-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C5hTtu3T0dj208Muf8ReZkttih5HUkEIfX9kNemExvfbpg41DBufObBbdGRyfYDR A0grmMglNobu1R+pOWG61Q== 0000784961-99-000005.txt : 19990608 0000784961-99-000005.hdr.sgml : 19990608 ACCESSION NUMBER: 0000784961-99-000005 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19990607 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VDC COMMUNICATIONS INC CENTRAL INDEX KEY: 0000784961 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 061510832 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-80107 FILM NUMBER: 99641382 BUSINESS ADDRESS: STREET 1: 75 HOLLY HILL LANE CITY: GREENWICH STATE: CT ZIP: 06831 BUSINESS PHONE: 2038695100 MAIL ADDRESS: STREET 1: 75 HOLLY HILL LANE CITY: GREENWICH STATE: CT ZIP: 06831 FORMER COMPANY: FORMER CONFORMED NAME: VDC CORP LTD DATE OF NAME CHANGE: 19960117 S-1 1 INITIAL STATEMENT REGISTRATION NO. 333- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- VDC COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) DELAWARE 4812 06-1524454 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.) 75 Holly Hill Lane Greenwich, Connecticut 06830 (203) 869-5100 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) -------------------------- Frederick A. Moran Chief Executive Officer VDC Communications, Inc. 75 Holly Hill Lane Greenwich, Connecticut 06830 (203) 869-5100 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------------- COPIES TO: Louis D. Frost, Esq. Stephen M. Cohen, Esq. VDC Communications, Inc. Buchanan Ingersoll Professional Corporation 75 Holly Hill Lane 1835 Market Street Greenwich, Connecticut 06830 14th Floor (203) 869-5100 Philadelphia, PA 19103 (215) 665-3873 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /X/ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If the Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / /
CALCULATION OF REGISTRATION FEE Title of Each Class Of Securities Amount Proposed Proposed To Be To Be Maximum Offering Maximum Aggregate Amount of Registered Registered Price Per Share(2) Offering Price Registration Fee ---------- ---------- ------------------ ----------------- ------------------- Common Stock, $.0001 par value 8,722,618(1) $ 3.125 $ 27,258,181 $ 7,578
(1) Pursuant to Rule 416 of the Securities Act of 1933, as amended, this Registration Statement also includes additional shares of common stock issuable upon stock splits, stock dividends or similar transactions. (2) Estimated pursuant to Rule 457(c) for the purpose of calculating the registration fee. Based on the average of the high and low prices per share of Common Stock on June 1, 1999 as reported on the American Stock Exchange. -------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. 2 The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED ________, 1999 PRELIMINARY PROSPECTUS VDC COMMUNICATIONS, INC. 8,722,618 SHARES OF COMMON STOCK The Selling Security Holders identified on page 62 of this prospectus, may offer and sell, from time to time, up to 8,722,618 Shares of Common Stock of VDC Communications, Inc. The Selling Security Holders may sell all or a portion of their respective Shares through public or private transactions, at prevailing market prices, or at privately negotiated prices. We will not receive any part of the proceeds from sales of these Shares. Our Common Stock is listed on the American Stock Exchange under the symbol "VDC". The last reported sale price of our Common Stock on June 3, 1999 on the American Stock Exchange was $3.4375 per share. -------------------- Investing in the Common Stock involves a high degree of risk. See "Risk Factors" beginning on page 7.
Underwriting Proceeds to the Price to Discounts Selling Class of Security Public and Commissions Security Holders ----------------- ------ --------------- ---------------- Shares of $ (1) $ (2) Common Stock
(1) Does not give effect to ordinary brokerage commissions or other costs of sale that will be borne solely by the Selling Security Holders. (2) Represents the anticipated sale by the Selling Security Holders at $3.4375 per share, the closing price for one share of the Company's Common Stock on the American Stock Exchange, Inc. on June 3, 1999. There can be no assurances, however that the Selling Security Holders will be able to sell their shares of Common Stock at this price, or that a liquid market will exist for the Company's Common Stock. The Company will realize no proceeds upon the sale of shares of Common Stock by the Selling Security Holders. -------------------- 3 Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is June _______, 1999 4 VDC COMMUNICATIONS, INC. TABLE OF CONTENTS PAGE NO. ABOUT THIS PROSPECTUS 6 PROSPECTUS SUMMARY 7 ABOUT VDC COMMUNICATIONS, INC. 7 THE OFFERING 8 RISK FACTORS 9 USE OF PROCEEDS 14 MARKET PRICE FOR THE COMPANY'S COMMON EQUITY 14 CAPITALIZATION 15 SELECTED FINANCIAL DATA 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27 BUSINESS 28 MANAGEMENT 36 COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT 51 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 52 PRINCIPAL STOCKHOLDERS 56 DESCRIPTION OF SECURITIES 58 SELLING SECURITY HOLDERS 62 PLAN OF DISTRIBUTION 65 WHERE YOU CAN FIND MORE INFORMATION 65 LEGAL MATTERS 66 EXPERTS 66 FINANCIAL STATEMENTS 67 5 ABOUT THIS PROSPECTUS You should only rely on information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. The Selling Security Holders are offering to sell, and seeking offers to buy, shares of Common Stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this or of any sale of common stock. This preliminary prospectus is subject to completion prior to this offering. Among other things, this preliminary prospectus describes our company as we currently expect it to exist at the time of this offering. 6 PROSPECTUS SUMMARY The following information is intended to summarize the detailed information and financial statements (including the notes thereto) appearing elsewhere in this prospectus. This Section is not intended to be a complete description of all aspects of our business or the Common Stock being offered by the Selling Security Holders. Investors should carefully consider the information set forth under the caption "RISK FACTORS" beginning at page 7 of this Prospectus. ABOUT VDC COMMUNICATIONS, INC. VDC Communications, Inc. (referred to herein as the "Company" or "We") owns telecommunications equipment and leases telecommunications lines to provide domestic and international long distance telecommunications services. In addition, we connect to other telephone companies and resell their services to destinations where we do not own equipment or lease lines. Our customers are other long distance telephone companies that resell our services to their retail customers or other telecommunications companies. In the future, we may offer our services directly to retail customers in addition to our current wholesale customers. The Company currently employs state-of-the-art digital switching and transmission technology. This equipment, located in New York, Los Angeles, Denver and Central America, comprises our facilities. Our facilities and industry agreements allow us to provide voice and facsimile telecommunications services from the U.S. to most countries in the world. The Company's current business has only recently commenced as we began developing our business strategies and marketing plans during March, 1998. During the remainder of 1998 we established the infrastructure necessary to provide voice and facsimile transmission services which we began marketing during the fourth quarter of calendar 1998. Accordingly, we do not believe that our current results of operations are indicative of future performance. Our business strategy is to develop a telecommunications business that focuses on niche segments of the market that are evolving by virtue of the deregulation of the telecommunications industry and the corresponding growth of the international long distance telecommunications markets. We intend to focus upon the international telecommunications carrier business, due to its potential for higher revenue and profit per minute of telephone call, and greater projected growth rate, as compared to the more mature domestic long distance telecommunications market. In particular, we are targeting certain of the less saturated international markets with potential for substantial volumes of traffic, relatively high revenue rates per minute of telephone use and prospects for growth. We believe that the ongoing trend toward deregulation and privatization can create these opportunities for growth in the future. 7 The Company was formerly the subsidiary of VDC Corporation, Ltd., a Bermuda public company ("VDC Bermuda") with its shares registered under the Securities Exchange Act of 1934 (the "Exchange Act"). On November 6, 1998, VDC Bermuda merged with and into the Company (the "Domestication Merger") for the principal purpose of domesticating VDC Bermuda from a Bermuda company to a Delaware corporation. This was done primarily to: (i) facilitate access to the U.S. capital markets; (ii) enhance the trading profile of the Company's securities within the investment banking and brokerage communities; and (iii) provide access to the comprehensive set of corporate laws available to companies incorporated in Delaware. The Domestication Merger was completed in conjunction with a prior business reorganization of VDC Bermuda. On March 6, 1998, the Company (then a wholly owned and newly formed subsidiary of VDC Bermuda) acquired Sky King Communications, Inc. ("Sky King Connecticut"), a development stage telecommunications company. The Sky King Connecticut acquisition enabled the Company to enter the telecommunications business and reflected the culmination of an overall business reorganization in which VDC Bermuda curtailed its prior lines of business. Our executive offices are located at 75 Holly Hill Lane, Greenwich, Connecticut, 06830, and our telephone number is (203) 869-5100. THE OFFERING Common Stock outstanding 20,173,583 shares (1) Common Stock offered by the Selling Security Holders: 8,722,618 shares Common Stock to be outstanding after the Offering: 21,237,664 shares (2) Proceeds: The Company will not receive any of the proceeds of the sale of shares of Common Stock by the Selling Security Holders. Trading Symbol: VDC - ----------------------------- (1) The Company presently has 20,173,583 shares of Common Stock outstanding. The number of shares outstanding does not include 948,500 shares of Common Stock reserved for issuance pursuant to the exercise of outstanding stock options; nor does it include outstanding warrants to purchase 1,064,081 shares of Common Stock (the "Warrants"). (2) This gives effect to the possible issuance of 1,064,081 shares of Common Stock upon exercise of the Warrants. - ----------------------------- 8 Summary Consolidated Financial Data
