable to salaries and
other operating expenses incurred in advance of the realization of significant
telecommunications traffic revenues.
Selling, general & administrative: Selling, general and administrative expenses
increased from $75 in the prior period to $922,410 in the current period. This
increase was primarily attributable to professional fees, including consulting,
legal and accounting expenses associated with the redeployment of the Company's
assets and salaries of new personnel necessary for the Company's development of
new telecommunications services, including the initial development of a domestic
and global telecommunications network.
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Depreciation and Amortization: Depreciation and amortization increased to
$102,836 in the three months ended September 30, 1998 from $1,651 in the three
months ended September 30, 1997. The increase was primarily attributable to the
amortization of goodwill associated with the Masatepe acquisition. Depreciation
for most of the Company's telecommunications equipment has not yet commenced
since the equipment was not yet operational as of September 30, 1998.
Noncash Compensation Expense: Noncash compensation expense was $16,146,000 for
the three months ended September 30, 1998 compared to $0 for the corresponding
period of the previous year. During the three months ended September 30, 1998,
3.9 million shares of the Company's Series B convertible preferred stock
("Series B Stock"), were released from escrow based upon the achievement of
performance criteria which included releasing 500,000 shares upon each
procurement of one or more frequency, operating and/or business licenses to
provide the following types of services to an aggregate minimum population of
500,000 people: wireless or wired Telephony, local loop telephony, and in
country long distance telephony services, or international long distance
telephony gateways or internet services provision: plus increments of 100,000
shares for each 100,000 people in excess of the aggregate minimum population of
500,000. The Company satisfied the performance criteria by obtaining a United
States Federal Communications Commission Overseas Carrier Section 214 license
authorizing it to provide international long distance telephony service
internationally and completed the construction of an international
telecommunications gateway switch in New York City which has a surrounding
population of 15 million people. Of the 3.9 million shares of Series B Stock
released, 2.7 million shares were considered compensatory for accounting
purposes. These compensatory shares were owned by management, their family
trusts, minor children, and an employee. The non-cash expense reflected on the
Company's financial statements was developed based on the deemed value of the
shares released from escrow, which in turn, was based on the trading price of
the Company's common stock on the date of release.
Liquidity and Capital Resources
The Company is currently experiencing a short term cash flow issue, since, among
other things, a significant amount of capital has been expended for corporate
infrastructure and operating and other capital expenditures in connection with
the establishment of Company programs. These expenditures have occurred in
advance of the realization of revenues that is likely to occur as a result of
such acquisitions and programs. These issues have been compounded by virtue of
significant capital that remains in escrow in connection with the Company's
acquisition of 2,000,000 shares of common stock and 4,000,000 warrants to
purchase shares of common stock of Metromedia China Corporation ("MCC") from
PortaCom Wireless, Inc. ("PortaCom"). Management anticipates that it will
resolve its cash flow issues within the short term by a combination of any one
or more of the following factors: (i) the realization of revenues from
operations as the Company's telecommunications switches are likely to become
commercially operational; (ii) the release of a significant portion of funds
held in escrow from the MCC transaction; (iii) collection on the promissory
notes emanating from the bulk sale of its former investment assets; and (iv)
alternative financing arrangements.
An inability to generate cash from any one or more of these factors within the
short term could have the effect of adversely affecting the Company's plans for
future growth. If these issues continue for more than the short term, management
may be caused to materially reduce the size and scope of its overhead and
planned operations.
Net cash used by operating activities was $224,567 for the three months ended
September 30, 1998. The Company collected $97,695 from customers and earned
$132,024 in interest and dividends while paying $454,286 to its vendors and
employees. Net cash used by operating activities was $389 for the corresponding
period of the previous year.
Net cash used by investing activities totaled $2,392,239 for the three months
ended September 30, 1998. Cash was used for capital expenditures and the
purchase of Masatepe offset by proceeds from repayments of notes and the partial
return of cash in escrow in connection with
12
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the MCC transaction. There were no cash flows from investing activities for the
three months ending September 30, 1997.
