REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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VDC COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 4812 06-1524454
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
75 Holly Hill Lane
Greenwich, Connecticut 06830
(203) 869-5100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
--------------------------
Frederick A. Moran
Chief Executive Officer
VDC Communications, Inc.
75 Holly Hill Lane
Greenwich, Connecticut 06830
(203) 869-5100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
Louis D. Frost, Esq. Stephen M. Cohen, Esq.
VDC Communications, Inc. Buchanan Ingersoll Professional Corporation
75 Holly Hill Lane 1835 Market Street
Greenwich, Connecticut 06830 14th Floor
(203) 869-5100 Philadelphia, PA 19103
(215) 665-3873
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<PAGE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If the Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Title of
Each Class
Of Securities Amount Proposed Proposed
To Be To Be Maximum Offering Maximum Aggregate Amount of
Registered Registered Price Per Share(2) Offering Price Registration Fee
---------- ---------- ------------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Common Stock, $.0001 par value 8,722,618(1) $ 3.125 $ 27,258,181 $ 7,578
</TABLE>
(1) Pursuant to Rule 416 of the Securities Act of 1933, as amended, this
Registration Statement also includes additional shares of common stock
issuable upon stock splits, stock dividends or similar transactions.
(2) Estimated pursuant to Rule 457(c) for the purpose of calculating the
registration fee. Based on the average of the high and low prices per
share of Common Stock on June 1, 1999 as reported on the American Stock
Exchange.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
2
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration filed with the Securities and
Exchange Commission is effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED ________, 1999
PRELIMINARY
PROSPECTUS
VDC COMMUNICATIONS, INC.
8,722,618 SHARES OF COMMON STOCK
The Selling Security Holders identified on page 62 of this prospectus, may offer
and sell, from time to time, up to 8,722,618 Shares of Common Stock of VDC
Communications, Inc. The Selling Security Holders may sell all or a portion of
their respective Shares through public or private transactions, at prevailing
market prices, or at privately negotiated prices. We will not receive any part
of the proceeds from sales of these Shares.
Our Common Stock is listed on the American Stock Exchange under the symbol
"VDC". The last reported sale price of our Common Stock on June 3, 1999 on the
American Stock Exchange was $3.4375 per share.
--------------------
Investing in the Common Stock involves a high degree of risk. See "Risk Factors"
beginning on page 7.
<TABLE>
<CAPTION>
Underwriting Proceeds to the
Price to Discounts Selling
Class of Security Public and Commissions Security Holders
----------------- ------ --------------- ----------------
<S> <C> <C> <C>
Shares of $ (1) $ (2)
Common Stock
</TABLE>
(1) Does not give effect to ordinary brokerage commissions or other costs of
sale that will be borne solely by the Selling Security Holders.
(2) Represents the anticipated sale by the Selling Security Holders at
$3.4375 per share, the closing price for one share of the Company's
Common Stock on the American Stock Exchange, Inc. on June 3, 1999. There
can be no assurances, however that the Selling Security Holders will be
able to sell their shares of Common Stock at this price, or that a
liquid market will exist for the Company's Common Stock. The Company
will realize no proceeds upon the sale of shares of Common Stock by the
Selling Security Holders.
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3
<PAGE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is June _______, 1999
4
<PAGE>
VDC COMMUNICATIONS, INC.
TABLE OF CONTENTS
PAGE NO.
ABOUT THIS PROSPECTUS 6
PROSPECTUS SUMMARY 7
ABOUT VDC COMMUNICATIONS, INC. 7
THE OFFERING 8
RISK FACTORS 9
USE OF PROCEEDS 14
MARKET PRICE FOR THE COMPANY'S COMMON EQUITY 14
CAPITALIZATION 15
SELECTED FINANCIAL DATA 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 27
BUSINESS 28
MANAGEMENT 36
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT 51
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 52
PRINCIPAL STOCKHOLDERS 56
DESCRIPTION OF SECURITIES 58
SELLING SECURITY HOLDERS 62
PLAN OF DISTRIBUTION 65
WHERE YOU CAN FIND MORE INFORMATION 65
LEGAL MATTERS 66
EXPERTS 66
FINANCIAL STATEMENTS 67
5
<PAGE>
ABOUT THIS PROSPECTUS
You should only rely on information contained in this prospectus. We have not
authorized anyone to provide you with information different from that contained
in this prospectus. The Selling Security Holders are offering to sell, and
seeking offers to buy, shares of Common Stock only in jurisdictions where offers
and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this or of any sale of common stock.
This preliminary prospectus is subject to completion prior to this offering.
Among other things, this preliminary prospectus describes our company as we
currently expect it to exist at the time of this offering.
6
<PAGE>
PROSPECTUS SUMMARY
The following information is intended to summarize the detailed information and
financial statements (including the notes thereto) appearing elsewhere in this
prospectus. This Section is not intended to be a complete description of all
aspects of our business or the Common Stock being offered by the Selling
Security Holders. Investors should carefully consider the information set forth
under the caption "RISK FACTORS" beginning at page 7 of this Prospectus.
ABOUT VDC COMMUNICATIONS, INC.
VDC Communications, Inc. (referred to herein as the "Company" or "We") owns
telecommunications equipment and leases telecommunications lines to provide
domestic and international long distance telecommunications services. In
addition, we connect to other telephone companies and resell their services to
destinations where we do not own equipment or lease lines. Our customers are
other long distance telephone companies that resell our services to their retail
customers or other telecommunications companies. In the future, we may offer our
services directly to retail customers in addition to our current wholesale
customers. The Company currently employs state-of-the-art digital switching and
transmission technology. This equipment, located in New York, Los Angeles,
Denver and Central America, comprises our facilities. Our facilities and
industry agreements allow us to provide voice and facsimile telecommunications
services from the U.S. to most countries in the world.
The Company's current business has only recently commenced as we began
developing our business strategies and marketing plans during March, 1998.
During the remainder of 1998 we established the infrastructure necessary to
provide voice and facsimile transmission services which we began marketing
during the fourth quarter of calendar 1998. Accordingly, we do not believe that
our current results of operations are indicative of future performance.
Our business strategy is to develop a telecommunications business that focuses
on niche segments of the market that are evolving by virtue of the deregulation
of the telecommunications industry and the corresponding growth of the
international long distance telecommunications markets. We intend to focus upon
the international telecommunications carrier business, due to its potential for
higher revenue and profit per minute of telephone call, and greater projected
growth rate, as compared to the more mature domestic long distance
telecommunications market. In particular, we are targeting certain of the less
saturated international markets with potential for substantial volumes of
traffic, relatively high revenue rates per minute of telephone use and prospects
for growth. We believe that the ongoing trend toward deregulation and
privatization can create these opportunities for growth in the future.
7
<PAGE>
The Company was formerly the subsidiary of VDC Corporation, Ltd., a Bermuda
public company ("VDC Bermuda") with its shares registered under the Securities
Exchange Act of 1934 (the "Exchange Act"). On November 6, 1998, VDC Bermuda
merged with and into the Company (the "Domestication Merger") for the principal
purpose of domesticating VDC Bermuda from a Bermuda company to a Delaware
corporation. This was done primarily to: (i) facilitate access to the U.S.
capital markets; (ii) enhance the trading profile of the Company's securities
within the investment banking and brokerage communities; and (iii) provide
access to the comprehensive set of corporate laws available to companies
incorporated in Delaware.
The Domestication Merger was completed in conjunction with a prior business
reorganization of VDC Bermuda. On March 6, 1998, the Company (then a wholly
owned and newly formed subsidiary of VDC Bermuda) acquired Sky King
Communications, Inc. ("Sky King Connecticut"), a development stage
telecommunications company. The Sky King Connecticut acquisition enabled the
Company to enter the telecommunications business and reflected the culmination
of an overall business reorganization in which VDC Bermuda curtailed its prior
lines of business.
Our executive offices are located at 75 Holly Hill Lane, Greenwich, Connecticut,
06830, and our telephone number is (203) 869-5100.
THE OFFERING
Common Stock outstanding 20,173,583 shares (1)
Common Stock offered by the Selling Security Holders: 8,722,618 shares
Common Stock to be outstanding after the Offering: 21,237,664 shares (2)
Proceeds: The Company will not
receive any of the
proceeds of the sale
of shares of Common
Stock by the Selling
Security Holders.
Trading Symbol: VDC
- -----------------------------
(1) The Company presently has 20,173,583 shares of Common Stock
outstanding. The number of shares outstanding does not include 948,500 shares of
Common Stock reserved for issuance pursuant to the exercise of outstanding stock
options; nor does it include outstanding warrants to purchase 1,064,081 shares
of Common Stock (the "Warrants").
(2) This gives effect to the possible issuance of 1,064,081 shares of
Common Stock upon exercise of the Warrants.
- -----------------------------
8
<PAGE>
Summary Consolidated Financial Data
<TABLE>
<CAPTION>
Period from
January 3, 1996
(inception) through Years ended Nine-months ended
June 30, 1996 June 30, 1997 June 30, 1998 March 31, 1998 March 31, 1999
------------- ------------- ------------- -------------- --------------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
revenues $ 4,850 $ 43,248 $ 99,957 $ 62,741 $ 1,425,952
direct costs of revenues (exclusive of depreciation) 1,091 22,020 28,460 26,546 2,159,210
--------------------------------------------------------------------------------
gross margin 3,759 21,228 71,497 36,195 (733,258)
selling, general and administrative 28,921 50,267 1,064,593 463,744 3,768,885
depreciation and amortization 1,540 3,390 102,836 4,953 704,166
non-cash compensation (2) - - 2,254,000 801,000 16,146,000
--------------------------------------------------------------------------------
operating (loss) (26,702) (32,429) (3,349,932) (1,233,502) (21,352,309)
(loss) on impairment-MCC (19,388,641)
(loss) on note restructuring - - - - (1,598,425)
other income (expense) - - 195,122 6,325 (84,000)
equity in (loss) of affiliate - - - - (664,717)
--------------------------------------------------------------------------------
net loss $ (26,702) $ (32,429) $ (3,154,810) $ (1,227,177) $ (43,088,092)
================================================================================
net loss per share (1) $ (0.01) $ (0.01) $ (0.72) $ (0.33) $ (2.45)
weighted average shares outstanding 3,699,838 3,699,838 4,390,423 3,713,342 17,604,937
--------------------------------------------------------------------------------
Balance Sheet data:
investment in MCC $ - $ - $ 37,790,877 $ - $ 4,340,000
--------------------------------------------------------------------------------
total assets $ 16,499 $ 15,000 $ 45,823,684 $ 8,938,885 $ 13,673,140
--------------------------------------------------------------------------------
stockholders' equity $ 16,249 $ 14,750 $ 45,667,499 $ 8,787,155 $ 8,188,535
--------------------------------------------------------------------------------
Other Operating data:
EBITDA - Adjusted (2) $ (25,162) $ (29,039) $ (993,096) $ (427,549) $ (4,502,143)
--------------------------------------------------------------------------------
</TABLE>
(1) Diluted earnings per share for this period is not calculated because
inclusion of common share equivalents would be antidilutive.
(2) EBITDA-Adjusted represents earnings (losses) before interest expense,
income taxes, depreciation, amortization, other income (expense) and
non-recurring charges including non-cash compensation. EBITDA does not
represent cash flows as defined by generally accepted accounting
principles. EBITDA is a financial measure commonly used in the Company's
industry and should not be considered in isolation or as a substitute for
net income (loss), cash flow from operating activities or other measure of
liquidity determined in accordance with generally accepted accounting
principles.
RISK FACTORS
An investment in the shares of Common Stock offered by this Prospectus involves
a high degree of risk. Prospective purchasers of the shares of Common Stock
offered hereby should carefully review the following risk factors as well as the
other information set forth in this Prospectus.
This Prospectus contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Pro forma information
contained within this Prospectus, to the extent it is predictive of the
financial condition and results of operations that would have occurred on the
basis of certain stated assumptions, may also be characterized as
forward-looking statements. Although forward-looking statements are based on
assumptions made, and information believed, by management to be reasonable, no
assurance can be given that such statements will prove to be correct. Such
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated, projected or expected. Some, but not all, of such risks
and uncertainties are described in the risk factors set forth below.
9
<PAGE>
WE ARE A COMPANY IN THE EARLY STAGES OF DEVELOPMENT. We have only
recently commenced our present operations, and therefore, have only a
limited operating history upon which you can evaluate our business. We
have strategically placed telecommunications equipment in cities that we
believe will enable us to efficiently transport telecommunications
services. Now we are building our customer base in order to achieve
greater revenues and market penetration. We will also add additional
telecommunications equipment in other areas of the world. We have not
yet determined with certainty where those areas will be.
WE ARE LOSING MONEY. We have not yet experienced a profitable quarter
and may not ever achieve profitability. By virtue of the early stage of
our development, we have yet to build sufficient volume of
telecommunications voice and facsimile traffic to reach profitability.
Our current expenses are greater than our revenues. This will probably
continue until we reach a greater level of maturity and it is possible
that our revenues may never exceed our expenses. If operating losses
continue for longer than the short-term, then our continued operation
will be in jeopardy. However, we believe that what we have developed
over the past year is valuable and has the potential to generate
revenues greater than expenses.
NUMEROUS CONTINGENCIES COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
Because we are in the early stages of development and because of the
nature of the industry in which we operate, there are numerous
contingencies over which we have little or no control, any one of which
could have a material adverse effect on us. The contingencies include,
but are not limited to, the addition or loss of major customers, whether
through competition, merger, consolidation or otherwise; the loss of
economically beneficial routing options for telecommunications traffic
termination; financial difficulties of major customers; pricing pressure
resulting from increased competition; and technical difficulties with or
failures of portions of our network that could impact our ability to
provide service to or bill our customers.
OUR ABILITY TO IMPLEMENT OUR PLAN SUCCESSFULLY IS DEPENDENT ON A FEW
KEY PEOPLE. We are particularly dependent upon Frederick A. Moran,
Chairman, Chief Executive Officer, Chief Financial Officer, Secretary
and Director of the Company. Mr. Moran is also a significant
shareholder of the Company. The Company has an employment agreement
with Mr. Moran. We believe the combination of his employment agreement
and equity interest keeps Mr. Moran highly motivated to remain with
the Company.
THE INTERNATIONAL TELECOMMUNICATIONS MARKET IS RISKY. The international
nature of our operations involves certain risks, such as changes in U.S.
and foreign government regulations and telecommunications standards,
dependence on foreign partners, tariffs, taxes and other trade barriers,
the potential for nationalization and economic downturns and political
instability in foreign countries. At the current time, we are
particularly dependent on Central and North America. In addition, our
business could be adversely affected by a reversal in the current trend
toward the deregulation of the telecommunications industry. We will be
increasingly subject to these risks to the extent that we proceed with
the planned expansion of international operations.
10
<PAGE>
GOVERNMENT INVOLVEMENT IN INDUSTRY COULD HAVE AN ADVERSE EFFECT. We are
subject to various U.S. and foreign laws, regulations, agency actions
and court decisions. Our U.S. international telecommunications service
offerings are subject to regulation by the Federal Communications
Commission (the "FCC"). The FCC requires international carriers to
obtain authorization prior to acquiring international facilities by
purchase or lease, or providing international service to the public.
Prior FCC approval is also required, in most cases, to transfer control
of a certificated carrier. We must file reports, notifications,
contracts, and other documents with the FCC and must pay regulatory and
other fees, which are subject to change. We are also subject to the FCC
policies and rules discussed below. The FCC could determine, by its own
actions or in response to a third party's filing, that certain of our
services, termination arrangements, agreements with foreign carriers, or
reports did not comply with FCC policies and rules. If this occurred,
the FCC could order us to discontinue such arrangements, fine us or
revoke our authorizations. Any of these actions could have a material
adverse effect on our business, operating results and financial
condition.
POTENTIAL FOR TECHNICAL FAILURE. Our services are dependent on our own
and other companies' ability to successfully integrate technologies
and equipment. In connecting with other companies' equipment we take
the risk of not being able to provide service due to their error. In
addition, there is the risk that our equipment may malfunction or that
we could make an error which negatively affects our customers'
service. We are also dependent on the protection of our hardware and
other equipment from damage from natural disasters such as fires,
floods, hurricanes and earthquakes, other catastrophic events such as
civil unrest, terrorism and war and other sources of power loss and
telecommunications failures. We have taken a number of steps to
prevent our service from being affected by natural disasters, fire and
the like. We have built redundant systems for power supply to our
equipment. Nevertheless, there can be no assurance that any such
systems will prevent the switches from becoming disabled in the event
of an earthquake, power outage or otherwise. The failure of our
network, or a significant decrease in telephone traffic resulting from
effects of a natural or man-made disaster, could have a material
adverse effect on our relationship with our customers and our
business, operating results and financial condition.
THE LONG DISTANCE AND INTERNATIONAL LONG DISTANCE TELEPHONE INDUSTRY IS
HIGHLY COMPETITIVE. We are a small company in an industry with many
companies that have more experience and greater resources than us.
International telecommunications providers compete mainly on the basis
of price, but also customer service, transmission quality, breadth of
service offerings and value-added services. Our operating history is
probably not long enough for you to make a judgment about our ability to
compete in this industry.
TECHNOLOGICAL ADVANCEMENT COULD RENDER OUR INFRASTRUCTURE OBSOLETE.
The international telecommunications industry is highly competitive and
subject to the introduction of new services facilitated by advances in
technology. We expect that the future will bring technological change.
It is possible that these changes could result in more advanced
telecommunications equipment that could render our current equipment
obsolete. If this were to happen, we would most likely have to invest
significant capital into this new technology.
11
<PAGE>
WE HAVE LIMITED CAPITAL. Being a small company in a capital intensive
industry, our position of limited capital is a significant risk to our
future viability. We may seek additional financing. We may sell
additional shares of our stock in order to provide capital that may be
needed for our operations. There is no guarantee that we will be able to
do this.
RECENT IMPAIRMENT OF SIGNIFICANT ASSET. We own a minority interest in a
private company, Metromedia China Corporation ("MCC") that constitutes
one of the principal assets of the Company. Since this company is
private and in development, it is difficult to place a value on its
worth. We currently value our ownership interest based on extrapolating
the carrying value placed on MCC by its majority shareholder, Metromedia
International Group. As of March 31, 1999, that equaled $4.34 million.
Our total assets were $13.7 million. The value of our interest in MCC
may change in the future. The value of MCC may be unfavorably influenced
by negative operating results, the Chinese telecommunications market
and/or other factors. Furthermore, changes in governmental policy
towards foreign investment in telecommunications in China could also
adversely effect the value of our investment. We have decreased the
value placed on this asset, in large part, due to the uncertainty of the
future of foreign participation in the Chinese telecommunications
market. Even so, there is still the possibility that this asset will be
worth less in the future than we believe is a fair value currently.
WE HAVE A SIGNIFICANT INVESTMENT IN A PRIVATE COMPANY THAT WE DO NOT
CONTROL. Through Masatepe Communications, U.S.A., L.L.C. ("Masatepe"),
we have a non-controlling investment in Masatepe Comunicaciones, S.A., a
private Nicaraguan telecommunications company ("Masacom"). We have
loaned funds and equipment to Masacom. This equipment is located in
Nicaragua. The recoverability of our loans and equipment is not assured.
OUR STOCK IS HIGHLY VOLATILE. Our stock price fluctuates significantly.
We believe that this will most likely continue. Historically, the market
prices for securities of emerging companies in the telecommunications
industry have been highly volatile. Future announcements concerning us
or our competitors, including results of operations, technological
innovations, government regulations, proprietary rights or significant
litigation, may have a significant impact on the market price of our
stock.
ADDITIONAL SHARES WILL BE AVAILABLE FOR SALE IN THE PUBLIC MARKET. This
Prospectus will permit the resale of up to 8,722,618 shares of Company
Common Stock into the public trading market. This will have the effect
of significantly increasing the number of shares eligible for public
trading. Sales of substantial amounts of the stock in the public market
could have an adverse effect on the price of the stock and may make it
more difficult for us to sell stock in the future. Although it is
impossible to predict market influences and prospective values for
securities, it is possible that the substantial increase in the number
of shares available for sale, in and of itself, could have a depressive
effect on the price of our stock.
12
<PAGE>
WE HAVE NOT PAID ANY DIVIDENDS TO OUR STOCKHOLDERS AND DO NOT EXPECT TO
ANYTIME IN THE NEAR FUTURE. Instead, we plan to retain future earnings,
if any, for investment back into the Company.
THE YEAR 2000 PROBLEM COULD HAVE A MATERIALLY ADVERSE EFFECT ON US. We
are currently responding to year 2000 issues. Year 2000 issues are the
result of computer programs being written using two digits rather than
four to define the applicable year associated with the program or an
associated computation. Any such two-digit computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. A significant portion of the devices that we
use to provide our basic services use date-sensitive processing which
affect functions such as service activation, service assurance and
billing processes.
We are currently evaluating the year 2000 readiness of our computer
systems, software applications and telecommunications equipment. We are
sending year 2000 compliance inquiries to certain third parties (i.e.
vendors, customers, outside contractors) with whom we have 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 effect on their equipment and operations and what remedial
actions will be taken with regard to these problems.
Since we are a new company, our key systems have just recently been
implemented. Most of the vendors of such systems have represented to us
that the systems are compliant with the year 2000 issues without any
modification. We will, however, continue to require confirmation of year
2000 compliance in our 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 our business, financial condition and results
from operations.
Further, if the software and equipment of those on whose services we
depend are not year 2000 functional, it could have a material adverse
effect on our operations. While most major domestic telecommunications
companies have announced that they expect all of their network and
support systems to be year 2000 functional by the middle of 1999, other
domestic and international carriers may not be year 2000 functional. We
intend to continue to monitor the performance of our accounting,
information and other systems and software applications to identify and
resolve any year 2000 issues. Currently, through our discovery process,
we have identified an estimated $84,000 of expenditures associated with
updating systems to be year 2000 compliant. However, we expect we will
find additional expenses pending the finalization of our year 2000
investigation. Carriers in other countries with whom we may do business
may not be year 2000 compliant, possibly having an adverse impact upon
our ability to transmit or terminate telecom traffic.
We believe that the most reasonably likely worst case scenario resulting
from the century change could be the inability to efficiently send voice
and facsimile calls at current rates to desired locations. We do not
know how long this might last. This would have a material adverse effect
on our results from operations.
13
<PAGE>
ANTI-TAKEOVER PROVISIONS MAY DETER CHANGE IN CONTROL TRANSACTIONS.
Certain provisions of our Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), and Bylaws, as amended (the "Bylaws"),
and the General Corporation Law of the State of Delaware (the "GCL")
could deter a change in our management or render more difficult an
attempt to obtain control of us. For example, we are subject to the
provisions of the GCL that prohibit a public Delaware corporation from
engaging in a broad range of business combinations with a person who,
together with affiliates and associates, owns 15% or more of the
corporation's outstanding voting shares (an "interested stockholder")
for three years after the person became an interested stockholder,
unless the business combination is approved in a prescribed manner. The
Certificate of Incorporation includes undesignated Preferred Stock,
which may enable the Board to discourage an attempt to obtain control of
us by means of a tender offer, proxy contest, merger or otherwise. In
addition, the Certificate of Incorporation provides for a classified
Board of Directors such that approximately only one-third of the members
of the Board will be elected at each annual meeting of stockholders.
Classified boards may have the effect of delaying, deferring or
discouraging changes in control of us. Further, certain other provisions
of the Certificate of Incorporation and Bylaws and of the GCL could
delay or make more difficult a merger, tender offer or proxy contest
involving us. Additionally, certain federal regulations require prior
approval of certain transfers of control of telecommunications
companies, which could also have the effect of delaying, deferring or
preventing a change in control. See "DESCRIPTION OF
SECURITIES--Anti-Takeover Effects of Provisions of the Certificate of
Incorporation, Bylaws and Delaware Law".
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Common Stock
offered by the Selling Security Holders.
MARKET PRICE FOR THE COMPANY'S COMMON EQUITY
The Company's Common Stock has traded on the American Stock Exchange, Inc.
("AMEX") since July 7, 1998. Commencing in 1993 until November 26, 1997, the
Company's Common Stock traded on The NASDAQ stock market under the trading
symbol "VDCLF". On November 26, 1997, NASDAQ imposed a trading halt on the
Company's Common Stock, which was subsequently delisted from trading on NASDAQ
on March 2, 1998. From March 2, 1998 to July 7, 1998, the Company's Common Stock
was traded on the OTC Bulletin Board under the trading symbol "VDCLF."
The following table sets forth certain information with respect to the high and
low bid or closing prices of the Company's Common Stock for the periods
indicated below:
<TABLE>
<CAPTION>
Fiscal 1999 High Low
<S> <C> <C>
First Quarter $7.88 $3.88
Second Quarter $4.75 $3.25
Third Quarter $6.13 $3.63
Fiscal 1998
First Quarter $5.38 $3.88
Second Quarter $6.50 $4.50
Third Quarter $6.50 $3.75
Fourth Quarter $8.63 $5.88
Fiscal 1997
First Quarter $9.25 $7.37
Second Quarter $7.87 $5.00
Third Quarter $6.50 $5.00
Fourth Quarter $5.25 $3.00
</TABLE>
On June 3, 1999, the last reported sale price of the Common Stock on AMEX was
$3.4375 per share.
14
<PAGE>
The high and low bid prices for the Company's Common Stock are rounded to the
nearest 1/8th. Such prices are inter-dealer prices without retail mark-ups or
commissions and may not represent actual transactions.
Record Holders
As of June 3, 1999, the approximate number of holders of record of the Company's
Common Stock was 657. The Company believes the number of beneficial owners of
the Common Stock exceeds 1,500.
Dividends
The Company has not paid any cash dividends, to date, and has no intention of
paying any cash dividends on its Common Stock in the foreseeable future. The
declaration and payment of dividends is subject to the discretion of the Board
of Directors and to certain limitations under the General Corporation Law of the
State of Delaware. The timing, amount and form of dividends, if any, will
depend, among other things, on the Company's results of operations, financial
condition, cash requirements and other factors deemed relevant by the Board of
Directors.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March 31,
1999. This table should be read in conjunction with the Company's financial
statements and related notes appearing elsewhere in the prospectus.
<TABLE>
<CAPTION>
<S> <C>
capitalized lease obligations-long term portion $ 913,503
----------------
Shareholders' equity:
preferred stock, $.0001 par value; 10,000,000 shares authorized,
and no shares issued and outstanding -
common stock. $.0001 par value; 50,000,000 shares authorized,
16,938,051 shares issued and outstanding 1,881
additional paid in capital 64,290,814
accumulated deficit (55,285,127)
stock subscription receivable (344,700)
accumulated comprehensive loss (310,158)
----------------
8,352,710
treasury stock - 1,875,000 shares at cost (164,175)
----------------
total shareholders' equity 8,188,535
----------------
Total $ 9,102,038
================
</TABLE>
15
<PAGE>
SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for each of the
period(s) ended June 30, 1998, 1997 and 1996 have been derived from the audited
consolidated financial statements of the Company. The financial data presented
above reflects the relevant Statement of Operations data and Balance Sheet data
of Sky King Connecticut, which became publicly held by virtue of its acquisition
by VDC Bermuda on March 6, 1998. Since, as a result of the acquisition, the
former stockholders of Sky King Connecticut acquired a controlling interest in
VDC Bermuda , the acquisition has been accounted for as a "reverse acquisition".
Accordingly, for financial statement presentation purposes, Sky King Connecticut
is viewed as the continuing entity and the related business combination is
viewed as a recapitalization of Sky King Connecticut, rather than an acquisition
by VDC Bermuda. The selected financial data for the nine-months ended March 31,
1999 and 1998 have been derived from unaudited financial statements which, in
the opinion of management, include all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of financial position
and results of operations for the nine-months ended March 31, 1999 and 1998. The
financial data presented for the nine-months ended March 31, 1999 reflects the
Domestication Merger which was accounted for as a capital reorganization. The
following data should be read in conjunction with the Consolidated Financial
Statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included herein.
<TABLE>
<CAPTION>
Period from
January 3, 1996
(inception) through Years ended Nine-months ended
June 30, 1996 June 30, 1997 June 30, 1998 March 31, 1998 March 31, 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
revenues $ 4,850 $ 43,248 $ 99,957 $ 62,741 $ 1,425,952
direct costs of revenues (exclusive of depreciation) 1,091 22,020 28,460 26,546 2,159,210
--------------------------------------------------------------------------------
gross margin 3,759 21,228 71,497 36,195 (733,258)
selling, general and administrative 28,921 50,267 1,064,593 463,744 3,768,885
depreciation and amortization 1,540 3,390 102,836 4,953 704,166
non-cash compensation - - 2,254,000 801,000 16,146,000
--------------------------------------------------------------------------------
operating (loss) (26,702) (32,429) (3,349,932) (1,233,502) (21,352,309)
(loss) on impairment-MCC (19,388,641)
(loss) on note restructuring - - - - (1,598,425)
other income (expense) - - 195,122 6,325 (84,000)
equity in (loss) of affiliate - - - - (664,717)
--------------------------------------------------------------------------------
net loss $ (26,702) $ (32,429) $ (3,154,810) $ (1,227,177) $ (43,088,092)
================================================================================
net loss per share $ (0.01) $ (0.01) $ (0.72) $ (0.33) $ (2.45)
weighted average shares outstanding 3,699,838 3,699,838 4,390,423 3,713,342 17,604,937
--------------------------------------------------------------------------------
Balance Sheet data:
investment in MCC $ - $ - $ 37,790,877 $ - $ 4,340,000
--------------------------------------------------------------------------------
total assets $ 16,499 $ 15,000 $ 45,823,684 $ 8,938,885 $ 13,673,140
--------------------------------------------------------------------------------
long-term liabilities, net of current portion $ - $ - $ - $ - $ 913,503
--------------------------------------------------------------------------------
stockholders' equity $ 16,249 $ 14,750 $ 45,667,499 $ 8,787,155 $ 8,188,535
--------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
(1) The loss from operations of $3,349,932 incurred during the year
ended June 30, 1998 is primarily attributable to non-cash compensation
of $2,254,000 (See Note 9 to the consolidated financial statements for
the year ended June 30, 1998) and selling, general and administrative
expenses.
(2) The loss from operations of $21,352,309 incurred during the
nine-months March 31, 1999 is primarily attributable to non-cash
compensation of $16,146,000 (See Note 5 to the consolidated financial
statements for the nine-months ended March 31, 1999) and selling,
general and administrative expenses.
(3) Diluted earnings per share for this period is not calculated because
inclusion of common share equivalents would be antidilutive.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
VDC Communications, Inc. (referred to herein as the "Company" or "We") owns
telecommunications equipment and leases telecommunications lines to provide
domestic and international long distance telecommunications services. In
addition, we connect to other telephone companies and resell their services to
destinations where we do not own equipment or lease lines. Our customers are
other long distance telephone companies that resell our services to their retail
customers or other telecommunications companies. In the future, we expect to
offer our services directly to retail customers in addition to our current
wholesale customers. The Company currently employs state-of-the-art digital
switching and transmission technology. This equipment, located in New York, Los
Angeles, Denver and Central America, comprises our facilities. Our facilities
and industry agreements allow us to provide voice and facsimile
telecommunications services to most countries in the world.
We believe the telecommunications industry is attractive given its current size
and future growth potential. Furthermore, we believe the international
telecommunications market provides greater opportunity than the domestic market,
due to the relatively limited capacity in certain markets and potentially
greater gross margin per minute of traffic. Our objective is to become an
international telecommunications company with strategic assets and transmission
capability in many attractive markets worldwide. Management believes that in
order to achieve this, we must provide our customers with long distance and
international voice and facsimile transmission at competitive prices. We strive
to provide competitive rates, while maintaining carrier grade toll quality to
destinations worldwide. We believe that our current facilities are sufficient to
handle significantly more traffic than we are currently experiencing. In order
to make better use of this capacity, we need to build a reputation for high
quality transmission within our industry and provide competitive pricing.
Current results reflect the fact that we have been a company in transition. We
began the development of our long-distance telecommunications business on March
6, 1998 and have since developed our infrastructure and industry relations. We
began marketing our services in December 1998 and have had modest success
generating traffic over our infrastructure during early 1999. We do not believe
that our most recent results are indicative of future performance.
Revenue is earned from three sources. The main source is revenue from our
domestic and international telecommunications long distance services which is
earned based on the number of minutes billable to our customers, other telephone
companies. These minutes are billed on a weekly, semi-monthly, or monthly basis.
Bills are generally paid within thirty days. Our second source of revenues is
derived from the rental of telecommunications equipment at our
telecommunications facilities and telecommunications circuits to other telephone
companies. This revenue is generated and billed on a month-to-month basis.
Additionally, we derive minimal revenues from the management of tower sites that
provide transmission and receiver locations for wireless communications
companies. This revenue is also generated and billed on a month-to-month basis.
Revenue derived through the per-minute transmission of voice and facsimile is
normally in accordance with contracts with other telecommunications companies.
These contracts are often for a year or more, but can be terminated or changed
with a few days notice.
17
<PAGE>
Direct costs of revenues include domestic long distance charges for transmission
services, terminating overseas-originated traffic in the United States and
internationally and terminating domestic originated, international traffic
outside the United States. We use other telecommunications companies services in
the same manner that they use ours. Therefore, our costs include significant
payments to other telecommunications companies, including variable per minute
costs for them to provide voice and facsimile services to us, which we resell to
our customers. In addition, we pay fixed monthly expenses for capacity on a
fiber optic backbone across the United States and a satellite connection to
Central America. These fixed costs, including some additional circuit costs, are
approximately $130,000 per month. Our direct costs of revenue also include the
allocable personnel and overhead associated with operations.
Our costs also include selling, general, and administrative costs ("SG&A"). SG&A
consists primarily of personnel costs, professional fees, travel and other
business development related costs. Total personnel costs are currently about
$200,000 per month. We incur costs on a regular basis associated with
international market research and due diligence regarding potential projects
outside of the U.S. We believe that our recurring SG&A costs will begin to level
off as we reach a mature operating level. It is, however, possible that as new
opportunities arise, SG&A could increase significantly. We believe that over
time, we may build our volume of minutes billed so that our revenues surpass our
costs. We believe that the infrastructure and personnel necessary to achieve
this are currently in place.
We also incur non-cash expenses associated with the depreciation of long
distance telecommunications equipment and other fixed assets and the
amortization of goodwill from the acquisition of Masatepe. We depreciate long
distance telecommunications and other fixed assets over a period of
three-to-five years and are amortizing goodwill over two years.
During the quarter ended March 31, 1999, we formed a new subsidiary,
WorldConnect Telecom.com, Inc. ("WorldConnectTelecom.com").
WorldConnectTelecom.com is a wholly-owned subsidiary of VDC Telecommunications
and holds an FCC 214 License. WorldConnectTelecom.com is a Delaware corporation
which plans to provide retail long distance telecommunications services via the
Internet and other outlets. Prior to the creation of WorldConnectTelecom.com, we
did not offer voice and facsimile services to retail customers.
WorldConnectTelecom.com generated minimal revenues during the quarter ended
March 31, 1999.
Background
We are the successor to our former parent, VDC Bermuda, by virtue of the
Domestication Merger that occurred on November 6, 1998. The effect of the
Domestication Merger was that members/stockholders of VDC Bermuda became
stockholders of the Company. The primary reason for the Domestication Merger was
to reorganize VDC Bermuda as a publicly traded United States corporation
domesticated in the State of Delaware. In connection with the Domestication
Merger, 11,810,862 issued and outstanding shares of common stock of VDC Bermuda
, $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. The Domestication Merger has been
accounted for as a reorganization which has been given retroactive effect in the
financial statements for all periods presented.
18
<PAGE>
The Domestication Merger reflects the completion of a series of transactions
that commenced on March 6, 1998, when the Company (then a wholly-owned
subsidiary of VDC Bermuda ) acquired Sky King Communications, Inc. ("Sky King
Connecticut") by merger. This merger transaction was accounted for as a reverse
acquisition whereby Sky King Connecticut was treated as the acquirer for
accounting purposes. Accordingly, the historical financial statements presented
are those of Sky King Connecticut before the merger on March 6, 1998 and reflect
the consolidated results of Sky King Connecticut and VDC Bermuda, and other
wholly-owned subsidiaries after the Domestication Merger.
The Sky King Connecticut acquisition (the "Sky King Connecticut Acquisition")
enabled VDC Bermuda to enter into the telecommunications business and reflected
the culmination of an overall business reorganization in which VDC Bermuda
curtailed its prior lines of business. From its inception in 1980 through 1992,
the principal business of VDC Bermuda had involved the acquisition and
exploration of North American mineral resource properties. In recognition,
however, of the decreasing mineral prices and increasing drilling and
exploration costs, during the early 1990's, it elected to phase out of the
mining business, and, by 1994, effectively suspended any further efforts in
connection with its former mining business.
Following a brief period in which it owned farm and ranch properties, the
principal business of VDC Bermuda through 1996 consisted of the acquisition and
development of commercial properties in and around the Isle of Man, British
Isles, where the executive offices of VDC Bermuda were located at that time. In
view, however, of unanticipated development costs and delays in zoning
approvals, among others, management thereafter concluded that VDC Bermuda would
be unable to complete the development of these properties in the manner
originally intended. With returns on investment likely to be below management's
expectations, during 1995 and 1996, VDC Bermuda commenced the sale of its real
estate holdings, while attempting to devise plans for the redeployment of its
capital resources.
Finally, during Fiscal 1997, VDC Bermuda made equity investments in an aggregate
amount of approximately $5 million in two early stage ventures. When expected
yields from these investments failed to materialize, management concluded that
it was in the best interest of the Company to: (i) suspend its venture capital
operations; (ii) dispose of its investment assets; and (iii) select new
management who would be in a better position to identify business opportunities
that would more fully benefit from the Company's attributes as a public
corporation.
During the remainder of Fiscal 1997, management reviewed several possibilities
and ultimately identified Sky King Connecticut for acquisition in recognition of
a number of factors, including its belief in the growth opportunities available
within the national and international telecommunications industries, and the
significant collective experiences of the Sky King Connecticut's management
within the telecommunications industry.
19
<PAGE>
Results of Operations
For the Nine Months Ended March 31, 1999 Compared to the Nine Months Ended March
31, 1998
Revenues: Total revenues in the nine months ended March 31, 1999 increased to
$1.4 million from approximately $63,000 for the corresponding prior year period.
This is the initial result of the implementation of our telecommunications
services during the period. Revenues were generated during the period primarily
by the transmission of minutes domestically and internationally, and, to a
lesser extent, the rental of telecommunications switch space and tower
management. Since our current operations have only recently commenced, we do not
believe that our current revenue rate is indicative of future performance.
Revenue for the corresponding prior year period was attributable to tower
management, and, accordingly, provides no meaningful comparative information.
Gross Margin: Negative gross margins in the nine months ending March 31, 1999
were the result of a combination of per minute fees and leased line fees
associated with the traffic carried in the period and salaries and other
operating expenses incurred in advance of the realization of more significant
revenues. Positive gross margins could result if volume increases sufficiently
to cover fixed direct costs of revenue, such as circuit and personnel costs and
variable direct costs of revenue. Gross margins for the corresponding prior year
period reflected the excess of site rental revenues over site leasing costs.
Selling, general & administrative: SG&A expenses increased to $3.8 million from
approximately $464,000 for the corresponding prior year period. This increase
includes salaries and corporate development costs necessary for the development
and operation of new telecommunications services, including our
telecommunications infrastructure; and professional fees, including consulting,
legal and accounting expenses associated with the restructuring and
establishment of our Company's business. Additionally, we absorbed one-time
write-offs and non-cash severance expenses totaling approximately $1,004,000.
Non-cash Compensation Expense: Non-cash compensation expense was $16,146,000 for
the nine-months ended March 31, 1999, compared to $801,000 for the corresponding
prior year period. During the nine months ended March 31, 1999, 3.9 million
shares of a former class of preferred 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 500,000 people. We satisfied the performance criteria by obtaining
an FCC 214 license authorizing us to provide international long distance
telephony service and completed the construction of an international
telecommunications gateway switch in New York City which has a surrounding
population of approximately 15 million people. Of the 3.9 million shares of
preferred stock released from escrow, 2.7 million shares were considered
compensatory for accounting purposes. During the nine-months ended March 31,
1998, 300,000 shares of preferred stock were released from escrow based upon the
achievement of performance criteria which included the procurement of $3.4
million in equity financing. Of the 300,000 shares released, 207,542 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 our financial statements is an accounting charge
which 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 Common
Stock on the date of release. At this time, we do not expect further material
non-cash charges to operations associated with Company stock in the future, as
all of the preferred shares have been released from escrow.
20
<PAGE>
Depreciation and Amortization: Depreciation and amortization increased to
approximately $704,000 from approximately $5,000 for the corresponding prior
year period. The increase was attributable to the amortization of goodwill
associated with the Masatepe acquisition and depreciation of property and
equipment. Depreciation expense should increase as we add assets to our current
telecommunications infrastructure. By August 2000, we will have fully amortized
the goodwill associated with the acquisition of Masatepe. Therefore, to some
extent, this decrease will offset the increase associated with future equipment
depreciation.
Other income (expense): Other income (expense) was approximately $(21.1) million
for the nine months ended March 31, 1999, compared with approximately $6,300 for
the corresponding prior year period. The increase was mostly due to a non-cash
charge attributable to the writedown of our ownership interest in MCC. We show
the $19.4 million charge as a separate caption "writedown of investment in MCC"
in the other income (expense) section of the statement of operations. The charge
will not be included in "operating loss" because it represents a minority
interest in a passive investment. In other words, we neither control nor exert
significant influence over MCC. See "LIQUIDITY AND CAPITAL RESOURCES." In
addition to the aforementioned write down of our investment in MCC, we
restructured certain notes receivable to maximize their recovery and expedite
payment and wrote off all previously accrued interest, which resulted in a
$1,598,425 charge to operations.
Net loss: The Company's net loss for the nine months ended March 31, 1999 was
approximately $43.1 million. The net loss was mainly the result of non-cash
charges and balance sheet restructuring. Non-cash compensation and the write
down of our investment in MCC accounted for approximately $35.5 million of the
loss. Neither affected our liquidity and we do not foresee any additional
expenses relating to these two items. Excluding non-cash write-downs and
non-cash severance expenses, we experienced a net loss, on an operating cash
basis, of approximately $4.9 million. The Company's net loss for the
corresponding prior year period of approximately $1.2 million was primarily
attributable to the non-cash compensation expense associated with the release of
escrow shares on a compensatory basis. If greater revenues are achieved, our
operations could become profitable. We expect that future profitability is
likely to depend upon a combination of several factors:
1) the continued growth of the business through increased volume
and competitiveness;
2) the management of this growth and keeping expenses limited; and
3) the continued increase in the worldwide market for minutes of
voice and data transmission.
We believe that these factors should impact our ability to produce positive
operating results in the future. However, there are many other factors that will
also have an impact, some of which cannot be foreseen.
For the Year Ended June 30, 1998, Compared to the Year Ended June 30, 1997
21
<PAGE>
Revenues: Total revenues increased to approximately $100,000 in the year ended
June 30, 1998 ("Fiscal 1998") as compared to approximately $43,000 for year
ended June 30, 1997 ("Fiscal 1997"). The increase reflects increased sites under
management and consulting fees. We no longer act as a consultant to other
telecommunications companies.
Site Leasing Expense: Site leasing expense increased to approximately $28,000 in
Fiscal 1998 from approximately $22,000 in Fiscal 1997. The increase was
primarily due to an increase in radio tower and antenna space rentals.
Selling, general & administrative: Selling, general and administrative expenses
increased to approximately $1.2 million in Fiscal 1998 from approximately
$54,000 in the previous year. 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.
Non-cash Compensation Expense: Non-cash compensation expense was $2,254,000 in
Fiscal 1998 up from $0 in Fiscal 1997. During Fiscal 1998, 600,000 shares of a
former class of preferred stock were released from escrow based upon the
achievement of performance criteria which included the procurement of $6.9
million in equity financing. Of the 600,000 shares released, 415,084 were
considered compensatory. These compensatory shares were owned by management,
their family trusts, minor children, and an employee. The non-cash expense
reflected on our financial statements is an accounting charge which 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.
For the Year Ended June 30, 1997, Compared to the Year Ended June 30, 1996
Revenues: Total revenues increased to approximately $43,000 in Fiscal 1997 as
compared to approximately $5,000 for the fiscal period ended June 30, 1996
("Fiscal 1996"). The increase was primarily the result of a longer operating
period (inception-January 3, 1996) and higher volume of revenue associated with
increased sites under management.
Site Leasing Expense: Site leasing expense increased to approximately $22,000 in
Fiscal 1997 as compared to approximately $1,000 in Fiscal 1996. This increase
was primarily the result of increased volume associated with a longer operating
period and an increase in radio tower and antenna space rentals.
Selling, general & administrative: Selling, general and administrative expenses
increased to approximately $54,000 in Fiscal 1997 from approximately $30,000 in
Fiscal 1996. This increase was primarily due to a longer operating period.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
A significant amount of capital has been expended towards building corporate
infrastructure and operating and capital expenditures in connection with certain
acquisitions and the establishment of our programs. These expenditures have been
incurred in advance of the realization of revenue that is likely to occur as a
result of such acquisitions and programs. As a result, our liquidity and capital
resources have diminished significantly. Recently, however, liquidity and
capital resources improved due to a private placement of our Common Stock,
resulting in net proceeds of $3,446,508 in May 1999. Liquidity and capital
resources could further improve by a combination of any one or more of the
following factors: (i) an increase in revenues generating gross profit from
operations; (ii) collection on certain outstanding promissory notes; and (iii)
continued financing activities.
Net cash used in operating activities was approximately $2.6 million for the
nine months ended March 31, 1999. We collected approximately $1.0 million from
customers while paying approximately $3.6 million to vendors and employees. Net
cash used by operating activities of approximately $429,000 for the
corresponding prior year period was due to the net loss from operations offset
by a non-cash compensation charge.
Net cash used by investing activities was approximately $1.5 million for the
nine months ended March 31, 1999. Cash was used for capital expenditures on
facilities and switching equipment, the purchase of Masatepe as well as
investing in and/or lending funds to Masatepe's 49% Nicaraguan owned subsidiary,
Masatepe Comunicaciones, S.A.("Masacom"). Cash provided by investing activities
was attributable to the collection of notes receivable and the return of escrow
funds in connection with the investment in MCC. Net cash provided by investing
activities was approximately $463,000 for the corresponding prior year period.
This was primarily the result of proceeds from notes receivable and loan
advances offset by the purchase of marketable securities and loan advances.
Cash provided by financing activities was approximately $2.1 million for the
nine months ended March 31, 1999. This reflects proceeds from the issuance of
Common Stock, including the sale on December 23, 1998 of 245,159 shares of
Company Common Stock to Frederick A. Moran, Chairman and Chief Executive Officer
of the Company, and certain entities associated with and family members of Mr.
Moran, the collection of stock subscriptions receivable, and proceeds from
issuance of short-term debt less repayments of notes for the purchase of
telecommunications equipment. The funds were used to fund operations and capital
expenditures. Proceeds provided by financing activities of approximately $3.7
million for the corresponding prior year period were solely from the issuance of
Common Stock and were used to fund operations and capital expenses.
For the year ended June 30, 1998, net cash used in operating activities
increased to approximately $859,000, from approximately $29,000 and $25,000 in
the years ended June 30, 1997 and 1996, respectively. The increase in 1998 was
mostly attributable to the increased losses from operations.
Net cash used by investing activities totaled approximately $3.2 million in the
year ended June 30, 1998. Cash was used for the investment in MCC, purchase
and/or deposits for capital equipment purchases and purchases of investment
securities offset by proceeds from repayments of notes receivable. There were no
cash flows from investing activities in the years ended June 30, 1997 and 1996.
23
<PAGE>
Net cash provided by financing activities increased to approximately $6.3
million in the year ended June 30, 1998 from approximately $28,000 in the years
ended June 30, 1997 and 1996, respectively. Proceeds reflected the issuance of
Company Common Stock by way of private placements. The proceeds were used to
fund operations during Fiscal 1998, to purchase Masatepe, and to acquire MCC
shares and MCC warrants. In the years ended June 30, 1997 and 1996, proceeds
reflect capital contributions by the owners of Sky King Connecticut and were
used to fund operations.
At March 31, 1999, we had outstanding capital commitments of approximately $1.9
million for the purchase of facilities and switching equipment. These
commitments are reflected in our consolidated balance sheet at March 31, 1999.
As of March 31, 1999, we also had an obligation to repay, on or before July 26,
1999, a $500,000 principal loan advanced to the Company by our Chief Executive
Officer. This loan was repaid in its entirety on May 13, 1999.