Period from January 3, 1996 (inception) through Years ended Nine-months ended June 30, 1996 June 30, 1997 June 30, 1998 March 31, 1998 March 31, 1999 ------------- ------------- ------------- -------------- -------------- Statement of Operations Data: revenues $ 4,850 $ 43,248 $ 99,957 $ 62,741 $ 1,425,952 direct costs of revenues (exclusive of depreciation) 1,091 22,020 28,460 26,546 2,159,210 -------------------------------------------------------------------------------- gross margin 3,759 21,228 71,497 36,195 (733,258) selling, general and administrative 28,921 50,267 1,064,593 463,744 3,768,885 depreciation and amortization 1,540 3,390 102,836 4,953 704,166 non-cash compensation (2) - - 2,254,000 801,000 16,146,000 -------------------------------------------------------------------------------- operating (loss) (26,702) (32,429) (3,349,932) (1,233,502) (21,352,309) (loss) on impairment-MCC (19,388,641) (loss) on note restructuring - - - - (1,598,425) other income (expense) - - 195,122 6,325 (84,000) equity in (loss) of affiliate - - - - (664,717) -------------------------------------------------------------------------------- net loss $ (26,702) $ (32,429) $ (3,154,810) $ (1,227,177) $ (43,088,092) ================================================================================ net loss per share (1) $ (0.01) $ (0.01) $ (0.72) $ (0.33) $ (2.45) weighted average shares outstanding 3,699,838 3,699,838 4,390,423 3,713,342 17,604,937 -------------------------------------------------------------------------------- Balance Sheet data: investment in MCC $ - $ - $ 37,790,877 $ - $ 4,340,000 -------------------------------------------------------------------------------- total assets $ 16,499 $ 15,000 $ 45,823,684 $ 8,938,885 $ 13,673,140 -------------------------------------------------------------------------------- stockholders' equity $ 16,249 $ 14,750 $ 45,667,499 $ 8,787,155 $ 8,188,535 -------------------------------------------------------------------------------- Other Operating data: EBITDA - Adjusted (2) $ (25,162) $ (29,039) $ (993,096) $ (427,549) $ (4,502,143) --------------------------------------------------------------------------------
(1) Diluted earnings per share for this period is not calculated because inclusion of common share equivalents would be antidilutive. (2) EBITDA-Adjusted represents earnings (losses) before interest expense, income taxes, depreciation, amortization, other income (expense) and non-recurring charges including non-cash compensation. EBITDA does not represent cash flows as defined by generally accepted accounting principles. EBITDA is a financial measure commonly used in the Company's industry and should not be considered in isolation or as a substitute for net income (loss), cash flow from operating activities or other measure of liquidity determined in accordance with generally accepted accounting principles. RISK FACTORS An investment in the shares of Common Stock offered by this Prospectus involves a high degree of risk. Prospective purchasers of the shares of Common Stock offered hereby should carefully review the following risk factors as well as the other information set forth in this Prospectus. This Prospectus contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Pro forma information contained within this Prospectus, to the extent it is predictive of the financial condition and results of operations that would have occurred on the basis of certain stated assumptions, may also be characterized as forward-looking statements. Although forward-looking statements are based on assumptions made, and information believed, by management to be reasonable, no assurance can be given that such statements will prove to be correct. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, projected or expected. Some, but not all, of such risks and uncertainties are described in the risk factors set forth below. 9 WE ARE A COMPANY IN THE EARLY STAGES OF DEVELOPMENT. We have only recently commenced our present operations, and therefore, have only a limited operating history upon which you can evaluate our business. We have strategically placed telecommunications equipment in cities that we believe will enable us to efficiently transport telecommunications services. Now we are building our customer base in order to achieve greater revenues and market penetration. We will also add additional telecommunications equipment in other areas of the world. We have not yet determined with certainty where those areas will be. WE ARE LOSING MONEY. We have not yet experienced a profitable quarter and may not ever achieve profitability. By virtue of the early stage of our development, we have yet to build sufficient volume of telecommunications voice and facsimile traffic to reach profitability. Our current expenses are greater than our revenues. This will probably continue until we reach a greater level of maturity and it is possible that our revenues may never exceed our expenses. If operating losses continue for longer than the short-term, then our continued operation will be in jeopardy. However, we believe that what we have developed over the past year is valuable and has the potential to generate revenues greater than expenses. NUMEROUS CONTINGENCIES COULD HAVE A MATERIAL ADVERSE EFFECT ON US. Because we are in the early stages of development and because of the nature of the industry in which we operate, there are numerous contingencies over which we have little or no control, any one of which could have a material adverse effect on us. The contingencies include, but are not limited to, the addition or loss of major customers, whether through competition, merger, consolidation or otherwise; the loss of economically beneficial routing options for telecommunications traffic termination; financial difficulties of major customers; pricing pressure resulting from increased competition; and technical difficulties with or failures of portions of our network that could impact our ability to provide service to or bill our customers. OUR ABILITY TO IMPLEMENT OUR PLAN SUCCESSFULLY IS DEPENDENT ON A FEW KEY PEOPLE. We are particularly dependent upon Frederick A. Moran, Chairman, Chief Executive Officer, Chief Financial Officer, Secretary and Director of the Company. Mr. Moran is also a significant shareholder of the Company. The Company has an employment agreement with Mr. Moran. We believe the combination of his employment agreement and equity interest keeps Mr. Moran highly motivated to remain with the Company. THE INTERNATIONAL TELECOMMUNICATIONS MARKET IS RISKY. The international nature of our operations involves certain risks, such as changes in U.S. and foreign government regulations and telecommunications standards, dependence on foreign partners, tariffs, taxes and other trade barriers, the potential for nationalization and economic downturns and political instability in foreign countries. At the current time, we are particularly dependent on Central and North America. In addition, our business could be adversely affected by a reversal in the current trend toward the deregulation of the telecommunications industry. We will be increasingly subject to these risks to the extent that we proceed with the planned expansion of international operations. 10 GOVERNMENT INVOLVEMENT IN INDUSTRY COULD HAVE AN ADVERSE EFFECT. We are subject to various U.S. and foreign laws, regulations, agency actions and court decisions. Our U.S. international telecommunications service offerings are subject to regulation by the Federal Communications Commission (the "FCC"). The FCC requires international carriers to obtain authorization prior to acquiring international facilities by purchase or lease, or providing international service to the public. Prior FCC approval is also required, in most cases, to transfer control of a certificated carrier. We must file reports, notifications, contracts, and other documents with the FCC and must pay regulatory and other fees, which are subject to change. We are also subject to the FCC policies and rules discussed below. The FCC could determine, by its own actions or in response to a third party's filing, that certain of our services, termination arrangements, agreements with foreign carriers, or reports did not comply with FCC policies and rules. If this occurred, the FCC could order us to discontinue such arrangements, fine us or revoke our authorizations. Any of these actions could have a material adverse effect on our business, operating results and financial condition. POTENTIAL FOR TECHNICAL FAILURE. Our services are dependent on our own and other companies' ability to successfully integrate technologies and equipment. In connecting with other companies' equipment we take the risk of not being able to provide service due to their error. In addition, there is the risk that our equipment may malfunction or that we could make an error which negatively affects our customers' service. We are also dependent on the protection of our hardware and other equipment from damage from natural disasters such as fires, floods, hurricanes and earthquakes, other catastrophic events such as civil unrest, terrorism and war and other sources of power loss and telecommunications failures. We have taken a number of steps to prevent our service from being affected by natural disasters, fire and the like. We have built redundant systems for power supply to our equipment. Nevertheless, there can be no assurance that any such systems will prevent the switches from becoming disabled in the event of an earthquake, power outage or otherwise. The failure of our network, or a significant decrease in telephone traffic resulting from effects of a natural or man-made disaster, could have a material adverse effect on our relationship with our customers and our business, operating results and financial condition. THE LONG DISTANCE AND INTERNATIONAL LONG DISTANCE TELEPHONE INDUSTRY IS HIGHLY COMPETITIVE. We are a small company in an industry with many companies that have more experience and greater resources than us. International telecommunications providers compete mainly on the basis of price, but also customer service, transmission quality, breadth of service offerings and value-added services. Our operating history is probably not long enough for you to make a judgment about our ability to compete in this industry. TECHNOLOGICAL ADVANCEMENT COULD RENDER OUR INFRASTRUCTURE OBSOLETE. The international telecommunications industry is highly competitive and subject to the introduction of new services facilitated by advances in technology. We expect that the future will bring technological change. It is possible that these changes could result in more advanced telecommunications equipment that could render our current equipment obsolete. If this were to happen, we would most likely have to invest significant capital into this new technology. 