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, 2000
/ / Transition Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from
,
to
--
,
Commission File Number: 001-14281
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:
Name of Each Exchange
Title of Each Class on Which Registered
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common stock, $.0001 par value per share American Stock Exchange
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 7, 2000, was approximately $16,551,328 based upon
the closing price of the common stock on such date on the American Stock
Exchange of $0.875. 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 7, 2000, the number of shares outstanding of the registrant's
common stock, par value $.0001 per share, was 24,398,029 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 1933 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, 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 "VDC", "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.
Current Telecommunications Operations
VDC Communications, Inc. (referred to herein as "VDC," "we" or "us"), directly
and through its subsidiaries, owns telecommunications switching and ancillary
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equipment, leases telecommunications lines and interconnects a global network of
carriers and customers providing domestic and international long distance
telecommunications services. Our customers include residential long distance end
users and long distance telephone companies that resell our services to their
retail customers or other telecommunications companies. We currently employ
digital switching and transmission technology, and Internet Telephony, or Voice
over Internet Protocol ("VoIP") gateway technology. Our telecommunications
equipment, currently located in New York and Los Angeles comprises our operating
facilities.
We believe the telecommunications industry is attractive given its current size
and future growth potential. We are currently a domestic and international
telecommunications company providing retail and wholesale carrier services. Our
objective is to provide these services to both retail and wholesale customers
utilizing VoIP and circuit switched technologies in the short term; and,
migrating towards a pure VoIP network in the long term. We have already begun
the process of transforming our network with next generation technology.
During the year ended June 30, 2000 ("Fiscal 2000"), we initiated the
development of VDC's VoIP clearinghouse through a wholly-owned subsidiary
("Sub"). We expect that utilizing new Internet technologies to provide voice and
facsimile, and possibly additional value added services in the future, will
provide us: (i) increased cost efficiencies; (ii) greater network flexibility;
and, (iii) an increased network scope. We expect that this can be achieved with
a relatively minimal capital outlay. During Fiscal 2000, we began the
development of this clearinghouse through Sub by: ordering IP, or Internet
Protocol, gateway equipment; and, provisioning to connect to the Internet. In
addition, we have since completed a trial and subsequently initiated the
clearinghouse. Our clearinghouse is expected to allow wholesale customers to
connect and use our network via the public Internet for the transmission of
voice calls worldwide. The clearinghouse will provide the clearing and settling
of all amounts due as a result of telecommunications traffic passed.
During the fiscal year ending June 30, 2001 ("Fiscal 2001"), we expect to commit
most of our resources towards the further development of our residential long
distance operations and the VoIP clearinghouse. During the same period, we plan
to de-emphasize our traditional wholesale operations and have already begun to
take steps to reduce the costs associated with traditional wholesale operations.
Services:
1. Domestic Residential Services
We recently completed the merger of a residential long distance provider with
and into one of our wholly-owned subsidiaries, which was renamed Rare Telephony,
Inc. ("Rare"). As a result, through Rare and one of its wholly-owned
subsidiaries, we now have over 9,500 retail customers in the United States. The
majority of the traffic generated by these customers is originated and
terminated domestically.
We acquire residential customers through direct marketing via the telephone. We
currently have two products that we offer to residential phone users. They
provide the customer a competitive termination rate for long distance calls
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within the United States. Both of these services are paid for in advance by the
customer. We currently do not utilize our own facilities to carry our retail
customers' traffic, but may in the future. We refer to these services as VDC
PeopleTalkSM on our website, which is located at www.vdccorp.com.
In the future, we expect to procure residential customers through an Internet
marketing program. A provisional patent application has been filed for the
business method (the "Method") associated with this marketing program. Through a
second wholly-owned subsidiary of Rare ("Rare Sub"), we currently hold, subject
to certain conditions, an exclusive license (the "Method License") to use the
Method for the greatest time permitted by law (but in no event less than ten
years). Although we believe the Method License may eventually become material to
our operations, it is not currently material.
We believe the acquisition of a retail provider diversifies both our customer
base and our telecommunications traffic. In addition, we believe that there is
significant potential to achieve higher levels of market penetration in the
United States residential market. As a result, we have committed significant
resources towards the development of this subsidiary.
Our statements of operations and cash flow for the year ended June 30, 2000, do
not include the results of our residential services operations. For the year
ended June 30, 2000, these operations, on a stand-alone basis, resulted in
revenues of approximately $1.5 million and a net loss of approximately $3.5
million.
2. International Wholesale Services
The international telecommunications market consists of all telecommunications
traffic that originates in one country and terminates in another. 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. We have international gateway switches located in New
York and Los Angeles and a VoIP gateway in New York. The network is capable of
interconnecting and routing a voice or facsimile call to most parts of the
world. In addition, we provide use of our switch capacity and co-location of our
switch site to other carriers.
We identify our wholesale services as those using traditional circuit switched
technology and those using VoIP technology. Traditional wholesale services are
referred to as VDC NetworkTalkSM on our website. VoIP wholesale services are
referred to as VDC BusinessTalkSM on our website.
At the end of December 1998, our international wholesale network became
operational and we began carrying telecommunications traffic domestically and
globally. Our international services are provided 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 US common carriers for the provision of
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authorized international basic switched, private line, data, and business
services to virtually all countries.
During the calendar years 1998 and 1999, we explored developing direct
telecommunications routes to foreign countries, including into Central America.
We operated a direct route into Central America until mid-1999. Although we
received revenues from the operation of this direct route, it was not a
profitable endeavor and we have since migrated to VoIP as a more cost effective
manner of building network connectivity to foreign countries.
The wholesale market provides international telecommunications services to its
target customer base of long distance service providers worldwide. Our wholesale
marketing efforts have traditionally been primarily directed to U.S.-based
carriers that originate international traffic. With the advent of our VoIP
clearinghouse, we will more actively seek international partners and customers.
During Fiscal 2000, we initiated the development of a Voice over Internet
Protocol ("VoIP"), or Internet Telephony, network, which we also call a
clearinghouse. This network is expected to both supplement and complement our
existing circuit-switched telephony network. We expect that this network will
utilize the Internet as a means of transporting calls primarily to international
destinations. We expect that the implementation of the VoIP network will result
in decreased cost of transmission without noticeable degradation in quality.
Although it has been possible to transmit VoIP calls since 1995, only recently
has the technology improved such that phone-to-phone calls can be transmitted
with quality more similar to traditional circuit-switched networks. Internet
Telephony is based on packet switching technology. This technology completes a
call by digitizing and dividing a speaker's voice into small packets that travel
to their destination along lines carrying packets of other Internet traffic.
Packets from multiple calls or faxes can be carried over the same line
simultaneously with data from other sources, which results in a higher
utilization of transmission lines than can be achieved with circuit-switched
technology. Unlike circuit-switched traffic, data packets also can be
compressed, which means that Internet Telephony uses less bandwidth per call
than traditional methods. As a result, calls can be completed at a lower cost
using VoIP.
In order to successfully complete a VoIP call, the network provider, or VDC in
this case, needs to have VoIP gateways at the originating and terminating ends
of the call. We have provisioned and tested our United States gateway. We are in
the process of identifying international partners to provision gateways in
foreign countries. As a result, in the interim, we expect to utilize both the
circuit-switched and the VoIP networks simultaneously and believe that this will
provide an optimal network operation. However, we plan to reduce the use of our
traditional technology and migrate our wholesale business towards the VoIP
clearinghouse. As a result, we plan to de-emphasize our traditional wholesale
operations during Fiscal 2001 and have begun the process of reducing the costs
associated with traditional wholesale operations. In addition, we expect that
this may reduce the revenues generated from these operations during Fiscal 2001.
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We expect the addition of VoIP capability to our international wholesale network
to provide significant operational flexibility and reduced costs. In addition,
we are also exploring ways to utilize VoIP in our residential product offerings.
The vast majority, approximately 98%, of our revenues during Fiscal 2000 were
derived from traditional wholesale operations. Our two largest wholesale
customers generated approximately 70% of our total revenues during Fiscal 2000.
Therefore, the loss of our largest customers could have a material adverse
effect on our business. We believe that the recent addition of residential
customers helps diversify our customer base so that we will not be as dependent
on these larger customers.
3. Tower Site Management
Through Sky King Communications, Inc., a Delaware corporation and wholly-owned
subsidiary of VDC ("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 2%, of our current revenues are
derived from Sky King's tower site management service. We are exploring certain
strategic alternatives regarding Sky King, including the potential sale of Sky
King or its material contracts.
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. 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 $140,000.
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.
During Fiscal 2000, we recorded an approximate $2.3 million writedown of our
investment in MCC. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 5 to the Consolidated Financial
Statements.
Competition
The domestic and 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 and
improve our competitive position or what expenditures will be required to
develop and provide such products and services. Telecommunications providers,
both retail and wholesale, 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
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Corporation. 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. This competition has been
putting downward pressure on the price of telecommunications services, such as
voice and facsimile services. The continuance of this trend 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.
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 and the services we provide. 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 operations are generally 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 and state specific 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 do not currently act as a LEC. The FCC
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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.
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 VDC, with certain exceptions. Under
the Communications Act and FCC rules, all international telecommunications
carriers, including VDC's subsidiaries, 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 (and wholly-owned subsidiaries of our wholly-owned subsidiaries),
have received five Section 214 authorizations that authorize the provision of
international services on a facilities and resale basis and have filed the
requisite tariff for our international services. 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 VDC's subsidiaries are not required to obtain
Section 214 or other authorization from the FCC for the provision of domestic
interstate telecommunications services. Domestic interstate carriers previously
were required to 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 the
requisite domestic tariffs with the FCC. The FCC recently adopted rules
eliminating the obligation to file tariffs governing domestic interstate
services and requiring that such tariffs be withdrawn. Thus, we will no longer
be able to rely upon filed tariffs to establish the rates, terms, and conditions
governing our relationships with customers of these services, and instead will
have to enter into and rely upon contracts with these customers. The
establishment and execution of such agreements will likely increase our costs of
doing business.
When appropriate, we would be required to conduct 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
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of the agreement. 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, among others. 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.
Regulation Specific to Domestic Interstate Telecommunications Services
Our provision of domestic long distance in the United States is subject to
regulation by the FCC and certain state public service commission and public
utilities commissions, who regulate to varying degrees interstate and intrastate
rates, respectively, ownership of transmission facilities, and the terms and
conditions under which domestic services are provided. Under federal law, the
domestic interstate carriers are subject to a variety of regulations that, for
instance, govern the documentation and verifications necessary to change a
consumer's long distance carrier and require the filing of periodic reports. The
FCC also has jurisdiction to act upon complaints against any common carrier for
failure to comply with its statutory obligations.
Regulation Specific to Internet Telephony - VoIP
In the United States and in numerous other countries, there is currently a small
but growing body of laws and regulations directly applicable to Internet access,
Internet commerce and VoIP. Due to the popularity and use of the Internet and
VoIP, it is likely that a growing number of laws and regulations may be adopted
at the international, federal, state and local levels. These regulations cover
issues such as user privacy, consumer protection, freedom of expression,
encryption standards, trade barriers, pricing, characteristics and quality of
products and services, taxation, advertising, intellectual property rights,
information security and the convergence of traditional telecommunications
services with Internet communications and licensing. Moreover, a number of laws
and regulations have been proposed and are currently being considered by
federal, state and foreign legislatures with respect to those issues. The nature
of any laws and regulations and the manner in which existing and new laws and
regulations may be interpreted and enforced cannot be fully determined. VoIP and
Internet service providers are currently considered "enhanced service providers"
within the U.S. and are exempt from U.S. federal and state regulations governing
telecommunications common carriers. Accordingly, the provision of Internet and
VoIP services is currently exempt from tariffing, certification and rate
regulation. We cannot predict the likelihood that state, federal, or foreign
governments will impose additional regulations on VoIP operations, nor can we
predict the future impact that any such regulation will have on our business,
financial condition or results of operations. In April 1998, the FCC issued a
report to Congress on the implementation of the universal service provisions of
the Telecommunications Act of 1996. In its report, the FCC indicated that it
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would re-examine its policy of not requiring providers of certain forms of VoIP
and Internet service providers to contribute to the universal service
mechanisms. In addition, the FCC stated that it may recognize phone-to-phone
VoIP providers as being regulated telecommunications service providers. The
European Commission issued on January 10, 1998, a Communication addressing
whether VoIP should be considered "voice telephony" and thus subject to
regulation by the member states of the European Union. Consistent with its
earlier directives, the European Commission stated that Internet telephony could
properly be considered "voice telephony," and thus subject to regulation only if
certain factors are satisfied. The European Commission also held that at the
time no form of VoIP satisfied all of these factors. Currently, providers of
VoIP within the European Union are subject to no more than general authorization
or declaration requirements by the Member States. Within the U.S. or
internationally, we cannot predict the outcome of any future proceedings that
may impact our provision of VoIP services or that may impose additional
requirements, regulations, or changes upon our provision of such services.
Other Disclosures
We currently hold one service mark registered with the United States Patent and
Trademark Office. The registration shall remain in force for ten years from the
date of registration (March 28, 2000), subject to certain conditions and
requirements. We do not currently believe that this mark is material to our
operations.
Employees
As of September 6, 2000, VDC and its wholly-owned subsidiaries (including
wholly-owned subsidiaries of VDC's wholly-owned subsidiaries) had approximately
251 employees, of which 5 were executive officers, and 195 were engaged in
sales, 37 were engaged in operations, engineering and technical/data systems,
and 14 were engaged in administration. We consider our employee relations to be
good.
Risk Factors
1. The auditors' report on our financial statements contains a going
concern qualification.
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, working capital deficiency and future cash needs. We have
used substantial amounts of working capital in our operations and have sustained
significant operating losses. As of June 30, 2000, current liabilities exceeded
current assets by approximately $2,700,000. Our continued operations are
dependent upon meeting short term financing requirements and long term
profitability.
2. We are not profitable.
We have not yet experienced a profitable quarter and may not ever achieve
profitability. We have yet to build sufficient volume of telecommunications
voice and facsimile traffic to reach profitability. Our current expenses are
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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 we will need to find new sources of
financing which may or may not be available or our operations will be in
jeopardy.
3. 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 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 operations may be in jeopardy.
4. We are a company in the early stages of development.
We commenced our present operations during the past 2-3 years, and therefore,
have only a limited operating history upon which you can evaluate our business
and performance.