For the near term, we anticipate that our monthly fixed costs of operations,
exclusive of rate per minute charges from other carriers, will consist of the
following:
Personnel costs $200,000
Circuit Costs $130,000
Other SG&A costs $63,000
Capital Leases payments $57,000
-------
Total $450,000
--------
This includes the operating personnel and other non-variable costs considered
direct costs of revenue. Notwithstanding our best estimate, we cannot be certain
that our actual costs over the next couple of months will not differ
significantly from these figures. We believe that there is certainly the
possibility that the actual costs will be higher than estimated. We will not
make a profit until our revenues exceed all our costs. Until we achieve this
goal, we will continue to experience a cash flow deficit and we will have to
find ways to fund that deficit.
We are currently funding operations through existing cash, notes and accounts
receivable collections and proceeds from additional financing activities. We do
not know how long it will take before we will be able to operate profitably and,
therefore, sustain our business without outside funding. We have recently
entered into investment banking agreements to explore financing alternatives. In
May 1999, we completed a private placement of Common Stock which resulted in net
proceeds of $3,446,508. Proceeds raised from these private placements will be
used to fund operations in the near term and pay off certain indebtedness.
Recent Acquisitions
We entered into a Purchase Agreement on July 31, 1998 to acquire Masatepe for
$589,169 in cash and shares of our 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"). In
November 1998, the entire purchase price for the Masatepe acquisition was
released from escrow, less 14,160 shares of the Company's Common Stock. The
14,160 shares were originally 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, and were
subsequently retired for cancellation.
24
<PAGE>
In June 1999, the Company also issued an aggregate of 54,319 shares of our
Common Stock to Activated and a former executive officer of Masatepe because the
market price of the Company's Common Stock was less than $7.00 for a period of
time following February 7, 1999, as determined by a formula set forth in the
Purchase Agreement.
We expect to continue to explore acquisition opportunities. Such acquisitions
may have a significant impact on our need for capital. In the event of a need
for capital in connection with an acquisition, we 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 favorable terms. We also consider
acquisitions using our Common Stock.
Investment in MCC
We own 2.0 million shares and warrants to purchase 4.0 million shares of MCC, a
private company. We have held this asset for approximately one year. We
originally valued the asset based on the value of our shares exchanged for the
investment. However, significant time has passed since that transaction. During
that time, the legality of the structure of MCC's joint ventures have come into
question by Chinese authorities.
MCC operates joint ventures in China under the direction of its majority owner,
Metromedia International Group ("MMG"). Currently, legal restrictions in China
prohibit foreign ownership and operations in the telecommunications sector.
MCC's investments in joint ventures have been made through a structure known as
Sino-Sino-Foreign ("SSF") joint venture. This is a widely used method for
foreign investment in the Chinese telecommunications industry. The SSF venturer,
in this case MCC, is a provider of telecommunications equipment, financing and
technical services to telecommunications operators and not a direct provider of
telephony service. The joint ventures invest in telecommunications system
construction and development networks being undertaken by the local partner,
China Unicom. The completed systems are operated by China Unicom. MCC receives
payments from China Unicom based on revenues and profits generated by the
systems in return for their providing financing, technical advice, consulting
and other services.
MMG has represented to us that it owns 33 million MCC shares, or 56% (33
million/59 million shares). As such, our 2 million shares represent a 3.4%
interest (2 million/59 million shares).
We also hold warrants to purchase 4.0 million shares of MCC at an exercise price
of $4 per share, which currently expire in September 1999. Our current financial
position does not allow us to exercise the warrants without the liquidity of a
public market for MCC stock. Therefore, in performing a review for current
recoverability of our investment, we have disregarded the warrants.
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<PAGE>
Historically, we have assessed the investment in MCC for asset impairment by
applying a valuation technique commonly used by financial and equity analysts.
This method involves applying a dollar value to each unit of population in the
market ("per-pop"). Market capitalization of publicly traded companies in the
industry divided by the population in the area served equals the per-pop
valuation. Although we still believe this is an appropriate manner to assess the
potential of the investment, it is not definitive enough for us to assess the
current market value of 2.0 million shares of MCC.
There has been uncertainty regarding possible significant changes in the
regulation of and policy concerning foreign participation in and financing of
the telecommunications industry in China, including the continued viability of
the SSF structure and associated service and consulting arrangements with China
Unicom. The Chinese government has stated that it does not intend to issue
future telecom licenses to foreign companies or joint ventures. No definitive
word has come forth regarding how, if at all, this affects MCC's existing
Chinese operations. More recently, China has been indicating a renewed openness
towards foreign companies, including telecommunications, in order to gain
admission to the World Trade Organization ("WTO"). Yet, no definitive action has
been taken by the Chinese government, the WTO or the US-China trade negotiators.
We have limited understanding of MCC's stand-alone financial information because
MCC is private. Our best source of information has been MMG's filings with the
SEC. MMG recently released their audited financials for the year ended December
31, 1998. MMG is currently carrying its approximate 56% interest in MCC at $71.6
million. This implies a valuation of $127.9 million for a 100% interest.
Based on the situation in China as it relates to the telecommunications industry
and the limited financial information available, we have adjusted the carrying
value of our investment in MCC to an amount relative to MMG's most recently
audited carrying amount. This results in a carrying amount of $4.34 million. A
charge of $19.4 million was, therefore, taken during the nine months ended March
31, 1999.
Although we hope the Chinese telecommunications market proves profitable, that
our warrants will be exercisable and that our investment shows significant
returns in the future, we believe the conservative approach, given the great
uncertainty surrounding the China telecommunications market and our inability to
value MCC based on hard data and/or facts, is to decrease our carrying value of
MCC. Our best source of information currently reflects a value of $127.9 million
for 100% of MCC. This is based on the capital invested less the operating
losses. Since it is unclear whether we will have the ability to exercise our
warrants, we have decreased their current value to $0. Currently, we hold 2.0
million shares of MCC. Given that the total value of MCC is $127.9 million and
we own approximately 3.4%, we derived our value to be $4.34 million.
Recent Accounting Standards
In June 1998, the AICPA issued statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities". We have not
yet analyzed the impact of this new standard. We will adopt this standard in
July of 2000.
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The Year 2000 Readiness Disclosure
A significant portion of the voice and data networking and network management
devices are date-sensitive processing which affect network administration and
operations functions such as service activation, service assurance and billing
processes.
We are currently evaluating the year 2000 readiness of our computer systems,
software applications and telecommunications equipment. We are sending year 2000
compliance inquiries to certain third parties (i.e. vendors, customers, outside
contractors) with whom we have 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 effect on their computers and what remedial actions will be taken
with regard to these problems.
Our key processing systems have recently been implemented. Most of the vendors
of such systems have represented to us that their systems are compliant with the
year 2000 issues without any modification. We will, however, continue to require
confirmation of year 2000 compliance in our future requests for proposals from
equipment and software vendors. The failure of our computer systems and software
applications to accommodate year 2000 issues, could have a material adverse
effect on our business, financial condition and result of operations.
Further, if the networks and systems of those on whose services we depend and
with whom our networks and systems must interface are not year 2000 functional,
it could have a material adverse effect on the operation of our networks and, as
a result, have a material adverse effect on the Company. Most major domestic
carriers have announced 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. We intend to continue to
monitor the performance of our accounting, information and processing systems
and software applications and those of our third-party constituents to identify
and resolve any year 2000 issues. Currently, through our discovery process, we
have identified an estimated $84,000 of expenditures associated with updating
our systems to be compliant with the year 2000. However, we expect to find
additional expenses pending the finalization of our year 2000 investigation.
Carriers in other countries with whom we may do business may not be year 2000
compliant, possibly having an adverse impact upon our ability to transmit or
terminate telecom traffic.
We believe that the most reasonably likely worst case scenario resulting from
the century change could be the inability to route telecommunications traffic at
current rates to desired locations for an indeterminable period of time, which
could have a material adverse effect on our results of operations and liquidity.
Impact of Inflation
The effects of inflation on our operations were not significant during the
periods represented.
Quantitative and Qualitative Disclosures About Market Risk
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The Company is currently not exposed to material future earnings or cash flow
exposures from changes in interest rates on long-term debt obligations since our
long-term debt obligations are at fixed rates. We may be exposed to interest
rate risk, as additional financing may be required due to the operating losses
and capital expenditures associated with establishing and expanding our
facilities. The interest rate that we will be able to obtain on additional
financing will depend on market conditions at that time, and may differ from the
rates we have secured on our current debt. We do not currently anticipate
entering into interest rate swap and/or similar instruments.
The Company's carrying value of cash and cash equivalents, accounts and notes
receivable, accounts payable, marketable securities-available for sale, and
notes payable is a reasonable approximation of their fair value.
BUSINESS
VDC Communications, Inc. (referred to herein as the "Company" or "We") owns
telecommunications equipment and leases telecommunications lines to provide
domestic and international long distance telecommunications services. In
addition, we connect to other telephone companies and resell their services to
destinations where we do not own equipment or lease lines. Our customers are
other long distance telephone companies that resell our services to their retail
customers or other telecommunications companies. In the future, we may offer our
services directly to retail customers in addition to our current wholesale
customers. The Company currently employs state-of-the-art digital switching and
transmission technology. This equipment, located in New York, Los Angeles,
Denver and Central America, comprises our facilities. Our facilities and
industry agreements allow us to provide voice and facsimile telecommunications
services to most countries in the world.
Through VDC Telecommunications, Inc., a subsidiary of the Company ("VDC
Telecommunications"), we operate our international network of owned and leased
telecommunications equipment. At the end of December 1998, VDC
Telecommunications began carrying telecommunications traffic domestically and to
certain countries in the world. VDC Telecommunications provides international
services through a United States Federal Communications Commission Overseas
Common Carrier Section 214 License ("FCC 214 License"). An FCC 214 License
authorizes an entity to provide domestic and international telecommunication
services. VDC Telecommunications has approximately ten contracted customers,
other telecommunications companies, for carriage of telecommunications traffic
or provision of related telecommunications services. In addition, VDC
Telecommunications plans to provide retail long distance services via the
Internet and other outlets through its subsidiary WorldConnectTelecom.com, Inc.
Through Masatepe, a subsidiary of the Company, we provide long distance voice
and facsimile services between Central America and the United States through an
operating agreement with Enitel, the Nicaraguan government controlled telephone
company. Masatepe holds an FCC 214 License. Masatepe's subsidiary, Masatepe
Comunicaciones, S.A., holds an Internet license in Nicaragua from TELCOR (El
Instituto Nicaraguense de Telecomunicaciones y Correos), the Nicaraguan
telecommunications regulatory authority, and a license to operate an earth
station. Masatepe has two customers currently. In late April 1999, Masatepe
completed an increase in the capacity of its Central American network.
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Through Voice & Data Communications (Hong Kong) Limited ("VDC Hong Kong"), a
subsidiary of the Company, we are developing long distance voice and facsimile
transmission capability in Asia. The Company has been licensed by the Office of
Telecommunications Authority in Hong Kong to provide international calling
services, value-added services and Internet services. In addition, VDC Hong Kong
has an FCC 214 License. VDC Hong Kong is currently in the developmental stage
and does not yet provide customers with telecommunications services. We had
previously announced that VDC Hong Kong had ordered three telecommunications
switches. Due to the current state of the long distance market in Hong Kong, VDC
has cancelled that order. We do not know if and when VDC Hong Kong will provide
services independently. It may develop operations, which would be integrated
into VDC Telecommunications international network.
Through Sky King Communications, Inc., a Delaware corporation and wholly-owned
subsidiary of the Company, we derive modest revenues from tower site management.
The towers provide sites for wireless communications companies to transmit their
signals to their customers and receive signals from their customers.
The Company has sought a telecommunications license and operating agreement in
Egypt because it believes this market offers significant opportunity. The
Company's efforts in Egypt have not resulted in any licenses or agreements to
date. Currently, we do not expect that our past efforts will result in the
future issuance of the necessary licenses or agreements to provide the desired
services in Egypt and we have significantly decreased our resources committed
towards this project.
Industry Background
We are a relatively small company in the large international telecommunications
market. This market is dominated by several large retail long distance and
international voice and data providers; such as AT&T, MCI Worldcom, Sprint,
British Telecom, Deutsch Telecom and others. We compete with all
telecommunications companies that sell domestic and international long distance
services to other telecommunications companies.
The international telecommunications market consists of all telephone calls and
other telecom services that originate in one country and are completed in
another. This market can be divided into two major segments: the United
States-originated international market, consisting of all international calls
which either originate or terminate in the United States, and the
overseas-originated international market, consisting of calls between countries
other than the United States. We provide service to customers who originate
calls in the U.S. and customers who originate calls outside the U.S. and who
terminate calls in the U.S. and outside the U.S.
The Company believes that the market for its services will continue to
experience strong growth for the foreseeable future as a result of the following
trends:
1) the opening of overseas telecommunications markets due to
deregulation and the privatization of government-owned monopoly
telecommunications companies;
2) the reduction of long distance rates, driven by competition
and technological advancements, which is making international
calling and other telecommunications services available to a much
larger customer base and resulting in increased number of
telephone calls;
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3) the dramatic increases in the availability of telephones and the
number and quality of access lines in service around the world;
4) the worldwide proliferation of new communications devices; such
as cellular telephones, facsimile machines and other forms of
data communications equipment;
5) the rapidly increasing globalization of commerce, trade and
travel; and
6) the rapidly increasing demand for bandwidth-intensive data
transmission services, including the Internet.
Many of the world's developing countries are committing significant resources to
building telecommunications infrastructures in order to increase the number and
quality of telephone lines and other telecom services in their countries. We
believe that increasing investment in telecommunications infrastructure will
stimulate increasing demand for international telecommunications services.
Certain countries have opened their telecommunications markets to competition in
order to increase the level of private investment and the rate of infrastructure
development. We expect that this trend will continue. Deregulation of
telecommunications services in the United States began in 1984 with the AT&T
divestiture. The Company believes that this trend creates numerous opportunities
for U.S.-based carriers to increase their access to developing
telecommunications markets and to increase their market share in both the
U.S.-originated market and the overseas-originated market.
Business Strategy
Our business strategy is to develop a telecommunications business that focuses
on niche segments of the market that are evolving by virtue of the deregulation
of the telecommunications industry and the corresponding growth of the
international long distance markets.
Key elements of our business strategy include the following:
1) Capitalize on Projected International Telecommunications
Industry Growth. We believe that the telecommunications industry,
and, in particular, the international long distance market
provides attractive opportunity. We seek to capitalize on the
international market opportunity, due to its potential for higher
revenue and profit per call minute, and greater projected growth
rate, as compared to the domestic long distance market. We seek
to target international markets with possibilities to generate
impressive volumes of traffic, relatively high rates per minute,
prospects for deregulation, privatization and growth and/or
limited competition. We believe that the ongoing trend toward
deregulation and privatization may create new opportunities for
us in international markets.
2) Leverage Increased Traffic Volume to Reduce Costs per Minute of
Traffic Carried. We are focused on trying to build our volume of
international long distance traffic. Higher traffic volumes
strengthen our negotiating position with vendors, customers and
potential foreign partners, which allows us to lower the cost of
our services.
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3) Secure Additional Operating Agreements or Owned Routes for
Additional Countries. We are actively seeking to enter into
additional operating agreements to expand the geographical scope
of our owned facilities and to attract new domestic and foreign
customers. An operating agreement and/or owned route is an
agreement with a foreign country or telecommunications carrier to
build telecommunications capability in that country and to
provide service to that country from the United States and
possibly other parts of the world. We currently have three
operating agreements. Two of the operating agreements are new and
the potential telecommunications capabilities underlying these
agreements have not yet been developed. We anticipate that the
addition of new operating agreements will increase the revenues
generated by our existing customer base by providing direct, or
owned, services for these customers to additional countries.
4) Expand and Enhance Existing Network Facilities. To support
additional operating agreements and the growth of traffic on our
owned or partially owned routes, we intend to continue to build
telecommunications infrastructure in desirable locations. In
general, we believe we can increase our gross profit margin and
provide greater assurance of the quality and reliability of
transmission by routing traffic over owned international
facilities. Currently, we utilize state-of-the-art equipment and
technologies that conform to relevant operating standards to
ensure high quality, cost-effective transmission service.
5) Growth Through Acquisitions. We are actively pursuing
opportunities to enhance our business through strategic and
synergistic acquisitions. These acquisitions may focus on
entering new territories, enlarging our presence in an existing
territory or adding capacity. In addition to expanding our
revenue base, we could realize operating efficiencies by
integrating acquired operations into the Company's billing,
routing and other systems. On August 7, 1998, we acquired
Masatepe, an international telecommunications company focused on
the Central American countries. On April 13, 1998, we completed
the acquisition of the business of VDC Telecommunications (then
known as "Blue Sky International").
6) Provide Competitive Priced, High Quality Services. We seek to
provide our customers with highly competitive rates, while
maintaining carrier grade toll quality services. Currently, we
provide excellent quality service at good prices. In the future,
we believe we can lower our prices by adding telecommunications
equipment in strategic locations and increasing our total number
of minutes of telecommunications traffic through our network.
Owning facilities, rather than reselling services, provides a
more efficient manner of transmission. This leads to a lower
cost, which we can pass along to our customers. To areas of the
world where we do not own equipment, we can achieve cost savings
by increasing our traffic and getting volume discounts from our
suppliers.
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Network
We provide international long distance services to over 200 foreign countries
and cities through a flexible, switched-based network consisting of resale
arrangements with other long distance providers, foreign termination
relationships, international gateway switches and leased transmission
facilities. The Company's network employs state-of-the-art digital switching and
transmission technologies and is supported by technical personnel.
Switches and Transmission Facilities
International long distance traffic to and from the United States is generally
transmitted through an international gateway switching facility across undersea
digital fiber optic cable or via satellite to the end termination point.
International gateway switches are digital computerized routing facilities that
receive calls, route calls through transmission lines to their destination and
record information about the source, destination and duration of calls. We
currently operate international gateway switches in New York and Los Angeles and
an earth station and switch in Central America. In addition, we own and operate
a switch in Denver. We consider any of our switches to be international gateway
switches, if we can route international calls across such switches. We have
installed multiple redundancies into our switching facilities to decrease the
risk of a network failure. For example, we employ both battery and generator
power back-up and have installed hardware that automatically shifts the system
to auxiliary power during a power outage, rather than rely on manual override.
Sales and Marketing
We market our services to other telecommunications companies through our
experienced direct sales force and marketing/account management team who, seek
to leverage their industry relationships. We reach our customers primarily
through domestic and international trade shows and through relationships gained
from years of experience in the telecommunications industry. As of June 3, 1999,
we had four direct sales and marketing employees. The salespeople's compensation
is weighted towards commissions. They also received stock options, which vest
over five years, to enhance their retention. We also use outside agents to sell
our services. We pay them a percentage of the revenue we receive from the
customers they bring us.
Billing
We have been developing a state-of-the-art billing system for wholesale
customers. The Company utilizes an application, which collects, processes, and
reports data for effective telecommunications billing management.
The application consists of three integrated databases:
1) Call Accounting. Call Accounting provides reports that detail
outgoing, incoming, and internal information regarding the
details of each call. The system captures the variety of raw data
and normalizes it into a Company layout for further processing
and reporting. We utilize and warehouse the Call Detail Record,
or CDR, information for billing, fraud detection, and various
other customer and internal requirements. Billing cycles are
variable to allow for weekly, bimonthly and monthly billing
cycles depending on the credit rating of the customer;
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2) Traffic Management. Traffic Management reports concentrate on
route usage and cost analysis. Reports include usage by route,
traffic histograms by route, and universal call distribution, all
by customer or provider; and
3) Directory Center. The Directory Center provides operators the
ability to search on a variety of customer or vendor demographics
to efficiently access and utilize all data captured within the
system.
The system provides management of a complicated communications environment
including equipment, circuits and multi-site network management using three
interrelated modules:
1) Network Information System. Keeps track of switches and circuits.
2) Equipment/Features Inventory. Provides complete inventory
tracking by numerous hardware and software identifiers.
3) Order Processing and Tracking System. Tracks trouble reports from
origination to resolution.
Company Subject to Intense Competition
The international telecommunications industry is highly competitive and subject
to rapid change, including the introduction of new services facilitated by
advances in technology. We are unable to predict which of many possible future
product and service offerings will be important to maintain our competitive
position or what expenditures will be required to develop and provide such
products and services. International telecommunications providers compete on the
basis of price, customer service, transmission quality, breadth of service
offerings and value-added services. The U.S.-based international
telecommunications services market is dominated by AT&T, MCI Worldcom and
Sprint. The wholesale long distance market in which we focus our operations is
also highly competitive. As our network develops further, we expect to encounter
increasing competition from these and other major domestic and international
communications companies, many of which may have significantly greater resources
and more extensive domestic and international communications networks than ours.
We expect the domestic and international long distance marketplace to continue
to be highly competitive. This competition has been and will continue to put
downward pressure on the price of telecommunications services, such as voice and
facsimile. Competition is expected to further increase as a result of the new
competitive opportunities created by the WTO Agreement. Under the WTO Agreement,
the United States and 68 other countries committed to open their
telecommunications markets to competition.
Government Regulation
The following summary does not purport to describe all present and proposed
federal, state and local regulation and legislation affecting the
telecommunications industry. Regulations are often the subject of judicial
proceedings, legislative hearings, and administrative proposals, which could
change, in varying degrees, the manner in which the telecommunications industry
operates. Neither the outcome of these proceedings, nor their impact upon the
telecommunications industry or the Company can be predicted at this time.
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Our gateway and long distance telecommunications business is heavily regulated.
The United States Federal Communications Commission ("FCC") exercises authority
over all interstate and international facilities-based and resale services
offered by us. We also may be subject to regulation in foreign countries in
connection with certain business activities.
There can be no assurance that future regulatory, judicial and legislative
changes will not have a material adverse effect on the Company, or that domestic
or international regulators or third parties will not raise material issues with
regard to our compliance or noncompliance with applicable regulations or that
regulatory activities will not have a materially adverse effect on the Company.
We are also subject to other FCC requirements, including the filing of periodic
reports and the payment of annual regulatory and other fees. In addition, FCC
rules limit the routing of international traffic via international
privately-owned lines and prohibit the accepting of "special concessions" from
certain foreign providers. The FCC continues to refine its international service
rules. FCC rules also require international companies notify the FCC sixty days
in advance of an acquisition of a 25% or greater controlling interest by a
foreign carrier in that U.S. carrier or an acquisition by the U.S. carrier of a
25% or greater controlling interest in a foreign carrier. After receiving this
notification, the FCC reviews the proposed transaction and, among other things,
can require a carrier to meet certain "dominant carrier" reporting and other
conditions if the FCC finds that the acquisition creates an affiliation with a
dominant foreign carrier.
Our cost of providing long distance services may also be affected by changes in
the access charge rates imposed by incumbent local exchange carriers ("LECs").
The FCC has significantly revised its access charge rules to permit incumbent
LECs greater pricing flexibility and relaxed regulation in certain
circumstances. The FCC also revised its universal service rules and we may be
required to contribute to the federal universal service fund.
We must comply with the requirements of common carriage under the Communications
Act of 1934, as amended (the "Communications Act"), including the offering of
service on a non-discriminatory basis at just and reasonable rates, and
obtaining FCC approval prior to any assignment of FCC authorizations or any
transfer of de jure or de facto control of the Company, with certain exceptions.
Under the Communications Act and the FCC's rules, all international
telecommunications carriers, including the Company, are required to obtain
authority under Section 214 of the Communications Act prior to initiating
international common carrier services, and must file and maintain tariffs
containing the rates, terms and conditions applicable to their services. The
Company, through its wholly-owned subsidiaries VDC Telecommunications, Masatepe,
VDC Hong Kong and WorldConnectTelecom.com, a wholly-owned subsidiary of VDC
Telecommunications, has received four Section 214 Licenses that authorize the
provision of international services on a facilities and resale basis. The FCC
recently adopted changes to its rules regarding Section 214 Authorizations,
which are intended to reduce certain regulatory requirements. Among other
things, the recent order: reduces the waiting period for granting new
streamlined applications from 35 days to 14 days; eliminates the requirement for
prior approval of pro forma assignments and transfers control of Section 214
authorizations; and simplifies the FCC's process of authorizing the use of
private lines to provide switched services (ISR) on particular routes. Domestic
interstate common carriers such as the Company are not required to obtain
Section 214 or other authorization from the FCC for the provision of domestic
interstate telecommunications services. Domestic interstate carriers currently
must, however, file and maintain tariffs with the FCC containing the specific
rates, terms and conditions applicable to their services. These tariffs are
effective upon one day's notice. We have filed a domestic tariff and an
international tariff with the FCC.
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We must also conduct our international business in compliance with the FCC's
international settlements policy (the "ISP"). The international settlements
policy establishes the permissible boundaries for U.S.-based carriers and their
foreign correspondents to settle the cost of terminating each other's traffic
over their respective networks. The precise terms of settlement are established
in a correspondent agreement, also referred to as an operating agreement. Among
other terms, the operating agreement establishes the types of service covered by
the agreement, the division of revenues between the carrier that bills for the
call and the carrier that terminates the call at the other end, the frequency of
settlements (i.e. monthly or quarterly), the currency in which payments will be
made, the formula for calculating traffic flows between countries, technical
standards, procedures for the settlement of disputes, the effective date of the
agreement and the term of the agreement. In accordance with FCC regulations, we
have applied for an accounting rate modification on an international route,
which application was deemed granted under FCC procedures. The FCC recently
approved significant changes to its ISP. Specifically, the FCC removed the ISP
for arrangements between U.S. carriers and non-dominant foreign carriers (i.e.,
foreign carriers that lack market power). In addition, the FCC removed the ISP
for arrangements with any carrier (dominant or non-dominant) on certain
competitive routes where settlement rates are at least 25% below the FCC's
applicable benchmarks. These routes currently include Canada, the United
Kingdom, Sweden, Germany, Hong Kong, The Netherlands, Denmark and Norway.
Certain confidential filing requirements still apply to dominant carrier
arrangements.
Employees
As of June 3, 1999, the Company had 37 full-time employees, of which ten were
engaged in corporate general and administrative, twenty-three in operations and
engineering, and four in sales and marketing.
Properties
The Company's headquarters are located in approximately 10,800 square feet of
leased office space in Greenwich, Connecticut. The office space is leased from
an unaffiliated third party pursuant to a five-year agreement at an annual
rental of approximately $290,000. We also lease approximately 5,600 square feet
of office space in Aurora, Colorado where the operations of our subsidiary, VDC
Telecommunications, Inc. ("VDC Telecommunications"), are located. The office is
leased from an unaffiliated third party pursuant to a five-year agreement at an
annual rental of approximately $94,000.
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The Company also leases an aggregate of approximately 8,500 square feet in New
York, Los Angeles and Denver as sites for its switching facilities. The
locations are leased from unaffiliated third parties pursuant to ten-year leases
at an aggregate annual rental of approximately $199,000. We anticipate that the
office space for VDC Telecommunications will be expanded to accommodate this
subsidiary's growth. However, this expansion is not expected to result in a
material rent increase. Other than its facilities for VDC Telecommunications, we
believe that our facilities are adequate to support our current needs and that
suitable additional facilities will be available, when needed, at commercially
reasonable terms.
Legal Proceedings
We are not currently involved in any litigation or proceeding which is material,
either individually or in the aggregate, and, to our knowledge, no other legal
proceeding of a material nature is currently contemplated by any individuals,
entities or government authorities.
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information with respect to each of the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Frederick A. Moran (1) 57 Chairman, Chief Executive Officer,
Chief Financial Officer, Secretary and
Director
James B. Dittman (1) 56 Director
Dr. Hussein Elkholy (2) 65 Director
Dr. Leonard Hausman (1)(2) 57 Director
Clayton F. Moran (2) 28 Vice President, Finance
Charles W. Mulloy 34 Vice President, Corporate Development
Robert E. Warner 56 Vice President, Sales and Marketing
William H. Zimmerling 42 Vice President
</TABLE>
(1) Member of Compensation Committee
(2) Member of Audit Committee
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Frederick A. Moran
Mr. Moran has served as Chairman, Chief Executive Officer, Chief Financial
Officer, Secretary, and Director of the Company since March 6, 1998. Mr. Moran
served as the Chairman of Sky King Connecticut from its inception in 1996
through its merger with and into the Company. In 1997, Mr. Moran served as
Chairman and Chief Executive Officer of NovoComm, Inc., a privately owned
company engaged in the telephony and communications businesses in Russia and
Ukraine. Mr. Moran was the co-founder and, from 1990 to 1993, served as Chairman
and Chief Executive Officer of International Telcell, Inc. (now part of
Metromedia International Group, Inc.). Additionally, Mr. Moran was the founder
of and, from 1987 to 1996, served as President of Moran & Associates, Inc.
Securities Brokerage, an investment banking and securities brokerage firm
("Moran Brokerage"), and Moran Asset Management, Inc., an investment advisory
firm ("Moran Asset"). Mr. Moran has been listed in the "Who's Who of American
Business Leaders."
Dr. Hussein Elkholy
Dr. Elkholy has served as a Director of the Company since July 8, 1998. From
1995 to the present, Dr. Elkholy has served as the Chairman of National Telecom
Company and the President and Chief Executive Officer of Satellite Equipment
Manufacturing Corporation, both located in Cairo, Egypt. Dr. Elkholy is also a
full professor at the Department of Mathematics, Computer Science and Physics at
Fairleigh Dickinson University, where he has taught undergraduate and graduate
courses in physics, engineering and computer science for over 34 years. From
1979 to 1980, Dr. Elkholy served as acting Dean of the College of Arts and
Sciences at Fairleigh Dickinson University. In addition, Dr. Elkholy has
conducted research and taught classes in the fields of physics and computer
science at several universities and institutes in the United States, Italy,
Hungary, Egypt and Sudan. During the past several years, Dr. Elkholy has
consulted numerous governmental agencies, private companies and research and
educational institutions in the United States and abroad on computer and
electronic technology. Dr. Elkholy holds doctorate degrees in natural sciences
from Eotvos Lorand University and in solid state physics from the Hungarian
Academy of Sciences, and a Bachelor of Science degree in physics from Cairo
University.
Dr. Leonard Hausman
Dr. Hausman has served as a member of the Company's Board of Directors since
November 4, 1998. Dr. Hausman is a partner in Middle East Holdings LLC, a
company devoted to facilitating trade and investment in the Middle East and
North Africa. From 1988 until 1998, Dr. Hausman was the Director of the
Institute for Social and Economic Policy in the Middle East at Harvard
University. There, he developed a broad program on the social and economic
aspects of the Arab-Israeli peace process, as well as micro-economic reform
throughout the Middle East and North Africa. Prior to holding this position, Dr.
Hausman was the Director of the East Asia Management Studies at the
Massachusetts Institute of Technology. Based on his work there and his academic
work at the Kennedy School at Harvard, he is now completing a book, with a
colleague, entitled: "Social Protection Reform in China." From 1970 to 1988, Dr.
Hausman was a professor of economics, holding the Hexter Chair, at Brandies
University in Boston. He began his work there on human resources and social
protection and initiated two research programs on China and on the Middle East.
37
<PAGE>
James B. Dittman
Mr. Dittman has served as a member of the Company's Board of Directors since
November 4, 1998. Mr. Dittman is President and a principal shareholder of
Dittman Incentive Marketing, a motivation and performance improvement company he
founded in 1976. The company provides incentive marketing consulting services
and programs. Prior to forming Dittman Incentive Marketing, Mr. Dittman held
management positions in marketing and communications with such firms as the
Bendix Corporation, Litton Industries, and the SCM Corporation. Mr. Dittman's
articles on incentive marketing have appeared widely in business publications,
and he has been a keynote speaker and conducted incentive workshops and seminars
for 25 years. Mr. Dittman is a Past President of the Society of Incentive Travel
Executives ("SITE"). In 23 years of SITE involvement, Mr. Dittman has been a
member of the Board of Directors and Executive Committee and a Trustee of the
SITE Foundation, which funds independent research in the field of incentive
marketing. Mr. Dittman was an advisor for 15 years to the Motivation Show, the
industry's premier event. In 1985, Mr. Dittman was named "Incentive Travel
Executive of the Year" and that same year, earned the designation of Certified
Incentive Travel Executive, one of fewer than 40 people in the world to do so.
In 1987, Mr. Dittman was named one of the 25 most influential people in the
United States travel business a list that included the presidents of Hyatt
Hotels, American Airlines, British Airways, Hertz, and National Car Rental, as
well as the Secretary of the United States Department of Transportation and a
United States Senator. In 1997, Mr. Dittman's company was named by the top
industry publication as one of the five most innovative incentive marketing
companies in the United States.
Clayton F. Moran
Mr. Moran has served as Vice President, Finance, of the Company since June 1,
1998. Prior thereto, Mr. Moran was employed by Moran Real Estate Holdings, Inc.
and Putnam Avenue Properties, Inc. From 1993 to 1995, Mr. Moran was an equity
research analyst with Smith Barney, Inc. Mr. Moran is a graduate of Princeton
University, with a Bachelor of Arts degree in economics. Mr. Moran is the adult
son of Frederick A. Moran.
Charles W. Mulloy
Mr. Mulloy has served as Vice President, Corporate Development, of the Company
since February 1, 1998. Mr. Mulloy has a broad background as a technologist and
business development manager, having worked in California's Silicon Valley
business community for over 10 years. From 1996 to 1998, Mr. Mulloy served as a
business development and system design executive for the IBM Corporation and
managed IBM's strategic relationship with the Intel Corporation. From 1994 to
1996, Mr. Mulloy served as Vice President of Inacom Information Systems. Prior
to that, from 1987 to 1994, Mr. Mulloy served as National Sales Manager for
California Computer Options. Mr. Mulloy has extensive experience in developing
data and telecommunications solutions with a foundation in network strategy and
deployment. He has designed and managed business solutions for several
telecommunications companies. Mr. Mulloy graduated from San Francisco State
University with a Bachelor of Arts degree in telecommunications.
38
<PAGE>
Robert E. Warner
Mr. Warner has served as Vice President, Sales and Marketing, of the Company
since January 29, 1999, and has been an employee of the Company since March 15,
1998. From 1993 to 1998, Mr. Warner served as Director of Marketing for CGI
Worldwide, Inc. In that role, Mr. Warner was responsible for the marketing of
communications systems in Asia, the South Pacific, and Russia. Additionally, he
was the Project Director responsible for major engineering projects, including
projects in Hong Kong, China, Saipan, and Ukraine. From 1990 to 1993, Mr. Warner
was President of Century Marketing, a Company that provided consulting to
independent sales producers of insurance and securities products. From 1988 to
1990, Mr. Warner served as President of the California Division of Rocky
Mountain Constructors, Inc. In that role, Mr. Warner was responsible for
marketing and estimating operations.
William H. Zimmerling
Mr. Zimmerling has served as Vice President of the Company since April 1, 1998.
Prior to joining the Company, Mr. Zimmerling served as a financial and
managerial consultant to telecommunications companies based in Argentina,
Colorado, Costa Rica, Panama, the United Kingdom, and Mexico. In this capacity,
Mr. Zimmerling surveyed potential markets, capital requirements and
regulatory/business issues, and reviewed a variety of business and legal issues
related to telecommunications companies. From 1993 to 1996, Mr. Zimmerling
served as Vice President for Wells Fargo Bank/First Interstate Bank. From 1986
to 1993, Mr. Zimmerling served as Vice President for Chemical Bank (now Chase
Manhattan Bank). In his positions with Wells Fargo Bank and Chemical Bank, Mr.
Zimmerling assumed a broad range of responsibilities associated with portfolio
management.
Involvement in Certain Legal Proceedings
In a civil action filed by the Securities and Exchange Commission ("SEC") during
June 1995, Frederick A. Moran ("Mr. Moran") and Moran Asset were found by the
United States District Court for the Southern District of New York to have
violated Section 206(2) of the Investment Advisers Act of 1940 (the "Advisers
Act") for negligently allocating shares of stock to Mr. Moran's personal, family
and firm accounts at a slightly lower price than shares of stock purchased for
Moran Asset's advisory clients the following day. The Court also found that Mr.
Moran, Moran Asset and Moran Brokerage had violated the disclosure requirements
of Section 204 of the Advisers Act and the corresponding broker-dealer
registration requirements of Section 15(b) of the Securities Exchange Act of
1934 (the "Exchange Act") by willfully failing to disclose that Mr. Moran's two
eldest sons were members of Moran Asset's and Moran Brokerage's board of
directors. Mr. Moran was the President and principal portfolio manager of Moran
Asset, as well as the President and Director of Research for Moran Brokerage. As
a result of these findings, Mr. Moran, Moran Asset and Moran Brokerage were
permanently enjoined from violating Sections 204, 206(2), and 207 of the
Advisers Act and Section 15(b) of the Exchange Act. The Court ordered Moran
Asset and Moran Brokerage to pay civil monetary penalties in the respective
amounts of $50,000 and $25,000. The Court also ordered Mr. Moran to disgorge
$9,551.17 plus prejudgment interest and pay a civil monetary penalty in the
amount of $25,000.
39
<PAGE>
Although Mr. Moran and the other named parties accepted and fully complied with
the findings of the District Court, they believe that the outcome of the matter
and the sanctions imposed failed to take into account a number of mitigating
circumstances, the first of which is that the basis for the violation of Section
206(2) of the Advisers Act was an isolated incident of negligence resulting in
the allocation of 15,000 shares of stock to Moran family and firm accounts at a
slightly lower price than those purchased for firm clients the following day,
resulting in $9,551.17 in higher purchase cost incurred by these clients. In the
opinion of Mr. Moran, the scope of this infraction was not properly considered
in view of the following circumstances, among others: (i) the extraordinary
volume of the daily business undertaken by Moran Asset and Moran Brokerage
which, on the date in question, purchased approximately $34,000,000 of stocks
for advisory clients and proprietary accounts; (ii) that the appropriate
personnel had inadvertently allocated shares to certain personal and family
accounts on the belief that all client purchases had been completed; and (iii)
shares of an additional stock had been purchased that day for certain personal
and family accounts at prices higher than those paid by advisory clients the
following day. Second, with respect to the violation of the disclosure
requirements of Section 204 of the Advisers Act and Section 15(b) of the
Exchange Act, the Court found Mr. Moran and others to be liable for failure to
disclose additional directors of Moran Asset and Moran Brokerage. However, the
additional directors in question were Mr. Moran's two older sons who had been
appointed as directors as a matter of clerical convenience. In fact, they never
participated in any Board of Directors meetings, nor made any decisions
concerning Moran Asset or Moran Brokerage, and were never informed that they
were directors. Furthermore, if their directorships had been disclosed, as the
Court had determined to be required, Mr. Moran believes that any such disclosure
would have, in fact, enhanced the Form ADV of Moran Asset and the Form BD of
Moran Brokerage, since both adult sons were professional securities analysts
with major investment banks and held college degrees from prestigious
universities. Third, during his twenty-four years as a full time investment
professional, Mr. Moran has not otherwise been the subject of any SEC, NASD or
other regulatory or judicial matters.
To the best of the Company's knowledge, other than the events specified above,
there have been no events under any state or federal bankruptcy laws, no
criminal proceedings, no judgments, orders, decrees or injunctions entered
against any officer or director, and no violations of federal or state
securities or commodities laws material to the ability and integrity of any
director or executive officer during the past five years.
Terms of Officers
All officers of the Company serve for terms expiring at the next annual meeting
of shareholders following their appointment. Officers' terms are without
prejudice to the terms of their employment agreements. Each of the Company's
officers, as well as each employee director, devotes substantially full time to
the affairs of the Company.
40
<PAGE>
Board Composition
In accordance with the terms of the Company's Certificate of Incorporation, the
terms of office of the Board of Directors are divided into three classes: Class
I, whose term will expire at the annual meeting of stockholders to be held in
1999; Class II, whose term will expire at the annual meeting of stockholders to
be held in 2000; and Class III, whose term will expire at the annual meeting of
stockholders to be held in 2001. The Class I directors are Dr. Hussein Elkholy
and James Dittman; the Class II director is Dr. Leonard Hausman; and the Class
III director is Frederick A. Moran. At each annual meeting of stockholders after
the initial classification, the successors to directors whose term will then
expire will be elected to serve from the time of election and qualification
until the third annual meeting following election. This classification of the
Board of Directors may have the effect of delaying or preventing changes in
control or changes in management of the Company. See "RISK
FACTORS--Anti-Takeover Provisions may Deter Change in Control Transactions" and
"DESCRIPTION OF SECURITIES--Anti-Takeover Effects of Provisions of the
Certificate of Incorporation, Bylaws and Delaware Law."
Executive Compensation
Report of the Board of Directors on Compensation
For the fiscal year ended June 30, 1998 ("Fiscal 1998"), the Company's executive
compensation strategy was administered by its Board of Directors. The Board had
oversight responsibility for the implementation of executive compensation for
the Company. The primary functions of the Board included: (i) reviewing,
approving and determining, in its discretion, the annual salary, bonus and other
benefits, direct and indirect, of the chief executive officer, directors, all
executive officers and other employees; (ii) reviewing stock option issuances;
and (iii) establishing and periodically reviewing the Company's policies in the
area of management perquisites.
Goals: In determining the amount and composition of executive compensation, the
Board was guided by the following goals:
1) Attract, motivate and retain the executives necessary to the
Company's success by providing compensation comparable to that
offered by companies with which the Company competes for such
employees;
2) Afford the executives an opportunity to acquire or increase their
proprietary interest in the Company through the grant of options
that align the interests of the executives more closely with
those of the overall goals of the Company; and
3) Ensuring that a portion of the executives' compensation is
variable and is tied to short-term goals (annual performance) and
long-term measures (stock-based incentives awards) of the
Company's performance.
41
<PAGE>
The Board considered several factors in establishing the components of the
executives' compensation package, including: (i) a base salary which reflects
individual performance and is designed primarily to be competitive with salary
levels of companies with which the Company competes; (ii) annual discretionary
bonuses, if any, tied to the Company's achievement of performance goals; and
(iii) long-term incentives in the form of stock options or other Company
securities which the Board believes strengthen the mutuality of interest between
the executive and the Company's stockholders. The Board may have, in its
discretion, applied entirely different factors, particularly different measures
of financial performance, in recommending and/or setting executive compensation,
but all compensation decisions were designed to further the general goals as
indicated above.
Base Salary: As a general matter, the Company establishes base salaries for each
of its executives based upon their individual performance and contribution to
the organization, as measured against executives of comparable position in
similar industries and companies. Certain of the Company's executives, including
Mr. Moran, the Chief Executive Officer, are employed under employment agreements
that were established in connection with the Sky King Connecticut Acquisition.
Accordingly, these arrangements were negotiated in the context of an acquisition
transaction and are generally based upon the executive's level of compensation
prior to the acquisition as well as other factors.
Stock Options: During Fiscal 1998, the Company did not have a stock option plan.
However, the Board periodically considered the grant of stock options to certain
of its executives. The grants were designed to align the interests of each
executive with those of the stockholders and provide each individual with a
significant incentive to manage the Company from the perspective of an owner
with an equity stake in the business. Each grant was intended to permit the
executive to acquire shares of the Company's Common Stock at a fixed price per
share (typically, the market price on the grant date) over a specified period of
time, thus providing a return to the executive only if the market price of the
shares appreciates over the option term. The size of the option grant to each
executive was intended to take into account the individual's potential for
future responsibility over the option term, the individual's personal
performance in recent periods and the individual's current holdings of the
Company's stock and options. Additional information regarding stock options
granted in Fiscal 1998 is included in the "Option/SAR Grants in Last Fiscal
Year" table below.
Compensation of the Chief Executive Officer: During Fiscal 1998, Frederick A.
Moran served as the Chairman of the Board, Chief Executive Officer, Chief
Financial Officer, and Secretary of the Company. Mr. Moran's compensation was
determined pursuant to the terms of his employment agreement, which was
negotiated and entered into by the Company in connection with the Sky King
Connecticut Acquisition and was intended to align his interests with those of
the stockholders and to compensate him for guiding the Company to achieve its
goals and objectives. Additional information regarding Mr. Moran's employment
contract is contained in the "EMPLOYMENT ARRANGEMENTS" section below.
Employee Compensation Strategy: The Board believes the Company's employee
compensation strategy enables the Company to attract, motivate and retain
employees by providing competitive total compensation opportunity based on
performance. Base salaries that reflect each individual's level of
responsibility and annual variable performance-based incentive awards are
intended to be important elements of the Company's compensation policy. The
Board believes that the grant of options not only aligns the interests of the
executive with stockholders, but creates a competitive advantage for the Company
as well. The Board believes the Company's executive compensation policies strike
an appropriate balance between short and long-term performance objectives.
42
<PAGE>
On November 9, 1998, the Company's Board of Directors established a Compensation
Committee. The Compensation Committee consists of Frederick A. Moran, James
Dittman, and Dr. Leonard Hausman. James Dittman and Dr. Leonard Hausman are
non-employee directors within the meaning of Rule 16b-3 under the Exchange Act
and outside directors within the meaning of Section 162(m) of the Internal
Revenue Code of 1986, as amended. The Compensation Committee is responsible for
administering the Company's stock plans and reviewing and making decisions with
respect to the other compensation of executive officers and employees of the
Company. Although the Compensation Committee will present a complete report in
the Company's 1999 Annual Report, it expects to be guided by the principles set
forth above.
Compensation Committee:
Frederick A. Moran
James Dittman
Dr. Leonard Hausman
The following Summary Compensation Table sets forth the compensation earned by
the Company's Chief Executive Officer and three other executive officers who
earned (or would have earned) salary and bonus in excess of $100,000 for
services rendered in all capacities to the Company and its subsidiaries for each
of the fiscal years during the three year period ended June 30, 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE(1)
Long Term Compensation
Annual Compensation Awards Payouts
Other Securities
Annual Restricted Underlying All Other
Compen- Stock Award(s) Options/ LTIP Compen-
Name and Principal Position Year(s) Salary($) Bonus($) sation ($) ($) SARs(#) Payouts ($) sation($)
- --------------------------- ------- --------- -------- ---------- --- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Frederick A. Moran(2) 1998 $40,625.05 (3) - - - - - -
Chief Executive Officer, 1997 - - - - - - -
Chief Financial Officer, 1996 - - - - - - -
Chairman and Director
of the Company
Dr. James C. Roberts(4) 1998 $41,666.72 (3) - - - - - $12,550 (5)
Deputy Chairman, Chief 1997 - - - - - - -
Operating Officer and 1996 - - - - - - -
Director of the Company
Charles W. Mulloy(6) 1998 $33,333.36 (3) - - - 60,000 (7) - -
Vice President, Corporate 1997 - - - - - - -
Development of the Company 1996 - - - - - - -
Graham F. Lacey(8) 1998 $42,367.37 (3) - - $760,937.50 (9) 45,000 (10) - -
Former Chief Executive 1997 $35,257 - - $168,750 (11) - - $352,860 (12)
Officer, President and 1996 $45,000 - - $117,500 (13) - - -
Director of the Company
</TABLE>
43
<PAGE>
(1) Based upon the fiscal years ending June 30, 1998, 1997 and 1996.
(2) Mr. Moran became Chief Executive Officer, Chief Financial Officer,
Chairman, and Director of the Company in March 1998 in connection with
the Sky King Connecticut Acquisition. Mr. Moran was neither an officer
nor a director of the Company prior to the Sky King Connecticut
Acquisition.
(3) Reflects compensation for partial year employment.
(4) Dr. Roberts became Deputy Chairman, Chief Operating Officer, and
Director of the Company in March 1998 in connection with the Sky King
Connecticut Acquisition. Dr. Roberts was neither an officer nor a
director of the Company prior to the Sky King Connecticut Acquisition.
On November 19, 1998, subsequent to the merger of VDC Bermuda with and
into the Company, Dr. Roberts resigned from all positions held with the
Company.
(5) Represents house rental payments paid by the Company for Dr. Roberts.
The Company shall not make any further rental payments on behalf of Dr.
Roberts.
(6) Mr. Mulloy became Vice President, Corporate Development, of the Company
on February 1, 1998. Mr. Mulloy was not an officer of the Company prior
to February, 1998.
(7) The Company granted Mr. Mulloy an option to purchase 10,000 shares of
the Company Common Stock on February 1, 1998. The Company granted Mr.
Mulloy options to purchase 50,000 shares of Company Common Stock on
September 2, 1998. Additional information regarding these stock option
grants is contained in the "Option/SAR Grants in Last Fiscal Year" table
below.
(8) Mr. Lacey resigned as Chief Executive Officer, President and Director of
the Company in connection with the Sky King Connecticut Acquisition.
(9) On March 2, 1998, the Company issued 25,000 shares of Company Common
Stock to Mr. Lacey as compensation for his services rendered to the
Company as a Director. Said shares were valued at $135,937.50 based upon
a closing price of Company Common Stock on March 2, 1998 of $5.4375 per
share. On July 1, 1997, the Company issued 28,000 shares of the Company
Common Stock to Mr. Lacey as compensation for his services rendered to
the Company as a Director. Said shares were valued at $131,250 based
upon a closing price of Company Common Stock on July 1, 1997 of $4.6875
per share. On July 31, 1997, the Company issued 100,000 shares of
Company Common Stock to Mr. Lacey as compensation for his services
rendered to the Company as a Director. Said shares were valued at
$493,750 based upon a closing price of Company Common Stock on July 31,
1997 of $4.9375 per share.