11 WE HAVE LIMITED CAPITAL. Being a small company in a capital intensive industry, our position of limited capital is a significant risk to our future viability. We may seek additional financing. We may sell additional shares of our stock in order to provide capital that may be needed for our operations. There is no guarantee that we will be able to do this. RECENT IMPAIRMENT OF SIGNIFICANT ASSET. We own a minority interest in a private company, Metromedia China Corporation ("MCC") that constitutes one of the principal assets of the Company. Since this company is private and in development, it is difficult to place a value on its worth. We currently value our ownership interest based on extrapolating the carrying value placed on MCC by its majority shareholder, Metromedia International Group. As of March 31, 1999, that equaled $4.34 million. Our total assets were $13.7 million. The value of our interest in MCC may change in the future. The value of MCC may be unfavorably influenced by negative operating results, the Chinese telecommunications market and/or other factors. Furthermore, changes in governmental policy towards foreign investment in telecommunications in China could also adversely effect the value of our investment. We have decreased the value placed on this asset, in large part, due to the uncertainty of the future of foreign participation in the Chinese telecommunications market. Even so, there is still the possibility that this asset will be worth less in the future than we believe is a fair value currently. WE HAVE A SIGNIFICANT INVESTMENT IN A PRIVATE COMPANY THAT WE DO NOT CONTROL. Through Masatepe Communications, U.S.A., L.L.C. ("Masatepe"), we have a non-controlling investment in Masatepe Comunicaciones, S.A., a private Nicaraguan telecommunications company ("Masacom"). We have loaned funds and equipment to Masacom. This equipment is located in Nicaragua. The recoverability of our loans and equipment is not assured. OUR STOCK IS HIGHLY VOLATILE. Our stock price fluctuates significantly. We believe that this will most likely continue. Historically, the market prices for securities of emerging companies in the telecommunications industry have been highly volatile. Future announcements concerning us or our competitors, including results of operations, technological innovations, government regulations, proprietary rights or significant litigation, may have a significant impact on the market price of our stock. ADDITIONAL SHARES WILL BE AVAILABLE FOR SALE IN THE PUBLIC MARKET. This Prospectus will permit the resale of up to 8,722,618 shares of Company Common Stock into the public trading market. This will have the effect of significantly increasing the number of shares eligible for public trading. Sales of substantial amounts of the stock in the public market could have an adverse effect on the price of the stock and may make it more difficult for us to sell stock in the future. Although it is impossible to predict market influences and prospective values for securities, it is possible that the substantial increase in the number of shares available for sale, in and of itself, could have a depressive effect on the price of our stock. 12 WE HAVE NOT PAID ANY DIVIDENDS TO OUR STOCKHOLDERS AND DO NOT EXPECT TO ANYTIME IN THE NEAR FUTURE. Instead, we plan to retain future earnings, if any, for investment back into the Company. THE YEAR 2000 PROBLEM COULD HAVE A MATERIALLY ADVERSE EFFECT ON US. We are currently responding to year 2000 issues. Year 2000 issues are the result of computer programs being written using two digits rather than four to define the applicable year associated with the program or an associated computation. Any such two-digit computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. A significant portion of the devices that we use to provide our basic services use date-sensitive processing which affect functions such as service activation, service assurance and billing processes. We are currently evaluating the year 2000 readiness of our computer systems, software applications and telecommunications equipment. We are sending year 2000 compliance inquiries to certain third parties (i.e. vendors, customers, outside contractors) with whom we have a relationship. These inquiries include, among other things, requests to provide documentation regarding the third party's year 2000 programs, and questions regarding how the third party specifically examined the year 2000 effect on their equipment and operations and what remedial actions will be taken with regard to these problems. Since we are a new company, our key systems have just recently been implemented. Most of the vendors of such systems have represented to us that the systems are compliant with the year 2000 issues without any modification. We will, however, continue to require confirmation of year 2000 compliance in our future requests for proposals from equipment and software vendors. The failure of the Company's computer systems and software applications to accommodate the year 2000, could have a material adverse effect on our business, financial condition and results from operations. Further, if the software and equipment of those on whose services we depend are not year 2000 functional, it could have a material adverse effect on our operations. While most major domestic telecommunications companies have announced that they expect all of their network and support systems to be year 2000 functional by the middle of 1999, other domestic and international carriers may not be year 2000 functional. We intend to continue to monitor the performance of our accounting, information and other systems and software applications to identify and resolve any year 2000 issues. Currently, through our discovery process, we have identified an estimated $84,000 of expenditures associated with updating systems to be year 2000 compliant. However, we expect we will find additional expenses pending the finalization of our year 2000 investigation. Carriers in other countries with whom we may do business may not be year 2000 compliant, possibly having an adverse impact upon our ability to transmit or terminate telecom traffic. We believe that the most reasonably likely worst case scenario resulting from the century change could be the inability to efficiently send voice and facsimile calls at current rates to desired locations. We do not know how long this might last. This would have a material adverse effect on our results from operations. 13 ANTI-TAKEOVER PROVISIONS MAY DETER CHANGE IN CONTROL TRANSACTIONS. Certain provisions of our Certificate of Incorporation, as amended (the "Certificate of Incorporation"), and Bylaws, as amended (the "Bylaws"), and the General Corporation Law of the State of Delaware (the "GCL") could deter a change in our management or render more difficult an attempt to obtain control of us. For example, we are subject to the provisions of the GCL that prohibit a public Delaware corporation from engaging in a broad range of business combinations with a person who, together with affiliates and associates, owns 15% or more of the corporation's outstanding voting shares (an "interested stockholder") for three years after the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The Certificate of Incorporation includes undesignated Preferred Stock, which may enable the Board to discourage an attempt to obtain control of us by means of a tender offer, proxy contest, merger or otherwise. In addition, the Certificate of Incorporation provides for a classified Board of Directors such that approximately only one-third of the members of the Board will be elected at each annual meeting of stockholders. Classified boards may have the effect of delaying, deferring or discouraging changes in control of us. Further, certain other provisions of the Certificate of Incorporation and Bylaws and of the GCL could delay or make more difficult a merger, tender offer or proxy contest involving us. Additionally, certain federal regulations require prior approval of certain transfers of control of telecommunications companies, which could also have the effect of delaying, deferring or preventing a change in control. See "DESCRIPTION OF SECURITIES--Anti-Takeover Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware Law". USE OF PROCEEDS The Company will not receive any proceeds from the sale of the Common Stock offered by the Selling Security Holders. MARKET PRICE FOR THE COMPANY'S COMMON EQUITY The Company's Common Stock has traded on the American Stock Exchange, Inc. ("AMEX") since July 7, 1998. Commencing in 1993 until November 26, 1997, the Company's Common Stock traded on The NASDAQ stock market under the trading symbol "VDCLF". On November 26, 1997, NASDAQ imposed a trading halt on the Company's Common Stock, which was subsequently delisted from trading on NASDAQ on March 2, 1998. From March 2, 1998 to July 7, 1998, the Company's Common Stock was traded on the OTC Bulletin Board under the trading symbol "VDCLF." The following table sets forth certain information with respect to the high and low bid or closing prices of the Company's Common Stock for the periods indicated below:
Fiscal 1999 High Low First Quarter $7.88 $3.88 Second Quarter $4.75 $3.25 Third Quarter $6.13 $3.63 Fiscal 1998 First Quarter $5.38 $3.88 Second Quarter $6.50 $4.50 Third Quarter $6.50 $3.75 Fourth Quarter $8.63 $5.88 Fiscal 1997 First Quarter $9.25 $7.37 Second Quarter $7.87 $5.00 Third Quarter $6.50 $5.00 Fourth Quarter $5.25 $3.00
On June 3, 1999, the last reported sale price of the Common Stock on AMEX was $3.4375 per share. 14 The high and low bid prices for the Company's Common Stock are rounded to the nearest 1/8th. Such prices are inter-dealer prices without retail mark-ups or commissions and may not represent actual transactions. Record Holders As of June 3, 1999, the approximate number of holders of record of the Company's Common Stock was 657. The Company believes the number of beneficial owners of the Common Stock exceeds 1,500. Dividends The Company has not paid any cash dividends, to date, and has no intention of paying any cash dividends on its Common Stock in the foreseeable future. The declaration and payment of dividends is subject to the discretion of the Board of Directors and to certain limitations under the General Corporation Law of the State of Delaware. The timing, amount and form of dividends, if any, will depend, among other things, on the Company's results of operations, financial condition, cash requirements and other factors deemed relevant by the Board of Directors. CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1999. This table should be read in conjunction with the Company's financial statements and related notes appearing elsewhere in the prospectus.
capitalized lease obligations-long term portion $ 913,503 ---------------- Shareholders' equity: preferred stock, $.0001 par value; 10,000,000 shares authorized, and no shares issued and outstanding - common stock. $.0001 par value; 50,000,000 shares authorized, 16,938,051 shares issued and outstanding 1,881 additional paid in capital 64,290,814 accumulated deficit (55,285,127) stock subscription receivable (344,700) accumulated comprehensive loss (310,158) ---------------- 8,352,710 treasury stock - 1,875,000 shares at cost (164,175) ---------------- total shareholders' equity 8,188,535 ---------------- Total $ 9,102,038 ================
15 SELECTED FINANCIAL DATA The following selected consolidated financial data as of and for each of the period(s) ended June 30, 1998, 1997 and 1996 have been derived from the audited consolidated financial statements of the Company. The financial data presented above reflects the relevant Statement of Operations data and Balance Sheet data of Sky King Connecticut, which became publicly held by virtue of its acquisition by VDC Bermuda on March 6, 1998. Since, as a result of the acquisition, the former stockholders of Sky King Connecticut acquired a controlling interest in VDC Bermuda , the acquisition has been accounted for as a "reverse acquisition". Accordingly, for financial statement presentation purposes, Sky King Connecticut is viewed as the continuing entity and the related business combination is viewed as a recapitalization of Sky King Connecticut, rather than an acquisition by VDC Bermuda. The selected financial data for the nine-months ended March 31, 1999 and 1998 have been derived from unaudited financial statements which, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of financial position and results of operations for the nine-months ended March 31, 1999 and 1998. The financial data presented for the nine-months ended March 31, 1999 reflects the Domestication Merger which was accounted for as a capital reorganization. The following data should be read in conjunction with the Consolidated Financial Statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein.
