SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ Annual Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the fiscal year ended June 30, 1999
/ / Transition Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from
,
to
,
Commission File Number: 0-14045
VDC COMMUNICATIONS, INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 061524454
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(State or Other (I.R.S. Employer Identification No.)
Jurisdiction of Incorporation
or Organization)
75 HOLLY HILL LANE
GREENWICH, CONNECTICUT 06830
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(Address of Principal Offices) (Zip Code)
Registrant's telephone number, including area code: (203) 869-5100
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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common stock, $.0001 par value per share American Stock Exchange, Inc.
Securities registered under Section 12(g) of the Act:
NONE
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes (X) No () (2) Yes (X) No ()
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of September 14, 1999, was approximately $22,305,960 based upon
the closing price of the common stock on such date on the American Stock
Exchange, Inc. of $2.00. The information provided shall in no way be construed
as an admission that any person whose holdings are excluded from the figure is
an affiliate or that any person whose holdings are included is not an affiliate,
and any such admission is hereby disclaimed. The information provided is
included solely for record keeping purposes of the Securities and Exchange
Commission.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of September 14, 1999, the number of shares outstanding of the registrant's
common stock, par value $.0001 per share, was 20,173,583 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Annual Report on Form 10-K contains certain information regarding the
registrant's plans and strategies that are "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1993 and Section 21E of the
Securities Exchange Act of 1934. When used in this and in other public
statements by registrant and its officers, the words "may," "could," "should,"
"would," "believe," "anticipate," "estimate," "expect," "intend," "plan,"
"project" and similar terms and/or expressions are intended to identify
forward-looking statements. These statements reflect the registrant's assessment
of a number of risks and uncertainties and the registrant's actual results could
differ materially from the results anticipated in these forward-looking
statements. 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. Pro forma information contained within this Annual Report on Form
10-K, 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. Any forward-looking
statement speaks only as of the date of this Annual Report on Form 10-K or the
documents incorporated by reference, and the registrant undertakes no obligation
to update any forward-looking statements to reflect events or circumstances
after the date on which such statement is made or to reflect the occurrence of
an unanticipated event.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Background
VDC Communications, Inc., a Delaware corporation ("VDC"), is the successor
corporation to its former parent, VDC Corporation Ltd., a Bermuda company ("VDC
Bermuda"), by virtue of a domestication merger (the "Domestication Merger") that
occurred on November 6, 1998 pursuant to which VDC Bermuda merged with and into
VDC. The effect of the Domestication Merger was that members/stockholders of VDC
Bermuda became stockholders of VDC. 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 VDC, $.0001 par value per share,
were converted, on a one-for-one basis, into an aggregate 20,298,362 shares of
common stock of VDC, $.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. (As used in this
document, the terms "the Company", "we" and "us" include both VDC and VDC
Bermuda. The use of these terms reflects the fact that through November 6, 1998,
the publicly held company was VDC Bermuda. Thereafter, due to the Domestication
Merger, the publicly held company was VDC.)
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The Domestication Merger reflects the completion of a series of transactions
that commenced on March 6, 1998, when VDC (then a wholly-owned subsidiary of VDC
Bermuda) acquired Sky King Communications, Inc., a Connecticut corporation ("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 the year ended June 30, 1997 ("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 VDC
Bermuda 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
VDC Bermuda'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 Sky King Connecticut's management within
the telecommunications industry.
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The Telecommunications Industry
We own telecommunications equipment and lease 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. We currently employ state-of-the-art digital switching and
transmission technology. This equipment, located in New York, Los Angeles, and
Denver, comprises our operating facilities. Our facilities and industry
agreements allow us to provide voice and facsimile telecommunications services
to most countries in the world. The vast majority, approximately 97%, of our
revenues are derived from domestic and international wholesale
telecommunications services.
The international telecommunications market consists of all telecommunications
traffic that originates in one country and terminates in another. Bilateral
operating agreements between international long distance carriers in different
countries are key components of the international long distance
telecommunications market. Under an operating agreement, each carrier agrees to
terminate traffic in its country and provide proportional return traffic to its
partner carrier. The implementation of a high quality international network is
an important element in enabling a carrier to compete effectively in the
international long distance telecommunications market.
Through our subsidiaries, we operate an international network of owned and
leased telecommunications equipment. At the end of December 1998, we began
carrying telecommunications traffic domestically and globally. We provide
international services through several United States Federal Communications
Commission Overseas Common Carrier Section 214 authorizations. The
facilities-based global Section 214 authorization enables us to provide
international basic switched, private line, data, and business services using
authorized facilities to virtually all countries in the world, while the global
resale Section 214 authorization enables us to resell the international services
of authorized U.S. common carriers for the provision of authorized international
basic switched, private line, data, and business services to virtually all
countries. We are currently operating communications switching equipment at our
Denver, New York City and Los Angeles facilities to provide international
telecommunications services under our Section 214 authorization and we also
provide domestic long distance telecommunications services. All of the switches
are gateway switches except for the Denver switch, which handles in-country long
distance telecommunications traffic. We anticipate that we may order additional
switches and/or telecommunications equipment in the future to provide
international gateway service in one or more other countries.
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Switched services represent the largest component of telecommunications traffic.
These services are provided through transmission facilities employing switches
that automatically route telecommunications traffic to available circuits. A
typical international telephone call first travels through the local carrier's
switched network to the caller's domestic long distance carrier. The domestic
long distance carrier then carries the call to an international gateway switch.
An international carrier picks up the call at its gateway switch and sends it
through a digital undersea fiber optic cable or satellite circuit to the
corresponding international gateway switch operated by an international carrier
in the country of destination. The long distance carrier in that country then
routes the call to its customer through the domestic telephone network.
The U.S. wholesale market provides international telecommunications services to
its target customer base of long distance service providers worldwide. Our U.S.
wholesale marketing efforts are primarily directed to U.S.-based carriers that
originate international traffic.
Based upon management's relationships within the industry, we sell
telecommunications/carrier services to our customers who originate
telecommunications traffic. To date, we have contracts with 16
telecommunications carrier companies to carry telecommunications traffic or
provide related telecommunications services for these customers. In addition, we
rent switch space to certain customers. Furthermore, we expect to test market
retail long distance services via the Internet and other outlets through
WorldConnectTelecom.com, Inc., a subsidiary of the Company.
Our two largest customers generated approximately 65% of our total revenues
during the year ended June 30, 1999 ("Fiscal 1999"). The larger of these two
customers accounted for approximately 38% of our revenues during that period.
Therefore, the loss of one or both of these customers would have a material
adverse effect on our business. We are attempting to diversify our customer base
so that we will not be subject to significant losses should one or both of these
customers reduce or eliminate their use of our telecommunications services.
We are actively seeking to enter into operating agreements and/or
telecommunications service agreements in foreign countries to expand the
geographical scope of our international network and to attract domestic and
foreign customers. Currently, we are focusing our resources on establishing
routes primarily in Asia, and expect to focus on additional areas in the future.
We believe that these markets, if secured, could present attractive return on
investment characteristics.
Through Sky King Communications, Inc., a Delaware corporation and wholly-owned
subsidiary of the Company ("Sky King"), we derive modest revenues from domestic
tower site management. The towers provide sites for wireless communications
companies to transmit their signals to their customers and receive signals from
their customers. A small minority, approximately 3%, of our current revenues are
derived from Sky King's site tower management service.
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We are not currently profitable on a cash flow or net income basis. Our total
assets at June 31, 1999 were approximately $10 million. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations.")
Metromedia China Corporation Investment
At the inception of our telecommunications business in March, 1998, we actively
investigated telecommunications opportunities in Asia, Egypt and Russia, among
other countries. In connection with our investigations in Asia, we purchased two
million shares and warrants to purchase four million additional shares of
Metromedia China Corporation ("MCC"). MCC is a private company that has
participated in telecommunications and e-commerce joint ventures in China. We
are currently carrying the investment in MCC at $2.4 million. This valuation is
extrapolated from the asset value attributed to this investment in the financial
statements of Metromedia International Group ("MMG"), the majority owner of MCC.
We continue to hold these shares and warrants for investment purposes only.
As discussed more thoroughly in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the fact that we are currently
carrying the investment in MCC at $2.4 million reflects a write down based upon
recent government intervention and regulatory problems in China. The recent
developments in China have caused management to reassess the investigation of
potential opportunities in countries such as Russia and China. Nonetheless, we
continue to explore potential opportunities in these countries.
During the year ended June 30, 1999 ("Fiscal 1999"), we recorded approximately a
$21.3 million writedown of the investment in MCC. (See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 4 to the
Consolidated Financial Statements.)
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 transmission quality, price, customer service, and breadth of service
offerings. The U.S.-based international telecommunications services market is
dominated by AT&T, MCI WorldCom and Sprint Corporation. 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 services. This
could result in lower profit margins for us if we must reduce our prices to stay
competitive. Furthermore, competition is expected to increase as a result of the
new competitive opportunities created by the Basic Telecommunications Agreement
concluded by members of the World Trade Organization in April 1997 (the "WTO
Agreement"). Under the WTO Agreement, the United States and 68 other countries
committed to open their telecommunications markets to competition commencing
February 5, 1998.
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Government Regulation
The following information provides a summary of the material present and
proposed federal, state and local and international regulation and legislation
affecting the telecommunications industry. This does not purport to be
exhaustive. Regulations and legislation 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 us can be predicted at this time.
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 us, or that domestic or
international regulators or third parties will not raise material issues with
regard to our compliance or noncompliance with applicable laws or regulations or
that regulatory activities will not have a materially adverse effect on us.
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 telecommunications carriers. The FCC continues to refine its
international service rules. FCC rules also require carriers holding Section 214
authorizations to 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 domestic long distance services may also be affected by
changes in the access charge rates imposed by incumbent local exchange carriers
("LECs") on long distance carriers. We are not a LEC. The FCC has significantly
revised its access charge rules to permit incumbent LECs greater pricing
flexibility and relaxed regulation in certain circumstances. The FCC may further
modify its access charge rules, and we cannot predict the outcome of any such
future rulemaking proceedings or any subsequent legal challenges on the
telecommunications industry in general or on us in particular.
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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 FCC 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. We, through our 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") and WorldConnectTelecom.com, Inc.
("WorldConnectTelecom.com"), a wholly-owned subsidiary of VDC
Telecommunications, have received four Section 214 authorizations 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, these changes reduce the waiting period for granting new streamlined
applications from 35 days to 14 days; eliminate the requirement for prior
approval of pro forma assignments and transfers of control of Section 214
authorizations; and simplify the FCC's process of authorizing the use of private
lines to provide switched services (known as international simple resale or
"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. Through our
subsidiaries, we have filed requisite domestic tariffs and international tariffs
with the FCC.
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 typically 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 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 that affect us by
virtue of our status as a carrier. 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 routes where
settlement rates are at least 25% below the FCC's applicable benchmarks and U.S.
carriers can terminate 50 percent more of U.S. billed traffic in the foreign
market. These routes currently include Canada, the United Kingdom, Sweden,
Germany, Hong Kong, The Netherlands, Denmark, Norway, France, Ireland, and
Italy. Certain confidential filing requirements still apply to dominant carrier
arrangements. Moreover, in connection with changes to the ISP, the FCC now
permits U.S. private line resellers to enter into ISR arrangements with
non-dominant foreign carriers on any route.
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Employees
As of September 14, 1999, we had 29 employees, of which 5 were executive
officers, 2 were engaged in sales, 17 were engaged in operations, engineering
and technical/data systems, and 5 were engaged in administration. We consider
our employee relations to be good.
Risk Factors
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 and performance. We have
strategically placed telecommunications equipment in cities that we believe will
enable us to efficiently transport telecommunications services. Now we are
trying to build our customer base in order to achieve greater revenues and
market penetration. We expect to 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, our operations will be in jeopardy.
GOING CONCERN QUALIFICATION TO FINANCIAL STATEMENTS. We may not be able to
continue as a going concern if we do not generate profits or secure significant
financing within the short term. Our auditors have raised the issue that we may
not be able to continue as a going concern as a result of a lack of profits. We
have used substantial amounts of working capital in our operations and have
sustained significant operating losses. As of June 30, 1999, current liabilities
exceeded current assets by approximately $200,000. Our continued operations are
dependent upon meeting short term financing requirements and long term
profitability.
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WE HAVE LIMITED CAPITAL. Being a relatively small company in a capital intensive
industry, our limited capital is a significant risk to our future profitability
and viability. We are currently seeking additional financing. We may sell
additional shares of our stock, or engage in other financing activities, in
order to provide capital that may be needed for our operations. There is no
guarantee that market conditions will permit us to do this. If we cannot secure
additional capital, our continued operation will be in jeopardy.
ADDITIONAL SHARES WILL BE AVAILABLE FOR SALE IN THE PUBLIC MARKET WHICH COULD
CAUSE THE MARKET PRICE OF OUR STOCK TO DROP SIGNIFICANTLY. We estimate that
approximately 10.7 million shares of our common stock are currently eligible for
resale under applicable securities laws. Of these shares, 2,000,000 are being
held in escrow but may be released if the closing market price of a share of the
Company's common stock is less than $5.00 on any 40 trading days during the 120
consecutive trading days subsequent to August 31, 1999. We expect, given that
the current price is less than $5.00, that all of these shares will be released
from escrow. In addition, we are currently in the process of registering the
potential resale of up to an additional 8,722,618 shares of Company common stock
into the public trading market, including 6,296,589 shares on behalf of
Frederick A. Moran and certain members of Mr. Moran's immediate family. Finally,
contractual restrictions on the resale of 750,000 shares of Company common stock
held by a trust affiliated with a former executive officer and director of the
Company will lapse in November, 1999. These expected events 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.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH OTHER LONG DISTANCE CARRIERS.
AT&T, MCI WorldCom and Sprint Corporation dominate the U.S.-based international
telecommunications services market. We also compete with Pacific Gateway
Exchange, Inc., Star Telecommunications, Inc. and other foreign and U.S.-based
long distance providers, including the Regional Bell Operating Companies, which
presently have some FCC authority to resell and terminate international
telecommunication services. Many of these competitors have considerably greater
financial and other resources and more extensive domestic and international
communications networks than we do. If we compete with them for the same
markets, their financial strength could prevent us from obtaining business
there. For example, our larger competitors could discount services to attract or
maintain customers. We may not have the financial resources to effectively
compete with them on that level. We also may compete abroad with a number of
dominant telecommunications operators that previously held various monopolies
established by law over the telecommunications traffic in their countries.
International wholesale switched service providers compete on the basis of
transmission quality, price, customer service, and breadth of service offerings.
Further, the number of our competitors is likely to increase as a result of the
competitive opportunities created by a new Basic Telecommunications Agreement
concluded by members of the WTO in April 1997. Under the terms of the WTO
agreement, starting February 5, 1998, the United States and 68 countries have
committed to open their telecommunications markets to competition, increase
foreign ownership and adopt measures to protect against anti-competitive
behavior. As a result, we believe that competition will continue to increase,
placing downward pressure on prices. Such pressure could adversely affect our
gross margins if we are not able to reduce our costs commensurate with such
price reductions.
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TECHNICAL ADVANCEMENT COULD RENDER OUR EQUIPMENT OBSOLETE. The
telecommunications industry is in a period of rapid technological evolution,
marked by the introduction of competitive product and service offerings, such as
the utilization of the Internet for international voice and data communications.
We are unable to predict which technological developments will challenge our
competitive position or the amount of expenditures that will be required to
respond to a rapidly changing technological environment. We expect that the
future will bring significant 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 in this new technology, which could
have a material adverse effect on our business, operating results and financial
condition.
CUSTOMER CONCENTRATION. A small number of customers historically have accounted
for a significant percentage of our total sales. For the year ended June 30,
1999, two customers accounted for approximately 65% of our total sales. Our
customers typically are not obligated contractually to purchase any quantity of
services in any particular period. The loss of, or a material reduction in
orders by, one or more of our key customers could have a material adverse effect
on business, financial condition and results of operations.
ONE OR MORE OF OUR CUSTOMERS COULD FAIL TO PAY US. We must assume a certain
level of credit risk with our customers in order to do business. It is possible
that one or more of our customers could fail or refuse to pay us in a timely
manner, or at all. If that happened, it could have a material adverse affect on
business, cash flow and financial condition. We try to minimize the risk by
checking the credit background of our customers. To date, we have not had
material problems with customers failing to pay us.
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.
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We are continually 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. We send follow up letters as
necessary providing our vendors a format to disclose any new discoveries.
We have conducted our investigations through a discovery process undertaken by
VDC and each of its operating subsidiaries. At the current time, we believe year
2000 risk is minimal to VDC and the following subsidiaries: Masatepe, Sky King,
VDC Hong Kong, WorldConnectTelecom.com, and Voice & Data Communications (Latin
America), Inc. The biggest risk from the year 2000 is to our subsidiary, VDC
Telecommunications. This subsidiary operates most of our software and processing
systems and is interconnected with many telecommunications service suppliers. We
will continue our efforts to minimize risk associated with VDC
Telecommunications. VDC Telecommunications produces the vast majority of our
revenues.