(10) The Company granted Mr. Lacey warrants to purchase 45,000 shares of
Company Common Stock on March 7, 1998. Additional information regarding
this warrant grant is contained in the "Option/SAR Grants in Last Fiscal
Year" table below.
(11) On January 30, 1997, the Company issued 30,000 shares of Company Common
Stock to Mr. Lacey as compensation for his services rendered to the
Company as Director. Said shares were valued at $168,750 based upon
a closing price of Company Common Stock on January 30, 1997 of $5.625
per share.
(12) Includes $60,000 applied towards the exercise of warrants during the
fiscal year ended 1997, $17,680 of waived accrued interest on a $340,000
note, and $275,000 which represents the difference between market value
($5.75) and exercise price ($3.00) on 100,000 options granted to Mr.
Lacey, which were subsequently exercised.
(13) The Company issued 20,000 shares of Company Common Stock to Mr. Lacey on
June 28, 1996 valued at $117,500, as set forth in the Company's Form
20-F filed with the SEC for the Company's fiscal year ended June 30,
1997.
44
<PAGE>
The following table contains information concerning stock option grants made to
certain individuals named below for the year ended June 30, 1998.
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Individual Grants
Potential Realizable Potential Realizable
Value at Assumed Value at Assumed
Annual Rates of Annual Rates of
Number of Securities % of Total Options/SARs Exercise or Stock Price Stock Price
Underlying Options/ Granted to Employees Base Price Expiration Appreciation for Appreciation for
Name SARs Granted (#) in Fiscal Year ($/Share)(6) Date Option Term 5% Option Term 10%
<S> <C> <C> <C> <C> <C> <C>
Charles W. Mulloy 10,000 (1) 4.3% (2) $5.00 2/1/08 31,444.50 79,687
Charles W. Mulloy 50,000 (1) 21.5% (2) $5.75 9/2/08 180,805.87 458,200.25
Graham F. Lacey 45,000 (3) 19.4% (2) $5.00 (4) 23,062.50 (5) 47,250 (5)
</TABLE>
(1) The options vest in equal installments over five years commencing on the
first anniversary of the date of grant. The options are exercisable upon
vesting.
(2) Based upon an aggregate of 231,500 shares of Common Stock issuable
upon the exercise of options to purchase 186,500 shares of Common
Stock and warrants to purchase 45,000 shares of Common Stock granted
to employees during Fiscal 1998.
(3) The warrants are exercisable upon issuance.
(4) The Company extended the expiration date of the warrants from August 30,
1998 to the date that is 30 days following the effective date of a
registration statement registering the resale of the shares issuable
upon the exercise of the warrants.
(5) Assumes the warrants will expire within two years of grant. The warrants
will expire 30 days after the date of this Prospectus.
(6) For information on repricing see "Ten-Year Option/SAR Repricings."
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End(#) at FY-End($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized($) Unexercisable Unexercisable(1)
<S> <C> <C> <C> <C>
Charles W. Mulloy 0 0 0(E)/10,000(U) 0(E)/$31,250(U)
Charles W. Mulloy 0 0 0(E)/50,000(U) 0(E)/$118,750(U)
Graham F. Lacey 0 0 45,000(E)/0(U) $140,625(E)/0(U)
</TABLE>
(1) Based upon the closing price for Company Common Stock as reported on the
OTC Bulletin Board for June 30, 1998 of $8.125 per share. Effective July
7, 1998, Company Common Stock commenced trading on the American Stock
Exchange, Inc.
45
<PAGE>
<TABLE>
<CAPTION>
Ten-Year Option / SAR Repricings
Number of Securites Market Price of Length of Original
Underlying Options/ Stock at Time Exercise Price at New Option Term Remaining
SARs Repriced or of Repricing or Time of Repricing Exercise at Date of Repricing
Name Date Amended (#) Amendment $ or Amendment $ Price $ or Amendment
<S> <C> <C> <C> <C> <C> <C>
Clayton F. Moran 10/21/98 10,000 $ 4.125 $ 6.00 $ 4.125 115 months
Charles W. Mulloy 10/21/98 10,000 $ 4.125 $ 5.00 $ 4.125 111 months
Charles W. Mulloy 10/21/98 50,000 $ 4.125 $ 5.75 $ 4.125 118 months
Robert E. Warner 10/21/98 5,000 $ 4.125 $ 5.00 $ 4.125 113 months
Robert E. Warner 10/21/98 2,500 $ 4.125 $ 5.75 $ 4.125 118 months
William H. Zimmerling 10/21/98 26,500 $ 4.125 $ 5.00 $ 4.125 113 months
</TABLE>
Explanation of Repricing
At the time of the repricing, the Company's Board of Directors was of the
opinion that its Common Stock price was low. The Company's stock price was
significantly below the exercise prices for options granted to date to employees
and non-employee directors. The Company's Board of Directors decided in light of
the contributions of its employees and non-employee directors, repricing the
exercise price for stock options for employees and non-employee directors
serving the Company as of October 21, 1998 was appropriate and in the best
interests of the Company.
Board of Directors of the Company on October 21, 1998 (1):
Frederick A. Moran
Dr. Hussein Elkholy
(1) Dr. James C. Roberts, who was a director at the time of the repricing
and voted in favor of the same, resigned from all positions held with the
Company in November 1998.
Committees of the Board of Directors
On November 9, 1998, the Company's Board of Directors established an Audit
Committee and Compensation Committee. Clayton F. Moran, Dr. Hussein Elkholy, and
Dr. Leonard Hausman serve on the Audit Committee. The Audit Committee reviews
and reports to the Board of Directors with respect to the selection, retention,
termination and terms of engagement of the Company's independent public
accountants, and maintains communications among the Board of Directors, the
independent public accountants, and the Company's internal accounting staff with
respect to accounting and audit procedures. The Audit Committee also reviews,
with management, the Company's internal accounting and control procedures and
policies and related matters.
The Compensation Committee consists of Frederick A. Moran, James Dittman, and
Dr. Leonard Hausman. James Dittman and Dr. Leonard Hausman are non-employee
directors within the meaning of Rule 16b-3 under the Exchange Act and outside
directors within the meaning of Section 162(m) of the Internal Revenue Code of
1986, as amended. The Compensation Committee is responsible for administering
the Company's stock plans and reviewing and making decisions with respect to the
other compensation of executive officers and employees of the Company.
The Board may, from time to time, establish other committees of the Board.
46
<PAGE>
Director Compensation
As compensation for their service to the Company, each independent Director is
granted upon initial appointment options to purchase 25,000 shares of the
Company's Common Stock. Other than the stock options granted to independent
Directors, Directors do not receive a salary, payment or reimbursement of any
kind for their service to the Company. By way of illustration, Directors are not
reimbursed for out-of-pocket expenses incurred in the performance of Company
duties, nor are they compensated for attending meetings of the Company's Board
of Directors, whether by telephone or in person.
On November 4, 1998, the Company granted each of Dr. Leonard Hausman and James
Dittman options to purchase 25,000 shares of Company Common Stock at an exercise
price of $4.00 per share, in connection with their appointment as Directors. The
options vest in equal installments over three years commencing on the first
anniversary of the date of grant and are contingent upon continued service as a
member of the Board of Directors.
On July 8, 1998, the Company granted to Dr. Hussein Elkholy an option to
purchase 25,000 shares of Company Common Stock at an exercise price of $7.625
per share, in connection with his service as a Director. As originally issued,
the options vested in equal installments over five years commencing on the first
anniversary of the date of grant and was contingent upon continued service as a
member of the Company's Board of Directors. These options were subsequently
amended to vest in equal installments over three years commencing on the first
anniversary of the date of grant. On October 21, 1998, the Company's Board of
Directors repriced the exercise price for all outstanding stock options granted
to employees and directors serving the Company as of October 21, 1998 to $4.125.
Dr. Elkholy's options were repriced accordingly.
On March 2, 1998, the Company issued 25,000 shares of Company Common Stock to
Graham F. Lacey as compensation for his services rendered to the Company as a
Director. Said shares were valued at $135,937.50 based upon a closing price of
Company Common Stock on March 2, 1998 of $5.4375 per share on the OTC Bulletin
Board. Mr. Lacey received these shares prior to the change in management
accompanying the Sky King Connecticut Acquisition and the adoption of the
current management's compensation policy for directors.
On July 31, 1997, the Company issued 100,000 shares of Company Common Stock to
Mr. Lacey as compensation for his services rendered to the Company as a
Director. Said shares were valued at $493,750, based upon a closing price of
Company Common Stock on July 31, 1997 of $4.9375 per share. Mr. Lacey received
these shares prior to the change in management accompanying the Sky King
Connecticut Acquisition and the adoption of the current management's
compensation policy for directors.
On July 1, 1997, the Company issued 28,000 shares of Company Common Stock to Mr.
Lacey as compensation for his services rendered to the Company as a Director.
Said shares were valued at $131,250 based upon a closing price of Company Common
Stock on July 1, 1997 of $4.6875 per share. Mr. Lacey received these shares
prior to the change in management accompanying the Sky King Connecticut
Acquisition and the adoption of the current management's compensation policy for
directors.
47
<PAGE>
Employment Arrangements
The Company has employment agreements with Messrs. Frederick A. and Clayton
Moran, Mulloy, Warner, and Zimmerling. Each employment agreement provides for
year-to-year renewals in the event that neither the employee nor the Company
elects to terminate the agreement after the initial term or otherwise and
contains non-competition and non-solicitation provisions which survive
employment for a term of one (1) year. Other salient provisions of the
employment agreement are set forth below.
<TABLE>
<CAPTION>
EMPLOYMENT AGREEMENTS
Name Annual Salary Initial Term
<S> <C> <C>
Frederick A. Moran $125,000 5 years
Clayton F. Moran $75,000 3 years
Charles W. Mulloy $100,000 3 years
Robert E. Warner $72,500 3 years
William H. Zimmerling $80,000 3 years
</TABLE>
Messrs. Frederick and Clayton Moran, Mulloy, Warner, and Zimmerling have all
been granted options to purchase shares of Company Common Stock. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
Stock Options
The Company's 1998 Stock Incentive Plan (the "1998 Plan"), which authorizes the
issuance of up to 5,000,000 shares of the Company's Common Stock was adopted by
the Board of Directors on September 4, 1998. Under its terms, officers,
directors, key employees and consultants of the Company are eligible to receive
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code, as well as non-qualified stock options, stock appreciation rights
("SARs"), restricted stock awards, stock awards, and performance share awards.
The 1998 Plan may be administered by the Board of Directors or the Company's
Compensation Committee (the "Plan Administrator"). Incentive stock options
granted under the 1998 Plan are exercisable for a period of up to 10 years from
the date of grant and at an exercise price that is not less than the fair market
value of the Common Stock on the date of the grant, except that the term of an
incentive stock option granted under the 1998 Plan to a stockholder owning more
than 10% of the outstanding Common Stock may not exceed five years from the date
of grant and the exercise price of an incentive stock option granted to such
stockholder may not be less than 110% of the fair market value of the Common
Stock on the date of the grant. Non-qualified stock options may be granted on
terms determined by the Plan Administrator. SARs, which give the holder the
privilege of surrendering such rights for the appreciation in the Company's
Common Stock between the time of grant and the surrender, may be granted on any
terms determined by the Plan Administrator. A restricted stock award entitles
the recipient to acquire shares of stock subject to such restrictions and
conditions as the Plan Administrator may determine at the time of grant.
Conditions may be based on continuing employment (or other business
relationship) and/or achievement of pre-established performance goals and
objectives. A stock award is an award pursuant to which an individual may
receive shares of stock free of any vesting restrictions under the Plan. A
performance share award is an award entitling the recipient to acquire shares of
stock upon the attainment of specified performance goals. The Plan Administrator
in its sole discretion shall determine whether and to whom performance share
awards shall be made, the performance goals applicable under each such award,
the periods during which performance is to be measured, and all other
limitations and conditions applicable to the awarded performance shares;
provided, however, that the Plan Administrator may rely on the performance goals
and other standards applicable to other performance plans of the Company in
setting the standards for performance share awards under the 1998 Plan.
48
<PAGE>
Stock options with respect to no more than 1,000,000 shares of stock may be
granted to any one individual participant during any one calendar year period.
Additionally, under the terms of the 1998 Plan, the aggregate fair market value
(determined as of the date of grant) of the shares of Common Stock with respect
to which incentive stock options are exercisable for the first time by an
employee during any calendar year (under all such plans of the Company and any
parent and subsidiary corporation of the Company) may not exceed $100,000.
Under the 1998 Plan, the Plan Administrator is authorized to impose
limitations on 1998 Plan awards, including limitations on transferability.
Non-qualified stock options and SARs are not transferable by the participant
otherwise than by will or by the laws of descent and distribution or pursuant to
a domestic relations order.
In addition to other times during which they are exercisable while the
participant has a continuing relationship with the Company, options and SARs
granted under the 1998 Plan may be exercised within two years after the date of
a participant's termination of employment by reason of his death or disability,
or within three months after the date of termination by reason of retirement or
voluntary termination, but only to the extent the option or SAR was otherwise
exercisable at the date of termination. If a participant is terminated for
"Cause" (as defined in the 1998 Plan), or if the optionee becomes an officer,
director of, or a consultant to or employed by a "Competing Business" (as
defined in the 1998 Plan) then any and all options and SARs held by such
participant shall terminate and all vested options shall be forfeited.
The 1998 Plan provides that, in general, the Plan Administrator, shall,
consistent with the 1998 Plan, determine the terms and conditions, including
vesting provisions, of any option or SAR granted under the 1998 Plan, and may
accelerate the exercisability of any option or SAR.
The Board of Directors may alter, amend, suspend or discontinue the 1998 Plan,
provided that no such action shall deprive any person without such person's
consent of any rights theretofore granted pursuant hereto.
As of the date hereof, the Company has granted employees and agents options to
purchase 797,500 shares of Company Common Stock under the 1998 Plan, of which
722,000 are outstanding. All of these options vest in equal installments over
five years. With the exception of the options granted to Frederick A. Moran,
which expire in five years, all options granted to employees expire ten years
after the date of grant.
Between March 1998 and November 1998, the Company granted certain employees and
non-employee directors options to purchase 241,500 shares of Company Common
Stock outside of the 1998 Plan, of which 226,500 are outstanding. These options
vest in equal installments over five years and expire ten years after the grant.
49
<PAGE>
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
During Fiscal 1998, Frederick A. Moran and Dr. James C. Roberts served
continuously as executive officers and directors of the Company from March 1998
through June 1998. As directors they participated in the Board of Directors'
administration of the Company's executive compensation policies. In March 1998,
the employment agreements between the Company and Mr. Moran and Dr. Roberts were
negotiated and entered into in connection with the Sky King Connecticut
Acquisition. Moreover, during Fiscal 1998, Mr. Moran and Dr. Roberts were
involved in certain related party transactions. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS." Graham F. Lacey served as Chairman and Director of the
Company until his resignation in March 1998 in connection with the Sky King
Connecticut Acquisition. See "MANAGEMENT."
Frederick A. Moran serves as a member of the Company's Compensation Committee.
Mr. Moran participated in the Company's deliberations regarding stock option
grants to the Company's employees in December, 1998. During those deliberations,
the Committee recommended, and the Board of Directors approved, granting Mr.
Moran stock options to purchase 200,000 shares of Company Common Stock.
Additionally, Mr. Moran participated in the decision to grant his son, Clayton
F. Moran, Vice President - Finance of the Company, options to purchase 45,000
shares of Company Common Stock. Finally, Mr. Moran participated in the decision
to grant his wife, Joan Moran, also an employee of the Company, options to
purchase 10,000 shares of Company Common Stock. All options granted to the
Morans, as well as to all other employees, in December 1998, vest in equal
installments over five (5) years.
Comparison of 5 Year Cumulative Total Returns
The following Performance Graph sets forth the Company's total stockholder
return (1) as compared to: (i) the University of Chicago Graduate School of
Business CRSP Total Return Index for the NASDAQ Stock Market (U.S. & Foreign)
("CRSP Index")(2), and (ii) a Peer Group selected on the Basis of a 3-Digit SIC
Group (SIC 4810-4819 U.S. & Foreign). The table assumes that $100 was invested
on June 30, 1993 in the Company's Common Stock, the CRSP Index and the peer
group index, and that all dividends were reinvested. In addition, the graph
weighs the peer group on the basis of its respective market capitalization,
measured at the beginning of each relevant time period.
(1) The Company became involved in the telecommunications industry on
March 6, 1998. Prior to March 6, 1998 the Company was involved in
other unrelated industries. The Peer Group reflects the Company's
SIC Group and does not reflect the Company's SIC Groups for
periods prior to the Sky King Connecticut Acquisition.
Consequently, a comparison of the Peer Groups performance to the
performance of the Company during the period March 6, 1998 to
June 30, 1998 may be meaningful, however, a comparison of the
Peer Groups performance to that of the Company for periods prior
to the Sky King Connecticut Acquisition is unlikely to be
meaningful. Accordingly, the comparisons presented may not be
indicative of the Company's performance.
(2) The Performance Graph contains a NASDAQ index because the
Company's Common Stock traded on NASDAQ during Fiscal 1998. The
Company's Common Stock began trading on the American Stock
Exchange, Inc. on July 7, 1998.
50
<PAGE>
<TABLE>
<CAPTION>
Company Market Market Peer Peer
Date Index Index Count Index Count
<S> <C> <C> <C> <C> <C>
6/30/93 100.000 100.000 4347 100.000 70
7/30/93 77.778 100.175 4380 102.084 71
8/31/93 88.889 105.387 4422 107.187 74
9/30/93 111.111 108.343 4463 105.061 75
10/29/93 133.333 110.845 4512 106.614 75
11/30/93 127.778 107.349 4596 100.540 75
12/31/93 144.444 110.509 4675 101.382 76
1/31/94 111.111 114.032 4703 106.474 77
2/28/94 77.778 112.796 4745 99.893 79
3/31/94 111.111 105.886 4801 95.517 80
4/29/94 111.111 104.503 4828 96.915 82
5/31/94 66.667 104.628 4870 99.317 84
6/30/94 66.667 100.507 4889 98.287 92
7/29/94 55.556 102.889 4909 100.872 92
8/31/94 38.889 109.145 4926 102.249 90
9/30/94 105.556 108.993 4932 101.377 92
10/31/94 77.778 110.890 4953 101.703 93
11/30/94 55.556 107.003 4970 94.269 96
12/30/94 50.000 107.190 4979 93.037 96
1/31/95 41.667 107.568 4974 94.994 96
2/28/95 38.889 113.068 4976 95.167 96
3/31/95 50.000 116.610 4969 96.208 100
4/28/95 50.000 120.401 4984 98.460 100
5/31/95 44.444 123.360 4986 97.916 101
6/30/95 47.222 133.299 5009 101.587 102
7/31/95 53.611 142.826 5031 105.913 103
8/31/95 51.667 145.616 5055 110.890 100
9/29/95 57.778 149.176 5054 120.663 98
10/31/95 44.444 148.016 5099 118.990 99
11/30/95 44.444 151.478 5134 122.749 99
12/29/95 50.000 150.551 5182 127.074 98
1/31/96 52.222 151.570 5175 129.120 98
2/29/96 52.222 157.525 5207 125.021 103
3/29/96 52.222 157.858 5252 122.913 103
4/30/96 63.889 170.760 5298 126.645 104
5/31/96 75.556 178.541 5354 127.320 107
6/28/96 80.000 170.093 5420 126.985 111
7/31/96 77.778 154.729 5458 116.160 113
8/30/96 73.333 163.594 5489 115.928 113
9/30/96 65.556 175.864 5496 119.412 115
10/31/96 67.778 173.991 5544 118.490 118
11/29/96 55.556 184.576 5595 127.015 122
12/31/96 46.667 184.314 5599 129.954 122
1/31/97 52.222 197.559 5588 133.590 122
2/28/97 52.222 186.988 5603 136.139 126
3/31/97 45.556 174.898 5611 125.764 126
4/30/97 33.333 180.125 5594 130.387 122
5/30/97 30.000 200.468 5589 142.299 122
6/30/97 37.778 206.689 5573 149.243 123
7/31/97 43.889 228.252 5571 156.198 124
8/29/97 44.444 227.673 5562 148.526 125
9/30/97 40.556 241.921 5549 164.887 127
10/31/97 50.000 228.868 5563 169.967 133
11/28/97 45.556 229.341 5588 183.479 135
12/31/97 45.556 225.422 5543 190.091 133
1/30/98 45.556 232.225 5515 202.756 132
2/27/98 45.556 254.344 5498 211.683 135
3/31/98 90.554 264.056 5459 237.151 135
4/30/98 110.336 268.643 5439 235.753 137
5/29/98 98.174 254.336 5431 227.064 142
6/30/98 112.970 270.628 5409 241.492 145
</TABLE>
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Based solely on its review of copies of forms filed pursuant to Section 16(a) of
the Exchange Act, and written representations from certain reporting persons,
the Company believes that during Fiscal 1998 all reporting persons timely
complied with all filing requirements applicable to them, except for certain
reports, which were filed late including: (i) a Form 3 for Frederick A. Moran;
(ii) a Form 3 for James C. Roberts; (iii) a Form 3 for Thomas W. Wilson, III;
and (iv) a Form 3 for William H. Zimmerling.
51
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Loans From Director and Officer
Between January and February 1999, Frederick A. Moran, a director and officer of
the Company, transferred personal funds totaling $500,000 to the Company. This
amount represents a short-term loan to be repaid by the Company in accordance
with the terms of a promissory note executed by the Company on January 26, 1999.
The promissory note which was to be due on or before July 26, 1999, bore an
interest rate of ten percent (10%) per annum. The Company paid the promissory
note in full on May 13, 1999.
On October 22, 1998, Frederick A. Moran transferred personal funds totaling
$65,000 to the Company. This amount represented a short-term loan bearing no
interest. The Company paid back the loan in full on October 26, 1998.
Private Placement Transactions
Through Securities Purchase Agreements dated May 5, 1999, the Company sold an
aggregate of 328,170 shares of Company Common Stock, at a price of $3.00 per
share, to Frederick A. Moran and Joan B. Moran, Mr. Moran's wife, and certain
trusts for the benefit of Mr. and Mrs. Moran's minor children in a non-public
offering exempt from registration pursuant to Section 4(2) and Rule 506 of
Regulation D of the Act.
Through Securities Purchase Agreements dated December 23, 1998, the Company sold
an aggregate of 245,159 shares of Company Common Stock, at a price of $3.625 per
share, to certain entities associated with and family members of Frederick A.
Moran in a non-public offering exempt from registration pursuant to Section 4(2)
and Rule 506 of Regulation D of the Act.
Through Securities Purchase Agreements dated May 27, 1998, the Company issued an
aggregate of 583,430 shares of Company Common Stock, at a price of $6.00 per
share, in a non-public offering pursuant to Section 4(2) and Regulation D of the
Act, including 308,430 shares of Company Common Stock to certain entities
associated with and family members of Frederick A. Moran.
Certain Transactions Arising out of Sky King Connecticut Acquisition
In connection with the Sky King Connecticut Acquisition, the Company issued
shares of Company Series A Convertible Preferred Stock ("Series A Stock") and
Series B Convertible Preferred Stock ("Series B Stock") to Frederick A. Moran,
and certain family members of and entities associated with Mr. Moran which in
the aggregate totaled approximately 5,537,670 shares. Also, the Company issued
shares of Series A Stock and Series B stock to the Roberts Family Trust which in
the aggregate totaled approximately 2,750,000 shares. James C. Roberts is a
former officer and director of the Company.
52
<PAGE>
In June 1998, with the approval of the respective Boards of Directors of VDC
Bermuda and the Company, 1,512,500 shares of Series B Stock owned by the Roberts
Family Trust were converted into 1,512,500 shares of Company Common Stock.
All shares of Series B Stock issued in connection with the Sky King Connecticut
Acquisition were placed in escrow to be released upon the satisfaction of
certain performance criteria set forth in the Escrow Agreement, dated as of
March 6, 1998 (the "Escrow Agreement"). In May 1998, the Company released
600,000 shares of Series B Stock from escrow based upon the satisfaction of
certain criteria identified on the Escrow Agreement. On August 31, 1998, the
Company released an additional 3,900,000 shares of Series B Stock as additional
performance criteria were satisfied.
Certain members of the management and Board of Directors of VDC Bermuda and the
Company, among others, had interests in the Domestication Merger that were in
addition to the interests of the members and stockholders of said companies.
Upon the consummation of the Domestication Merger, all of the outstanding shares
of VDC Bermuda common stock were convertible, on a share-for-share basis, into
shares of Company Common Stock. Additionally, all shares of Company Series A
Stock and Series B Stock, were automatically converted, on a share-for-share
basis, into shares of Company Common Stock. Upon the consummation of the
Domestication Merger, Frederick A. Moran, Chairman, Chief Executive Officer,
Chief Financial Officer, Secretary and Director of the Company together with his
spouse and his minor children, received 2,849,150 of Company Common Stock; a
trust for the benefit of Dr. James C. Roberts, an officer and director of the
Company and his family received 2,750,000 shares of Company Common Stock; and
Clayton F. Moran, Vice President of Finance of the Company, received 1,422,850
shares of Company Common Stock.
The Company Common Stock issued upon the conversion of the Series A Stock and
Series B Stock to Frederick A. Moran, certain family members of and entities
associated with Mr. Moran, and to the Roberts Family Trust were subject to an
eighteen month contractual restriction on resale (the "Restriction"). On
December 15, 1998, the Company removed the Restriction from all shares of
Company Common Stock held by Frederick A. Moran, and family members of and
entities associated with Frederick A. Moran (in the aggregate approximately
5,537,670 shares). The Company removed this Restriction in order to permit the
Morans more flexibility with regard to providing the Company with future
financing. Also, on December 15, 1998 the Company removed the Restriction from
all shares held by the Roberts Family Trust in connection with a certain
Settlement Agreement by and among the Company, Dr. James C. Roberts, and
Frederick A. Moran, dated November 19, 1998 (in the aggregate approximately
750,000 shares), pursuant to which Dr. Roberts resigned from all positions held
with the Company and its subsidiaries and surrendered to the Company 1,875,000
shares of Company Common Stock.
Certain Transactions and Agreements with PortaCom
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, for an aggregate purchase price of 5,300,000 shares of
Common Stock and approximately $370,000 in cash.
53
<PAGE>
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 would fund an escrow account
in the amount of up to $2,682,000 (the "Escrow Cash") for the benefit of holders
of priority unsecured claims and general unsecured claims against PortaCom's
bankruptcy estate. To the extent that the cash escrow was used by PortaCom,
PortaCom received proportionally fewer Company shares. The Escrow Cash and
5,300,000 shares (the "Escrow Shares") were placed in escrow pending the
resolution of the disputed claims against PortaCom's bankruptcy estate.
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
releasing the majority of the Escrow Cash and Escrow Shares, as reduced based
upon the use of Escrow Cash, from escrow in accordance with PortaCom's Amended
Plan of Reorganization as Modified (the "Plan") and postponing the distribution
of certain Escrow Shares to PortaCom and PortaCom shareholders.
In November 1998, PortaCom, the Company and Michael Richard, a PortaCom officer
charged with certain responsibilities in distributing certain assets in
connection with the Plan, entered into a Settlement Agreement pursuant to which
2 million of the Escrow Shares will be retained in escrow for up to eighteen
(18) months (the "Retained Shares"). A portion or all of the Retained Shares
shall be released to PortaCom contingent upon certain performance criteria.
Those shares not so released will be returned to the Company.
As of February 1999, PortaCom had used $1,669,839 of the Escrow Cash, resulting
in PortaCom's return, or obligation to return, 186,105 Escrow Shares to the
Company. The unused Escrow Cash has been returned to the Company.
Settlement Agreement with Roberts
Pursuant to the terms of a Settlement, Release and Discharge Agreement, dated
November 19, 1998, by and among the Company, Dr. James C. Roberts and Frederick
A. Moran, Dr. Roberts resigned from all positions he held with the Company and
its subsidiaries. Additionally, Dr. Roberts surrendered 1,875,000 shares of
Company Common Stock to the Company's treasury.
Repricing of Stock Options
On October 21, 1998, the Company's Board of Directors voted to reprice the
exercise price for stock options held by all employees and non-employee
directors serving the Company as of October 21, 1998. The exercise price for the
stock options was repriced to $4.125, the closing stock price for shares of
Company Common Stock on October 21, 1998. In connection with this repricing,
stock options that had previously been granted to Dr. Hussein Elkholy, Clayton
F. Moran, Charles W. Mulloy, Robert E. Warner, and William H. Zimmerling were
repriced.
54
<PAGE>
Securities Issued to Former Directors
On March 2, 1998, the Company issued warrants to purchase 45,000 shares of
Company Common Stock to Graham Ferguson Lacey, who, at that time, served as the
Company's Chairman and was a member of the Company's Board of Directors.
On March 2, 1998, the Company issued 25,000 shares of Company Common Stock to
Mr. Lacey, who, at that time, served as the Company's Chairman and was a member
of the Company's Board of Directors.
On March 2, 1998, the Company issued 10,000 shares of Company Common Stock to
Robert Alexander, who, at that time, served as the Company's Deputy Chairman and
was a member of the Company's Board of Directors.
On July 31, 1997, the Company issued 100,000 shares of Company Common Stock to
Mr. Lacey, who, at that time, served as the Company's Chairman and was a member
of the Company's Board of Directors.
On July 1, 1997, the Company issued 28,000 shares of Company Common Stock to Mr.
Lacey, who, at that time, served as the Company's Chairman and was a member of
the Company's Board of Directors.
Options Issued to Officers
On December 8, 1998, the Company granted options to purchase shares of Company
Common Stock to executive officers as follows: (i) 200,000 shares for Frederick
A. Moran; (ii) 45,000 for Clayton F. Moran; (iii) 40,000 for Charles W. Mulloy;
(iv) 42,500 for Robert Warner; (v) 33,500 for William H. Zimmerling. The
exercise price for these options, other than those granted to Frederick A.
Moran, is $3.75 per share. The exercise price for the options granted to
Frederick A. Moran is $4.125. These options vest in equal installments over five
years and, other than the options granted to Frederick A. Moran, expire ten
years from the date of grant (December 8, 2008). The options granted to
Frederick A. Moran expire five years from the date of grant (December 8, 2003).
On September 2, 1998, the Company issued options to purchase 50,000 shares of
Company Common Stock to Charles W. Mulloy. These options have an exercise price
of $4.125 per share. These options vest in equal installments over five years
and expire ten years from the date of grant (September 2, 2008).
On June 1, 1998, the Company issued options to purchase 10,000 shares of Company
Common Stock to Clayton F. Moran. These options have an exercise price of $4.125
per share. These options vest over five years and expire ten years from the date
of grant (June 1, 2008).
55
<PAGE>
On April 1, 1998, the Company issued options to purchase 26,500 shares of
Company Common Stock to William H. Zimmerling. These options have an exercise
price of $4.125 per share. Options to purchase 9,000 shares vested on April 1,
1998. Options to purchase 17,500 shares vest over five years and expire ten
years from the date of grant (April 1, 2008).
On February 1, 1998, the Company issued options to purchase 10,000 shares of
Company Common Stock to Charles W. Mulloy. These options have an exercise price
of $4.125 per share. These options vest in equal installments over five years
and expire ten years from the date of grant (February 1, 2008).
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 3, 1999, information with respect to
the securities holdings of all persons which the Company, pursuant to filings
with the Securities and Exchange Commission, has reason to believe may be deemed
the beneficial owners of more than 5% of the Company's outstanding Common Stock.
Also set forth in the table is the beneficial ownership of all shares of the
outstanding Company Common Stock, as of such date, of all executive officers and
directors, individually and as a group.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name and Address of Beneficial Owner Beneficial Ownership(1) of Class
<S> <C> <C>
Frederick A. Moran 3,343,425 (2) 16.6%
75 Holly Hill Lane
Greenwich, CT 06830
Dr. Hussein Elkholy 8,333 (3) *
781 Oneida Trail
Franklin Lakes, NJ 07417
Dr. Leonard Hausman 0 (4) *
70 Neshobe Road
Waban, MA 02468
James B. Dittman 2,000 (5) *
8 Worthington Ave.
Spring Lake, NJ 07762
Robert E. Warner 1,000 (6) *
3025 South Parker Road
Suite 711
Aurora, CO 80014
William H. Zimmerling 12,500 (7) *
3025 South Parker Road
Suite 711
Aurora, CO 80014
Charles W. Mulloy 2,000 (8) *
75 Holly Hill Lane
Greenwich, CT 06830
Clayton F. Moran 1,427,600 (9) 7.1%
75 Holly Hill Lane
Greenwich, CT 06830
Frederick W. Moran 1,402,750 (10) 7.0%
230 Park Avenue
13th Floor
New York, NY 10169
PortaCom Wireless, Inc. 4,306,878 (11) 21.3%
10061 Talbert Avenue
Suite 200
Fountain Valley, CA 92708
All officers and directors 4,796,858 23.7%
as a group (8 persons)
</TABLE>
56
<PAGE>
(*) Less than 1%.
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in
the regulations promulgated under the Securities Exchange Act of 1934,
and, accordingly, may include securities owned by or for, among others,
the spouse and/or minor children of an individual and any other relative
who has the same home as such individual, as well as other securities as
to which the individual has or shares voting or investment power or
which each person has the right to acquire within 60 days of the date
hereof through the exercise of options, or otherwise. Beneficial
ownership may be disclaimed as to certain of the securities. This table
has been prepared based on 20,173,583 shares of Common Stock outstanding
as of June 3, 1999.
(2) Includes 527,817 owned directly Mr. Moran as well as 2,815,608 shares
owned, directly or indirectly, by certain members of Mr. Moran's family
and certain entities associated with Mr. Moran's family, whose ownership
is attributed to Mr. Moran. Does not include shares beneficially owned
by Mr. Moran's mother. Also, does not include 1,402,750 shares owned by
Frederick W. Moran and 1,427,600 beneficially owned by Clayton F. Moran,
both of whom are Mr. Moran's adult children. Does not include options to
purchase 210,000 shares of Common Stock which may vest on and after
December, 1999.
(3) Includes options to purchase 8,333 shares which vest in July, 1999.
Does not include options to purchase 16,667 shares of Common Stock which
may vest on and after July, 2000.
(4) Does not include options to purchase 25,000 shares of Common Stock which
may vest on or after November 4, 1999.
(5) Does not include options to purchase 25,000 shares of Common Stock
which may vest on or after November 4, 1999.
(6) Includes options to purchase 1,000 shares of Common Stock. Does not
include options to purchase 49,000 shares of Common Stock which may vest
on and after September 2, 1999.
(7) Includes options to purchase 12,500 shares of Common Stock. Does not
include options to purchase 47,500 shares of Common Stock which may vest
on or after December 8, 1999.
(8) Includes options to purchase 2,000 shares of Common Stock. Does not
include options to purchase 98,000 shares of Common Stock which may vest
on and after September 2, 1999.
(9) Includes options to purchase 2,000 shares of Common Stock. An adult son
of Frederick A. Moran and employed as Vice-President, Finance of the
Company. Does not include options to purchase 53,000 shares of Common
Stock which may vest on and after December 8, 1999.
(10) An adult son of Frederick A. Moran.
(11) Certain of these shares are subject to potential cancellation pursuant
to arrangements arising out of the sale of the MCC shares and warrants
to the Company. These shares are subject to certain limitations upon
resale and redistribution requirements.
57
<PAGE>
PortaCom Shares
Pursuant to the terms of a Memorandum of Understanding by and among the Company,
PortaCom and the Official Committee of Unsecured Creditors of PortaCom Wireless,
Inc., dated June 8, 1998, certain of the shares owned by PortaCom are subject to
certain contractual restrictions upon resale. Approximately 2,650,000 shares of
Common Stock owned by PortaCom may not be resold until on or about September 17,
1999. Additionally, pursuant to the terms of a settlement agreement dated
November 1998 (the "Settlement Agreement"), approximately 2,000,000 of the
shares of Common Stock that may not be resold until September 17, 1999 are
currently being held in escrow, and may be retained in escrow for up to 18
months. A portion or all of these shares may be released to PortaCom contingent
upon certain performance criteria set forth in the Settlement Agreement. Those
shares not so released will be returned to the Company.
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 50,000,000 shares of Common Stock, $.0001 par
value per share, of which 20,173,583 are outstanding as of June 3, 1999.
Holders of Common Stock have equal rights to receive dividends when and if
declared by the Board of Directors, out of funds legally available therefor.
Holders of Common Stock have one vote for each share held of record and do not
have cumulative voting rights.
Holders of Common Stock are entitled upon liquidation of the Company to share
ratably in the net assets available for distribution, subject to the rights, if
any, of holders of any preferred stock then outstanding. Shares of Common Stock
are not redeemable and have no pre-emptive or similar rights. All outstanding
shares of Common Stock are fully paid and non-assessable.
Preferred Stock
Pursuant to the Company's Certificate of Incorporation, the Board of Directors
has the authority to issue up to 10,000,000 shares of preferred stock, $.0001
par value per share, in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the Company's
stockholders. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders and may adversely affect the voting and other rights
of the holders of Common Stock. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the holders of Common
Stock, including the loss of voting control to others.
58
<PAGE>
Warrants
As of the date hereof, warrants to purchase 1,064,081 shares of Company Common
Stock are outstanding (the "Warrants") as follows:
<TABLE>
<CAPTION>
Number of Warrants Exercise Price Expiration Date
------------------ -------------- ---------------
<S> <C> <C>
893,546 $4.00 (1)
45,000 $5.00 (1)
4,500 $7.00 August 7, 2001
121,035 $6.00 May, 2002
-------
TOTAL: 1,064,081
</TABLE>
(1) Expire 30 days after the date of this Prospectus.
Registration Rights
This Prospectus has been prepared, in part, pursuant to contractual registration
rights granted in connection with the prior sale of certain securities by the
Company in private transactions.
Anti-Takeover Effects of Provisions of the Certificate of Incorporation, Bylaws
and Delaware Law
Certificate of Incorporation and Bylaws
The Company's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), provides that the Board of Directors be divided into three
classes of directors, with each class serving a staggered three-year term. The
classification system of electing directors may tend to discourage a third party
from making a tender offer or otherwise attempting to obtain control of the
Company and may maintain the incumbency of the Board of Directors, as the
classification of the Board of Directors generally increases the difficulty of
replacing a majority of the directors.
Additionally, the Company's Bylaws, as amended (the "Bylaws"), provide that
special meetings of stockholders may only be called by either the Chief
Executive Officer or the President, or pursuant to a written request of a
majority of the Board of Directors. Special meetings may not be called by the
stockholders. These provisions could have the effect of delaying consideration
of a stockholder proposal until the next annual meeting. The provisions would
also prevent the holders of a majority of the voting power of the capital stock
of the Company entitled to vote from unilaterally using the written consent
procedure to take stockholder action. Moreover, a stockholder could not force
the Board of Directors to call a special meeting of the stockholders prior to
the time such persons believe such consideration to be appropriate, except as
required by Delaware law.
59
<PAGE>
The Bylaws establish advance notice procedures with regard to stockholder
proposals and the nomination, other than by or at the direction of the Board of
Directors or a committee thereof, of candidates for election as directors. These
procedures provide that stockholder nominations for the election of directors at
an annual meeting must be in writing and received by the Company's Secretary not
less than 50 days nor more than 75 days prior to the meeting; provided, however,
that in the event that less than 60 days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder must be received not later than the close of business on the tenth
day following the day on which such notice of the date of the meeting was mailed
or such public disclosure was made, whichever first occurs. The notice of
nominations for the elections of directors must set forth certain information
with respect to the stockholder giving the notice and with respect to each
nominee.
By requiring advance notice of nominations by stockholders, the foregoing
procedures will afford the Board of Directors an opportunity to consider the
qualifications of the proposed nominees and, to the extent deemed necessary or
desirable by the Board of Directors, to inform stockholders about such
qualifications. By requiring advance notice of other proposed business, such
procedures will provide the Board of Directors with an opportunity to inform
stockholders prior to such meetings, of any business proposed to be conducted at
such meetings, together with any recommendations as to the Board of Directors'
position regarding action to be taken with respect to such business, so that
stockholders can better decide whether to attend such a meeting or to grant a
proxy regarding the disposition of any such business.
Although the Certificate of Incorporation and the Bylaws do not give the Board
of Directors any power to approve or disapprove stockholder nominations for the
election of directors or proposals for action, they may have the effect of
precluding a contest for the election of directors or the consideration of
stockholder proposals if the proper procedures are not followed, and of
discouraging or deterring a third party from conducting a solicitation of
proxies to elect its own slate of directors or to approve its own proposal, with
regard to whether consideration of such nominee or proposals might be harmful or
beneficial to the Company and its stockholders.
The Certificate of Incorporation provides that the Bylaws of the Company may be
adopted, altered, amended or repealed by the Board of Directors of the Company
except as otherwise provided by law. The Certificate of Incorporation also
provides that any Bylaw made by the Board of Directors, may be altered, amended
or repealed, and new Bylaws made by the affirmative vote of the holders of
two-thirds of the combined voting power of the then outstanding shares of stock
entitled to vote on the proposed adoption, alteration, amendment or repeal of or
to the Bylaws. This provision modifies the default rules of the Delaware General
Corporation Law by providing that the Board of Directors may adopt and modify
the Bylaws. Additionally, the provision alters the Delaware General Corporation
Law by requiring the affirmative vote of two-thirds of the combined voting power
of the than outstanding shares, as opposed to a simple majority.
60
<PAGE>
The Certificate of Incorporation provides that amendments to the Certificate of
Incorporation shall require the affirmative vote of the holders of two-thirds of
the combined voting power of the then outstanding shares of stock entitled to
vote on any proposed amendment to the Certificate of Incorporation. However, in
the event that a resolution to amend the Certificate of Incorporation is adopted
by the affirmative vote of at least eighty percent (80%) of the Board of
Directors, approval of the amendment shall only require the affirmative vote of
the holders of a majority combined voting power of the then outstanding shares
of the stock entitled to vote generally on such amendment. This provision
modifies the default rules of the Delaware General Corporation Law by requiring,
under certain conditions, a higher level of shareholder approval in favor of
modifying the Certificate of Incorporation.
Pursuant to the Company's Certificate of Incorporation, the Board of Directors
has the authority to issue up to 10,000,000 shares of preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of such series,
without further vote or action by the Company's stockholders. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of Common Stock.
The issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others.
The foregoing provisions of the Certificate of Incorporation and Bylaws could
discourage potential acquisition proposals and could delay or prevent a change
in control of the Company. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of the Board of
Directors and in the policies formulated by the Board of Directors and to
discourage certain types of transactions that may involve an actual or
threatened change of control of the Company. These provisions are designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal.
The provisions also are intended to discourage certain tactics that may be used
in proxy fights. However, such provisions could have the effect of discouraging
others from making tender offers for the Company's shares and, as a consequence,
they also may inhibit fluctuations in the market price of the Company's shares
that could result from actual or rumored takeover attempts. Such provisions also
may have the effect of preventing changes in the management of the Company.
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General Corporation Law
("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
61
<PAGE>
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Transfer Agent
The Transfer Agent for the Common Stock is American Stock Transfer & Trust
Company.
SELLING SECURITY HOLDERS
All of the shares of Common Stock of the Company offered by this Prospectus are
being sold for the account of the selling security holders identified in the
following table (the "Selling Security Holders").
The Selling Security Holders are offering for sale an aggregate of 8,722,618
shares of Common Stock which include: (i) 7,658,537 shares of Common Stock; and
(ii) 1,064,081 shares of Common Stock issuable, if at all, upon the exercise of
certain Common Stock purchase warrants (the "Warrants").
The following table sets forth the number of Shares being held of record or
beneficially (to the extent known by the Company) by such Selling Security
Holders and provides (by footnote reference) any material relationship between
the Company and such Selling Security Holder, all of which is based upon
information currently available to the Company.
The shares of Common Stock offered by the Selling Security Holders may be
offered for sale from time to time at market prices prevailing at the time of
sale or at negotiated prices, and without payment of any underwriting discounts
or commissions except for usual and customary selling commissions paid to
brokers or dealers.
62
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES TO BE BENEFICIALLY
PRIOR TO OFFERING(1) OWNED AFTER OFFERING
NAME NUMBER OF SHARES PERCENT SHARES BEING OFFERED NUMBER OF SHARES PERCENT
- ---- ---------------- ------- -------------------- ---------------- -------
<S> <C> <C> <C> <C> <C>
Activated Communications Limited Partnership 43,072 * 39,072 4,000 *
Adase Partners, L.P. 66,000 * 66,000 (2) 0 0%
Alnilam Partners, L.P. 2,185 * 2,185 0 0%
Anne Moran Trust 125 (3) * 125 0 0%
Bermuda Trust Company, as trustee for the
Elanken Family Trust 235,000 1.2% 235,000 (4) 0 0%
Dean Brizel and Jeanne Brizel 22,000 * 22,000 (5) 0 0%
Stephen Buell 22,000 * 22,000 (5) 0 0%
Capital Opportunity Partners One, L.P. 22,000 * 22,000 (5) 0 0%
Clifton Capital Ltd. 205,618 1.0% 185,618 (6) 20,000 *
Arthur Cooper and Joanie Cooper 44,000 * 44,000 (7) 0 0%
Mark Eshman and Jill Eshman trustees
for the Eshman Living Trust dated 9/24/90 22,000 * 22,000 (5) 0 0%
FAC Enterprises, Inc. 175,852 * 129,852 46,000 *
Jeffrey Feingold and Barbara Feingold 22,000 * 22,000 (5) 0 0%
Fred Fraenkel 22,000 * 22,000 (5) 0 0%
Torunn Garin 66,000 * 66,000 (2) 0 0%
Marc Graubart (8) 113,425 * 91,997 21,428 *
ING Barings Furman Selz, LLC (9) 4,500 * 4,500 (10) 0 0%
Henry D. Jacobs, Jr. 112,740 * 40,740 (11) 72,000 (12) *
KAB Investments, Inc. 30,148 * 30,148 0 0%
Graham F. Lacey (13) 70,000 * 45,000 (14) 25,000 *
Anne Moran 124,689 (15) * 124,689 0 *
Clayton F. Moran (16) 1,427,600 7.1% 1,425,600 2,000 *
Frederick A. Moran (17) 3,302,045 (18) 16.4% 3,302,045 0 0%
Frederick A. Moran and Anne Moran 41,380 * 41,380 0 0%
Frederick W. Moran (19) 1,402,750 7.0% 1,402,750 0 0%
Paradigm Group, LLC 435,184 2.2% 435,184 (20) 0 0%
PGP I Investors, LLC 203,703 1.0% 203,703 (21) 0 0%
Tab K. Rosenfeld 18,250 * 18,250 0 0%
Steven B. Rosner 78,610 * 41,110 (22) 37,500 *
Rozel International Holding Company Limited 431,818 2.1% 431,818 (23) 0 0%
Santa Fe Capital Group (NM), Inc. 3,000 * 3,000 0 0%
Scott Schenker and Randi Schenker 22,000 * 22,000 (5) 0 0%
SPH Equities, Inc. 44,852 * 44,852 0 0%
SPH Investments, Inc. 70,000 * 70,000 0 0%
Robert Vicas 22,000 * 22,000 (5) 0 0%
Ernst Von Olnhausen 11,000 * 11,000 (24) 0 0%
Michael Weissman 11,000 * 11,000 (24) 0 0%
TOTAL 8,722,618
</TABLE>
(*) Less than 1%
(1) Based upon 20,173,583 shares of Common Stock outstanding as of June 3,
1999.
(2) Includes 6,000 shares issuable, if at all, upon the exercise of
outstanding Warrants.
(3) A trust for the benefit of Frederick W. Moran, Clayton F. Moran, Kent F.
Moran and Luke F. Moran. Does not include 125 shares, the beneficial
ownership for which is attributed to Frederick A. Moran. Anne Moran is
the mother of Frederick A. Moran.
(4) Represents 235,000 shares issuable, if at all, upon the exercise of
outstanding Warrants.
(5) Includes 2,000 shares issuable, if at all, upon the exercise of
outstanding Warrants.
(6) Represents 185,618 shares issuable, if at all, upon the exercise of
outstanding Warrants.
(7) Includes 4,000 shares issuable, if at all, upon the exercise of
outstanding Warrants.
63
<PAGE>
(8) Former President and Chief Executive Officer of Masatepe Communications,
U.S.A., L.L.C., a Delaware limited liability company and wholly-owned
subsidiary of the Company.