Period from January 3, 1996 (inception) through Years ended Nine-months ended June 30, 1996 June 30, 1997 June 30, 1998 March 31, 1998 March 31, 1999 -------------------------------------------------------------------------------- Statement of Operations Data: revenues $ 4,850 $ 43,248 $ 99,957 $ 62,741 $ 1,425,952 direct costs of revenues (exclusive of depreciation) 1,091 22,020 28,460 26,546 2,159,210 -------------------------------------------------------------------------------- gross margin 3,759 21,228 71,497 36,195 (733,258) selling, general and administrative 28,921 50,267 1,064,593 463,744 3,768,885 depreciation and amortization 1,540 3,390 102,836 4,953 704,166 non-cash compensation - - 2,254,000 801,000 16,146,000 -------------------------------------------------------------------------------- operating (loss) (26,702) (32,429) (3,349,932) (1,233,502) (21,352,309) (loss) on impairment-MCC (19,388,641) (loss) on note restructuring - - - - (1,598,425) other income (expense) - - 195,122 6,325 (84,000) equity in (loss) of affiliate - - - - (664,717) -------------------------------------------------------------------------------- net loss $ (26,702) $ (32,429) $ (3,154,810) $ (1,227,177) $ (43,088,092) ================================================================================ net loss per share $ (0.01) $ (0.01) $ (0.72) $ (0.33) $ (2.45) weighted average shares outstanding 3,699,838 3,699,838 4,390,423 3,713,342 17,604,937 -------------------------------------------------------------------------------- Balance Sheet data: investment in MCC $ - $ - $ 37,790,877 $ - $ 4,340,000 -------------------------------------------------------------------------------- total assets $ 16,499 $ 15,000 $ 45,823,684 $ 8,938,885 $ 13,673,140 -------------------------------------------------------------------------------- long-term liabilities, net of current portion $ - $ - $ - $ - $ 913,503 -------------------------------------------------------------------------------- stockholders' equity $ 16,249 $ 14,750 $ 45,667,499 $ 8,787,155 $ 8,188,535 --------------------------------------------------------------------------------
16 (1) The loss from operations of $3,349,932 incurred during the year ended June 30, 1998 is primarily attributable to non-cash compensation of $2,254,000 (See Note 9 to the consolidated financial statements for the year ended June 30, 1998) and selling, general and administrative expenses. (2) The loss from operations of $21,352,309 incurred during the nine-months March 31, 1999 is primarily attributable to non-cash compensation of $16,146,000 (See Note 5 to the consolidated financial statements for the nine-months ended March 31, 1999) and selling, general and administrative expenses. (3) Diluted earnings per share for this period is not calculated because inclusion of common share equivalents would be antidilutive. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General VDC Communications, Inc. (referred to herein as the "Company" or "We") owns telecommunications equipment and leases telecommunications lines to provide domestic and international long distance telecommunications services. In addition, we connect to other telephone companies and resell their services to destinations where we do not own equipment or lease lines. Our customers are other long distance telephone companies that resell our services to their retail customers or other telecommunications companies. In the future, we expect to offer our services directly to retail customers in addition to our current wholesale customers. The Company currently employs state-of-the-art digital switching and transmission technology. This equipment, located in New York, Los Angeles, Denver and Central America, comprises our facilities. Our facilities and industry agreements allow us to provide voice and facsimile telecommunications services to most countries in the world. We believe the telecommunications industry is attractive given its current size and future growth potential. Furthermore, we believe the international telecommunications market provides greater opportunity than the domestic market, due to the relatively limited capacity in certain markets and potentially greater gross margin per minute of traffic. Our objective is to become an international telecommunications company with strategic assets and transmission capability in many attractive markets worldwide. Management believes that in order to achieve this, we must provide our customers with long distance and international voice and facsimile transmission at competitive prices. We strive to provide competitive rates, while maintaining carrier grade toll quality to destinations worldwide. We believe that our current facilities are sufficient to handle significantly more traffic than we are currently experiencing. In order to make better use of this capacity, we need to build a reputation for high quality transmission within our industry and provide competitive pricing. Current results reflect the fact that we have been a company in transition. We began the development of our long-distance telecommunications business on March 6, 1998 and have since developed our infrastructure and industry relations. We began marketing our services in December 1998 and have had modest success generating traffic over our infrastructure during early 1999. We do not believe that our most recent results are indicative of future performance. Revenue is earned from three sources. The main source is revenue from our domestic and international telecommunications long distance services which is earned based on the number of minutes billable to our customers, other telephone companies. These minutes are billed on a weekly, semi-monthly, or monthly basis. Bills are generally paid within thirty days. Our second source of revenues is derived from the rental of telecommunications equipment at our telecommunications facilities and telecommunications circuits to other telephone companies. This revenue is generated and billed on a month-to-month basis. Additionally, we derive minimal revenues from the management of tower sites that provide transmission and receiver locations for wireless communications companies. This revenue is also generated and billed on a month-to-month basis. Revenue derived through the per-minute transmission of voice and facsimile is normally in accordance with contracts with other telecommunications companies. These contracts are often for a year or more, but can be terminated or changed with a few days notice. 17 Direct costs of revenues include domestic long distance charges for transmission services, terminating overseas-originated traffic in the United States and internationally and terminating domestic originated, international traffic outside the United States. We use other telecommunications companies services in the same manner that they use ours. Therefore, our costs include significant payments to other telecommunications companies, including variable per minute costs for them to provide voice and facsimile services to us, which we resell to our customers. In addition, we pay fixed monthly expenses for capacity on a fiber optic backbone across the United States and a satellite connection to Central America. These fixed costs, including some additional circuit costs, are approximately $130,000 per month. Our direct costs of revenue also include the allocable personnel and overhead associated with operations. Our costs also include selling, general, and administrative costs ("SG&A"). SG&A consists primarily of personnel costs, professional fees, travel and other business development related costs. Total personnel costs are currently about $200,000 per month. We incur costs on a regular basis associated with international market research and due diligence regarding potential projects outside of the U.S. We believe that our recurring SG&A costs will begin to level off as we reach a mature operating level. It is, however, possible that as new opportunities arise, SG&A could increase significantly. We believe that over time, we may build our volume of minutes billed so that our revenues surpass our costs. We believe that the infrastructure and personnel necessary to achieve this are currently in place. We also incur non-cash expenses associated with the depreciation of long distance telecommunications equipment and other fixed assets and the amortization of goodwill from the acquisition of Masatepe. We depreciate long distance telecommunications and other fixed assets over a period of three-to-five years and are amortizing goodwill over two years. During the quarter ended March 31, 1999, we formed a new subsidiary, WorldConnect Telecom.com, Inc. ("WorldConnectTelecom.com"). WorldConnectTelecom.com is a wholly-owned subsidiary of VDC Telecommunications and holds an FCC 214 License. WorldConnectTelecom.com is a Delaware corporation which plans to provide retail long distance telecommunications services via the Internet and other outlets. Prior to the creation of WorldConnectTelecom.com, we did not offer voice and facsimile services to retail customers. WorldConnectTelecom.com generated minimal revenues during the quarter ended March 31, 1999. Background We are the successor to our former parent, VDC Bermuda, by virtue of the Domestication Merger that occurred on November 6, 1998. The effect of the Domestication Merger was that members/stockholders of VDC Bermuda became stockholders of the Company. The primary reason for the Domestication Merger was to reorganize VDC Bermuda as a publicly traded United States corporation domesticated in the State of Delaware. In connection with the Domestication Merger, 11,810,862 issued and outstanding shares of common stock of VDC Bermuda , $2.00 par value per share, were exchanged, and 8,487,500 issued and outstanding shares of preferred stock of the Company, $.0001 par value per share, were converted, on a one-for-one basis, into an aggregate 20,298,362 shares of Common Stock of the Company. The Domestication Merger has been accounted for as a reorganization which has been given retroactive effect in the financial statements for all periods presented. 18 The Domestication Merger reflects the completion of a series of transactions that commenced on March 6, 1998, when the Company (then a wholly-owned subsidiary of VDC Bermuda ) acquired Sky King Communications, Inc. ("Sky King Connecticut") by merger. This merger transaction was accounted for as a reverse acquisition whereby Sky King Connecticut was treated as the acquirer for accounting purposes. Accordingly, the historical financial statements presented are those of Sky King Connecticut before the merger on March 6, 1998 and reflect the consolidated results of Sky King Connecticut and VDC Bermuda, and other wholly-owned subsidiaries after the Domestication Merger. The Sky King Connecticut acquisition (the "Sky King Connecticut Acquisition") enabled VDC Bermuda to enter into the telecommunications business and reflected the culmination of an overall business reorganization in which VDC Bermuda curtailed its prior lines of business. From its inception in 1980 through 1992, the principal business of VDC Bermuda had involved the acquisition and exploration of North American mineral resource properties. In recognition, however, of the decreasing mineral prices and increasing drilling and exploration costs, during the early 1990's, it elected to phase out of the mining business, and, by 1994, effectively suspended any further efforts in connection with its former mining business. Following a brief period in which it owned farm and ranch properties, the principal business of VDC Bermuda through 1996 consisted of the acquisition and development of commercial properties in and around the Isle of Man, British Isles, where the executive offices of VDC Bermuda were located at that time. In view, however, of unanticipated development costs and delays in zoning approvals, among others, management thereafter concluded that VDC Bermuda would be unable to complete the development of these properties in the manner originally intended. With returns on investment likely to be below management's expectations, during 1995 and 1996, VDC Bermuda commenced the sale of its real estate holdings, while attempting to devise plans for the redeployment of its capital resources. Finally, during Fiscal 1997, VDC Bermuda made equity investments in an aggregate amount of approximately $5 million in two early stage ventures. When expected yields from these investments failed to materialize, management concluded that it was in the best interest of the Company to: (i) suspend its venture capital operations; (ii) dispose of its investment assets; and (iii) select new management who would be in a better position to identify business opportunities that would more fully benefit from the Company's attributes as a public corporation. During the remainder of Fiscal 1997, management reviewed several possibilities and ultimately identified Sky King Connecticut for acquisition in recognition of a number of factors, including its belief in the growth opportunities available within the national and international telecommunications industries, and the significant collective experiences of the Sky King Connecticut's management within the telecommunications industry. 