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. 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 the year 2000 issues 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, 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 and remedied an estimated $84,000 of expenditures associated with
updating systems to be year 2000 compliant. However, we expect we will continue
to find expenses pending the finalization of our year 2000 investigation, which
will not occur until all "trouble dates" have passed. 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.
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<PAGE>
Year 2000 problems could affect the purchasing power of our current or potential
customers if they incur significant year 2000 remediation costs or liabilities.
This could result in fewer funds available to purchase our services, which in
turn could have a material adverse effect on our business, financial condition
and results of operations.
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.
LIMITED LONG-TERM PURCHASE AND RESALE AGREEMENTS AND PRICING PRESSURES FOR
TRANSMISSION CAPACITY COULD ADVERSELY AFFECT OUR GROSS MARGINS. A substantial
portion of transmission capacity is obtained on a variable, per minute and
short-term basis, subjecting us to the possibility of unanticipated price
increases and service cancellations. Since we do not generally have long-term
arrangements for the purchase or resale of international long distance services,
and since rates fluctuate significantly over short periods of time, our gross
margins are subject to significant fluctuations over short periods of time. Our
gross margins also may be negatively impacted in the longer term by competitive
pricing pressures.
OUR ABILITY TO IMPLEMENT OUR PLAN SUCCESSFULLY IS DEPENDENT ON A FEW KEY PEOPLE.
We are particularly dependent upon Frederick A. Moran, the Chief Executive
Officer and Chief Financial Officer of the Company. Mr. Moran is also a
significant shareholder and Chairman of the Board of Directors of the Company.
The Company has an employment agreement with Mr. Moran through March 2003. We
believe the combination of his employment agreement and equity interest in the
Company keeps Mr. Moran highly motivated to remain with the Company.
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; credit risk; and technical difficulties
with or failures of portions of our network that could impact our ability to
provide service to or bill our customers.
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 FCC. The FCC requires international carriers to
obtain authorization prior to acquiring international facilities by purchase or
lease, or providing international telecommunications service to the public.
Prior FCC approval is also required, in most cases, to transfer control of
certificated carriers such as our subsidiaries. We must file certain 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
FCC policies and rules. 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 impose various
sanctions, including ordering us to discontinue such arrangements, fining us or
revoking our authorizations. Any of these actions could have a material adverse
effect on our business, operating results and financial condition.
14
<PAGE>
RECENT AND POTENTIAL FCC ACTIONS MAY ADVERSELY AFFECT OUR BUSINESS BY INCREASING
COMPETITION, DISRUPTING TRANSMISSION ARRANGEMENTS AND INCREASING COSTS.
Regulatory action that may be taken in the future by the FCC may intensify the
competition which we face, impose additional operating costs upon us, disrupt
certain of our transmission arrangements or otherwise require us to modify our
operations. Recent FCC rulemaking orders and other actions have lowered the
entry barriers for new facilities-based and resale international carriers by
streamlining the processing of new applications and granting non-dominant
carriers greater flexibility in establishing non-standard settlement
arrangements with non-dominant foreign carriers, including the non-dominant U.S.
affiliates of such carriers. In addition, the FCC's rules implementing the WTO
Agreement presume that competition will be advanced by the U.S. entry of
facilities-based and resale carriers from WTO member countries, thus further
increasing the number of potential competitors in the U.S. market and the number
of carriers which may also offer end-to-end services. The FCC has also sought to
reduce the foreign termination costs of U.S. international carriers by
prescribing maximum or benchmark settlement rates which foreign carriers may
charge U.S. carriers for terminating switched telecommunications traffic. The
FCC has not stated how it will enforce its settlement benchmarks if U.S.
carriers are unsuccessful in negotiating settlement rates at or below the
prescribed benchmarks. If the FCC implements the reduced benchmarks, our
transmission arrangements to certain countries may need to modify our existing
arrangements.
The Telecommunications Act of 1996 permits the FCC to forbear enforcement of the
tariff provisions in such act, which apply to all interstate and international
carriers, and the U.S. Court of Appeals is currently reviewing an FCC order
directing all domestic interstate carriers to de-tariff their offerings. While
the court reviews the FCC's order all international and domestic carriers must
continue to file tariffs. The FCC routinely reviews the contribution rate for
various levels of regulatory fees, including the rate for fees levied to support
universal service, which fees may be increased in the future for various
reasons, including the need to support the universal service programs mandated
by The Telecommunications Act of 1996, the total costs for which are still under
review by the FCC. We cannot predict the net effect of these or other possible
future FCC actions on our business, operating results and financial condition,
although the net effect could be material.
REGULATION OF CUSTOMERS MAY MATERIALLY ADVERSELY AFFECT OUR REVENUES BY
DECREASING THE VOLUME OF TRAFFIC WE RECEIVE FROM MAJOR CUSTOMERS. Our customers
are also subject to actions taken by domestic or foreign regulatory authorities
that may affect the ability of customers to deliver traffic to us. Future
regulatory actions could materially adversely affect the volume of traffic
received from a major customer, which could have a material adverse effect on
our business, financial condition and results of operations.
15
<PAGE>
CERTAIN OF OUR ARRANGEMENTS WITH FOREIGN OPERATORS MAY BE INCONSISTENT WITH FCC
POLICIES. The FCC's international private line resale policy limits the
conditions under which a carrier may connect international private lines to the
public switched telephone network at one or both ends to provide switched
services, commonly known as International Simple Resale. Certain of our
termination arrangements with foreign operators may be inconsistent with the
FCC's international private line resale policy and our existing FCC
authorizations. In summary, a carrier generally may only offer International
Simple Resale services to a foreign country if the FCC has found (a) the country
is a member of the WTO and at least 50% of the U.S. billed and settled traffic
to that country is settled at or below the FCC's benchmark settlement rate or
(b) the country is not a WTO member, but it offers U.S. carriers equivalent
opportunities to engage in International Simple Resale and at least 50% of the
U.S. billed and settled traffic is settled at or below the applicable benchmark.
However, in connection with its changes to its International Settlements Policy,
the FCC now permits U.S. private line resellers to enter into International
Simple Resale arrangements with non-dominant carriers on any route.
The FCC's International Settlements Policy limits the arrangements which U.S.
international carriers may enter into with foreign carriers for exchanging
public switched telecommunications traffic, which the FCC terms International
Message Telephone Service. This policy does not apply to International Simple
Resale services. The International Settlements Policy requires that U.S.
carriers receive an equal share of the service rate and receive inbound traffic
in proportion to the volume of U.S. outbound traffic, which they generate. The
International Settlements Policy and other FCC policies also prohibit a U.S.
carrier and a foreign carrier which possesses sufficient market power on the
foreign end of the route to affect competition adversely in the U.S. market by
entering into an exclusive arrangement involving services, facilities or
functions on the foreign end of a U.S. international route which are necessary
for providing basic telecommunications and which are not offered to similarly
situated U.S. carriers. It is possible that the FCC could find that certain of
our arrangements with foreign operators are inconsistent with the International
Settlements Policy.
We may use both transit and refile arrangements, which provide indirect
termination service through an alternative location, to terminate our
international traffic. The FCC currently permits transit arrangements by U.S.
international carriers. The FCC's rules also permit carriers in many cases to
use International Simple Resale facilities to route traffic via a third country
for refile through the public switched telephone network. The extent to which
U.S. carriers may enter into refile arrangements consistent with the
International Settlements Policy is currently under review by the FCC. Certain
transit or refile arrangements may violate the International Settlements Policy
or other FCC rules, regulations or policies.
16
<PAGE>
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. Moreover, our international operations are subject to the Foreign
Corrupt Practices Act ("FCPA"), which generally prohibits U.S. companies and
their intermediaries from bribing foreign officials for the purpose of obtaining
or keeping business. Failure by our agents, strategic partners and other
intermediaries, whether past or future, to comply with the FCPA could result in
our facing liability. 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.
International sales are subject to inherent risks, including:
(1) unexpected changes in regulatory requirements, tariffs or
other barriers;
(2) difficulties in staffing and managing foreign operations;
(3) longer payment cycles;
(4) unstable political environments;
(5) dependence on foreign partners;
(6) greater difficulty in accounts receivable collection; and
(7) potentially adverse tax consequences.
We may rely on foreign partners to terminate traffic in foreign countries and to
assist in installing transmission facilities and network switches, complying
with local regulations, obtaining required licenses and assisting with customer
and vendor relationships. We may have limited recourse if our foreign partners
do not perform under their contractual arrangements. Our arrangements with
foreign partners may expose us to significant legal, regulatory or economic
risks over which we may have little control.
WE MAY LOSE REVENUE OR INCUR ADDITIONAL COSTS BECAUSE OF NETWORK FAILURE. Any
system or network failure that causes interruptions in our operations could have
a material adverse effect on our business, financial condition or results of
operations. Our services are dependent on our own and other companies' abilities
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 may negatively affect our
customers' service and/or our ability to accurately bill our customers for
services. Our hardware and other equipment may also suffer 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.
17
<PAGE>
GOVERNMENT REGULATORY POLICIES MAY INCREASE PRICING PRESSURES IN OUR INDUSTRY.
We expect that government regulatory policies are likely to continue to have a
major impact on the pricing of network services and possibly accelerate the
entrance of new competitors and consolidation of the industry. These trends may
affect demand for such services. Tariff rates, whether determined autonomously
by telecommunications service providers or in response to regulatory directives,
may affect the cost effectiveness of deploying network services. Tariff policies
are under continuous review and are subject to change. User uncertainty
regarding future policies may also negatively affect demand for our services.
OUR COST OF SERVICES AND OPERATING EXPENSES MAY FLUCTUATE SIGNIFICANTLY. Our
cost of services and operating expenses in any given period can vary due to
factors including, but not limited to:
(1) fluctuations in rates charged by carriers to terminate our
telecommunications traffic;
(2) increases in bad debt expense and reserves;
(3) the timing of capital expenditures and other costs associated
with acquiring or obtaining other rights to switching and
other transmission facilities;
(4) costs associated with changes in staffing levels of sales,
marketing, technical support and administrative personnel;
(5) changes in routing due to variations in the quality of vendor
transmission capability;
(6) loss of favorable routing options;
(7) actions by domestic or foreign regulatory entities;
(8) financial difficulties of major customers;
18
<PAGE>
(9) pricing pressure resulting from increased competition;
(10) the level, timing and pace of our expansion in international
and commercial markets; and
(11) general domestic and international economic and political
conditions.
WE MAY NOT BE ABLE TO CONTINUE TO OBTAIN SUFFICIENT TRANSMISSION FACILITIES ON A
COST-EFFECTIVE BASIS. The failure to obtain telecommunications facilities that
are sufficient to support our network traffic in a manner that ensures the
reliability and quality of our telecommunications services may have a material
adverse effect on our business, financial condition or results of operations.
Our business depends in part, on our ability to obtain transmission facilities
on a cost-effective basis.
FOREIGN GOVERNMENTS MAY NOT PROVIDE US WITH PRACTICAL OPPORTUNITIES TO COMPETE
IN THEIR TELECOMMUNICATIONS MARKETS. We may be subject to regulation in foreign
countries in connection with certain of our business activities. For example,
laws or regulations in either the transmitting or terminating foreign
jurisdiction may affect our use of transit, resale or other routing
arrangements. In addition, our operations may be affected by foreign countries,
either independently or jointly as members of national organizations such as the
World Trade Organization ("WTO"), may have adopted or may adopt laws or
regulatory requirements regarding such services for which compliance would be
difficult or expensive and that could force us to choose less cost-effective
routing alternatives and that could adversely affect our business, operating
results and financial condition. To the extent that we seek to provide
telecommunications services in other non-U.S. markets, we are subject to the
developing laws and regulations governing the competitive provision of
telecommunications services in those markets. We currently plan to expand our
operations as these markets implement scheduled liberalization to permit
competition in the full range of telecommunications services in the next several
years. The nature, extent and timing of the opportunity for us to compete in
these markets will be determined, in part, by the actions taken by the
governments in these countries to implement competition and the response of
incumbent carriers to these efforts. The regulatory regimes in these countries
may not provide us with practical opportunities to compete in the near future,
or at all, and we may not be able to take advantage of any such liberalization
in a timely manner.
Governments of many countries exercise substantial influence over various
aspects of their countries' telecommunications markets. In some cases, the
government owns or controls companies that are or may become competitors with us
and/or our partners, such as national telephone companies, upon which our
foreign partners may depend for required interconnections to local telephone
networks and other services. Certain actions of these foreign governments could
have a material adverse effect on our operations. In highly regulated countries
in which we are not dealing directly with the dominant local exchange carrier,
the dominant carrier may have the ability to terminate service to us or our
foreign partner and, if this occurs, we may have limited or no recourse. In
countries where competition is not yet fully established and we are dealing with
an alternative operator, foreign laws may prohibit or impede new operators from
offering services.
19
<PAGE>
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, the gain or loss of significant customers, general trends in the
industry, market conditions, analysts' estimates, proprietary rights,
significant litigation, and other events in our industry, may have a significant
impact on the market price of our stock. In addition, the stock market has
experienced extreme price and volume fluctuations that have particularly
affected the market price for many technology and telecommunications companies
and that have often been unrelated to the operating performance of these
companies. These broad market fluctuations may adversely affect the market price
of our common stock.
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, even if
such transactions would be beneficial to our shareholders. 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.
RISK OF IMPAIRMENT OF SIGNIFICANT ASSET. We own a minority interest in a private
company, Metromedia China Corporation ("MCC"), that constitutes one of our
principal assets. As of June 30, 1999, the carrying value of our ownership
interest in MCC equaled $2.4 million, or approximately 24% of our total assets
of approximately $10 million as of that date. 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 Internet and telecommunications markets
and/or other factors. Furthermore, changes in governmental policy towards
foreign investment in China could also adversely affect the value of our
investment. MCC has recently been notified that the supervisory departments of
the Chinese government had requested MCC's local Chinese partner to terminate
two of its four telecommunications joint ventures. MCC expects that the
remaining two joint ventures will also be terminated due to regulatory policies
of the Chinese government.
20
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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
telecommunications equipment to Masacom. This equipment is located in Nicaragua.
The recoverability of our loans and equipment is not assured. As of the date of
this filing, there are no services being provided by Masatepe. As a result, we
have written off the goodwill associated with the Masatepe acquisition and
operating equipment located in Nicaragua.
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.
ITEM 2. DESCRIPTION OF PROPERTIES
Our 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 a subsidiary are
located. This office is leased from an unaffiliated third party pursuant to a
five-year agreement at an annual rental of approximately $95,000.
We also lease a total 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 a combined
annual rental of approximately $199,000. 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.
ITEM 3. LEGAL PROCEEDINGS
Worldstar Suit
On or about July 30, 1999, Worldstar Communications Corporation ("Worldstar")
commenced an action in the Supreme Court of New York entitled Worldstar
Communications Corporation v. Lindemann Capital L.P., Activated Communications,
L.P., Marc Graubart, Michael Mazzone, VDC Corporation and ING Baring Furman
Selz, LLC (Index No. 603621/99) (the "Action"). Worldstar asserts in the Action
that, under the terms of a purported joint venture arrangement with Lindemann
Capital LP ("Lindemann") and Activated Communications, LP ("Activated"),
Worldstar acquired certain rights to share in the profits and ownership of a
telecommunications project in Nicaragua (the "Nicaraguan Project") owned by
Masatepe Comunicaciones S.A., a Nicaraguan company ("Masacom"). Masatepe
Communications U.S.A., L.L.C. ("Masatepe"), which owns a 49% equity interest in
Masacom, was acquired by the Company and is now a wholly-owned subsidiary of the
Company. The relief sought by Worldstar includes: (1) monetary damages arising
out of purported interference with Worldstar's profit participation and
ownership in the Nicaraguan Project and (2) a declaratory judgment that among
other things: (a) Worldstar is entitled to share in the profits and ownership of
the Nicaraguan Project; and (b) the transaction pursuant to which the Company
acquired an interest in the Nicaraguan Project was void.
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In the event that the plaintiff prevails in the Action, the value of the
Company's interest in Masatepe, Masacom and/or the Nicaraguan Project could be
diluted. Additionally, the Company could be held liable for certain profits
associated with the operation of Masatepe and/or the Nicaraguan Project and for
related damages. However, pursuant to the Purchase Agreement through which the
Company acquired Masatepe (the "Purchase Agreement"), Activated has an
obligation to indemnify and hold the Company and Masatepe harmless from any
loss, liability, claim, damage and expense arising out or resulting from the
Action. In addition, under certain circumstances, Activated has an obligation
under the Purchase Agreement to repurchase from the Company all or part of the
Company's equity interest in Masatepe. Furthermore, defendants are vigorously
defending the Action and certain of the defendants including the Company, have
filed a Motion to Dismiss. In view of the foregoing, the Company does not
believe that the claims asserted in the Action will have a material adverse
effect on the Company's assets or operations.