Cash provided by financing activities totaled $917,076 for the three months
ended September 30, 1998. The proceeds reflect the collection of stock
subscriptions. The proceeds were used to fund operations and capital
expenditures. Proceeds provided by financing activities for the three months
ended September 30, 1997 were used to fund operations.
Acquisitions
The Company entered into a Purchase Agreement on July 31, 1998 to acquire
Masatepe for $589,169 in cash and shares of the Company's Common Stock valued
at $700,875, less any adjustments made to the purchase price by virtue of
indemnification claims made by the Company against an escrow fund established
under the Purchase Agreement. The entire purchase price for the Masatepe
acquisition was placed in escrow pending the satisfaction of certain regulatory
filings to be made by Masatepe with the United States Federal Communications
Commission (the "FCC"). On or about October 27, 1998, the entire purchase price
for the Masatepe acquisition was released from escrow, less 14,160 shares of the
Company's common stock, which shall be retained in escrow pending the resolution
of a claim made by the Company against the escrow fund for outstanding expenses
incurred by Masatepe prior to its acquisition by the Company.
In addition, the Company delivered a promissory note (the "Graubard Note") to
Marc Graubart, an executive officer of Masatepe, in connection with the Masatepe
acquisition. The amount due under the Graubart Note is payable in shares of the
Company's common stock on or before September 30, 2001, and be based on
Masatepe's cash flow for the twelve calendar months immediately prior to July
31, 2001.
The Company may also be obligated under the Purchase Agreement to pay a deferred
puchase price component (the "Deferred Purchase Price") to Activated on
February 7, 1999 in the event that the market price of the Company's common
stock is less than $7.00 per share at that time, as determined by a formula set
forth in the Purchase Agreement. The Deferred Purchase Price is payable in
shares of common stock of the Company.
Masatepe provides toll quality international switched long distance services,
along with value added telecommunications products to Central American markets.
The Company expects to continue to explore acquisition opportunities. Such
acquisitions may have a significant impact on the Company's need for capital.
The Company would explore a range of financing options, which could include
public or private debt, or equity financing. There can be no assurances that
such financing will be available, or if available, will be available on terms
attractive to the Company. The Company may also consider acquisitions using the
Company's common stock.
The Year 2000 Readiness Disclosure
The Year 2000 issue is a matter of worldwide concern for carriers and affects
many aspects of telecommunications technology, including the computer systems
and software applications that are essential for network administration and
operations. A significant portion of the voice and data networking and network
management devices have date-sensitive processing in them which affect network
administration and operations functions such as service activation, service
assurance and billing processes.
The Company is currently evaluating the year 2000 readiness of its computer
systems and software applications. It is sending Year 2000 compliance inquiries
to certain third parties (i.e. vendors, customers, outside contractors) with
whom it has a relationship. These inquiries include, among other things,
requests to provide documentation regarding the third party's year 2000
programs, and questions regarding how the third party specifically examined the
Year 2000 affect on their computers and what remedial actions will be taken with
regard to these problems.
The Company's key processing systems have recently been implemented. Most of the
vendors of such systems have represented to the Company that the systems are
compliant with the year 2000 issues without any modification. The Company will,
however, continue to require confirmation of year 2000 compliance in its future
requests for proposals from equipment and software vendors. The failure of the
Company's computer systems and software applications to accommodate the year
2000, could have a material adverse effect on the Company's business, financial
condition and result of operations.
13
<PAGE>
Further, if the networks and systems of those on whose services the Company
depends and with whom the Company's networks and systems must interface are not
year 2000 functional, it could have a material adverse effect on the operation
of the Company's networks and, as a result, have a material adverse effect on
the Company. Most major domestic carriers have announced that that they expect
all of their network and support systems to be year 2000 functional by mid 1999.