(9) Frederick W. Moran, son of Frederick A. Moran and brother of Clayton F.
Moran, is a managing director of ING Barings Furman Selz, LLC.
(10) Represents 4,500 shares issuable, if at all, upon the exercise of
outstanding Warrants.
(11) Includes 3,703 shares issuable, if at all, upon the exercise of
outstanding Warrants.
(12) Of the 72,000 shares not being offered by Mr. Jacobs hereby, 36,000 are
subject to a contractual restriction on resale until September 6, 1999.
(13) Former Chief Executive Officer, President and Director of the Company.
(14) Represents 45,000 shares issuable, if at all, upon the exercise of
outstanding Warrants.
(15) Includes shares owned individually and in an IRA by Mrs. Moran. Does not
include 125 shares held by the Anne Moran Trust. Does not include 41,380
shares beneficially owned by Frederick A. Moran and Anne Moran.
(16) An adult son of Frederick A. Moran and employed as Vice President,
Finance, of the Company.
(17) Frederick A. Moran serves as Chairman, Chief Executive Officer, Chief
Financial Officer, Secretary and Director of the Company.
(18) Includes 486,437 owned directly Mr. Moran as well as 2,815,608
shares owned, directly or indirectly, by certain members of Mr.
Moran's family and certain entities associated with Mr. Moran's
family, whose ownership is attributed to Mr. Moran. Does not include
124,689 shares beneficially owned by Mr. Moran's mother. Does
not include 41,380 shares beneficially owned by Frederick A. Moran and
Anne Moran. Also, does not include 1,402,750 shares beneficially
owned by Frederick W. Moran and 1,427,600 beneficially owned by
Clayton F. Moran, both of whom are Mr. Moran's adult children. Does
not include options to purchase 210,000 shares of Company Common Stock
which may vest on and after December, 1999.
(19) An adult son of Frederick A. Moran.
(20) Includes 64,814 shares issuable, if at all, upon the exercise of
outstanding Warrants.
(21) Includes 18,518 shares issuable, if at all, upon the exercise of
outstanding Warrants.
(22) Represents 41,110 shares issuable, it at all, upon the exercise of
outstanding Warrants.
(23) Represents 431,818 shares issuable, it at all, upon the exercise of
outstanding Warrants.
(24) Includes 1,000 shares issuable, if at all, upon the exercise of
outstanding Warrants.
64
<PAGE>
PLAN OF DISTRIBUTION
The Selling Security Holders are offering shares of Common Stock for their own
account, and not for the account of the Company. The Company will not receive
any proceeds from the sale of the shares of Common Stock by the Selling Security
Holders.
The Common Stock may be sold from time to time by the Selling Security Holders
or by their pledges, donees, transferees or other successors in interest. Such
sales may be made on the exchange or market upon which the shares trade at the
time, the over-the-counter market or otherwise at prices and at terms then
prevailing or at prices related to the then current market price, or in
negotiated transactions. The Common Stock may be sold by one or more of the
following:
(1) a block trade in which the broker or dealer so engaged will
attempt to sell the shares as agent but may position and resell a
portion of the block as principal to facilitate the transaction;
(2) purchases by a broker or dealer for its account pursuant to this
Prospectus; and
(3) ordinary brokerage transactions and transactions in which the
broker solicits purchases.
In effecting sales, brokers or dealers engaged by the Selling Security Holders
may arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from Selling Security Holders in amounts to be
negotiated immediately prior to the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933 (the "Securities Act") in connection with
such sales. In addition, any securities covered by this Prospectus that qualify
for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to
this Prospectus. The Company will not receive any of the proceeds from the sale
of these shares, although it has paid the expenses of preparing this Prospectus
and the related Registration Statement. The Selling Security Holders have been
advised that they are subject to the applicable provisions of the Exchange Act,
including without limitation, Regulation M thereunder.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission a Registration Statement with respect to the
Common Stock to be issued hereby, of which this Prospectus constitutes a part.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information, reference is hereby made to the Registration Statement and the
exhibits and schedules thereto. Any statements contained herein concerning the
contents of any contract, agreement or other document referred to herein and
files as an exhibit to the Registration Statement or otherwise filed with the
Commission are not necessarily complete. With respect to each such contract,
agreement or other document filed with the Commission as an exhibit, reference
is made to the exhibit for a more complete description of the matter involved,
and each such statement is qualified in its entirety by such reference.
65
<PAGE>
Our Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports,
proxy statements, registration statements and other information with the
Commission. The reports, proxy statements, registration statements and other
information filed by the Company with the Commission may be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661-2511. The public
may obtain information on the operation of the public reference room by calling
the SEC at 1-800-SEC-0330. The Commission also maintains a Web Site at
http://www.sec.gov which contains reports, proxy statements, registration
statements and other information regarding registrants that file electronically
with the Commission. VDC's Common Stock is listed on the American Stock Exchange
("AMEX") under the symbol "VDC".
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for us by
Buchanan Ingersoll Professional Corporation, Eleven Penn Center, 1835 Market
Street, 14th Floor, Philadelphia, Pennsylvania, 19103.
EXPERTS
The balance sheets as of June 30, 1997 and 1998 and the statements of
operations, cash flows, and changes in stockholders' equity for the period
January 3, 1996 (inception) to June 30, 1996 and each of the two years in the
period ended June 30, 1998 included in this Prospectus have been included herein
in reliance on the report of BDO Seidman, LLP, independent accountants, given on
the authority of that firm as experts in accounting and auditing.
66
<PAGE>
VDC Communications, Inc.
Index to Financial Statements
Consolidated Statements of the Company
Report of BDO Seidman, LLP F-2
Balance sheets at June 30, 1998 and June 30, 1997 F-3
Statements of operations for the years ended
June 30, 1998 and 1997 and the period January 2, 1996
(inception) to June 30, 1996 F-4
Statements of stockholders' equity for the
years ended June 30, 1998 and 1997 and the
period January 2, 1996 (inception) to June 30, 1996 F-5
Statements of cash flows for the years ended
June 30, 1998 and 1997 and the period January 2, 1996
(inception) to June 30, 1996 F-6
Notes to consolidated financial statements F-7 - F-23
Interim Financial Statements
Consolidated balance sheets as of June 30, 1998
and March 31, 1999 F-24
Consolidated statements of operations and comprehensive
loss for the nine-month periods ended March 31, 1998
and 1999 (unaudited) F-25
Consolidated statements of cash flows for the
nine-months ended March 31, 1998 and 1999 (unaudited) F-26
Notes to consolidated financial statements (unaudited) F-27 - F-32
67
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders VDC Corporation Ltd.
Greenwich, Connecticut
We have audited the accompanying consolidated balance sheets of VDC Corporation
Ltd. and subsidiaries (formerly Sky King Communications, Inc.) as of June 30,
1997 and 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the period January 3, 1996 (inception)
to June 30, 1996 and each of the two years in the period ended June 30, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of VDC Corporation
Ltd. and subsidiaries at June 30, 1997 and 1998, and the results of their
operations and their cash flows for the period January 3, 1996 (inception) to
June 30, 1996 and each of the two years in the period ended June 30, 1998 in
conformity with generally accepted accounting principles.
BDO Seidman, LLP
Valhalla, New York
September 1, 1998
F-2
68
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, June 30,
Assets 1997 1998
-------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $1,430 $2,212,111
Marketable securities (Note 3) 451,875
Notes receivable - current (Note 4) 2,800,000
-------------------------
Total current assets 1,430 5,463,986
Property, plant and equipment, less accumulated
depreciation (Note 7) 13,570 331,316
Notes receivable, less current portion (Note 4) 1,500,000
Investment in MCC (Note 5) 37,790,877
Deposits (Note 7) 567,775
Other assets 169,730
-------------------------
Total assets $15,000 $45,823,684
=========================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses 250 156,185
-------------------------
Total current liabilities 250 156,185
-------------------------
Commitments (Notes 5, 7, 11 and 13)
Stockholders' equity:
Convertible Preferred Stock Series A (Note 8) 550 399
Convertible Preferred Stock Series B (Note 8) 60
Common stock (Note 8) 22,923,214
Additional paid-in capital 73,331 29,417,561
Accumulated deficit (59,131) (5,323,559)
Stock subscriptions receivable (Note 6) (1,425,951)
Unrealized gain on marketable securities (Note 3) 75,775
-------------------------
Total stockholders' equity 14,750 45,667,499
-------------------------
Total liabilities and stockholders' equity $15,000 $45,823,684
=========================
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
69
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
January 3, 1996
(inception) to Year Ended Year Ended
June 30, 1996 June 30, 1997 June 30, 1998
----------------------------------------------
<S> <C> <C> <C>
Revenue (Note 11) $ 4,850 $ 43,248 $ 99,957
Site leasing expense (Note 11) 1,091 22,020 28,460
Selling, general and administrative 30,461 53,657 1,167,429
Non-cash compensation expense (Note 9) -- -- 2,254,000
----------------------------------------------
Loss from operations (26,702) (32,429) (3,349,932)
Interest income -- -- 195,122
----------------------------------------------
Net loss $ (26,702) $ (32,429) $ (3,154,810)
==============================================
Net loss per common share - basic ($0.01) ($0.01) ($0.72)
----------------------------------------------
Weighted average number of shares outstanding 3,699,838 3,699,838 4,390,423
----------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
70
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Convertible Convertible
Preferred Stock Preferred Stock
Series A Series B Common Stock
Shares Amount Shares Amount Shares
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 3, 1996 -- $-- -- $ -- --
Issuance of common stock (Note 2) 5,500,000 550 -- -- --
Capital contribution -- -- -- -- --
Net loss -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Balance - June 30, 1996 5,500,000 550 -- -- --
Capital contribution -- -- -- -- --
Net loss -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Balance - June 30, 1997 5,500,000 550 -- -- --
Issuance of stock subscription receivable (note 6) -- -- -- -- --
Reverse acquisition (Note 9) -- -- -- -- 3,698,373
collections on stock subscriptions receivable -- -- -- -- --
Release of escrow shares (Note 9) -- -- 600,000 60 --
Issuance of common stock in connection with
investment in MCC (Note 5) -- -- -- -- 4,965,828
Issuance of common stock -- -- -- -- 1,130,584
Issuance of stock for notes (Note 6) -- -- -- -- 154,322
Preferred stock conversion to common stock (1,512,500) (151) -- -- 1,512,500
Unrealized gain on marketable securities -- -- -- -- --
Net loss -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Balance - June 30, 1998 3,987,500 $ 399 600,000 $ 60 11,461,607
=================================================================================================================
Additional Stock Unrealized Gain
Common Stock Paid-in Accumulated Subscriptions on Marketable
Amount Capital Deficit Receivable Securities Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 3, 1996 $- $- $- $- $- $-
Issuance of common stock (Note 2) -- 450 -- -- -- 1,000
Capital contribution -- 41,951 -- -- -- 41,951
Net loss -- -- (26,702) -- -- (26,702)
- --------------------------------------------------------------------------------------------------------------------------------
Balance - June 30, 1996 -- 42,401 (26,702) -- -- 16,249
Capital contribution -- 30,930 -- -- -- 30,930
Net loss -- -- (32,429) -- -- (32,429)
- --------------------------------------------------------------------------------------------------------------------------------
Balance - June 30, 1997 -- 73,331 (59,131) -- -- 14,750
Issuance of stock subscription receivable (note 6) -- 164,175 -- (164,175) -- --
Reverse acquisition (Note 9) 7,396,724 (237,506) (1,105,524) (465,838) -- 5,587,856
collections on stock subscriptions receivable -- -- -- 287,800 -- 287,800
Release of escrow shares -- 3,258,034 (1,004,094) -- -- 2,254,000
Issuance of common stock in connection with
investment in MCC (Note 5) 9,931,678 24,686,946 -- -- -- 34,618,624
Issuance of common stock 2,261,168 3,722,336 -- -- -- 5,983,504
Issuance of stock for notes (Note 6) 308,644 775,094 -- (1,083,738) -- --
Preferred stock conversion to common stock 3,025,000 (3,024,849) -- -- -- --
Unrealized gain on marketable securities -- -- -- -- 75,775 75,775
Net loss -- -- (3,154,810) -- -- (3,154,810)
- --------------------------------------------------------------------------------------------------------------------------------
Balance - June 30, 1998 $ 22,923,214 $ 29,417,561 $(5,323,559) $(1,425,951) $75,775 $ 45,667,499
================================================================================================================================
See accompanying notes to consolidated financial statements
</TABLE>
F-5
71
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Period Ended
June 30, 1996 Year Ended Year Ended
(since inception) June 30, 1997 June 30, 1998
-----------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (26,702) $ (32,429) $ (3,154,810)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 1,540 3,390 6,205
Non-cash compensation expense -- -- 2,254,000
Changes in operating assets and liabilities:
Prepaid expenses and other assets (466) 466 122,770
Deposits -- -- (78,624)
Accounts payable and accrued expenses 250 -- (8,931)
-----------------------------------------------------
Net cash flows used by operating activities (25,378) (28,573) (859,390)
Cash flows from investing activities:
Purchase of investment securities - - (288,600)
Proceeds from repayment of notes receivable - - 700,000
Cash paid for investment in MCC - - (2,799,731)
Deposits on fixed assets - - (489,151)
Fixed asset acquisition - - (323,951)
-----------------------------------------------------
Net cash flows used by investing activities - - (3,201,433)
Cash flows from financing activities:
Proceeds from issuance of common stock 1,000 -- 6,271,504
Capital contribution 26,551 27,830 --
-----------------------------------------------------
Net cash flows from financing activities 27,551 27,830 6,271,504
Net increase (decrease) in cash and cash equivalents 2,173 (743) 2,210,681
Cash and cash equivalents, beginning of period -- 2,173 1,430
-----------------------------------------------------
Cash and cash equivalents, end of period $ 2,173 $ 1,430 $ 2,212,111
=====================================================
Supplemental schedule of non-cash investing and financing activities:
Net assets acquired in exchange for capital stock $- $- $5,587,856
Investment in MCC in exchange for capital stock - - 34,618,624
Investment in MCC in exchange for loan receivable - - 372,522
Stock subscription for common stock - - 1,083,738
Fixed assets contributed by stockholders 15,400 3,100 -
=====================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
72
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Notes to Consolidated Financial Statements
1. Organization and VDC Corporation Ltd. (formerly Sky King
Business Operations Communications, Inc.) (the "Company") was
incorporated in Connecticut on January 3, 1996 to
engage in the international telecommunications
and wireless communications businesses.
2. Significant Accounting (a) Basis of Presentation
Policies
On March 6, 1998 ("Effective date"), Sky
King Communications, Inc. ("Sky King") entered
into a merger agreement with VDC Corporation
Ltd. ("VDC") and VDC (Delaware), Inc. ("Sub",
a wholly-owned subsidiary of VDC). Under the
agreement, all of the outstanding shares of
Sky King's common stock were exchanged for Sub
preferred stock convertible into up to 10
million newly issued shares of Sub common
stock. Sub Preferred Stock Series A that is
convertible into 5.5 million shares of Sub
common stock was issued at the closing, and
Sub Preferred Stock Series B convertible into
the remaining 4.5 million shares of Sub common
stock was placed and held in escrow pending
the achievement of certain performance
criteria. The Merger Agreement requires the
Company to use diligent efforts to domesticate
as a United States corporation within one year
following the Effective Date. The
domestication is anticipated to occur through
the merger of the Company into the Sub (the
"Domestication Merger"). Upon the occurrence
of the Domestication Merger, the shares of Sub
Preferred Stock issued to the former Sky King
shareholders in the Merger would automatically
convert into shares of Sub Common Stock. In
the event that the Domestication Merger does
not occur within one year following the
Effective Date, the Sub Preferred Stock would
be converted for common shares of the Company
(the "Company Common Shares"), on a share for
share basis, resulting in the issuance of up
to 10,000,000 Company Common Shares. Based
upon the number of Company Common Shares
outstanding as of the Effective Date, the
former Sky King Shareholders would become the
majority shareholders of the Company Common
Shares through either the Domestication Merger
or through the issuance of Company Common
Shares in lieu of the Domestication Merger.
Simultaneous with the merger, Sub changed its
name to Sky King Communications, Inc. This
transaction was accounted for as a reverse
acquisition whereby Sky King is the acquirer
for accounting purposes. Accordingly, the
historical financial statements presented are
those of Sky King prior to the merger on March
6, 1998 and reflect the consolidated results
of Sky King and VDC, and VDC's wholly-owned
subsidiary subsequent to the merger. For
periods prior to the merger, the Sky King
shares outstanding have been retroactively
restated to reflect the number of shares and
par value of VDC (Delaware), Inc. shares
received in the merger. In September 1998, Sky
King Communications, Inc. changed its name to
VDC Communications, Inc.
73
<PAGE>
(b) 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. At June
30, 1998, cash equivalents of $2,158,159 was
held in money market funds.
F-7
74
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Notes to Consolidated Financial Statements
(c) Investments
Investments in marketable securities are
classified as available-for-sale and are
reported at fair values in accordance with
Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." The fair
values are based on quoted market prices, and
any unrealized gains or losses are excluded
from earnings and reported in stockholders'
equity. Realized gains and losses are recorded
in the income statement and the cost assigned
to securities sold is based on the specific
identification method.
The Company's investment in MCC has been
recorded under the cost method (see Note 5)
(d) Property, Plant and Equipment and Depreciation
Property, plant and equipment are stated at
cost. Depreciation is computed over the
estimated lives of the assets using the
straight-line method.
(e) Credit Risk
Financial instruments which potentially
subject the Company to concentrations of
credit risk consist principally of temporary
cash investments. The Company's cash
investments are placed with high credit
quality financial institutions and may exceed
the amount of federal deposit insurance.
(f) Principles of Consolidation
The financial statements include the
consolidated accounts of the company and
subsidiaries with significant intercompany
accounts and transactions eliminated.
(g) Income Taxes
Deferred income taxes are provided, when
applicable, on differences between the
financial reporting and income tax bases of
assets and liabilities based upon statutory
tax rates enacted for future periods.
F-8
75
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Notes to Consolidated Financial Statements
(h) Use of Estimates
In preparing the financial statements in
conformity with generally accepted accounting
principles, management is required to make
estimates and assumptions that affect the
reported amounts of assets and liabilities and
the disclosure of contingent assets and
liabilities at the date of the financial
statements, and revenues and expenses during
the reporting period. The Investment in MCC
was valued based on criteria discussed at Note
5. Actual results could differ from those
estimates.
(i) Financial Instruments
The carrying amounts of financial instruments
including cash and cash equivalents and
accounts payable approximated fair value as of
June 30, 1998, because of the relatively short
maturity of these financial instruments. The
carrying value of long-term notes receivable,
including the current portion, approximated
fair value as of June 30, 1998, based upon
quoted market prices for similar debt issues.
The Investment in MCC approximated fair value
as of June 30, 1998 based on valuation
criteria discussed at Note 5.
(j) Loss Per Share of Common Stock
During February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No.
128 "Earnings Per Share," which replaces the
presentation of primary earnings per share
("EPS"), with basic EPS. It also requires dual
presentation of basic and diluted EPS. The
Company adopted SFAS 128 as of July 1, 1997.
The adoption of SFAS 128 did not affect the
Company's financial statement disclosures.
Loss per common share-basic is computed using
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. If
the preferred shares issued were considered to
be common shares, loss per share would have
been $(0.00), $(0.00) and $(0.44) for the
periods ended June 30, 1996, June 30, 1997 and
June 30, 1998.
F-9
76
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Notes to Consolidated Financial Statements
(k) Long-Lived Assets
The Company reviews certain long-lived assets
and identifiable intangibles for impairment
whenever events or changes in circumstances
indicate that the carrying amount may not be
recoverable. In that regard, the Company
assesses the recoverability of such assets
based upon estimated non- discounted cash flow
forecasts.
(l) Revenue and Cost Recognition
Revenues are derived under sub-lease
agreements for radio tower and antenna space.
Revenues and the associated site-leasing costs
are recognized under the terms of the
operating lease agreements.
(m) Recent Accounting Standards
Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income,"
established standards for reporting and
display of comprehensive income, its
components and accumulated balances.
Comprehensive income is defined to include all
changes in equity except those resulting from
investments by owners and distributions to
owners. Among other disclosures, SFAS No. 130
requires that all items that are required to
be recognized under current accounting
standards as components of comprehensive
income be recognized under current accounting
standards as components of comprehensive
income and reported in a financial statement
that is displayed with the same prominence as
other financial statements.
Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an
Enterprise and Related Information", which
supersedes SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise"
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
defines 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.
F-10
77
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Notes to Consolidated Financial Statements
Both SFAS Nos. 130 and 131 are effective for
financial statements for fiscal years
beginning after December 15, 1997 and require
comparative information for earlier years to
be restated. The adoption of SFAS No. 130 is
not expected to have a material effect on the
Company's financial statement disclosures. The
Company is currently reviewing the effect of
SFAS No. 131 but has yet been unable to fully
evaluate the impact, if any, it may have on
future financial statement disclosures.
3. Marketable Securities Marketable equity securities, which are available
for sale are measured at fair value, with net
unrealized gains and losses included as a
component of stockholders' equity. Gross
unrealized holding gains of $75,775 were
included as changes in the component of
stockholders' equity during the periods ended
June 30, 1998 ($0 in 1996 and 1997). The
Company uses the specific identification method
to determine the cost of securities sold.
4. Notes Receivable Notes receivable which resulted from the sale
of certain VDC Corporation, Ltd. investments to
unrelated parties prior to the March 6, 1998
merger (Note 9) have repayment terms through
September, 1999 and bear interest at 8%. The
notes are with recourse against the general
assets of the debtors and are collateralized
by the related investments sold which consisted
of its investments in private and publicly-traded
companies. As of June 30, 1998, the notes
receivable and related collateral consisted of
the following:
$3,500,000 due from Rozel International Holdings
Limited, collateralized by 3,972,877 shares of
netValue, Inc., notes in the aggregate principal
amount of $200,000 due from netValue, 100,000
shares of Informatix, Inc., and $700,000 principal
amount note due from Informatix.
$800,000 due from Tasmin Limited, collateralized
by 15,836,364 shares of Tamaris PLC, a note in the
principal amount of $167,842 due from Silk
Securities, notes receivable in the aggregate
principal amount of $161,990 due from MJZ
Securities Ltd., advances amounting to $119,264
due from EPSOM Investment Services and an
investment in FIP Holdings, Ltd. in the aggregate
amount of $330,000.
Under the agreements, principal payments due under
these notes are $450,000 in June 1998, $1,350,000
in February 1999, $1,000,000 in May 1999,
$1,000,000 in August 1999 and $500,000 in
September 1999. The borrowers have made payments
of $1,000,000 since the inception of these notes,
including $700,000 through June 30, 1998. Interest
of $161,333 has been accrued on these notes
through June 30, 1998.
F-11
78
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Notes to Consolidated Financial Statements
5. Investment in MCC On June 8, 1998 the Company acquired from
Portacom Wireless, Inc. ("PortaCom") two million
shares of common stock of Metromedia China
Corporation (formerly Metromedia Asia Corporation)
("MCC") and warrants to purchase four million
shares of common stock of MCC at $4.00 per share.
The warrants expire on September 13, 1999. 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 the projects' distributable cash
flows. The purchase price and number of shares
under the warrant agreemen t are subject to
adjustments based on capital changes of MCC. The
investment was recorded at cost, based on the
consideration given which included 4,915,828
common shares of the Company at the market value
of $6.98125, the elimination of a loan receivable
and accrued interest of $390,522 and $2,781,731
in cash. The Company's management has stated that
they intend to raise the necessary funds to
exercise the warrants. The MCC common shares
and warrants represent a potential 8.7% interest
in the outstanding common stock of MCC on a fully
exercised basis. In connection with the MCC
acquisition, the Company incurred an investment
advisory fee of 50,000 common shares 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. In connection with PortaCom's
bankruptcy proceedings, the acquisition agreement
provides that the Company will fund an escrow
account in the amount of up to $2,682,000
(included in the $2,781,731 noted above) for the
benefit of holders of priority unsecured claims
and general unsecured claims against PortaCom's
bankruptcy estate. The extent that the cash escrow
is used by PortaCom, it will receive fewer VDC
shares. The number of VDC shares that will
ultimately be issued shall be the difference
between 5,300,000 shares and the principal amount
of the cash escrow divided by the value of the
Company's stock. The escrow fund and VDC shares
shall be held in escrow pending the resolution of
the disputed claims against PortaCom's bankruptcy
estate.
F-12
79
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Notes to Consolidated Financial Statements
In the event that on the one year anniversary of
the closing date of the acquisition agreement with
PortaCom, MCC is a publicly held company whose
shares are registered with the Securities and
Exchange Commission under the securities act of
1933, the Company may be required to pay PortaCom
additional purchase consideration in accordance
with an agreed upon formula as follows:
(MCC Market Price/$12) - (VDC Market Price/$5) X
$5,000,000.
6. Stock Subscriptions In December 1997, a shareholder acquired 465.3
shares of Sky King Communications, Receivable
Inc. for a note amounting to $164,175.
These shares were subsequently exchanged for VDC
(Delaware), Inc. Preferred Stock issued in
connection with the Merger (See Note 9). The
note, which bears interest at 8%, matures in
December, 1999. This note has been presented
as a reduction of stockholders' equity.
In March 1998, prior to the merger ( Note 9),
253,000 shares of VDC were issued in exchange for
a $632,500 note which bears interest at 8% and is
due in March, 1999. The stock subscription
receivable arose in connection with the merger as
a component of the capital structure of VDC
Corporation Lrd., which was assumed in the reverse
acquisition merger. It was entered into with an
unrelated third party at fair value prior to the
merger. The unpaid balance at June 30, 1998 of
$344,700 has been presented as a reduction of
stockholders' equity.
In May 1998, 583,430 shares of VDC were issued in
exchange for $3,500,580. As of June 30, 1998,
$917,076 had not yet been funded and has been
presented as a reduction of stockholders' equity.
7. Property, Plant and Major classes of property, plant and equipment
Equipment consist of the following:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1998
<S> <C> <C>
Long distance communication equipment $ - $ 115,538
Computers and office equipment 11,900 191,219
Furniture and fixtures 6,600 34,442
----- ------
18,500 341,199
Less accumulated depreciation 4,930 9,883
----- -----
$13,570 $331,316
======= ========
</TABLE>
F-13
80
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Notes to Consolidated Financial Statements
The Company had approximately $444,000 on
deposit, and has additional firm purchase
commitments in the amount of $946,000 for long
distance communication equipment at June 30,
1998.
8. Capital Stock and Capital stock is comprised of the following:
Capital Transactions
<TABLE>
<CAPTION>
30-Jun-97 30-Jun-98
<S> <C> <C>
Convertible Preferred Stock Series A of VDC
(Delaware), Inc., non-voting, $.0001 par
value, shares authorized, 5,500,000 at June 30,
1997 and 3,987,500 at June 30,
1998(a) $550 $399
Convertible Preferred Stock Series B of VDC
(Delaware), Inc. non-voting $.0001 par
value shares authorized 4,500,000 issued
and outstanding 600,000 at June 30,
1998(a) - $60
Common stock of VDC Corporation, Ltd. $2
par value, shares authorized 50,000,000,
issued and outstanding 11,461,607 at June
30, 1998 - $22,923,214
</TABLE>
(a) The convertible preferred stock, which is non
voting, is convertible into up to 10 million newly
issued shares of VDC (Delaware), Inc. common stock
upon the domestication of VDC Corporation Ltd.
into VDC (Delaware), Inc. If the domestication
does not occur within one year of the merger (Note
9), the convertible preferred stock will be
exchangeable into common stock of VDC Corporation
Ltd. on a share for share basis. There are 3.9
million shares of Series B Preferred Stock held in
escrow at June 30, 1998 under the merger agreement
(See Note 9). In June, 1998, with the approval of
the Boards of Directors of VDC and Sub, 1,512,500
shares of Convertible Preferred Stock Series A
were converted into 1,512,500 shares of VDC
Corporation Ltd. Common Stock. The Exchange was
accounted for on a share for share basis with the
cumulative difference in par values reflected as
an adjustment to additional paid in capital.
On March 6, 1998, Sky King Communications, Inc.
entered into a merger agreement with VDC
Corporation Ltd. and VDC (Delaware), Inc. wherein
all of the outstanding shares of Sky King
Communications, Inc. were exchanged for
preferred shares of VDC (Delaware), Inc. (See
Note 9). For periods prior to the merger, the
Sky King Communications, Inc. shares outstanding
have been retroactively restated to reflect the
number of shares and par value of VDC (Delaware),
Inc. shares received in the merger.
F-14
81
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Notes to Consolidated Financial Statements
On March 31, 1998, the Company sold 100,000 shares
of common stock at $5.50 and on March 24, 1998,
600,000 shares of common stock at $4.75, each to
unrelated investors for total cash consideration
of $3,400,000 less an investment fee of $85,500.
The 600,000 shares have not been issued, but for
financial statement purposes such shares have been
treated as if they had been issued and
outstanding.
During the year ended June 1998, the Company
issued options to purchase an aggregate of 61,500
common stock shares of VDC Corporation, Ltd. for
prices ranging from $5.00 to $6.00 per share.
9,000 of these options vest immediately. The
remaining options vest over five years. All the
options expire after ten years.
At June 30, 1998, the Company had outstanding
warrants to acquire an aggregate of 938,546 shares
of common stock at prices ranging from $4.00 to
$5.00. These warrants were issued prior to the
March 6, 1998 merger in connection with
obligations arising prior to that date. The
warrants were assumed by Sky King in the merger.
The warrants originally were to expire in August
1998. At that date, they were extended until 30
days following the effective date of a
registration statement for the underlying common
stock.
In May, 1998 the Company sold 275,000 shares of
common stock to unrelated investors and 308,430
shares to the Chief Executive Officer and his
family for $6.00 per share less an investment
banking fee of $31,500. These shares have not been
issued, but for financial statement purposes such
shares have been treated as if they had been
issued and outstanding.
In June 1998, the Company issued to escrow
5,300,000 shares of common stock for PortaCom in
exchange for the investment in MCC (See Note 5).
4,915,828 shares have been reflected as
outstanding under the agreement as of June 30,
1998. In addition, as of June 30, 1998 50,000
common shares representing an investment advisory
fee had not been issued, but for financial
statement purposes such shares have been treated
as if they had been issued and outstanding.
The Company is obligated to pay investment banking
fees in connection with the merger in an aggregate
amount equal to 5% of the total merger
consideration or 444,852 common shares of VDC
Corporation, Ltd. (Note 9). The issuance of the
shares is subject to the satisfaction of certain
contingencies relating to the collection of stock
subscriptions receivable existing at the date of
merger which have not yet been satisfied. Upon
issuance, the shares will be accounted for as an
additional cost of acquiring the net monetary
assets of VDC Corporation, Ltd. This will result
in the recognition of the shares at the fair value
as of the date of the merger ($2.50 a share) and a
corresponding increase in accumulated deficit.
F-15
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<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Notes to Consolidated Financial Statements
9. Merger On March 6, 1998, Sky King Communications, Inc.
entered into a merger agreement with VDC
Corporation Ltd. and VDC (Delaware), Inc.(See Note
2). This transaction is being accounted for as
a reverse acquisition whereby Sky King is the
acquirer for accounting purposes. Since the assets
and liabilities of VDC Corporation Ltd. acquired
were monetary in nature, the merger has been
recorded at the value of the net monetary assets.
VDC Corporation Ltd. operated as an investment
company prior to the merger. Its assets and
liabilities consisted of cash, notes receivable,
investments in and advances to PortaCom and
accounts payable. Operations of VDC Corporation
Ltd. consisted of the management of its
investments.
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 Sub (the "Sub Preferred
Stock") which is convertible, in the aggregate,
into 10,000,000 shares of common stock of Sub (the
"Sub Common Stock"). Of the consideration paid to
the Sky King Shareholders, Sub Preferred Stock
convertible in the aggregate into 4,500,000 shares
of Sub Common Stock (the "Escrow Shares") was
placed in escrow to be held and released from time
to time as the Sub achieves certain performance
criteria described below. To the extent that any
of the Escrow Shares have not been released at the
expiration of an escrow period of five (5) years
(the "Escrow Period"), the remaining Escrow Shares
shall be surrendered to the Company for
cancellation.
The historical financial statements presented are
those of Sky King prior to the merger and reflect
the consolidated results of Sky King and VDC, and
VDC's wholly-owned subsidiaries subsequent to the
merger. Pro forma unaudited consolidated results
of operations as if the merger had taken place as
of July 1, 1996, rather than at March 6, 1998 are
as follows:
<TABLE>
<CAPTION>
Years ended June 30,
1997 1998
<S> <C> <C>
Revenue $ 43,248 $ 99,957
Loss before extraordinary items $(1,205,416) $(4,764,998)
Net loss $(1,637,691) $(4,764,998)
Net loss per common share - basic $ (0.44) $ (1.09)
</TABLE>
F-16
83
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Notes to Consolidated Financial Statements
Escrow shares will be released to the Sky King shareholders from time to time in
accordance with the following schedule:
Number of Shares to be Released(1) Performance Criteria
---------------------------------- --------------------
500,000 Upon each procurement
of one or more
frequency, operating
and/or business
licenses ("Licenses")
to provide the
following types of
services (the
"Services") to an
aggregate minimum
population of 500,000
people: wireless or
wired telephony, local
loop telephony, and in
country long distance
telephony services,
international long
distance telephony
gateways or internet
service provision;
plus
- --------------------------------------------------------------------------------
100,000 for each 100,000
people in excess of
the aggregate minimum
population of 500,000
covered by the
Licenses.
- --------------------------------------------------------------------------------
500,000 The provision of
billing services at an
average rate of
100,000 bills per
month for a
consecutive three
month period.
- --------------------------------------------------------------------------------
100,000 Upon each procurement
of $1,000,000 of
appropriate financing
for the provision of
Services or for
capital expenditures
or other expenses
associated with the
Services; or
procurement of
$200,000 of
appropriate financing
for the provision
of paging services or
for capital
expenditures or other
expenses associated
with the provision
of paging services.
- --------------------------------------------------------------------------------
100,000 Upon each procurement
of one or more for
Licenses to provide
paging services an
aggregate minimum
population of 500,000
people; plus
- --------------------------------------------------------------------------------
100,000 for each 100,000
people in excess of
the aggregate minimum
population of $500,000
covered by the
Licenses.
84
<PAGE>
(1) The aggregate number of shares of Sub Common Stock (or if the
Domestication Merger does not occur within one year after the Effective
Date, the VDC (Common Shares) to be released resulting from the
conversion of Escrow Shares.
During the year ended June 30, 1998, 600,000 shares were released from
escrow. Of the 600,000 shares released, 415,084 shares were considered
to be compensatory resulting in non-cash compensation of $2,254,000
based on the fair value of the Company's common stock when released.
Compensatory shares are related to members of the Company's management,
their family trusts and minor children and two employees.
Non-compensatory shares released related to former Sky King shareholders
who are neither employee shareholders nor 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 issued stock is recorded at fair value on the date of release
through a charge to accumulated deficit. The future release of escrow
shares which are considered compensatory could have a significant impact
on the Company's future operating results.
F-17
85
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Notes to Consolidated Financial Statements
10. Income Taxes The Company has net operational loss carryforwards
in the amount of approximately $900,000 at June
30, 1998 which expire in 2018.
As of June 30, 1998, the Company had deferred tax
assets of approximately $360,000, for which a
valuation allowance has been established. Deferred
income taxes result primarily from net operating
loss carryforwards.
11. Leases The Company leases radio tower and antenna
space under various operating leases. The future
remaining minimum lease payments under these
leases are as follows:
<TABLE>
<CAPTION>
Years ending June 30,
---------------------
<S> <C>
1999 $35,460
2000 35,973
2001 31,686
2002 21,307
2003 2,135
-----
Total $126,561
--------
</TABLE>
The Company sub-leases the radio tower and antenna
space with future remaining minimum lease payments
due to the Company as follows:
<TABLE>
<CAPTION>
Years ending June 30,
---------------------
<S> <C>
1999 $72,709
2000 83,519
2001 41,361
2002 15,159
------
Total $212,748
--------
</TABLE>
F-18
86
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Notes to Consolidated Financial Statements
11. Lease (continued) The Company occupies office and equipment space
and equipment pursuant to operating leases expiring
through 2008. Future minimum lease payments are as
follows:
<TABLE>
<CAPTION>
Year ending June 30,
--------------------
<S> <C>
1999 $935,213
2000 953,803
2001 959,678
2002 965,181
2003 970,590
Thereafter 1,036,702
---------
$5,821,167
==========
</TABLE>
Rent expense for the years ended June 30, 1998 and
1997 and period ended June 30, 1996 was not
material to the financial statements.
12. Stock Option Plans The Company granted 61,500 stock options during
the year ended June 30, 1998. All stock options
have been granted to employees at exercise prices
equal to the market value on the date of the grant.
The Company applies APB Opinion 25, "Accounting
for Stock Issued to Employees" and related
Interpretations in accounting for its stock
option plan by recording as compensation expense
the excess of the fair market value over the
exercise price per share as of the date of
grant. Under APB Opinion 25, because the exercise
price of the Company's employee stock options
equals the market price of the underlying stock on
the date of the grant, no compensation cost is
recognized.
In September 1998, VDC Communications, Inc.
established the Voice and Data Communications 1998
Stock Option Plan (the "1998 Plan"). The 1998 Plan
provides for the grant of incentive stock options to
purchase up to 5,000,000 shares of common stock to
employees of VDC Communications, Inc. and
non-qualified stock options to employees, officers,
directors and consultants of VDC Communications,
Inc. The 1998 Plan is administered by a committee
appointed by the Board which determines the terms of
the options granted, including the exercise price,
the number of shares subject to option, and the
option vesting period. The exercise price of all
options granted under the Plan must be at least 100%
of the fair market value on the date of the grant.
Options generally vest in equal annual increments
over a five-year period.
F-19
87
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Notes to Consolidated Financial Statements
SFAS No. 123 requires the Company to provide pro
forma information regarding net loss per share as
if compensation cost for the Company's stock
option plan has been determined in accordance with
the fair value based method prescribed in FASB
123. The Company estimates the fair value of each
stock option at the grant date by using the
Black-Scholes pricing model with the following
weighted-average assumptions used for grants in
1998.
<TABLE>
<CAPTION>
Years ended June 30, 1998
-------------------- ----
<S> <C>
Dividend yield 0.0%
Risk free interest rate 5.6%
Expected volatility 46.5%
Expected lives 6 years
</TABLE>
Under the accounting provisions of FASB Statement
123, the Company's net loss and net loss per share
would have been adjusted to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Year ended June 30, 1998
------------------- ----
<S> <C>
Pro forma results
Net loss:
As reported $(3,154,810)
Pro forma $(3,188,260)
Loss per common share-basic
As reported $(0.72)
Pro forma $(0.73)
</TABLE>
F-20
88
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Notes to Consolidated Financial Statements
A summary of status of the Company's stock option
plan as of June 30, 1998 and changes for the year
ending June 30, 1998 is presented below:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Stock option Plan Grants Shares Price
------------------------ ------ -----
<S> <C> <C>
Outstanding at June 30, 1997 -- --
Granted 61,500 $5.16
Outstanding at June 30, 1998 61,500 $5.16
Options exercisable and weighted average
fair-value of options granted during the year
ended June 30, 1998 is shown below:
Options exercisable at year-end 9,000
Weighted average exercise price $5.00
Weighted average fair value of options
granted during the year $2.88
</TABLE>
The following table summarizes information about
stock options outstanding at June 30, 1998.
<TABLE>
<CAPTION>
Weighted
Weighted
Average
Average
Number Remaining
Exercise
Range of Prices Outstanding Contractual Life Price
--------------- ----------- ---------------- -----
<S> <C> <C> <C>
$5 to $6 61,500 9.8 years $5.16
</TABLE>
During the initial phase-in period of SFAS 123,
the effects on the pro-forma results are not
likely to be representative of the effect on pro
forma results in future years since options vest
over several years and additional awards could be
made each year.
F-21
89
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Notes to Consolidated Financial Statements
13. Commitments Employment Agreements
The Company has entered into eleven multi-year
employment agreements expiring through 2003 with
officers of the Company, which provide for
aggregate annual base salaries as follows:
<TABLE>
<CAPTION>
Years ended June 30,
--------------------
<S> <C>
1999 $996,000
2000 990,000
2001 861,000
2002 269,000
2003 188,000
---- -------
$3,304,000
==========
</TABLE>
14. Subsequent Events Asset Purchases
On July 31, 1998 the Company acquired Masatepe
Communications USA, L.L.C. ("Masatepe") for
$1,140,043 in cash and stock. The consideration
has been placed in escrow pending Federal
Communications Commission approval. Masatepe
provides voice and data telecommunications
services between the United States and Central
American markets.
In addition, there may be compensation due a
former 20% shareholder of Masatepe who is now a
current employee of VDC that is contingent upon
future cash flows (as defined) under the following
formula:
Cash flows of Masatepe for the twelve months prior
to July 31, 2001 plus, cash flows for the three
months prior to July 31, 2001 times four. This
product is divided by two and multiplied by 2.4.
A finders fee consisting of warrants to purchase
4,504 shares of Company common stock at $7.00 per
share was issued in connection with the
transaction.
In July 1998, the Company entered into a
preliminary agreement, which is subject to due
diligence review, to acquire substantially all the
assets of World Lynx, Inc. ("WL") for $3,100,000
in common stock and $500,000 in debt assumption.
WL is an Internet service provider based in Little
Rock, Arkansas.
F-22
90
<PAGE>
VDC Corporation Ltd. and Subsidiaries
(Formerly Sky King Communications, Inc.)
Notes to Consolidated Financial Statements
15. Fourth Quarter During the fourth quarter of the year ended
Financial Information June 30, 1998, the Company recorded non-cash
compensation expense of $1,453,000, related to
the release of Preferred Series B shares from
escrow (See Note 9).
F-23
91
<PAGE>
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VDC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1999 June 30, 1998
(Unaudited)
<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 241,507 $ 2,212,111
Restricted cash (Note 10) 411,713 -
Marketable securities 103,630 451,875
Accounts receivable 396,991 -
Notes receivable - current 1,254,979 2,800,000
------------------------------------
Total current assets 2,408,820 5,463,986
Property and equipment, less accumulated depreciation 5,747,236 331,316
Notes receivable, less current portion - 1,500,000
Investment in MCC (Note 4) 4,340,000 37,790,877
Intangible assets less accumulated amortization 756,369 -
Investment - at equity (Note 7) 96,092 -
Other assets 324,623 737,505
------------------------------------
====================================
Total assets $13,673,140 $ 45,823,684
====================================
Liabilities and Stockholders' Equity
Current:
accounts payable and accrued expenses $3,516,106 $ 156,185
current portion of capitalized lease obligations (Note 13) 554,996
note payable - officer (Note 12) 500,000 -
------------------------------------
Total current liabilities 4,571,102 156,185
long-term portion of capitalized lease obligations (Note 13) 913,503 -
------------------------------------
Total liabilities 5,484,605 156,185
Stockholders' equity:
convertible preferred stock series B - 60
common stock 1,881 1,545
additional paid-in capital 64,290,814 51,234,105
accumulated deficit (55,285,127) (4,218,035)
treasury stock - at cost (Note 6) (164,175) -
stock subscriptions receivable (344,700) (1,425,951)
accumulated comprehensive income (loss) (310,158) 75,775
------------------------------------
------------------------------------
Total stockholders' equity 8,188,535 45,667,499
------------------------------------
====================================
Total liabilities and stockholders' equity $13,673,140 $ 45,823,684
====================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
92
<PAGE>
VDC COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS
OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
<TABLE>
<CAPTION>
nine-months ended
March 31,
1998 1999
<S> <C> <C>
revenue $ 62,741 $ 1,425,952
direct costs of revenues (exclusive of depreciation) 26,546 2,159,210
------ ---------
gross margin 36,195 (733,258)
selling, general and administrative 463,744 3,768,885
depreciation and amortization 4,953 704,166
non-cash compensation expense (Note 5) 801,000 16,146,000
------- ----------
total operating expenses 1,269,697 20,619,051
--------- ----------
operating loss (1,233,502) (21,352,309)
other income (expense)
writedown of investment in MCC (Note 4) -- (19,388,641)
loss on note restructuring (Note 9) -- (1,598,425)
other income (expense) 6,325 (84,000)
----- -------
total other income (expense) 6,325 (21,071,066)
equity in loss of affiliate (Note 7) -- (664,717)
--------
net loss (1,227,177) (43,088,092)
========== ===========
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on marketable securities 25,025 (385,933)
------ --------
Comprehensive loss $(1,202,152) $(43,474,025)
=========== ============
net loss per common share - basic $ (0.33) $ (2.45)
----------- ------------
weighted average number of shares outstanding 3,713,342 17,604,937
--------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
93
<PAGE>
VDC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
nine-months ended
March 31,
1998 1999
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,227,177) $ (43,088,092)
Adjustments to reconcile net loss to net cash
Provided by operating activities:
Depreciation and amortization 4,953 704,166
Writedown of investment in MCC - 19,388,641
Non-cash compensation expense 801,000 16,146,000
Loss on note restructuring - 1,598,425
Equity in losses of affiliate - 664,717
Impairment loss-fixed assets - 479,199
Non-cash severance - 391,875
Changes in operating assets and liabilities:
Resticted cash - (411,713)
Accounts receivable - (396,991)
Other assets (35,230) 531,300
Accounts payable and accrued expenses 27,201 1,427,889
---------------------------------------
Net cash used by operating activities (429,253) (2,564,584)
Cash flows from investing activities:
Proceeds from return of escrow in connection
with the investment in MCC - 1,012,155
Payment for purchase of subsidiary - (589,169)
Investment in affiliate - (760,809)
Proceeds from repayment of notes receivable 885,700 1,446,596
Purchase of investment securities (288,600) -
Advances under loan receivable (122,000) -
Fixed asset acquisition (12,527) (2,628,191)
---------------------------------------
Net cash flows (used in) provided by investing activities 462,573 (1,519,418)
Cash flows from financing activities:
Proceeds from issuance of common stock 3,749,286 888,701
Collections on stock subscription receivables - 917,076
Repayment of note payable - (192,379)
Proceeds from issuance of short-term debt 500,000
---------------------------------------
Net cash flows provided by financing activities 3,749,286 2,113,398
---------------------------------------
Net increase (decrease) in cash and cash equivalents 3,782,606 (1,970,604)
Cash and cash equivalents, beginning of period 1,430 2,212,111
---------------------------------------
Cash and cash equivalents, end of period $ 3,784,036 $ 241,507
=======================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
94
<PAGE>
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 Bermuda") by way
of a 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
Bermuda, $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 per share ("Common Stock").
The Domestication Merger reflects the completion of a series of transactions
that commenced on March 6, 1998 when the Company (then a wholly-owned subsidiary
of VDC Bermuda) acquired Sky King Communications ("Sky King Connecticut") by
merger. This merger transaction was accounted for as a reverse acquisition
whereby Sky King Connecticut was the acquirer for accounting purposes.
Accordingly, the historical financial statements presented are those of Sky King
Connecticut before the merger on March 6, 1998 and reflect the consolidated
results of Sky King Connecticut , VDC Bermuda, and VDC Bermuda's wholly-owned
subsidiaries after the merger. On November 6, 1998, the Domestication Merger,
whereby VDC Bermuda merged with and into the Company, was consummated.
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the instructions 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. The results for the nine-month period ended March 31, 1999 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.
2. Summary of Significant Accounting Policies
(a) Principles of Consolidation
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. ("VDC Telecommunications"), Masatepe Communications
U.S.A., L.L.C. ("Masatepe"), Voice & Data Communications (Hong Kong) Limited
("VDC Hong Kong") Sky King Communications, Inc. and WorldConnectTelecom.com,
Inc. ("World ConnectTelecom.com").
F-27
95
<PAGE>
(b) Revenue Recognition
The Company records revenues for telecommunications sales at the time of
customer usage. Additionally, the Company records revenues from renting its
network facilities on a monthly basis and from the management of tower sites
that provide transmission and receiver site locations for wireless
communications companies.
(c) Direct costs of revenues (exclusive of depreciation and amortization)
Direct costs of revenue for wholesale long distance services represent direct
charges from vendors that the Company incurs to deliver service to its
customers. These include leasing costs for dedicated phone lines and
rate-per-minute charges from other carriers that terminate traffic on behalf of
the Company. These costs also include salaries and overhead attributable to
operations.
(d) 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.
(e) 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. Warrants to purchase 938,546 shares of Company
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.
(f) Goodwill and Amortization
Goodwill is amortized using the straight-line method over its estimated useful
life.
(g) Recent Accounting Standards
In June1998, the AICPA issued statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities". We have not
yet analyzed the impact of this new standard. We will adopt this standard in
July of 2000.