5. We are diversifying our operations.
We have recently entered into a phase of rapid diversification. We are expanding
our business lines from being a provider of international wholesale
telecommunications services to becoming a diverse supplier of residential,
traditional wholesale, and VoIP wholesale telecommunications services. These
efforts require us to assume greater risks, which include but are not limited
to: greater demands on management's time; the ability of management to learn new
skills while continuing to manage effectively our existing operations;
investment risks associated with expenditures for new lines of business; and
increased pressures upon our operations and financial systems.
6. 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.
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7. There are a number of risks specifically associated with our
residential long distance operations.
We may not be able to successfully integrate the acquisition of Rare Telephony,
Inc., a Nevada corporation ("Rare Nevada") into VDC. In addition, we may not be
able to develop our newly acquired residential services successfully. If the
market for our residential service products does not develop as we expect, or
develops more slowly than expected, our business, financial condition and
results of operations may be materially and adversely affected. Our customers
and potential customers may be reluctant to use our residential services for a
number of reasons, including, but not limited to: lack of product recognition;
perceptions that the quality of service may be substandard; and, the reluctance
of customers to change long distance carriers.
8. There are a number of risks that will be specifically associated with
our VoIP operations.
We may not be able to successfully develop our VoIP operations. If the market
for Internet telephony and new services does not develop as we expect, or
develops more slowly than expected, our business, financial condition and
results of operations may be materially and adversely affected. Our customers
may be reluctant to use VoIP services for a number of reasons, including, but
not limited to: perceptions that the quality of voice transmitted over the
Internet is substandard; and perceptions that Internet telephony is unreliable.
In addition, competition in the market place may limit our ability to obtain an
adequate profit margin.
9. There are a number of risks specifically associated with our
traditional wholesale operations.
Our traditional wholesale business depends partially on carriers and other
communications service providers generating international voice traffic and
selecting our network to carry at least some of this traffic. If the volume of
international voice traffic fails to increase, or decreases, and our customers
do not employ our network, our traditional wholesale operations will not be
profitable, which may materially and adversely affect our business, financial
condition and results of operations. We plan to de-emphasize our traditional
wholesale services during the year ending June 30, 2001. As such, it is likely
that the revenues derived from traditional wholesale services will not grow and
could decrease. We cannot assure you that end-users will continue to purchase
services from our customers or that our wholesale customers will maintain a
demand for our services.
10. We rely heavily on certain underlying carriers.
Separately, our wholesale and residential operations rely on a one or two
underlying carriers for their underlying telecommunications connectivity and/or
call completion. If any of these carriers can longer no provide services to us,
or chooses to no longer provide services to us, it may materially and adversely
affect our business.
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11. 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 21.6 million shares of our common stock are
currently eligible for resale under applicable securities laws. We expect to
register the potential resale of up to an additional 1,388,706 shares of VDC
common stock into the public trading market, including 587,073 shares on behalf
of Frederick A. Moran and his wife. This would have the effect of 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 increase in the number of shares
available for sale, in and of itself, could have a depressive effect on the
price of our stock.
12. The future issuance of additional shares of common stock could decrease
the value of the shares.
We are presently authorized to issue 50,000,000 shares of common stock, of which
24,398,029 are outstanding as of the date of this report. Issuance of additional
shares would likely have a dilutive effect upon the existing stockholders and
may reduce the value of their investment. If, as of September 7, 2000, holders
of our outstanding options and warrants exercise their rights to purchase
shares, we must issue up to 2,924,535 shares of common stock.
We may issue additional shares for valid business purposes within the discretion
of our board of directors, including, without limitation:
- additional equity financings;
- the acquisition of other companies; and
- compensation of our officers, employees, consultants, and
directors.
13. 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 ITXC, Inc., iBasis,
Inc. and other foreign and U.S.-based long distance and VoIP 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 customers, their financial strength could
hinder our ability to succeed. For example, 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. Additionally, in the
future we 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. 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
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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.
14. 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.
15. A small number of customers historically have accounted for a
significant percentage of our total sales.
For the year ended June 30, 2000, two customers accounted for approximately 70%
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.
16. Our cost of services and operating expenses may fluctuate
significantly.
Our cost of services, operating expenses and cash flow 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;
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(6) loss of favorable routing options;
(7) actions by domestic or foreign regulatory entities;
(8) financial difficulties of major customers;
(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.
17. Some of our customers are high credit risks.
We must assume a certain level of credit risk with our customers in order to do
business. Based on such failures in the past, we know that if one or more of our
customers fails or refuses to pay us in a timely manner, or at all, it could
have a material adverse affect on business, cash flow and financial condition.
18. 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.
19. Our ability to implement our plan successfully is dependent on a few
key people.
We are dependent on the management of VDC and its subsidiaries. We are
particularly dependent upon Frederick A. Moran, the Chief Executive Officer of
VDC. Mr. Moran is also a significant shareholder and Chairman of the Board of
Directors of VDC. VDC has an employment agreement with Mr. Moran through March
2003. We believe the combination of his employment agreement and equity interest
in VDC keeps Mr. Moran highly motivated to remain with VDC. We do not maintain
key man insurance on Mr. Moran's life.
20. We may not be able to attract enough qualified technical personnel
because they are in short supply. If this happens, our ability to
compete in our industry would likely be curtailed.
We believe that our success will depend in large part upon our ability to
attract, retain, train and motivate highly-skilled employees, particularly
project managers and other senior technical personnel. Qualified personnel are
17
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in great demand. There is significant competition for good employees and it is
likely that access to qualified personnel will remain limited for the
foreseeable future. Many of our competitors are in a better financial position
than VDC to offer higher compensation to qualified personnel. We may not be
successful in attracting a sufficient number of such personnel in the future, or
in retaining, training and motivating the employees we are able to attract.
21. 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.
22. The future regulation of VoIP services may be burdensome and eliminate
cost advantages.
VoIP operations may become subject to regulation in the future. If VoIP is
regulated in a manner similar to traditional telephony, our VoIP operations may
be burdened and any cost advantages provided by VoIP may be eliminated. We are
unable to predict whether, and to what extent, VoIP will be regulated and the
impact such regulation may have on our business.
23. 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.
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24. 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. The FCC has adopted rules eliminating the tariffing requirements for
domestic interstate services and requiring those carriers to de-tariff their
interstate offerings. International service providers 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.
25. 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.
26. 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
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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.
27. The international telecommunications market is risky.
The international telecommunications market 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, 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.
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 equipment, 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. Our arrangements with foreign partners may expose us to
significant legal, regulatory or economic risks over which we may have little
control.
28. 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
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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.
29. 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.
30. 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 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 may 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.
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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.
31. 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.
32. 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
VDC.
Item 2. Description of Properties
Our headquarters are located in approximately 6,270 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 $170,000. We also lease approximately 3,566 square feet of office
space in Aurora, Colorado and 15,790 square feet of office space in Newark, New
Jersey where the operations of two of our subsidiaries are located. These
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offices are leased from unaffiliated third parties pursuant to a five-year
agreement at an annual rental of approximately $61,000 and a two-year agreement
at an annual rental of approximately $132,000, respectively.
We also lease a total of approximately 8,952 square feet in New York and Los
Angeles 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 $204,000.
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 VDC and is now a wholly-owned subsidiary of VDC. The
relief sought by Worldstar included: (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 VDC acquired an
interest in the Nicaraguan Project was void.
Certain of the defendants, including VDC, filed a Motion to Dismiss. In an order
dated July 12, 2000, the Court dismissed Worldstar's claims against VDC
demanding monetary damages arising out of purported interference with
Worldstar's profit participation and ownership in the Nicaraguan Project. The
Court denied VDC's Motion to Dismiss Worldstar's declaratory judgment claim
against VDC.
In the event that the plaintiff prevails in the Action, the value of VDC's
interest in Masatepe, Masacom and/or the Nicaraguan Project could be diluted.
Additionally, VDC could be held liable for certain value that may be deemed to
have been derived from the operation of Masatepe and/or the Nicaraguan Project,
and for related damages. However, pursuant to the Purchase Agreement through
which VDC acquired Masatepe (the "Purchase Agreement"), Activated has an
obligation to indemnify and hold VDC 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 VDC all or part of VDC's equity interest
in Masatepe. Furthermore, the defendants are vigorously defending the Action. In
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view of the foregoing, VDC does not believe that the claims asserted in the
Action will have a material adverse effect on VDC'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
VDC induced it to enter into an agreement with VDC 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 VDC's purported misrepresentations and purported
breaches of contract. In the event that StarCom prevails in the StarCom Action,
VDC could be liable for monetary damages in an amount that would have a material
adverse effect on VDC's assets and operations.
VDC does not believe that the claims asserted in the StarCom Action are either
meritorious or will have a material adverse effect on VDC's assets or
operations. To date, despite the fact that the StarCom Action was filed over one
year ago, opposing counsel in the StarCom Action has refused to have VDC served
with process. Moreover, opposing counsel filed a Motion to Withdraw as Attorney
in Charge of the StarCom Action. In the event that VDC is served in the StarCom
Action, it intends to defend itself vigorously.
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.
VDC's common stock has traded on the American Stock Exchange ("AMEX") since July
7, 1998 under the trading symbol "VDC." Commencing in 1993 until November 26,
1997, VDC'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 VDC's
common stock, which was subsequently delisted from trading on NASDAQ on March 2,
1998. From March 2, 1998 to July 7, 1998, VDC'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 VDC's common stock for the periods indicated below:
<TABLE>
<CAPTION>
Fiscal 2000 High Low
<S> <C> <C>
First Quarter $3.50 $1.25
Second Quarter $2.25 $0.75
Third Quarter $3.94 $1.31
Fourth Quarter $3.94 $1.44
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Fiscal 1999
First Quarter $7.88 $4.13
Second Quarter $4.50 $3.50
Third Quarter $5.63 $3.69
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
</TABLE>
On September 7, 2000, the closing price for VDC's common stock on AMEX was
$0.875 per share.
The high and low bid and closing prices for VDC's common stock are rounded to
the nearest 1/16th.
Dividends
VDC has not paid any cash dividends to date and has no intention of paying any
cash dividends on its common stock in the foreseeable future. The declaration
and payment of dividends is subject to the discretion of the Board of Directors
and to certain limitations under the General Corporation Law of the State of
Delaware. The timing, amount and form of dividends, if any, will depend, among
other things, on VDC's results of operations, financial condition, cash
requirements and other factors deemed relevant by the Board of Directors.
Holders
As of September 7, 2000, the approximate number of holders of record of VDC's
common stock was 843. Based upon the records of our transfer agent, VDC believes
the number of beneficial owners of the common stock exceeds 2,127.
Recent Sales of Unregistered Securities
In July 2000, VDC sold 625,000 shares of VDC common stock to accredited
investors in a non-public offering exempt from registration pursuant to Section
4(2) and Rule 506 of Regulation D of the Securities Act of 1933, as amended, as
follows:
<TABLE>
<CAPTION>
Shareholder Number of Shares Consideration ($)
----------- ---------------- -----------------
<S> <C> <C>
Alan B. Snyder 375,000 375,000
Alan B. Snyder, IRA 125,000 125,000
Merl Trust 43,125 43,125
The Lucien I. Levy Revocable Living Trust 17,500 17,500
25
<PAGE>
The Elvire Levy Revocable Living Trust 10,000 10,000
O.T. Finance, SA 54,375 54,375
------ ------
Total 625,000 625,000
</TABLE>
No commissions were paid in connection with the foregoing transaction.
In June 2000, VDC issued 1,551,020 shares of VDC common stock to the former
shareholders of Rare Telephony, Inc., a Nevada corporation ("Rare Nevada") in
consideration of the merger of Rare Nevada with and into the Voice & Data
Communications (Latin America), Inc. (a wholly-owned subsidiary of VDC now known
as Rare Telephony, Inc.) (the "Rare Merger") and 81,633 shares of VDC common
stock to RC&A Group, Inc., in consideration of investment banking services
rendered in connection with the Rare Merger, in a non-public offering exempt
from registration pursuant to Section 4(2) and Rule 506 of Regulation D of the
Securities Act of 1933, as amended. Of the shares issued to the Rare Nevada
shareholders, 930,610 were issued in escrow.
On April 26, 2000, VDC sold 540,000 shares of VDC common stock to Frederick A.
Moran and Joan Moran, joint tenants, both accredited investors, for $1,080,000
in a non-public offering exempt from registration pursuant to Section 4(2) and
Rule 506 of Regulation D of the Securities Act of 1933, as amended. No
commissions were paid in connection with the foregoing transaction.
In consideration for investment banking services arising out of the March 6,
1998 Sky King Merger, during March and April 2000, VDC issued 127,500 shares of
VDC common stock to accredited investors in a non-public offering exempt from
registration pursuant to Section 4(2) and Rule 506 of Regulation D of the
Securities Act of 1933, as amended, as follows: 52,500 shares to SPH
Investments, Inc.; 50,000 shares to KAB Investments, Inc.; and 25,000 to FAC
Enterprises, Inc.
In October 1999, VDC sold 1,333,334 shares of VDC common stock to accredited
investors in a non-public offering exempt from registration pursuant to Section
4(2) and Rule 506 of Regulation D of the Securities Act of 1933, as amended, as
follows:
<TABLE>
<CAPTION>
Shareholder Number of Shares Consideration ($)
----------- ---------------- -----------------
<S> <C> <C>
Adase Partners, L.P. 140,000 105,000.00
The Lucien I. Levy Revocable Living Trust 10,000 7,500.00
Frederick W. Moran (1) 666,667 500,000.25
Merl Trust 28,000 21,000.00
O.T. Finance, SA 22,000 16,500.00
Alan B. Snyder 266,667 200,000.25
Eric M. Zachs 200,000 150,000.00
------- ----------
Total 1,333,334 1,000,000.50
</TABLE>
(1) An adult son of Frederick A. Moran.
26
<PAGE>
No commissions were paid in connection with the foregoing transaction.
Item 6. Selected Financial Data.
The following selected consolidated financial data as of and for each of the
period(s) ended June 30, 2000, 1999, 1998, 1997 and 1996 have been derived from
the audited consolidated Financial Statements of VDC. 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.