However, other domestic and international carriers may not be year 2000
functional. The Company intends to continue to monitor the performance of its
accounting, information and processing systems and software applications and
those of its third-party constituents to identify and resolve any year 2000
issues. Currently, the Company does not believe it will incur costs for any
replacement, upgrade or reprogramming of its existing computer systems and
software applications to resolve any year 2000 issues. However, this conclusion
may change pending the finalization of its year 2000 investigation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item not applicable.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Worldstar Suit
On or about June 10, 1998, Worldstar Communications Corporation
("Worldstar") commenced an action in the United States District Court for the
Southern District of New York entitled Worldstar Communications Corporation v.
Lindemann Capital L.P., Activated Communications, L.P. and Marc Graubart (Civil
Action No. 98 4093) (the "Action"). Worldstar asserts in the Action that, under
the terms of a purported joint venture arrangement with Lindemann Capital L.P.
("Lindemann") and Activated Communications, L.P. ("Activated"), Worldstar
acquired certain rights to share in the profits and ownership of a
telecommunications project in Nicaragua (the "Nicaraguan Project") owned by
Masatepe Communiciones S.A., a Nicaraguan company ("Masatepe S.A."). Masatepe
Communications U.S.A., L.L.C. ("Masatepe U.S.A."), which owns a 49% equity
interest in Masatepe S.A., was acquired by the Company and is now a wholly-owned
subsidiary of the Company.
In the event that the plaintiff prevails in the Action, the value of
the Company's interest in Masatepe U.S.A., Masatepe S.A and/or the Nicaraguan
Project could be diluted. However, pursuant to the Purchase Agreement through
which the Company acquired Masatepe U.S.A. (the "Purchase Agreement"), Activated
agreed to indemnify and hold the Company and Masatepe U.S.A. harmless from any
loss, liability, claim, damage and expense arising out or resulting from the
Action. Under certain circumstances, Activated has an obligation under the
Purchase Agreement to repurchase from the Company all or part of the Company's
equity interest in Masatepe U.S.A. Furthermore, after consultation with counsel
to the defendants, the Company does not believe that the claims asserted in the
Action are meritorious. In view of the foregoing, the Company does not believe
that the claims asserted in the Action will have a material adverse effect on
the Company's assets or operations.
Other Matters
The response to this section of this item is incorporated by reference
from Note 6 to the consolidated financial statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On August 27, 1998, the Company issued 50,000 shares of common stock of VDC in
the name of SPH Equities Inc. ("SPH") in a non-public offering exempt from
registration pursuant to Section 4(2) and Rule 506 of Regulation D of the
Securities Act of 1933, as amended (the "Act"). These shares were issued to SPH
as an investment banking fee for SPH's work in arranging for, and providing
consulting services to the Company in connection with the purchase by the
Company of MCC shares and warrants from PortaCom.
On August 18, 1998, the Company issued 78,697 shares in the name of Activated in
a non-public offering exempt from registration pursuant to Section 4(2) and Rule
506 of Regulation D of the
15
<PAGE>
Act (the "Activated Shares"). The Activated Shares were issued in escrow as
partial consideration for Activated's equity ownership interest Masatepe
pursuant to the terms of the Purchase Agreement by which the Company acquired
Masatepe. On October 27, 1998, 64,537 Activated Shares were released from
escrow to Activated, and 14,160 Activated Shares were retained in escrow pending
the resolution of a claim made by the Company.
On August 18, 1998, the Company issued 21,428 shares of common stock of the
Company in the name of Marc Graubart in a non-public offering exempt from
registration pursuant to Section 4(2) and Rule 506 of Regulation D of the Act
(the "Graubart Shares"). The Graubart Shares were issued in escrow as payment
for Mr. Graubart's assistance in structuring and facilitating the completion of
the Company's acquisition of the equity ownership interests in Masatepe. The
Graubart Shares will be released from escrow, if at all, in the event that the
FCC approves certain regulatory filings made by Masatepe.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Item not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item not applicable.