F-28
96
<PAGE>
3. Domestication Merger
On November 6, 1998, the Company completed the Domestication Merger with VDC
Bermuda. The effect of the Domestication Merger was that members of VDC Bermuda
became stockholders of the Company. The primary reason for the Domestication
Merger was to reorganize VDC Bermuda, which had been a Bermuda company, as a
publicly traded U.S. corporation domesticated in the State of Delaware. In
connection with the Domestication Merger, 11,810,862 issued and outstanding
shares of common stock of VDC Bermuda, $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 has been accounted for as a
reorganization which has been given retroactive effect in the financial
statements for all periods presented.
4. Metromedia China Corporation Investment
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 consideration given for the investment in MCC
consisted of 5,110,810 common shares at $6.98125, $1,669,839 in cash, the
elimination of a loan receivable of $390,522 and 50,000 investment advisory
shares valued at $6.00 per share.
MCC operates joint ventures in China under the direction of its majority owner,
Metromedia International Group. Currently, legal restrictions in China prohibit
foreign ownership and operations in the telecommunications sector. MCC's
investments in joint ventures have been made through a structure known as
Sino-Sino-Foreign ("SSF") joint venture, a widely used method for foreign
investment in the Chinese telecommunications industry, in which the SSF venturer
is a provider of telephony equipment, financing and technical services to
telecommunications operators and not a direct provider of telephone service. The
joint ventures invest in telephony system construction and development networks
being undertaken by the local partner, China Unicom. The completed systems are
operated by China Unicom. MCC receives payments from China Unicom based on
revenues and profits generated by the systems in return for their providing
financing, technical advice and consulting and other services.
In November 1998, the Company and PortaCom settled a dispute regarding the June
22, 1998 transaction. Pursuant to this settlement, PortaCom agreed to place 2
million VDC Bermuda shares in escrow for up to eighteen months. These shares
will be released from escrow contingent upon certain performance criteria. The 2
million escrow shares have been recorded as a reduction in common shares
outstanding at their original issue price of $6.98125 (fair market value as
determined at the date of acquisition) and a corresponding reduction in the
investment in MCC.
F-29
97
<PAGE>
In March 1999, the Company recorded a $19,388,641 writedown of the investment in
MCC. VDC had previously assessed the investment in MCC for impairment by
applying a valuation technique commonly used in the telecommunications industry
to assess market potential. Although the Company believes this method is an
appropriate method for assessing the potential of the investment, it is not
definitive enough to assess the investment's current market value given the
recent developments in China. There has been uncertainty regarding possible
significant changes in the regulation of and policy concerning foreign
participation in and financing of the telecommunications industry in China,
including the continued viability of the SSF structure and associated service
and consulting arrangements with China Unicom. Additionally, the Company has
been unable to obtain the MCC financial information necessary to assess the
investment for impairment. Financial information such as historical stand-alone
financial statements and financial projections have not been available for the
Company's review. The Company has therefore adjusted the carrying value of the
investment to an amount relative to Metromedia International Group's (majority
owner) carrying amount.
5. Non-cash Compensation
The merger between VDC Bermuda, the Company and Sky King Connecticut on March 6,
1998 was accounted for as a reverse acquisition whereby Sky King Connecticut 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 Connecticut shareholders in the
merger consisted of the issuance of 10 million newly-issued shares of preferred
stock of the Company which were convertible, and have been converted, in the
aggregate, into 10 million shares of Common Stock of the Company. Of this
consideration, preferred stock 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 March 31, 1999, all of the performance criteria had
been met. Accordingly, 4.5 million shares have been released from escrow.
During the nine-months ended March 31, 1999, 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 a non-cash compensation charge of
$16,146,000 for the nine-months ended March 31, 1999. Compensatory shares are
related to former Sky King Connecticut shareholders who are members of the
Company's management, their family trusts and minor children and an employee.
Non-compensatory shares released related to 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 issued stock is recorded at fair value on the date of release
through a charge to accumulated deficit.
6. Shares Surrendered
In November 1998, an executive officer and member of the Company's Board of
Directors ("Officer") resigned. In connection with the resignation, the Officer
surrendered 1,875,000 common shares in exchange for the elimination of a
subscription receivable for $164,175. The transaction has been accounted for as
the purchase of 1,875,000 shares of treasury stock using the cost method. The
subscription receivable represented the Officer's basis in his 27.5% ownership
in Sky King Connecticut .
F-30
98
<PAGE>
7. Investment in Masatepe Comunicaciones, S.A.
Masatepe owns a 49% interest in Masatepe Comunicaciones, S.A. ("Masacom"), a
Nicaraguan company. Masacom supports the development of Masatepe's operations in
Central America. Masatepe accounts for the investment using the equity method
considering 100% of Masacom's losses, since the recovery of 51% of the losses is
not reasonably assured. The following is Masacom's summary of financial position
at March 31, 1999 and results of operations from inception through March 31,
1999:
<TABLE>
<CAPTION>
<S> <C>
Assets $ 163,303
Liabilities $ 28,510
Results of operations $ (664,717)
</TABLE>
8. Private Placement
In December 1998, the Company sold 245,159 shares at $3.625, the public market
price at that time. The Chairman and CEO and certain family members and entities
associated with the Chairman and CEO participated as the sole investors in the
private placement.
9. Restructured Note Receivable
During the nine-months ended March 31, 1999, the Company restructured notes
receivable from debtors by reducing the principal due by $1,598,425 which has
been charged to operations. The Company believes this step will maximize the
recovery of its investment and expedite payment on the notes. The debt is
scheduled to be repaid in installments through June 1999.
10. 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 LCs must be collateralized in the form of
cash equivalents held by the issuing bank. Collateral at March 31, 1999
consisted of approximately $412,000 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
March 31, 1999, there were no advances issued under the revolving line of
credit.
11. Issuance of Investment Banking Shares
During the nine-months ended March 31, 1999, the Company issued 290,000 shares
of Company Common Stock to investment bankers in connection with the March 6,
1998 merger of Sky King Connecticut, VDC Bermuda and the Company. The shares
were issued at the fair market value as of the date of the merger ($2.50 per
share) and a corresponding charge to accumulated deficit.
12. Note Payable-Officer
In February 1999, the Chairman and CEO loaned the Company $500,000. The note
bore interest at 10% per annum and was due in July 1999. The Company paid the
note in full on May 13, 1999.
F-31
99
<PAGE>
13. Capital Leases
The Company entered into several equipment leases during the nine-months ended
March 31, 1999 with lease terms ranging from one to five years. Leased capital
assets included in property and equipment at March 31, 1999 were $1,525,339.
Future minimum lease payments under capital leases are as follows:
<TABLE>
<CAPTION>
Year ending March 31,
<S> <C>
2000 $686,742
2001 364,502
2002 364,502
2003 249,843
2004 112,300
-------
Total minimum lease payment 1,777,889
less: amount representing interest 309,390
-------
present value of minimum lease payments 1,468,499
less: current portion 554,996
-------
long-term capital lease obligations $913,503
=======
</TABLE>
14. Supplemental Disclosure of Cash Flow Information
schedule of non-cash investing and financing activities:
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1999 1998
<S> <C> <C>
Net assets acquired in exchange for stock -- $5,871,071
Equipment financed through trade accounts payable $1,932,031 --
Equipment acquired through capital lease obligation 1,525,399 --
Equipment exchanged for note 192,379 --
Release of investment banking shares 290,000 --
Common stock placed in escrow in connection with investment in MCC 13,962,500 --
Stock subscription for common stock -- 164,175
Treasury stock acquired in exchange for subscription receivable 164,175 --
Acquisition of subsidiary:
Fair value of assets acquired 1,290,044 --
Common stock issued 700,875 --
-------
Cash paid 589,169 --
-------
</TABLE>
F-32
100
<PAGE>
8,722,618 Shares
[Logo]
VDC COMMUNICATIONS, INC.
Common Stock
------------------
Prospectus
------------------
June ___, 1999
101
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale of
Common Stock being registered. All amounts are estimates except the SEC
registration fee and the American Stock Exchange listing fee.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration fee $ 7,578
American Stock Exchange listing fee 0
Printing and engraving expenses 15,000
Legal fees and expenses 30,000
Accounting fees and expenses 10,000
Transfer agent fees 5,000
Miscellaneous fees and expenses 5,000
--------
Total $ 72,578
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation generally provides that officers,
directors and certain others will be indemnified by the Company against any
liability incurred in any civil, criminal, administrative or investigative
proceeding if such individual acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal proceeding, had no reasonable cause
to believe his conduct was unlawful. In addition, to the extent that a director,
or officer has been successful on the merits or otherwise in defense of any
proceeding referred to above or in defense of any claim, issue or matter
therein, he or she will be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in a successful
defense of any action, suit or proceeding) is asserted by a director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issuer.
The Company does not currently have liability insurance for the benefit of its
directors and officers.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
In May 1999, the Company sold 1,265,947 shares of Company Common Stock and
granted warrants to purchase 121,035 shares of Company Common Stock 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 (the "Act") as follows:
<TABLE>
<CAPTION>
Shareholder Number of Shares Consideration Warrants (1)
- ----------- ---------------- ------------- ------------
<S> <C> <C> <C>
Adase Partners, L.P. 60,000 162,000.00 6,000
Alnilam Partners, LP 2,185 (2)
Dean Brizel and Jeanne Brizel 20,000 54,000.00 2,000
Stephen Buell 20,000 54,000.00 2,000
Capital Opportunity Partners One, LP 20,000 54,000.00 2,000
Arthur Cooper and Joanie Cooper 40,000 108,000.00 4,000
Mark Eshman & Jill Eshman trustees for the 20,000 54,000.00 2,000
Eshman Living Trust dated 9/24/90
Jeffrey Feingold and Barbara Feingold 20,000 54,000.00 2,000
Fred Fraenkel 20,000 54,000.00 2,000
Torunn Garin 60,000 162,000.00 6,000
Henry D. Jacobs Jr. 37,037 99,999.90 3,703
Frederick A. Moran and Joan B. Moran 280,000 840,000.00 -
Kent F. Moran Trust 24,160 72,480.00 -
Luke F. Moran Trust 24,010 72,030.00 -
Ernst Von Olnhausen 10,000 27,000.00 1,000
Paradigm Group, LLC 370,370 999,999.00 64,814 (3)
PGP I Investors, LLC 185,185 499,999.50 18,518
Santa Fe Capital Group (NM), Inc. 3,000 (2)
Scott Schenker and Randi Schenker 20,000 54,000.00 2,000
Michael Weissman 10,000 27,000.00 1,000
Robert Vicas 20,000 54,000.00 2,000
------ -----
Total 1,265,947 121,035
</TABLE>
(1) The warrants have an exercise price of $6.00 per share and expire three
years from the date of grant (May, 2002).
(2) In consideration for investment banking services rendered in connection
with private placement.
(3) Includes warrant to purchase 27,777 shares granted in consideration for
consulting services rendered in connection with private placement.
In May 1999, the Company issued, in a non-public offering exempt from
registration pursuant to Section 4(2) and Rule 506 of Regulation D of the Act,
warrants to purchase 4,500 shares of Company Common Stock at an exercise price
of $7.00 per share to ING Barings Furman Selz ("ING") in consideration for
investment banking services rendered by ING in connection with the Company's
acquisition of the membership interests of Masatepe Communications, U.S.A.,
L.L.C. ("Masatepe"). The warrants expire on August 7, 2001.
In April 1999, the Company issued, in a non-public offering exempt from
registration pursuant to Section 4(2) and Rule 506 of Regulation D of the Act,
76,750 shares of Company Common Stock in the name of Marc Graubart and 18,250
shares of Company Common Stock in the name of Tab K. Rosenfeld, in consideration
for Mr. Graubart's resignation from positions held with Masatepe, the release of
various claims, and other consideration set forth more particularly in a
Settlement, Release and Discharge Agreement by and among the Company, Masatepe,
and Marc Graubart, dated March 9, 1999 (the "Release Agreement"). Of the shares
issued in the name of Marc Graubart, 7,500 will be held in escrow for a period
of one (1) year following the date of the Release Agreement (the "Escrow
Shares"). The Escrow Shares will be released from escrow, if at all, in the
event that Marc Graubart has complied with certain terms of the Release
Agreement during the one (1) year following the date of the Release Agreement.
II-2
<PAGE>
In connection with the Company's acquisition of Sky King Connecticut, the
Company agreed to issue to SPH Equities Inc. ("SPH Equities"), KAB Investments
Inc. ("KAB"), FAC Enterprises, Inc. ("FAC"), and SPH Investments Inc. ("SPH
Investments") an aggregate of 444,852 shares of Company Common Stock as an
investment banking fee, subject to certain conditions (the "Investment Banking
Shares"). In partial satisfaction of this obligation, on December 22, 1998, the
Company issued 129,852 shares of Company Common Stock in the name of FAC, 70,000
shares of Company Common Stock in the name of SPH Investments, and 40,148 shares
of Company Common Stock in the name of SPH Equities in a non-public offering
exempt from registration pursuant to Section 4(2) and Rule 506 of Regulation D
of the Act. On February 16, 1999, in further satisfaction of this commitment,
the Company issued 19,852 shares of Company Common Stock in the name of SPH
Equities and 30,148 shares of Company Common Stock in the name of KAB in a
non-public offering exempt from registration pursuant to Section 4(2) and Rule
506 of Regulation D of the Act.
On December 23, 1998, the Company sold 245,159 shares of Company Common Stock,
to certain entities associated with and family members of Frederick A. Moran in
a non-public offering exempt from registration pursuant to Section 4(2) and Rule
506 of Regulation D of the Act as follows:
<TABLE>
<CAPTION>
Shareholder Number of Shares Price per Share
- ----------- ---------------- ---------------
<S> <C> <C>
Anne Moran 35,310 $3.625
Anne Moran, IRA 49,379 $3.625
Frederick A. Moran & 41,380 $3.625
Anne Moran
Frederick A. Moran, IRA 331 $3.625
Frederick W. Moran 100,000 $3.625
Joan Moran, IRA 248 $3.625
Kent Moran 8,221 $3.625
Luke Moran 9,352 $3.625
Moran Equity Fund, Inc. 938 $3.625
----------------
TOTAL 245,159
</TABLE>
In August 1998, the Company issued, in a non-public offering exempt from
registration pursuant to Section 4(2) and Rule 506 of Regulation D of the Act,
78,697 shares of Company Common Stock (the "Activated Shares") to Activated
Communications Limited Partnership ("Activated") and 21,428 shares of Company
Common Stock to Marc Graubart (the "Graubart Shares") in connection with the
Company's acquisition of the membership interests of Masatepe (the "Masatepe
Acquisition") pursuant to the terms of a Purchase Agreement dated July 31, 1998,
by and among the Company, Masatepe, Activated and Marc Graubart (the "Purchase
Agreement"). The Activated Shares were issued in escrow as partial consideration
for Activated's membership interest in Masatepe. The Graubart Shares were issued
in escrow as consideration for investment banking services rendered by Graubart
in connection with the Masatepe Acquisition. Both the Activated Shares, less
14,160 shares returned to the Company for a claim made by the Company, and the
Graubart Shares were released from escrow. Both the Activated Shares and the
Graubart Shares were subject to upward adjustment due to price adjustment
rights. In June 1999, in connection with these rights, the Company issued, in a
non-public offering exempt from registration pursuant to Section 4(2) and Rule
506 of Regulation D of the Act, 39,072 shares of Company Common Stock to
Activated and 15,247 shares of Company Common Stock to Mr. Graubart.
II-3
<PAGE>
In June 1998, the Company issued 5,300,000 shares of Company Common Stock,
pursuant to an exemption from registration provided by Section 1145 of Chapter
11 of the United States Bankruptcy Code, to PortaCom Wireless, Inc. ("PortaCom")
in consideration of the issuance by PortaCom to the Company of 2 million shares
of 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 "PortaCom Warrants"). The PortaCom Warrants currently have an expiration
date of September 1999.
In May 1998, the Company issued 583,430 shares of Company Common Stock in a
non-public offering exempt from registration pursuant to Section 4(2) and Rule
506 of Regulation D of the Act as follows:
<TABLE>
<CAPTION>
Shareholder Number of Shares Price Per Share
- ----------- ---------------- ---------------
<S> <C> <C>
Lancer Offshore, Inc. 150,000 $6.00
Lancer Voyager Fund 25,000 $6.00
Anne Moran 39,333 $6.00
Anne Moran Trust 250 $6.00
Anne Moran, IRA 11,667 $6.00
Moran Equity Fund, Inc. 27,000 $6.00
Frederick A. Moran 85,667 $6.00
Frederick A. Moran 23,667 $6.00
& Joan B. Moran
Frederick A. Moran Trust 180 $6.00
Frederick W. Moran 100,000 $6.00
Kent Moran 10,000 $6.00
Kent Moran, IRA 333 $6.00
Luke Moran 10,000 $6.00
Luke Moran, IRA 333 $6.00
Alan B. Snyder 100,000 $6.00
-----------------
TOTAL 583,430
</TABLE>
In March 1998, and prior to the merger of Sky King Connecticut and VDC Bermuda
whereby Frederick A. Moran became Chairman and C.E.O., the Company issued
1,490,902 shares of Company Common Stock in non-public offerings exempt from
registration as follows:
<TABLE>
<CAPTION>
Shareholder Number of Shares Consideration Exemption
- ----------- ---------------- ------------- ---------
<S> <C> <C> <C>
Robert Alexander 10,000 (1) (2)
FAC Enterprises, Inc. 30,000 $75,000 (3) (2)
FYL Service Limited 10,000 (4) (2)
Gibralt Holdings Limited 100,000 $250,000 (2)
HPC Corporate Services Limited 122,027 $305,069 (3) (5)
HPC Corporate Services Limited 132,000 (6) (5)
HPC Corporate Services Limited 253,000 (7) (5)
KAB Investments, Inc. 75,000 (8) (2)
Graham Lacey 25,000 (1) (2)
Lancer Offshore, Inc. 390,000 $1,852,500 (2)
Lancer Partners LP 132,000 $627,000 (2)
Lancer Voyager Fund 58,500 $277,875 (2)
Michael Lauer 19,500 $92,625 (2)
Rozel International Holdings Limited 5,290 $13,225 (3) (5)
SPH Equities, Inc. 28,585 (4) (2)
Alan Snyder 100,000 $550,000 (2)
------------------
TOTAL 1,490,902
</TABLE>
II-4
<PAGE>
(1) In consideration for services rendered as a member of the Company's
Board of Directors.
(2) Issued in a non-public offering exempt from registration pursuant to
Section 4(2) of the Act.
(3) Debt conversion.
(4) In consideration for services rendered in arranging for financing
transactions.
(5) Issued in a non-public offering exempt from registration pursuant
to Rules 901-904, inclusive, of Regulation S of the Act.
(6) In consideration for services rendered in arranging certain business
transactions.
(7) In consideration for subscription agreement for $632,500 purchase price
due in March 1999.
(8) In consideration for services rendered in connection with arranging
the Company's acquisition of certain MCC securities from PortaCom
Wireless, Inc.
In March 1998, prior to the merger of Sky King Connecticut and VDC Corporation,
the Company issued warrants to purchase 938,546 shares of Company Common Stock
in consideration for services rendered and various other claims, in a non-public
offering exempt from registration pursuant to Section 4(2) and Rule 506 of
Regulation D of the Act as follows:
<TABLE>
<CAPTION>
Number of Shares
Warrant Holder Underlying Warrants Exercise Price Consideration
- -------------- ------------------- -------------- -------------
<S> <C> <C>
Bermuda Trust Company Limited 85,000 $4.00 (1)
Clifton Capital Ltd. 285,618 $4.00 (2)
Graham F. Lacey 45,000 $5.00 (3)
HPC Corporate Services Limited 50,000 $4.00 (4)
Steven B. Rosner 41,110 $4.00 (5)
Rozel International Holding Company Limited 431,818 $4.00 (2)
------- ----- --
TOTAL 938,546
</TABLE>
(1) Issued in connection with raising additional working capital.
(2) Issued in connection with previous financing transactions and in connection
with subscription agreements dated February 1, 1997.
(3) Issued in connection with services rendered to the Company as Director.
(4) Issued in connection with previous financing transactions.
(5) Issued pursuant to subscription agreement dated February 1, 1997.
II-5
<PAGE>
On March 6, 1998, the Company issued 10 million shares of preferred stock (the
"Preferred Stock") to the former shareholders of Sky King Connecticut in
consideration of the merger of Sky King Connecticut with and into the Company in
a non-public offering exempt from registration pursuant to Section 4(2) and
Regulation D of the Act. 4.5 million shares of the Preferred Stock were issued
in escrow. The shares of Preferred Stock were converted, on a one-for-one basis,
into shares of Company Common Stock in connection with the Domestication Merger.
During the period from January 1997 to October 1997, the Company issued in the
aggregate 921,386 shares of Company Common Stock in non-public offerings exempt
from registration as follows:
<TABLE>
<CAPTION>
Shareholder Number of Shares Consideration Exemption
- ----------- ---------------- ------------- ---------
<S> <C> <C> <C>
Channel Hotel and Properties Limited 49,375 $197,500 (1) (2)
Channel Hotel and Properties Limited 49,375 $197,500 (1) (2)
Clifton Capital Ltd. 49,000 (3) $134,750 (4) (2)
Clifton Capital Ltd. 30,000 (3) $82,500 (4) (2)
Clifton Capital Ltd. 100,000 $275,000 (4) (2)
Gibralt Holdings Ltd. 40,000 (6) (5)
Gibralt Holdings Ltd. 49,091 $130,000 (4) (2)
HPC Corporate Services Limited 70,000 $180,000 (4) (2)
Graham Lacey 30,000 (7) (2)
Graham Lacey 50,000 $150,000 (8) (2)
Graham Lacey 50,000 $150,000 (8) (2)
Graham Lacey 28,000 (7) (2)
Graham Lacey 100,000 (8) (2)
Radway Investments Inc. 90,909 (3) $249,999.75 (4) (5)
Rozel International Holdings Limited 30,000 (3) $82,500 (4) (5)
Rozel International Holdings Limited 32,909 (3) $90,499.75 (4) (5)
Steven Rosner 72,727 (3) $199,999.25 (4) (5)
----------------------
TOTAL 921,386
</TABLE>
(1) Pursuant to the exercise of warrants dated April 17, 1995.
(2) Issued in a non-public offering exempt from registration pursuant to
Rules 901-904, inclusive, of Regulation S of the Act.
(3) Additionally, pursuant to the terms of Security Purchase Agreements, for
each share of common stock issued, the purchaser was granted one common
stock purchase warrant exercisable at any time prior to February 1, 2001
at an exercise price of $3.50 per share.
II-6
<PAGE>
(4) Debt conversion.
(5) Issued in a non-public offering exempt from registration pursuant to
Section 4(2) of the Act.
(6) In consideration for services rendered in arranging for financing
transaction.
(7) In consideration for services rendered as a member of the Company's
Board of Directors.
(8) Pursuant to an exercise of options dated January 17, 1997.
During the period from June 1996 to November 1996, the Company issued in the
aggregate 725,175 shares of Common Stock in non-public offerings exempt from
registration as follows:
<TABLE>
<CAPTION>
Shareholder Number of Shares Consideration Exemption
- ----------- ---------------- ------------- ---------
<S> <C> <C> <C>
Robert Alexander 10,000 - (1) (2)
Audley Investment Group 49,347 $107,082.99 (3) (2)
Bel Cal Holdings Inc. 86,364 $475,002 (2)
Campden Financial Services Ltd. 2,500 - (5) (2)
Harold Chaffe 10,000 - (6) (2)
Clifton Capital Ltd. 144,364 $794,002 (4)
Comprehensive Claims Corp. 34,274 $74,374.58 (3) (2)
David Crane 1,875 - (7) (2)
Crawsfield Limited 114,067 $247,525.39 (3) (2)
Diversified Securities Fund 48,963 $106,249.71 (3) (2)
Harvey Glicker 24,442 $53,039.14 (3) (2)
Andrew Gordon 5,000 - (8) (2)
HST Partners 49,347 $107,082.99 (3) (2)
Herb Josephart 4,896 $10,624.32 (3) (2)
Graham Lacey 20,000 - (1) (2)
Graham Lacey 50,000 $200,000 (2)
Graham Lacey 50,000 $200,000 (2)
Sid Sands and Edith Sands 4,934 $10,706.78 (3) (2)
Gloria Sax 4,934 $10,706.78 (3) (2)
Weston Investors 9,868 $21,413.56 (3) (2)
----------------------
TOTAL 725,175
</TABLE>
(1) In consideration for services rendered as a member of the Company's
Board of Directors.
(2) Issued in a non-public offering exempt from registration pursuant to
Rules 901-904, inclusive, of Regulation S of the Act.
(3) Represents debt conversion.
(4) Issued in a non-public offering exempt from registration pursuant to
Section 4(2) of the Act.
(5) In consideration for the rent-free use of office facilities.
(6) In consideration for services rendered regarding the administration of
Company accounts.
(7) In consideration for services rendered as a real estate broker for the
sale of a Company property.
(8) In consideration for services rendered in connection with acquisition of
certain securities in a business transaction.
II-7
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS.
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
<S> <C> <C>
2.1 Amended and Restated Agreement and Plan of Merger, (1)
dated as of December 10, 1997, by and among VDC
Corporation Ltd., VDC Communications, Inc.
(f/k/a VDC (Delaware), Inc.) and Sky King
Communications, Inc.
2.2 Amendment to Amended and Restated Agreement and (1)
Plan of Merger, dated as of March 6, 1998, by and
among VDC Corporation Ltd., VDC Communications,
Inc. (f/k/a VDC (Delaware), Inc.) and Sky King
Communications, Inc.
2.3 Agreement and Plan of Merger, made as of October 5, (2)
1998, by and between VDC Corporation Ltd. and VDC
Communications, Inc. (f/k/a Sky King
Communications, Inc.)
2.4 Certificate of Merger of Sky King Communications, (1)
Inc. into VDC Communications, Inc. (formerly known
as VDC (Delaware), Inc.)
2.5 Certificate of Merger of VDC Corporation Ltd. into (3)
VDC Communications, Inc.
3.1 Certificate of Incorporation, as amended of VDC (2)
Communications, Inc.
3.2 Amended and Restated Bylaws of VDC Communications, (2)
Inc.
4.1 Specimen of Common Stock Certificate (4)
4.2 1998 Stock Incentive Plan (4)
5.1 Opinion of Buchanan Ingersoll Professional (5)
Corporation
II-8
<PAGE>
10.1 Purchase Agreement, dated as of July 31, 1998, by (6)
and among VDC Corporation Ltd., Masatepe
Communications U.S.A., L.L.C, Activated
Communications Limited Partnership and Marc Graubart
10.2 Bridge Loan Agreement, dated as of August 1, 1998, (6)
by and among Masatepe Communications U.S.A., L.L.C.
and VDC Corporation Ltd.
10.3 Bridge Note, dated as of August 1, 1998, made by (6)
Masatepe Communications U.S.A., L.L.C. in favor of
VDC Corporation Ltd.
10.4 Guaranty, dated as of August 1, 1998, by Activated (6)
Communications Limited Partnership to VDC
Corporation Ltd.
10.5 Amended and Restated Asset Purchase Agreement (8)
between VDC Corporation Ltd. and PortaCom Wireless,
Inc., dated as of March 23, 1998, as amended by two
Bankruptcy Court Stipulations and Orders in Lieu of
Objection, dated as of April 3, 1998 and April 23,
1998, respectively
10.6 Escrow Agreement by and among VDC Corporation Ltd., (8)
PortaCom Wireless, Inc., the Official Committee of
Unsecured Creditors of PortaCom Wireless, Inc. and
Klehr, Harrison, Harvey, Branzburg & Ellers, LLP,
dated as of April __, 1998
10.7 Memorandum of Understanding, dated June 8, 1998, by (9)
and among VDC Corporation Ltd., PortaCom Wireless,
Inc. and the Official Committee of Unsecured
Creditors of PortaCom Wireless, Inc.
10.8 Closing Escrow Agreement, dated June 8, 1998, by (9)
and among VDC Corporation Ltd., PortaCom Wireless,
Inc., Metromedia China Corporation, the Official
Committee of Unsecured Creditors of PortaCom
Wireless, Inc. and Klehr, Harrison, Harvey,
Branzburg & Ellers LLP
10.9 Promissory Note, dated June 9, 1998, made by VDC (9)
Corporation Ltd. in favor of PortaCom Wireless,
Inc.
II-9
<PAGE>
10.10 Assignment, dated June 8, 1998, by PortaCom (9)
Wireless, Inc.
10.11 Loan Agreement, dated November 10, 1997, between (9)
VDC Corporation Ltd. and PortaCom Wireless, Inc.
10.12 Pledge Agreement, dated November 10, 1997, between (9)
VDC Corporation Ltd. and PortaCom Wireless, Inc.
10.13 Security Agreement, dated November 10, 1997, (9)
between VDC Corporation Ltd. and PortaCom Wireless,
Inc.
10.14 Debtor-in-Possession Loan, Pledge and Security (9)
Agreement, dated March 23, 1998 between VDC
Corporation Ltd and PortaCom Wireless, Inc.
10.15 Waiver, dated June 8, 1998, by VDC Corporation Ltd. (9)
10.16 Asset Purchase Agreement between VDC Corporation (1)
Ltd. and Rozel International Holdings Limited,
dated December 18, 1997, including Exhibits thereto
10.17 Asset Purchase Agreement between VDC Corporation (1)
Ltd. and Tasmin Limited, dated February 10, 1998,
including Exhibits thereto
10.18 Promissory Note from HPC Corporate Services (1)
Limited, dated March 2, 1998
10.19 Employment Agreement of Frederick A. Moran, as (1)
amended
10.20 Employment Agreement of Dr. James C. Roberts (1)
10.21 Employment Agreement of Charles W. Mulloy (6)
10.22 Option to Purchase 10,000 Shares Granted to Charles (6)
W. Mulloy
10.23 Option to Purchase 50,000 Shares Granted to Charles (6)
W. Mulloy
10.24 Registration Rights Agreements between VDC (6)
Corporation Ltd. and Charles W. Mulloy
II-10
<PAGE>
10.25 Employment Agreement of Clayton F. Moran (6)
10.26 Option to Purchase 10,000 Shares Granted to Clayton (6)
F. Moran
10.27 Registration Rights Agreement between VDC (6)
Corporation Ltd. and Clayton F. Moran
10.28 Director Agreement with Dr. Hussein Elkholy (6)
10.29 Option to Purchase 25,000 Shares Granted to Dr. (6)
Hussein Elkholy
10.30 Registration Rights Agreement between VDC (6)
Corporation Ltd. and Dr. Hussein Elkholy
10.31 Warrant to Purchase 45,000 Shares Granted to Graham (6)
Ferguson Lacey
10.32 Settlement, Release and Discharge Agreement, by and (10)
among VDC Communications, Inc., Dr. James C.
Roberts, and Frederick A. Moran, dated November 19,
1998
10.33 Settlement Agreement between VDC Communications, (10)
Inc., PortaCom Wireless, Inc., and Michael
Richards, dated November 24, 1998
10.34 Director Agreement with Dr. Leonard Hausman, dated (11)
November 4, 1998
10.35 Option to Purchase 25,000 shares granted to Dr. (11)
Leonard Hausman, dated November 4, 1998
10.36 Registration Rights Agreement between VDC (11)
Corporation Ltd. and Dr. Leonard Hausman, dated
November 4, 1998
10.37 Director Agreement with James Dittman, dated (11)
November 4, 1998
10.38 Option to Purchase 25,000 shares granted to James (11)
Dittman, dated November 4, 1998
10.39 Registration Rights Agreement between VDC (11)
Corporation Ltd. and James Dittman, dated November
4, 1998
II-11
<PAGE>
10.40 Settlement, Release and Discharge Agreement, by and (12)
among VDC Communications, Inc., Masatepe
Communications, U.S.A., L.L.C., and Marc Graubart,
dated March 9, 1999
10.41 Form of Securities Purchase Agreement, dated (12)
December 23, 1998
10.42 Form of Securities Purchase Agreement, dated May 5, (12)
1999
10.43 Form of Securities Purchase Agreement, dated May 7, (12)
1999
10.44 Securities Purchase Agreement, between PGP I (12)
Investors, LLC and VDC Communications, Inc., dated
May 12, 1999
10.45 Securities Purchase Agreement, between Paradigm (3)
Group, LLC, and VDC Communications, Inc., dated May
17, 1999
10.46 Form of Employment Agreement (3)
10.47 Form of Option Agreement (3)
10.48 Form of Registration Rights Agreement (3)
10.49 Form of Incentive Stock Option Agreement (3)
10.50 Incentive Stock Option Agreement between Frederick (3)
A. Moran and VDC Communications, Inc., dated
December 8, 1998
16.1 Letter to the SEC from Neville Russell dated (7)
May 21, 1998
16.2 Letter to the SEC from Neville Russell dated (7)
June 19, 1998
21.1 Subsidiaries of Registrant (3)
23.1 Consent of BDO Seidman LLP, independent accountants (3)
27.1 Financial Data Schedule (3)
</TABLE>
II-12
<PAGE>
(1) Filed as an Exhibit to VDC Corporation Ltd.'s Current Report on Form
8-K, dated March 6, 1998, and incorporated by reference herein.
(2) Filed as an Exhibit to Registrant's registration statement on Form
S-4, filed with the SEC on September 9, 1998, and incorporated by reference
herein.
(3) Filed herewith.
(4) Filed as an Exhibit to Registrant's registration statement on Form
8-A/A, filed with the SEC on January 19, 1999, and incorporated by reference
herein.
(5) To be filed in an amendment hereto.
(6) Filed as an Exhibit to VDC Corporation Ltd.'s Form 10-K for the year
ended June 30, 1998, as amended by Form 10-K/A filed with the SEC on February
17, 1999, and incorporated herein by reference.
(7) Filed as an Exhibit to VDC Corporation Ltd.'s Current Report on Form
8-K, dated May 21, 1998, as amended by Form 8-K/A, filed with the SEC on June
19, 1998, and incorporated by reference herein.
(8) Filed as an Exhibit to VDC Corporation Ltd.'s Form 10-Q for the
quarter ended March 31, 1998, and incorporated by reference herein.
(9) Filed as an Exhibit to VDC Corporation Ltd.'s Current Report on Form
8-K, dated June 22, 1998, and incorporated by reference herein.
(10) Filed as an Exhibit to Registrant's Current Report on Form 8-K dated
November 19, 1998, and incorporated by reference herein.
(11) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended
December 31, 1998, and incorporated herein by reference.
(12) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended
March 31, 1999, and incorporated herein by reference.
II-13
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Greenwich,
State of Connecticut, on this 7th date of June, 1999.
VDC COMMUNCATIONS, INC.
By:/s/ Frederick A. Moran
-------------------------
Chairman of the Board, Chief
Executive Officer, Chief
Financial Officer, and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Frederick A. Moran, his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
/s/ Frederick A. Moran Dated: June 4, 1999
- ------------------------------------ -----------------------
Frederick A. Moran
Chairman of the Board, Chief Executive
Officer, Director, and Chief Financial
Officer (Principal Executive, Financial
and Accounting Officer)
/s/ Hussein Elkholy Dated: June 6, 1999
- ------------------------------------ -----------------------
Dr. Hussein Elkholy
Director
/s/ James B. Dittman Dated: June 7, 1999
- ------------------------------------ -----------------------
James B. Dittman
Director
/s/ Leonard Hausman Dated: June 4, 1999
- ------------------------------------ -----------------------
Dr. Leonard Hausman
Director
II-14
<PAGE>
EXHIBIT INDEX
Exhibit Number Page Number in
(Referenced to Rule 0-3(b)
Item 601 of Sequential
Reg. S-K) Numbering System
Where Exhibit Can
Be Found
2.5 Certificate of Merger of VDC Corporation Ltd. into
VDC Communications, Inc.
5.1 Opinion of Buchanan Ingersoll Professional
Corporation*
10.45 Securities Purchase Agreement, between Paradigm
Group, LLC, and VDC Communications, Inc., dated May
17, 1999
10.46 Form of Employment Agreement
10.47 Form of Option Agreement
10.48 Form of Registration Rights Agreement
10.49 Form of Incentive Stock Option Agreement
10.50 Incentive Stock Option Agreement between Frederick
A. Moran and VDC Communications, Inc., dated
December 8, 1998
21.1 Subsidiaries of Registrant
23.1 Consent of BDO Seidman LLP, independent accountants
27.1 Financial Data Schedule
* To be filed in an amendment to the Registration Statement.
II-15
CERTIFICATE OF MERGER
VDC CORPORATION LTD.
INTO
VDC COMMUNICATIONS, INC.
The undersigned corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That the name and state/country of incorporation of each of the
constituent corporations of the merger is as follows:
NAME STATE/COUNTRY OF INCORPORATION
VDC Corporation Ltd. Bermuda
VDC Communications, Inc. Delaware
SECOND:That an Agreement of Merger between the parties to the merger has
been approved, adopted, certified, executed and acknowledged by each of the
constituent corporations in accordance with the requirements of Section 253 of
the General Corporation Law of the State of Delaware.
THIRD: That the surviving corporation of the merger is VDC
Communications, Inc.
FOURTH:That the certificate of incorporation of Vdc Communications,
Inc., a Delaware Corporation, the surviving corporation, shall be the
Certificate of Incorporation of the surviving corporation.
FIFTH: That the executed Agreement of Merger is on file at the principal
place of business of the surviving corporation. The address of the principal
place of business of the surviving corporation is 75 Holly Hill Lane, Greenwich,
CT 06830.
SIXTH: That a copy of the Agreement of Merger will be furnished by the
surviving corporation, on request and without cost to any stockholder of any
constituent corporation.
SEVENTH: The authorized capital stock for VDC Corporation Ltd. is
50,000,000 shares of common stock at $2.00 par value per share.
IN WITNESS WHEREOF, VDC Communications, Inc. has caused the Certificate
to be signed by Frederick A. Moran, its authorized officer, this 5th day of
November, 1998.
VDC COMMUNICATIONS, INC.
By: /s/ Frederick A. Moran
------------------------
Frederick A. Moran, President
VDC COMMUNICATIONS, INC.
----------
SECURITIES PURCHASE AGREEMENT
----------
SHARES OF COMMON STOCK
AT $2.70 PER SHARE
AND COMMON STOCK
PURCHASE WARRANTS
----------
MAY 17, 1999
<PAGE>
CONFIDENTIAL
- ------------
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (the "Agreement") is entered into as
of the 17th day of May, 1999, by and between VDC Communications, Inc., a
Delaware corporation ("VDC" or the "Company"), and the investor whose name
appears at the end of this Agreement ("Purchaser" or "Subscriber").
R E C I T A L S:
----------------
The Company wishes to obtain additional working capital and the
Purchaser desires to provide such working capital to the Company through the
purchase of certain shares of the Company's common stock, $.0001 par value per
share (the "Common Stock"), being privately offered by the Company.
NOW, THEREFORE, in consideration of the premises hereof and the
agreements set forth herein below, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Sale and Purchase of Shares and Warrants.
Subject to the terms and conditions hereof, the Company agrees to
issue and sell, and the Purchaser agrees to purchase that number of shares of
Common Stock (the "Shares") identified on the signature page hereof at a
purchase price of $2.70 per share. The total purchase price is set forth on the
signature page hereof (the "Purchase Price"). The Purchase Price is payable upon
subscription in cash, check or wire transfer. If paying by check, the check
should be made payable to "VDC Communications, Inc." and delivered to VDC
Communications, Inc. at 75 Holly Hill Lane, Greenwich, Connecticut, 06830. For
every full block of ten (10) Shares purchased pursuant to this Agreement, the
Purchaser shall be entitled to receive from the Company, and the Company shall
grant to the Purchaser, one (1) Common Stock Purchase Warrant (the "Warrants")
upon substantially the terms set forth in the document attached hereto as
Exhibit "A." The sale of Shares and Warrants evidenced by this Agreement is part
of an overall private placement transaction being undertaken by the Company of a
maximum principal amount of $1,499,998.50. See Section 3 hereafter.
No broker, investment banker or any other person, other than
Paradigm Group LLC ("Paradigm") and Santa Fe Capital Group (NM), Inc. ("Santa
Fe"), will receive from the Company any compensation as a broker, finder,
adviser or in any other capacity in connection with the purchase of the Shares
and Warrants hereunder. As a consulting fee, for every full block of twenty (20)
Shares purchased by "accredited investors," as that term is defined in Rule 501
of Regulation D of the Securities Act of 1933, as amended (the "Act") introduced
to the Company exclusively by Paradigm ("Paradigm Purchasers"), Paradigm shall
be entitled to receive from the Company, and the Company shall grant to the
Paradigm, one (1) Warrant. The Company shall pay Santa Fe an investment banking
fee (the "Santa Fe Fee") based upon gross proceeds paid to the Company by
Paradigm Purchasers (the "Proceeds"). Specifically, Santa Fe is entitled to:
five percent (5%) of the first $1,000,000 in Proceeds; four percent (4%) of the
second $1,000,000 in Proceeds; three percent (3%) of the third $1,000,000 in
Proceeds; two percent (2%) of the fourth $1,000,000 in proceeds; and one percent
(1%) for all Proceeds in excess of $4,000,000. Twenty percent (20%) of the Santa
Fe Fee shall be paid to Santa Fe in shares of Company Common valued at $2.70 per
share.
<PAGE>
2. Description of the Securities.
(a) Restricted Securities. The Shares, Warrants and shares
of Common Stock issuable upon exercise of the Warrants (the "Warrant Shares")
being offered hereby (collectively, the "Securities") shall be "restricted
securities" as that term is defined under Rule 144 promulgated under the Act and
may not be offered for sale or sold or otherwise transferred in a transaction
which would constitute a sale thereof within the meaning of the Act unless (i)
such Security has been registered for sale under the Act and registered or
qualified under applicable state securities laws relating to the offer and sale
of securities; or (ii) exemptions from the registration requirements of the Act
and the registration or qualification requirements of all such state securities
laws are available and the Company shall have received an opinion of counsel,
prepared at Purchaser's expense, that the proposed sale or other disposition of
such securities may be effected without registration under the Act and would not
result in any violation of any applicable state securities laws relating to the
registration or qualification of securities for sale, such counsel and such
opinion to be satisfactory to the Company.
(b) Voting Rights; Dividends. Holders of Common Stock of
the Company have equal rights to receive dividends when, as, and if declared by
the Board of Directors out of funds legally available therefor. Holders of
Common Stock of the Company have one vote for each share held of record and do
not have cumulative voting rights.
(c) Liquidation; Redemption. Holders of Common Stock of
the Company are entitled upon liquidation of the Company to share ratably in the
net assets available for distribution, subject to the rights, if any of holders
of any preferred stock of the Company then outstanding. Shares of Common Stock
of the Company are not redeemable and have no preemptive or similar rights. All
outstanding shares of Common Stock of the Company are fully paid and
nonassessable.
(d) Description of Warrants. Each Warrant entitles the
holder to purchase one (1) share of Common Stock at an exercise price of $6.00
per share, exercisable for a three year period from the date of Closing. Prior
to the exercise of the Warrants, holders of the Warrants shall not be entitled
to any right whatsoever, either in law or equity, of a stockholder of the
Company, including without limitation, the right to receive dividends or to vote
or to consent or to receive notice as a stockholder in respect of the meetings
of stockholders or the election of directors of the Company or any other matter.
(e) Restriction Upon Resale. The Subscriber hereby agrees
that the Securities shall be subject to restrictions upon the transfer, sale,
encumbrance or other disposition of the Securities. See "UNDERSTANDING OF
INVESTMENT RISKS" AND "REGISTRATION RIGHTS".
2
<PAGE>
3. Securities Offered in a Private Placement Transaction.
The Securities offered by this Agreement are being offered as a
non-public offering (the "Offering") pursuant to Section 4(2) and Regulation D
of the Act ("Regulation D") by the Company on a "best efforts" basis of a
maximum principal amount of $1,499,998.50 (the "Maximum Offering") to be offered
to the Paradigm Purchasers. Accordingly, there can be no assurances as to the
number of securities that will be sold in the Offering. The Company may, in its
sole discretion, reject, in whole or part, subscriptions from Paradigm
Purchasers to the extent such subscriptions, when aggregated with other
subscriptions from Paradigm Purchasers exceed the Maximum Offering.
Additionally, the Company may, in its sole discretion, reject any subscription
from any Paradigm Purchaser to the extent funds for such subscription are not
received by the Company on or before 5 p.m. Eastern Standard Time on Wednesday,
May 26, 1999, (the "Outside Payment Date").
The Company is concurrently offering up to 700,000 shares of
Common Stock and up to 70,000 three-year warrants to purchase one (1) share of
Common Stock at an exercise price of $6.00 per share in a private placement at a
purchase price of between $2.70 and approximately $4.00 per share of Common
Stock with the right to receive one (1) warrant for every full block of ten (10)
shares of Common Stock (the "Concurrent Offering"). The proceeds of this
Offering and the Concurrent Offering are intended to raise working capital for
the Company.
4. Binding Effect of Agreement; The Closing.
This Agreement shall not be binding on the Company unless and
until an authorized executive officer of the Company has evidenced acceptance
thereof by executing the signature page at the end hereof. The Company may
accept or reject this Agreement in its sole discretion if the Purchaser does not
meet the suitability standards established herein. Additionally, even if
accepted, this Agreement shall be voidable, in the Company's sole discretion, if
the Purchase Price is received by the Company after 5 p.m. Eastern Standard Time
on the Outside Payment Date, and the Company shall have no obligation to issue
the Securities, or any one of them. In the event the Company rejects this
Agreement, or this Agreement is voided in accordance with the provisions above,
the Purchaser's funds, to the extent received by the Company, will be returned
without deduction of any costs and without interest.
A closing (the "Closing") will occur contemporaneously with the
acceptance of this Agreement by the Company and the Company's receipt of the
Purchase Price. The Company shall deliver to the Purchaser within fifteen
business (15) days after the Closing:
(a) A stock certificate representing the number of Shares
purchased, bearing applicable restrictive legends, duly executed by the
appropriate officer(s) and registered on the books of the Company in Purchaser's
name; and
(b) The Warrants in substantially the form set forth at
Exhibit "A" duly executed by the appropriate officer(s) and registered on the
books of the Company in the Purchaser's name.
3
<PAGE>
5. Representations and Warranties of the Purchaser. The
Purchaser represents and warrants to the Company as follows:
(a) Accredited Investor. The Purchaser has such knowledge
and experience in business and financial matters such that the Purchaser is
capable of evaluating the merits and risks of purchasing the Securities. The
Purchaser is either an "accredited investor" as that term is defined in Rule 501
of Regulation D of the Act or a "qualified institutional buyer" as that term is
defined in Rule 144A of the Act, and represents that he satisfies the
suitability standards identified in Section 10 hereof;
(b) Loss of Investment. The Purchaser('s) (i) overall
commitment to investments which are not readily marketable is not
disproportionate to his net worth; (ii) investment in the Company will not cause
such overall commitment to become excessive; (iii) can afford to bear the loss
of his entire investment in the Company; and (iv) has adequate means of
providing for his current needs and personal contingencies and has no need for
liquidity in his investment in the Company;
(c) Special Suitability. The Purchaser satisfies any special
suitability or other applicable requirements of his state of residence and/or
the state in which the transaction by which the Securities are purchased occurs;
(d) Investment Intent. The Purchaser hereby acknowledges
that the Purchaser has been advised that this offering has not been registered
with, or reviewed by, the Securities and Exchange Commission ("SEC") because
this offering is intended to be a non-public offering pursuant to Section 4(2)
and Regulation D of the Act. The Purchaser represents that the Purchaser's
Securities are being purchased for the Purchaser's own account and not on behalf
of any other person, for investment purposes only and not with a view towards
distribution or resale to others. The Purchaser will not attempt to sell,
transfer, assign, pledge or otherwise dispose of all or any portion of the
Securities unless they are registered under the Act or unless in the opinion of
counsel an exemption from such registration is available, such counsel and such
opinion to be satisfactory to the Company. The Purchaser understands that the
Securities have not been registered under the Act by reason of a claimed
exemption under the provisions of the Act which depends, in part, upon the
Purchaser's investment intention;
(e) State Securities Laws. The Purchaser understands that
no securities administrator of any state has made any finding or determination
relating to the fairness of this investment and that no securities administrator
of any state has recommended or endorsed, or will recommend or endorse, the
offering of the Securities;
(f) Authority; Power; No Conflict. The execution, delivery
and performance by the Purchaser of the Agreement are within the powers of the
Purchaser, have been duly authorized and will not constitute or result in a
breach or default under, or conflict with, any order, ruling or regulation of
any court or other tribunal or of any governmental commission or agency, or any
agreement or other undertaking, to which the Purchaser is a party or by which
the Purchaser is bound, and, if the Purchaser is not an individual, will not
violate any provision of the charter documents, Bylaws, indenture of trust or
partnership agreement, as applicable, of the Purchaser. The signatures on the
Agreement are genuine, and the signatory, if the Purchaser is an individual, has
legal competence and capacity to execute the same, or, if the Purchaser is not
an individual, the signatory has been duly authorized to execute the same; and
the Agreement constitutes the legal, valid and binding obligations of the
Purchaser, enforceable in accordance with its terms;
4
<PAGE>
(g) No General Solicitation. The Purchaser acknowledges
that no general solicitation or general advertising (including communications
published in any newspaper, magazine or other broadcast) has been received by
him and that no public solicitation or advertisement with respect to the
offering of the Securities has been made to him;
(h) Advice of Tax and Legal Advisors. The Purchaser has
relied solely upon the advice of his own tax and legal advisors with respect to
the tax and other legal aspects of this investment;
(i) Broker Fees. The Purchaser is not aware that any
person, and has been advised that no person, will receive from the Company any
compensation as a broker, finder, adviser or in any other capacity in connection
with the purchase of the Securities other than as declared herein;
(j) Access to Information. Purchaser has had access to all
material and relevant information concerning the Company, its management,
financial condition, capitalization, market information, properties and
prospects necessary to enable Purchaser to make an informed investment decision
with respect to its investment in the Securities. Purchaser has carefully read
and reviewed, and is familiar with and understands the contents thereof and
hereof, including, without limitation, the risk factors described in this
Agreement. See "UNDERSTANDING OF INVESTMENT RISKS." Purchaser acknowledges that
it has had the opportunity to ask questions of and receive answers from, and to
obtain additional information from, representatives of the Company concerning
the terms and conditions of the acquisition of the Securities and the present
and proposed business and financial condition of the Company, and has had all
such questions answered to its satisfaction and has been supplied all
information requested;
(k) Review of Reports. The Purchaser acknowledges that it
has been provided with an opportunity to review: (i) a copy of the Company's
Annual Report on Form 10-K for the year ended June 30, 1998; (ii) a copy of the
Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1998;
(iii) a copy of the Company's Registration Statement on Form S-4, pursuant to
which VDC Corporation Ltd., a Bermuda company, merged with and into the Company;
and (iv) all other recent reports filed by the Company with the Securities and
Exchange Commission under the Securities Exchange Act of 1934 (collectively, the
"Reports").