19 Results of Operations For the Nine Months Ended March 31, 1999 Compared to the Nine Months Ended March 31, 1998 Revenues: Total revenues in the nine months ended March 31, 1999 increased to $1.4 million from approximately $63,000 for the corresponding prior year period. This is the initial result of the implementation of our telecommunications services during the period. Revenues were generated during the period primarily by the transmission of minutes domestically and internationally, and, to a lesser extent, the rental of telecommunications switch space and tower management. Since our current operations have only recently commenced, we do not believe that our current revenue rate is indicative of future performance. Revenue for the corresponding prior year period was attributable to tower management, and, accordingly, provides no meaningful comparative information. Gross Margin: Negative gross margins in the nine months ending March 31, 1999 were the result of a combination of per minute fees and leased line fees associated with the traffic carried in the period and salaries and other operating expenses incurred in advance of the realization of more significant revenues. Positive gross margins could result if volume increases sufficiently to cover fixed direct costs of revenue, such as circuit and personnel costs and variable direct costs of revenue. Gross margins for the corresponding prior year period reflected the excess of site rental revenues over site leasing costs. Selling, general & administrative: SG&A expenses increased to $3.8 million from approximately $464,000 for the corresponding prior year period. This increase includes salaries and corporate development costs necessary for the development and operation of new telecommunications services, including our telecommunications infrastructure; and professional fees, including consulting, legal and accounting expenses associated with the restructuring and establishment of our Company's business. Additionally, we absorbed one-time write-offs and non-cash severance expenses totaling approximately $1,004,000. Non-cash Compensation Expense: Non-cash compensation expense was $16,146,000 for the nine-months ended March 31, 1999, compared to $801,000 for the corresponding prior year period. During the nine months ended March 31, 1999, 3.9 million shares of a former class of preferred stock, were released from escrow based upon the achievement of performance criteria which included releasing 500,000 shares upon each procurement of one or more frequency, operating and/or business licenses to 500,000 people. We satisfied the performance criteria by obtaining an FCC 214 license authorizing us to provide international long distance telephony service and completed the construction of an international telecommunications gateway switch in New York City which has a surrounding population of approximately 15 million people. Of the 3.9 million shares of preferred stock released from escrow, 2.7 million shares were considered compensatory for accounting purposes. During the nine-months ended March 31, 1998, 300,000 shares of preferred stock were released from escrow based upon the achievement of performance criteria which included the procurement of $3.4 million in equity financing. Of the 300,000 shares released, 207,542 shares were considered compensatory for accounting purposes. These compensatory shares were owned by management, their family trusts, minor children, and an employee. The non-cash expense reflected on our financial statements is an accounting charge which was developed based on the deemed value of the shares released from escrow, which in turn, was based on the trading price of the Company Common Stock on the date of release. At this time, we do not expect further material non-cash charges to operations associated with Company stock in the future, as all of the preferred shares have been released from escrow. 20 Depreciation and Amortization: Depreciation and amortization increased to approximately $704,000 from approximately $5,000 for the corresponding prior year period. The increase was attributable to the amortization of goodwill associated with the Masatepe acquisition and depreciation of property and equipment. Depreciation expense should increase as we add assets to our current telecommunications infrastructure. By August 2000, we will have fully amortized the goodwill associated with the acquisition of Masatepe. Therefore, to some extent, this decrease will offset the increase associated with future equipment depreciation. Other income (expense): Other income (expense) was approximately $(21.1) million for the nine months ended March 31, 1999, compared with approximately $6,300 for the corresponding prior year period. The increase was mostly due to a non-cash charge attributable to the writedown of our ownership interest in MCC. We show the $19.4 million charge as a separate caption "writedown of investment in MCC" in the other income (expense) section of the statement of operations. The charge will not be included in "operating loss" because it represents a minority interest in a passive investment. In other words, we neither control nor exert significant influence over MCC. See "LIQUIDITY AND CAPITAL RESOURCES." In addition to the aforementioned write down of our investment in MCC, we restructured certain notes receivable to maximize their recovery and expedite payment and wrote off all previously accrued interest, which resulted in a $1,598,425 charge to operations. Net loss: The Company's net loss for the nine months ended March 31, 1999 was approximately $43.1 million. The net loss was mainly the result of non-cash charges and balance sheet restructuring. Non-cash compensation and the write down of our investment in MCC accounted for approximately $35.5 million of the loss. Neither affected our liquidity and we do not foresee any additional expenses relating to these two items. Excluding non-cash write-downs and non-cash severance expenses, we experienced a net loss, on an operating cash basis, of approximately $4.9 million. The Company's net loss for the corresponding prior year period of approximately $1.2 million was primarily attributable to the non-cash compensation expense associated with the release of escrow shares on a compensatory basis. If greater revenues are achieved, our operations could become profitable. We expect that future profitability is likely to depend upon a combination of several factors: 1) the continued growth of the business through increased volume and competitiveness; 2) the management of this growth and keeping expenses limited; and 3) the continued increase in the worldwide market for minutes of voice and data transmission. We believe that these factors should impact our ability to produce positive operating results in the future. However, there are many other factors that will also have an impact, some of which cannot be foreseen. For the Year Ended June 30, 1998, Compared to the Year Ended June 30, 1997 21 Revenues: Total revenues increased to approximately $100,000 in the year ended June 30, 1998 ("Fiscal 1998") as compared to approximately $43,000 for year ended June 30, 1997 ("Fiscal 1997"). The increase reflects increased sites under management and consulting fees. We no longer act as a consultant to other telecommunications companies. Site Leasing Expense: Site leasing expense increased to approximately $28,000 in Fiscal 1998 from approximately $22,000 in Fiscal 1997. The increase was primarily due to an increase in radio tower and antenna space rentals. Selling, general & administrative: Selling, general and administrative expenses increased to approximately $1.2 million in Fiscal 1998 from approximately $54,000 in the previous year. This increase was primarily attributable to professional fees, including consulting, legal and accounting expenses associated with the redeployment of the Company's assets and salaries of new personnel necessary for the Company's development of new telecommunications services. Non-cash Compensation Expense: Non-cash compensation expense was $2,254,000 in Fiscal 1998 up from $0 in Fiscal 1997. During Fiscal 1998, 600,000 shares of a former class of preferred stock were released from escrow based upon the achievement of performance criteria which included the procurement of $6.9 million in equity financing. Of the 600,000 shares released, 415,084 were considered compensatory. These compensatory shares were owned by management, their family trusts, minor children, and an employee. The non-cash expense reflected on our financial statements is an accounting charge which was developed based on the deemed value of the shares released from escrow, which in turn, was based on the trading price of the Company's Common Stock on the date of release. For the Year Ended June 30, 1997, Compared to the Year Ended June 30, 1996 Revenues: Total revenues increased to approximately $43,000 in Fiscal 1997 as compared to approximately $5,000 for the fiscal period ended June 30, 1996 ("Fiscal 1996"). The increase was primarily the result of a longer operating period (inception-January 3, 1996) and higher volume of revenue associated with increased sites under management. Site Leasing Expense: Site leasing expense increased to approximately $22,000 in Fiscal 1997 as compared to approximately $1,000 in Fiscal 1996. This increase was primarily the result of increased volume associated with a longer operating period and an increase in radio tower and antenna space rentals. Selling, general & administrative: Selling, general and administrative expenses increased to approximately $54,000 in Fiscal 1997 from approximately $30,000 in Fiscal 1996. This increase was primarily due to a longer operating period. 22 LIQUIDITY AND CAPITAL RESOURCES A significant amount of capital has been expended towards building corporate infrastructure and operating and capital expenditures in connection with certain acquisitions and the establishment of our programs. These expenditures have been incurred in advance of the realization of revenue that is likely to occur as a result of such acquisitions and programs. As a result, our liquidity and capital resources have diminished significantly. Recently, however, liquidity and capital resources improved due to a private placement of our Common Stock, resulting in net proceeds of $3,446,508 in May 1999. Liquidity and capital resources could further improve by a combination of any one or more of the following factors: (i) an increase in revenues generating gross profit from operations; (ii) collection on certain outstanding promissory notes; and (iii) continued financing activities. Net cash used in operating activities was approximately $2.6 million for the nine months ended March 31, 1999. We collected approximately $1.0 million from customers while paying approximately $3.6 million to vendors and employees. Net cash used by operating activities of approximately $429,000 for the corresponding prior year period was due to the net loss from operations offset by a non-cash compensation charge. Net cash used by investing activities was approximately $1.5 million for the nine months ended March 31, 1999. Cash was used for capital expenditures on facilities and switching equipment, the purchase of Masatepe as well as investing in and/or lending funds to Masatepe's 49% Nicaraguan owned subsidiary, Masatepe Comunicaciones, S.A.