StarCom Suit
On or about July 12, 1999, StarCom Telecom, Inc. ("StarCom") commenced an action
in the District Court of Harris County, Texas, in the 127th Judicial District
entitled StarCom Telecom, Inc. vs. VDC Communications, Inc. (Civil Action No.
1999-35578) (the "StarCom Action"). StarCom asserts in the StarCom Action that
the Company induced it to enter into an agreement with the Company through
various purported misrepresentations. StarCom alleges that, due to these
purported misrepresentations and purported breaches of contract, it has been
unable to provide services to its customers. The relief sought by StarCom
includes monetary damages arising out of the Company's purported
misrepresentations and purported breaches of contract. In the event that StarCom
prevails in the StarCom Action, the Company could be liable for monetary damages
in an amount that would have a material adverse effect on the Company's assets
and operations.
The Company does not believe that the claims asserted in the StarCom Action are
either meritorious or will have a material adverse effect on the Company's
assets or operations. To date, despite the fact that the StarCom Action was
filed over two months ago, opposing counsel in the StarCom Action has refused to
have the Company served with process because opposing counsel has represented to
the Company that it is still investigating the facts underlying the StarCom
Action. Moreover, opposing counsel has also filed a Motion to Withdraw as
Attorney in Charge of the StarCom Action. Finally, based on a review on the
documents and evidence available to date, there does not appear to be a factual
basis for StarCom's claims. The complaint does not identify with any specificity
the contract that the Company has purportedly breached and is very general about
the representations that were purportedly made. In the event that the Company is
served in the StarCom Action, it intends to vigorously defend itself.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock has traded on the American Stock Exchange, Inc.
("AMEX") since July 7, 1998 under the trading symbol "VDC". Commencing in 1993
until November 26, 1997, the Company's common stock traded on The NASDAQ Small
Cap 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 $4.13
Second Quarter $4.50 $3.50
Third Quarter $5.63 $3.63
Fourth Quarter $4.00 $2.88
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 $7.38
Second Quarter $7.88 $5.00
Third Quarter $6.50 $5.00
Fourth Quarter $5.25 $3.00
</TABLE>
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On September 14, 1999, the closing price for the Company's common stock on AMEX
was $2.00 per share.
The high and low bid and closing prices for the Company's common stock are
rounded to the nearest 1/8th. Such prices are inter-dealer prices without retail
mark-ups or commissions and may not represent actual transactions.
Dividends
The Company has not paid any cash dividends to date and has no intention of
paying any cash dividends on its common stock in the foreseeable future. The
declaration and payment of dividends is subject to the discretion of the Board
of Directors and to certain limitations under the General Corporation Law of the
State of Delaware. The timing, amount and form of dividends, if any, will
depend, among other things, on VDC's results of operations, financial condition,
cash requirements and other factors deemed relevant by the Board of Directors.
Holders
As of September 14, 1999, the approximate number of holders of record of the
Company's common stock was 668. The Company believes the number of beneficial
owners of the common stock exceeds 1,500.
Recent Sales of Unregistered Securities
In May 1999, the Company sold 1,265,947 shares of Company common stock and
granted warrants to purchase 121,035 shares of Company common stock to
accredited investors in a non-public offering exempt from registration pursuant
to Section 4(2) and Rule 506 of Regulation D of the Securities Act of 1933 (the
"Act") as follows:
<TABLE>
<CAPTION>
Shareholder Number of Shares Consideration ($) 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
Eshman Living Trust dated 9/24/90 20,000 54,000.00 2,000
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 3,502,508.40 121,035
</TABLE>
24
<PAGE>
(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 the private placement.
(3) Includes warrants to purchase 27,777 shares granted in consideration
for consulting services rendered in connection with the 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"), an accredited investor,
in consideration for investment banking services rendered by ING. 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 to Marc Graubart and 18,250 shares of
Company common stock to Tab K. Rosenfeld, both accredited investors, 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 to 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") to insure compliance with the terms of the Release Agreement.
In connection with the Company's acquisition of Sky King Connecticut, the
Company agreed to issue an aggregate of 444,852 shares of Company common stock
as an investment banking fee, in a non-public offering exempt from registration
pursuant to Section 4(2) and Rule 506 of Regulation D of the Act, to SPH
Equities Inc. ("SPH Equities"), KAB Investments Inc. ("KAB"), FAC Enterprises,
Inc. ("FAC"), and SPH Investments Inc. ("SPH Investments"), all of which are
accredited investors, subject to certain conditions (the "Investment Banking
Shares"). In partial satisfaction of this obligation, on December 22, 1998, the
Company issued an aggregate 240,000 shares of Company common stock as follows:
129,852 shares to FAC, 70,000 shares of Company common stock to SPH Investments,
and 40,148 shares of Company common stock to SPH Equities. On February 16, 1999,
in further satisfaction of this commitment, the Company issued 19,852 shares of
Company common stock to SPH Equities and 30,148 shares of Company common stock
to KAB.
25
<PAGE>
On December 23, 1998, the Company sold 245,159 shares of Company common stock,
to accredited investors consisting of 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 &
Anne Moran 41,380 $3.625
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"), both accredited
investors, 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.
26
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA.
The following selected consolidated financial data as of and for each of the
period(s) ended June 30, 1999, 1998, 1997 and 1996 have been derived from the
audited consolidated Financial Statements of the Company. Since, as a result of
the March 6, 1998 merger, 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 was, for periods prior to March 6,
1998, viewed as the continuing entity and the related business combination was
viewed as a recapitalization of Sky King Connecticut, rather than an acquisition
by VDC Bermuda. The financial data presented below, for accounting purposes,
reflects the relevant Statement of Operations data and Balance Sheet of Sky King
Connecticut for periods 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 VDC, was
consummated. The Domestication Merger has been accounted for as a
reorganization, which has been given retroactive effect in the financial
statements for all periods presented. 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.
27
<PAGE>
<TABLE>
<CAPTION>
Period from
January 3, 1996
(inception) through Years ended
-------------------------------------------
June 30, 1996 June 30, 1997 June 30, 1998 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
revenues .................................... $ 4,850 $ 43,248 $ 99,957 $ 3,298,357
cost of services ............................ 1,091 22,020 28,460 5,155,752
selling, general and administrative ......... 30,461 53,657 1,167,429 4,636,230
non-cash compensation ....................... 0 - 2,254,000 16,146,000
asset impairment charges .................... 0 - - 1,644,385
--------- --------- --------- ---------
operating (loss) (1)......................... (26,702) (32,429) (3,349,932) (24,284,010)
operating (loss) per common share ........... (0.01) (0.01) (0.76) (1.37)
(loss) on impairment-MCC .................... (21,328,641)
(loss) on note restructuring ................ -- -- -- (1,598,425)
other income (expense) ...................... -- -- 195,122 (63,637)
equity in (loss) of affiliate ............... -- -- -- (867,645)
--------
net loss .................................... $ (26,702) $ (32,429) $ (3,154,810) $(48,142,358)
============ ============ ============ ============
net loss per common share-basic and diluted(2) $ (0.01) $ (0.01) $ (0.72) $ (2.72)
weighted average shares outstanding ......... 3,699,838 3,699,838 4,390,423 17,678,045
--------- --------- --------- ----------
Balance Sheet data:
investment in MCC ........................... $ -- $ -- $ 37,790,877 $ 2,400,000
------------ ------------ ------------ ------------
total assets ................................ $ 16,499 $ 15,000 $ 45,823,684 $ 10,002,061
------------ ------------ ------------ ------------
long-term liabilities, net of current portion $ -- $ -- $ -- $ 847,334
------------ ------------ ------------ ------------
stockholders' equity ........................ $ 16,249 $ 14,750 $ 45,667,499 $ 6,567,532
------------ ------------ ------------ ------------
Other Operating data:
EBITDA - Adjusted (3)........................ $ (25,162) $ (29,039) $ (1,089,726) $ (5,386,607)
------------ ------------ ------------ ------------
Cash flows used by operating activities ..... $ (25,378) $ (28,573) $ (859,390) $ (4,253,532)
------------ ------------ ------------ ------------
Cash flow used in investing activities ...... $ -- $ -- $ (3,201,433) $ (2,492,484)
------------ ------------ ------------ ------------
Cash flow from financing activities ......... $ 27,551 $ 27,830 $ 6,271,504 $ 4,851,704
------------ ------------ ------------ ------------
Minutes of Use .............................. -- -- -- 12,155,801
----------
Revenue per Minute of Use ................... $ -- $ -- $ -- $ 0.225
------------ ---------- ---------- ------------
</TABLE>
28
<PAGE>
(1) The loss from operations of $24,284,010 and $3,349,932
incurred during the years ended June 30, 1999 and 1998,
respectively, is primarily attributable to non-cash
compensation of $16,146,000 and $2,254,000, respectively (See
Note 4 to the consolidated financial statements) and selling,
general and administrative expenses.
(2) Diluted net loss per share does not reflect the inclusion of
common share equivalents which would be antidilutive.
(3) EBITDA-Adjusted represents earnings (losses) before interest
expense, income taxes, depreciation, amortization, other
income (expense) and non-recurring charges including non-cash
compensation and asset impairment charges. 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.
29
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
As used in this document, the terms "the Company", "we" and "us" include both
VDC and VDC Bermuda. The use of these terms reflects the fact that through
November 6, 1998, the publicly held company was VDC Bermuda. Thereafter, due to
the Domestication Merger, the publicly held company was VDC. We own
telecommunications equipment and lease 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 anticipate
offering our services directly to retail customers in addition to our current
wholesale customers. We currently employ state-of-the-art digital switching and
transmission technology. This equipment, located in New York, Los Angeles, and
Denver comprises our operating 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 for growth 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 goal, 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.
During these pre-operating phases we focused upon: fund raising; developing a
strategic business plan; purchasing telecommunications switches; developing
corporate infrastructure; and developing and commencing marketing programs.
Effectively, operations began when our telecommunications network was activated
and our marketing efforts commenced in January 1999. Since then we have had
modest success generating traffic over our infrastructure.
During the past year, we have made significant advancements in our strategic
business plan. Some of the more important events in our short history include:
30
<PAGE>
(1) listed on the American Stock Exchange in July 1998;
(2) completed Domestication Merger in November 1998, thereby
domesticating the publicly held company in Delaware, United
States;
(3) added three members to the Board of Directors, all of whom
were previously independent of the Company;
(4) completed initial facilities and network development;
(5) started marketing world-wide network January 1, 1999;
(6) raised additional funds of approximately $4.3 million;
(7) wrote-down investment in Metromedia China Corporation; and
(8) revenues increased from an approximate run rate of
$175,000/month at mid-fiscal year to an approximate run rate
of $725,000/month at fiscal year end.
While we also made significant inroads in the telecommunications business in
Central America in the past year, during the quarter ended June 30, 1999, we
cancelled our circuit into Central America and curtailed the operations of our
Masatepe subsidiary. The practical effect of this cancellation is that Masatepe
no longer operates its owned telecommunications route to Central America. It is
possible that Masatepe may develop other routes or restart its Central American
route. We are currently terminating a similar volume of traffic in Central
America through the use of our international network. Moreover, additional
opportunities in Central America are currently being explored through Voice &
Data Communications (Latin America), Inc., a subsidiary of the Company.
We earn revenue from three sources. The main source is from our domestic and
international telecommunications long distance services which is earned based on
the number of minutes billable to our customers, which are other telephone
companies. These minutes are generally billed on a 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. Wholesale telecommunications
services such as long distance, international long distance, and switching
equipment and capacity rental represented approximately 97% of our revenues
during the year ended June 30, 1999 ("Fiscal 1999"). Additionally, we derive
minimal revenues from the management of domestic tower sites that provide
transmission and receiver locations for wireless communications companies. This
revenue is also generated and billed on a month-to-month basis. Revenue from
site tower management represents approximately 3% of our total revenues during
Fiscal 1999.
31
<PAGE>
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 generally be amended with
a few days notice.
Costs of services include:
(1) terminating domestic long distance traffic in the United States;
(2) terminating overseas-originated traffic in the United States and
internationally; and
(3) 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, our costs of services include:
(4) fixed monthly expenses for capacity on a fiber optic backbone
across the United States;
(5) the allocable personnel and overhead associated with operations;
and,
(6) depreciation of telecommunications equipment. We depreciate long
distance telecommunications over a period of five years.
Our costs also include selling, general, and administrative expenses ("SG&A").
SG&A consists primarily of personnel costs, professional fees, travel, office
rental and business development related costs. We incur costs on a regular basis
associated with international market research and due diligence regarding
potential projects inside and 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 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 majority of the infrastructure and personnel
necessary to achieve this are currently in place.
32
<PAGE>
Background
VDC Communications, Inc. ("VDC") is the successor to its 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 VDC. 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 VDC, $.0001 par value per share,
were converted, on a one-for-one basis, into an aggregate 20,298,362 shares of
common stock of VDC. The Domestication Merger has been accounted for as a
reorganization which has been given retroactive effect in the financial
statements for all periods presented.
The Domestication Merger reflects the completion of a series of transactions
that commenced on March 6, 1998, when VDC (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 March 6, 1998 merger.
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 the year ended June 30, 1997 ("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 VDC
Bermuda 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
VDC Bermuda's attributes as a public corporation.
33
<PAGE>
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.
Results of Operations
For the Year-Ended June 30, 1999 Compared to the Year-Ended June 30, 1998
Revenues: Total revenues in the year ended June 30, 1999 ("Fiscal 1999")
increased to approximately $3.3 million from approximately $100,000 for the year
ended June 30, 1998 ("Fiscal 1998" or "corresponding prior year period"). This
is the initial result of the implementation of our telecommunications services.
During Fiscal 1999, our international network for telecommunications services
became operational and commercial. During the latter months of Fiscal 1999, we
experienced a steady increase in minutes of usage of telecommunications services
as customers came on line and began utilizing our services. Revenues were
generated during the period by the transmission of minutes domestically and
internationally, the rental of telecommunications facilities, and tower
management. Revenue for the corresponding prior year period was attributable to
tower management and consulting.
Costs of services: Costs of services of approximately $5.2 million during Fiscal
1999 were the result of a combination of per minute fees and leased line fees
associated with the traffic carried in the period, salaries, depreciation of
telecommunications equipment, and other operating expenses. Costs of services of
approximately $28,500 for the corresponding prior year period reflected site
leasing expenses.
Selling, general & administrative: SG&A expenses increased to approximately $4.6
million during Fiscal 1999 from approximately $1.2 million for the corresponding
prior year period. This increase was attributable to:
(1) an overall increase in operational and corporate activity,
including salaries and development costs necessary for the
development and operation of new telecommunications services,
including our telecommunications infrastructure;
(2) professional fees, including consulting, legal and accounting
expenses associated with the redeployment of our assets;
(3) amortization of approximately $500,000 associated with the
acquisition of Masatepe; and
34
<PAGE>
(4) non-recurring items: one-time write-off related to the
purchase of a telecommunications route of $135,000 and
non-cash severance expense totaling $391,875.
Had the non-recurring items not occurred during the period, SG&A expenses would
have been approximately $4.1 million for Fiscal 1999. 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, or as mergers and
acquisitions are completed, or if we fail to accurately estimate future
expenses, SG&A could increase significantly.
Non-cash Compensation Expense: Non-cash compensation expense was $16,146,000 for
Fiscal 1999 compared to $2,254,000 for the corresponding prior year period.
During Fiscal 1999, 3.9 million shares of VDC's Series B convertible preferred
stock ("Escrow Shares"), were released from escrow based upon the achievement of
performance criteria which includes the deployment of telecommunications
equipment in service areas with an aggregate population of greater than 3.9
million. Of the 3.9 million Escrow Shares released, 2.7 million were considered
compensatory for accounting purposes. These compensatory shares were owned by
management, their family trusts, minor children of management and an employee.
The shares issued to former Sky King Connecticut shareholders' minor children
were considered compensatory because their beneficial ownership was attributed
to certain Sky King Connecticut shareholders in management positions with the
Company. The non-cash expense reflected on our financial statements was
developed based on the deemed value of the shares released from escrow, which in
turn, was based on the trading price of VDC's common stock on the date of
release. During Fiscal 1998, 600,000 shares of Series B convertible 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 of Series B convertible preferred stock released from escrow,
415,084 were considered compensatory for accounting purposes. These compensatory
shares were owned by management, their family trusts, minor children of
management, and an employee. The non-cash compensation 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 VDC Bermuda's common stock on the date of release.