ITEM 5. OTHER INFORMATION
Extension of Expiration Date of Warrants
On March 7, 1998, the Company issued warrants to purchase 938,546 shares of
common stock of the Company (the "Warrants") to certain individuals and
entities. The expiration date for the Warrants was August 30, 1998. On August
25, 1998, the Company extended the expiration date of the Warrants to the date
that is thirty days following the effective date of a registration statement
registering the resale of shares issuable upon the exercise of the Warrants.
Earn Out of Preferred Stock
On August 31, 1998, the Board of Directors of the Company determined that the
performance criteria set forth in the Escrow Agreement (the "Sky King
Connecticut Escrow Agreement"), dated as of March 6, 1998, entered into by and
among VDC, the Company and Sky King Communications, Inc. had been satisfied such
that the 3,900,000 shares of Series B Stock in escrow had been earned out. The
Board of Directors had previously determined in May, 1998 that 600,000 shares of
Series B Stock had been earned out based on the performance criteria set forth
in the Sky King Connecticut Escrow Agreement. The 4,500,000 shares Series B
Stock in escrow were part of 10,000,000 shares of preferred stock of the Company
issued to former Sky King shareholders when Sky King was acquired by VDC through
the Company.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
----------- ----------- ----------------
<S> <C> <C>
2.1 Amended and Restated Agreement and Plan (1)
of Merger, dated as of December 10, 1997,
by and among VDC Corporation Ltd., VDC
Communications, Inc. (formerly known as
VDC (Delaware), Inc.) and Sky King
Communications, Inc.
2.2 Amendment to Amended and Restated Agreement (1)
and Plan of Merger, dated as of March 6,
1998, by and among VDC Corporation Ltd.,
VDC Communications, Inc.(formerly known as
VDC (Delaware), Inc.) and Sky King
Communications, Inc.
2.3 Agreement and Plan of Merger, made (2)
as of October 5, 1998, by and between
VDC Corporation Ltd. and VDC
Communications, Inc. (f/k/a Sky King
Communications, Inc.)
3.1 Articles of Incorporation, as amended (2)
3.2 Amended and Restated Bylaws (2)
27 Financial Data Schedule (3)
</TABLE>
(1) Filed as an Exhibit to the Company's Current Report on Form 8-K, dated
March 6, 1998, and incorporated by reference herein.
(2) Filed as an Exhibit to the Company's registration statement on Form
S-4, filed with the SEC on September 9, 1998, and incorporated by
reference herein.
(3) Filed herewith.
(b) Reports on Form 8-K
Report on Form 8-K dated June 22, 1998 reporting acquisition of assets
of PortaCom Wireless, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
VDC COMMUNICATIONS INC.
By: /s/ Frederick A. Moran Dated: November 16, 1998
----------------------
Chairman, Chief Executive Officer,
Chief Financial Officer and Director
17
<PAGE>
EXHIBIT INDEX
Exhibit Page Number in
Number Rule 0-3(b)
(Referenced to Sequential
Item 601 of Numbering System
Reg. S-K) Where Exhibit Can
Be Found
27 Financial Data Schedule
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains Summary Financial information extracted from the
Financial Statements for the Three Months Ended September 30, 1998 and is
qualified in its entirety by reference to such statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 512
<SECURITIES> 151
<RECEIVABLES> 3793
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4856
<PP&E> 3236
<DEPRECIATION> 18
<TOTAL-ASSETS> 47371
<CURRENT-LIABILITIES> 1708
<BONDS> 192
0
1
<COMMON> 2
<OTHER-SE> 45661
<TOTAL-LIABILITY-AND-EQUITY> 47371
<SALES> 0
<TOTAL-REVENUES> 201
<CGS> 0
<TOTAL-COSTS> 17512
<OTHER-EXPENSES> 311
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (17622)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17622)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17622)
<EPS-PRIMARY> (1.01)
<EPS-DILUTED> (1.01)
</TABLE>