<TABLE>
<CAPTION>
Period from
January 3, 1996
(inception) through Years ended
June 30, 1996 June 30, 1997 June 30, 1998 June 30, 1999 June 30, 2000
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
revenues $ 4,850 $ 43,248 $ 99,957 $ 3,298,357 $ 8,528,693
cost of services 1,091 22,020 28,460 5,155,752 8,721,649
selling, general and administrative 30,461 53,657 1,167,429 4,636,230 2,482,457
non-cash compensation 0 - 2,254,000 16,146,000 -
asset impairment charges 0 - - 1,644,385 -
-----------------------------------------------------------------------------------
operating (loss) (26,702) (32,429) (3,349,932) (24,284,010) (2,675,413)
operating (loss) per common share (0.01) (0.01) (0.76) (1.37) (0.13)
(loss) on impairment-MCC - - - (21,328,641) (2,260,000)
(loss) on note restructuring - - - (1,598,425) -
other income (expense) - - 195,122 (63,637) (311,017)
equity in (loss) of affiliate - - - (867,645) -
-----------------------------------------------------------------------------------
net loss $ (26,702) $ (32,429) $ (3,154,810) $(48,142,358) $(5,246,430)
===================================================================================
net loss per common share - basic and diluted $ (0.01) $ (0.01) $ (0.72) $ (2.72) $ (0.26)
-----------------------------------------------------------------------------------
weighted average shares outstanding 3,699,838 3,699,838 4,390,423 17,678,045 20,573,864
-----------------------------------------------------------------------------------
Balance Sheet data:
investment in MCC $ - $ - $ 37,790,877 $ 2,400,000 $ 140,000
-----------------------------------------------------------------------------------
total assets $ 16,499 $ 15,000 $ 45,823,684 $ 10,002,061 $10,334,513
-----------------------------------------------------------------------------------
long-term liabilities, net of current portion $ - $ - $ - $ 847,334 $ 745,559
-----------------------------------------------------------------------------------
27
<PAGE>
stockholders' equity $ 16,249 $ 14,750 $ 45,667,499 $ 6,567,532 $ 5,127,501
-----------------------------------------------------------------------------------
Other Operating data:
EBITDA - Adjusted $ (25,162) $ (29,039) $ (1,089,726) $ (5,386,607) $(1,657,148)
-----------------------------------------------------------------------------------
Cash flows used by operating activities $ (25,378) $ (28,573) $ (859,390) $ (4,253,532) $ (395,335)
-----------------------------------------------------------------------------------
Cash flow used in investing activities $ - $ - $ (3,201,433) $ (2,492,484) $ (856,261)
-----------------------------------------------------------------------------------
Cash flow from financing activities $ 27,551 $ 27,830 $ 6,271,504 $ 4,851,704 $ 1,705,922
-----------------------------------------------------------------------------------
Minutes of Use (4) - - - 12,155,801 31,699,313
-----------------------------------------------------------------------------------
Revenue per Minute of Use (4) $ - $ - $ - $ 0.225 0.22
-----------------------------------------------------------------------------------
</TABLE>
(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 VDC'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.
(4) Not derived from audited financial statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
As used in this document, the terms "VDC", "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, directly and through our subsidiaries, own telecommunications switching and
ancillary equipment, lease telecommunications lines and interconnect a global
network of carriers and customers providing domestic and international long
distance telecommunications services. Our customers include residential long
distance end users and long distance telephone companies that resell our
services to their retail customers or other telecommunications companies. We
currently employ digital switching and transmission technology, and Internet
Telephony, or Voice over Internet Protocol ("VoIP") gateway technology. Our
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<PAGE>
telecommunications equipment, currently located in New York and Los Angeles,
comprises our operating facilities.
We believe the telecommunications industry is attractive given its current size
and future growth potential. We are currently a domestic and international
telecommunications company providing retail and wholesale carrier services. Our
objective is to provide these services to both retail and wholesale customers
utilizing VoIP and circuit switched technologies in the short term; and,
migrating towards a pure VoIP network in the long term. We have already begun
the process of transforming our network with next generation technology.
During the past year, we have made significant advancements in our strategic
business plan. Some of the more important events include:
(1) We completed, and had declared effective, a registration
statement permitting the resale of outstanding shares
providing our shareholders liquidity and enhancing the
efficiency of the public market for our stock;
(2) We raised over $2.1 million through the private placement of
equity;
(3) We initiated the development of a VoIP network; and
(4) We completed the acquisition of a residential long distance
telecommunications provider thereby diversifying our customer
base and our traffic mix.
We completed the merger of a residential long distance provider with and into
one of our subsidiaries (the "Rare Merger"), which was renamed Rare Telephony,
Inc. ("Rare") towards the end of the year ended June 30, 2000 ("Fiscal 2000").
As such, the operating results of Rare (and its predecessor Rare Nevada) were
not included in our results. Rare's results of operations will be consolidated
into VDC effective July 1, 2000.
As a result of the Rare Merger, we now provide long distance telephone services
to residential customers. We now have over 9,500 retail long distance telephone
customers, more than tripling the number of customers at March 31, 2000 and up
from the initiation of the residential sales effort in December 1999. As of
September 7, 2000, Rare employed approximately 195 salespeople.
We currently have three primary retail long-distance marketing concepts. Two of
them provide customers with a competitive termination rate for long distance
calls within the United States and a monthly rebate. The third concept will
utilize an exclusive license, held by a wholly-owned subsidiary of Rare, to use
a proprietary, Internet-driven, customer-acquisition method that we plan to
employ to market telephony services over the Internet. We expect to initiate
this concept in the future, although we have not yet set an implementation
schedule.
According to a member of National TeleCommunications, Inc.'s ("NTC") former
management: seven of Rare's eight-member management team constituted a
substantial part of NTC management; NTC, over a 30-month period, grew to
approximately $275,000,000 in annualized run-rate revenues and about 1,800,000
29
<PAGE>
telephony customers, thereby becoming the 8th largest retail long distance
telephony company measured by presubscribed lines in the United States in 1998;
and, NTC's assets were acquired by MCI WorldCom, or an affiliate or subsidiary
thereof, in or about January 2000. Inc. Magazine ranked NTC the 38th fastest
growing private company in the United States in 1997.
As a result of the Rare transaction, we will seek to employ Internet
technologies, including VoIP Telephony and an Internet-driven marketing
technique, to reduce the operating costs and improve the marketing methodologies
of the combined companies. In addition, Rare is expected to substantially
broaden VDC's telephony customer base.
Rare (including its predecessor Rare Nevada) only recently began operations and
is currently experiencing negative earnings before interest, taxes, depreciation
and amortization ("EBITDA"), which should continue to occur for at least the
next several months. The acquisition of Rare Nevada is expected to result in a
short-term increase in VDC's propensity to experience negative EBITDA. EBITDA is
a financial measure commonly used in the telecommunications industry. Still,
EBITDA is not derived from generally accepted accounting principles ("GAAP") and
therefore investors should not consider it as indicative of operating income or
cash flows from operating activities, as determined in accordance with GAAP, or
as a measure of liquidity.
We earn revenue from three sources. The first two sources we consider our
traditional wholesale operations. The first source is 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 due within zero to thirty days. Our second source of revenues is
derived from the rental of space, switch capacity and circuits at our
telecommunications facilities ("Partition") to other telephone companies. This
revenue is generated and billed on a month-to-month basis. We plan to
de-emphasize our wholesale operations, in part, by reducing related expenses. As
such, we expect revenue from traditional wholesale operations may decrease
during the year ending June 30, 2001 ("Fiscal 2001"). Our third source of
revenue is 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. Effective July 1, 2000, we
expect to generate revenues from residential long distance customer usage, which
will be derived on a per-minute or monthly basis and which is anticipated to be
a separate segment.
Revenue derived through the per-minute wholesale transmission of voice and
facsimile telecommunications traffic 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. Further, these
contracts generally do not provide for a fixed volume of telecommunications
traffic to be sent to us and, as such, the amount of telecommunications traffic
that a customer sends to us during any given month can vary considerably.
Occasionally, however, these contracts require payments to us if a customer does
not send a fixed minimum amount of telecommunications traffic to us.
30
<PAGE>
Costs of services is primarily comprised of costs incurred from other domestic
and foreign telecommunications carriers to originate, transport and terminate
calls that we send to them. The majority of our cost of service is variable,
based on the number of minutes of use, with transmission and termination costs
being our most significant expense. In addition, our costs of services include
circuit expenses, the allocable personnel and overhead associated with
operations, and depreciation of telecommunications equipment. We depreciate long
distance telecommunications equipment 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. These costs include, but are not
limited to, costs associated with international and VoIP market research, and
due diligence regarding potential projects inside and outside of the U.S.
Results of Operations
For the Year-Ended June 30, 2000 Compared to the Year-Ended June 30, 1999
Revenues: Total revenues in the year ended June 30, 2000 increased to
approximately $8.5 million from approximately $3.3 million for the year ended
June 30, 1999 ("Fiscal 1999"). Revenue of approximately $7.0 million was
generated during Fiscal 2000 by the transmission of approximately 31.7 million
minutes of telecommunications traffic domestically and internationally ("Long
Distance Revenue"). We also generated revenue of approximately $1.1 million from
Partition, approximately $217,000 from contractually required payments from a
customer due to its failure to provide a certain minimum level of
telecommunications traffic, and approximately $129,000 from site tower
management. Long Distance Revenue of approximately $2.8 million was generated
during Fiscal 1999 by the transmission of approximately 12.2 million minutes. We
also generated revenue of approximately $340,000 from Partition and
approximately $106,000 from site tower management during Fiscal 1999.
Costs of services: Costs of services of approximately $8.7 million during Fiscal
2000 were up from approximately $5.2 million for Fiscal 1999. The increase is
due to increased domestic and international minutes of telecommunications
traffic, which we purchased from other long distance carriers and increased
operational expenses including salaries, depreciation, and circuit costs. Costs
of services as a percentage of revenues decreased from 157% in Fiscal 1999 to
102% in Fiscal 2000. The decrease was mostly attributable to improved rates,
increased traffic volume and lower fixed monthly circuit costs.
Selling, general & administrative: SG&A expenses decreased to approximately $2.5
million during Fiscal 2000 from approximately $4.6 million for Fiscal 1999. This
decrease was mainly attributable to an aggressive cost cutting program initiated
in the Fall of 1999 that successfully discovered and reduced non-critical
overhead and selling expenses without impairing our ability to grow revenues.
Specifically, the following cost reductions were realized during Fiscal 2000:
salaries decreased approximately $1 million, professional fees decreased
approximately $427,000, amortization decreased approximately $472,000 and travel
and entertainment decreased approximately $211,000.
31
<PAGE>
Non-cash Compensation Expense: Non-cash compensation expense was $0 for Fiscal
2000 compared to $16,146,000 for Fiscal 1999. See "Non-cash Compensation
Expense" under "For the Year-Ended June 30, 1999 compared to the Year-Ended June
30, 1998."
Asset impairment charges: There were no asset impairment charges in Fiscal 2000.
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 canceled our
circuit into Central America and curtailed Masatepe's operations. Masatepe no
longer operates its owned telecommunications route to Central America.
Therefore, the goodwill attributable to the Masatepe acquisition had been
permanently impaired.
Other expense: Other expense was approximately $2.6 million for Fiscal 2000
compared with approximately $23.0 million for Fiscal 1999. The other expense in
Fiscal 2000 was mostly due to a non-cash charge of $2,260,000 attributable to a
writedown of our ownership interest in MCC, and approximately $275,000 in
charges attributable to settlement or adjustments to disputed carrier charges.
Other expense in Fiscal 1999 was mostly due to an approximate $21.3 million
writedown of our ownership interest in MCC and a $1.6 million loss on
restructuring of notes receivable.
Net loss: Our net loss for Fiscal 2000 was approximately $5.2 million. The net
loss was primarily the result of our operating loss and the writedown of our
investment in MCC, which is separate and apart from our ongoing core operations.
In Fiscal 1999, our net loss was approximately $48.1 million. This 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. On an EBITDA basis, we experienced a loss of
approximately $1.7 million during Fiscal 2000 as compared with approximately
$5.4 million during Fiscal 1999.
We expect that future profitability is likely to depend upon a combination of
several factors, including the following:
(1) the success of our retail marketing programs;
(2) the competitiveness of both our retail and wholesale products;
(3) the successful implementation of our VoIP network;
(4) management of growth; and,
(5) our financial and operational flexibility.
32
<PAGE>
There are many other factors that could also have an impact.
For the Year Ended June 30, 1999, Compared to the Year Ended June 30, 1998
Revenues: Total revenues in Fiscal 1999 increased to approximately $3.3 million
from approximately $100,000 for the year ended June 30, 1998 ("Fiscal 1998").
This was 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 by Long Distance Revenue, the rental of telecommunications
facilities, and tower management. Revenue for Fiscal 1998 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 Fiscal 1998 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 Fiscal 1998. 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
(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.
Non-cash Compensation Expense: Non-cash compensation expense was $16,146,000 for
Fiscal 1999 and $2,254,000 for Fiscal 1998. 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
included 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
33
<PAGE>
compensatory because their beneficial ownership was attributed to certain Sky
King Connecticut shareholders in management positions with VDC. 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.
Other income (expense): Other income (expense) was approximately $(23.0) million
for Fiscal 1999 compared with approximately $195,000 for Fiscal 1998. 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 2000. Other income during Fiscal
1998 was attributable to interest and dividend income.
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 EBITDA basis, we experienced a loss of approximately $5.4 million during
Fiscal 1999. Our net loss for Fiscal 1998 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 EBITDA basis, we experienced a loss of approximately
$1.0 million during Fiscal 1998.
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, working capital deficiency and
future cash needs. A significant amount of capital has been expended towards
operations and in connection with certain acquisitions and the establishment of
our programs. These expenditures have been incurred in advance of the
realization of gross profit that may occur as a result of such programs.
Our liquidity requirements arise primarily from cash used in operating
activities. To date, we have financed ourselves mostly through equity financing.
As of September 12, 2000, we had approximately $200,000 in cash, on a
consolidated basis. This does not represent sufficient funds to support our
business plans or our current rate of operating losses. In order to continue
developing our plans and operations, we need to find a source of funding. We
expect to meet short term liquidity requirements by raising additional funds
through equity financings and we are currently exploring several financing
atlternatives. 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
34
<PAGE>
activities. An inability to generate cash from either of these factors within
the short term could have an adverse material affect on our operations and plans
for future growth.
During Fiscal 2000, we implemented cost-cutting measures, which included the
following:
(1) Reduced circuit costs by over 50% by eliminating unused
capacity and more fully utilizing remaining capacity.
(2) Obtained a release from the vendor on an equipment lease for
an asset that was not a strategic fit for our current network
and would have cost approximately $16,800 per month beginning
January 2000.
(3) Reduced our employees from 29 at September 14, 1999 to 18 at
March 31, 2000. We have subsequently increased our employees
significantly as a result of the Rare Nevada acquisition.
(4) Amended our lease space in our Colorado office which reduced
Colorado office rent by approximately 60%.