Asset impairment charges: We incurred approximately $1.6 million in asset
impairment charges during Fiscal 1999. These charges relate to the write off of
billing software ($479,000), the write off of fixed assets ($503,000) in
Nicaragua and write off of goodwill ($661,824) related to the Masatepe
subsidiary. The acquisition of Masatepe was made primarily because of the
continued relationship Masatepe's affiliate, Masatepe Comunicaciones, S.A.
("Masacom"), had with ENITEL, the Nicaraguan government controlled
telecommunications company. Disagreements over business development arose
between Masatepe and Masacom. As a result, we cancelled our circuit into Central
America and curtailed Masatepe's operations. Masatepe no longer operates its
owned telecommunications route to Central America. Therefore, we believe that
the goodwill attributable to the Masatepe acquisition has been permanently
impaired. There were no asset impairment charges in Fiscal 1998.
35
<PAGE>
Other income (expense): Other income (expense) was approximately $(23.0) million
for Fiscal 1999 compared with approximately $195,000 for the corresponding prior
year period. The other expense was mostly due to a non-cash charge of $(21.3)
million attributable to a writedown of our ownership interest in MCC and a
$(1.6) million loss on restructuring of notes receivable during Fiscal 1999.
Other income during Fiscal 1998 was attributable to interest and dividend
income. See "LIQUIDITY AND CAPITAL RESOURCES".
Net loss: Our net loss for Fiscal 1999 was approximately $48.1 million. The net
loss was primarily the result of non-cash charges, separate and apart from our
ongoing core operations. The write down of our investment in MCC accounted for
approximately $21.3 million of the loss. Non-cash compensation accounted for an
additional $16.1 million of the loss. These items did not affect our liquidity.
On an operating cash basis, we experienced a loss of approximately $5.0 million
during Fiscal 1999. Losses on an operating cash basis represent cash flows from
operations excluding changes in operating assets and liabilities. Our net loss
for the corresponding prior year period was approximately $3.2 million. The
Fiscal 1998 net loss was mostly attributable to a non-cash compensation charge
and SG&A expenses. On an operating cash basis, we experienced a loss of
approximately $0.9 million during Fiscal 1998.
We expect that future profitability is likely to depend upon a combination of
several factors:
(1) the continued increase in the market for international
telecommunications services;
(2) the anticipated increase in the competitiveness of our product;
and
(3) management of growth.
There are many other factors that could also have an impact.
For the Year Ended June 30, 1998, Compared to the Year Ended June 30, 1997
Revenues: Total revenues increased to approximately $100,000 in 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.
Costs of services: Costs of services during Fiscal 1998 and Fiscal 1997
consisted of site leasing expense. Site leasing expense increased to
approximately $28,000 in Fiscal 1998 from approximately $22,000 in Fiscal 1997.
The increase was due to an increase in radio tower and antenna space rentals.
36
<PAGE>
Selling, general & administrative: Selling, general and administrative expenses
increased to approximately $1.2 million in Fiscal 1998 from approximately
$54,000 in Fiscal 1997. This increase was primarily attributable to professional
fees, including consulting, legal and accounting expenses associated with the
redeployment of our assets and salaries of new personnel necessary for our
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
Series B convertible 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 of Series B convertible
preferred stock released, 415,084 were considered compensatory. These
compensatory shares were owned by management, their family trusts, minor
children, and an employee. The shares issued to former Sky King Connecticut
shareholders' minor children were considered compensatory because their
beneficial ownership was attributed to certain Sky King Connecticut
shareholders. 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.
Liquidity and Capital Resources
Our auditors have raised the issue that we may not be able to continue as a
going concern as a result of a lack of profits. 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 may occur as a result of such programs. As a
result, our liquidity and capital resources have diminished significantly.
Liquidity and capital resources could improve within the short term by a
combination of any one or more of the following factors: (i) an increase in
revenues and gross profit from operations; and (ii) financing activities.
An inability to generate cash from either of these factors within the short term
could adversely affect our operations and plans for future growth. If these
issues are not addressed, we may have to materially reduce the size and scope of
our overhead and planned operations.
In September 1999, Frederick A. Moran, a director and officer of the Company,
transferred personal funds totaling $80,000 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 September 24, 1999. The
promissory note is due on September 24, 2000 and provides for an interest rate
of eight percent (8%) per annum.
For our most recent quarter, we lost approximately $350,000 per month on an
operating cash basis. Based on ongoing cost cutting and related efforts, we
anticipate that we will lose between approximately $250,000 and $300,000 per
month on an operating cash basis in the short term. If we are unable to
supplement our operations with outside funding, our operations may have to be
modified and our business may be in jeopardy of bankruptcy. We are exploring
financing and other alternatives and are developing our operations in order to
increase our liquidity and capital resources. Some of our potential financing
alternatives and operational developments include: (i) a loan using our
telecommunications equipment as collateral; (ii) equity financing; (iii) an
increase in revenues and gross profit through the initiation of services for new
customers and/or increases in capacity available to existing customers; (iv) we
are attempting to develop direct telecommunications routes which, once
operational, could help liquidity by increasing revenues and gross profit; and
(v) reducing SG&A and/or other cost cutting measures. There are no assurances,
however, that any of these different possibilities, which could positively
impact liquidity, will occur.
37
<PAGE>
We are currently contemplating capital expenditures of approximately $750,000
during fiscal 2000. The capital expenditures represent telecommunications
equipment that could potentially be located in foreign countries. Our expected
sources of funds include debt and/or equity fund raising and cash flow from
operations.
Net cash used in operating activities was approximately $(4.3) million for
Fiscal 1999. We collected approximately $2.0 million from customers while paying
approximately $6.3 million to capital equipment vendors, carriers and other
vendors and employees. Net cash used by operating activities of approximately
$(0.9) million for the year ended June 30, 1998 was mostly due to the net loss
from operations net of a non-cash compensation charge. Net cash used of
$(28,573) for the year ended June 30, 1997 was mostly due to the net loss.
Net cash used by investing activities was approximately $(2.5) million for
Fiscal 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, Masacom. Cash flows from
investing activities included the collection of notes receivable and the return
of escrow funds in connection with the investment in MCC. Net cash used by
investing activities was approximately $(3.2) million for the year ended June
30, 1998. This was primarily the result of the investment in MCC, fixed asset
acquisitions and deposits on the purchase of fixed assets offset by the
collection of notes receivable. There were no cash flows from investing
activities for the year ended June 30, 1997.
Cash provided by financing activities was approximately $4.9 million for Fiscal
1999. This reflects proceeds primarily from the issuance of 1,511,106 shares of
VDC common stock, including 573,329 shares of VDC 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 the issuance of short-term debt less
repayments of debt and capital lease obligations. The funds were used mostly for
working capital and capital expenditures. Proceeds provided by financing
activities of approximately $6.3 million for Fiscal 1998 were solely from the
issuance of common stock and were used to fund operations and capital expenses.
Fiscal 1997 proceeds reflect capital contributions by the owners of Sky King
Connecticut and were used to fund operations.
38
<PAGE>
We are currently funding operations through existing cash and accounts
receivable collections. 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 and strategic alternatives.
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 will 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 telecommunications company. We have held this asset for over one year.
We originally valued the asset based on the value of our shares and cash
exchanged for the investment. 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 not attributed a value to the warrants.
MCC operates joint ventures in China. Metromedia International Group ("MMG") is
the majority owner of MCC. 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.
Based on MMG's Form 10-Q for its quarter ended June 30, 1999 ("June 10-Q"), two
of the four joint ventures (the one Ningbo Ya Mei Telecommunications Co., Ltd.
and the other Ningbo Ya Lian Telecommunications Co., Ltd.) were notified by
China Unicom that the supervisory department of the Chinese government had
requested that China Unicom terminate the projects. The notification requested
that negotiations begin immediately regarding the amounts to be paid to the
joint ventures, including return of investment made and appropriate compensation
and other matters related to winding up the Ningbo joint ventures' activities as
a result of this notice. Negotiations regarding the termination have begun. The
content of the negotiations includes determining the investment principal of the
joint ventures, appropriate compensation and other matters related to
termination of contracts. MCC cannot currently determine the amount of
compensation the joint ventures will receive. While MCC has not received
notification regarding the termination of its other two joint ventures (the one
Sichuan Tai Li Feng Telecommunications Co., Ltd. and the other Chongqing Tai Le
Feng Telecommunications Co., Ltd.), the majority owner, MMG, expects that these
will also be the subject of project termination negotiations. MMG has disclosed
in its June 10-Q that depending on the amount of compensation it receives, it
will record a non-cash charge equal to the difference between the sum of the
carrying values of its investment and advances made to joint ventures plus
goodwill less the cash compensation it receives from the joint ventures which
China Unicom has paid.
39
<PAGE>
MMG has represented to us that it owns approximately 33 million MCC shares, or
56% (33 million/59 million shares). As such, our 2 million shares represents
approximately a 3.4% interest (2 million/59 million shares).
Prior to the project termination agreements, there had 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. As a result,
we recorded a $19,388,641 writedown of the investment in MCC during the quarter
ended March 31, 1999. The write-down adjusted the carrying value of the
investment in MCC to an amount relative to MMG's carrying amount. Due to the
recent announcement of the project terminations described above, we recorded an
additional $1,940,000 writedown of the investment in MCC. The write-down
adjusted the carrying value of the investment in MCC to an amount relative to
MMG's carrying amount, excluding MMG's goodwill attributable to the investment
in MCC. As such, we adjusted the carrying value of our investment in MCC to $2.4
million ($70.8 million X 3.4%) at June 30, 1999. Given the uncertainty regarding
the outcome of the negotiations of the project terminations, it is reasonably
possible that our investment in MCC could be reduced further in the near term.
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.
The Year 2000 Readiness Disclosure
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.
40
<PAGE>
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 us. Most major domestic carriers
have announced that they expect all of their network and support systems to be
year 2000 functional by the middle of 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 and remedied
$84,000 worth 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. We have not made an
estimate of what those additional expenditures might be. Although, we do expect
they will be less than the initial $84,000. We believe there is significant risk
in that 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 and therefore, a material adverse effect on
business financial condition and results.
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.
We do not have a completed contingency plan. However, in order to handle our
perceived worst case scenario, we believe we would have to test alternative
routing options and possibly re-route significant amounts of telecommunications
traffic. Re-routing to certain destinations may not be readily available. We
anticipate having our year 2000 compliance procedures completed prior to the end
of calendar 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are currently not exposed to material future earnings or cash flow exposures
from changes in interest rates on long-term debt obligations since our capital
lease obligations are at fixed rates. The only debt we currently have is in the
form of long term equipment leases. 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.
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Our 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.
ITEM 8. FINANCIAL STATEMENTS
The information required by this Item is found immediately following the
signature page of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL STATEMENT DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
The directors and executive officers of the Company are listed below.
<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) 57 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>
42
<PAGE>
(1) Member of Compensation Committee
(2) Member of Audit Committee
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."
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.
43
<PAGE>
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.
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 an adult
son of Frederick A. Moran.
44
<PAGE>
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.
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.
45
<PAGE>
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 for
$25,000.
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.
46
<PAGE>
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.
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.
Section 16(a) Beneficial Ownership Reporting Compliance
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 1999 all reporting persons timely
complied with all filing requirements applicable to them, except for certain
reports which were not timely filed including: (i) a Form 3 for James B.
Dittman; (ii) a Form 3 for Leonard Hausman; and (iii) a Form 4 for Frederick A.
Moran (reporting one transaction).
47
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Compensation Committee Report
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 recommends general
compensation policies to the Board, oversees the Company's compensation plans,
establishes the compensation levels for executive officers and advises the Board
on the compensation policies for the Company's executive officers. Prior to the
establishment of the Compensation Committee, compensation matters were handled
by the Board of Directors which consisted of Frederick A. Moran, Dr. James C.
Roberts and Dr. Hussein Elkholy. For purposes of this Report the term
"Committee" refers to either the Compensation Committee or the entire Board of
Directors dependent on which group of directors was charged with the
responsibility for executive compensation matters at the relevant time. Dr.
James C. Roberts resigned from the Board of Directors in November 1998.
Goals: In determining the amount and composition of executive compensation for
Fiscal 1999, the Committee 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 other entrepreneurial growth companies;
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.
The Committee 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 other entrepreneurial growth companies; (ii) annual discretionary
bonuses 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 Committee believes strengthen the mutuality of interest between the
executive and the Company's stockholders. In establishing the actual level of
compensation for executives, the Committee took into account both qualitative
and quantitative factors and all compensation decisions were designed to further
the general goals as described 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. The employment contracts for certain of the
Company's executive officers were entered into contemporaneously with the
commencement of the Company's telecommunications business (March 1998) and
reflect the executive's level of compensation prior to such commencement and the
factors described in the preceding sentence.
48
<PAGE>
Bonus: The Committee may from time to time award discretionary bonuses to its
executive officers to reward them for extraordinary individual or Company
performance. No discretionary bonus awards were made to executive officers of
the Company in Fiscal 1999.
Stock Options: During Fiscal 1999, the Committee and the Board periodically
considered the grant of stock options to certain of its executives, and other
employees, pursuant to the Company's 1998 Stock Incentive Plan (the "Plan").
Additionally, prior to the Domestication Merger, the Board granted stock options
outside of the Plan. In both instances, 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 (typically, with five year vesting periods), and to
provide a return to the executive only if the market price of the shares
appreciated 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 1999
is included in the "Option Grants in Last Fiscal Year" table below.
Compensation of the Chief Executive Officer: During Fiscal 1999, 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 Contracts and Termination of Employment
and Change-in-Control Arrangements" section below. During Fiscal 1999, the Board
granted Mr. Moran options to purchase 200,000 shares of Company common stock.
These options vest in equal installments over five years. This grant was made in
recognition of Mr. Moran's contributions to and achievements with the Company in
his capacity as an executive officer. See "Option Grants in Last Fiscal Year."
49
<PAGE>
Employee Compensation Strategy: The Committee 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
Committee believes that the grant of options not only aligns the interests of
the employee with stockholders, but creates a competitive advantage for the
Company as well. The Committee believes the Company's employee compensation
policies strike an appropriate balance between short and long-term performance
objectives.
Option Repricing Program: Competition for skilled engineers, sales personnel and
other key employees in the telecommunications industry is intense, and the use
of stock options for retention and motivation of such personnel is widespread in
high-technology industries. The Committee believes that stock options are a
critical component of the compensation offered by the Company to promote
long-term retention of key employees, motivate high levels of performance and
recognize employee contributions to the success of the Company. The market price
of the common stock decreased from a high of $7.50 in July 1998 to a low of
$4.00 in October 1998. In light of this substantial decline in market price, the
Committee believed that the outstanding stock options with an exercise price in
excess of the actual market price were no longer an effective tool to encourage
employee retention or to motivate high levels of performance. As a result, in
October 1998, the Committee approved an option repricing program under which
options to acquire shares of common stock that were originally issued with
exercise prices above $4.125 per share were reissued with an exercise price of
$4.125 per share, the fair market value of the common stock at the repricing
date. These options will continue to vest under the original terms of the option
grant. None of the options held by Named Executive Officers (as defined below)
were affected by the repricing program.
Compensation Committee:
Frederick A. Moran
James Dittman
Dr. Leonard Hausman
Dr. Hussein Elkholy (in his capacity as a member of the Company's Board of
Directors prior to the establishment of the Compensation Committee).
The following Summary Compensation Table sets forth the compensation earned for
the three fiscal years ended June 30, 1999 by the Company's Chief Executive
Officer and each of the Company's four most highly compensated executive
officers, other than the Chief Executive Officer, whose total annual salary and
bonus for Fiscal 1999 exceeded $100,000 (the "Named Executive Officers"). Other
than the Chief Executive Officer, there was no Company executive officer who
earned salary and bonus in excess of $100,000 for services rendered in all
capacities to the Company and its subsidiaries during Fiscal 1999.
50
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
----------------------
Annual Compensation Awards
------------------- ------
Securities
Underlying
Options/
Name and Principal Position Year(s) Salary($) SARs(#)
- --------------------------- ------- --------- -------
<S> <C> <C> <C>
Frederick A. Moran(1) 1999 $125,000.04 (2) 200,000 (3)
Chief Executive Officer, 1998 $ 40,625.05 (4) -
Chief Financial Officer, 1997 - -
Chairman and Director
of the Company
</TABLE>
(1) 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.
(2) Includes $20,833.34 in deferred income.
(3) The Company granted Mr. Moran an option to purchase 200,000 shares of
the Company common stock on December 8, 1998. Additional information
regarding these stock option grants is contained in the "Option Grants
in Last Fiscal Year" table below.
(4) Reflects compensation for partial year employment.