(l) Understanding the Nature of Securities. The Purchaser
understands and acknowledges that:
5
<PAGE>
(i) The Securities have not been registered under the
Act or any state securities laws and are being issued and sold in reliance upon
certain exemptions contained in the Act;
(ii) The Securities are "restricted securities" as that
term is defined in Rule 144 promulgated under the Act;
(iii) The Securities cannot be sold or transferred without
registration under the Act and applicable state securities laws, or unless the
Company receives an opinion of counsel reasonably acceptable to it (as to both
counsel and the opinion) that such registration is not necessary; and
(iv) The Securities and any certificates issued in
replacement therefor shall bear the following legend, in addition to any other
legend required by law or otherwise:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES
MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION FROM
REGISTRATION, UNDER THE ACT, BASED ON AN OPINION LETTER OF
COUNSEL SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER FROM
THE SECURITIES AND EXCHANGE COMMISSION."
6. Indemnification. The Purchaser shall indemnify and hold
harmless the Company and the Company's officers, directors and employees from
and against any and all loss, damage or liability (including attorneys' fees),
due to, or arising out of, a breach or inaccuracy of any representation or
warranty contained in Section 5.
7. Understanding of Investment Risks. Any investment in the
Securities should not be made by a Purchaser who cannot afford the loss of his
entire Purchase Price. THE PURCHASER ACKNOWLEDGES THAT THE SECURITIES OFFERED
HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION, OR ANY STATE SECURITIES COMMISSIONS, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ADEQUACY
OR ACCURACY OF THIS AGREEMENT OR ANY EXHIBIT HERETO. PRIOR TO MAKING AN
INVESTMENT IN THE SECURITIES, THE PURCHASER HAS FULLY CONSIDERED, AMONG OTHER
THINGS, THE FINANCIAL AND OTHER INFORMATION SET FORTH IN THE REPORTS AS WELL AS
THE RISK FACTORS ATTACHED HERETO AS EXHIBIT "B" AND ACKNOWLEDGES THAT SUCH
INFORMATION HAS BEEN CONSIDERED PRIOR TO MAKING THIS INVESTMENT DECISION.
8. Registration Rights. The Company has agreed to advise the
Purchaser by written notice at least ten (10) calendar days prior to the filing
of a registration statement under the Act (excluding registration on Forms S-8,
S-4 or any successor forms thereto), covering securities of the Company to be
offered and sold to the public generally (whether on behalf of the Company or
selling security holders) and shall, upon the request of the Purchaser given at
least five (5) calendar days prior to the filing of such registration statement,
include in any such registration statement such information as may be required
to permit the public resale of the Shares and Warrant Shares; provided, however,
that in the event the resale of the Shares and Warrant Shares has not been
previously included within a registration statement, the Company shall in any
event file a registration statement under the Act within one year of the
Closing, the purpose of which is to register the resale of the Shares and
Warrant Shares. The registration rights associated with the Shares and Warrants
Shares are described more particularly and are subject in full to the terms of a
Registration Rights Agreement substantially in the form attached hereto as
Exhibit "C."
6
<PAGE>
The Company shall use its best efforts to file, within thirty (30) days
of the Outside Payment Date, a registration statement on Form S-1 on behalf of
certain Company security holders which, if filed, will include the Shares and
Warrant Shares referenced in this Agreement.
The Company's obligation to register the Shares and the Warrant Shares
extends only to the inclusion of the Shares and the Warrant Shares in a
registration statement which covers the public resale thereof. In all events,
the Company shall have no obligation: (i) to assist or cooperate in the offering
or disposition of such Shares or Warrant Shares; (ii) to obtain a commitment
from an underwriter relative to the sale of such Shares or Warrant Shares; or
(iii) to include such Shares or Warrant Shares within an underwritten offering
of the Company. The Company shall assume no responsibility for the manner of
sale, timing of sale, or sales price relating to the resale of the Shares and
Warrant Shares.
9. Representations and Warranties of the Company. The Company
hereby represents and warrants to Purchaser as follows:
(a) Organization and Standing of the Company. The Company
is a duly organized and validly existing corporation in good standing under the
laws of the State of Delaware with adequate power and authority to conduct the
business in which it is now engaged and has the corporate power and authority to
enter into this Agreement, and is duly qualified and licensed to do business as
a foreign corporation in such other jurisdictions as is necessary to enable it
to carry on its business, except where failure to do so would not have a
material adverse effect on its business;
(b) Corporate Power and Authority. The execution and
delivery of this Agreement and the transactions contemplated hereby have been
duly authorized by the Board of Directors of the Company. No other corporate act
or proceeding on the part of the Company is necessary to authorize this
Agreement or the consummation of the transactions contemplated hereby. When duly
executed and delivered by the parties hereto, this Agreement will constitute a
valid and legally binding obligation of the Company enforceable against it in
accordance with its terms, except as such enforceability may be limited by (i)
bankruptcy, insolvency, moratorium, reorganization or other similar laws and
legal and equitable principles limiting or affecting the rights of creditors
generally; and/or (ii) general principles of equity, regardless of whether
considered in a proceeding in equity or at law;
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<PAGE>
(c) Noncontravention. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby will not,
to the best of the Company's knowledge and belief, (i) permit the termination or
acceleration of the maturity of any material indebtedness or material obligation
of the Company; (ii) permit the termination of any material note, mortgage,
indenture, license, agreement, contract, or other instrument to which the
Company is a party or by which it is bound or the Certificate of Incorporation
or Bylaws of the Company; (iii) except as expressly provided in this Agreement
and except for state "blue sky" approvals that may be required and those
consents and waivers which already have been obtained by the Company, require
the consent, approval, waiver or authorization from or registration or filing
with any party, including but not limited to any party to a material agreement
to which the Company is a party or by which it is bound, or any regulatory or
governmental agency, body or entity except where failure to obtain such consent,
approval, waiver or authorization would not have a material adverse effect on
the Company's business; (iv) result in the creation or imposition of any lien,
claim or encumbrance of any kind or nature on any material properties or assets
of the Company; or (v) violate in any material aspect any statue, law, rule,
regulation or ordinance, or any judgment, decree, order, regulation or rule of
any court, tribunal, administrative or governmental agency, body or entity to
which the Company or its properties is subject except where such violation would
not have a material adverse effect on the Company's business.
10. IMPORTANT CONSIDERATIONS: SUITABILITY STANDARDS - WHO SHOULD INVEST.
INVESTMENT IN THE SECURITIES INVOLVES A HIGH DEGREE OF RISK AND
IS SUITABLE ONLY FOR PERSONS OF SUBSTANTIAL FINANCIAL RESOURCES WHO HAVE NO NEED
FOR LIQUIDITY IN THEIR INVESTMENT.
A substantial number of state securities commissions have
established investor suitability standards for the marketing within their
respective jurisdictions of restricted securities. Some have also established
minimum dollar levels for purchases in their states. The reasons for these
standards appear to be, among others, the relative lack of liquidity of
securities of such programs as compared with other securities investments.
Investment in the Securities involves a high degree of risk and is suitable only
for persons of substantial financial means who have no need for liquidity in
their investments.
The Company has adopted as a general investor suitability
standard the requirement that each Subscriber for Securities represents in
writing that the Subscriber: (a) is acquiring the Securities for investment and
not with a view to resale or distribution; (b) can bear the economic risk of
losing its entire investment; (c) its overall commitment to investments which
are not readily marketable is not disproportionate to its net worth, and an
investment in the Securities will not cause such overall commitment to become
excessive; (d) has adequate means of providing for its current needs and
personal contingencies and has no need for liquidity in this investment in the
Securities; (e) has evaluated all the risks of investment in the Company; and
(f) has such knowledge and experience in financial and business matters as to be
capable of evaluating the merits and risks of investing in the Company or is
relying on its own purchaser representative in making an investment decision.
8
<PAGE>
In addition, all of the Subscribers for Securities must be: (1)
extremely sophisticated investors with substantial net worth and experience in
making investments of this nature; and (2) "accredited investors," as defined in
Rule 501 of Regulation D under the Act, by meeting any of the following
conditions:
(i) he or she has an individual income in excess of
$200,000 in each of the two most recent years or joint income with his or her
spouse in excess of $300,000 in each of those years, and he or she reasonably
expects an income in excess of the aforesaid levels in the current year, or
(ii) he or she has an individual net worth, or a joint net worth
with his or her spouse, at the time of his or her purchase, in excess of
$1,000,000 (net worth for these purposes includes homes, home furnishings and
automobiles), or
(iii) he or she otherwise satisfies the Company that he or she is
an accredited investor, as defined in Rule 501 under the Act.
Other categories of investors included within the definition of
accredited investor include the following: certain institutional investors,
including certain banks, whether acting in their individual or fiduciary
capacities; certain insurance companies; federally registered investment
companies; business development companies (as defined under the Investment
Company Act of 1940); Small Business Investment Companies licensed by the Small
Business Administration; certain employee benefit plans; private business
development companies (as defined in the Investment Advisers Act of 1940); tax
exempt organizations (as defined in Section 501(c)(3) of the Internal Revenue
Code) with total assets in excess of $5,000,000; entities in which all the
equity owners are accredited investors; and certain affiliates of the Company.
A partnership Subscriber, which satisfies the requirements set
forth in clauses (a) through (f) above shall satisfy the suitability standards
if it is an accredited investor by reason of clause (iii) above, or if all of
its partners are accredited investors. A corporate subscriber, which satisfies
the requirements set forth in clauses (a) through (f) above shall satisfy the
investor suitability standards if it is an accredited investor by reason of
clause (iii) above, or if all of its shareholders are accredited investors.
Corporate subscribers must have net worth of at least three (3) times the amount
of their investment in the Securities.
The suitability standards referred to above represent minimum
suitability requirements for prospective purchasers and the satisfaction of such
standards by a prospective purchaser does not necessarily mean that the
Securities are a suitable investment for such purchaser. The Company may, in
circumstances it deems appropriate, modify such requirements. The Company may
also reject subscriptions for whatever reasons, in its sole discretion, it deems
appropriate.
Securities Purchase Agreements may not necessarily be accepted in
the order in which received. Purchasers who are residents of certain states may
be required to meet certain additional suitability standards.
9
<PAGE>
THE ACCEPTANCE OF A SUBSCRIPTION FOR THE SECURITIES BY THE COMPANY
DOES NOT CONSTITUTE A DETERMINATION BY THE COMPANY THAT AN INVESTMENT IN THE
SECURITIES IS SUITABLE FOR A PROSPECTIVE INVESTOR. THE FINAL DETERMINATION OF
THE SUITABILITY OF INVESTMENT IN THE SECURITIES MUST BE MADE BY THE
PROSPECTIVE INVESTOR AND HIS OR HER ADVISERS.
11. State Law Considerations for Residents of All States.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON
THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE
MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY
FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE
FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY
OF THE DESCRIPTION OF BUSINESS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY
AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
SECURITIES ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME.
12. Notices. All notices, consents, waivers, and other
communications under this Agreement must be in writing and will be deemed to
have been duly given when (a) delivered by hand (with written confirmation of
receipt), (b) sent by facsimile (with written confirmation of receipt), provided
that a copy is mailed by registered mail, return receipt requested (provided
that facsimile notice shall be deemed received on the next business day if
received after 5:00 p.m. local time), or (c) when received by the addressee, if
sent by a nationally recognized overnight delivery service (receipt requested),
in each case to the appropriate addresses and facsimile numbers set forth below
(or to such other addresses and facsimile numbers as a party may designate by
notice to the other parties):
If to the Company:
VDC Communications, Inc.
75 Holly Hill Lane
Greenwich, CT 06830
Attention: Frederick A. Moran
Chairman & C.E.O.
Facsimile: (203) 552-0908
10
<PAGE>
with a copy to:
VDC Communications, Inc.
75 Holly Hill Lane
Greenwich, CT 06830
Attention: Louis D. Frost, Esq.
VDC Corporate Counsel
Facsimile: (203) 552-0908
If to Purchaser:
to the address set forth at the end of this Agreement or to such
other addresses as may be specified in accordance herewith from time to time.
13. Survival of Representations and Warranties. Representations and
warranties contained herein shall survive the execution and delivery of this
Agreement.
14. Parties in Interest. All the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the respective successors and permitted assigns of the parties hereto,
provided that this Agreement and the interests herein may not be assigned by
either party without the express written consent of the other party.
15. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the state of Delaware without regard to
the principles of conflict of laws.
16. Arbitration. All controversies which may arise between the
parties including, but not limited to, those arising out of or related to this
Agreement shall be determined by binding arbitration applying the laws of the
State of Delaware. Any arbitration between the parties shall be conducted at the
Company's offices in Greenwich, Connecticut, or at such other location
designated by the Company, before the American Arbitration Association (the
"AAA"). If the Parties are unable to agree on a single arbitrator with fifteen
(15) days of a demand for arbitration being filed with the AAA by one of the
parties, each party shall select an arbitrator and the two (2) arbitrators shall
mutually select a third arbitrator, the three of whom shall serve as an
arbitration panel. The decision of the arbitrator(s) shall be final and binding
upon the Parties and shall not be required to include written findings of law
and fact, and judgment may be obtained thereon by either party in a court of
competent jurisdiction. Each party shall bear the cost of preparing and
presenting its own case. The cost of the arbitration, including the fees and
expenses of the arbitrator(s), shall be shared equally by the parties hereto
unless the award otherwise provides. Nothing in this section will prevent either
party from resorting to judicial proceedings if interim injunctive relief under
the laws of the State of Delaware from a court is necessary to prevent serious
and irreparable injury to one of the parties, and the parties hereto agree that
the state courts in Stamford, Connecticut and the United States District Court
in the District of Connecticut in Bridgeport, Connecticut shall have exclusive
subject matter and in personam jurisdiction over the parties for purposes of
obtaining interim injunctive relief.
11
<PAGE>
17. Sections and Other Headings. The section and other headings
contained in this Agreement are for the convenience of reference only, and do
not constitute part of this Agreement or otherwise affect any of the provisions
hereof.
18. Pronouns. Whenever the context of this Agreement may
require, any pronoun will include the corresponding masculine, feminine and
neuter form, and the singular form of nouns and pronouns will include the
plural.
19. Signatures in Counterpart and Facsimile. This Agreement may
be executed in multiple counterparts and by facsimile signature, each of which
shall constitute an original, but all of which counterparts taken together shall
constitute one and the same instrument.
20. Severability. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction.
21. Entire Agreement; Amendments. This Agreement and the
instruments referenced herein contain the entire understanding of the parties
with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company nor the Purchaser
make any representation, warranty, covenant or undertaking with respect to such
matters. No provision of this Agreement may be waived or amended other than by
an instrument in writing signed by the party to be charged with enforcement.
22. Construction. This Agreement and any related instruments will
not be construed more strictly against one party then against the other by
virtue of the fact that drafts may have been prepared by counsel for one of the
parties, it being recognized that this Agreement and any related instruments are
the product of negotiations between the parties and that both parties have
contributed to the final preparation of this Agreement and all related
instruments.
23. Agreement Read and Understood. Both parties hereto
acknowledge that they have had an opportunity to consult with an attorney, and
such other experts or consultants as they deem necessary or prudent, regarding
this Agreement and that they, or their designated agents, have read and
understand this Agreement.
24. United States Dollars. All dollar amounts stated herein refer
to and are payable solely in United States Dollars.
12
<PAGE>
IN WITNESS WHEREOF, intending to be legally bound, the parties hereto
have caused this Agreement to be signed.
Purchaser: Paradigm Group, LLC
370,370 Shares/$999,999.00
- --------------------------
Number and dollar amount By:/s/ Randall S. Goulding
of Shares purchased - --------------------------
Purchase Price Its: Managing Director
-----------------
Address/Residence of Purchaser:
3000 W. Dundee Suite 105
------------------------
37,037 Northbrook, IL 60062
- ------ -------------------
Warrants
Employer Identification No.: 36-4207221
Accredited Investor Certification
(Place initials on the appropriate line(s))
____ (i) I am a natural person who had individual
income of more than $200,000 in each of the most recent two
years or joint income with my spouse in excess of $300,000 in
each of the most recent two years and reasonably expect to
reach that same income level for the current year ("income",
for purposes hereof, should be computed as follows: individual
adjusted gross income, as reported (or to be reported) on
a federal income tax return, increased by (1) any deduction of
long-term capital gains under Section 1202 of the Internal
Revenue Code of 1986 (the "Code"), (2) any deduction for
depletion under Section 611 et seq. of the Code, (3) any
exclusion for interest under Section 103 of the Code and (4) any
losses of a partnership as reported on Schedule E of Form 1040);
_____ (ii) I am a natural person whose individual net
worth (i.e., total assets in excess of total liabilities), or
joint net worth with my spouse, will at the time of purchase of
the Securities be in excess of $1,000,000;
_____ (iii) The Purchaser is an investor satisfying the
requirements of Section 501(a)(1), (2) or (3) of Regulation D
promulgated under the Securities Act, which includes but is not
limited to, a self-directed employee benefit plan where
investment decisions are made solely by persons who are
"accredited investors" as otherwise defined in Regulation D;
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<PAGE>
_____ (iv) The Purchaser is a "qualified institutional buyer"
as that term is defined in Rule 144A of the Securities Act;
_____ (v) The Purchaser is a trust, which trust
has total assets in excess of $5,000,000, which is not formed for
the specific purpose of acquiring the Securities offered hereby
and whose purchase is directed by a sophisticated person as
described in Rule 506(b)(ii) of Regulation D and who has such
knowledge and experience in financial and business matters that
he is capable of evaluating the risks and merits of an investment
in the Securities;
_____ (vi) I am a director or executive officer of the Company;
or
- ----- (vii) The Purchaser is an entity (other than a trust)
in which all of the equity owners meet the requirements of
at least one of the above subparagraphs.
Agreed and Accepted by
VDC COMMUNICATIONS, INC.
By: /s/ Frederick A. Moran
----------------------
Frederick A. Moran
Chairman & C.E.O.
Dated: May 17, 1999
------------
14
<PAGE>
EXHIBIT "A"
Warrant No. 1999-W^
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE
SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION
FROM REGISTRATION, UNDER THE ACT, BASED ON AN OPINION LETTER OF COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER FROM THE SECURITIES
AND EXCHANGE COMMISSION.
FORM OF
WARRANT TO PURCHASE COMMON STOCK
OF
VDC COMMUNICATIONS, INC.
Void after 5:00 p.m. Eastern Standard Time on May ^, 2002
This is to verify that, FOR VALUE RECEIVED, the undersigned, or its
registered assigns (hereinafter referred to as the "Holder"), is entitled to
purchase, subject to the terms and conditions hereof, from VDC COMMUNICATIONS,
INC., a Delaware corporation (the "Company"), that number of shares of Common
Stock, par value $.0001 per share of the Company (the "Common Stock") set forth
on the signature page hereto at any time during the period commencing at 9:00
a.m., Eastern Standard Time on May ^, 1999 (the "Commencement Date") and ending
at 5:00 p.m. Eastern Standard Time on May ^, 2002 (the "Termination Date") at an
exercise price of $6.00 per share of Common Stock. The number of shares of
Common Stock purchasable upon exercise of this Warrant (the "Warrant(s)") and
the exercise price per share shall be subject to adjustment from time to time
upon the occurrence of certain events as set forth below.
The shares of Common Stock or any other shares or other units of stock
or other securities or property, or any combination thereof then receivable upon
exercise of this Warrant, as adjusted from time to time, are sometimes referred
to hereinafter as "Exercise Shares". The exercise price per share as from time
to time in effect is referred to hereinafter as the "Exercise Price".
1. Exercise of Warrant: Issuance of Exercise Shares.
(a) Exercise of Warrant. This Warrant may be exercised in whole or
in part at any time or from time to time on or after the Commencement Date and
until and including the Termination Date, upon surrender on any business day to
the Company at its principal office, presently located at the address of the
Company set forth in Section 8 hereof (or such other office of the Company, if
any, as shall theretofore have been designated by the Company by written notice
to the Holder), together with: (i) a completed and executed Notice of Warrant
Exercise in the form set forth in Appendix A hereto and made a part hereof and
(ii) payment of the full Exercise Price for the amount of Exercise Shares set
forth in the Notice of Warrant Exercise, in lawful money of the United States of
America by certified check or cashier's check, made payable to the order of the
Company.
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<PAGE>
In the event that this Warrant shall be duly exercised in part prior to
the Termination Date, the Company shall issue a new Warrant or Warrants of like
tenor evidencing the rights of the Holder thereof to purchase the balance of the
Exercise Shares purchasable under the Warrant so surrendered that shall not have
been purchased.
No adjustments shall be made for any cash dividends on Exercise Shares
issuable upon exercise of the Warrant. The Company shall cancel Warrant
Certificates surrendered upon exercise of Warrants.
(b) Issuance of Exercise Shares: Delivery of Warrant Certificate.
The Company shall, within fifteen (15) business days or as soon thereafter as is
practicable of the exercise of this Warrant, issue in the name of and cause to
be delivered to the Holder (or such other person or persons, if any, as the
Holder shall have designated in the Notice of Warrant Exercise) one or more
certificates representing the Exercise Shares to which the Holder (or such other
person or persons) shall be entitled upon such exercise under the terms hereof.
Such certificate or certificates shall be deemed to have been issued and the
Holder (or such other person or persons so designated) shall be deemed to have
become the record holder of the Exercise Shares as of the date of the due
exercise of this Warrant.
(c) Exercise Shares Fully Paid and Non-assessable. The Company
agrees and covenants that all Exercise Shares issuable upon the due exercise of
the Warrant represented by this Warrant Certificate will, upon issuance in
accordance with the terms hereof, be duly authorized, validly issued, fully paid
and non-assessable and free and clear of all taxes (other than taxes which,
pursuant to Section 2 hereof, the Company shall not be obligated to pay) or
liens, charges, and security interests created by the Company with respect to
the issuance thereof.
(d) Reservation of Exercise Shares. At the time of or before taking
any action which would cause an adjustment pursuant to Section 5 hereof
increasing the number of shares of capital stock constituting the Exercise
Shares, the Company will take any corporate action which may, in the opinion of
its counsel, be necessary in order that the Company have remaining, after such
adjustment, a number of shares of such capital stock unissued and unreserved for
other purposes sufficient to permit the exercise of all the then outstanding
Warrants of like tenor immediately after such adjustment; the Company will also
from time to time take action to increase the authorized amount of its capital
stock constituting the Exercise Shares if at any time the number of shares of
capital stock authorized but remaining unissued and unreserved for other
purposes shall be insufficient to permit the exercise of the Warrants then
outstanding. The Company may but shall not be limited to reserve and keep
available, out of the aggregate of its authorized but unissued shares of capital
stock, for the purpose of enabling it to satisfy any obligation to issue
Exercise Shares upon exercise of Warrants, through the Termination Date, the
number of Exercise Shares deliverable upon the full exercise of this Warrant and
all other Warrants of like tenor then outstanding.
16
<PAGE>
(e) Fractional Shares. The Company shall not be required to issue
fractional shares of capital stock upon the exercise of this Warrant or to
deliver Warrant Certificates which evidence fractional shares of capital stock.
In the event that any fraction of an Exercise Share would, except for the
provisions of this subparagraph (e), be issuable upon the exercise of this
Warrant, the Company shall pay to the Holder exercising the Warrant an amount in
cash equal to such fraction multiplied by the current market value of the
Exercise Share. For purposes of this subparagraph (e), the current market value
shall be determined as follows:
(i) if the Exercise Shares are traded in the
over-the-counter market and not on any national securities exchange and not in
the NASDAQ Reporting System, the average of the mean between the last bid and
asked prices per share, as reported by the National Quotation Bureau, Inc., or
an equivalent generally accepted reporting service, for the last business day
prior to the date on which this Warrant is exercised, or if not so reported, the
average of the closing bid and asked prices for an Exercise Share as furnished
to the Company by any member of the National Association of Securities Dealers,
Inc., selected by the Company for that purpose; or
(ii) if the Exercise Shares are listed or traded on a national
securities exchange or in the NASDAQ National Market System, the closing price
on the principal national securities exchange on which they are so listed or
traded or in the NASDAQ National Market System, as the case may be, on the last
business day prior to the date of the exercise of this Warrant. The closing
price referred to in this clause (ii) shall be the last reported sales price or,
in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices, in either case on the national securities
exchange on which the Exercise Shares are then listed or in the NASDAQ Reporting
System; or
(iii) if no such closing price or closing bid and asked prices
are available, as determined in any reasonable manner as may be prescribed by
the Board of Directors of the Company.
2. Payment of Taxes.
(a) The Company will pay all documentary stamp taxes, if any,
attributable to the initial issuance of Exercise Shares upon the exercise of
this Warrant; provided, however, that the Company shall not be required to pay
any tax or taxes which may be payable in respect of any transfer involved in the
issue of any Warrant Certificates or any certificates for Exercise Shares in a
name other than that of the Holder of a Warrant Certificate surrendered upon the
exercise of a Warrant, and the Company shall not be required to issue or deliver
such certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(b) Upon exercise of a Warrant, the Company shall have the right to
require the Holder to remit to the Company an amount sufficient to satisfy
federal, state and local tax withholding requirements prior to the delivery of
any certificate for Exercise Shares issuable pursuant to the exercise of such
Warrant.
17
<PAGE>
(c) A Holder who is obligated to pay the Company an amount required
to be withheld under applicable tax withholding requirements may pay such amount
(i) in cash; (ii) in the discretion of the Company's Chief Executive Officer,
through the delivery to the Company of previously-owned shares of common stock
of the Company having an aggregate current market value equal to the tax
obligation, provided that the previously owned shares delivered in satisfaction
of the withholding obligations must have been held by the Holder for at least
six (6) months; (iii) in the discretion of the Company's Chief Executive
Officer, through the withholding of shares of common stock of the Company
otherwise issuable to the Holder in connection with the exercise of a Warrant;
or (iv) in the discretion of the Company's Chief Executive Officer, through a
combination of the procedures set forth in clauses (i), (ii) and (iii) of this
Section 2(c).
3. Mutilated or Missing Warrant Certificates. In case any Warrant
Certificate shall be mutilated, lost, stolen or destroyed, the Company may in
its discretion issue, in exchange and substitution for and upon cancellation of
the mutilated Warrant Certificate, or in lieu of and in substitution for the
Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate or
Warrant Certificates of like tenor and in the same aggregate denomination, but
only (i) in the case of loss, theft or destruction, upon receipt of evidence
satisfactory to the Company of such loss, theft or destruction of such Warrant
Certificate and indemnity or bond, if requested, also satisfactory to them and
(ii) in the case of mutilation, upon surrender of the mutilated Warrant.
Applicants for such substitute Warrant Certificates shall also comply with such
other reasonable regulations and pay such other reasonable charges as the
Company or its counsel may prescribe.
4. Rights of Holder. The Holder shall not, by virtue of anything
contained in this Warrant Certificate or otherwise, be entitled to any right
whatsoever, either in law or equity, of a stockholder of the Company, including
without limitation, the right to receive dividends or to vote or to consent or
to receive notice as a shareholder in respect of the meetings of shareholders or
the election of directors of the Company or any other matter.
5. Adjustment of Exercise Shares and Exercise Price. The Exercise Price
and the number and kind of Exercise Shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the happening of
certain events as hereinafter provided. The Exercise Price in effect at any time
and the number and kind of securities purchasable upon exercise of each Warrant
shall be subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend on its shares of
Common Stock in shares of Common Stock, (ii) subdivide its outstanding Common
Stock into a greater number of shares, or (iii) combine its outstanding Common
Stock into a smaller number of shares, the Exercise Price and number of
securities purchasable under this Warrant in effect at the time of the record
date for such dividend or distribution or of the effective date of such
subdivision, combination or reclassification, shall be proportionally adjusted
so that the Holder of this Warrant exercised after such date shall be entitled
to receive the aggregate number and kind of shares which, if this Warrant had
been exercised by such Holder immediately prior to such date, he would have
owned upon such exercise and been entitled to receive upon such dividend,
subdivision, combination or reclassification. For example, if the Company
declares a 2 for 1 stock dividend or stock split and the Exercise Price
immediately prior to such event was $5.00 per share, the adjusted Exercise Price
immediately after such event would be $2.50 per share. Additionally, the number
of securities purchasable under this Warrant would be adjusted accordingly. Such
adjustment shall be made successively whenever any event listed above shall
occur.
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<PAGE>
(b) If at any time while this Warrant, or any portion thereof, is
outstanding and unexpired there shall be (i) a capital reorganization pursuant
to which the shares of the Company's capital stock outstanding immediately prior
to such reorganization are converted by virtue of such reorganization into other
property, whether in the form of new securities, cash or otherwise (other than a
combination, reclassification, exchange or subdivision of shares otherwise
provided for herein), (ii) a merger or consolidation of the Company with or into
another corporation in which the Company is not the surviving entity, or a
reverse triangular merger in which the Company is the surviving entity but the
shares of the Company's capital stock outstanding immediately prior to the
merger are converted by virtue of the merger into other property, whether in the
form of securities, cash or otherwise, or (iii) a sale or transfer of all or
substantially all of the Company's properties and assets as, or substantially
as, an entirety to any other person, then, as a part of such capital
reorganization, merger, consolidation, sale or transfer, lawful provision shall
be made so that the holder of this Warrant shall thereafter be entitled to
receive upon payment of the Exercise Price then in effect, the number of shares
of stock or other securities or property of the successor corporation resulting
from such capital reorganization, merger, consolidation, sale or transfer that a
holder of the shares deliverable upon exercise of this Warrant would have been
entitled to receive in such capital reorganization, consolidation, merger, sale
or transfer if this Warrant had been exercised immediately before such capital
reorganization, merger, consolidation, sale or transfer, all subject to further
adjustment as provided in Section 5. The foregoing provisions of this Subsection
5(b) shall similarly apply to successive capital reorganizations,
consolidations, mergers, sales and transfers and to the stock or securities of
any other corporation that are at the time receivable upon the exercise of this
Warrant. If the per-share consideration payable to the Holder hereof for shares
in connection with any such transaction is in a form other than cash or
marketable securities, then the value of such consideration shall be determined
in good faith by the Company's Board of Directors. In all events, appropriate
adjustment (as determined in good faith by the Company's Board of Directors)
shall be made in the application of the provisions of this Warrant with respect
to the rights and interests of the Holder after the transaction, to the end that
the provisions of this Warrant shall be applicable after that event, as near as
reasonably may be, in relation to any shares or other property deliverable after
that event upon exercise of this Warrant.
(c) Whenever the Exercise Price payable upon exercise of each
Warrant is adjusted pursuant to subsections (a) and (b) above, the number of
Exercise Shares purchasable upon exercise of this Warrant shall simultaneously
be adjusted by multiplying the number of Exercise Shares initially issuable upon
exercise of this Warrant by the Exercise Price in effect on the date hereof and
dividing the product so obtained by the Exercise Price, as adjusted.
(d) No adjustment in the Exercise Price shall be required unless
such adjustment would require an increase or decrease of at least twenty-five
cents ($0.25) in such price; provided, however, that any adjustments which by
reason of this subsection (d) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment required to be made
hereunder. All calculations under this Section 5 shall be made to the nearest
cent or to the nearest one-hundredth of a share, as the case may be.
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(e) Whenever the Exercise Price is adjusted, as herein provided,
the Company shall promptly cause a notice setting forth the adjusted Exercise
Price and adjusted number of Exercise Shares issuable upon exercise of each
Warrant to be mailed to the Holders, at their last addresses appearing on the
books of the Company. The Company may retain a firm of independent certified
public accountants selected by the Board of Directors (who may be the regular
accountants employed by the Company) to make any computation required by this
Section 5, and a certificate signed by such firm shall be conclusive evidence of
the correctness of such adjustment.
(f) Irrespective of any adjustments in the Exercise Price or the
number or kind of Exercise Shares purchasable upon exercise of this Warrant,
Warrants theretofore or thereafter issued may continue to express the same price
and number and kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Warrant.
(g) Whenever the Exercise Price shall be adjusted as required by
the provisions of the foregoing Section 5, the Company shall forthwith file in
the custody of its Secretary or an Assistant Secretary at its principal office
an officer's certificate showing the adjusted Exercise Price determined as
herein provided, setting forth in reasonable detail the facts requiring such
adjustment, including a statement of the number of additional shares of Common
Stock, if any, and such other facts as shall be necessary to show the reason for
and the manner of computing such adjustment. Each such officer's certificate
shall be made available at all reasonable times for inspection by the Holder and
the Company shall, forthwith after each such adjustment, mail a copy by
certified mail of such certificate to the Holder.
6. Transfers, Exchanges, and Certain Restrictions.
(a) The Warrant shall be transferable, subject to the provisions of
Section 6 hereof, only upon the books of the Company, if any, to be maintained
by it for that purpose, upon surrender of the Warrant to the Company at its
principal office accompanied (if so required by it) by a written instrument or
instruments of transfer in form satisfactory to the Company and duly executed by
the Holder thereof or by the duly appointed legal representative thereof or by a
duly authorized attorney and upon payment of any necessary transfer tax or other
governmental charge imposed upon such transfer. In all cases of transfer by an
attorney, the original letter of attorney, duly approved, or an official copy
thereof, duly certified, shall be deposited and remain with the Company. In case
of transfer by executors, administrators, guardians or other legal
representatives, duly authenticated evidence of their authority shall be
produced, and may be required to be deposited and remain with the Company in its
discretion. Upon any such registration of transfer, a new Warrant Certificate
shall be issued to the transferee named in such instrument of transfer, and the
surrendered Warrant Certificate shall be canceled by the Company.
(b) The Warrant may be exchanged, at the option of the Holder
thereof and without change, when surrendered to the Company at its principal
office, or at the office of its transfer agent, if any, for another Warrant or
other Warrants of like tenor and representing in the aggregate the right to
purchase from the Company a like number and kind of Shares as the Warrant
surrendered for exchange or transfer, and the Warrant so surrendered shall be
canceled by the Company or transfer agent, as the case may be.
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(c) The Holder of this Warrant, by acceptance hereof, acknowledges
that this Warrant and the Shares to be issued upon exercise hereof are being
acquired solely for the Holder's own account and not as a nominee for any other
party, and for investment, and that the Holder will not offer, sell or otherwise
dispose of this Warrant or any Shares to be issued upon exercise hereof except
under circumstances that will not result in a violation of applicable federal
and state securities laws. Upon exercise of this Warrant, the Holder shall, if
requested by the Company, execute the Company's standard Investor Representation
Letter which shall, among other things, confirm in writing that the Exercise
Shares so purchased are being acquired solely for the Holder's own account and
not as a nominee for any other party, for investment, and not with a view toward
distribution or resale.
(d) Neither this Warrant nor any Exercise Share may be offered for
sale or sold, or otherwise transferred or sold, unless (i) such security has
been registered for sale under the Securities Act of 1933, as amended (the "1933
Act") and registered or qualified under applicable state securities laws
relating to the offer and sale of securities, or (ii) exemptions from the
registration requirements of the 1933 Act and the registration or qualification
requirements of all such state securities laws are available and the Company
shall have received an opinion of counsel, prepared at Holder's expense,
reasonably satisfactory to the Company that the proposed sale or other
disposition of such securities may be effected without registration under the
1933 Act and would not result in any violation of any applicable state
securities laws relating to the registration or qualification of securities for
sale, such counsel and such opinion to be satisfactory to the Company.
(e) All Shares issued upon exercise hereof shall be stamped or
imprinted with a legend in substantially the following form (in addition to any
legend required by law or otherwise deemed necessary or appropriate by Company's
counsel, including, but not limited to, an affiliate legend).
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION, OR
THE AVAILABILITY OF EXEMPTION FROM REGISTRATION, UNDER THE ACT, BASED ON
AN OPINION LETTER OF COUNSEL SATISFACTORY TO THE COMPANY OR A NO-ACTION
LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION."
The Company is hereby authorized to notify its transfer agent of the status of
the Exercise Shares and to take such other action including, but not limited to,
the placing of a "stop-transfer" order on the transfer agent's books and records
to assure compliance with the Act.
(f) Holder recognizes that investing in the Warrant and the Exercise
Shares involves a high degree of risk, and Holder is in a financial position to
hold the Warrant and the Exercise Shares indefinitely and is able to bear the
economic risk and withstand a complete loss of its investment in the Warrant and
the Exercise Shares. The Holder is a sophisticated investor and is capable of
evaluating the merits and risks of investing in the Company. The Holder has had
an opportunity to discuss the Company's business, management and financial
affairs with the Company's management, has been given full and complete access
to information concerning the Company, and has utilized such access to its
satisfaction for the purpose of obtaining information or verifying information
and have had the opportunity to inspect the Company's operation. Holder has had
the opportunity to ask questions of, and receive answers from, the management of
the Company (and any person acting on its behalf) concerning the Warrant and the
Shares and the agreements and transactions contemplated hereby, and to obtain
any additional information as Holder may have requested in making its investment
decision. The initial Holder of this Warrant is an "accredited investor", as
defined by Regulation D promulgated under the 1933 Act.
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(g) The Holder agrees to indemnify and hold harmless the Company
against any loss, damage, claim or liability arising from any inaccuracy in the
provisions of Section 6 hereof or the disposition of this Warrant or any
Exercise Share held by such holder or any interest therein in violation of the
provisions of Section 6 hereof.
7. Registration Rights. The shares of Common Stock or other equity
securities of the Company that may be issued to the Holder upon the exercise of
the Warrants are entitled to the registration rights set forth in the
Registration Rights Agreement of even date herewith between the Company and the
Holder.
8. Notices. All notices or other communications under this Warrant
Certificate shall be in writing and shall be deemed to have been given on the
day of delivery if delivered by hand, on the fifth day after deposit in the mail
if mailed by certified mail, postage prepaid, return receipt requested, or on
the next business day after mailing if sent by a nationally recognized overnight
courier such as federal express, addressed as follows:
If to the Company:
VDC Communications, Inc.
75 Holly Hill Lane
Greenwich, CT 06830
Attn: Frederick A. Moran, Chief Executive Officer
and to the Holder at the address of the Holder appearing on the
books of the Company or the Company's transfer agent, if any.
Either of the Company or the Holder may from time to time change the
address to which notices to it are to be mailed hereunder by notice in
accordance with the provisions of this Section 8.
9. Supplements and Amendments. The Company may from time to time
supplement or amend this Warrant Certificate without the approval of any holders
of Warrants in order to cure any ambiguity or to correct or supplement any
provision contained herein which may be defective or inconsistent with any other
provision, or to make any other provisions in regard to matters or questions
herein arising hereunder which the Company may deem necessary or desirable and
which shall not materially adversely affect the interests of the Holder.
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10. Successors and Assigns. This Warrant shall inure to the benefit of and
be binding on the respective successors, assigns and legal representatives of
the Holder and the Company.
11. Severability. If for any reason any provision, paragraph or terms of
this Warrant Certificate is held to be invalid or unenforceable, all other valid
provisions herein shall remain in full force and effect and all terms,
provisions and paragraphs of this Warrant shall be deemed to be severable.
12. Governing Law. This Warrant shall be deemed to be a contract made
under the laws of the State of Delaware and for all purposes shall be governed
by and construed in accordance with the laws of said jurisdiction without regard
to such jurisdiction's conflicts of laws provisions.
13. Headings. Paragraph and subparagraph headings used herein are included
herein for convenience of reference only and shall not affect the construction
of this Warrant Certificate nor constitute a part of this Warrant Certificate
for any other purpose.
14. Counterparts. This Warrant may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
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IN WITNESS WHEREOF, the Company has caused these presents to be duly
executed as of the ^th day of May, 1999 defined herein as the "Commencement
Date."
Number of Warrants:
VDC COMMUNICATIONS, INC.
By: ------------------------
Frederick A. Moran
Chief Executive Officer
Acknowledged and Agreed to by the undersigned this ____ day of May 1999.
- ----------------------------------
- ----------------------------------
- ----------------------------------
- ----------------------------------
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APPENDIX A
NOTICE OF WARRANT EXERCISE
Pursuant to a Warrant by and between the undersigned and VDC
COMMUNICATIONS, INC., a Delaware corporation (the "Company"), dated as of May ^,
1999, the undersigned hereby irrevocably elects to exercise its warrant to the
extent of purchasing _______________ shares of Common Stock, $.0001 par value
(the "Warrant Shares"), of the Company as provided for therein.
The undersigned hereby represents and agrees that the Warrant Shares
purchased pursuant hereto are being purchased for investment and not with a view
to the distribution or resale thereof, and that the undersigned understands that
said Warrant Shares have not been registered under the Securities Act of 1933,
as amended.
Payment of the full Purchase Price of the Warrant Shares is enclosed
herewith, in the form of a check made payable to the Company.
The undersigned requests that a certificate for the Warrant Shares be
issued in the name of:
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
(Please print name, address and social security number)
Dated:_______________________________________
Address: __________________________________________________
--------------------------------------------------
--------------------------------------------------
Signature:_________________________________________________
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EXHIBIT "B"
RISK FACTORS
An investment in Company Common Stock and Warrants to purchase Company Common
Stock involves a high degree of risk. Purchasers of such securities should
carefully review the following risk factors.
This following Risk Factors contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Although
forward-looking statements are based on assumptions made, and information
believed, by management to be reasonable, no assurance can be given that such
statements will prove to be correct. Such statements are subject to certain
risks, uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, projected
or expected. Some, but not all, of such risks and uncertainties are described in
the risk factors set forth below.
1. WE ARE A DEVELOPMENT STAGE COMPANY. We have only recently commenced
our present operations, and therefore, have only a limited operating
history upon which you can evaluate our business. We have
strategically placed telecommunications equipment in cities that we
believe will enable us to efficiently transport telecommunications
services. Now we are building our customer base as rapidly as we can
in order to achieve greater revenues and market penetration. We will
also add additional telecommunications equipment in other areas of the
world. We have not yet determined with certainty where those areas
will be.
2. WE ARE LOSING MONEY. We have not yet experienced a profitable
quarter and may not ever achieve profitability. By virtue of the early
stage of our development, we have yet to build sufficient volume of
telecommunications voice and facsimile traffic to reach profitability.
Our current expenses are greater than our revenues. This will probably
continue until we reach a greater level of maturity and it is possible
that our revenues may never exceed our expenses. If operating losses
continue for longer than the short-term, then our continued operation
will be in jeopardy. However, we believe that what we have developed
over the past year is valuable and has the potential to generate
revenues greater than expenses.
3. NUMEROUS CONTINGENCIES COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
Because we are a development stage company, and because of the nature
of the industry in which we operate, there are numerous contingencies
over which we have little or no control, any one of which could have a
material adverse effect on us. The contingencies include, but are not
limited to, the addition or loss of major customers, whether through
competition, merger, consolidation or otherwise; the loss of
economically beneficial routing options for the termination of our
telecommunications traffic; financial difficulties of major customers;
pricing pressure resulting from increased competition; and technical
difficulties with or failures of portions of our network that could
impact our ability to provide service to or bill our customers.
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4. OUR ABILITY TO IMPLEMENT OUR PLAN SUCCESSFULLY IS DEPENDENT ON A FEW KEY
PEOPLE. We are particularly dependent upon Frederick A. Moran, Chairman,
Chief Executive Officer, Chief Financial Officer, Secretary and Director
of the Company. Mr. Moran is also a significant beneficial shareholder
of the Company. The Company has an employment agreement with Mr. Moran.
We believe the combination of his employment agreement and equity
interest keeps Mr. Moran highly motivated to remain with the Company.
5. THE INTERNATIONAL TELECOMMUNICATIONS MARKET IS RISKY. The
international nature of the our operations involves certain risks,
such as changes in U.S. and foreign government regulations and
telecommunications standards, dependence on foreign partners, tariffs,
taxes and other trade barriers, the potential for nationalization and
economic downturns and political instability in foreign countries. At
the current time, we are particularly dependent on Central and North
America. In addition, our business could be adversely affected by a
reversal in the current trend toward the deregulation of the
telecommunications industry. We will be increasingly subject to these
risks to the extent that we proceed with the planned expansion of
international operations.
6. GOVERNMENT INVOLVEMENT IN INDUSTRY COULD HAVE AN ADVERSE EFFECT. We
are subject to various U.S. and foreign laws, regulations, agency
actions and court decisions. Our U.S. international telecommunications
service offerings are subject to regulation by the Federal
Communications Commission (the "FCC"). The FCC requires international
carriers to obtain certificates of public convenience and necessity
prior to acquiring international facilities by purchase or lease, or
providing international service to the public. Prior FCC approval is
also generally required to transfer control of a certificated carrier.
We must file reports and contracts with the FCC and must pay
regulatory and other fees, which are subject to change. We are also
subject to the FCC policies and rules discussed below. The FCC could
determine, by its own actions or in response to a third party's
filing, that certain of our services, termination arrangements,
agreements with foreign carriers, transit or refile arrangements or
reports did not comply with FCC policies and rules. If this occurred,
the FCC could order us to terminate arrangements, fine us or revoke
our authorizations. Any of these actions could have a material adverse
effect on our business, operating results and financial condition.
7. POTENTIAL FOR TECHNICAL FAILURE. Our services are dependent on our
own and other companies' ability to successfully integrate
technologies and equipment. In connecting with other companies'
equipment we take the risk of not being able to provide service due to
their error. In addition, there is the risk that our equipment may
malfunction or that we could make an error which negatively affects
our customers' service. We are also dependent on the protection of our
hardware and other equipment from damage from natural disasters such
as fires, floods, hurricanes and earthquakes, other catastrophic
events such as civil unrest, terrorism and war and other sources of
power loss and telecommunications failures. We have taken a number of
steps to prevent our service from being affected by natural disasters,
fire and the like. We have built redundant systems for power supply to
our equipment. Even though, there can be no assurance that any such
systems will prevent the switches from becoming disabled in the event
of an earthquake, power outage or otherwise. The failure of our
network, or a significant decrease in telephone traffic resulting from
effects of a natural or man-made disaster, could have a material
adverse effect on our relationship with our customers and our
business, operating results and financial condition.
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8. THE LONG DISTANCE AND INTERNATIONAL LONG DISTANCE TELEPHONE INDUSTRY IS
HIGHLY COMPETITIVE. We are a small company in an industry with many
companies that have more experience and greater resources than us.
International telecommunications providers compete mainly on the basis
of price, but also customer service, transmission quality, breadth of
service offerings and value-added services. Our operating history is
probably not long enough for you to make a judgment about our ability to
compete in this industry.
9. TECHNOLOGICAL ADVANCEMENT COULD RENDER OUR INFRASTRUCTURE OBSOLETE.
The international telecommunications industry is highly competitive and
subject to the introduction of new services facilitated by advances in
technology. We expect that the future will bring technological change.