Although operating results improved significantly during Fiscal 2000, the
American Stock Exchange ("AMEX") has notified us that we fall below certain of
AMEX's continued listing qualifications. We took numerous steps in Fiscal 2000
to address this issue, including: (i) raising $2.1 million through a private
sale of equity; and (ii) substantially reducing overhead costs and operational
expenses. As a result of cost cutting and increased sales, we have reduced our
negative EBITDA, from approximately $5.4 million during Fiscal 1999 to
approximately $1.7 million during Fiscal 2000. However, we expect our rate of
EBITDA loss to increase in the quarter ending September 30, 2000 primarily as a
result of the losses from our residential long distance operations. Our
calculation of EBITDA does not take into account our existing commitments for
capital expenditures and should not be seen as representative of the amount of
funds generally available to us. The fact that our auditors have raised a going
concern issue will likely result in intensified scrutiny by AMEX of our
continued listing. As such, there can be no assurances of continued listing.
As a result of the completion of the Rare Nevada acquisition in June 2000, we
consider it less likely we will pursue other acquisition opportunities in the
short term. Although we would likely use our common stock for acquisitions, 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. Furthermore,
any acquisition may increase our cash losses from operations, thereby reducing
our liquidity.
We are projecting capital expenditures of approximately $0 to $50,000 during the
remainder of calendar 2000. The capital expenditures are expected to be mainly
associated with the VoIP strategy and the residential services. We expect to
fund these purchases through capital lease financing or equity financing and
cash flow from operations, if any.
35
<PAGE>
Funds may become available to us, through the monetization of certain
non-strategic assets. For example, we have sold the telecommunications switch
that we formerly owned and operated in Colorado. We have sold this switch for
cash and a promissory note. We are also exploring the sale of Sky King, a
wholly-owned subsidiary that manages domestic tower sites that provide
transmission and receiver locations for wireless communications companies. We
expect that any success in monetizing non-strategic assets would improve
liquidity.
To meet liquidity requirements in the long term, we need to increase our
revenues and gross profit, which will most likely occur as a result of growth in
the retail long distance business and an increase in minutes passed by our
existing wholesale customers. There are no assurances, however, that these long
term objectives will transpire.
In order to meet these long term objectives, we believe we have to further
develop a network that provides competitive telecommunications services and a
marketing capability that is competitive in customer acquisition. We expect that
we will continue to operate the network to build our customer base and that we
will continue to acquire customers.
Net cash used in operating activities was approximately $395,000 for Fiscal
2000. We collected approximately $8.4 million from customers while paying
approximately $8.8 million to vendors, carriers, and employees. Net cash used by
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, other vendors and
employees. Net cash used by operating activities of approximately $859,000 for
Fiscal 1998 was mostly due to the net loss from operations net of a non-cash
compensation charge.
Net cash used by investing activities was approximately $856,000 for Fiscal
2000. Cash was used for capital expenditures and to fund Rare Nevada prior to
the acquisition and was provided from collections on notes receivable and a
sales tax refund on previously acquired switching equipment. 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 Fiscal 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.
Cash provided by financing activities was approximately $1.7 million for Fiscal
2000. Cash was provided from the proceeds of the issuance of common stock and
the exercise of common stock options and used to fund capital lease obligations.
The funds were used mostly for working capital and to fund Rare Nevada prior to
the acquisition. Cash provided by financing activities was approximately $4.9
million for Fiscal 1999. This reflects proceeds from the issuance of common
stock, 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.
36
<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.
Recent Accounting Standards
During 1998, the FASB issued SFAS No. 133. "Accounting for Derivative
Instruments and Hedging Activities". During the second quarter of 1999, the FASB
postponed the adoption date of SFAS No. 133 until January 1, 2000. The FASB
further amended SFAS No. 133 in June 2000. SFAS No. 133 requires that all
derivative financial instruments be recorded on the consolidated balance sheets
at their fair value. Changes in the fair value of derivatives will be recorded
each period in earnings or other comprehensive earnings, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. Gains and losses on derivative instruments reported in
other comprehensive earnings will be reclassified as earnings in the periods in
which earnings are affected by the hedged item. VDC does not expect the adoption
of this statement to have a significant impact on VDC's results of operations,
financial position or cash flows.
In 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin No. 101 dealing with revenue recognition which is effective in the
fourth quarter of calendar 2000. VDC does not expect its adoption to have a
material effect on VDC's financial statements.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
VDC is currently not exposed to material future earnings or cash flow exposures
from changes in interest rates on long-term debt obligations since our long-term
debt obligations are at fixed rates.
VDC's carrying value of cash and cash equivalents, accounts receivable, accounts
payable, and marketable securities-available for sale, are 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.
37
<PAGE>
Part III
Item 10. Directors and Executive Officers.
The directors and executive officers of VDC are listed below.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Frederick A. Moran (1)(2) 58 Chairman, Chief Executive Officer, Secretary and Director
James B. Dittman (1) 58 Director
Dr. Hussein Elkholy (2) 67 Director
Dr. Leonard Hausman (1)(2) 58 Director
Clayton F. Moran 29 Chief Financial Officer and Treasurer
Charles W. Mulloy 35 Vice President, Corporate Development
Edwin B. Read 43 Vice President, Operations
Peter Zagres 36 Vice President, Sales & Buying
</TABLE>
(1) Member of Compensation Committee
(2) Member of Audit Committee
Frederick A. Moran
Mr. Moran has served as Chairman, Chief Executive Officer, Secretary, and
Director of VDC since March 6, 1998. Mr. Moran served as Chief Financial Officer
of VDC from March 6, 1998 until December 10, 1999. Mr. Moran served as the
Chairman of Sky King Connecticut from its inception in 1996 through its merger
with and into VDC. 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").
James B. Dittman
Mr. Dittman has served as a member of VDC'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.
38
<PAGE>
In 1997, this company was named by the top industry publication as one of the
five most innovative incentive marketing companies in the United States. 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.
Dr. Hussein Elkholy
Dr. Elkholy has served as a member of VDC's Board of Directors 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 member of the Board of Directors of the following entities:
Egynet, Egyptian Telephone Company, Egyptian Space Communication. 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.
Dr. Leonard Hausman
Dr. Hausman has served as a member of VDC'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. Dr.
Hausman is also a member of the Board of Directors of the following entities:
deltathree.com, Inc., EastWeb, Inc., Peaceworks, Inc. Dr. Hausman is also
President of American Online University. From 1988 until 1998, Dr. Hausman was
the Director of the Institute for Social and Economic Policy in the Middle East
at Harvard University.
Clayton F. Moran
Mr. Moran has served as Chief Financial Officer and Treasurer of VDC since
December 10, 1999. Prior thereto, Mr. Moran served as Vice President, Finance of
VDC beginning on June 1, 1998. Prior to joining VDC, Mr. Moran was employed by
Moran Real Estate Holdings, Inc. and Putnam Avenue Properties, Inc. and 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.
39
<PAGE>
Charles W. Mulloy
Mr. Mulloy has served as Vice President, Corporate Development, of VDC 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.
Edwin B. Read
Mr. Read has served as Vice President of Operations of VDC since December 10,
1999. Prior to this appointment he served as Manager of System Engineering,
having joined VDC in April 1998 as one of its charter employees. As a 20 year
Electrical Engineer, Mr. Read has a diverse background in telecommunications,
having implemented systems throughout the world, most recently with
Communications Group International Inc ("CGI") (1993 - 1998). Prior to CGI, he
held engineering management positions with Plexsys Corporation, Harris
Corporation and worked as a private consultant. With these companies and as an
independent consultant, Mr. Read has served as a field installation/integration
engineer, as a project development engineer, and has been extensively involved
in projects for most of the continents of the world. His work has taken him to
several Central and South American countries, throughout the Caribbean region,
to the countries of the former Soviet Union, to China, Africa, and the Middle
East.
Peter Zagres
Mr. Zagres has served as the Vice President of Sales and Buying for VDC since
December 10, 1999. From 1997 to present, Mr. Zagres has served as Chief
Executive Officer of Quality Management Resources, Inc., a telecommunications
consulting firm specializing in structuring the operations and sales efforts of
telecommunications companies. In 1998, in his capacity as Chief Executive
Officer of Quality Management Resources, Inc., Mr. Zagres served as Director of
Operations for AmeriCom Communications, Inc., a Sacramento based retail long
distance provider and as Vice President of Sales for Cross Communications, Inc.,
a California based calling card and callback provider. From 1995 to 1998, Mr.
Zagres served as Director of Operations for One World Communications, Inc. an
Arizona based callback and calling card solutions provider.
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
40
<PAGE>
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.
To the best of VDC'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
41
<PAGE>
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 VDC 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 VDC's officers, as well as
each employee director, devotes substantially full time to the affairs of VDC.
Board Composition
In accordance with the terms of VDC'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 2002; 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 VDC.
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,
VDC believes that during Fiscal 2000 all reporting persons timely complied with
all filing requirements applicable to them, except for Form 4s and a Form 5 for
PortaCom Wireless, Inc ("PortaCom"). Beyond what is reported above, VDC does not
know the following with regard to PortaCom: (i) the number of late reports; (ii)
the number of transactions that were not reported on a timely basis, or (iii)
any known failure to file a required form.
Item 11. Executive Compensation
The following Summary Compensation Table sets forth the compensation earned for
the three fiscal years ended June 30, 2000 by VDC's Chief Executive Officer and
each of VDC's four most highly compensated executive officers, other than the
Chief Executive Officer, whose total annual salary and bonus for Fiscal 2000
exceeded $100,000 (the "Named Executive Officers"). Other than the Chief
Executive Officer, there was no VDC executive officer who earned salary and
bonus in excess of $100,000 for services rendered in all capacities to VDC and
its subsidiaries during Fiscal 2000.
42
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
----------------------
Annual Compensation Awards
------------------- ------
Securities
Underlying
Options/
Name and Principal Position Year(s) Salary($) SARs(#)
--------------------------- ------- --------- -------
<S> <C> <C> <C>
Frederick A. Moran(1) 2000 125,000.00 670,000(2)
Chief Executive Officer, 1999 125,000.04(3) 200,000(4)
Chairman, Secretary and 1998 40,625.05(5) -
Director of VDC
</TABLE>
(1) Mr. Moran also served as Chief Financial Officer during Fiscal 2000
until December 10, 1999 when another officer was elected to that
position.
(2) VDC granted Mr. Moran an option to purchase 450,000 shares of VDC
common stock on November 30, 1999 and an option to purchase 20,000
shares of VDC common stock on March 24, 2000. Additional information
regarding these stock option grants is contained in the "Option Grants
in Last Fiscal Year" table below. Also includes option to purchase
200,000 shares of VDC common stock that was repriced. See "Ten-Year
Option / SAR Repricings."
(3) Included $20,833.34 in deferred income, but not yet paid to Mr. Moran.
(4) VDC granted Mr. Moran an option to purchase 200,000 shares of VDC
common stock on December 8, 1998. Additional information regarding
these stock option grants is contained in the "Option Grants in Last
Fiscal Year" table below.
(5) Reflects compensation for partial year employment. Mr. Moran became
Chief Executive Officer, Chief Financial Officer, Chairman, and
Director of VDC in March 1998 in connection with the Sky King
Connecticut Acquisition. Mr. Moran was neither an officer nor a
director of VDC prior to the Sky King Connecticut Acquisition.
The following table contains information concerning stock option grants made to
Named Executive Officers during Fiscal 2000.
43
<PAGE>
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
---------------------------------
Individual Grants
-----------------
Potential Potential
Realizable Realizable
Value at Assumed Value at Assumed
Annual Rates of Annual Rates of
% of Total Stock Price Stock Price
Number of Securities Options/SARs Exercise or Appreciation for Appreciation for
Underlying Options/ Granted to Employees Base Price Expiration Option Term Option Term
Name SARs Granted (#) in Fiscal Year (1) ($/Share) Date 5% ($)(2) 10% ($) (2)
---- ---------------- ------------------ --------- ---- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Frederick A. Moran 450,000 (3) 17.7% $1.03125 11/30/04 74,368.13 215,371.41
Frederick A. Moran 20,000 (4) 1%(5) $3.79 3/24/05 11,944.25 34,922.56
Frederick A. Moran 200,000 (6) 7.9% $1.38 12/8/03 27,877.50 (7) 90,025.00 (7)
</TABLE>
(1) Based upon options to purchase an aggregate of 2,544,500 shares of
common stock granted to employees in Fiscal 2000. The options to
purchase 2,544,500 shares of common stock includes: (a) options to
purchase 1,862,000 shares of common stock granted under VDC's 1998
Stock Incentive Plan, as Amended in Fiscal 2000; and (b) options to
purchase 682,500 shares of common stock granted prior to Fiscal 2000
but repriced in Fiscal 2000. Excludes options to purchase 30,000 shares
of common stock granted to non-employees in Fiscal 2000 and options to
purchase 75,000 shares of common stock granted to non-employees prior
to Fiscal 2000 but repriced in Fiscal 2000.
(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 VDC'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) VDC granted Mr. Moran an option to purchase 450,000 shares of VDC
common stock on November 30, 1999. The option vests in equal
installments over five years commencing on the first anniversary of the
date of grant. The options are exercisable upon vesting.
(4) VDC granted Mr. Moran an option to purchase 20,000 shares of VDC common
stock on March 24, 2000. The option was fully vested as of the date of
grant. The option was exercisable as of the date of grant.
(5) The actual percentage is less than 1%. The 1% reflected in the table
reflects rounding.
(6) Represents option to purchase 200,000 shares of VDC common stock
granted to Mr. Moran on December 8, 1998 and repriced on October 1,
1999. The option vests 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.
44
<PAGE>
(7) Does not include potential realized value at assumed annual rates of
stock price appreciation for period from October 1, 1999 to December 8,
1999. Assumes appreciation from December 8, 1999 through December 8,
2003.
<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 (1)
---- --------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Frederick A. Moran 0 0 40,000(E)/160,000(U) 4,800(E)/19,200(U)
Frederick A. Moran 0 0 0(E)/450,000(U) 0(E)/210,937.50(U)
Frederick A. Moran 0 0 20,000(E)/0(U) (2)
</TABLE>
(1) Based upon the closing price for VDC common stock for June 30, 2000 of
$1.50 per share.
(2) Based upon the closing price for VDC common stock for June 30, 2000
of $1.50 per share, none of the options referenced in this line were
in-the-money at the close of Fiscal 2000.