51
<PAGE>
The following table contains information concerning stock option grants made to
Named Executive Officers during Fiscal 1999.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
---------------------------------
Individual Grants
-----------------
Potential Realizable Potential Realizable
Value at Assumed Value at Assumed
Annual Rates of Annual Rates of
% of Total Stock Price Stock Price
Number of Securities Options/SARs Exercise or Appreciation for Appreciation for
Underlying Options/ Granted to Employees Base Price Expiration Option Term Option Term
Name SARs Granted (#) in Fiscal Year (1) ($/Share) Date 5% ($)(2) 10% ($) (2)
- ---- ---------------- ------------------ --------- ---- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Frederick A. Moran 200,000 (3) 20.0% $ 4.125 12/08/03 132,210.00 382,882.50
</TABLE>
(1) Based upon options to purchase an aggregate of 999,000 shares of
common stock granted to employees in Fiscal 1999. The options to
purchase 999,000 shares of common stock includes: (a) options to
purchase 757,500 shares of common stock granted under the Company's
1998 Stock Incentive Plan in Fiscal 1999; (b) options to purchase
180,000 shares of common stock granted outside of the Company's 1998
Stock Incentive Plan in Fiscal 1999; and (c) options to purchase 61,500
shares of common stock granted outside of the Company's 1998 Stock
Incentive Plan in Fiscal 1998 but repriced in Fiscal 1999. Excludes
options to purchase 40,000 shares of common stock granted to
non-employees in Fiscal 1999.
(2) The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange
Commission. There can be no assurance provided to any executive officer
or any other holder of the Company's securities that the actual stock
price appreciation over the 5 year option term will be at the assumed
5% and 10% levels or at any other defined level. Unless the market
price of the common stock appreciates over the option term, no value
will be realized from the option grants made to the Named Executive
Officers.
(3) The options vest in equal installments over five years commencing on
the first anniversary of the date of grant (December 8, 1998). The
options are exercisable upon vesting. Does not include options to
purchase 10,000 shares of common stock granted to Joan B. Moran,
Mr. Moran's wife and an employee of the Company.
52
<PAGE>
<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 Options/SARs
at FY-End(#) at FY-End($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized($) Unexercisable Unexercisable
---- --------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Frederick A. Moran - - 0(E)/200,000(U) (1)
</TABLE>
(1) Based upon the closing price for Company common stock for June 30, 1999
of $3.00 per share, none of the options referenced in this table were
in-the-money at the close of Fiscal 1999.
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 recommends general compensation
policies to the Board, oversees the Company's compensation plans, establishes
the compensation levels for executive officers and advises the Board on the
compensation policies for the Company's executive officers.
53
<PAGE>
The Board may, from time to time, establish other committees of the Board.
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.
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. See "Compensation Committee
Report" for a description of the Repricing.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
The Company has an employment agreement with Frederick A. Moran. The agreement,
which is dated March 3, 1998, provides for an initial term of five years with
year-to-year renewals in the event that neither Mr. Moran nor the Company elects
to terminate the agreement after the initial term or otherwise. The agreement
contains non-competition and non-solicitation provisions which survive
employment for a term of one year. Mr. Moran's current base salary is $125,000.
Upon Mr. Moran's death, incapacity or termination without "cause", as defined in
the agreement, Mr. Moran is entitled to a lump sum payment at the time of the
termination of his employment equal to one year's base salary. Mr. Moran has
been granted options to purchase shares of Company common stock. See "Option
Grants in Last Fiscal Year."
54
<PAGE>
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
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. Mr. Moran serves as an executive officer of
the Company and as an officer of each of the Company's subsidiaries. The
Compensation Committee recommends general compensation policies to the Board,
oversees the Company's compensation plans, establishes the compensation levels
for executive officers and advises the Board on the compensation policies for
the Company's executive officers. Prior to the establishment of the Compensation
Committee, compensation matters were handled by the Company's Board of
Directors. The Board of Directors, prior to the establishment of the
Compensation Committee, consisted of Frederick A. Moran, Dr. James C. Roberts
and Dr. Hussein Elkholy.
No executive officer of the Company served as a member of the board of directors
of any entity that had one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.
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 AMEX Market (U.S. companies) ("CRSP
Index")(2), and (ii) a Peer Group selected on the Basis of a 3-Digit SIC Group
(SIC 4810-4819 U.S.). The table assumes that $100 was invested on June 30, 1994
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 March 6, 1998
acquisition. Consequently, a comparison of the Peer Group's
performance to the performance of the Company during the
period March 6, 1998 to June 30, 1999 may be meaningful,
however, a comparison of the Peer Group's performance to that
of the Company for periods prior to the Sky King Connecticut
Acquisition is unlikely to be meaningful. Furthermore, the
comparisons presented may not be indicative of the Company's
future performance.
55
<PAGE>
(2) The Performance Graph contains an AMEX index because the
Company's common stock began trading on the American Stock
Exchange, Inc. on July 7, 1998.
<TABLE>
<CAPTION>
Company Market Peer
Date Index Index Index
---- ----- ----- -----
<S> <C> <C> <C>
06/30/94 $ 100.000 $ 100.000 $ 100.000
09/30/94 $ 158.333 $ 108.444 $ 103.144
12/30/94 $ 75.000 $ 106.650 $ 94.658
03/31/95 $ 75.000 $ 116.023 $ 97.884
06/30/95 $ 70.833 $ 132.630 $ 103.357
09/29/95 $ 86.667 $ 148.429 $ 122.765
12/29/95 $ 75.000 $ 149.802 $ 129.288
03/29/96 $ 78.333 $ 157.079 $ 125.054
06/28/96 $ 120.000 $ 169.251 $ 129.198
09/30/96 $ 98.333 $ 174.994 $ 121.492
12/31/96 $ 70.000 $ 183.402 $ 132.218
03/31/97 $ 68.333 $ 174.003 $ 127.850
06/30/97 $ 56.667 $ 205.630 $ 151.727
09/30/97 $ 60.833 $ 240.644 $ 167.637
12/31/97 $ 70.000 $ 223.964 $ 193.294
03/31/98 $ 70.000 $ 262.443 $ 241.091
06/30/98 $ 70.000 $ 268.439 $ 245.650
09/30/98 $ 37.869 $ 239.271 $ 234.357
12/31/98 $ 40.164 $ 309.650 $ 316.453
03/31/99 $ 36.721 $ 345.411 $ 350.460
06/30/99 $ 27.541 $ 377.785 $ 397.111
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company common stock as of September 14, 1999 with respect to:
(i) each person known by the Company to beneficially own 5% or more of the
outstanding shares of Company common stock; (ii) each of the Company's
directors; (iii) each of the Company's Named Executive Officers; and (iv) all
directors and executive officers of the Company as a group. Except as otherwise
indicated, each person set forth below has sole voting and investment power on
the shares reported.
56
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name and Address of Beneficial Owner Beneficial Ownership(1) Of Class
- ------------------------------------ ----------------------- --------
<S> <C> <C>
Frederick A. Moran 3,311,125 (2) 16.4%
75 Holly Hill Lane
Greenwich, CT 06830
Dr. Hussein Elkholy 8,333 (3) *
781 Oneida Trail
Franklin Lakes, NJ 07417
Dr. Leonard Hausman 8,333 (4) *
70 Neshobe Road
Waban, MA 02468
James B. Dittman 10,333 (5) *
8 Worthington Ave.
Spring Lake, NJ 07762
Clayton F. Moran 1,427,600 (6) 7.1%
75 Holly Hill Lane
Greenwich, CT 06830
Frederick W. Moran 1,402,750 (7) 7.0%
230 Park Avenue
13th Floor
New York, NY 10169
PortaCom Wireless, Inc. 4,281,878 (8) 21.2%
10061 Talbert Avenue
Suite 200
Fountain Valley, CA 92708
All executive officers and directors 4,791,724 23.7%
as a group (8 persons)
</TABLE>
(*) 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 September 14, 1999.
57
<PAGE>
(2) Includes 527,817 shares owned directly by Mr. Moran as well as
2,783,308 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 of common stock which vested
in July, 1999. Does not include options to purchase 16,667 shares of
common stock which may vest on or after July, 2000.
(4) Includes options to purchase 8,333 shares of common stock which vest in
November, 1999. Does not include options to purchase 16,667 shares of
common stock which may vest on or after November 4, 2000.
(5) Includes 2,000 shares and options to purchase 8,333 shares of common
stock which vest in November, 1999. Does not include options to
purchase 16,667 shares of common stock which may vest on or after
November 4, 2000.
(6) Includes options to purchase 2,000 shares of common stock. Does
not include options to purchase 53,000 shares of common stock which
may vest on and after December 8, 1999. An adult son of Frederick A.
Moran and employed as Vice-President, Finance of the Company.
(7) An adult son of Frederick A. Moran.
(8) Pursuant to the terms of a settlement agreement dated November 1998
(the "Settlement Agreement"), approximately 2,000,000 of the shares of
common stock held by PortaCom are currently being held in escrow, and
may be retained in escrow for up to 18 months from November 1998. A
portion or all of these shares may be released to PortaCom contingent
upon certain performance criteria set forth in the settlement
agreement. For example, the 2,000,000 shares being held in escrow may
be released if the closing market price of a share of the Company's
common stock is less than $5.00 on any 40 trading days during the 120
consecutive trading days subsequent to August 31, 1999. We expect,
given that the current price is less than $5.00, that all of these
shares will be released from escrow.
58
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Registration of Certain Moran Shares
The Company is in the process of registering the potential resale of 6,296,589
shares of Company common stock the beneficial ownership of which is attributed
to Frederick A. Moran and certain members of Mr. Moran's immediate family (the
"Moran Shares"). The Moran Shares were included in a Registration Statement on
Form S-1 (Registration No. 333-80107) which was filed with the United States
Securities and Exchange Commission on June 7, 1999 (the "Registration
Statement"). Of the Moran Shares included in the Registration Statement, 328,170
of said shares are being included pursuant to registration rights granted in
connection with the sale of said shares in May 1999 to Mr. Moran, certain Moran
family members, and certain trusts for the benefit of Mr. Moran's minor
children.
Loans From Director and Officer
In September 1999, Frederick A. Moran, a director and officer of the Company,
transferred personal funds totaling $80,000 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 September 24, 1999. The
promissory note is due on September 24, 2000 and provides for an interest rate
of eight percent (8%) per annum.
Between January and February 1999, Frederick A. Moran 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, the closing market price on the date of sale, 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.
59
<PAGE>
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.
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.
60
<PAGE>
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.
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. Also in connection with this agreement, Dr. Roberts
surrendered 1,875,000 shares of Company common stock to the Company's treasury
and the Company forgave indebtedness totaling $164,175 owed to it by Dr.
Roberts.
61
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Financial Statements filed as part of this Report:
Auditors' Report of BDO Seidman LLP, Independent Auditors, on Company's
Consolidated Financial Statements for the fiscal years ended June 30,
1999 and 1998, and 1997.
Consolidated Balance Sheets of the Company as of June 30, 1999, 1998.
Consolidated Statements of Operations of the Company for the fiscal
years ended June 30, 1999, 1998, and 1997.
Consolidated Statements of Cash Flows of the Company for the fiscal
years ended June 30, 1999, 1998, and 1997.
Consolidated Statements of Stockholders' Equity of the Company for the
fiscal years ended June 30, 1999, 1998, and 1997.
Notes to Consolidated Financial Statements of the Company
B. The following Exhibits are filed as part of this Report:
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, dated as of (1)
December 10, 1997, by and among VDC Corporation Ltd., VDC
Communications, Inc. (formerly known as VDC (Delaware), Inc.)
and Sky King Communications, Inc.
2.2 Amendment to Amended and Restated Agreement and Plan of Merger, (1)
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.
62
<PAGE>
2.3 Agreement and Plan of Merger, made as of October 5, 1998, by (2)
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, Inc. into VDC (1)
Communications, Inc. (formerly known as VDC (Delaware), Inc.)
2.5 Certificate of Merger of VDC Corporation Ltd. into VDC (3)
Communications, Inc.
3.1 Certificate of Incorporation, as amended of VDC Communications, (2)
Inc.
3.2 Amended and Restated Bylaws of VDC Communications, Inc. (2)
4.1 Specimen of common stock certificate (4)
4.2 1998 Stock Incentive Plan (4)
10.1 Purchase Agreement, dated as of July 31, 1998, by and among VDC (5)
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, by and among (5)
Masatepe Communications U.S.A., L.L.C. and VDC Corporation Ltd.
10.3 Bridge Note, dated as of August 1, 1998, made by Masatepe (5)
Communications U.S.A., L.L.C. in favor of VDC Corporation Ltd.
10.4 Guaranty, dated as of August 1, 1998, by Activated (5)
Communications Limited Partnership to VDC Corporation Ltd.
10.5 Amended and Restated Asset Purchase Agreement between VDC (6)
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
63
<PAGE>
10.6 Escrow Agreement by and among VDC Corporation Ltd., PortaCom (6)
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 and among (7)
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 and among VDC (7)
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 Corporation (7)
Ltd. in favor of PortaCom Wireless,
Inc.
10.10 Assignment, dated June 8, 1998, by PortaCom Wireless, Inc. (7)
10.11 Loan Agreement, dated November 10, 1997, between VDC (7)
Corporation Ltd. and PortaCom Wireless, Inc.
10.12 Pledge Agreement, dated November 10, 1997, between VDC (7)
Corporation Ltd. and PortaCom Wireless, Inc.
10.13 Security Agreement, dated November 10, 1997, between VDC (7)
Corporation Ltd. and PortaCom Wireless, Inc.
10.14 Debtor-in-Possession Loan, Pledge and Security Agreement, dated (7)
March 23, 1998 between VDC Corporation Ltd and PortaCom
Wireless, Inc.
10.15 Waiver, dated June 8, 1998, by VDC Corporation Ltd. (7)
10.16 Asset Purchase Agreement between VDC Corporation Ltd. and Rozel (1)
International Holdings Limited, dated December 18, 1997,
including Exhibits thereto
64
<PAGE>
10.17 Asset Purchase Agreement between VDC Corporation Ltd. and (1)
Tasmin Limited, dated February 10, 1998, including Exhibits
thereto
10.18 Promissory Note from HPC Corporate Services Limited, dated (1)
March 2, 1998
10.19 Employment Agreement of Frederick A. Moran, as amended (1)
10.20 Employment Agreement of Charles W. Mulloy (5)
10.21 Option to Purchase 10,000 Shares Granted to Charles W. Mulloy (5)
10.22 Option to Purchase 50,000 Shares Granted to Charles W. Mulloy (5)
10.23 Registration Rights Agreements between VDC Corporation Ltd. and (5)
Charles W. Mulloy
10.24 Employment Agreement of Clayton F. Moran (5)
10.25 Option to Purchase 10,000 Shares Granted to Clayton F. Moran (5)
10.26 Registration Rights Agreement between VDC Corporation Ltd. and (5)
Clayton F. Moran
10.27 Director Agreement with Dr. Hussein Elkholy (5)
10.28 Option to Purchase 25,000 Shares Granted to Dr. Hussein Elkholy (5)
10.29 Registration Rights Agreement between VDC Corporation Ltd. and (5)
Dr. Hussein Elkholy
10.30 Settlement, Release and Discharge Agreement, by and among VDC (8)
Communications, Inc., Dr. James C. Roberts, and Frederick A.
Moran, dated November 19, 1998
65
<PAGE>
10.31 Settlement Agreement between VDC Communications, Inc., PortaCom (8)
Wireless, Inc., and Michael Richards, dated November 24, 1998
10.32 Director Agreement with Dr. Leonard Hausman, dated November 4, (9)
1998
10.33 Option to Purchase 25,000 shares granted to Dr. Leonard (9)
Hausman, dated November 4, 1998
10.34 Registration Rights Agreement between VDC Corporation Ltd. and (9)
Dr. Leonard Hausman, dated November 4, 1998
10.35 Director Agreement with James Dittman, dated November 4, 1998 (9)
10.36 Option to Purchase 25,000 shares granted to James Dittman, (9)
dated November 4, 1998
10.37 Registration Rights Agreement between VDC Corporation Ltd. and (9)
James Dittman, dated November 4, 1998
10.38 Settlement, Release and Discharge Agreement, by and among VDC (10)
Communications, Inc., Masatepe Communications, U.S.A., L.L.C.,
and Marc Graubart, dated March 9, 1999
10.39 Form of Securities Purchase Agreement, dated December 23, 1998 (10)
10.40 Form of Securities Purchase Agreement, dated May 5, 1999 (10)
10.41 Form of Securities Purchase Agreement, dated May 7, 1999 (10)
10.42 Securities Purchase Agreement, between PGP I Investors, LLC and (10)
VDC Communications, Inc., dated May 12, 1999
10.43 Securities Purchase Agreement, between Paradigm Group, LLC, and (3)
VDC Communications, Inc., dated May 17, 1999
10.44 Form of Employment Agreement (3)
66
<PAGE>
10.45 Form of Option Agreement (3)
10.46 Form of Registration Rights Agreement (3)
10.47 Form of Incentive Stock Option Agreement (3)
10.48 Incentive Stock Option Agreement between Frederick A. Moran and (3)
VDC Communications, Inc., dated December 8, 1998
10.49 Promissory Note, dated January 26, 1999, made by VDC (12)
Communications, Inc. in favor of Frederick A. Moran
10.50 Promissory Note, dated September 24, 1999, made by VDC (12)
Communications, Inc. in favor of Frederick A. Moran
21.1 Subsidiaries of Registrant (12)
27.1 Financial Data Schedule (12)
</TABLE>
(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 as an Exhibit to Registrant's registration statement on Form S-1,
filed with the SEC on June 7, 1999, and incorporated by reference herein.