("Masacom"). Cash provided by investing activities was attributable to the collection of notes receivable and the return of escrow funds in connection with the investment in MCC. Net cash provided by investing activities was approximately $463,000 for the corresponding prior year period. This was primarily the result of proceeds from notes receivable and loan advances offset by the purchase of marketable securities and loan advances. Cash provided by financing activities was approximately $2.1 million for the nine months ended March 31, 1999. This reflects proceeds from the issuance of Common Stock, including the sale on December 23, 1998 of 245,159 shares of Company Common Stock to Frederick A. Moran, Chairman and Chief Executive Officer of the Company, and certain entities associated with and family members of Mr. Moran, the collection of stock subscriptions receivable, and proceeds from issuance of short-term debt less repayments of notes for the purchase of telecommunications equipment. The funds were used to fund operations and capital expenditures. Proceeds provided by financing activities of approximately $3.7 million for the corresponding prior year period were solely from the issuance of Common Stock and were used to fund operations and capital expenses. For the year ended June 30, 1998, net cash used in operating activities increased to approximately $859,000, from approximately $29,000 and $25,000 in the years ended June 30, 1997 and 1996, respectively. The increase in 1998 was mostly attributable to the increased losses from operations. Net cash used by investing activities totaled approximately $3.2 million in the year ended June 30, 1998. Cash was used for the investment in MCC, purchase and/or deposits for capital equipment purchases and purchases of investment securities offset by proceeds from repayments of notes receivable. There were no cash flows from investing activities in the years ended June 30, 1997 and 1996. 23 Net cash provided by financing activities increased to approximately $6.3 million in the year ended June 30, 1998 from approximately $28,000 in the years ended June 30, 1997 and 1996, respectively. Proceeds reflected the issuance of Company Common Stock by way of private placements. The proceeds were used to fund operations during Fiscal 1998, to purchase Masatepe, and to acquire MCC shares and MCC warrants. In the years ended June 30, 1997 and 1996, proceeds reflect capital contributions by the owners of Sky King Connecticut and were used to fund operations. At March 31, 1999, we had outstanding capital commitments of approximately $1.9 million for the purchase of facilities and switching equipment. These commitments are reflected in our consolidated balance sheet at March 31, 1999. As of March 31, 1999, we also had an obligation to repay, on or before July 26, 1999, a $500,000 principal loan advanced to the Company by our Chief Executive Officer. This loan was repaid in its entirety on May 13, 1999. For the near term, we anticipate that our monthly fixed costs of operations, exclusive of rate per minute charges from other carriers, will consist of the following: Personnel costs $200,000 Circuit Costs $130,000 Other SG&A costs $63,000 Capital Leases payments $57,000 ------- Total $450,000 -------- This includes the operating personnel and other non-variable costs considered direct costs of revenue. Notwithstanding our best estimate, we cannot be certain that our actual costs over the next couple of months will not differ significantly from these figures. We believe that there is certainly the possibility that the actual costs will be higher than estimated. We will not make a profit until our revenues exceed all our costs. Until we achieve this goal, we will continue to experience a cash flow deficit and we will have to find ways to fund that deficit. We are currently funding operations through existing cash, notes and accounts receivable collections and proceeds from additional financing activities. We do not know how long it will take before we will be able to operate profitably and, therefore, sustain our business without outside funding. We have recently entered into investment banking agreements to explore financing alternatives. In May 1999, we completed a private placement of Common Stock which resulted in net proceeds of $3,446,508. Proceeds raised from these private placements will be used to fund operations in the near term and pay off certain indebtedness. Recent Acquisitions We entered into a Purchase Agreement on July 31, 1998 to acquire Masatepe for $589,169 in cash and shares of our Common Stock valued at $700,875, less any adjustments made to the purchase price by virtue of indemnification claims made by the Company against an escrow fund established under the Purchase Agreement. The entire purchase price for the Masatepe acquisition was placed in escrow pending the satisfaction of certain regulatory filings to be made by Masatepe with the United States Federal Communications Commission (the "FCC"). In November 1998, the entire purchase price for the Masatepe acquisition was released from escrow, less 14,160 shares of the Company's Common Stock. The 14,160 shares were originally retained in escrow pending the resolution of a claim made by the Company against the escrow fund for outstanding expenses incurred by Masatepe prior to its acquisition by the Company, and were subsequently retired for cancellation. 24 In June 1999, the Company also issued an aggregate of 54,319 shares of our Common Stock to Activated and a former executive officer of Masatepe because the market price of the Company's Common Stock was less than $7.00 for a period of time following February 7, 1999, as determined by a formula set forth in the Purchase Agreement. We expect to continue to explore acquisition opportunities. Such acquisitions may have a significant impact on our need for capital. In the event of a need for capital in connection with an acquisition, we would explore a range of financing options, which could include public or private debt, or equity financing. There can be no assurances that such financing will be available, or if available, will be available on favorable terms. We also consider acquisitions using our Common Stock. Investment in MCC We own 2.0 million shares and warrants to purchase 4.0 million shares of MCC, a private company. We have held this asset for approximately one year. We originally valued the asset based on the value of our shares exchanged for the investment. However, significant time has passed since that transaction. During that time, the legality of the structure of MCC's joint ventures have come into question by Chinese authorities. MCC operates joint ventures in China under the direction of its majority owner, Metromedia International Group ("MMG"). Currently, legal restrictions in China prohibit foreign ownership and operations in the telecommunications sector. MCC's investments in joint ventures have been made through a structure known as Sino-Sino-Foreign ("SSF") joint venture. This is a widely used method for foreign investment in the Chinese telecommunications industry. The SSF venturer, in this case MCC, is a provider of telecommunications equipment, financing and technical services to telecommunications operators and not a direct provider of telephony service. The joint ventures invest in telecommunications system construction and development networks being undertaken by the local partner, China Unicom. The completed systems are operated by China Unicom. MCC receives payments from China Unicom based on revenues and profits generated by the systems in return for their providing financing, technical advice, consulting and other services. MMG has represented to us that it owns 33 million MCC shares, or 56% (33 million/59 million shares). As such, our 2 million shares represent a 3.4% interest (2 million/59 million shares). We also hold warrants to purchase 4.0 million shares of MCC at an exercise price of $4 per share, which currently expire in September 1999. Our current financial position does not allow us to exercise the warrants without the liquidity of a public market for MCC stock. Therefore, in performing a review for current recoverability of our investment, we have disregarded the warrants. 25 Historically, we have assessed the investment in MCC for asset impairment by applying a valuation technique commonly used by financial and equity analysts. This method involves applying a dollar value to each unit of population in the market ("per-pop"). Market capitalization of publicly traded companies in the industry divided by the population in the area served equals the per-pop valuation. Although we still believe this is an appropriate manner to assess the potential of the investment, it is not definitive enough for us to assess the current market value of 2.0 million shares of MCC. There has been uncertainty regarding possible significant changes in the regulation of and policy concerning foreign participation in and financing of the telecommunications industry in China, including the continued viability of the SSF structure and associated service and consulting arrangements with China Unicom. The Chinese government has stated that it does not intend to issue future telecom licenses to foreign companies or joint ventures. No definitive word has come forth regarding how, if at all, this affects MCC's existing Chinese operations. More recently, China has been indicating a renewed openness towards foreign companies, including telecommunications, in order to gain admission to the World Trade Organization ("WTO"). Yet, no definitive action has been taken by the Chinese government, the WTO or the US-China trade negotiators. We have limited understanding of MCC's stand-alone financial information because MCC is private. Our best source of information has been MMG's filings with the SEC. MMG recently released their audited financials for the year ended December 31, 1998. MMG is currently carrying its approximate 56% interest in MCC at $71.6 million. This implies a valuation of $127.9 million for a 100% interest. Based on the situation in China as it relates to the telecommunications industry and the limited financial information available, we have adjusted the carrying value of our investment in MCC to an amount relative to MMG's most recently audited carrying amount. This results in a carrying amount of $4.34 million. A charge of $19.4 million was, therefore, taken during the nine months ended March 31, 1999. Although we hope the Chinese telecommunications market proves profitable, that our warrants will be exercisable and that our investment shows significant returns in the future, we believe the conservative approach, given the great uncertainty surrounding the China telecommunications market and our inability to value MCC based on hard data and/or facts, is to decrease our carrying value of MCC. Our best source of information currently reflects a value of $127.9 million for 100% of MCC. This is based on the capital invested less the operating losses. Since it is unclear whether we will have the ability to exercise our warrants, we have decreased their current value to $0. Currently, we hold 2.0 million shares of MCC. Given that the total value of MCC is $127.9 million and we own approximately 3.4%, we derived our value to be $4.34 million. Recent Accounting Standards In June 1998, the AICPA issued statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities". We have not yet analyzed the impact of this new standard. We will adopt this standard in July of 2000. 