<TABLE>
<CAPTION>
Ten-Year Option / SAR Repricings
Number of Securities Market Price of Length of Original
Underlying Options/ Stock at Time Exercise Price at New Option Term Remaining
SARs Repriced or of Repricing or Time of Repricing Exercise at Date of Repricing
Name Date Amended (#) Amendment $ or Amendment $ Price $ or Amendment
---- ---- ----------- ----------- -------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Clayton F. Moran 10/1/99 10,000 1.25 4.125 1.25 6/1/08
Clayton F. Moran 10/1/99 45,000 1.25 3.75 1.25 12/8/08
Frederick A. Moran 10/1/99 200,000 1.25 4.125 1.38 (1) 12/8/03
Charles W. Mulloy 10/1/99 10,000 1.25 4.125 1.25 2/1/08
Charles W. Mulloy 10/1/99 50,000 1.25 4.125 1.25 9/2/08
Charles W. Mulloy 10/1/99 40,000 1.25 3.75 1.25 12/8/08
Robert E. Warner 10/1/99 5,000 1.25 4.125 1.25 4/1/08
Robert E. Warner 10/1/99 2,500 1.25 4.125 1.25 9/2/08
Robert E. Warner 10/1/99 42,500 1.25 3.75 1.25 12/8/08
</TABLE>
45
<PAGE>
(1) The new exercise price was slightly more than 110% of the market price of
the stock at the time of repricing. The repricing was structured this way for
Mr. Moran to preserve the incentive stock option nature of his option.
Explanation of Repricing
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 Board of Directors believes that stock options are a critical
component of the compensation offered by VDC to promote long-term retention of
key employees, motivate high levels of performance and recognize employee
contributions to the success of VDC. The market price of the common stock
decreased from a high of $7.50 in July 1998 to a low of $1.25 on October 1,
1999. In light of this substantial decline in market price, the Board of
Directors 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 1999, the Board of Directors approved an option repricing program under
which options to acquire shares of common stock that were originally issued with
exercise prices above $1.25 per share were reissued with an exercise price of
$1.25 per share (or $1.38 in the case of the Chief Executive Officer and his
wife), 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.
Options to purchase 757,500 shares of VDC common stock were affected by the
repricing program including options to purchase 567,500 shares of common stock
issued under the Plan and options to purchase 190,000 shares of common stock
issued outside of the Plan. Options to purchase 510,000 shares of common stock
granted to executive officers and members of the Board of Directors were
affected by the repricing program.
Compensation Committee:
Frederick A. Moran
James Dittman
Dr. Leonard Hausman
Committees of the Board of Directors
On November 9, 1998, VDC's Board of Directors established an Audit Committee and
Compensation Committee. Frederick A. Moran, Dr. Hussein Elkholy, and Dr. Leonard
Hausman serve on the Audit Committee. Mr. Moran is not an independent member of
the Audit Committee. On May 30, 2000, VDC's Board of Directors and the Audit
Committee adopted and approved an Audit Committee Charter for VDC. As reflected
in this Charter, the Audit Committee's primary duties and responsibilities are
to:
- Monitor the integrity of VDC's financial reporting process and systems of
internal controls regarding finance, accounting, and legal compliance.
46
<PAGE>
- Monitor the independence and performance of VDC's independent auditors
and internal auditing department.
- Provide an avenue of communication among the independent auditors,
management, the internal auditing department, and the Board of Directors.
The Charter goes into considerable additional detail regarding the Audit
Committee's duties and responsibilities.
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 VDC's compensation plans, establishes the
compensation levels for executive officers and advises the Board on the
compensation policies for VDC's executive officers.
The Board may, from time to time, establish other committees of the Board.
Director Compensation
As compensation for their service to VDC, each independent Director is granted
upon initial appointment options to purchase 25,000 shares of VDC's common
stock. 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. 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 VDC. From time to time, the Board
may grant additional options to each independent Director.
On November 30, 1999, VDC granted each of Dr. Leonard Hausman, Dr. Hussein
Elkholy and James Dittman options to purchase 10,000 shares of VDC common stock
at an exercise price of $.9375 per share, in connection with their service 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.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
VDC 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 VDC 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 VDC common stock. See "Option Grants
in Last Fiscal Year." Pursuant to VDC's 1998 Stock Incentive Plan, as Amended
47
<PAGE>
(the "Plan"), all options held by Mr. Moran, and all other option holders under
the Plan will vest upon certain change-in-control transactions.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
On November 9, 1998, VDC'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
VDC and as an officer of each of VDC's subsidiaries. The Compensation Committee
recommends general compensation policies to the Board, oversees VDC's
compensation plans, establishes the compensation levels for executive officers
and advises the Board on the compensation policies for VDC's executive officers.
No executive officer of VDC served as a member of the board of directors of any
entity that had one or more executive officers serving as a member of VDC's
Board of Directors or Compensation Committee.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of VDC common stock as of September 7, 2000 with respect to: (i) each
person known by VDC to beneficially own 5% or more of the outstanding shares of
VDC common stock; (ii) each of VDC's directors; (iii) each of VDC's Named
Executive Officers; and (iv) all directors and executive officers of VDC as a
group. Except as otherwise indicated, each person set forth below has sole
voting and investment power on the shares reported.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name and Address of Beneficial Owner (1) Beneficial Ownership(2) Of Class
------------------------------------ ----------------------- --------
<S> <C> <C>
Frederick A. Moran 4,112,387 (3) 16.8%
75 Holly Hill Lane
Greenwich, CT 06830
Dr. Hussein Elkholy 16,666 (4) *
75 Holly Hill Lane
Greenwich, CT 06830
Dr. Leonard Hausman 16,666 (4) *
75 Holly Hill Lane
Greenwich, CT 06830
James B. Dittman 18,666 (4) *
75 Holly Hill Lane
Greenwich, CT 06830
48
<PAGE>
Clayton F. Moran 1,448,663 (5) 5.9%
75 Holly Hill Lane
Greenwich, CT 06830
Frederick W. Moran 1,608,563 (6) 6.6%
Jefferies & Company
520 Madison Avenue
New York, NY 10022
All executive officers and directors 5,700,786 (7) 23.2%
as a group (8 persons)
</TABLE>
(*) Less than 1%.
(1) PortaCom Wireless, Inc. ("PortaCom"), a shareholder shown in previous
VDC Annual Reports on Form 10-K as being a significant shareholder, has
been excluded from the foregoing table due to the fact that the records
of VDC's transfer agent as of September 7, 2000 indicate that PortaCom
does not beneficially own 5% or more of the outstanding shares of VDC
common stock.
(2) 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 24,398,029 shares of
common stock outstanding as of September 7, 2000.
(3) Includes 1,139,890 shares owned directly by Mr. Moran as well as
2,907,997 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. Also, does not
include 1,608,563 shares owned by Frederick W. Moran and 1,448,663
beneficially owned by Clayton F. Moran, both of whom are Mr. Moran's
adult children. Includes options, in the name of Mr. Moran, to purchase
60,000 shares of common stock. Includes options, in the name of Mr.
Moran's wife, to purchase 4,500 shares of common stock. Does not
include options, in the name of Mr. Moran, to purchase 760,000 shares
of common stock which may vest in or after November 2000. Does not
include options, in the name of Mr. Moran's wife, to purchase 33,000
shares of common stock which may vest in or after November 2000. Mr.
Moran has filed a Schedule 13D (and an amendment thereto) reporting
beneficial ownership of more than 10% of VDC Communications, Inc.'s
outstanding shares of common stock. This Schedule 13D contains numerous
disclaimers including one in which he asserts "[t]he filing of this
Statement shall not be construed as an admission that Mr. Moran is, for
purposes of Section 13(d), or 13(g) of the Act, the beneficial owner of
any securities covered by the Statement."
49
<PAGE>
(4) Includes options to purchase 16,666 shares of common stock. Does not
include options to purchase 18,334 shares of common stock which may
vest on or after November 30, 2000.
(5) Includes options to purchase 23,000 shares of common stock. Does not
include options to purchase 212,000 shares of common stock which may
vest on and after November 30, 2000. Includes 63 shares that Mr. Moran
has the right to acquire upon demand from a trust. An adult son of
Frederick A. Moran and employed as Chief Financial Officer and
Treasurer of VDC.
(6) Includes 63 shares that Mr. Moran has the right to acquire upon demand
from a trust. An adult son of Frederick A. Moran.
(7) Includes options to purchase 218,498 shares of common stock. Does not
include options to purchase 1,587,002 shares of common stock which may
vest on and after November 30, 2000.
Item 13. Certain Relationships and Related Transactions
Registration of Certain Moran Shares
VDC registered the potential resale of 6,931,046 shares of VDC 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 an Amendment No. 1 to a Registration Statement on Form S-1
(Registration No. 333-80107) which was filed with the United States Securities
and Exchange Commission on November 8, 1999 (the "Registration Statement"). Of
the Moran Shares included in the Registration Statement, 328,170 of said shares
were 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.
VDC will include the Moran Shares, to the extent they have not been sold or
disposed of, in a registration statement on Form S-3 that VDC is currently
working on in order to continue to permit their resale. VDC will also include in
the S-3 an additional 587,073 for Mr. Moran and his wife. 540,000 of these
shares are being included in the S-3 pursuant to registration rights granted in
connection with their sale to Mr. Moran and his wife.
Loans From Director and Officer
In September 1999, Frederick A. Moran, a director and officer of VDC,
transferred personal funds totaling $80,000 to VDC. This amount represented a
short term loan to be repaid by VDC in accordance with the terms of a promissory
note executed by VDC on September 24, 1999. In April 2000, VDC repaid the
promissory note and accrued interest in full. The promissory note was due on
September 24, 2000 and provided for an interest rate of eight percent (8%) per
annum.
50
<PAGE>
Private Placement Transactions
Through a Securities Purchase Agreement dated April 26, 2000, VDC sold an
aggregate of 540,000 shares of VDC common stock, at a price of $2.00 per share,
the closing market price on the date of sale, to Frederick A. Moran and Joan B.
Moran, joint tenants, in a non-public offering exempt from registration pursuant
to Section 4(2) and Rule 506 of Regulation D of the Act.
Through a Securities Purchase Agreement dated October 27, 1999, VDC sold 666,667
shares of VDC common stock, at a price of $0.75 per share, to Frederick W.
Moran, the adult son 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.
Part IV
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,
2000 and 1999, and 1998.
Consolidated Balance Sheets of VDC as of June 30, 2000, 1999.
Consolidated Statements of Operations of VDC for the fiscal years ended
June 30, 2000, 1999, and 1998.
Consolidated Statements of Cash Flows of VDC for the fiscal years ended
June 30, 2000, 1999, and 1998.
Consolidated Statements of Stockholders' Equity of VDC for the fiscal
years ended June 30, 2000, 1999, and 1998.
Notes to Consolidated Financial Statements of VDC
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 Agreement and Plan of Merger dated May 25, 2000 by and among (1)
VDC Communications, Inc., Voice & Data Communications (Latin
America), Inc., Rare Telephony, Inc., and the holders of all of
the outstanding common stock of Rare Telephony, Inc.
51
<PAGE>
2.2 Amendment to Agreement and Plan of Merger dated June 14, 2000 (1)
2.3 Certificate of Merger of Rare Telephony, Inc. into Voice & Data (1)
Communications (Latin America), Inc.
2.4 Articles of Merger of Rare Telephony, Inc. into Voice & Data (1)
Communications (Latin America), 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 (3)
4.2 1998 Stock Incentive Plan (3)
10.1 1998 Stock Incentive Plan, as Amended (4)
10.2 Settlement, Release and Separation Agreement by and among VDC (4)
Communications, Inc. and William H. Zimmerling, dated October
1, 1999
10.3 Settlement, Release and Separation Agreement by and among VDC (4)
Communications, Inc. and Robert E. Warner, dated October 18,
1999
10.4 Form of Non-Qualified Stock Option Agreement (4)
10.5 Incentive Stock Option Agreement between Frederick A. Moran and (4)
VDC Communications, Inc., dated October 1, 1999
10.6 Form of Incentive Stock Option Agreement (4)
10.7 Form of Incentive Stock Option Agreement (4)
10.8 Form of Securities Purchase Agreement for October 1999 (4)
10.9 Form of Registration Rights Agreement for October 1999 (4)
10.10 Form of Non-Qualified Stock Option Agreement for November 1999 (5)
10.11 Form of Incentive Stock Option Agreement for November 1999 (5)
10.12 Incentive Stock Option Agreement between Frederick A. Moran and (5)
VDC Communications, Inc., dated November 30, 1999
10.13 Incentive Stock Option Agreement between Peter Zagres and VDC (5)
Communications, Inc., dated November 30, 1999
52
<PAGE>
10.14 Incentive Stock Option Agreement between Charles W. Mulloy and (5)
VDC Communications, Inc., dated December 21, 1999
10.15 Release Agreement by and among Zions Credit Corporation, VDC (5)
Communications, Inc., and VDC Telecommunications, Inc., dated
December 6, 1999
10.16 Assumption Agreement between Zions Credit Corporation, VDC (5)
Communications, Inc., VDC Telecommunications, Inc. and Wang
Communications, Inc., dated December 1999
10.17 Master Agreement to Lease Equipment by and between Cisco (6)
Systems Capital Corporation and VDC Telecommunications, Inc.,
dated February 22, 2000
10.18 Letter Agreement by and between Cisco Systems Capital (6)
Corporation and VDC Telecommunications, Inc. dated March 3, 2000
10.19 Guaranty executed by VDC Communications, Inc. on February 22, (6)
2000 for the benefit of Cisco Systems Capital Corporation
10.20 Agreement by and between Level 3 Communications, LLC and VDC (6)
Telecommunications, Inc. dated March, 2000
10.21 Commercial Pilot Agreement by and between TransNexus, L.L.C. (6)
and VDC Telecommunications, Inc. dated March 27, 2000
10.22 Incentive Stock Option Agreement between Frederick A. Moran and (6)
VDC Communications, Inc., dated March 24, 2000
10.23 Form of Incentive Stock Option Agreement for March 2000 (6)
10.24 Agreement by and among VDC Communications, Inc., Masatepe (6)
Communications, U.S.A., L.L.C., General Electric Capital
Corporation, Newbridge Networks Corporation and Newbridge
Networks, Inc., dated March 2000
10.25 Securities Purchase Agreement by and between VDC (6)
Communications, Inc. and Frederick A. Moran and Joan Moran,
joint tenants, dated April 26, 2000
10.26 Promissory Note, dated April 20, 2000, made by Rare Telephony, (6)
Inc. and Cash Back Rebates LD.com, Inc. in favor of VDC
Communications, Inc.
10.27 Guaranty Agreement, dated April 20, 2000, made by Network (6)
Consulting Group, Inc. in favor of VDC Communications, Inc.