It is possible that these changes could result in more advanced
telecommunications equipment that could render our current equipment
obsolete. If this were to happen, we would most likely have to invest
significant capital into this new technology.
10. WE HAVE LIMITED CAPITAL. Being a small company in a capital intensive
industry, our position of limited capital is a significant risk to our
future viability. We are currently seeking financing alternatives that
would put us in a better position financially. There is no guarantee
that we will be able to do this. We may sell additional shares of our
stock in order to provide the capital needed for our operations.
11. WE HAVE A SIGNIFICANT INVESTMENT IN A PRIVATE COMPANY THAT WE DO
NOT CONTROL. We have a non-controlling investment in a private
company, Metromedia China Corporation ("MCC"). Since this company is
private and in development, it is difficult to place a value on its
worth. We currently value our ownership interest based on
extrapolating the value placed on MCC by its majority shareholder,
Metromedia International Group. As of March 31, 1999, that equaled
$4.34 million. Our total assets were $13.7 million. The value of our
interest in MCC may change in the future. The value of MCC may be
unfavorably influenced by negative operating results, the Chinese
telecommunications market and/or other factors. Furthermore, changes
in governmental policy towards foreign investment in
telecommunications in China could also adversely effect the value of
our investment. We have decreased the value placed on this asset, in
large part, due to the uncertainty of the future of foreign
participation in the Chinese telecommunications market. Even so, there
is still the possibility that this asset will be worth less in the
future than we believe is a fair value currently.
12. OUR STOCK IS HIGHLY VOLATILE. Our stock price fluctuates significantly.
We believe that this will most likely continue. Historically, the market
prices for securities of emerging companies in the telecommunications
industry have been highly volatile. Future announcements concerning us
or our competitors, including results of operations, technological
innovations, government regulations, proprietary rights or significant
litigation, may have a significant impact on the market price of our
stock.
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13. ADDITIONAL SHARES WILL BE AVAILABLE FOR SALE IN THE PUBLIC MARKET.
We registered stock in connection with the domestication merger of VDC
Corporation Ltd. ("VDC Bermuda") with and into us (the "Domestication
Merger"). The effect of the Domestication Merger was that
members/shareholders of VDC Bermuda became shareholders of the Company
which then became the publicly traded company. In addition, we issued
shares in connection with the MCC investment and other additional
business related matters. These stock issuances and future
registration statements will have the effect of significantly
increasing the number of shares eligible for public trading. Sales of
substantial amounts of the stock in the public market could have an
adverse effect on the price of the stock and may make it more
difficult for us to sell stock in the future. Although it is
impossible to predict market influences and prospective values for
securities, it is possible that the substantial increase in the number
of shares available for sale, in and of itself, could have a
depressive effect on the price of our stock.
14. WE HAVE NOT PAID ANY DIVIDENDS TO OUR STOCKHOLDERS AND DO NOT EXPECT TO
ANY TIME IN THE NEAR FUTURE. Instead, we plan to retain earnings for
investment back into the company.
15. THE YEAR 2000 PROBLEM COULD HAVE A MATERIAL ADVERSE EFFECT ON US. 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
operations. A significant portion of the devices that we use to provide
our basic services use date-sensitive processes which affect functions
such as service activation, service assurance and billing processes.
We are currently evaluating the Year 2000 readiness of our computer systems,
software applications and telecommunications equipment. We are sending Year 2000
compliance inquiries to certain third parties (i.e. vendors, customers, outside
contractors) with whom we have 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 effect on their equipment and operations and what remedial actions
will be taken with regard to these problems.
Since we are a new company, our key systems have just recently been implemented.
Most of the vendors of such systems have represented to us that the systems are
compliant with the Year 2000 issues without any modification. We will, however,
continue to require confirmation of Year 2000 compliance in our 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 our business, financial condition and results
from operations.
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Further, if the software and equipment of those on whose services we depend are
not Year 2000 functional, it could have a material adverse effect on our
operations. While most major domestic telecommunications companies have
announced that they expect all of their network and support systems to be Year
2000 functional by the middle of 1999, other domestic and international carriers
may not be Year 2000 functional. We intend to continue to monitor the
performance of our accounting, information and other systems and software
applications to identify and resolve any Year 2000 issues. Currently, through
our discovery process, we have identified an estimated $84,000 of expenditures
associated with updating systems to be Year 2000 compliant. However, we expect
we will find additional expenses pending the finalization of our Year 2000
investigation.
We believe that the most reasonably likely worst case scenario resulting from
the century change could be the inability to efficiently send voice and
facsimile calls at current rates to desired locations. We do not know how long
this might last. This would have a material adverse effect on our results from
operations.
16. CERTAIN ANTI-TAKEOVER CONSIDERATIONS. Certain provisions of our
Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), and Bylaws, as amended (the "Bylaws"), and the
General Corporation Law of the State of Delaware (the "GCL") could
deter a change in our management or render more difficult an attempt
to obtain control of us. For example, we are subject to the provisions
of the GCL that prohibit a public Delaware corporation from engaging
in a broad range of business combinations with a person who, together
with affiliates and associates, owns 15% or more of the corporation's
outstanding voting shares (an "interested stockholder") for three
years after the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The
Certificate of Incorporation includes undesignated Preferred Stock,
which may enable the Board to discourage an attempt to obtain control
of us by means of a tender offer, proxy contest, merger or otherwise.
In addition, the Certificate of Incorporation provides for a
classified Board of Directors such that approximately only one-third
of the members of the Board will be elected at each annual meeting of
stockholders. Classified boards may have the effect of delaying,
deferring or discouraging changes in control of us. Further, certain
other provisions of the Certificate of Incorporation and Bylaws and of
the GCL could delay or make more difficult a merger, tender offer or
proxy contest involving us. Additionally, certain federal regulations
require prior approval of certain transfers of control of
telecommunications companies, which could also have the effect of
delaying, deferring or preventing a change in control.
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EXHIBIT "C"
FORM OF
-------
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (this "AGREEMENT") is dated as of May
^, 1999 by and between VDC COMMUNICATIONS, INC., a Delaware corporation (the
"COMPANY"), and the undersigned (the "HOLDER" or the "INVESTOR").
W I T N E S S E T H:
--------------------
WHEREAS, simultaneously with the execution and delivery of this
Agreement, the Investor is purchasing from the Company, pursuant to a Securities
Purchase Agreement dated the date hereof (the "PURCHASE AGREEMENT"), certain
shares of the Company's common stock (the "SHARES") and Warrants to purchase
certain shares of the Company's common stock (the "WARRANTS") (the Shares and
Warrants are collectively referred to as the "SECURITIES" of the Company);
WHEREAS, all capitalized terms not hereinafter defined shall have
that meaning assigned to them in the Purchase Agreement; and
WHEREAS, the Company desires to grant to the Holder the
registration rights set forth herein with respect to the Securities.
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions.
(a) "CLOSING" shall mean the closing provided for in the
Purchase Agreement.
(b) "COMMON STOCK" shall mean the common stock of the
Company, par value $.0001 per share.
(c) "COMPANY" shall mean VDC Communications, Inc.
(d) "OFFERING" shall mean that private placement transaction
pursuant to which the Company shall offer shares of Common Stock and Warrants to
purchase shares of Common Stock upon terms and conditions set forth in the
Purchase Agreements.
(e) "PERSON" means an individual, a partnership (general or
limited), corporation, limited liability company, joint venture, business trust,
cooperative, association or other form of business organization, whether or not
regarded as a legal entity under applicable law, a trust (inter vivos or
testamentary), an estate of a deceased, insane or incompetent person, a
quasi-governmental entity, a government or any agency, authority, political
subdivision or other instrumentality thereof, or any other entity.
(f) "PRINCIPAL MARKET" means the OTC Electronic Bulletin
Board, the Nasdaq National Market, the Nasdaq Small Cap Stock Market, the
American Stock Exchange or the New York Stock Exchange, whichever is at the time
the principal trading exchange or market for the Common Stock.
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(h) "REGISTRATION STATEMENT" shall mean the Registration
Statement of the Company filed with the SEC pursuant to the provisions of
Section 2 of this Agreement which covers the resale of the Shares and the shares
of Common Stock underlying the Warrants (the "Warrant Shares") on Form S-1, SB-2
or any other appropriate form then permitted by the SEC to be used for such
registration and the sales contemplated to be made thereby under the Securities
Act, or any similar rule that may be adopted by the SEC, and all amendments and
supplements to such Registration Statement, including any pre-and post-
effective amendments thereto, in each case including the prospectus contained
therein, all exhibits thereto and all materials incorporated by reference
therein.
(i) "RESTRICTED STOCK" shall mean the Shares, the Warrant
Shares, and any additional shares of Common Stock or other equity securities of
the Company issued or issuable after the date hereof in respect of any such
securities (or other equity securities issued in respect thereof) by way of a
stock dividend or stock split, in connection with a combination, exchange,
reorganization, recapitalization or reclassification of Company securities, or
pursuant to a merger, division, consolidation or other similar business
transaction or combination involving the Company; provided that: as to any
particular shares of Restricted Stock, such securities shall cease to constitute
Restricted Stock (i) when a registration statement with respect to the sale of
such securities shall have become effective under the Securities Act and such
securities shall have been disposed of thereunder, or (ii) when and to the
extent such securities are permitted to be distributed pursuant to subparagraph
(k) of Rule 144 (or any successor provision to such Rule) promulgated under the
Securities Act or are otherwise freely transferable to the public without
further registration under the Securities Act.
(j) "SECURITIES ACT" shall mean the Securities Act of 1933,
as amended, or any similar or successor federal statute, and the rules and
regulations of the SEC thereunder, all as the same shall be in effect at any
relevant time.
(k) "SEC" shall mean the United States Securities and
Exchange Commission.
(l) "TRADING DAY" means a day on which the Principal Market
on which the Common Stock is listed or admitted to trading is open for the
transaction of business or, if the Common Stock is not listed or admitted to
trading on any national securities exchange, any day other than a Saturday,
Sunday, or a day on which banking institutions in the State of Delaware are
authorized or obligated by law or executive order to close.
2. Registration Rights.
(a) Piggyback Registration Rights.
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The Company shall advise the Holder by written notice at least
ten (10) calendar days prior to the filing of a Registration Statement under the
Securities Act (excluding registration on Forms S-8, S-4, or any successor forms
thereto), covering securities of the Company to be offered and sold (whether by
the Company or any stockholder thereof) and shall, upon the request of the
Holder given at least five calendar (5) days prior to the filing of such
Registration Statement, include in any such Registration Statement such
information as may be required to permit the public distribution of the
Restricted Stock. The Holder shall furnish such information as may be reasonably
requested by the Company in order to include such Restricted Stock in the
Registration Statement. In the event that any registration pursuant to this
Section 2 shall be, in whole or in part, an underwritten public offering of
Common Stock on behalf of the Company, and the managing underwriters advise the
Company in writing that in their opinion the number of securities requested to
be included in such registration exceeds the number which can be sold in an
orderly manner in such offering within a price range acceptable to the Company,
the Company shall include in such registration (i) first, the securities the
Company proposes to sell, and (ii) second, the Restricted Stock and any other
securities eligible and requested to be included in such registration to the
extent that the number of shares to be registered will not, in the opinion of
the managing underwriters, adversely affect the offering of the securities
pursuant to clause (i), pro rata among the holders of such securities, including
the Holder of the Restricted Stock, on the basis of the number of shares
eligible for registration which are owned by all such holders. Notwithstanding
the foregoing, the Company may withdraw any registration statement referred to
in this Section 2 without thereby incurring liability to the holders of the
Restricted Stock.
(b) Shelf Registration.
In the event that the Restricted Stock is not otherwise included
within a Registration Statement filed pursuant to Section 2(a) above, the
Company shall use its best efforts to prepare and file, not later than twelve
(12) months following the Closing of the Offering, a Registration Statement with
the SEC and use its best efforts to, as promptly as possible, have such
Registration Statement declared effective for the purpose of facilitating the
public resale of the Restricted Stock.
(c) Notwithstanding anything to the contrary contained
herein, the Company's obligation in Section 2(a) and 2(b) above shall extend
only to the inclusion of the Restricted Stock in a Registration Statement filed
under the Securities Act. The Company shall have no obligation to assure the
terms and conditions of distribution, to obtain a commitment from an underwriter
relative to the sale of the Restricted Stock or to otherwise assume any
responsibility for the manner, price or terms of the distribution of the
Restricted Stock. Furthermore, the Company shall not be restricted in any manner
from including within the Registration Statement the distribution, issuance or
resale of any of its or any other securities.
3. Registration Procedures. Whenever it is obligated to register
any Restricted Stock pursuant to this Agreement, the Company shall:
(a) prepare and file with the SEC a Registration Statement
with respect to the Restricted Stock in the manner set forth at Sections 2(a) or
2(b) hereof and use its best efforts to cause such Registration Statement to
become effective as promptly as possible and to remain effective for that period
identified in Section 3(g) hereafter;
(b) prepare and file with the SEC such amendments and
supplements to such Registration Statement and the prospectus used in connection
therewith as may be necessary to keep such Registration Statement effective for
the period specified in Section 3(g) below and to comply with the provisions of
the Securities Act with respect to the disposition of all Restricted Stock
covered by such Registration Statement in accordance with the Holders intended
method of disposition set forth in such Registration Statement for such period;
33
<PAGE>
(c) furnish to the Holder and to each underwriter, if any,
such number of copies of the Registration Statement and the prospectus included
therein (including each preliminary prospectus), as such person may reasonably
request in order to facilitate the public sale or other disposition of the
Restricted Stock covered by such Registration Statement;
(d) use its best efforts to register or qualify the
Restricted Stock covered by such Registration Statement under the securities or
blue sky laws of such jurisdictions as the Holder, or, in the case of an
underwritten public offering, the managing underwriter shall reasonably request;
provided, however, that the Company shall not for any such purpose be required
to qualify generally to transact business as a foreign corporation in any
jurisdiction where it is not so qualified or to consent to general service of
process in any such jurisdiction;
(e) promptly notify the Holder under such Registration
Statement and each underwriter, at any time when a prospectus relating thereto
is required to be delivered under the Securities Act, of the happening of any
event as a result of which the prospectus contained in such Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state any material fact required or necessary to be stated therein in
order to make the statements contained therein not misleading in light of the
circumstances under which they were made;
(f) make available for inspection by any underwriter
participating in an underwritten disposition on behalf of any Holder, and any
attorney, accountant or other agent retained by such underwriter, all financial
and other records, pertinent corporate documents and properties of the Company,
and cause the Company's officers, directors and employees to supply all
information reasonably requested by the underwriter, attorney, accountant or
agent in connection with such Registration Statement;
(g) for purposes of Sections 3(a) and 3(b) above, the period
of distribution of Restricted Stock shall be deemed to extend until the earlier
of: (A) in an underwritten public offering of all of the Restricted Stock, the
period in which each underwriter has completed the distribution of all
securities purchased by it; (B) in any other registration, the earlier of the
period in which all shares of Restricted Stock covered thereby shall have been
sold or three (3) years from the date of Closing.
(h) if the Common Stock of the Company is listed on any
securities exchange or automated quotation system, the Company shall use its
best efforts to list (with the listing application being made at the time of the
filing of such Registration Statement or as soon thereafter as is reasonably
practicable) the Restricted Stock covered by such Registration Statement on such
exchange or automated quotation system;
(i) enter into normal and customary underwriting
arrangements or an underwriting agreement and take all other reasonable and
customary actions if the Holder sells its shares of Restricted Stock pursuant to
an underwriting (however, in no event shall the Company, in connection with such
underwriting, be required to undertake any special audit of a fiscal period in
which an audit is normally not required);
34
<PAGE>
(j) notify the Holder if there are any amendments to the
Registration Statement, any requests by the SEC to supplement or amend the
Registration Statement, or of any threat by the SEC or state securities
commission to undertake a stop order with respect to sales under the
Registration Statement; and
(k) cooperate in the timely removal of any restrictive
legends from the shares of Restricted Stock in connection with the resale of
such shares covered by an effective Registration Statement.
4. Expenses.
(a) For the purposes of this Section 4, the term
"REGISTRATION EXPENSES" shall mean: all expenses incurred by the Company in
complying with Sections 2 and 3 of this Agreement, including, without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel and independent public accountants for the Company,
"blue sky" fees, fees of the National Association of Securities Dealers, Inc.
("NASD"), fees and expenses of listing shares of Restricted Stock on any
securities exchange or automated quotation system on which the Company's shares
are listed and fees of transfer agents and registrars. The term "SELLING
EXPENSES" shall mean: all underwriting discounts and selling commissions
applicable to the sale of Restricted Stock and all accountable or
non-accountable expenses paid to any underwriter in respect of the sale of
Restricted Stock.
(b) Except as otherwise provided herein, the Company will
pay all Registration Expenses in connection with the Registration Statements
filed pursuant to Section 2 of this Agreement. All Selling Expenses in
connection with any Registration Statements filed pursuant to Section 2 of this
Agreement shall, in the case of an underwritten offering, be borne by the
participating Holders in proportion to the number of shares sold by each, or, in
all other instances, shall be borne by the Holder incurring such expenses.
5. Obligations of Holder.
(a) In connection with each registration hereunder, each
selling Holder will furnish to the Company in writing such information with
respect to such seller and the securities held by such seller, and the proposed
distribution by him or them as shall be reasonably requested by the Company in
order to assure compliance with federal and applicable state securities laws, as
a condition precedent to including such seller's Restricted Stock in the
Registration Statement. Each selling Holder also shall agree to promptly notify
the Company of any changes in such information included in the Registration
Statement or prospectus as a result of which there is an untrue statement of
material fact or an omission to state any material fact required or necessary to
be stated therein in order to make the statements contained therein not
misleading in light of the circumstances then existing.
35
<PAGE>
(b) In connection with each registration pursuant to this
Agreement, the Holder whose shares are included therein will not effect sales
thereof until notified by the Company of the effectiveness of the Registration
Statement, and thereafter will suspend such sales after receipt of telegraphic
or written notice from the Company to suspend sales to permit the Company to
correct or update a Registration Statement or prospectus. At the end of any
period during which the Company is obligated to keep a Registration Statement
current, the Holder included in said Registration Statement shall discontinue
sales of shares pursuant to such Registration Statement upon receipt of notice
from the Company of its intention to remove from registration the shares covered
by such Registration Statement which remain unsold, and such Holder shall notify
the Company of the number of shares registered which remain unsold immediately
upon receipt of such notice from the Company.
6. Information Blackout.
At any time when a Registration Statement effected pursuant to
Section 2 relating to Restricted Stock is effective, upon written notice from
the Company to the Holder that the Company has determined in good faith that
sale of Restricted Stock pursuant to the Registration Statement would require
disclosure of non-public material information, the Holder shall suspend sales of
Restricted Stock pursuant to such Registration Statement until such time as the
Company notifies the Holder that such material information has been disclosed to
the public or has ceased to be material or that sales pursuant to such
Registration Statement may otherwise be resumed.
7. Indemnification.
(a) The Company agrees to indemnify, to the extent permitted
by law, each Holder of Restricted Stock, its officers and directors and each
Person who controls such Holder (within the meaning of the Securities Act)
against all losses, claims, damages, liabilities and expenses caused by any
untrue statement of material fact contained in any Registration Statement,
prospectus or preliminary prospectus or any amendment thereof or supplement
thereto or any omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as the
same are caused by or contained in any information furnished to the Company by
such Holder for use therein or by such Holder's failure to deliver a copy of the
Registration Statement or prospectus or any amendments or supplements thereto
after the Company has furnished such Holder with a sufficient number of copies
of the same.
(b) In connection with any Registration Statement in which a
Holder of Restricted Stock is participating, each such Holder shall furnish to
the Company in writing such information and affidavits as the Company reasonably
requests for use in connection with any such Registration Statement or
prospectus and, to the extent permitted by law, shall indemnify the Company, its
directors and officers and each Person who controls the Company (within the
meaning of the Securities Act) against any losses, claims, damages, liabilities
and expenses resulting from: (i) any untrue or alleged untrue statement of
material fact contained in the Registration Statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, (but only to the extent that such
untrue statement or omission is contained in any information or affidavit so
furnished by such Holder); or (ii) any disposition of the Restricted Stock in a
manner that fails to comply with the permitted methods of distribution
identified within the Registration Statement; provided that the obligation to
indemnify (if there shall be more than one Holder) shall be individual, not
joint and several, for each Holder and shall be limited to the net amount of
proceeds received by such Holder from the sale of Restricted Stock pursuant to
such Registration Statement.
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<PAGE>
(c) Any Person entitled to indemnification hereunder shall
(i) give prompt written notice to the indemnifying party of any claim with
respect to which it seeks indemnification (provided that the failure to give
prompt notice shall not impair any Person's right to indemnification hereunder
to the extent such failure has not prejudiced the indemnifying party) and (ii)
unless in such indemnified party's reasonable judgment a conflict of interest
between such indemnified and indemnifying parties may exist with respect to such
claim, permit such indemnifying party to assume the defense of such claim with
counsel reasonably satisfactory to the indemnified party. If such defense is
assumed, the indemnifying party shall not be subject to any liability for any
settlement made by the indemnified party without its consent (but such consent
shall not be unreasonably withheld). An indemnifying party who is not entitled
to, or elects not to, assume the defense of a claim shall not be obligated to
pay the fees and expenses of more than one counsel for all parties indemnified
by such indemnifying party with respect to such claim, unless in the reasonable
judgment of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
(d) The indemnification provided for under this Agreement
shall remain in full force and effect regardless of any investigation made by or
on behalf of the indemnified party or any officer, director or controlling
Person of such indemnified party and shall survive the transfer of securities.
The Company also agrees to make such provisions, as are reasonably requested by
any indemnified party, for contribution to such party in the event the Company's
indemnification is unavailable for any reason.
8. Miscellaneous Provisions.
(a) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware with regard to
principles of conflicts of laws.
(b) Counterparts. This Agreement may be signed in any number
of counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
(c) Amendments and Waivers. Except as otherwise provided
herein, the provisions of this Agreement may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given without the written consent of the Company and the Holder.
(d) Notices. All notices, consents, waivers, and other
communications under this Agreement must be in writing and will be deemed to
have been duly given when (a) delivered by hand (with written confirmation of
receipt), (b) sent by facsimile (with written confirmation of receipt), provided
that a copy is mailed by registered mail, return receipt requested (provided
that facsimile notice shall be deemed received on the next business day if
received after 5:00 p.m. local time), or (c) when received by the addressee, if
sent by a nationally recognized overnight delivery service (receipt requested),
in each case to the appropriate addresses and facsimile numbers set forth below
(or to such other addresses and facsimile numbers as a party may designate by
notice to the other parties)
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<PAGE>
(i) if to the Company to:
VDC Communications, Inc.
75 Holly Hill Lane
Greenwich, CT 06830
Attn: Frederick A. Moran, Chief Executive Officer
Telephone: (203) 869-5100
Facsimile: (203) 552-0908
(ii) if to the Holder, to the address identified on the
books and records of the Company
(e) Successors and Assigns; Holders as Beneficiaries. This
Agreement shall inure to the benefit of and be binding upon the parties and
their respective successors and assigns, and the agreements of the Company
herein shall inure to the benefit of the Holders and their respective successors
and assigns.
(f) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(g) Entire Agreement; Survival; Termination. This Agreement
is intended by the parties as a final expression of their agreement and intended
to be a complete and exclusive statement of the agreement and understanding of
the parties hereto in respect of the subject matter contained herein. There are
no restrictions, promises, warranties or undertakings, other than those set
forth or referred to herein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter.
(h) Construction. This Agreement and any related instruments
will not be construed more strictly against one party then against the other by
virtue of the fact that drafts may have been prepared by counsel for one of the
parties, it being recognized that this Agreement and any related instruments are
the product of negotiations between the parties and that both parties have
contributed to the final preparation of this Agreement and all related
instruments.
(i) Arbitration. All controversies which may arise between
the parties including, but not limited to, those arising out of or related to
this Agreement shall be determined by binding arbitration applying the laws of
the State of Delaware. Any arbitration between the parties shall be conducted at
the Company's offices in Greenwich, Connecticut, or at such other location
designated by the Company, before the American Arbitration Association (the
"AAA"). If the Parties are unable to agree on a single arbitrator with fifteen
(15) days of a demand for arbitration being filed with the AAA by one of the
parties, each party shall select an arbitrator and the two (2) arbitrators shall
mutually select a third arbitrator, the three of whom shall serve as an
arbitration panel. The decision of the arbitrator(s) shall be final and binding
upon the Parties and shall not be required to include written findings of law
and fact, and judgment may be obtained thereon by either party in a court of
competent jurisdiction. Each party shall bear the cost of preparing and
presenting its own case. The cost of the arbitration, including the fees and
expenses of the arbitrator(s), shall be shared equally by the parties hereto
unless the award otherwise provides. Nothing in this section will prevent either
party from resorting to judicial proceedings if interim injunctive relief under
the laws of the State of Delaware from a court is necessary to prevent serious
and irreparable injury to one of the parties, and the parties hereto agree that
the state courts in Stamford, Connecticut and the United States District Court
in the District of Connecticut in Bridgeport, Connecticut shall have exclusive
subject matter and in personam jurisdiction over the parties for purposes of
obtaining interim injunctive relief.
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<PAGE>
(j) Agreement Read and Understood. Both parties hereto
acknowledge that they have had an opportunity to consult with an attorney, and
such other experts or consultants as they deem necessary or prudent, regarding
this Agreement and that they, or their designated agents, have read and
understand this Agreement.
IN WITNESS WHEREOF, intending to be legally bound, the parties hereto
have caused this Agreement to be signed.
ATTEST: VDC COMMUNICATIONS, INC.
______________________________ By:________________________________
Frederick A. Moran
Chief Executive Officer
WITNESS:
- ------------------------------ --------------------------------
^
39
The following Form of Employment Agreement was entered into with the following
executive officers:
<TABLE>
<CAPTION>
Name Start Date Term Salary Positions Other Significant Changes
<S> <C> <C> <C> <C> <C>
Robert Warner 03/15/98 3 years $60,000 Senior Account Section 5.b, Termination
Executive/Director by Company without
of Carrier Sales "Cause", eliminated
William Zimmerling 04/01/98 3 years $80,000 Vice President/ Section 5.b, Termination
Executive Vice by Company without
President "Cause", eliminated
</TABLE>
<PAGE>
FORM OF EMPLOYMENT AGREEMENT
----------------------------
AGREEMENT made as of the ___ day of ______, 1998, by and between
____________, an adult individual residing at
___________________________________ (hereinafter referred to as "Executive") and
VDC Corporation Ltd., a Bermuda corporation having a registered office at 44
Church Street, Hamilton HM FX Bermuda (hereinafter referred to as the"
Company").
WITNESSETH
----------
WHEREAS, on even date herewith, through its wholly-owned subsidiary,
Blue Sky Telecommunications, Inc., (the "Sub"), the Company completed the
purchase of the assets, business and operations of Blue Sky International,
L.L.C., a Colorado limited liability company ("LLC");
WHEREAS, the purchase of LLC was accomplished pursuant to the terms of
an Asset Purchase Agreement entered into among the parties hereto on even date
herewith ("Asset Purchase Agreement"); and
WHEREAS, pursuant to the terms of the Asset Purchase Agreement, the
Company agreed to employ Executive and Executive agreed to become employed by
the Company, each upon the terms and conditions contained within this Employment
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Employment Term, Duties and Acceptance
a. The Company hereby retains the Executive as ___________________,
to render his services to the Company upon the terms and
conditions herein contained, in such executive capacity, subject
to the direction of the Company through its principal executive
officers (including its Chief Executive, Chief Operating or Chief
Financial Officers), or its Board of Directors.
b. In recognition that the Company desires to continue the operation
of the historic business of LLC through the Sub, the Company also
assigns to the Executive the position as _______________________
of the Sub, and Executive accepts such position and agrees to
render such services to the Sub in such executive capacities as
are assigned to him by, and subject to the discretion of, the
Board of Directors of Sub.
c. The Executive hereby accepts the foregoing employment and agrees
to devote his full time, best efforts, energy and skill to such
employment.
d. The Executive shall not engage in any other business endeavor or
activity during the Employment Period.
e. The Executive hereby agrees that any and all business
opportunities which are similar to or in competition with the
Business of the Company (as such term is used and defined in
Section 6(a) below) and are available as of the date hereof or
become available to the Executive during the Employment Period
shall automatically become the sole property of the Company
without any obligation of the Company to compensate or otherwise
pay the Executive for such opportunities.
<PAGE>
f. The term of the Executive's employment hereunder (the
"Employment Period") shall commence on the date hereof and shall
end on the third anniversary hereof, unless sooner terminated as
provided herein, provided, however, that the Employment Period
shall be extended and this Agreement shall be automatically
renewed for successive one-year periods unless: (i) this
Agreement is terminated as otherwise provided herein; or (ii)
Executive provides written notice to the Company of his desire
not to extend the Employment Period at least sixty (60) days
prior to the expiration of the then lapsing term.
2. Compensation and Expense Reimbursement
a. As base compensation for the Executive duly rendering his
services to the Company and the Sub pursuant to the terms of this
Agreement, Company agrees to pay and Executive agrees to accept a
base salary ("Base Salary") of _________ Dollars ($___________)
per annum to be paid in accordance with the general payroll
practices of the Company as from time to time in effect. The Base
Salary will be subject to merit increases annually as determined
by the Board of Directors.
b. Any bonus or other compensation provided for herein shall at all
times be exclusive of Executive's interest in and to the options
granted by the Company to him as set forth in the Option to
Purchase Common Shares entered into by the Executive and the
Company and dated of even date herewith (the "Option Agreement"),
as well as any stock option plan(s) that may in the future be
adopted by the Company for its management personnel.
c. The Company will pay or reimburse Executive for all reasonable
and necessary out-of-pocket expenses incurred by him in the
performance of his duties under this Agreement, including all of
the Executive's travel, hotel, meal and other incidental expenses
during the Executive's travel on behalf of the Company. Executive
shall keep detailed and accurate records of expenses incurred in
connection with the performance of his duties hereunder and
reimbursement therefor shall be in accordance with policies and
procedures to be established from time to time by the Board.
3. Fringe Benefits
a. Executive shall be entitled, subject to the terms and conditions
of particular plans and programs, to all fringe benefits
generally afforded to other employees of the Company at the level
of Executive, including, but not by way of limitation, the right
to participate in any pension, stock option, retirement, major
medical, group health, disability, accident and life insurance,
and other employee benefit programs made generally available,
from time to time, by the Company.
2
<PAGE>
b. During the term of this Agreement, the Company shall include
Executive and his family in family health insurance coverage
provided for executive level employees of the Company.
4. Vacations
Executive shall be entitled to compensated vacation in each
fiscal year, to be taken at times which do not unreasonably interfere with the
performance of Executive's duties hereunder and otherwise in accordance with the
Company's vacation policies in effect from time to time as applied to other
executives of the Company.
5. Termination
a. Termination by Company for "Cause". In addition to any other
remedies which the Company may have at law or in equity, the
Board of Directors may upon the affirmative vote of no less than
a majority of its members, terminate Executive's employment under
this Agreement by giving Executive written notice of such
termination upon or at any time following the occurrence of any
of the following events, and each such termination shall
constitute a termination for "cause," provided, however, that
Executive has first been given written notice of the facts or
circumstances constituting the determination of "cause" and a
reasonable opportunity (in no event less than fifteen (15) days)
to cure, rectify or reverse such facts or circumstances and
Executive shall have failed to do so: (a) any act or failure to
act (or series or combination thereof) by Executive done with the
intent to harm in any material respect the interests of the
Company or any affiliate thereof; (b) the commission by Executive
of a felony for which he is convicted by a court of competent
jurisdiction; (c) the finding by a court of competent
jurisdiction that Executive perpetrated a dishonest act or common
law fraud against the Company or any affiliate thereof; or (d) a
grossly negligent act or failure to act (or series or combination
thereof) by Executive detrimental to a material extent to the
interests of the Company or any affiliate thereof; or (e) the
continued refusal to follow the directives of the Board or the
Company's Chief Executive Officer which are consistent with
Executive's duties, responsibilities and covenants hereunder
unless the failure to follow such directives were either: (i)
based upon the advice of counsel; or (ii) based upon the
Executive's judgment in good faith that such directives would not
be in the best interests of the Company or its members.
Upon the early termination of Executive's employment under this
Agreement by the Company for "cause," the Company shall pay to Executive: (i) an
amount equal to Executive's Base Salary accrued through the effective date of
termination at the rate in effect at the time of termination, payable at the
time such payment is due; and (ii) any expense reimbursement amounts accrued to
the effective date of termination, payable on the effective date of termination.
Upon payment of such amounts, the Company shall have no further obligation to
Executive under this Agreement.
3
<PAGE>
b. Termination by Company without "Cause". At any time after the
six month anniversary of the date of this Agreement, the Company
may terminate this Agreement for any reason or no reason other
than for cause upon thirty (30) days written notice to the
Executive. Upon the early termination of the Executive's
employment under this Agreement by the Company "without cause,"
the Company shall pay to the Executive: (i) an amount equal to
the Executive's Base Salary accrued through the effective date of
termination at the rate in effect at the time of termination,
payable at the time such payment is due; (ii) a lump sum payment
at the time of termination equal to three month's Base Salary,
payable on the effective date of termination; and (iii) any
expense reimbursement amounts accrued to the effective date of
termination, payable on the effective date of termination. Upon
payment of such amounts, the Company shall have no further
obligation to Executive under this Agreement, and Executive shall
have no further rights under this Agreement.
c. Incapacity of Executive. Subject to applicable law, if
Executive shall become ill or be injured or otherwise become
incapacitated such that, in the opinion of the Board of
Directors, he cannot fully carry out and perform his duties
hereunder, and such incapacity shall continue for a period of 180
consecutive days, the Board of Directors may, at any time
thereafter, by giving Executive twenty (20) days' prior written
notice, fully and finally terminate his employment under this
Agreement. Termination under this Section 5(c) shall be effective
as of the date provided in such notice, which date shall not be
fewer than thirty (30) days after such notice is delivered to
Executive or his representative, and on the effective date of
termination, the Company shall pay the Executive (i) his Base
Salary accrued to the effective date of termination at the rate
in effect at the time of such notice, payable at the time such
payment is due; and (ii) any expense reimbursement amounts
accrued to the effective date of termination, payable on the
effective date of termination. Upon payment of such amounts, the
Company shall have no further obligation to Executive under this
Agreement, and Executive shall have no further rights under this
Agreement.
d. Death of Executive. This Agreement shall automatically
terminate upon the death of Executive. Upon the early termination
of this Agreement as a result of death, the Company shall pay the
Executive's estate: (i) an amount equal to the Executive's Base
Salary accrued through the effective date of termination at the
rate in effect at the effective date of termination, payable at
the time such payment is due; and (ii) any expense reimbursement
amounts accrued to the effective date of termination, payable on
the effective date of termination. Upon payment of such amounts,
the Company shall have no further obligation to Executive under
this Agreement, and Executive shall have no further rights under
this Agreement.
4
<PAGE>
e. Termination by Employee. At any time after the six month
anniversary of the date of this Agreement, the Executive may
terminate this Agreement by giving at least thirty (30) days'
prior written notice to the Company.
f. Mitigation. The Executive shall not be required to mitigate the
amount of any payment or other benefits provided for under this
Agreement by seeking other employment and none of these payments
or other benefits may be reduced by any salary or other benefits
that Executive may earn.
6. Covenant Not to Compete
a. The Executive recognizes and acknowledges that the Company is
placing its confidence and trust in the Executive. The Executive,
therefore, covenants and agrees that during the Applicable
Non-Compete Period (as defined below), the Executive shall not,
either directly or indirectly, without the prior written consent
of the Board of Directors: (i) engage in or carry on any business
or in any way become associated with any business which is
similar to or is in competition with the Business of the Company
(as such term is used and defined below); (ii) solicit the
business of any person or entity, on behalf of himself or any
other person or entity, which is or has been at any time during
the term of this Agreement a material customer or material
supplier of the Company including, but not limited to, former or
present customers or suppliers with whom the Executive has had
personal contact during, or by reason of, his relationship with
the Company; (iii) be or become an employee, agent, consultant,
representative, director or officer of, or be otherwise in any
manner associated with, any person, firm, corporation,
association or other entity which is engaged in or is carrying on
any business which is similar to or in competition with the
Business of the Company; (iv) solicit for employment or employ
any person employed by the Company at any time during the
12-month period immediately preceding such solicitation or
employment; or (v) be or become a shareholder, joint venturer,
owner (in whole or in part), partner, or be or become associated
with or have any proprietary or financial interest in or of any
firm, corporation, association or other entity which is engaged
in or is carrying on any business which is similar to or in
competition with the Business of the Company. Notwithstanding the
preceding sentence above, the following shall not be deemed to
violate this Section 6:
i. passive equity investments by Executive of $25,000 or less
in any entity or affiliated group of any entity which is
engaged in or is carrying on any business which is similar
to or in competition with the Business of the Company; or
ii. passive equity investments by Executive in excess of
$25,000 in any entity or affiliated group of any entity
which is engaged in or is carrying on any business which
is similar to or in competition with the Business of the
Company, so long as and only to the extent that Executive
has obtained the prior written consent of the Company to
make such investments; or
5
<PAGE>
iii. an equity investment by Executive of up to 5% in any
publicly traded company which is engaged in or is carrying
on any business which is similar to or in competition with
the Business of the Company.
b. As used in this Agreement, the term "Business of the Company"
shall include all material business activities in which the
Company is engaged now or during the Applicable Non-Compete
Period, which are: (i) telephony gateways in the United States,
Ukraine, Kazakhstan, Russia, China and Egypt; (ii) the
acquisition of Alaska Telecom; (iii) cellular, PCS or other
wireless telephony licenses and businesses for the United States,
Egypt, Kazakhstan, Ukraine, China and various republics and
regions of Russia; (iv) Internet service provision and local loop
opportunities in the United States, Egypt, Kazakhstan, Ukraine,
China and Russia; (v) funding and/or vendor financing from NTS,
Qualcomm, Ericcson and Motorola; (vi) paging and cable TV
licenses for the entire country of Ukraine; (vii) a billing
system the United States, Egypt, Kazakhstan, Ukraine, China and
Russia; (viii) a long distance in country project for the
national railway system of Ukraine; (ix) communications tower
site management business in the United States, Ukraine,
Kazakhstan, Egypt, China and Russia; and (x) Internet service
provision in the United States, Egypt, Kazakhstan, Ukraine, China
and Russia. The term "Business of the Company" shall not include
the business and activity currently conducted by Blue Sky
International L.L.C., which consists entirely of (i) marketing
and reselling telecommunications services and (ii) providing
consulting services to carriers, networks, telephone companies
and prepaid telephone card companies (the "Business of Blue
Sky").
c. Executive hereby recognizes and acknowledges that the existing
Business of the Company extends throughout a number of countries,
including Ukraine, Russia, China, Egypt and Kazakhstan and most
states of the United States, and therefore agrees that the
covenants not to compete contained in this Section 6 shall be
applicable in and throughout such countries and states, as well
as throughout such additional areas, states or countries in which
the Company may be (or has prepared written plans to be) doing
business as of the date of termination of the Executive's
employment. The Executive further warrants and represents that,
because of his varied skill and abilities, he does not need to
compete with the Business of the Company and that this Agreement
will not prevent him from earning a livelihood and acknowledges
that the restrictions contained in this Section 6 constitute
reasonable protections for the Company.
d. As used in this Section 6, "Applicable Non-Compete Period" shall
mean all periods of employment hereunder and that period of one
year following the termination of Executive's employment
hereunder.
6
<PAGE>
7. Trade Secrets and Confidential Information
Executive recognizes and acknowledges that certain information
including, without limitation, information pertaining to the financial condition
of the Company, its systems, methods of doing business, agreements with
customers or suppliers or other aspects of the Business of the Company or which
is sufficiently secret to derive economic value from not being disclosed
("Confidential Information") may be made available or otherwise come into the
possession of the Executive by reason of his employment with the Company.
Accordingly, the Executive agrees that he will not at any time disclose any
Confidential Information to any person, firm, corporation, association or other
entity for any reason or purpose whatsoever or make use to his personal
advantage or to the advantage of any third party, of any Confidential
Information, without the prior written consent of the Board of Directors. The
Executive shall, upon termination of employment, return to the Company all
documents which reflect Confidential Information (including copies thereof).
Notwithstanding anything heretofore stated in this Section 7, the Executive's
obligations under this Section 7 shall not, after termination of the Executive's
employment with the Company, apply to information which has become generally
available to the public without any action or omission of the Executive (except
that any Confidential Information which is disclosed to any third party by an
employee or representative of the Company who is not authorized to make such
disclosure shall be deemed to remain confidential and protectable by the
Executive under this Section 7).
8. Severability
The invalidity or unenforceability of any term of this Agreement
shall not affect the validity or enforceability of this Agreement or any of its
other terms; and this Agreement and such other terms shall be construed as
though the invalid or unenforceable term(s) were not included herein, unless the
effect would be to vitiate the parties' fundamental purposes in entering into
this Agreement.
9. Breach
The Executive hereby recognizes and acknowledges that irreparable
injury or damage shall result to the Company in the event of a breach or
threatened breach by the Executive of any of the terms of provisions Section 6
or 7 hereunder, and the Executive therefore agrees that the Company shall be
entitled to an injunction restraining Executive from engaging in any activity
constituting such breach or threatened breach. Nothing contained herein shall be
construed as prohibiting the Company from pursuing any other remedies available
to the Company at law or in equity for breach or threatened breach of this
Agreement, including but not limited to, the recovery of damages from the
Executive and, if the Executive is an employee of the Company, the termination
of his employment with the Company in accordance with the terms and provisions
of this Agreement.
10. Arbitration
All controversies which may arise between the parties hereto
including, but not limited to, those arising out of or related to this Agreement
shall be determined by binding arbitration applying the laws of the State of
Delaware as set forth in Section 14 hereof. Any arbitration pursuant to this
Agreement shall be conducted in Philadelphia, Pennsylvania before the American
Arbitration Association in accordance with its arbitration rules. The
arbitration shall be final and binding upon all the parties (so long as the
award was not procured by corruption, fraud or undue means) and the arbitrator's
award shall not be required to include factual findings or legal reasoning.
Nothing in this Section 10 will prevent either party from resorting to judicial
proceedings if interim injunctive relief under the laws of the State of Delaware
from a court is necessary to prevent serious and irreparable injury to one of
the parties, and the parties hereto agree that the federal and state courts
located in Philadelphia, Pennsylvania shall have exclusive subject matter and in
personam jurisdiction over the parties and any such claims or disputes arising
from the subject matter contained herein.
7
<PAGE>
11. Remedies Cumulative
Except as otherwise expressly provided herein, each of the rights
and remedies of the parties set forth in this Agreement shall be cumulative with
all other such rights and remedies, as well as with all rights and remedies of
the parties otherwise available at law or in equity.
12. Counterparts
This Agreement may be executed via facsimile transmission
signature and in counterparts, each of which shall be deemed to be an original
but all of which together will constitute one and the same instrument.
13. Waiver
The failure of either party at any time or times to require
performance of any provision hereof shall in no manner affect the right at a
later time to enforce the same. To be effective, any waiver must be contained in
a written instrument signed by the party waiving compliance by the other party
of the term or covenant as specified. The waiver by either party of the breach
of any term or covenant contained herein, whether by conduct or otherwise, in
any one or more instances, shall not be deemed to be, or construed as, a further
or continuing waiver of any such breach, or a waiver of the breach of any other
term or covenant contained in this Agreement.
14. Governing Law
This Agreement shall be governed by the laws of the State of
Delaware without regard to principles of conflict of laws.
15. Complete Agreement
This Agreement constitutes the complete and exclusive agreement
between the parties hereto which supersedes all proposals, oral and written, and
all other communications between the parties relating to the subject matter
contained herein.
16. Warranties
The Executive represents, warrants, covenants and agrees that he
has a right to enter into this Agreement, that he is not a party to any
agreement or understanding whether or not written which would prohibit or
restrict his performance of his obligations under this Agreement and that he
will not use in the performance of his obligations hereunder any proprietary
information of any other party which he is legally prohibited from using.
8
<PAGE>
17. Notice
Any notice required to be given pursuant to the provisions of
this Agreement shall be in writing and sent by registered mail or nationally
recognized overnight carrier, to the parties at the following addresses:
To the Company at:
Frederick A. Moran, Chief Executive Officer
VDC Corporation Ltd.
27 Doubling Road
Greenwich, CT 06830
with a copy to:
Stephen M. Cohen, Esquire
Buchanan Ingersoll Professional Corporation
Eleven Penn Center, 14th Floor
1835 Market Street
Philadelphia, PA 19103
To the Executive at:
--------------------------------
--------------------------------
--------------------------------
18. Key Man Insurance
The Company shall have the right to obtain what is commonly known
as "Key Man Insurance" on the life of the Executive in such amount as the
Company deems appropriate. The Executive agrees to cooperate in all manner in
the obtaining of such a policy. All expenses involved in connection with the
obtaining and maintaining of such a policy shall be that of the Company.
19. Due Authorization
The Company represents to the Executive that this Agreement has
been duly authorized and approved by the Board of Directors of the Company.
20. Assignment
This Agreement shall inure to the benefit of and be binding upon
the Company, its successors and assigns. This Agreement may not be assigned to
any third party without the written consent of all parties to the assignment.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as
of this __ day of ______, 1998.
ATTEST: VDC CORPORATION LTD.
_______________________________ By:_________________________________
, Secretary Frederick A. Moran, Chief Executive Officer
WITNESS: EXECUTIVE:
- ------------------------------- -----------------------------------
10
The following Form of Option Agreement was entered into with the following
executive officers:
<TABLE>
<CAPTION>
Exercise
Name Date Options Vesting Price Expiration
---- ---- ------- ------- ----- ----------
<S> <C> <C> <C> <C> <C>
Robert Warner 04/01/98 5,000 20% per year for five years $5.00 04/01/08
Robert Warner 09/02/98 2,500 20% per year for five years $5.75 09/02/08
William Zimmerling 04/01/98 26,500 9,000 immediately $5.00 04/01/08
17,500, 20% per year for
five years
</TABLE>
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR ANY APPLICABLE STATE
SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION
FROM REGISTRATION, UNDER THE 1933 ACT, BASED ON AN OPINION LETTER OF COUNSEL
SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER FROM THE SECURITIES AND
EXCHANGE COMMISSION.
FORM OF OPTION TO PURCHASE COMMON SHARES
OF
VDC CORPORATION LTD.
Void after _____, 2008
This certifies that, for value received, __________ ("Holder"), is
entitled, subject to the terms set forth below and prior to the Expiration Date
(as hereinafter defined), to purchase from VDC Corporation Ltd. (the "Company"),
a Bermuda corporation, Common Shares of the Company (as defined below),
commencing on the date hereof (the "Option Issue Date"), with the Notice of
Exercise attached hereto duly executed, and simultaneous payment therefor in
lawful money of the United States, at the Exercise Price as set forth in Section
2 below. The number, character and Exercise Price of the shares are subject to
adjustment as provided below. The options granted hereunder are intended to be
treated as non-qualified stock options and will not be treated as incentive
stock options under Section 422 of the Internal Revenue Code of 1986, as
amended.
1. TERM OF OPTION. Subject to compliance with the vesting
provisions identified at Paragraph 2.3 hereafter, this Option shall be
exercisable, in whole or in part, during the term commencing on the Option Issue
Date and ending at 5:00 p.m. on _____, 2008 (the "Expiration Date"), and shall
be void thereafter.
2. EXERCISE PRICE, NUMBER OF SHARES AND VESTING PROVISIONS.
2.1 NUMBER OF SHARES. The number of shares of the Company's
Common Shares, $2.00 par value per share ("Common Shares"), which may be
purchased pursuant to this Option shall be _____ shares, as adjusted pursuant to
Section 11 hereof.
2.2 EXERCISE PRICE. The Exercise Price at which this Option
may be exercised shall be $_____ per common share, as adjusted pursuant to
Section 11 hereof.
2.3 VESTING. The Options granted hereunder shall vest in
accordance with the following schedule on an aggregate basis:
(i) _____ provided Holder remains continuously employed
by the Company from _____, 1998 through _____, 1999;
(ii) _____ provided Holder remains continuously employed
by the Company from _____, 1998 through _____, 2000;
<PAGE>
(iii) _____ provided Holder remains continuously employed
by the Company from _____, 1998 through _____, 2001;
(iv) _____ provided Holder remains continuously employed
by the Company from _____, 1998 through _____, 2002; and
(v) _____ provided Holder remains continuously employed by
the Company from _____, 1998 through _____, 2003.
Except as otherwise specifically provided herein, Holder's right in and
to any Options that do not vest at the date of termination of Holder's
employment with the Company shall lapse and terminate.