26 The Year 2000 Readiness Disclosure A significant portion of the voice and data networking and network management devices are date-sensitive processing which affect network administration and operations functions such as service activation, service assurance and billing processes. We are currently evaluating the year 2000 readiness of our computer systems, software applications and telecommunications equipment. We are sending year 2000 compliance inquiries to certain third parties (i.e. vendors, customers, outside contractors) with whom we have a relationship. These inquiries include, among other things, requests to provide documentation regarding the third party's year 2000 programs, and questions regarding how the third party specifically examined the year 2000 effect on their computers and what remedial actions will be taken with regard to these problems. Our key processing systems have recently been implemented. Most of the vendors of such systems have represented to us that their systems are compliant with the year 2000 issues without any modification. We will, however, continue to require confirmation of year 2000 compliance in our future requests for proposals from equipment and software vendors. The failure of our computer systems and software applications to accommodate year 2000 issues, could have a material adverse effect on our business, financial condition and result of operations. Further, if the networks and systems of those on whose services we depend and with whom our networks and systems must interface are not year 2000 functional, it could have a material adverse effect on the operation of our networks and, as a result, have a material adverse effect on the Company. Most major domestic carriers have announced that they expect all of their network and support systems to be year 2000 functional by mid 1999. However, other domestic and international carriers may not be year 2000 functional. We intend to continue to monitor the performance of our accounting, information and processing systems and software applications and those of our third-party constituents to identify and resolve any year 2000 issues. Currently, through our discovery process, we have identified an estimated $84,000 of expenditures associated with updating our systems to be compliant with the year 2000. However, we expect to find additional expenses pending the finalization of our year 2000 investigation. Carriers in other countries with whom we may do business may not be year 2000 compliant, possibly having an adverse impact upon our ability to transmit or terminate telecom traffic. We believe that the most reasonably likely worst case scenario resulting from the century change could be the inability to route telecommunications traffic at current rates to desired locations for an indeterminable period of time, which could have a material adverse effect on our results of operations and liquidity. Impact of Inflation The effects of inflation on our operations were not significant during the periods represented. Quantitative and Qualitative Disclosures About Market Risk 27 The Company is currently not exposed to material future earnings or cash flow exposures from changes in interest rates on long-term debt obligations since our long-term debt obligations are at fixed rates. We may be exposed to interest rate risk, as additional financing may be required due to the operating losses and capital expenditures associated with establishing and expanding our facilities. The interest rate that we will be able to obtain on additional financing will depend on market conditions at that time, and may differ from the rates we have secured on our current debt. We do not currently anticipate entering into interest rate swap and/or similar instruments. The Company's carrying value of cash and cash equivalents, accounts and notes receivable, accounts payable, marketable securities-available for sale, and notes payable is a reasonable approximation of their fair value. BUSINESS VDC Communications, Inc. (referred to herein as the "Company" or "We") owns telecommunications equipment and leases telecommunications lines to provide domestic and international long distance telecommunications services. In addition, we connect to other telephone companies and resell their services to destinations where we do not own equipment or lease lines. Our customers are other long distance telephone companies that resell our services to their retail customers or other telecommunications companies. In the future, we may offer our services directly to retail customers in addition to our current wholesale customers. The Company currently employs state-of-the-art digital switching and transmission technology. This equipment, located in New York, Los Angeles, Denver and Central America, comprises our facilities. Our facilities and industry agreements allow us to provide voice and facsimile telecommunications services to most countries in the world. Through VDC Telecommunications, Inc., a subsidiary of the Company ("VDC Telecommunications"), we operate our international network of owned and leased telecommunications equipment. At the end of December 1998, VDC Telecommunications began carrying telecommunications traffic domestically and to certain countries in the world. VDC Telecommunications provides international services through a United States Federal Communications Commission Overseas Common Carrier Section 214 License ("FCC 214 License"). An FCC 214 License authorizes an entity to provide domestic and international telecommunication services. VDC Telecommunications has approximately ten contracted customers, other telecommunications companies, for carriage of telecommunications traffic or provision of related telecommunications services. In addition, VDC Telecommunications plans to provide retail long distance services via the Internet and other outlets through its subsidiary WorldConnectTelecom.com, Inc. Through Masatepe, a subsidiary of the Company, we provide long distance voice and facsimile services between Central America and the United States through an operating agreement with Enitel, the Nicaraguan government controlled telephone company. Masatepe holds an FCC 214 License. Masatepe's subsidiary, Masatepe Comunicaciones, S.A., holds an Internet license in Nicaragua from TELCOR (El Instituto Nicaraguense de Telecomunicaciones y Correos), the Nicaraguan telecommunications regulatory authority, and a license to operate an earth station. Masatepe has two customers currently. In late April 1999, Masatepe completed an increase in the capacity of its Central American network. 28 Through Voice & Data Communications (Hong Kong) Limited ("VDC Hong Kong"), a subsidiary of the Company, we are developing long distance voice and facsimile transmission capability in Asia. The Company has been licensed by the Office of Telecommunications Authority in Hong Kong to provide international calling services, value-added services and Internet services. In addition, VDC Hong Kong has an FCC 214 License. VDC Hong Kong is currently in the developmental stage and does not yet provide customers with telecommunications services. We had previously announced that VDC Hong Kong had ordered three telecommunications switches. Due to the current state of the long distance market in Hong Kong, VDC has cancelled that order. We do not know if and when VDC Hong Kong will provide services independently. It may develop operations, which would be integrated into VDC Telecommunications international network. Through Sky King Communications, Inc., a Delaware corporation and wholly-owned subsidiary of the Company, we derive modest revenues from tower site management. The towers provide sites for wireless communications companies to transmit their signals to their customers and receive signals from their customers. The Company has sought a telecommunications license and operating agreement in Egypt because it believes this market offers significant opportunity. The Company's efforts in Egypt have not resulted in any licenses or agreements to date. Currently, we do not expect that our past efforts will result in the future issuance of the necessary licenses or agreements to provide the desired services in Egypt and we have significantly decreased our resources committed towards this project. Industry Background We are a relatively small company in the large international telecommunications market. This market is dominated by several large retail long distance and international voice and data providers; such as AT&T, MCI Worldcom, Sprint, British Telecom, Deutsch Telecom and others. We compete with all telecommunications companies that sell domestic and international long distance services to other telecommunications companies. The international telecommunications market consists of all telephone calls and other telecom services that originate in one country and are completed in another. This market can be divided into two major segments: the United States-originated international market, consisting of all international calls which either originate or terminate in the United States, and the overseas-originated international market, consisting of calls between countries other than the United States. We provide service to customers who originate calls in the U.S. and customers who originate calls outside the U.S. and who terminate calls in the U.S. and outside the U.S. The Company believes that the market for its services will continue to experience strong growth for the foreseeable future as a result of the following trends: 1) the opening of overseas telecommunications markets due to deregulation and the privatization of government-owned monopoly telecommunications companies; 2) the reduction of long distance rates, driven by competition and technological advancements, which is making international calling and other telecommunications services available to a much larger customer base and resulting in increased number of telephone calls; 29 3) the dramatic increases in the availability of telephones and the number and quality of access lines in service around the world; 4) the worldwide proliferation of new communications devices; such as cellular telephones, facsimile machines and other forms of data communications equipment; 5) the rapidly increasing globalization of commerce, trade and travel; and 6) the rapidly increasing demand for bandwidth-intensive data transmission services, including the Internet. Many of the world's developing countries are committing significant resources to building telecommunications infrastructures in order to increase the number and quality of telephone lines and other telecom services in their countries. We believe that increasing investment in telecommunications infrastructure will stimulate increasing demand for international telecommunications services. Certain countries have opened their telecommunications markets to competition in order to increase the level of private investment and the rate of infrastructure development. We expect that this trend will continue. Deregulation of telecommunications services in the United States began in 1984 with the AT&T divestiture. The Company believes that this trend creates numerous opportunities for U.S.-based carriers to increase their access to developing telecommunications markets and to increase their market share in both the U.S.-originated market and the overseas-originated market. Business Strategy Our business strategy is to develop a telecommunications business that focuses on niche segments of the market that are evolving by virtue of the deregulation of the telecommunications industry and the corresponding growth of the international long distance markets. Key elements of our business strategy include the following: 1) Capitalize on Projected International Telecommunications Industry Growth. We believe that the telecommunications industry, and, in particular, the international long distance market provides attractive opportunity. We seek to capitalize on the international market opportunity, due to its potential for higher revenue and profit per call minute, and greater projected growth rate, as compared to the domestic long distance market. We seek to target international markets with possibilities to generate impressive volumes of traffic, relatively high rates per minute, prospects for deregulation, privatization and growth and/or limited competition. We believe that the ongoing trend toward deregulation and privatization may create new opportunities for us in international markets. 2) Leverage Increased Traffic Volume to Reduce Costs per Minute of Traffic Carried. We are focused on trying to build our volume of international long distance traffic. Higher traffic volumes strengthen our negotiating position with vendors, customers and potential foreign partners, which allows us to lower the cost of our services. 