53
<PAGE>
10.28 Personal Guaranty Agreement, dated April 20, 2000, made by (6)
Peter J. Salzano in favor of VDC Communications, Inc.
10.29 Security Agreement, dated April 20, 2000, by and between (6)
Network Consulting Group, Inc. and VDC Communications, Inc.
10.30 Security Agreement, dated April 20, 2000, by and between (6)
Network Consulting Group, Inc. and VDC Communications, Inc.
10.31 Security Agreement, dated April 20, 2000, by and between Peter (6)
J. Salzano and VDC Communications, Inc.
10.32 Agreement, dated April 20, 2000, by and among VDC (6)
Communications, Inc., Rare Telephony, Inc., and Cash Back
Rebates LD.com, Inc.
10.33 Letter Agreement, dated April 7, 2000, by and among VDC (6)
Communications, Inc., Rare Telephony, Inc., and Cash Back
Rebates LD.com, Inc., and Free dot Calling.com, Inc.
10.34 Promissory Note, dated May 4, 2000, made by Rare Telephony, (6)
Inc. and Cash Back Rebates LD.com, Inc. in favor of VDC
Communications, Inc.
10.35 Guaranty Agreement, dated May 4, 2000, made by Network (6)
Consulting Group, Inc. in favor of VDC Communications, Inc.
10.36 Personal Guaranty Agreement, dated May 4, 2000, made by Peter (6)
J. Salzano in favor of VDC Communications, Inc.
10.37 Escrow Agreement, dated May 25, 2000, by and among VDC (1)
Communications, Inc., Voice & Data Communications (Latin
America), Inc., the shareholders of Rare Telephony, Inc., and
Buchanan Ingersoll Professional Corporation
10.38 Form of Registration Rights Agreement (1)
10.39 Form of Executive Employment Agreement (1)
10.40 Form of Employment Agreement (1)
10.41 Independent Contractor Agreement, dated May 25, 2000, by and (1)
among Peter J. Salzano and Voice & Data Communications (Latin
America), Inc.
10.42 License Agreement, dated June 14, 2000, by and between Peter J. (1)
Salzano and Free dot Calling.com, Inc.
54
<PAGE>
10.43 Network Agreement, dated May 25, 2000, by and among Network (1)
Consulting Group, Inc. and VDC Communications, Inc.
10.44 Funding Agreement, dated June 14, 2000, by and between Voice & (1)
Data Communications (Latin America), Inc. and VDC
Communications, Inc.
10.45 Promissory Note, dated June 23, 2000, made by Rare Telephony, (1)
Inc. in favor of Peter J. Salzano
10.46 Form of Securities Purchase Agreement for June 2000 (7)
10.47 Form of Amendment to Securities Purchase Agreement for July (7)
2000
10.48 Form of Registration Rights Agreement for June 2000 (7)
10.49 1998 Stock Incentive Plan, as Amended Through August 9, 2000 (7)
10.50 Incentive Stock Option Agreement between Frederick A. Moran and (7)
VDC Communications, Inc., dated August 9, 2000
10.51 Incentive Stock Option Agreement between Clayton F. Moran and (7)
VDC Communications, Inc., dated August 9, 2000
10.52 Purchase and Sale Agreement, by and between Omnetrix (7)
International, Inc. and VDC Telecommunications, Inc., dated
August 26, 2000
10.53 Promissory Note, dated August 26, 2000, made by Omnetrix (7)
International, Inc. in favor of VDC Telecommunications, Inc.
10.54 Security Agreement, dated August 26, 2000, made by Omnetrix (7)
International, Inc. in favor of VDC Telecommunications, Inc.
10.55 Promissory Note, dated June 14, 2000, made by Voice & Data (7)
Communications (Latin America), Inc. in favor of VDC
Communications, Inc.
10.56 Promissory Note, dated June 14, 2000, made by Voice & Data (7)
Communications (Latin America), Inc. in favor of VDC
Communications, Inc.
10.57 Form of Promissory Note executed by Rare Telephony, Inc. (7)
21.1 Subsidiaries of Registrant (7)
27.1 Financial Data Schedule (7)
</TABLE>
55
<PAGE>
(1) Filed as an Exhibit to VDC Communications, Inc.'s Current Report on
Form 8-K, dated June 14, 2000, 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
8-A/A, filed with the SEC on January 19, 1999, and incorporated by reference
herein.
(4) Filed as an Exhibit to Registrant's Amendment No. 1 to Registration
Statement on Form S-1, filed with the SEC on November 8, 1999, and incorporated
by reference herein.
(5) Filed as an Exhibit to VDC Communications, Inc.'s Form 10-Q for the
quarter ended December 31, 1999, and incorporated herein by reference.
(6) Filed as an Exhibit to VDC Communications, Inc.'s Form 10-Q for the
quarter ended March 31, 2000, and incorporated by reference herein.
(7) Filed herewith.
C. Reports on Form 8-K
Report on Form 8-K dated June 14, 2000 reporting acquisition of Rare
Telephony, Inc.
An Amendment to Form 8-K (Form 8-K/A) was filed with the Securities and
Exchange Commission on August 25, 2000 amending a previously filed Form 8-K
dated as of June 14, 2000 relative to the Company's acquisition of Rare
Telephony, Inc. The Amendment contained the historical "Financial Statements of
Acquired Businesses" and "Pro Forma Financial Information" required under Items
7(a) and 7(b) of Form 8-K.
56
<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 20, 2000 VDC COMMUNICATIONS, INC.
By: /s/ Frederick A. Moran
-----------------------------
Chairman of the Board and
Chief Executive Officer
By: /s/ Clayton F. Moran
-----------------------------
Chief Financial Officer/
Principal Accounting 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Frederick A. Moran Chairman of the Board, September 20, 2000
---------------------- Chief Executive Officer,
Frederick A. Moran Director
/s/ Clayton F. Moran Chief Financial Officer and September 20, 2000
-------------------- Treasurer/ Principal
Clayton F. Moran Accounting Officer
/s/ James B. Dittman Director September 13, 2000
--------------------
James B. Dittman
/s/ Dr. Hussein Elkholy Director September 14, 2000
-----------------------
Dr. Hussein Elkholy
/s/ Dr. Leonard Hausman Director September 14, 2000
-----------------------
Dr. Leonard Hausman
</TABLE>
57
<PAGE>
VDC COMMUNICATIONS, INC. AND SUBSIDIARIES
Index to Financial Statements
Report of Independent Certified Public Accountants F-2
Consolidated financial statements:
Balance sheets F-3
Statements of operations F-4
Statements of stockholders' equity F-5-F-7
Statements of cash flows F-8
Notes to consolidated financial statements F-9-F-25
Supplemental material:
Report of Independent Certified Public Accountants
on supplemental material F-26
Schedule II - Valuation and Qualifying Accounts F-27
F-1
<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, 1999 and 2000 and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for each of the three years in the period ended June 30, 2000. 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 financial position of VDC Communications,
Inc. and subsidiaries as of June 30, 1999 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2000 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a working captial deficit that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Valhalla, New York
August 30, 2000
F-2
<PAGE>
VDC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
1999 2000
---- ----
<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 317,799 $ 772,125
Restricted cash 475,770
Marketable securities 90,375 51,213
Accounts receivable, net of allowance for doubtful accounts
of $7,000 in 1999 and $504,088 in 2000 1,251,581 935,217
Notes receivable - current 249,979 -
--------------------------------------
Total current assets 2,385,504 1,758,555
Property and equipment, less accumulated depreciation 4,888,163 4,286,707
Intangibles, net - 3,643,193
Investment in MCC 2,400,000 140,000
Other assets 328,394 506,058
--------------------------------------
Total assets $ 10,002,061 $ 10,334,513
--------------------------------------
Liabilities and Stockholders' Equity
Current:
Accounts payable and accrued expenses $ 2,160,839 $ 3,748,037
Unearned revenue - 463,585
Current portion of long term debt - 71,490
Current portion of capitalized lease obligations 426,356 178,341
--------------------------------------
Total current liabilities 2,587,195 4,461,453
Long-term portion of long term debt - 224,077
Long-term portion of capitalized lease obligations 847,334 521,482
--------------------------------------
Total liabilities 3,434,529 5,207,012
--------------------------------------
Commitment and Contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value, authorized 10 million
shares; issued and outstanding-none - -
Common stock, $0.0001 par value, authorized 50 million shares issued -
20,186,462 and 25,200,347 at June 30, 1999 and 2000, respectively 2,018 2,520
Additional paid-in capital 67,737,195 71,556,305
Accumulated deficit (60,339,393) (65,904,573)
Treasury stock - at cost, 1,875,000 shares at June 30, 1999
and June 30, 2000 (164,175) (164,175)
Stock subscriptions receivable (344,700) -
Accumulated comprehensive income (loss) (323,413) (362,576)
--------------------------------------
Total stockholders' equity 6,567,532 5,127,501
--------------------------------------
Total liabilities and stockholders' equity $ 10,002,061 $ 10,334,513
--------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
VDC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Year Ended June 30,
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Revenue $ 99,957 $ 3,298,357 $ 8,528,693
Operating Expenses
Costs of services 28,460 5,155,752 8,721,649
Selling, general and administrative expenses 1,167,429 4,636,230 2,482,457
Non-cash compensation expense 2,254,000 16,146,000 -
Asset impairment charges - 1,644,385 -
---------------------------------------------------------------
Total operating expenses 3,449,889 27,582,367 11,204,106
---------------------------------------------------------------
Operating loss (3,349,932) (24,284,010) (2,675,413)
Other income (expense):
Writedown of investment in MCC - (21,328,641) (2,260,000)
Loss on note restructuring - (1,598,425) -
Other income (expense) 195,122 (63,637) (311,017)
---------------------------------------------------------------
Total other income (expense) 195,122 (22,990,703) (2,571,017)
Equity in loss of affiliate - (867,645) -
---------------------------------------------------------------
Net loss (3,154,810) (48,142,358) (5,246,430)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on marketable securities 75,775 (399,188) (39,163)
---------------------------------------------------------------
Comprehensive loss $ (3,079,035) $ (48,541,546) $ (5,285,593)
---------------------------------------------------------------
Net loss per common share - basic and diluted $ (0.72) $ (2.72) $ (0.26)
---------------------------------------------------------------
Weighted average number of shares outstanding 4,390,423 17,678,045 20,573,864
---------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
VDC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible Convertible
Preferred Stock Preferred Stock
Series A Series B
-------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance - June 30, 1997 - $- - $-
Reverse acquisition - - - -
Release of escrow shares 600,000 60
Collection on stock subscription receivable - - - -
Issuance of common shares in connection
with investment in MCC - - - -
Issuance of common stock - - - -
Issuance of common stock for note - - - -
Unrealized gain on marketable securities - - - -
Net loss - - - -
-------------------------------------------------------------------------------------------------------------------
Balance - June 30, 1998 - - 600,000 60
-------------------------------------------------------------------------------------------------------------------
Release of escrow shares - - 3,900,000 390
Issuance of common stock in connection with acquisition - - - -
Collection on stock subscription receivable - - - -
Conversion of preferred stock into common stock - - (4,500,000) (450)
Purchase of treasury stock - - - -
Issuance of common shares in connection
with investment banking fees - - - -
Issuance of common shares in connection
with investment in MCC - - - -
Return of common stock in connection with
investment in MCC - - - -
Adjustment to common stock issued in
connection with acquisition - - - -
Common stock issued to settle claim - - - -
Issuance of common stock - - - -
Unrealized loss on marketable securities - - - -
Net loss - - - -
-------------------------------------------------------------------------------------------------------------------
Balance - June 30, 1999 - - - -
-------------------------------------------------------------------------------------------------------------------
Cancel stock subscription receivable - - - -
Issuance of common stock - - - -
Issuance of common stock under price guarantee - - - -
Stock options exercised - - - -
Issuance of common shares in connection
with investment banking fees - - - -
Issuance of common shares in connection
with acquisition of subsidiary - - - -
Unrealized loss on marketable securities - - - -
Net loss - - - -
-------------------------------------------------------------------------------------------------------------------
Balance - June 30, 2000 - $ - - $ -
-------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
VDC COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Stock
Common Stock Paid-in Accumulated Subscriptions
Shares Amount Capital Deficit Receivable
------ ------ ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Balance - June 30, 1997 5,500,000 $ 550 $ 73,331 $ (59,131) $ -
Reverse acquisition 3,697,908 370 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 4,965,828 497 34,618,127 - -
Issuance of common stock 1,130,584 113 5,983,391 - -
Issuance of common stock for note 154,787 15 1,247,898 - (1,247,913)
Unrealized gain on marketable securities - - - - -
Net loss - - - (3,154,810) -
--------------------------------------------------------------------------------------------------------------------------------
Balance - June 30, 1998 15,449,107 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 154,444 15 700,865
Collection on stock subscription receivable 917,076
Conversion of preferred stock into common stock 4,500,000 450 - - -
Purchase of treasury stock - - - - 164,175
Issuance of common shares in connection
with investment banking fees 290,000 29 724,971 (725,000) -
Issuance of common shares in connection
with investment in MCC 198,067 20 1,012,141 - -
Return of common stock in connection with
investment in MCC (2,000,000) (200) (13,962,300) - -
Adjustment to common stock issued in
connection with acquisition (14,160) (1) (99,119) - -
Common stock issued to settle claim 95,000 9 391,865 - -
Issuance of common stock 1,514,004 151 4,335,057 - -
Unrealized loss on marketable securities - - - - -
Net loss - - - (48,142,358) -
--------------------------------------------------------------------------------------------------------------------------------
Balance - June 30, 1999 20,186,462 2,018 67,737,195 (60,339,393) (344,700)
--------------------------------------------------------------------------------------------------------------------------------
Cancel stock subscription receivable (137,880) (14) (344,686) - 344,700
Issuance of common stock 1,873,334 187 2,079,813 - -
Issuance of common stock under price guarantee 2,000,000 200 - - -
Stock options exercised 49,500 5 61,870 - -
Issuance of common shares in connection
with investment banking fees 127,500 13 318,737 (318,750) -
Issuance of common shares in connection
with acquisition of subsidiary 1,101,431 111 1,703,376 - -
Unrealized loss on marketable securities
Net loss - - - (5,246,430) -
--------------------------------------------------------------------------------------------------------------------------------
Balance - June 30, 2000 25,200,347 $ 2,520 $ 71,556,305 $(65,904,573) $ -
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
VDC COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
gain
(loss) on Treasury
Marketable Stock Treasury
Securities # of shares Stock $ Total
---------- ----------- ------- -----
<S> <C> <C> <C> <C>
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 - - - -
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
----------------------------------------------------------------------------------------------------------------------
Cancel stock subscription receivable - - - -
Issuance of common stock - - - 2,080,000
Issuance of common stock under price guarantee - - - 200
Stock options exercised - - - 61,875
Issuance of common shares in connection
with investment banking fees - - - -
Issuance of common shares in connection
with acquisition of subsidiary - - - 1,703,487
Unrealized loss on marketable securities (39,163) - - (39,163)
Net loss - - - (5,246,430)
----------------------------------------------------------------------------------------------------------------------
Balance - June 30, 2000 $ (362,576) 1,875,000 $ (164,175) $5,127,501
----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
VDC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(3,154,810) $(48,142,358) $(5,246,430)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 6,205 1,107,018 1,018,266
Writedown of investment in MCC - 21,328,641 2,260,000
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 -
Gain on disposal of fixed asset - - (54,878)
Provision for doubtful accounts - 7,000 497,088
Changes in operating assets and liabilities:
Restricted cash - (475,770) 475,770
Accounts receivable - (1,258,581) (61,393)
Other assets 44,146 527,533 71,364
Accounts payable and accrued expenses (8,931) 2,004,655 644,878
-----------------------------------------------------
Net cash used by operating activities (859,390) (4,253,532) (395,335)
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) -
Preacquisition loans to Rare - - (1,100,000)
Proceeds from repayment of notes receivable 700,000 2,451,596 249,979
Purchase of investment securities (288,600) - -
Fixed asset acquisition (323,951) (4,499,427) (216,258)
Refund of fixed asset acquisition - - 210,018
Deposit of fixed assets (489,151) - -
-----------------------------------------------------
Net cash flows used in investing activities (3,201,433) (2,492,484) (856,261)
Cash flows from financing activities:
Proceeds from issuance of common stock 6,271,504 4,335,209 2,080,000
Stock options exercised - - 61,875
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) (435,953)
-----------------------------------------------------
Net cash flows provided by financing activities 6,271,504 4,851,704 1,705,922
-----------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,210,681 (1,894,312) 454,326
Cash and cash equivalents, beginning of period 1,430 2,212,111 317,799
-----------------------------------------------------
Cash and cash equivalents, end of period $ 2,212,111 $ 317,799 $ 772,125
-----------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<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 4). (As used in these financial statements, the term "VDC,"
includes 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 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 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.