(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) 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.
(6) Filed as an Exhibit to VDC Corporation Ltd.'s Form 10-Q for the quarter
ended March 31, 1998, and incorporated by reference herein.
(7) Filed as an Exhibit to VDC Corporation Ltd.'s Current Report on Form 8-K,
dated June 22, 1998, and incorporated by reference herein.
(8) Filed as an Exhibit to Registrant's Current Report on Form 8-K dated
November 19, 1998, and incorporated by reference herein.
(9) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended December
31, 1998, and incorporated herein by reference.
67
<PAGE>
(10) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended March
31, 1999, and incorporated herein by reference.
(11) 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.
(12) Filed herewith.
C. Reports on Form 8-K
None.
68
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders of
VDC Communications, Inc. and Subsidiaries
Greenwich, Connecticut
We have audited the accompanying consolidated balance sheets of VDC
Communications, Inc. and Subsidiaries as of June 30, 1998 and 1999 and the
related consolidated statements of operations and retained earnings, and of cash
flows for each of the three years in the period ended June 30, 1999. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of VDC
Communications, Inc. and Subsidiaries as of June 30, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this matter are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
The Company's investment in Metromedia China Corporation is valued in the manner
described in Note 4.
BDO Seidman, LLP
Valhalla, New York
September 3, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
VDC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
June 30,
1998 1999
---- ----
<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 2,212,111 $ 317,799
Restricted cash - 475,770
Marketable securities 451,875 90,375
Accounts receivable, net of allowance for doubtful accounts
of $7,000 in 1999 - 1,251,581
Notes receivable - current 2,800,000 249,979
--------- -------
Total current assets 5,463,986 2,385,504
Property and equipment, less accumulated depreciation 331,316 4,888,163
Notes receivable, less current portion 1,500,000 -
Investment in MCC 37,790,877 2,400,000
Other assets 737,505 328,394
------- -------
Total assets $45,823,684 $ 10,002,061
=========== ============
Liabilities and Stockholders' Equity
Current:
Accounts payable and accrued expenses $ 156,185 $ 2,160,839
Current portion of capitalized lease obligations - 426,356
------------------------------------------------ ------- -------
Total current liabilities 156,185 2,587,195
Long-term portion of capitalized lease obligations - 847,334
------- -------
Total liabilities 156,185 3,434,529
------- ---------
Commitment and Contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value, authorized 10 million
shares; issued and outstanding-none - -
Convertible preferred stock series B, non-voting, $0.0001 par value, none
authorized issued or outstanding at June 30, 1999
4.5 million shares authorized, issued and outstanding at June 30, 1998 60 -
Common stock, $0.0001 par value, authorized 50 million shares
issued - 20,186,462 and 15,449,107 at
June 30, 1999 and 1998, respectively 1,545 2,018
Additional paid-in capital 51,234,105 67,737,195
Accumulated deficit (4,218,035) (60,339,393)
Treasury stock - at cost, 1,875,000 shares at June 30, 1999
and none at June 30, 1998 - (164,175)
Stock subscriptions receivable (1,425,951) (344,700)
Accumulated comprehensive income (loss) 75,775 (323,413)
------ --------
Total stockholders' equity 45,667,499 6,567,532
---------- ---------
Total liabilities and stockholders' equity $45,823,684 $ 10,002,061
=========== ============
See accompanying notes to consolidated financial statements.
</TABLE>
F-2
<PAGE>
VDC COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
-----------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenue $ 43,248 $ 99,957 $ 3,298,357
Operating Expenses
Costs of services 22,020 28,460 5,155,752
Selling, general and administrative expenses 53,657 1,167,429 4,636,230
Non-cash compensation expense - 2,254,000 16,146,000
Asset impairment charges 1,644,385
------ --------- ---------
Total operating expenses 75,677 3,449,889 27,582,367
------ --------- ----------
Operating loss (32,429) (3,349,932) (24,284,010)
Other income (expense):
Writedown of investment in MCC - - (21,328,641)
Loss on note restructuring - - (1,598,425)
Other income (expense) - 195,122 (63,637)
------- -------
Total other income (expense) - 195,122 (22,990,703)
Equity in loss of affiliate - - (867,645)
--------
Net loss (32,429) (3,154,810) (48,142,358)
------- ---------- -----------
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on marketable securities - 75,775 (399,188)
------- ------ --------
Comprehensive loss $ (32,429) $ (3,079,035) $ (48,541,546)
========== ============= =============
Net loss per common share - basic and diluted $ (0.01) $ (0.72) $ (2.72)
---------- ------------- -------------
Weighted average number of shares outstanding 3,699,838 4,390,423 17,678,045
--------- --------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
VDC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
Convertible Common Stock
Preferred Stock
Series B
Shares Amount Shares
------ ------ ------
<S> <C> <C> <C>
Balance - June 30, 1996 ............................... -- $ -- 5,500,000
Capital contribution .................................. -- -- --
Net loss .............................................. -- -- --
------------------------------------------
Balance - June 30, 1997 ............................... -- -- 5,500,000
Reverse acquisition ................................... -- -- 3,697,908
Release of escrow shares .............................. 600,000 60 --
collection on stock subscription receivable ........... -- -- --
issuance of common shares in connection ...............
with investment in MCC ................................ -- -- 4,965,828
Issuance of common stock .............................. -- -- 1,130,584
Issuance of common stock for note ..................... -- -- 154,787
Unrealized gain on marketable securities .............. -- -- --
Net loss .............................................. -- -- --
------------------------------------------
Balance - June 30, 1998 ............................... 600,000 60 15,449,107
Release of escrow shares .............................. 3,900,000 390 --
Issuance of common stock in connection with acquisition -- -- 154,444
collection on stock subscription receivable ........... -- -- --
Conversion of preferred stock into common stock ....... (4,500,000) (450) 4,500,000
Purchase of treasury stock ............................ -- -- (1,875,000)
Issuance of common shares in connection ...............
with investment banking fees .......................... -- -- 290,000
issuance of common shares in connection ...............
with investment in MCC ................................ -- -- 198,067
Return of common stock in connection with .............
investment in MCC ..................................... -- -- (2,000,000)
Adjustment to common stock issued in ..................
connection with acquisition ........................... -- -- (14,160)
Common stock issued to settle claim ................... -- -- 95,000
issuance of common stock .............................. -- -- 1,514,004
Unrealized loss on marketable securities .............. -- -- --
Net loss .............................................. -- -- --
------------------------------------------
Balance - June 30, 1999 ............................... -- $ -- 18,311,462
------------------------------------------
F-4
<PAGE>
Additional Stock
Common Stock Paid-in Accumulated Subscriptions
Amount Capital Deficit Receivable
------ ------- ------- ----------
<S> <C> <C> <C> <C>
Balance - June 30, 1996 ............................... $ 550 $ 42,401 $ (26,702) $ --
Capital contribution .................................. -- 30,930 -- --
Net loss .............................................. -- -- (32,429) --
---------------------------------------------------------------
Balance - June 30, 1997 ............................... 550 73,331 (59,131) --
Reverse acquisition ................................... 370 6,053,324 -- (465,838)
Release of escrow shares .............................. -- 3,258,034 (1,004,094) --
collection on stock subscription receivable ........... -- -- -- 287,800
issuance of common shares in connection ...............
with investment in MCC ................................ 497 34,618,127 -- --
Issuance of common stock .............................. 113 5,983,391 -- --
Issuance of common stock for note ..................... 15 1,247,898 -- (1,247,913)
Unrealized gain on marketable securities .............. -- -- -- --
Net loss .............................................. -- -- (3,154,810) --
---------------------------------------------------------------
Balance - June 30, 1998 ............................... 1,545 51,234,105 (4,218,035) (1,425,951)
Release of escrow shares .............................. -- 23,399,610 (7,254,000) --
Issuance of common stock in connection with acquisition 15 700,865 -- --
collection on stock subscription receivable ........... -- -- -- 917,076
Conversion of preferred stock into common stock ....... 450 -- -- --
Purchase of treasury stock ............................ -- -- -- 164,175
Issuance of common shares in connection ...............
with investment banking fees .......................... 29 724,971 (725,000) --
issuance of common shares in connection ...............
with investment in MCC ................................ 20 1,012,141 -- --
Return of common stock in connection with .............
investment in MCC ..................................... (200) (13,962,300) -- --
Adjustment to common stock issued in ..................
connection with acquisition ........................... (1) (99,119) -- --
Common stock issued to settle claim ................... 9 391,865 -- --
issuance of common stock .............................. 151 4,335,057 -- --
Unrealized loss on marketable securities .............. -- -- -- --
Net loss .............................................. -- -- (48,142,358) --
---------------------------------------------------------------
Balance - June 30, 1999 ............................... $ 2,018 $ 67,737,195 $(60,339,393) $ (344,700)
---------------------------------------------------------------
F-4 - continued
<PAGE>
Unrealized gain
(loss) on
Marketable Treasury Stock Treasury Stock
Securities # of shares $ Total
---------- ----------- - -----
<S> <C> <C> <C> <C>
Balance - June 30, 1996 ............................... $ -- -- $ -- $ 16,249
Capital contribution .................................. -- -- -- 30,930
Net loss .............................................. -- -- -- (32,429)
------------------------------------------------------------------
Balance - June 30, 1997 ............................... -- -- -- 14,750
Reverse acquisition ................................... -- -- -- 5,587,856
Release of escrow shares .............................. -- -- -- 2,254,000
collection on stock subscription receivable ........... -- -- -- 287,800
issuance of common shares in connection ...............
with investment in MCC ................................ -- -- -- 34,618,624
Issuance of common stock .............................. -- -- -- 5,983,504
Issuance of common stock for note ..................... -- -- -- 0
Unrealized gain on marketable securities .............. 75,775 -- -- 75,775
Net loss .............................................. -- -- -- (3,154,810)
------------------------------------------------------------------
Balance - June 30, 1998 ............................... 75,775 -- -- 45,667,499
Release of escrow shares .............................. -- -- -- 16,146,000
Issuance of common stock in connection with acquisition -- -- -- 700,880
collection on stock subscription receivable ........... -- -- -- 917,076
Conversion of preferred stock into common stock ....... -- -- -- --
Purchase of treasury stock ............................ -- 1,875,000 (164,175) --
Issuance of common shares in connection ...............
with investment banking fees .......................... -- -- -- --
issuance of common shares in connection ...............
with investment in MCC ................................ -- -- -- 1,012,161
Return of common stock in connection with .............
investment in MCC ..................................... -- -- -- (13,962,500)
Adjustment to common stock issued in ..................
connection with acquisition ........................... -- -- -- (99,120)
Common stock issued to settle claim ................... -- -- -- 391,874
issuance of common stock .............................. -- -- -- 4,335,208
Unrealized loss on marketable securities .............. (399,188) -- -- (399,188)
Net loss .............................................. -- -- -- (48,142,358)
------------------------------------------------------------------
Balance - June 30, 1999 ............................... $ (323,413) 1,875,000 $ (164,175) $ 6,567,532
------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4 - continued
<PAGE>
VDC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .......................................... $ (32,429) $ (3,154,810) $(48,142,358)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization ..................... 3,390 6,205 1,107,018
Writedown of investment in MCC .................... -- -- 21,328,641
Non-cash compensation expense ..................... -- 2,254,000 16,146,000
Loss on note restructuring ........................ -- -- 1,598,425
Equity in losses of affiliate ..................... -- -- 867,645
Impairment loss ................................... -- -- 1,644,385
Non-cash severance ................................ -- -- 391,875
Provision for doubtful accounts ................... -- -- 7,000
Changes in operating assets and liabilities:
Restricted cash ................................... -- -- (475,770)
Accounts receivable ............................... -- -- (1,258,581)
Other assets ...................................... 466 44,146 527,533
Accounts payable and accrued expenses ............. -- (8,931) 2,004,655
------ ------ ---------
Net cash used by operating activities ........... (28,573) (859,390) (4,253,532)
Cash flows from investing activities:
Cash paid for investment in MCC ................... -- (2,799,731) --
Proceeds from return of escrow in connection
with the investment in MCC ........................ -- -- 1,012,161
Payment for purchase of subsidiary ............... -- -- (589,169)
Investment in affiliate ........................... -- -- (867,645)
Proceeds from repayment of notes receivable ....... -- 700,000 2,451,596
Purchase of investment securities ................. -- (288,600) --
Fixed asset acquisition ........................... -- (323,951) (4,499,427)
Deposit on fixed assets ........................... (489,151) --
------ --------- ---------
Net cash flows used in investing activities .... -- (3,201,433) (2,492,484)
Cash flows from financing activities:
Proceeds from issuance of common stock ........... -- 6,271,504 4,335,209
Collections on stock subscription receivables .... -- -- 917,076
Repayment of note payable ........................ -- -- (692,379)
Proceeds from issuance of short-term debt ........ -- -- 500,000
Repayments on capital lease obligations .......... -- -- (208,202)
Capital contribution ............................. 27,830 -- --
------ ------ ------
Net cash flows provided by financing activities 27,830 6,271,504 4,851,704
------ --------- ---------
Net increase (decrease) in cash and cash equivalents (743) 2,210,681 (1,894,312)
Cash and cash equivalents, beginning of period ......... 2,173 1,430 2,212,111
----- ----- ---------
Cash and cash equivalents, end of period ............... $ 1,430 $ 2,212,111 $ 317,799
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
VDC Communications, Inc. and Subsidiaries
Notes to consolidated financial statements
1. Summary of Significant Accounting Policies
(a) Basis of Presentation
The financial statements presented are those of VDC Communications, Inc. ("VDC")
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. (see Note 3). (As used in this document, the terms "the Company", "we",
and "us" include both VDC and VDC Bermuda. The use of these terms reflects the
fact that through November 6, 1998, the publicly held company was VDC Bermuda.
Thereafter, due to the Domestication Merger, the publicly held company was VDC.)
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 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 VDC, was consummated.
(b) Business
The Company is a telecommunications services company focused primarily on the
international long-distance market. The Company's customers are other
long-distance telephone companies that resell the Company's services to their
retail customers or other telecommunications companies.
The Company is subject to various risks in connection with the operation of its
business. These risks include, but are not limited to, changes in liquidity,
availability of financing, government regulation, dependence on transmission
facilities, network maintenance and failure, and competition.
(c) Principles of Consolidation
The consolidated financial statements represent all companies of which the
Company directly or indirectly has majority ownership. 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. ("Sky King") and
WorldConnectTelecom.com, Inc. ("WorldConnectTelecom.com"). In September 1999,
the Company formed a subsidiary, Voice and Data Communications (Latin America),
Inc. Intercompany accounts and transactions have been eliminated.
F-6
<PAGE>
(d) Revenue Recognition
The Company records revenues for telecommunications sales at the time of
customer usage. Additionally, the Company records on a monthly basis, revenues
from renting its network facilities and from the management of tower sites that
provide transmission and receiver site locations for wireless communications
companies.
(e) Cost of services
Cost of services 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 telephone lines and rate-per-minute charges
from other carriers that terminate traffic on behalf of the Company. These costs
also include salaries, depreciation and overhead attributable to operations.
(f) Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all liquid
investments with an original maturity of three months or less to be cash
equivalents. The carrying amounts reported in the accompanying balance sheet
approximate fair market value.
(g) Property and Equipment
Property and equipment are carried at cost. Replacements and betterments are
capitalized. Repairs and maintenance are charged to operations. Depreciation and
amortization of property and equipment are computed using the straight-line
method over the following estimated useful lives:
operating equipment 5 years
leasehold improvements life of lease
furniture and equipment 3-5 years
Operating equipment includes assets financed under capital lease obligations of
$1,331,987 at June 30, 1999 (primarily acquired in the second half of Fiscal
1999). Accumulated amortization related to assets financed under capital leases
was $70,865 at June 30, 1999.
For income tax purposes, depreciation is computed using statutory recovery
methods.
F-7
<PAGE>
(h) Earnings (loss) Per Share of common stock
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share" specifies the computation, presentation and disclosure requirements for
earnings per share ("EPS"). SFAS 128 requires the presentation of basic EPS and
diluted EPS. Loss per common share - basic 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 1,064,081 and
938,546 shares of common stock at prices ranging from $4.00 to $7.00 and options
to purchase 850,500 and 61,500 and shares of common stock at prices ranging from
$3.75 to $4.125 for the years ended June 30, 1999 and 1998, respectively, are
not included in the computation of diluted loss per share because they are
antidilutive due to the net loss. If the preferred shares were considered to be
common shares, loss per share would have been $(0.00) and $(0.44) and $(2.63)
for the years ended June 30, 1997, 1998, and 1999.