2.4. DEATH OF HOLDER AND TERMINATION.
(a) If the Holder shall die or h is employment is
terminated due to incapacity pursuant to Section 5(c) of the Employment
Agreement, dated _____, 1998, by and between the Company and the Holder (the
"Employment Agreement"), he or his estate, personal representatives, or
beneficiary, as applicable, shall have the right, subject to the provisions
of this Paragraph 2 hereof, to continue to vest and exercise the Options as
if no termination of employment had occurred.
(b) In the event Holder's employment by the Company
is terminated without "cause" or for "cause", as such terms are defined in
the Employment Agreement, or H older voluntarily terminates his employment
with the Company, Holder shall have 30 days in which to exercise the Options
(only to the extent that the Holder would have been entitled to do so as
of the date of his termination) and thereafter, Holder's right in and to the
Options shall lapse and terminate.
3. EXERCISE OF OPTION.
(a) The Exercise Price shall either be payable in cash or by
bank or certified check; or by cashless exercise through the delivery by the
Holder to the Company of Common Shares for which Holder is the record and
beneficial owner which have been held for at least six (6) months, or by
delivering to the Company a notice of exercise with an irrevocable direction to
a broker/dealer registered under the Securities Exchange Act of 1934 to sell a
sufficient portion of the shares and deliver the sale proceeds directly to the
Company to pay the Exercise Price, or by any combination thereof. If Common
Shares of the Company are tendered as payment of the Exercise Price, the value
of such shares shall be their "market value" as of the trading date immediately
preceding the date of exercise. The "market value" shall be:
(i) If the Company's Common Shares are traded in the
over-the-counter market and not on any national securities exchange nor in the
NASDAQ Reporting System, the market value shall be the average of the mean
between the last bid and ask prices per share, as reported by the National
Quotation Bureau, Inc., or an equivalent generally accepted reporting service,
for the consecutive 20 trading days immediately preceding the date of exercise,
or if not so reported, the average of the closing bid and asked prices for a
share for the consecutive 20 trading days immediately preceding the date of
exercise, as furnished to the Company by any member of the National Association
of Securities Dealers, Inc., selected by the Company for that purpose.
2
<PAGE>
(ii) If the Company's Common Shares are traded on a
national securities exchange or in the NASDAQ Reporting System, the market value
shall be either (1) the simple average of the high and low prices at which a
share of the Company's Common Shares traded, as quoted on the NASDAQ-NMS
or its other principal exchange, for the consecutive 20 trading days immediately
preceding the date of exercise or (2) the average price of the last sale of a
Common Share as similarly quoted for the consecutive 20 trading days immediately
preceding the date of exercise, whichever is higher, and rounding out such
figure to the next higher multiple of 12.5 cents (unless the figure is already
a multiple of 12.5 cents).
If such tender would result in an issuance of a whole number of shares and a
fractional Common Share, the value of such fractional share shall be paid to the
Company in cash or by check by the Holder.
(b) The purchase rights represented by this Option are
exercisable by the Holder in whole or in part, at any time, or from time to
time, by the surrender of this Option and the Notice of Exercise annexed hereto
duly completed and executed on behalf of the Holder, at the office of the
Company (or such other office or agency of the Company as it may designate by
notice in writing to the Holder at the address of the Holder appearing on the
books of the Company).
(c) This Option shall be deemed to have been exercised
immediately prior to the close of business on the date of its surrender for
exercise as provided above, and the person entitled to receive the Common Shares
issuable upon such exercise shall be treated for all purposes as the holder of
record of such shares as of the close of business on such date. As promptly as
practicable on or after such date and in any event within ten (10) days
thereafter, the Company at its expense shall issue and deliver to the person or
persons entitled to receive the same a certificate or certificates for the
number of shares issuable upon such exercise. In the event that this Option is
exercised in part, the Company at its expense will execute and deliver a new
Option of like tenor exercisable for the number of shares for which this Option
may then be exercised.
4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this Option.
In lieu of any fractional share to which the Holder would otherwise be entitled,
the Company shall make a cash payment equal to the Exercise Price multiplied by
such fraction.
5. REPLACEMENT OF OPTION. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Option and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and substance to the Company
or, in the case of mutilation, on surrender and cancellation of this Option, the
Company at its expense shall execute and deliver, in lieu of this Option, a new
Option of like tenor and amount.
3
<PAGE>
6. RIGHTS OF STOCKHOLDER. The Holder shall not be entitled to vote
or receive dividends or be deemed the holder of Common Shares or any other
securities of the Company that may at any time be issuable on the exercise
hereof for any purpose, nor shall anything contained herein be construed to
confer upon the Holder, as such, any of the rights of a stockholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold consent
to any corporate action (whether upon any recapitalization, issuance of stock,
reclassification of stock, change of par value, or change of stock to no par
value, consolidation, merger, conveyance or otherwise) or to receive notice of
meetings, or to receive dividends or subscription rights or otherwise until the
Option shall have been exercised as provided herein.
7. TRANSFER OF OPTION.
7.1. NON-TRANSFERABILITY. Prior to vesting in accordance with
paragraph 2 herein, the Option shall not be assigned, transferred, pledged or
hypothecated in any way, nor subject to execution, attachment or similar
process, otherwise than by will or by the laws of descent and distribution. To
the extent the Options have vested, transfers thereof which comply with the
remaining provisions of this paragraph 7 may be undertaken upon the prior
written consent of the Company, which consent shall not be unreasonably
withheld. Any attempted assignment, transfer, pledge, hypothecation or other
disposition of the Option contrary to the provisions hereof, and the levy of an
execution, attachment, or similar process upon the Option, shall be null and
void and without effect.
7.2. EXCHANGE OF OPTION UPON A TRANSFER. On surrender of this
Option for exchange, properly endorsed, the Company at its expense shall issue
to or on the order of the Holder a new Option or Options of like tenor, in the
name of the Holder or as the Holder (on payment by the Holder of any applicable
transfer taxes) may direct, of the number of shares issuable upon exercise
hereof.
7.3. COMPLIANCE WITH SECURITIES LAWS; RESTRICTIONS ON TRANSFERS.
(a) The Holder of this Option, by acceptance hereof,
acknowledges that this Option and the Shares to be issued upon exercise
hereof are being acquired solely for the Holder's own account and not as a
nominee for any other party, and for investment (unless such shares are subject
to resale pursuant to an effective prospectus), and that the Holder will not
offer, sell or otherwise dispose of this Option or any Shares to be issued upon
exercise hereof except under circumstances that will not result in a violation
of applicable federal and state securities laws. Upon exercise of this Option,
the Holder shall, if requested by the Company, confirm in writing, in a form
satisfactory to the Company, that the Common Shares so purchased are being
acquired solely for the Holder's own account and not as a nominee for any other
party, for investment (unless such shares are subject to resale pursuant to an
effective prospectus), and not with a view toward distribution or resale.
4
<PAGE>
(b) Neither this Option nor any Common Shares issued
upon exercise of this Option may be offered for sale or sold, or otherwise
transferred or sold in any transaction which would constitute a sale thereof
within the meaning of the Securities Act of 1933, as amended (the "1933 Act"),
unless (i) such security has been registered for sale under the 1933 Act and
registered or qualified under applicable state securities laws relating to the
offer an sale of securities, or (ii) exemptions from the registration
requirements of the 1933 Act and the registration or qualification
requirements of all such state securities laws are available and the Company
shall have received an opinion of counsel satisfactory to the Company that the
proposed sale or other disposition of such securities may be effected without
registration under the 1933 Act and would not result in any violation of any
applicable state securities laws relating to the registration or qualification
of securities for sale, such counsel and such opinion to be satisfactory to the
Company.
(c) All Common Shares issued upon exercise hereof
shall be stamped or imprinted with a legend in substantially the following
form (in addition to any legend required by state securities laws).
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR ANY APPLICABLE STATE
SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION
FROM REGISTRATION, UNDER THE 1933 ACT, BASED ON AN OPINION LETTER OF COUNSEL
SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER FROM THE SECURITIES AND
EXCHANGE COMMISSION."
8. RESERVATION AND ISSUANCE OF STOCK; TAXES.
(a) The Company covenants that during the term that this Option is
exercisable, the Company will reserve from its authorized and unissued Common
Shares a sufficient number of shares to provide for the issuance of the shares
upon the exercise of this Option, and from time to time will take all steps
necessary to amend its Memorandum of Association to provide sufficient reserves
of Common Shares issuable upon the exercise of the Option.
(b) The Company further covenants that all Common Shares issuable
upon the due exercise of this Option will be free and clear from all taxes or
liens, charges and security interests created by the Company with respect to the
issuance thereof, however, the Company shall not be obligated or liable for the
payment of any taxes, liens or charges of Holder, or any other party
contemplated by Paragraph 7, incurred in connection with the issuance of this
Option or the Common Shares upon the due exercise of this Option. The Company
agrees that its issuance of this Option shall constitute full authority to its
officers who are charged with the duty of executing stock certificates to
execute and issue the necessary certificates for the Common Shares upon the
exercise of this Option. The Common Shares issuable upon the due exercise of
this Option, will, upon issuance in accordance with the terms hereof, be duly
authorized, validly issued, fully paid and non-assessable.
(c) Upon exercise of the Option, the Company shall have the right
to require the Holder to remit to the Company an amount sufficient to satisfy
federal, state and local tax withholding requirements prior to the delivery of
any certificate for Common Shares purchased pursuant to the Option.
5
<PAGE>
(d) A Holder who is obligated to pay the Company an amount required
to be withheld under applicable tax withholding requirements may pay such amount
(i) in cash; (ii) in the discretion of the Company's Chief Executive Officer,
through the delivery to the Company of previously-owned Common Shares having an
aggregate market value equal to the tax obligation provided that the previously
owned shares delivered in satisfaction of the withholding obligations must have
been held by the Holder for at least six (6) months; (iii) in the discretion of
the Company's Chief Executive Officer, through the withholding of Common Shares
otherwise issuable to the Holder in connection with the Option exercise; or (iv)
in the discretion of the Company's Chief Executive Officer, through a
combination of the procedures set forth in subsections (i), (ii) and (iii) of
this Paragraph 8(d).
9. NOTICES.
(a) Whenever the Exercise Price or number of shares
purchasable hereunder shall be adjusted pursuant to Section 11 hereof, the
Company shall issue a certificate signed by its Chief Executive Officer setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated, and the
Exercise Price and number of shares purchasable hereunder after giving effect to
such adjustment, and shall cause a copy of such certificate to be mailed (by
first-class mail, postage prepaid) to the Holder of this Option.
(b) All notices, advices and communications under this
Option shall be deemed to have been given, (i) in the case of personal delivery,
on the date of such delivery and (ii) in the case of mailing, on the third
business day following the date of such mailing, addressed as follows:
If to the Company:
VDC Corporation Ltd.
75 Holly Hill Lane
Greenwich, CT 06830
Attn: Frederick A. Moran, Chief Executive Officer
With a Copy to:
Stephen M. Cohen, Esquire
Buchanan Ingersoll Professional Corporation
Eleven Penn Center
1835 Market Street, 14th Floor
Philadelphia, PA 19103
and to the Holder:
at the address of the Holder appearing on the books
of the Company or the Company's transfer agent, if
any.
6
<PAGE>
Either of the Company or the Holder may from time to time change the
address to which notices to it are to be mailed hereunder by notice in
accordance with the provisions of this Paragraph 9.
10. AMENDMENTS.
(a) Any term of this Option may be amended with the written
consent of the Company and the Holder. Any amendment effected in accordance with
this Section 10 shall be binding upon the Holder, each future holder and the
Company.
(b) No waivers of, or exceptions to, any term, condition or
provision of this Option, in any one or more instances, shall be deemed to be,
or construed as, a further or continuing waiver of any such term, condition or
provision.
11. ADJUSTMENTS. The number of Shares purchasable hereunder and the
Exercise Price are subject to adjustment from time to time upon the occurrence
of certain events, as follows:
11.1. REORGANIZATION, MERGER OR SALE OF ASSETS. If at any time
while this Option, or any portion thereof, is outstanding and unexpired there
shall be (i) a reorganization (other than a combination, reclassification,
exchange or subdivision of shares otherwise provided for herein), (ii) a merger
or consolidation of the Company with or into another corporation in which the
Company is not the surviving entity, or a merger in which the Company is the
surviving entity but the shares of the Company's capital stock outstanding
immediately prior to the merger are converted by virtue of the merger into other
property, whether in the form of securities, cash or otherwise, or (iii) a sale
or transfer of substantially all of the Company's properties and assets as, or
substantially as, an entirety to any other person, then, as a part of such
reorganization, merger, consolidation, sale or transfer, lawful provision shall
be made so that the holder of this Option shall upon such reorganization,
merger, consolidation or sale or transfer, have the right by exercising such
Option, to purchase the kind and number of Common Shares or other securities or
property (including cash) otherwise receivable upon such reorganization, merger,
consolidation or sale or transfer by a holder of the number of Common Shares
that might have been purchased upon exercise of such Option immediately prior to
such reorganization, merger, consolidation or sale or transfer. The foregoing
provisions of this Section 11.1 shall similarly apply to successive
reorganizations, consolidations, mergers, sales and transfers and to the stock
or securities of any other corporation that are at the time receivable upon the
exercise of this Option. If the per-share consideration payable to the Holder
hereof for shares in connection with any such transaction is in a form other
than cash or marketable securities, then the value of such consideration shall
be determined in good faith by the Company's Board of Directors. In all events,
appropriate adjustment (as determined in good faith by the Company's Board of
Directors) shall be made in the application of the provisions of this Option
with respect to the rights and interests of the Holder after the transaction, to
the end that the provisions of this Option shall be applicable after that event,
as near as reasonably may be, in relation to any shares or other property
deliverable after that event upon exercise of this Option.
7
<PAGE>
11.2. RECLASSIFICATION. If the Company, at any time while this
Option, or any portion thereof, remains outstanding and unexpired, by
reclassification of securities or otherwise, shall change any of the securities
as to which purchase rights under this Option exist into the same or a different
number of securities of any other class or classes, this Option shall thereafter
represent the right to acquire such number and kind of securities as would have
been issuable as the result of such change with respect to the securities that
were subject to the purchase rights under this Option immediately prior to such
reclassification or other change and the Exercise Price therefor shall be
appropriately adjusted, all subject to further adjustment as provided in this
Section 11.
11.3. SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the Company
at any time while this Option, or any portion thereof, remains outstanding and
unexpired shall split, subdivide or combine the securities as to which purchase
rights under this Option exist, into a different number of securities of the
same class, the Exercise Price and the number of shares issuable upon exercise
of this Option shall be proportionately adjusted.
11.4. ADJUSTMENTS FOR DIVIDENDS IN STOCK OR OTHER SECURITIES OR
PROPERTY. If while this Option, or any portion hereof, remains outstanding and
unexpired the holders of the securities as to which purchase rights under this
Option exist at the time shall have received, or, on or after the record date
fixed for the determination of eligible Stockholders, shall have become entitled
to receive, without payment therefor, other or additional stock or other
securities or property (other than cash) of the Company by way of dividend, then
and in each case, this Option shall represent the right to acquire, in addition
to the number of shares of the security receivable upon exercise of this Option,
and without payment of any additional consideration therefor, the amount of such
other or additional stock or other securities or property (other than cash) of
the Company that such holder would hold on the date of such exercise had it been
the holder of record of the security receivable upon exercise of this Option on
the date hereof and had thereafter, during the period from the date hereof to
and including the date of such exercise, retained such shares and/or all other
additional stock, other securities or property available by this Option as
aforesaid during such period.
11.5 NECESSARY OR APPROPRIATE ACTION. The Company will not, by
any voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Company, but will
at all times in good faith assist in the carrying out of all the provisions of
this Section 11 and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holders of this Option against
impairment.
12. REGISTRATION RIGHTS. The Holder shall be entitled to the
registration rights set forth in that certain Registration Rights Agreement of
even date herewith by and between the Company and such Holder.
8
<PAGE>
13. SEVERABILITY. Whenever possible, each provision of this Option
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Option is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
the validity, legality or enforceability of any other provision of this Option
in such jurisdiction or affect the validity, legality or enforceability of any
provision in any other jurisdiction, but this Option shall be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision had never been contained herein.
14. GOVERNING LAW. The corporate law of the current jurisdiction of
incorporation of the Company shall govern all issues and questions concerning
the relative rights of the Company and its stockholders. All other questions
concerning the construction, validity, interpretation and enforceability of this
Option and the exhibits and schedules hereto shall be governed by, and construed
in accordance with, the laws of the current jurisdiction of incorporation of the
Company, without giving effect to any choice of law or conflict of law rules or
provisions that would cause the application of the laws of any jurisdiction
other than those of the current jurisdiction of incorporation of the Company.
For the purposes of this Section 14, the term "current" shall mean the time at
which any dispute, issue or question shall arise hereunder.
15. JURISDICTION. The Holder and the Company agree to submit to
personal jurisdiction and to waive any objection as to venue in the federal or
state courts located in Philadelphia, Pennsylvania. Service of process on the
Company or the Holder in any action arising out of or relating to this Option
shall be effective if mailed to such party at the address listed in Section 9
hereof.
16. ARBITRATION. If a dispute arises as to interpretation of this
Option, it shall be decided finally by three arbitrators in an arbitration
proceeding conforming to the Rules of the American Arbitration Association
applicable to commercial arbitration. The arbitrators shall be appointed as
follows: one by the Company, one by the Holder and the third by the said two
arbitrators, or, if they cannot agree, then the third arbitrator shall be
appointed by the American Arbitration Association. The third arbitrator shall be
chairman of the panel and shall be impartial. The arbitration shall take place
in Philadelphia, Pennsylvania. The decision of a majority of the Arbitrators
shall be conclusively binding upon the parties and final, and such decision
shall be enforceable as a judgment in any court of competent jurisdiction. Each
party shall pay the fees and expenses of the arbitrator appointed by it, its
counsel and its witnesses. The parties shall share equally the fees and expenses
of the impartial arbitrator.
17. CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The
execution, delivery and performance by the Company of this Agreement: (i) are
within the Company's corporate power; (ii) have been duly authorized by all
necessary or proper corporate action; (iii) are not in contravention of the
Company's memorandum of association or bye-laws; (iv) will not violate in any
material respect, any law or regulation, including any and all Federal and state
securities laws, or any order or decree of any court or governmental
instrumentality; and (v) will not, in any material respect, conflict with or
result in the breach or termination of, or constitute a default under any
agreement or other material instrument to which the Company is a party or by
which the Company is bound.
9
<PAGE>
18. SUCCESSORS AND ASSIGNS. This Option shall inure to the benefit
of and be binding on the respective successors, assigns and legal
representatives of the Holder and the Company.
IN WITNESS WHEREOF, the Company has caused this Option to be executed by
its officers thereunto duly authorized.
Dated: _____, 1998
VDC CORPORATION LTD.
---------------------------------
Frederick A. Moran, Chief Executive Officer
HOLDER:
--------------------------------
10
<PAGE>
NOTICE OF EXERCISE
TO: [_____________________________]
(1) The undersigned hereby elects to purchase _______ Common Shares
of VDC Corporation Ltd. pursuant to the terms of the attached Option, and
tenders herewith payment of the purchase price for such shares in full.
(2) In exercising this Option, the undersigned hereby confirms and
acknowledges that the Common Shares to be issued upon conversion thereof are
being acquired solely for the account of the undersigned and not as a nominee
for any other party, and for investment (unless such shares are subject to
resale pursuant to an effective prospectus), and that the undersigned will not
offer, sell or otherwise dispose of any such Common Shares except under
circumstances that will not result in a violation of the Securities Act of 1933,
as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing said
Common Shares in the name of the undersigned or in such other name as is
specified below:
-----------------------------------
(Name)
-----------------------------------
(Name)
- -------------------------- -----------------------------------
(Date) (Signature)
11
The following Form of Registration Rights Agreement was entered into
with: William Zimmerling as of April 1, 1998, Robert Warner as of April 1, 1998,
and Robert Warner as of September 2, 1998.
FORM OF REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT made and entered into as of this
___ day of _____, 1998, by and between VDC Corporation Ltd., a Bermuda
corporation (the "Company"), and _____, an individual residing at ______
("Holder").
BACKGROUND
----------
WHEREAS, pursuant to an Option to Purchase Common Shares of VDC
Corporation Ltd. dated _____, 1998, by and between the Company and the Holder,
the Company has agreed to issue to Holder options to purchase Common Shares of
the Company, par value $2.00 per share ("Common Stock") in accordance with the
terms of the Option Agreement.
WHEREAS, in order to induce Holder and the Company to enter into
the foregoing transactions, the Company has agreed to provide Holder with the
registration rights set forth in this Agreement.
ARTICLE 1 CERTAIN DEFINITIONS.
In addition to the other terms defined in this Agreement, the
following terms shall be defined as follows:
"Brokers' Transactions" has the meaning ascribed to such term
pursuant to Rule 144 under the Securities Act.
"Business Day" means any day on which the New York Stock Exchange
("NYSE") is open for trading.
"Common Stock" means any outstanding Common Shares of the Company.
"Company" means VDC Corporation Ltd., a Bermuda corporation, or
any successor thereof.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC thereunder, all as the same
shall be in effect at the relevant time.
"Holder" means Holder for so long as (and to the extent that) he
owns any Registrable Securities, and each of his heirs and personal
representatives who become registered owners of Registrable Securities or
securities exercisable, exchangeable or convertible into Registrable Securities.
<PAGE>
"Outstanding" means with respect to any securities as of any
date, all such securities therefore issued, except any such securities therefore
canceled or held by the Company or any successor thereto (whether in its
treasury or not) or any affiliate of the Company or any successor thereto shall
not be deemed "Outstanding" for the purpose of this Agreement.
"Person" means an individual, a partnership (general or limited),
corporation, limited liability company, joint venture, business trust,
cooperative, association or other form of business organization, whether or not
regarded as a legal entity under applicable law, a trust (inter vivos or
testamentary), an estate of a deceased, insane or incompetent person, a
quasi-governmental entity, a government or any agency, authority, political
subdivision or other instrumentality thereof, or any other entity.
"Registrable Security(ies)" means the Common Stock issued to the
Holder pursuant to the Option Agreement, and any additional shares of Common
Stock or other equity securities of the Company issued or issuable after the
date hereof in respect of any such securities (or other equity securities issued
in respect thereof) by way of a stock dividend or stock split, in connection
with a combination, exchange, reorganization, recapitalization or
reclassification of Company securities, or pursuant to a merger, division,
consolidation or other similar business transaction or combination involving the
Company; provided that: as to any particular Registrable Securities, such
securities shall cease to constitute Registrable Securities (i) when a
registration statement with respect to the sale of such securities shall have
become effective under the Securities Act and such securities shall have been
disposed of thereunder, or (ii) when and to the extent such securities are
permitted to be publicly sold pursuant to Rule 144 (or any successor provision
to such Rule) under the Securities Act or are otherwise freely transferable to
the public without further registration under the Securities Act, or (iii) when
such securities shall have ceased to be Outstanding and, in the case of clause
(ii), the Company shall, if requested by the Holder or Holders thereof, have
delivered to such Holder or Holders the written opinion of independent counsel
to the Company to such effect.
"Registration Expenses" means all expenses incident to the
Company's performance of or compliance with the registration requirements set
forth in this Agreement including, without limitation, the following: (i) the
fees, disbursements and expenses of the Company's counsel(s), accountants, and
experts in connection with the registration under the Securities Act of
Registrable Securities; (ii) all expenses in connection with the preparation,
printing and filing of the registration statement, any preliminary prospectus or
final prospectus, any other offering documents and amendments and supplements
thereto, and the mailing and delivery of copies thereof to the underwriters and
dealers, if any; (iii) the cost of printing or producing any agreement(s) among
underwriters, underwriting agreement(s) and blue sky or legal investment
memoranda, any selling agreements, and any other documents in connection with
the offering, sale or delivery of Registrable Securities to be disposed of; (iv)
any other expenses in connection with the qualification of Registrable
Securities for offer and sale under state securities laws, including the fees
and disbursements of counsel for the underwriters in connection with such
qualification and in connection with any blue sky and legal investment surveys;
(v) the filing fees incident to securing any required review by the NASDAQ Stock
Market of the terms of the sale of Registrable Securities to be disposed of and
any blue sky registration or filing fees, and (vi) the fees and expenses
incurred in connection with the listing of Registrable Securities on each
securities exchange (or the NASDAQ Stock Market) on which Company securities of
the same class are then listed; provided, however, that Registration Expenses
with respect to any registration pursuant to this Agreement shall not include
(x) expenses of any Holder's counsel, or (y) any underwriting discounts or
commissions attributable to Registrable Securities, each of which shall be borne
by the Holder.
2
<PAGE>
"SEC" means the United States Securities and Exchange Commission,
or such other federal agency at the time having the principal responsibility for
administering the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations of the SEC thereunder, all as the same shall be in
effect at the relevant time.
ARTICLE 2 PIGGYBACK REGISTRATIONS.
(a) Right to Piggyback. If at any time after the date
hereof, the Company proposes to file a registration statement under the
Securities Act (except with respect to registration statements on Forms S-4,
S-8, or any other form not available for registering the Registrable Securities
for sale to the public), with respect to an offering of newly issued Common
Stock for its own account, then the Company shall in each case give written
notice of such proposed filing to the Holders of Registrable Securities at least
45 days before the anticipated filing date of the registration statement with
respect thereto (the "Piggyback Registration"), and shall, subject to Sections
2(b) and 2(c) below, include in such Piggyback Registration such amount of
Registrable Securities as the Holder may request within 20 days of the receipt
of such notice.
(b) Priority on Primary Registrations. If a Piggyback
Registration is an underwritten primary registration on behalf of the Company,
and the managing underwriter advises the Company in writing that in its opinion
the number of securities requested to be included in such registration exceeds
the number which can be sold in an orderly manner in such offering within a
price range acceptable to the Company, the Company shall include in such
registration (i) first, the securities the Company proposes to sell, (ii)
second, the Registrable Securities requested to be included in such registration
to the extent that the number of shares to be registered will not, in the
opinion of the managing underwriter, adversely affect the offering of the
securities pursuant to clause (i), pro rata among the Holders of such
Registrable Securities on the basis of the number of shares owned by such Holder
and (iii) third, provided that all Registrable Securities requested to be
included in the registration statement have been so included, any other
securities requested to be included in such registration.
(c) Priority on Secondary Registrations. If a Piggyback
Registration is an underwritten secondary registration on behalf of holders of
the Company's securities other than the Holders of Registrable Securities, and
the managing underwriter advises the Company in writing that in their opinion
the number of securities requested to be included in such registration exceeds
the number which can be sold in an orderly manner in such offering within a
price range acceptable to the holders initially requesting such registration,
the Company shall include in such registration (i) first, the securities
requested to be included therein by the holders requesting such registration,
(ii) second, the Registrable Securities requested to be included in such
registration, to the extent that the number of shares to be registered will not,
in the opinion of the managing underwriter, adversely affect the offering of the
securities pursuant to clause (i), pro rata among the Holders of such securities
on the basis of the number of shares so requested to be included therein owned
by each such Holder, and (iii) third, other securities requested to be included
in such registration.
3
<PAGE>
ARTICLE 3 HOLDBACK AGREEMENTS.
The Holder of Registrable Securities shall not effect any public
sale or distribution (including sales pursuant to Rule 144) of equity securities
of the Company, or any securities convertible into or exchangeable or
exercisable for such securities, during the 60 days prior to and the 120-day
period beginning on the effective date of any underwritten primary registration
undertaken by the Company (except as part of such underwritten registration),
unless the underwriter managing the registered public offering otherwise agrees.
ARTICLE 4 REGISTRATION PROCEDURES.
Whenever the Holder of Registrable Securities has requested that
any Registrable Securities be registered pursuant to this Agreement, the Company
shall use its best efforts to effect the registration of the resale of such
Registrable Securities and pursuant thereto the Company shall as soon as
practicable:
(a) prepare and file with the SEC a registration statement
with respect to the resale of such Registrable Securities and use its best
efforts to cause such registration statement to become effective thereafter
(provided that before filing a registration statement or prospectus or any
amendments or supplements thereto, the Company shall furnish to the counsel
selected by the Holder of the Registrable Securities covered by such
registration statement copies of all such documents proposed to be filed, which
documents shall be subject to the review and consent of such counsel);
(b) notify the Holder of Registrable Securities of the
effectiveness of each registration statement filed hereunder and prepare and
file with the SEC such amendments and supplements to such registration statement
and the prospectus used in connection therewith as may be necessary to keep such
registration statement effective for a period of not less than 180 days and
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof set
forth in such registration statement;
(c) furnish to each seller of Registrable Securities such
number of copies of such registration statement, each amendment and supplement
thereto, the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller;
(d) use its best efforts to register or qualify such
Registrable Securities under such other securities or blue sky laws of such
jurisdictions as Holder reasonably requests and do any and all other acts and
things which may be reasonably necessary or advisable to enable such seller to
consummate the disposition of the Registrable Securities owned by the sellers in
such jurisdictions (provided that the Company shall not be required to (i)
qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this subparagraph, (ii) subject itself
to taxation in any such jurisdiction or (iii) consent to general service of
process in any such jurisdiction);
4
<PAGE>
(e) notify each seller of such Registrable Securities, at
any time when a prospectus relating thereto is required to be delivered under
the Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading, and, at the request of any such seller, the Company shall
prepare a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
shall not contain an untrue statement of a material fact or omit to state any
fact necessary to make the statements therein not misleading;
(f) cause all such Registrable Securities to be listed on
each securities exchange or trading system on which similar securities issued by
the Company are then listed;
(g) provide a transfer agent and registrar for all such
Registrable Securities not later than the effective date of such registration
statement;
(h) enter into such customary underwriting agreements
(containing terms acceptable to the Company) as the Holder of Registrable
Securities being sold or the underwriters, if any, reasonably requests (although
the Company has no obligation to secure any underwriting arrangements on behalf
of the Holder); and
(i) make available for inspection during normal business
hours by any seller of Registrable Securities, any underwriter participating in
any disposition pursuant to such registration statement and any attorney,
accountant or other agent retained by any such seller or underwriter, all
financial and other records, pertinent corporate documents and properties of the
Company, and cause the Company's officers, directors, employees and independent
accountants to supply all information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with such registration
statement.
ARTICLE 5 REGISTRATION EXPENSES.
All Registration Expenses in connection with any of the
registration events identified within this Agreement shall be borne by the
Company. All other expenses shall be borne by the Holder.
ARTICLE 6 INDEMNIFICATION.
(a) The Company agrees to indemnify, to the extent permitted
by law, the Holder of Registrable Securities, its officers and directors and
each Person who controls such Holder (within the meaning of the Securities Act)
against all losses, claims, damages, liabilities and expenses caused by any
untrue statement of material fact contained in any registration statement,
prospectus or preliminary prospectus or any amendment thereof or supplement
thereto or any omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as the
same are caused by or contained in any information furnished to the Company by
such Holder for use therein or by such Holder's failure to deliver a copy of the
registration statement or prospectus or any amendments or supplements thereto
after the Company has furnished such holder with a sufficient number of copies
of the same. In connection with an underwritten offering, the Company shall
provide reasonable and customary indemnification to such underwriters, their
officers and directors and each Person who controls such underwriters (within
the meaning of the Securities Act) to the same extent as provided above with
respect to the indemnification of the Holder of Registrable Securities.
5
<PAGE>
(b) In connection with any registration statement in which
the Holder of Registrable Securities is participating, such Holder shall furnish
to the Company in writing such information and affidavits as the Company
reasonably requests for use in connection with any such registration statement
or prospectus and, to the extent permitted by law, shall indemnify the Company,
its directors and officers and each Person who controls the Company (within the
meaning of the Securities Act) against any losses, claims, damages, liabilities
and expenses resulting from any untrue or alleged untrue statement of material
fact contained in the registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, but only to the extent that such
untrue statement or omission is contained in any information or affidavit so
furnished by such Holder.
(c) Any Person entitled to indemnification hereunder shall
(i) give prompt written notice to the indemnifying party of any claim with
respect to which it seeks indemnification (provided that the failure to give
prompt notice shall not impair any Person's right to indemnification hereunder
to the extent such failure has not prejudiced the indemnifying party) and (ii)
unless in such indemnified party's reasonable judgment a conflict of interest
between such indemnified and indemnifying parties may exist with respect to such
claim, permit such indemnifying party to assume the defense of such claim with
counsel reasonably satisfactory to the indemnified party. If such defense is
assumed, the indemnifying party shall not be subject to any liability for any
settlement made by the indemnified party without its consent (but such consent
shall not be unreasonably withheld). An indemnifying party who is not entitled
to, or elects not to, assume the defense of a claim shall not be obligated to
pay the fees and expenses of more than one counsel for all parties indemnified
by such indemnifying party with respect to such claim, unless in the reasonable
judgment of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
(d) The indemnification provided for under this Agreement
shall remain in full force and effect regardless of any investigation made by or
on behalf of the indemnified party or any officer, director or controlling
Person of such indemnified party and shall survive the transfer of securities.
The Company also agrees to make such provisions, as are reasonably requested by
any indemnified party, for contribution to such party in the event the Company's
indemnification is unavailable for any reason.
6
<PAGE>
ARTICLE 7 OBLIGATION OF HOLDERS.
(a) In connection with each registration hereunder, Holder will
furnish to the Company in writing such information with respect to such Holder
and the securities held by such Holder, and the proposed distribution by them as
shall be reasonably requested by the Company in order to assure compliance with
federal and applicable state securities laws, as a condition precedent to
including such Holder's Registrable Securities in the registration statement.
Each Holder also shall agree to promptly notify the Company of any changes in
such information included in the registration statement or prospectus as a
result of which there is an untrue statement of material fact or an omission to
state any material fact required or necessary to be stated therein in order to
make the statements contained therein not misleading in light of the
circumstances then existing.
(b) In connection with each registration pursuant to this
Agreement, the Holder included therein will not effect sales thereof until
notified by the Company of the effectiveness of the registration statement, and
thereafter will suspend such sales after receipt of telegraphic or written
notice from the Company to suspend sales to permit the Company to correct or
update a registration statement or prospectus. At the end of any period during
which the Company is obligated to keep a registration statement current, the
Holder included in said registration statement shall discontinue sales of shares
pursuant to such registration statement upon receipt of notice from the Company
of its intention to remove from registration the shares covered by such
registration statement which remain unsold, and such Holder shall notify the
Company of the number of shares registered which remain unsold immediately upon
receipt of such notice from the Company.
ARTICLE 8 INFORMATION BLACKOUT.
(a) At any time when a registration statement effected
pursuant to this Agreement relating to Registrable Securities is effective, upon
written notice from the Company to the Holders that the Company has determined
in good faith that sale of Registrable Securities pursuant to the registration
statement would require disclosure of non-public material information not
otherwise required to be disclosed under applicable law (an "Information
Blackout"), all Holders shall suspend sales of Registrable Securities pursuant
to such registration statement until the earlier of:
(i) thirty (30) days after the Company makes such
good faith determination; and
(ii) such time as the Company notifies the Holders that
such
material information has been disclosed to the public or has ceased to be
material or that sales pursuant to such registration statement may otherwise be
resumed (the number of days from such suspension of sales by the Holders until
the day when such sale may be resumed hereunder is hereinafter called a "Sales
Blackout Period").
(b) Notwithstanding the foregoing, there shall be no more
than two (2) Information Blackouts during the term of this Agreement and no
Sales Blackout Period shall continue for more than thirty (30) consecutive days.
7
<PAGE>
ARTICLE 9 MISCELLANEOUS.
(a) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the current jurisdiction of
incorporation of the Company without regard to that jurisdiction's conflict of
laws provisions. For the purposes of this paragraph, the term "current" shall
mean the time at which any dispute, issue or question shall arise hereunder.
(b) Counterparts. This Agreement may be signed in
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
(c) Amendments and Waivers. Except as otherwise provided
herein, the provisions of this Agreement may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given without the written consent of the Company and the Holders.
(d) Notices. All communications under this Agreement shall
be sufficiently given if delivered by hand or by overnight courier or mailed by
registered or certified mail, postage prepaid, addressed,
(i) if to the Company, to:
VDC Corporation Ltd.
75 Holly Hill Lane
Greenwich, CT 06830
Attention: Frederick A. Moran,
Chief Executive Officer
with a copy to:
Stephen M. Cohen, Esquire
Buchanan Ingersoll Professional Corporation
11 Penn Center, 14th Floor
1835 Market Street
Philadelphia, PA 19103
or, in the case of the Holders, at such address as each such Holder shall have
furnished in writing to the Company; or at such other address as any of the
parties shall have furnished in writing to the other parties hereto.
(e) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(f) Entire Agreement; Survival; Termination. This Agreement
is intended by the parties as a final expression of their agreement and intended
to be a complete and exclusive statement of the agreement and understanding of
the parties hereto in respect of the subject matter contained herein. There are
no restrictions, promises, warranties or undertakings, other than those set
forth or referred to herein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter.
8
<PAGE>
IN WITNESS WHEREOF, intending to be legally bound hereby, the parties
have executed this Agreement as of the date first written above.
VDC CORPORATION LTD.
By:_________________________________
Frederick A. Moran
Chief Executive Officer
HOLDER:
By:_________________________________
9
The following Form of Incentive Stock Option Agreement was entered into with the
following executive officers:
<TABLE>
<CAPTION>
Number
of Shares
Underlying Expiration
Name Option Vesting Exercise Price Grant Date Date
- ---- ------ ------- -------------- ---------- ----
<S> <C> <C> <C> <C> <C>
Clayton F. Moran 45,000 20% per year $3.75 12/08/98 12/08/08
for five
years
Charles W. Mulloy 40,000 20% per year $3.75 12/08/98 12/08/08
for five
years
Robert E. Warner 42,500 20% per year $3.75 12/08/98 12/08/08
for five
years
William H. Zimmerling 33,500 20% per year $3.75 12/08/98 12/08/08
for five
years
</TABLE>
<PAGE>
-------------------------
Optionee
VDC COMMUNICATIONS, INC.
FORM OF INCENTIVE STOCK OPTION AGREEMENT
UNDER THE VDC COMMUNICATIONS, INC.
1998 STOCK INCENTIVE PLAN (THE "PLAN")
This Agreement is made as of December 8, 1998, (the "Grant Date")
by and between VDC Communications, Inc., a Delaware corporation (the
"Corporation") and
(the "Optionee").
WHEREAS, Optionee is a valuable employee of the Corporation or
one of its subsidiaries and the Corporation considers it desirable and in its
best interest that Optionee be given an inducement to acquire a proprietary
interest in the Corporation and an incentive to advance the interests of the
Corporation by granting the Optionee an option to purchase shares of common
stock of the Corporation (the "Common Stock");
NOW, THEREFORE, the parties hereto, intending to be legally
bound, hereby agree that as of the Grant Date, the Corporation hereby grants
Optionee an option to purchase from it, upon the terms and conditions set forth
in the Plan (a copy of which is attached hereto), that number of shares of the
authorized and unissued Common Stock of the Corporation as is set forth on
Schedule A hereto.
1. Terms of Stock Option. The option to purchase Common Stock
granted herein is subject to the terms, conditions, and covenants set forth in
the Plan as well as the following:
(a) This option shall constitute an Incentive Stock Option which is
intended to qualify under Section 422 of the Internal Revenue
Code of 1986, as amended;
(b) The per share exercise price for the shares subject to this
option shall be the 100% of the Fair Market Value (as defined in
the Plan) of the Common Stock on the Grant Date, which exercise
price is set forth on Schedule A hereto;
(c) This option shall vest in accordance with the vesting schedule
set forth on Schedule A hereto; and
(d) No portion of this option may be exercised more than ten (10)
years from the Grant Date.
<PAGE>
2. Payment of Exercise Price. The option may be exercised, in part
or in whole, only by written request to the Corporation accompanied by payment
of the exercise price in full either: (i) in cash for the shares with respect to
which it is exercised; (ii) by delivering to the Corporation a notice of
exercise with an irrevocable direction to a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, to sell a sufficient portion of the
shares and deliver the sale proceeds directly to the Corporation to pay the
exercise price; (iii) in the discretion of the Plan Administrator, through the
delivery to the Corporation of previously-owned shares of Common Stock having an
aggregate Fair Market Value equal to the option exercise price of the shares
being purchased pursuant to the exercise of the Option; provided, however, that
shares of Common Stock delivered in payment of the option price must have been
held by the Optionee for at least six (6) months in order to be utilized to pay
the option price; (iv) in the discretion of the Plan Administrator, through an
election to have shares of Common Stock otherwise issuable to the Optionee
withheld to pay the exercise price of such Option; or (v) in the discretion of
the Plan Administrator, through any combination of the payment procedures set
forth in Subsections (i) - (iv) of this paragraph.
3. Miscellaneous.
(a) This Agreement is binding upon the parties hereto and their
respective heirs, personal representatives, successors and
assigns.
(b) This Agreement will be governed and interpreted in accordance
with the laws of the State of Delaware, and may be executed in
more than one counterpart, each of which shall constitute an
original document.
(c) No alterations, amendments, changes or additions to this
agreement will be binding upon either the Corporation or Optionee
unless reduced to writing and signed by both parties.
In witness whereof, the parties have executed this Agreement as of
the Grant Date.
VDC COMMUNICATIONS, INC.
By: ------------------------
Frederick A. Moran
Chief Executive Officer
OPTIONEE
------------------------
2
<PAGE>
------------------------
Optionee
SCHEDULE A
1. Grant Date: ------------------------
2. Number of Shares of Common Stock covered by the Option:----------------------
3. Exercise Price (100% of Fair Market Value of Common Stock on the Grant Date):
------------------------
4. The Option shall vest in accordance with the following schedule:
(i) ----- shares shall vest on the first anniversary of the Grant Date;
(ii) ----- shares shall vest on the second anniversary of the Grant Date;
(iii) ----- shares shall vest on the third anniversary of the Grant Date;
(iv) ----- shares shall vest on the fourth anniversary of the Grant Date;
and
(v) ----- shares shall vest on the fifth anniversary of the Grant Date.
------------------------
Initials of Authorized
Officer of VDC Communications, Inc.
------------------------
Optionee's Initials
3
Frederick A. Moran
Optionee
VDC COMMUNICATIONS, INC.
------------------------
INCENTIVE STOCK OPTION AGREEMENT
UNDER THE VDC COMMUNICATIONS, INC.
1998 STOCK INCENTIVE PLAN (THE "PLAN")
This Agreement is made as of December 8, 1998, (the "Grant Date")
by and between VDC Communications, Inc., a Delaware corporation (the
"Corporation") and Frederick A. Moran (the "Optionee").
WHEREAS, Optionee is a valuable employee of the Corporation or
one of its subsidiaries and the Corporation considers it desirable and in its
best interest that Optionee be given an inducement to acquire a proprietary
interest in the Corporation and an incentive to advance the interests of the
Corporation by granting the Optionee an option to purchase shares of common
stock of the Corporation (the "Common Stock");
NOW, THEREFORE, the parties hereto, intending to be legally
bound, hereby agree that as of the Grant Date, the Corporation hereby grants
Optionee an option to purchase from it, upon the terms and conditions set forth
in the Plan (a copy of which is attached hereto), that number of shares of the
authorized and unissued Common Stock of the Corporation as is set forth on
Schedule A hereto.
1. Terms of Stock Option. The option to purchase Common
Stock granted herein is subject to the terms, conditions, and covenants set
forth in the Plan as well as the following:
(a) This option shall constitute an Incentive Stock
Option which is intended to qualify under Section
422 of the Internal Revenue Code of 1986, as
amended;
(b) The per share exercise price for the shares subject
to this option shall be the 110% of the Fair Market
Value (as defined in the Plan) of the Common Stock
on the Grant Date, which exercise price is set
forth on Schedule A hereto;
(c) This option shall vest in accordance with the
vesting schedule set forth on Schedule A hereto;
and
(d) No portion of this option may be exercised more
than five (5) years from the Grant Date.
2. Payment of Exercise Price. The option may be exercised,
in part or in whole, only by written request to the Corporation accompanied by
payment of the exercise price in full either: (i) in cash for the shares with
respect to which it is exercised; (ii) by delivering to the Corporation a notice
of exercise with an irrevocable direction to a broker-dealer registered under
the Securities Exchange Act of 1934, as amended, to sell a sufficient portion of
the shares and deliver the sale proceeds directly to the Corporation to pay the
exercise price; (iii) in the discretion of the Plan Administrator, through the
delivery to the Corporation of previously-owned shares of Common Stock having an
aggregate Fair Market Value equal to the option exercise price of the shares
being purchased pursuant to the exercise of the Option; provided, however, that
shares of Common Stock delivered in payment of the option price must have been
held by the Optionee for at least six (6) months in order to be utilized to pay
the option price; (iv) in the discretion of the Plan Administrator, through an
election to have shares of Common Stock otherwise issuable to the Optionee
withheld to pay the exercise price of such Option; or (v) in the discretion of
the Plan Administrator, through any combination of the payment procedures set
forth in Subsections (i) - (iv) of this paragraph.
<PAGE>
3. Miscellaneous.
(a) This Agreement is binding upon the parties hereto
and their respective heirs, personal
representatives, successors and assigns.
(b) This Agreement will be governed and interpreted in
accordance with the laws of the State of Delaware,
and may be executed in more than one counterpart,
each of which shall constitute an original
document.
(c) No alterations, amendments, changes or additions to
this agreement will be binding upon either the
Corporation or Optionee unless reduced to writing
and signed by both parties.
In witness whereof, the parties have executed this Agreement as
of the Grant Date.
VDC COMMUNICATIONS, INC.
By: /s/ Frederick A. Moran
----------------------
Frederick A. Moran
Chief Executive Officer
OPTIONEE
/s/ Frederick A. Moran
----------------------
Frederick A. Moran
2
<PAGE>
Frederick A. Moran
Optionee
SCHEDULE A
1. Grant Date: December 8, 1998
2. Number of Shares of Common Stock covered by the Option: 200,000
3. Exercise Price (110% of Fair Market Value of Common Stock on the Grant Date):
$4.125
------
4. The Option shall vest in accordance with the following schedule:
(i) 40,000 shares shall vest on the first anniversary of the Grant
Date;
(ii) 40,000 shares shall vest on the second anniversary of the Grant
Date;
(iii) 40,000 shares shall vest on the third anniversary of the Grant
Date;
(iv) 40,000 shares shall vest on the fourth anniversary of the Grant
Date; and
(v) 40,000 shares shall vest on the fifth anniversary of the Grant
Date.
/s/ FAM
-----------------------------------
Initials of Authorized
Officer of VDC Communications, Inc.
/s/ FAM
-----------------------------------
Optionee's Initials
3
SUBSIDIARES OF REGISTRANT
1. Masatepe Communications, U.S.A., L.L.C., a Delaware limited liability
company
2. Sky King Communications, Inc., a Delaware corporation
3. VDC Telecommunications, Inc., a Delaware corporation (d/b/a Voice
and Data Communications)
4. Voice & Data Communications (Hong Kong) Limited, a Hong Kong corporation
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
VDC Communications, Inc.
Greenwich, Connecticut
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated September 1, 1998, relating to the
consolidated financial statements of VDC Corporation Ltd., which is contained in
that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
- --------------------
BDO Seidman, LLP
Valhalla, New York
June 4, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains Summary Financial information extracted from
the Financial Statements for the nine-months ended March 31, 1999 and is
qualified in its entirety by reference to such statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 653
<SECURITIES> 104
<RECEIVABLES> 1652
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2409
<PP&E> 6083
<DEPRECIATION> 336
<TOTAL-ASSETS> 13673
<CURRENT-LIABILITIES> 4571
<BONDS> 1968
0
0
<COMMON> 2
<OTHER-SE> 8187
<TOTAL-LIABILITY-AND-EQUITY> 13673
<SALES> 0
<TOTAL-REVENUES> 1426
<CGS> 0
<TOTAL-COSTS> 2159
<OTHER-EXPENSES> 37921
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (42423)
<INCOME-TAX> 0
<INCOME-CONTINUING> (43088)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43088)
<EPS-BASIC> (2.45)
<EPS-DILUTED> (2.45)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains Summary Financial information extracted from
the Financial Statements for the Year Ended June 30, 1998 and is qualified
in its entirety by reference to such statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 2212
<SECURITIES> 452
<RECEIVABLES> 4300
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5464
<PP&E> 341
<DEPRECIATION> 10
<TOTAL-ASSETS> 45824
<CURRENT-LIABILITIES> 156
<BONDS> 0
0
1
<COMMON> 22923
<OTHER-SE> 22743
<TOTAL-LIABILITY-AND-EQUITY> 45824
<SALES> 0
<TOTAL-REVENUES> 100
<CGS> 0
<TOTAL-COSTS> 3450
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3350)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3350)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3155)
<EPS-BASIC> (.72)
<EPS-DILUTED> (.72)
</TABLE>