In June 2000, VDC completed the acquisition of Rare Telephony, Inc., a Nevada
corporation ("Rare Nevada"). For financial statement purposes, the acquisition
was effective June 30, 2000. (See Note 3 for further discussion)
(b) Business
VDC is a facilities based global telecommunications company that offers
wholesale and retail international and domestic long distance. Effective July 1,
2000, VDC will operate two business segments (wholesale and retail businesses).
VDC 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 from larger
industry participants.
(c) Principles of Consolidation
The consolidated financial statements represent all companies of which VDC
directly or indirectly has majority ownership. VDC's consolidated financial
statements include the accounts of wholly-owned subsidiaries VDC
Telecommunications, Inc. ("VDC Telecommunications"), Rare Telephony, Inc., a
Delaware corporation ("Rare"), Masatepe Communications, U.S.A., L.L.C.
F-9
<PAGE>
("Masatepe"), Voice & Data Communications (Hong Kong) Limited ("VDC Hong Kong"),
Sky King Communications, Inc. ("Sky King"), WorldConnectTelecom.com, Inc.
("WorldConnectTelecom.com"), Cash Back Rebates LD.com, Inc. ("Cash Back"), and
Free dot Calling.com, Inc. ("Free dot"). Intercompany accounts and transactions
have been eliminated.
(d) Revenue Recognition
Revenues from wholesale and retail long distance are recognized when services
are provided and are presented net of estimated uncollectible amounts. Retail
customer prepayments are recorded as unearned revenue until earned.
Additionally, VDC 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) Accounts Receivable
After confirming retail customer orders in writing, VDC waits seven days to
deposit new customer prepayments. The seven day waiting period allows customers
time to receive written confirmation of their order. As such, VDC records the
last seven days retail sales in a reporting period as accounts receivable.
The increase in the allowance for doubtful accounts in Fiscal 2000 is mostly
attributable to two wholesale customers.
(f) Cost of services
Cost of services include network costs that consist of access, transport, and
termination costs. These costs also include salaries, depreciation and overhead
attributable to operations. Such costs are recognized when incurred in
connection with the provision of telecommunications services.
(g) Cash and Cash Equivalents
For purposes of the statement of cash flows, VDC 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.
(h) 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:
F-10
<PAGE>
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
$929,863 and $1,331,987 at June 30, 2000 and 1999, respectively. Accumulated
depreciation related to assets financed under capital leases was $219,036 and
$70,865 at June 30, 2000 and 1999, respectively.
For income tax purposes, depreciation is computed using statutory recovery
methods.
(i) Intangible Assets:
Intangible assets consist of goodwill of approximately $3.3 million, costs to
obtain telecommunications tariffs of approximately $87,000, and product
development costs of approximately $265,000.
In conjunction with its acquisition of Rare Nevada (see Note 3), VDC recorded
intangible assets of approximately $3.3 million due to the purchase price
exceeding the fair values of the net assets acquired. Goodwill is being
amortized over a period of three years.
Telecommunications Tariffs are amortized on a straight-line basis over a period
of 2 years.
Rare Nevada capitalized product development costs incurred for the production of
computer software used in the retail billing process and other related product
development costs. Capitalized costs consist of the direct labor involved from
the point of technological feasibility until the product was generally
available. VDC amortizes capitalized costs on a straight line basis over the
estimated useful life of the asset, which is three years.
(j) 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 and diluted 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
125,535, 1,064,081 and 938,546 shares of common stock at prices ranging from
$4.00 to $7.00 and options to purchase 2,513,000, 850,500 and 61,500 and shares
of common stock at prices ranging from $0.94 to $4.125 for the years ended June
30, 2000, 1999 and 1998, respectively, are not included in the computation of
diluted loss per share because they are antidilutive due to the net loss.
(k) 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
F-11
<PAGE>
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 5. Actual
results could differ from those estimates.
(l) Financial Instruments
The carrying amount of financial instruments including cash and cash
equivalents, accounts receivable and accounts payable approximated fair value at
June 30, 2000 and 1999 because of the relatively short maturity of these
financial instruments. Management estimates that the fair values of capital
lease obligations and long term debt approximates fair value at June 30, 2000
based on their terms and interest rates.
(m) 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, VDC recognized an impairment loss of $1,165,187 on long-lived assets
of a subsidiary as described in Note 7 and an impairment loss of $479,199 in
connection with the write off of certain billing software. VDC recorded a write
down of its investment in MCC of approximately $2.3 million and $21.3 million
during the years ended June 30, 2000 and 1999, respectively (see Note 5).
(n) Concentrations of Credit Risk and Major Customers
Financial instruments that potentially subject VDC to concentrations of credit
risk consist of cash and cash equivalents and accounts receivable. VDC's
customer base includes domestic and international companies in the
telecommunications industry. VDC performs ongoing credit evaluations of its
customers but generally does not require collateral to support customer
receivables. VDC will establish an allowance for possible losses, if needed,
based on factors surrounding the credit risk of specific customers.
Sales and net accounts receivables from major customers are as follows as of and
for the years ended June 30:
<TABLE>
<CAPTION>
Percentage of Sales
-------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Customer A -% 27% 48%
Customer B -% -% 24%
Customer C -% 38% -%
---------------------------------------------------------------
-% 65% 72%
---------------------------------------------------------------
F-12
<PAGE>
Percentage of Net Accounts Receivable
-------------------------------------
1998 1999 2000
---- ---- ----
Customer A -% 55% 64%
Customer B -% -% -%
Customer C -% -% -%
---------------------------------------------------------------
-% 55% 64%
---------------------------------------------------------------
</TABLE>
(o) Recent Accounting Pronouncements
During 1998, the FASB issued SFAS No. 133. "Accounting for Derivative
Instruments and Hedging Activities". During the second quarter of 1999, the FASB
postponed the adoption date of SFAS No. 133 until January 1, 2000. The FASB
further amended SFAS No. 133 in June 2000. SFAS No. 133 requires that all
derivative financial instruments be recorded on the consolidated balance sheets
at their fair value. Changes in the fair value of derivatives will be recorded
each period in earnings or other comprehensive earnings, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. Gains and losses on derivative instruments reported in
other comprehensive earnings will be reclassified as earnings in the periods in
which earnings are affected by the hedged item. VDC does not expect the adoption
of this statement to have a significant impact on VDC's results of operations,
financial position or cash flows.
In 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin No. 101 dealing with revenue recognition which is effective in the
fourth quarter of calendar 2000. VDC does not expect its adoption to have a
material effect on VDC's financial statements.
2. Going Concern
The accompanying consolidated financial statements have been prepared on the
basis that the Company is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities, except as otherwise disclosed, in
the normal course of business. However, because of the Company's recurring
losses from operations and significant arrearages on trade payables, such
realization of assets and the satisfaction of related liabilities is subject to
significant uncertainty. The Company's overall stability is highly dependent on
its ability to raise working capital, to achieve profitable operations and to
generate sufficient cash flows from operating and financing activities to meet
current obligations as they come due.
Management is currently pursuing various financing arrangements. However, there
can be no assurances that VDC will be able to secure additional financing.
3. Rare Nevada Acquisition
Rare Nevada was a privately held corporation through June 2000. Rare Nevada
merged with and into a wholly-owned subsidiary of VDC as of June 30, 2000. The
surviving VDC subsidiary has been renamed Rare Telephony, Inc. ("Rare"). Rare
Nevada commenced operations in July 1999. Rare operates through its wholly-owned
subsidiaries, Cash Back Rebates LD.com., a Delaware corporation and Free dot
Calling.com, Inc, a Nevada corporation, which is not yet operational. Rare is a
F-13
<PAGE>
pre-paid long distance provider that obtains customers through telemarketing
sales. In the future, through Free dot Calling.com, Inc., Rare anticipates
offering its services over the Internet through a proprietary E-commerce
platform.
The acquisition was consummated through the issuance of 1,551,020 shares of
common stock of which 531,222 shares of common stock are subject to release
based on certain Rare employees and consultants rendering post combination
services. The release of 531,222 shares of common stock, if and when it occurs,
will be charged to compensation expense at the fair market value of the common
stock on the date of release. Subject to certain additional terms and conditions
set forth in the applicable escrow agreement, if certain Rare employees and a
consultant are not terminated for cause, do not resign from employment or
service and do not breach a material term of employment or consulting contracts,
180,616, 138,118, and 212,488 shares of common stock will be released on June
14, 2001, 2002, and 2003, respectively. Accordingly, 1,019,798 shares of common
stock, valued at the June 14, 2000 closing market price of $1.5625 per share,
determined the purchase price. The purchase price also includes an investment
banking fee in the form of 81,633 shares of common stock valued at $1.5625 per
share. The acquisition has been accounted for using the purchase method of
accounting with the excess of the purchase price over the estimated fair value
of the net assets acquired recorded as goodwill. The consolidated financial
statements presented do not include Rare's results of operations since the
acquisition was effective, for accounting purposes, on June 30, 2000. As a
result, VDC's June 30, 2000 consolidated balance sheet reflects the effect of
the acquisition of Rare.
Pro-forma unaudited consolidated results of operations as if the merger had
taken place as of July 1, 1999, rather than June 30, 2000, are as follows:
<TABLE>
<CAPTION>
Year ended June 30, 2000
------------------------
<S> <C>
Net Revenue $ 9,997,677
Net loss $(10,080,745)
Loss per common share $(0.47)
</TABLE>
4. 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
F-14
<PAGE>
"Escrow Shares") were placed in escrow to be held and released as VDC achieved
certain performance criteria.
On November 6, 1998, VDC 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 was 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 VDC'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.
5. Metromedia China Corporation Investment
On June 22, 1998 VDC 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. VDC's ownership in MCC is
approximately 3.4% exclusive of the warrants.
In October 1999, a condition for the release from escrow of 2 million shares of
VDC's common stock to the seller of the investment in MCC was satisfied. The
shares were released pursuant to a condition in a settlement agreement which
provided for the release of the escrowed shares in the event that VDC's stock
price closed below $5.00 for 40 trading days during the 120 consecutive trading
F-15
<PAGE>
days subsequent to August 31, 1999. The shares issued under this escrow
agreement were recorded as an increase in common stock of $200.
Based on a review of MCC's majority owner's (Metromedia International Group
("MMG")) SEC filings, VDC is carrying its investment in MCC at $140,000. This
adjusted carrying value was developed based on an amount relative to MMG's
carrying amount. During the years ended June 30, 2000 and 1999, VDC recorded a
write down on the investment in MCC of approximately $2.3 million and $21.3
million, respectively. MMG's carrying value reflects the liquidation of MCC's
interests in four telecommunications joint ventures in China. All four of these
ventures prematurely terminated operations by order of the Chinese government in
calendar 1999.
According to MMG: (1) MCC is currently developing a family of commercial
information exchange and transaction processing business units, each targeting
operations within a specific Chinese vertical industry sector; (2) the units are
expected to focus on providing services to domestic Chinese enterprises; (3) MCC
also expects to operate its own application software and systems integration
unit; and (4) all MCC subsidiary units are expected to operate inside China as
licensed Chinese companies.
6. Property and Equipment
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 2000
------------- -------------
<S> <C> <C>
Operating equipment $ 4,943,233 $ 4,741,429
Office equipment 107,533 474,665
Leasehold Improvements 271,939 331,750
Furniture & fixtures 161,572 292,470
------- -------
5,484,277 5,840,314
Accumulated depreciation-beginning of year (9,883) (596,113)
depreciation expense-cost of services (597,398) (929,083)
depreciation expense-SG&A (36,890) (89,182)
Accumulated depreciation-equipment sold or impaired 48,057 60,771
-------------- --------------
Property and equipment, net of accumulated depreciation $ 4,888,163 $ 4,286,707
-------------- --------------
</TABLE>
7. Asset Impairment - subsidiary
The August 1998 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, VDC cancelled its circuit into Central America and curtailed Masatepe's
operations. Masatepe no longer operates its owned telecommunications route to
Central America. VDC believes that the goodwill attributable to its acquisition
of Masatepe has therefore been permanently impaired. For the year ended June 30,
1999, 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-16
<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, were considered
unrecoverable. During the year ended June 30, 1999, these assets were also
written off in accordance with FASB No. 121.
VDC has accrued approximately $1.1 million of current liabilities in the June
30, 2000 and 1999 balance sheets which is related to the responsibility of
Masatepe as a partial owner of Masacom.