(i) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the dates of the financial statements and
reported amounts of revenue and expenses during the reported periods. The
investment in MCC was valued based on criteria discussed in Note 3. Actual
results could differ from those estimates.
(j) Financial Instruments
The carrying amount of financial instruments including cash and cash
equivalents, accounts receivable and accounts payable approximated fair value at
June 30, 1999 and 1998 because of the relatively short maturity of these
financial instruments. The carrying amount of obligations under capital leases,
including the current portion, approximated fair value as of June 30, 1999 based
upon similar debt issues.
(k) Long-lived Assets
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the
Impairment of Long-Lived Assets for Long-Lived Assets to be Disposed of,
requires that long-lived assets and certain intangible assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If undiscounted expected future cash
flows are less than the carrying value of the assets, an impairment loss is to
be recognized based on the fair value of the assets. During the year ended June
30, 1999, the Company recognized an impairment loss of $1,165,187 on long
lived-assets of a subsidiary as described in Note 6 and an impairment loss of
$479,199 in connection with the write off of certain billing software.
F-8
<PAGE>
(l) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist of cash and cash equivalents and accounts receivable. The
Company's customer base includes domestic and international companies in the
telecommunications industry. The Company performs ongoing credit evaluations of
its customers but generally does not require collateral to support customer
receivables. The Company will establish an allowance for possible losses, if
needed, based on factors surrounding the credit risk of specific customers.
The two largest customers accounted for approximately 65 percent of revenues for
the year ended June 30, 1999.
(m) Recent Accounting Pronouncements
In June 1998, the AICPA issued statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities". The Company
has not yet analyzed the impact, if any, of this new standard. The Company will
adopt this standard in July of 2000.
(n) Reclassifications
Certain 1998 amounts have been reclassified to conform with 1999 presentation
format. Amounts reclassified had no impact on consolidated net loss.
2. Going Concern
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company has sustained substantial
operating losses. In addition, the Company has used substantial amounts of
working capital in its operations. Further, as of June 30, 1999, current
liabilities exceed current assets by approximately $200,000. Management is
currently attempting to obtain a $3 million line of credit which would be
collateralized by certain of the Company's long-distance telecommunications
equipment and is pursuing alternative financing arrangements. However, there can
be no assurance that the Company will be able to secure additional financing.
F-9
<PAGE>
In view of these matters, continued operations of VDC is dependent upon the its
ability to meet its financing requirements and the success of its future
operations.
3. Sky King Merger/Domestication Merger/Non-cash Compensation
On March 6, 1998, Sky King Connecticut entered into a merger agreement with VDC
Bermuda and its subsidiary, VDC Communications, Inc. (then called "VDC
(Delaware), Inc.") ("VDC") (the "Sky King Merger"). This transaction was
accounted for as a reverse acquisition whereby Sky King Connecticut was the
acquirer for accounting purposes. One of the conditions precedent to the
completion of the Sky King Merger was the sale by VDC Bermuda of its various
investment interests so that at the closing of the Sky King Merger, its only
material assets would consist of cash and notes receivable. Since the assets and
liabilities of VDC Bermuda acquired were monetary in nature, the merger has been
recorded at the value of the net monetary assets. Operations of VDC Bermuda
prior to the Sky King Merger consisted of the management of its investments. The
consideration paid to the former Sky King Connecticut shareholders in the Sky
King Merger consisted of the issuance of 10 million newly-issued shares of
preferred stock of VDC which were convertible, and have been converted, in the
aggregate, into 10 million shares of common stock of VDC. Of the consideration
paid to the Sky King Connecticut shareholders, VDC Series B preferred stock
convertible in the aggregate into 4.5 million shares of VDC common stock (the
"Escrow Shares") were placed in escrow to be held and released as the Company
achieved certain performance criteria. As of June 30, 1999, all of the
performance criteria had been met. Accordingly, the 4.5 million Escrow Shares
have been released from escrow.
F-10
<PAGE>
On November 6, 1998, the Company completed the Domestication Merger. The effect
of the Domestication Merger was that members of VDC Bermuda became stockholders
of VDC. 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 VDC preferred stock, $.0001 par value per share, were converted, on a
one-for-one basis, into an aggregate 20,298,362 shares of common stock of VDC,
$.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.
During the year ended June 30, 1999, 3.9 million Escrow Shares were released
from escrow. Of the Escrow Shares released, approximately 2.7 million 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 year ended June 30, 1999. During the year ended June 30,
1998, 600,000 Escrow Shares were released from escrow. Of the Escrow Shares
released, 415,084 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 $2,254,000 for the year ended June 30, 1998. Compensatory
shares are related to former Sky King Connecticut shareholders that are members
of the Company's management, their family trusts and minor children and an
employee. The shares issued to former Sky King Connecticut shareholders' minor
children were considered compensatory because their beneficial ownership was
attributed to certain Sky King Connecticut shareholders. 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.
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 5,113,895 common shares at $6.98125, $1,787,570 in cash, and 50,000
investment advisory shares valued at $6.00 per share. The Company's ownership in
MCC is approximately 3.4% exclusive of the warrants.
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 shares in escrow for up to eighteen months. These shares will be
released from escrow contingent upon certain performance criteria. The placement
of the 2 million shares in escrow 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. One of the conditions under which an additional 2 million
escrow shares may be issuable to PortaCom is if the Company's stock price trades
below $5 per share on any 40 trading days during the 120 consecutive days
subsequent to August 31, 1999. If these shares are issued under this price
guarantee, the Company's investment in MCC would increase by the par value of
the shares (i.e. $200).
F-11
<PAGE>
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, 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.
Based on MMG's June 1999 10-Q, subsequent to June 30, 1999, two of the four
joint ventures (the one Ningbo Ya Mei Telecommunications Co., Ltd. and the other
Ningbo Ya Lian Telecommunications Co., Ltd.) were notified by China Unicom that
the supervisory department of the Chinese government had requested that China
Unicom terminate the projects. The notification requested that negotiations
begin immediately regarding the amounts to be paid to the joint ventures,
including return of investment made and appropriate compensation and other
matters related to winding up the Ningbo joint ventures' activities as a result
of this notice. Negotiations regarding the termination have begun. The content
of the negotiations includes determining the investment principal of the joint
ventures, appropriate compensation and other matters related to termination of
contracts. MCC cannot currently determine the amount of compensation the joint
ventures will receive. While MCC had not received notification regarding the
termination of its other two joint ventures (the one Sichuan Tai Li Feng
Telecommunications Co., Ltd. and the other Chongqing Tai Le Feng
Telecommunications Co., Ltd.), the majority owner, MMG, expects that these will
also be the subject of project termination negotiations. MMG has disclosed in
their June 1999 10-Q that depending on the amount of compensation it receives,
it will record a non-cash charge equal to the difference between the sum of the
carrying values of its investment and advances made to joint ventures plus
goodwill less the cash compensation it receives from the joint ventures which
China Unicom has paid.
The Company had previously assessed the investment in MCC for impairment by
applying a valuation technique commonly used in the telecommunications industry
to assess market potential. Based on the developments relating to the
termination of the joint ventures discussed above, this valuation technique is
no longer appropriate.
F-12
<PAGE>
Prior to the project termination agreements, there had 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. As a result,
the Company recorded a $19,388,641 writedown of the investment in MCC during the
quarter ended March 31, 1999. The write-down adjusted the carrying value of the
investment in MCC to an amount relative to MMG's carrying amount. Due to the
recent announcement regarding the project terminations described above, the
Company recorded an additional $1,940,000 writedown of the investment in MCC.
The write-down adjusted the carrying value of the investment in MCC to an amount
relative to MMG's carrying amount, excluding MMG's goodwill attributable to the
investment in MCC. As such, the Company adjusted the carrying value of its
investment in MCC to $2.4 million ($70.8 million X 3.4%) at June 30, 1999. Given
the uncertainty regarding the outcome of the negotiations of the project
terminations, it is reasonably possible that our investment in MCC could be
written down further in the near term.
5. Property and Equipment
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1999
------------- -------------
<S> <C> <C>
Operating equipment $ 115,538 $ 4,943,233
Computers and office equipment 191,219 107,533
Furniture and fixtures 34,442 161,572
Leasehold improvements - 271,939
-- ---------
341,199 5,484,277
accumulated depreciation - beginning of year (3,678) (9,883)
depreciation expense - cost of services - (597,398)
depreciation expense - SG&A (6,205) (36,890)
depreciation expense on impaired assets - 48,057
------ ------
Property and Equipment, net of accumulation depreciation $ 331,316 $ 4,888,163
--------- -----------
</TABLE>
6. Asset Impairment - subsidiary
The acquisition of Masatepe resulted in goodwill of $1,134,554. The acquisition
was made primarily because of the contractual relationship Masatepe's affiliate,
Masatepe Comunicaciones, S.A. ("Masacom"), had with the Nicaraguan government
controlled telecommunications company, ENITEL. Disagreements over business
development arose between Masatepe and Masacom. As a result, we cancelled our
circuit into Central America and curtailed Masatepe's operations. Masatepe no
longer operates its owned telecommunications route to Central America. The
Company believes that the goodwill attributable to its acquisition of Masatepe
has therefore been permanently impaired. A write down in accordance with SFAS
121 was recognized by writing off the unamortized portion of the goodwill
associated with the Masatepe acquisition ($661,824).
F-13
<PAGE>
Additionally, Masatepe also had property and equipment with a net book value of
$503,363 in Nicaragua at June 30, 1999. Despite its efforts, Masatepe has not
been able to obtain its Nicaraguan assets and, therefore, they are considered
unrecoverable. These assets are also being written off in accordance with FASB
No. 121.
The Company has recorded approximately $1.1 million of current liabilities
believed to be the responsibility of Masacom. The liability relates to traffic
terminated by ENITEL on Masacom's behalf.
Masatepe owns a 49% interest in Masacom, a Nicaraguan company. Masacom had
supported the development of Masatepe's operations in Central America. Masatepe
accounted for the investment using the equity method considering 100% of
Masacom's losses. At June 30, 1999, the Company is carrying the investment in
Masacom at $0. The following is Masacom's summary of financial position at June
30, 1999 and results of operations from inception through May 26, 1999:
Assets $ 55,322
Liabilities $ 15,866
Results of operations (loss) $ (867,645)
7. Restructured Note Receivable
During the year ended June 30, 1999, the Company restructured notes receivable
from debtors by reducing the principal and accrued interest which together
totaled $1,598,425. It was necessary to restructure the notes for the following
reasons: (i) the debtors were not meeting the terms of the original notes and
(ii) to accelerate payment terms of the original notes for the benefit of the
Company. The restructured terms provided the Company with needed short term
working capital. The balance on this note was $249,979 at June 30, 1999 and
$65,000 as of the date of this report, which is past due.
F-14
<PAGE>
8. 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 to certain vendors (carriers) 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. Each LC expires no later than one
year from the date of issuance. Outstanding LC's in the amount of $395,000 were
secured by approximately $476,000 in three month U.S. Government bonds at June
30, 1998. As of June 30, 1999, there were no advances issued under the revolving
line of credit.
9. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," under which deferred assets and liabilities are
provided on differences between financial reporting and taxable income using
enacted tax rates. Deferred income tax expenses or credits are based on the
changes in deferred income tax assets or liabilities from period to period.
Under SFAS No. 109, deferred tax assets may be recognized for temporary
differences that will result in deductible amounts in future periods. A
valuation allowance is recognized if, on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax asset will not
be realized.
The Company had deferred tax assets of approximately $14 million and $360,000 at
June 30, 1999 and 1998, respectively. A valuation allowance has been established
for the entire amount of the deferred tax assets. Deferred income taxes result
primarily from the writedown of the investment in MCC and net operating loss
carryforwards which expire through 2019.
Reconciliation of the Company's actual tax rate to the U.S. Federal Statutory
rate is as follows:
<TABLE>
<CAPTION>
Year ended June 30, 1999 1998
(in percents) ---- ----
Income tax rates
- ----------------
<S> <C> <C>
Statutory U.S. Federal rate -34.0% -34.0%
States rates -9.5% -9.5%
Valuation allowance 43.5% 43.5%
---- ----
Total -% -%
</TABLE>
10. Capital Transactions
On March 6, 1998, in connection with the Sky King Merger, all of the outstanding
shares of Sky King Connecticut were exchanged for preferred shares of VDC (see
Note 3). On November 6, 1998, in connection with the Domestication Merger, all
the issued and outstanding shares of VDC Bermuda and all preferred stock issued
and outstanding of VDC were converted, on a one-for-one basis, into common stock
of VDC. The Domestication Merger has been given retroactive effect in the
financial statements for all periods presented.
F-15
<PAGE>
On March 31, 1998, the Company sold 100,000 shares of common stock at $5.50 per
share and on March 24, 1998, 600,000 shares of common stock at $4.75 per share,
each to unrelated investors for total cash consideration of $3.4 million less an
investment banking fee of $85,500.
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.
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. Additionally, the Company agreed not to
pursue potential employment and other claims against the Officer. 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.
In December 1998, the Company sold 245,159 shares at $3.625 per share, 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
investors in the private placement.
In May 1999, through a private placement, the Company sold 328,170 shares of
Company common stock to the Chief Executive Officer and his family at $3.00 per
share, the public market price at that time, and 932,592 shares of Company
common stock at $2.70 per share and warrants to purchase 93,258 shares of
Company common stock at $6.00 per share to unrelated investors. The Company
incurred investment-banking fees of: (i) $56,000, (ii) issued 5,185 shares of
Company common stock, and (iii) warrants to purchase 27,777 shares of Company
common stock at $6.00 in connection with the private placement. The warrants
expire in May 2002. The Chief Executive Officer and his family did not receive
any warrants in the private placement.
During the year ended June 30, 1999, the Company issued 290,000 shares of
Company common stock to investment bankers in connection with the March 6, 1998
Sky King Merger. 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. An additional 154,852 shares of Company common stock are contingently
issuable to investment bankers subject to the satisfaction of the collection of
notes and stock subscriptions receivable.
In June 1998, the Company issued 5.3 million Company common shares to PortaCom
in exchange for the investment in MCC (see Note 4). 3,113,895 and 4,915,828
common shares have been reflected as outstanding under the agreement as of June
30, 1999 and 1998, respectively. Additionally, 50,000 shares of Company common
stock were issued for investment advisory fees in connection with the investment
in MCC.
F-16
<PAGE>
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 Sky King Merger in connection
with obligations arising prior to that date. The warrants were assumed by Sky
King Connecticut 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 stock.
11. Stock Option Plans
During the year ended June 30, 1998, the Company granted 61,500 stock options.
All stock options were granted to employees at exercise prices equal to the
market value on the date of grant. In October 1998, the Company repriced these
options to $4.125, the fair market value of the Company's common stock on
October 21, 1998.
On September 4, 1998, the Company adopted the VDC Communications, Inc. 1998
Stock Incentive Plan (the "1998 Plan"). The 1998 Plan provides for the granting
of stock options or other rights to purchase up to 5 million shares of common
stock. Options expire up to 10 years after the date of grant, except for
incentive options issued to a holder of more than 10 percent of the common stock
outstanding, which expire five years after the date of grant. Options generally
vest in equal increments over five years.
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages adoption of
a fair-value based method for valuing the cost of stock-based compensation.
However, it allows companies to continue to use the intrinsic value method
prescribed under Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Options Issued to Employees", for options granted to employees and
disclose pro forma net income and earnings per share in accordance with SFAS No.
123. Had compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net income and earnings
per share would have been as follows:
<TABLE>
<CAPTION>
Year ended June 30, 1999 1998
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Pro forma results Net loss:
<S> <C> <C>
As reported $(48,142,358) $ (3,154,810)
Pro forma $(48,545,002) $ (3,188,260)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Loss per common share-basic and diluted
As reported $ (2.72) $ (0.72)
Pro forma $ (2.75) $ (0.73)
</TABLE>
F-17
<PAGE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes pricing model with the following assumptions:
<TABLE>
<CAPTION>
Years ended June 30, 1999 1998
- ----------------------------------------------------
<S> <C> <C>
Dividend yield 0.0% 0.0%
Risk free interest rate 5.0% 5.6%
Expected volatility 46.1% 46.5%
Expected lives 6 years 6 years
- ----------------------------------------------------
</TABLE>
Information regarding the Company's stock option plans and non-qualified stock
options as of June 30, 1998 and 1999 and changes during the years ended on those
dates is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Number of shares Price
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
<S> <C> <C>
Outstanding at June 30, 1997 - -
Granted 61,500 $5.16
Exercised - -
Forfeited - -
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Outstanding at June 30, 1998 61,500 $5.16
Granted 1,023,500 $3.88
Exercised - -
Forfeited 234,500 $4.04
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Outstanding at June 30, 1999 850,500 $3.85
- ---------------------------------------------------------------------------
</TABLE>
Information about stock options outstanding at June 30, 1999 is summarized as
follows:
F-18
<PAGE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- ------------------------------------------------------
Weighted Average
Number Weighted Average Number Fair Value of
Range of Outstanding at Remaining Contracted Weighted Average Exercisable at Weighted Average Options Granted
Exercise Prices June 30, 1999 Life-Years Exercise Price June 30, 1999 Exercise Price During the Year
- --------------- ------------- ---------- -------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$3.75 - $4.125 850,500 9.36 $3.85 20,500 $4.125 $2.07
</TABLE>
During the initial phase-in period of SFAS No. 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.