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, VDC 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 June 30, 1999:
Assets $ 55,322
Liabilities $ 15,866
Results of operations (loss) $ (867,645)
Masacom had no recorded assets or liabilities at June 30, 2000 and no revenues,
expenses, gains or losses for the year ended June 30, 2000.
8. Restructured Note Receivable
During the year ended June 30, 1999, VDC 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 VDC. The
restructured terms provided VDC with needed short term working capital.
9. Income Taxes
VDC accounts for income taxes in accordance with SFAS No. 109, "Accounting for
VDC Income Taxes," under which deferred tax 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 tax effects of temporary differences that give rise to deferred tax assets
at June 30, 1999 and 2000 are as follows (in thousands):
F-17
<PAGE>
<TABLE>
<CAPTION>
1999 2000
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Impairment loss - MCC - capital loss carryforward $ 9,278 $ 10,261
Net operating loss carry forwards 2,800 5,579
Accrual - ENITEL 481 481
Difference between book and tax depreciation and amortization 464 534
Loss from affiliate - capital loss carryforward 377 377
Reserve for loss on assets 223 439
----------------------------------------
Total gross deferred tax assets 13,623 17,671
Less: Valuation allowance (13,623) (17,671)
----------------------------------------
Net deferred tax assets $ - $ -
-----------------------------------------------------------------------------------------------------
</TABLE>
The Company has net operating loss carryforwards of approximately $12.8 million
as of June 30, 2000, which expire through 2020. Approximately $1.4 million of
the net operating loss carryforwards are subject to annual limitations of
approximately $79,000 due to the Rare acquisition.
Reconciliation of VDC's actual tax rate to the U.S. Federal Statutory rate is as
follows:
<TABLE>
<CAPTION>
Year ended June 30, 1998 1999 2000
(in percents) ---- ---- ----
<S> <C> <C> <C>
Income tax rates
Statutory U.S. Federal rate -34.0% -34.0% -34.0%
States rates -9.5% -9.5% -9.5%
Valuation allowance 43.5% 43.5% 43.5%
----- ----- -----
Total -% -% -%
</TABLE>
10. Debt
In February 2000, an independent third party loaned Rare Nevada $200,000 at 15%
per annum. The loan is due in monthly installments of $6,933.07 per month
commencing in June 2000 with the final payment due May 2003.
On June 14, 2000, Rare entered into a loan agreement to pay $100,000 to Network
Consulting Group with interest at 8% per annum (the "Note"). The Note will be
paid in monthly installments of $3,133.64 commencing on December 1, 2000 and
continue thereafter on the first day of each successive month until November 1,
2003 when the entire outstanding principal balance and any unpaid interest is
due. The president of Network Consulting was a significant shareholder in Rare
Nevada.
<TABLE>
<CAPTION>
Aggregate principal maturities on long term debt are as follows:
F-18
<PAGE>
Year ending June 30,
--------------------
<S> <C>
2001 $ 71,490
2002 98,911
2003 102,797
2004 22,369
--------
Total $295,567
</TABLE>
11. 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 4). 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.
On March 31, 1998, VDC 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, VDC 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 June 1998, VDC issued 5.3 million VDC common shares to PortaCom in exchange
for the investment in MCC (see Note 5). 5,113,895, 3,113,895 and 4,915,828
common shares have been reflected as outstanding under the agreement as of June
30, 2000, June 30, 1999, and June 30, 1998, respectively. Additionally, 50,000
shares of VDC common stock were issued for investment advisory fees in
connection with the investment in MCC.
In November 1998, an executive officer and member of the VDC'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, VDC 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, VDC 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, VDC sold 328,170 shares of VDC 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 VDC common stock at
$2.70 per share and warrants to purchase 93,258 shares of VDC common stock at
$6.00 per share to unrelated investors. VDC incurred investment-banking fees of:
F-19
<PAGE>
(i) $56,000, (ii) issued 5,185 shares of VDC common stock, and (iii) warrants to
purchase 27,777 shares of VDC 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.
In October 1999, VDC sold 666,667 shares of common stock to unrelated investors
and 666,667 shares to an adult son of VDC's Chief Executive Officer at $0.75 per
share, the public market price at that time.
In April 2000, VDC sold 540,000 shares of VDC common stock to the Chairman and
C.E.O. at $2 per share, the public market price at that time.
During the year ended June 30, 2000 and 1999, VDC issued 127,500 and 290,000
shares of VDC common stock, respectively, to satisfy investment bankers fees for
services arising out of the merger of Sky King Communications, Inc., a
Connecticut corporation with and into VDC Communications, Inc. (then a
wholly-owned subsidiary of VDC Corporation Ltd., a Bermuda company) on March 6,
1998 (the "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.
12. Stock Option Plans
During the year ended June 30, 1998, VDC 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.
On September 4, 1998, VDC 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.
In light of the decline in market price of the VDC's common stock as of October
1999, the Board of Directors 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 1999, the Board of Directors approved an option
repricing program under which options to acquire shares of common stock that
were originally issued with exercise prices above $1.25 per share were reissued
with an exercise price of $1.25 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. Options to purchase 757,500 shares of VDC
common stock were affected by the repricing program including options to
purchase 567,500 shares of common stock issued under VDC's 1998 Stock Incentive
Plan, as amended (the "Plan") and options to purchase 190,000 shares of common
stock issued outside of the Plan.
F-20
<PAGE>
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 "Accounting for Certain Transactions involving Stock
Compensation an interpretation of APB No. 25". Among other issues, this
interpretation clarifies the accounting consequence of various modifications to
the terms of a previously fixed stock option or award. The interpretation
requires a charge to operations for the difference between the quoted market
value of VDC's common stock at the end of each reporting period and the option
price of unexercised, outstanding stock options. The interpretation is effective
July 1, 2000 but covers events that occur after December 15, 1998. Thus,
compensation expense may be recorded in the future as a result of this
repricing.
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 VDC's stock-based compensation plans been
determined consistent with SFAS No. 123, VDC's net income and earnings per share
would have been as follows:
<TABLE>
<CAPTION>
Year ended June 30, 1998 1999 2000
-----------------------------------------------------------------------------------
Pro forma results Net loss:
<S> <C> <C> <C>
As reported $(3,154,810) $(48,142,358) $ (5,246,430)
Pro forma $(3,188,260) $(48,545,002) $ (5,919,211)
Loss per common share-basic and diluted
As reported $(0.72) $ (2.72) $ (0.26)
Pro forma $(0.73) $ (2.75) $ (0.27)
</TABLE>
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, 1998 1999 2000
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 0.0% 0.0% 0.0%
Risk free interest rate 5.6% 5.0% 6.4%
Expected volatility 46.5% 46.1% 45.8%
Expected lives 6 years 6 years 6 years
------------------------------------------------------------------------------------
</TABLE>
Information regarding VDC's stock option plans and non-qualified stock options
as of June 30, 2000, 1999 and 1998 and changes during the years ended on those
dates is summarized as follows:
F-21
<PAGE>
<TABLE>
<CAPTION>
Number of shares Weighted Average Exercise 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
Granted 1,892,000 $1.19
Exercised 49,500 $1.25
Forfeited 180,000 $3.09
--------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 2000 2,513,000 $1.20
</TABLE>
Options exercisable and weighted average fair value of options granted during
the years ended June 30 is shown below:
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Options exercisable at year end 20,500 261,600
weighted average exercise price $4.125 $1.25
weighted average fair value of options granted during the year $2.07 $0.67
</TABLE>
Information about stock options outstanding at June 30, 2000 is summarized as
follows:
<TABLE>
<CAPTION>
Range of exercise Number outstanding Weighted Average remaining Weighted average
prices at June 30, 2000 contracted life-years exercise price
<S> <C> <C> <C>
$.9375-$1.57 2,405,500 9.1 $1.20
-------------------- --------------------- ----------------------------- ----------------------
$3.00-$3.79 107,500 9.75 $3.50
-------------------- --------------------- ----------------------------- ----------------------
</TABLE>
13. Commitments and Contingencies
Litigation
In July 1999, a former customer filed suit against VDC asserting that VDC
induced it to enter into an agreement through various purported
misrepresentations. The suit alleges that, due to these purported
misrepresentations and purported breaches of contract, the former customer has
been unable to provide services to its customers. The relief sought includes
monetary damages resulting from the purported breach of contract and the
purported misrepresentations and the recovery of attorneys' fees. In the event
that the former customer prevails, VDC could be liable for monetary damages in
an amount that would have a material adverse effect on VDC's assets and
operations.
VDC believes that the claims asserted are without merit and VDC will, if it is
served with process, vigorously defend itself against them. In the opinion of
management, based on the information that it presently possesses, the claims
F-22
<PAGE>
will not have a material adverse effect on VDC's consolidated financial
position, results of operations or liquidity.
In addition, VDC is a defendant in another lawsuit. Management presently
believes that the disposition of this lawsuit will not have a material effect on
VDC's assets or operations.
Capital Leases
VDC finances some of its telecommunications equipment under capital lease
arrangements as follows:
Future minimum lease payments under capital leases are as follows:
<TABLE>
<CAPTION>
Year ending June 30,
--------------------
<S> <C>
2001 $ 246,900
2002 246,900
2003 246,900
2004 102,875
---- --------
Total minimum lease payments 843,575
less: amount representing interest 143,752
--------
present value of minimum lease payments 699,823
less: current portion 178,341
--------
long-term capital lease obligations $ 521,482
--------
</TABLE>
Operating Leases
VDC leases office and equipment space under noncancellable operating leases.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year ending June 30,
--------------------
<S> <C>
2001 564,534
2002 545,669
2003 438,804
2004 307,873
2005 220,093
thereafter 804,215
---------
$ 2,881,188
</TABLE>
F-23
<PAGE>
Rent expense for the years ended June 30, 2000, 1999 and 1998 was approximately
$532,000, $516,000, and $29,000, respectively.
Employment Agreements
VDC and its subsidiaries have entered into several multi-year employment
agreements expiring through 2003 with officers and certain employees of VDC,
which provide for aggregate annual base salaries as follows:
<TABLE>
<CAPTION>
Years ended June 30,
--------------------
<S> <C>
2001 $ 1,425,546
2002 1,089,296
2003 477,832
---- --------
$ 2,992,674
</TABLE>
14. Fourth Quarter Financial Information
During the fourth quarter of the year ended June 30, 2000, VDC recorded asset
impairment charges of $2,260,000 related to the investment in MCC (see Note 5),
approximately a $275,000 charge attributable to carrier disputes and a $254,000
bad debt reserve for a specific customer.
During the fourth quarter of the year ended June 30, 1999, VDC recorded asset
impairment charges of $1,165,187, related to the Masatepe acquisition (see Note
7) and $1,940,000 related to the investment in MCC (see Note 5).
During the fourth quarter of the year ended June 30, 1998, VDC recorded non-cash
compensation expense of $1,453,000, related to the release of convertible
preferred stock from escrow (See Note 4).
15. Subsequent Events
In July 2000, VDC sold 625,000 shares of common stock to unrelated investors at
$1.00 per share, the public market price at that time.
16. Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ - $92,304 $135,998
Schedule of non-cash investing and financing:
---------------------------------------------
Excess of purchase price above net liabilities of Rare Telephony including
$1,100,000 due to VDC - - 3,291,517
Cancellation of stock subscription receivable - - 344,700
Net assets acquired in exchange for stock 5,871,071 - -
F-24
<PAGE>
Equipment acquired through capital lease obligations - 1,481,892 249,335
Equipment exchanged for note - 192,379 -
Release of investment banking shares - 725,000 318,750
Common stock placed in escrow in connection with the investment in MCC - 13,962,500 -
Stock subscription for common stock 164,175 - -
Treasury stock acquired in exchange for subscription receivable - 164,175 -
Common stock issued in connection with acquisition of subsidiaries - 700,875 1,703,487
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-25
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders of
VDC Communications, Inc. and Subsidiaries
Greenwich, Connecticut
The audits referred to in our report dated August 30, 2000 relating to
the consolidated financial statements of VDC Communications and subsidiaries
included the audits of Schedule II - Valuation and Qualifying Accounts for each
of the three years in the period ended June 30, 2000. This schedule is the
responsibility of management. Our responsibility is to express and opinion on
this schedule based on our audits.
In our opinion, such Schedule II - Valuation and Qualifying Accounts,
presents fairly, in all material respects, the information set forth therein.
/s/ BDO SEIDMAN, LLP
--------------------
BDO SEIDMAN, LLP
Valhalla, New York
August 30, 2000
F-26
<PAGE>
Schedule II
<TABLE>
<CAPTION>
Valuation and Qualifying Accounts
Additions
Charged to
Balance at Selling Deductions-
Beginning General & Accounts Balance at
Description of Period Administrative Written Off End of Period
-------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
<S> <C> <C> <C> <C> <C>
30-Jun-98 $0 $0 $0 $0
30-Jun-99 $0 $7,000 $0 $7,000
30-Jun-00 $7,000 $497,088 $0 $504,088
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
Exhibit Index
Exhibit Page Number in
Number Rule 0-3 (b)
(Referenced to Sequential
Item 601 of Numbering System
Reg. S-K) Where Exhibit Can
Be Found
<S> <C>
10.46 Form of Securities Purchase Agreement for June 2000
10.47 Form of Amendment to Securities Purchase Agreement for July 2000
10.48 Form of Registration Rights Agreement for June 2000
10.49 1998 Stock Incentive Plan, as Amended Through August 9, 2000
10.50 Incentive Stock Option Agreement between Frederick A. Moran and VDC
Communications, Inc., dated August 9, 2000
10.51 Incentive Stock Option Agreement between Clayton F. Moran and VDC Communications,
Inc., dated August 9, 2000
10.52 Purchase and Sale Agreement, by and between Omnetrix International, Inc. and VDC
Telecommunications, Inc., dated August 26, 2000
10.53 Promissory Note, dated August 26, 2000, made by Omnetrix International, Inc. in
favor of VDC Telecommunications, Inc.
10.54 Security Agreement, dated August 26, 2000, made by Omnetrix International, Inc. in
favor of VDC Telecommunications, Inc.
10.55 Promissory Note, dated June 14, 2000, made by Voice & Data Communications (Latin
America), Inc. in favor of VDC Communications, Inc.
10.56 Promissory Note, dated June 14, 2000, made by Voice & Data Communications (Latin
America), Inc. in favor of VDC Communications, Inc.
10.57 Form of Promissory Note executed by Rare Telephony, Inc.
21.1 Subsidiaries of Registrant
27.1 Financial Data Schedule
</TABLE>
58