12. Commitments and Contingencies
Litigation
On or about July 12, 1999, StarCom Telecom, Inc. ("StarCom") commenced an action
in the District Court of Harris County, Texas, in the 127th Judicial District
entitled StarCom Telecom, Inc. vs. VDC Communications, Inc. (Civil Action No.
1999-35578) (the "StarCom Action"). StarCom asserts in the StarCom Action that
the Company induced it to enter into an agreement with the Company through
various purported misrepresentations. StarCom alleges that, due to these
purported misrepresentations and purported breaches of contract, it has been
unable to provide services to its customers. The relief sought by StarCom
includes monetary damages arising out of the Company's purported
misrepresentations and purported breaches of contract. In the event that StarCom
prevails in the StarCom Action, the Company could be liable for monetary damages
in an amount that would have a material adverse effect on the Company's assets
and operations.
Capital Leases
The Company entered into several equipment leases during the year ended June 30,
1999 with lease terms ranging from one to five years. Future minimum lease
payments under capital leases are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year ending June 30,
--------------------
<S> <C>
2000 $ 547,481
2001 364,502
2002 364,502
2003 206,846
2004 64,170
---- --------
--------------------
Total minimum lease payments 1,547,501
less: amount representing interest 273,811
---------
--------------------
present value of minimum lease payments 1,273,690
less: current portion 426,356
---------
long-term capital lease obligations $ 847,334
---------
- --------------------------------------------------------------------------------
</TABLE>
Operating Leases
The Company leases office and equipment space under noncancellable operating
leases. Future minimum lease payments are as follows:
F-19
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year ending June 30,
- --------------------
<S> <C>
2000 $ 591,421
2001 582,936
2002 582,038
2003 587,448
2004 407,974
thereafter 824,078
---------
$ 3,575,895
- --------------------------------------------------------------------------------
</TABLE>
Rent expense for the year ended June 30, 1999 was approximately $516,000. Rent
expense for the years ended June 30, 1998 and 1997 was not material to the
financial statements.
Employment Agreements
The Company has entered into several multi-year employment agreements expiring
through 2003 with officers and certain employees of the Company, which provide
for aggregate annual base salaries as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Years ended June 30,
- --------------------
<S> <C>
2000 $ 852,000
2001 708,750
2002 172,500
2003 75,000
---- --------
$ 1,808,250
- --------------------------------------------------------------------------------
</TABLE>
Bad Debt Reserve
In Fiscal 1999, the Company provided $7,000 for a reserve against accounts
receivable for potential bad debts.
F-20
<PAGE>
13. Fourth Quarter Financial Information
During the fourth quarter of the year ended June 30, 1999, the Company recorded
asset impairment charges of $1,165,187, related to the Masatepe acquisition (see
Note 6) and $1,940,000 related to the investment in MCC (see Note 4).
During the fourth quarter of the year ended June 30, 1998, the Company recorded
non-cash compensation expense of $1,453,000, related to the release of
convertible preferred stock from escrow (See Note 3).
14. Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
Year ended
June 30,
Cash paid during the year for: 1999 1998
- ------------------------------ ---- ----
<S> <C> <C>
Interest $ 92,304 $ -
-------- --
Schedule of non-cash investing and financing activities:
- --------------------------------------------------------
Net assets acquired in exchange for stock - 5,871,071
Equipment acquired through capital lease obligation 1,481,892 -
Equipment exchanged for note 192,379 -
Release of investment banking shares 725,000 -
Common stock placed in escrow in connection with stock 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-21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: September 28, 1999 VDC COMMUNICATIONS, INC.
By: /s/ Frederick A. Moran
-------------------------------------
Chairman, Chief Executive Officer and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form
10-K has been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
/s/ Frederick A. Moran Chairman, Chief Executive September 28, 1999
- ---------------------- Officer, Chief Financial
Frederick A. Moran Officer and Director
/s/ James B. Dittman Director September 21, 1999
- --------------------
James B. Dittman
/s/ Dr. Hussein Elkholy Director September 24, 1999
- -----------------------
Dr. Hussein Elkholy
/s/ Dr. Leonard Hausman Director September 24, 1999
- -----------------------
Dr. Leonard Hausman
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page Number in
Number Rule 0-3 (b)
(Referenced to Sequential
Item 601 of Numbering System
Reg. S-K) Where Exhibit Can
Be Found
<S> <C>
10.49 Promissory Note, dated January 26, 1999, made by VDC
Communications, Inc. in favor of Frederick A. Moran
10.50 Promissory Note, dated September 24, 1999, made by VDC
Communications, Inc. in favor of Frederick A. Moran
21.1 Subsidiaries of Registrant
27.1 Financial Data Schedule
</TABLE>
PROMISSORY NOTE
Up to $500,000 January 26, 1999
FOR VALUE RECEIVED, VDC COMMUNICATIONS, INC. ("The Maker"), promises
to pay to the order of FREDERICK A. MORAN ("The Payee"), up to Five Hundred
Thousand Dollars ($500,000) in accordance with the terms hereof.
The Maker shall pay interest on any unpaid principal balance hereof
from time to time as may be outstanding from the date hereof which shall accrue
at the rate of ten percent (10%) per annum ("the Interest Rate"). The entire
principal amount of this Note, together with all interest accrued shall be
payable in lawful money of the United States at Payee's office at 75 Holly Hill
Lane, Greenwich, CT or at such other place or places as Payee shall designate,
on the three month anniversary or prior thereto of the date hereof.
Maker is obligated to make payment in accordance with the terms of this
Note without defalcation or setoff and without notice or demand, and the failure
to receive any notice or demand from Payee shall not be a defense to, or excuse
for, the failure to make such payment on the due date.
Maker shall be in default hereunder upon the occurrence of any of the
following events (an "Event of Default"): (i) the failure to make payment when
due; (ii) the failure of Maker to observe or perform or cause to be observed or
performed any agreement, condition or obligation on Maker's part to be performed
hereunder; (iii) the institution by or against Maker of any bankruptcy,
insolvency, arrangement, debt adjustment or receivership, proceeding which, if
an involuntary bankruptcy petition, remains undismissed for thirty (30) days
after the filing thereof; (iv) the adjudication of Maker as a bankrupt or the
appointment of a trustee or receiver for all or any part of Maker's property;
(v) the making by Maker of an assignment for the benefit of creditors.
Upon the occurrence of any Event of Default, the entire amount
outstanding under this Note shall, at the option of Payee, become immediately
due and payable without presentment, demand or further action of any kind, and
one or more executions may forthwith issue on any judgment or judgments obtained
by virtue of any provision of this Note or otherwise obtained.
The rights and remedies provided herein shall be cumulative and
concurrent and shall not be exclusive of any right or remedy provided by law, in
equity or otherwise. Said rights and remedies may, at the sole discretion of
Payee, be pursued singly, successively or together as often as occasion therefor
shall arise, against Maker. No failure on the part of Payee to exercise any of
such rights or remedies shall be deemed a waiver of any such rights or remedies
or of any Event of Default hereunder.
Upon the occurrence of a default or an Event of Default, Payee shall
have the right, but not the duty, to cure such default or Event of Default, in
part or in its entirety, and all amounts expended or debts incurred by Payee,
including reasonable attorneys' fees, shall be deemed to be advances to Maker,
shall be added to the amount due under this Note, shall be secured by the
security for this Note, if any, and shall be payable by Maker to Payee upon
demand.
1
<PAGE>
Maker hereby waives the benefit of any laws now or hereafter enacted
providing for any stay of execution, marshalling of assets, exemption from civil
process, redemption, extension of time for payment, or valuation or appraisement
of all or any part of any security for this Note, exempting all or any part of
any other security for this Note or any other property of Maker from attachment,
levy or sale upon any such execution or conflicting with any provision of this
Note. Maker waives and releases Payee and said attorney or attorneys from all
errors, defects and imperfections whatsoever in confessing any such judgment or
in any proceedings relating thereto or instituted by Payee hereunder. Maker
hereby agrees that any property that may be levied upon pursuant to a judgment
obtained under this Note may be sold upon any execution thereon in whole or in
part, and in any manner and order that Payee, in its sole discretion may elect.
The Maker and all other endorsers, sureties and guarantors hereby
jointly and severally waive presentment and demand for payment, notice of
demand, notice of default, notice of dishonor, protest and notice of protest of
this Note, and all other notices in connection with the delivery, acceptance,
performance, default or enforcement of the payment of this Note, and also waive
notice of the exercise of any options on the part of Payee hereunder.
The granting, with or without notice, of any extension or extensions of
time for payment of any sum or sums due hereunder, or for the performance of any
covenant, provision, condition or agreement contained herein or therein, or the
granting of any other indulgence, or the taking or releasing or subordinating of
any security for the indebtedness evidenced hereby, or any other modification or
amendment of this Note will in no way release or discharge the liability of
Maker whether or not granted or done with the knowledge or consent of Maker.
Payee shall not be deemed, by any act of omission or commission, to
have waived any of its rights or remedies hereunder, at law or in equity, unless
such waiver is in writing and signed by Payee, and then only to the extent
specifically set forth in the writing. A waiver as to one event shall not be
construed as continuing or as a bar to or waiver of any right or remedy as to a
subsequent event.
In the event any portion of this Note shall be declared by any court of
competent jurisdiction to be invalid or unenforceable, such portion shall be
deemed severable from this Note, and the remaining parts hereof shall remain in
full force and effect, as fully as though such invalid or unenforceable portion
was never part of this Note.
The obligations of Maker hereunder shall be binding on the heirs,
representatives, successors and assigns of Maker and the benefits of this Note
shall inure to payee, and its heirs, representatives, successors and assigns and
to any holder of this Note.
2
<PAGE>
The outstanding balance due under this Note may be prepaid, in the
aggregate during the term of this Note, in whole or in part, without penalty or
premium. No partial prepayment shall postpone or interrupt payments of the
remaining balance, all of which shall continue to be due and payable at the time
and in the manner set forth above.
All notices and other communications required or given under this Note
shall be in writing and hand delivered, addressed to Payee or to Maker at their
respective addresses as set forth in the Asset Purchase Agreement between Maker
and Payee.
This Note, and all issues arising hereunder, shall be governed by and
construed according to the laws of the State of Connecticut without regard to
conflict of law principles.
IN WITNESS WHEREOF, Maker, intending to be legally bound hereby, has
caused this Promissory Note to be duly executed as of the 26th day of January
1999.
VDC Communications, Inc.
By: /s/ Clayton Moran
---------------------
Clayton Moran
Vice President, Finance
3
PROMISSORY NOTE
$80,000 September 24, 1999
FOR VALUE RECEIVED, VDC COMMUNICATIONS, INC. (the "Maker"), promises
to pay to the order of FREDERICK A. MORAN (the "Payee"), Eighty Thousand Dollars
($80,000) in accordance with the terms hereof.
The Maker shall pay interest on any unpaid principal balance hereof
from time to time as may be outstanding from the date hereof which shall accrue
at the rate of eight percent (8%) per annum ("the Interest Rate"). The entire
principal amount of this Note, together with all interest accrued shall be
payable in lawful money of the United States at Payee's office at 75 Holly Hill
Lane, Greenwich, CT or at such other place or places as Payee shall designate,
on the twelve month anniversary of the date hereof or prior thereto in
accordance with the terms of this Note.
Maker is obligated to make payment in accordance with the terms of this
Note without defalcation or setoff and without notice or demand, and the failure
to receive any notice or demand from Payee shall not be a defense to, or excuse
for, the failure to make such payment on the due date.
Maker shall be in default hereunder upon the occurrence of any of the
following events (an "Event of Default"): (i) the failure to make payment when
due; (ii) the failure of Maker to observe or perform or cause to be observed or
performed any agreement, condition or obligation on Maker's part to be performed
hereunder; (iii) the institution by or against Maker of any bankruptcy,
insolvency, arrangement, debt adjustment or receivership, proceeding which, if
an involuntary bankruptcy petition, remains undismissed for thirty (30) days
after the filing thereof; (iv) the adjudication of Maker as a bankrupt or the
appointment of a trustee or receiver for all or any part of Maker's property;
(v) the making by Maker of an assignment for the benefit of creditors.
Upon the occurrence of any Event of Default, the entire amount
outstanding under this Note shall, at the option of Payee, become immediately
due and payable without presentment, demand or further action of any kind, and
one or more executions may forthwith issue on any judgment or judgments obtained
by virtue of any provision of this Note or otherwise obtained.
The rights and remedies provided herein shall be cumulative and
concurrent and shall not be exclusive of any right or remedy provided by law, in
equity or otherwise. Said rights and remedies may, at the sole discretion of
Payee, be pursued singly, successively or together as often as occasion therefor
shall arise, against Maker. No failure on the part of Payee to exercise any of
such rights or remedies shall be deemed a waiver of any such rights or remedies
or of any Event of Default hereunder.
1
<PAGE>
The granting, with or without notice, of any extension or extensions of
time for payment of any sum or sums due hereunder, or for the performance of any
covenant, provision, condition or agreement contained herein or therein, or the
granting of any other indulgence, or the taking or releasing or subordinating of
any security for the indebtedness evidenced hereby, or any other modification or
amendment of this Note will in no way release or discharge the liability of
Maker whether or not granted or done with the knowledge or consent of Maker.
Payee shall not be deemed, by any act of omission or commission, to
have waived any of its rights or remedies hereunder, at law or in equity, unless
such waiver is in writing and signed by Payee, and then only to the extent
specifically set forth in the writing. A waiver as to one event shall not be
construed as continuing or as a bar to or waiver of any right or remedy as to a
subsequent event.
In the event any portion of this Note shall be declared by any court of
competent jurisdiction to be invalid or unenforceable, such portion shall be
deemed severable from this Note, and the remaining parts hereof shall remain in
full force and effect, as fully as though such invalid or unenforceable portion
was never part of this Note.
The obligations of Maker hereunder shall be binding on the successors
and assigns of Maker and the benefits of this Note shall inure to Payee, and his
heirs, representatives, successors and assigns and to any holder of this Note.
The outstanding balance due under this Note may be prepaid, in the
aggregate during the term of this Note, in whole or in part, without penalty or
premium. No partial prepayment shall postpone or interrupt payments of the
remaining balance, all of which shall continue to be due and payable at the time
and in the manner set forth above.
All notices and other communications required or given under this Note
shall be in writing and hand delivered, addressed to Payee or to Maker at their
respective addresses as set forth in the Asset Purchase Agreement between Maker
and Payee.
This Note, and all issues arising hereunder, shall be governed by and
construed according to the laws of the State of Connecticut without regard to
conflict of law principles.
IN WITNESS WHEREOF, Maker, intending to be legally bound hereby, has
caused this Promissory Note to be duly executed as of the 24th day of September
1999.
VDC Communications, Inc.
By: /s/ Clayton Moran
---------------------
Clayton Moran
Vice President, Finance
2
SUBSIDIARIES 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
5. Voice & Data Communications (Latin America), Inc., a Delaware
corporation
6. WorldConnectTelecom.com, Inc., a Delaware corporation
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains Summary Financial information extracted from
the financial statements for the year ended June 30, 1999 and is qualified in
its entirety by reference to such statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 794
<SECURITIES> 90
<RECEIVABLES> 1509
<ALLOWANCES> 7
<INVENTORY> 0
<CURRENT-ASSETS> 2386
<PP&E> 5484
<DEPRECIATION> 596
<TOTAL-ASSETS> 10002
<CURRENT-LIABILITIES> 2587
<BONDS> 1274
0
0
<COMMON> 2
<OTHER-SE> 6566
<TOTAL-LIABILITY-AND-EQUITY> 10002
<SALES> 3298
<TOTAL-REVENUES> 3298
<CGS> 0
<TOTAL-COSTS> 5156
<OTHER-EXPENSES> 17790
<LOSS-PROVISION> 7
<INTEREST-EXPENSE> 92
<INCOME-PRETAX> (48142)
<INCOME-TAX> 0
<INCOME-CONTINUING> (48142)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48142)
<EPS-BASIC> (2.72)
<EPS-DILUTED> (2.72)
</TABLE>