30 3) Secure Additional Operating Agreements or Owned Routes for Additional Countries. We are actively seeking to enter into additional operating agreements to expand the geographical scope of our owned facilities and to attract new domestic and foreign customers. An operating agreement and/or owned route is an agreement with a foreign country or telecommunications carrier to build telecommunications capability in that country and to provide service to that country from the United States and possibly other parts of the world. We currently have three operating agreements. Two of the operating agreements are new and the potential telecommunications capabilities underlying these agreements have not yet been developed. We anticipate that the addition of new operating agreements will increase the revenues generated by our existing customer base by providing direct, or owned, services for these customers to additional countries. 4) Expand and Enhance Existing Network Facilities. To support additional operating agreements and the growth of traffic on our owned or partially owned routes, we intend to continue to build telecommunications infrastructure in desirable locations. In general, we believe we can increase our gross profit margin and provide greater assurance of the quality and reliability of transmission by routing traffic over owned international facilities. Currently, we utilize state-of-the-art equipment and technologies that conform to relevant operating standards to ensure high quality, cost-effective transmission service. 5) Growth Through Acquisitions. We are actively pursuing opportunities to enhance our business through strategic and synergistic acquisitions. These acquisitions may focus on entering new territories, enlarging our presence in an existing territory or adding capacity. In addition to expanding our revenue base, we could realize operating efficiencies by integrating acquired operations into the Company's billing, routing and other systems. On August 7, 1998, we acquired Masatepe, an international telecommunications company focused on the Central American countries. On April 13, 1998, we completed the acquisition of the business of VDC Telecommunications (then known as "Blue Sky International"). 6) Provide Competitive Priced, High Quality Services. We seek to provide our customers with highly competitive rates, while maintaining carrier grade toll quality services. Currently, we provide excellent quality service at good prices. In the future, we believe we can lower our prices by adding telecommunications equipment in strategic locations and increasing our total number of minutes of telecommunications traffic through our network. Owning facilities, rather than reselling services, provides a more efficient manner of transmission. This leads to a lower cost, which we can pass along to our customers. To areas of the world where we do not own equipment, we can achieve cost savings by increasing our traffic and getting volume discounts from our suppliers. 31 Network We provide international long distance services to over 200 foreign countries and cities through a flexible, switched-based network consisting of resale arrangements with other long distance providers, foreign termination relationships, international gateway switches and leased transmission facilities. The Company's network employs state-of-the-art digital switching and transmission technologies and is supported by technical personnel. Switches and Transmission Facilities International long distance traffic to and from the United States is generally transmitted through an international gateway switching facility across undersea digital fiber optic cable or via satellite to the end termination point. International gateway switches are digital computerized routing facilities that receive calls, route calls through transmission lines to their destination and record information about the source, destination and duration of calls. We currently operate international gateway switches in New York and Los Angeles and an earth station and switch in Central America. In addition, we own and operate a switch in Denver. We consider any of our switches to be international gateway switches, if we can route international calls across such switches. We have installed multiple redundancies into our switching facilities to decrease the risk of a network failure. For example, we employ both battery and generator power back-up and have installed hardware that automatically shifts the system to auxiliary power during a power outage, rather than rely on manual override. Sales and Marketing We market our services to other telecommunications companies through our experienced direct sales force and marketing/account management team who, seek to leverage their industry relationships. We reach our customers primarily through domestic and international trade shows and through relationships gained from years of experience in the telecommunications industry. As of June 3, 1999, we had four direct sales and marketing employees. The salespeople's compensation is weighted towards commissions. They also received stock options, which vest over five years, to enhance their retention. We also use outside agents to sell our services. We pay them a percentage of the revenue we receive from the customers they bring us. Billing We have been developing a state-of-the-art billing system for wholesale customers. The Company utilizes an application, which collects, processes, and reports data for effective telecommunications billing management. The application consists of three integrated databases: 1) Call Accounting. Call Accounting provides reports that detail outgoing, incoming, and internal information regarding the details of each call. The system captures the variety of raw data and normalizes it into a Company layout for further processing and reporting. We utilize and warehouse the Call Detail Record, or CDR, information for billing, fraud detection, and various other customer and internal requirements. Billing cycles are variable to allow for weekly, bimonthly and monthly billing cycles depending on the credit rating of the customer; 32 2) Traffic Management. Traffic Management reports concentrate on route usage and cost analysis. Reports include usage by route, traffic histograms by route, and universal call distribution, all by customer or provider; and 3) Directory Center. The Directory Center provides operators the ability to search on a variety of customer or vendor demographics to efficiently access and utilize all data captured within the system. The system provides management of a complicated communications environment including equipment, circuits and multi-site network management using three interrelated modules: 1) Network Information System. Keeps track of switches and circuits. 2) Equipment/Features Inventory. Provides complete inventory tracking by numerous hardware and software identifiers. 3) Order Processing and Tracking System. Tracks trouble reports from origination to resolution. Company Subject to Intense Competition The international telecommunications industry is highly competitive and subject to rapid change, including the introduction of new services facilitated by advances in technology. We are unable to predict which of many possible future product and service offerings will be important to maintain our competitive position or what expenditures will be required to develop and provide such products and services. International telecommunications providers compete on the basis of price, customer service, transmission quality, breadth of service offerings and value-added services. The U.S.-based international telecommunications services market is dominated by AT&T, MCI Worldcom and Sprint. The wholesale long distance market in which we focus our operations is also highly competitive. As our network develops further, we expect to encounter increasing competition from these and other major domestic and international communications companies, many of which may have significantly greater resources and more extensive domestic and international communications networks than ours. We expect the domestic and international long distance marketplace to continue to be highly competitive. This competition has been and will continue to put downward pressure on the price of telecommunications services, such as voice and facsimile. Competition is expected to further increase as a result of the new competitive opportunities created by the WTO Agreement. Under the WTO Agreement, the United States and 68 other countries committed to open their telecommunications markets to competition. Government Regulation The following summary does not purport to describe all present and proposed federal, state and local regulation and legislation affecting the telecommunications industry. Regulations are often the subject of judicial proceedings, legislative hearings, and administrative proposals, which could change, in varying degrees, the manner in which the telecommunications industry operates. Neither the outcome of these proceedings, nor their impact upon the telecommunications industry or the Company can be predicted at this time. 33 Our gateway and long distance telecommunications business is heavily regulated. The United States Federal Communications Commission ("FCC") exercises authority over all interstate and international facilities-based and resale services offered by us. We also may be subject to regulation in foreign countries in connection with certain business activities. There can be no assurance that future regulatory, judicial and legislative changes will not have a material adverse effect on the Company, or that domestic or international regulators or third parties will not raise material issues with regard to our compliance or noncompliance with applicable regulations or that regulatory activities will not have a materially adverse effect on the Company. We are also subject to other FCC requirements, including the filing of periodic reports and the payment of annual regulatory and other fees. In addition, FCC rules limit the routing of international traffic via international privately-owned lines and prohibit the accepting of "special concessions" from certain foreign providers. The FCC continues to refine its international service rules. FCC rules also require international companies notify the FCC sixty days in advance of an acquisition of a 25% or greater controlling interest by a foreign carrier in that U.S. carrier or an acquisition by the U.S. carrier of a 25% or greater controlling interest in a foreign carrier. After receiving this notification, the FCC reviews the proposed transaction and, among other things, can require a carrier to meet certain "dominant carrier" reporting and other conditions if the FCC finds that the acquisition creates an affiliation with a dominant foreign carrier. Our cost of providing long distance services may also be affected by changes in the access charge rates imposed by incumbent local exchange carriers ("LECs"). The FCC has significantly revised its access charge rules to permit incumbent LECs greater pricing flexibility and relaxed regulation in certain circumstances. The FCC also revised its universal service rules and we may be required to contribute to the federal universal service fund. We must comply with the requirements of common carriage under the Communications Act of 1934, as amended (the "Communications Act"), including the offering of service on a non-discriminatory basis at just and reasonable rates, and obtaining FCC approval prior to any assignment of FCC authorizations or any transfer of de jure or de facto control of the Company, with certain exceptions. Under the Communications Act and the FCC's rules, all international telecommunications carriers, including the Company, are required to obtain authority under Section 214 of the Communications Act prior to initiating international common carrier services, and must file and maintain tariffs containing the rates, terms and conditions applicable to their services. The Company, through its wholly-owned subsidiaries VDC Telecommunications, Masatepe, VDC Hong Kong and WorldConnectTelecom.com, a wholly-owned subsidiary of VDC Telecommunications, has received four Section 214 Licenses that authorize the provision of international services on a facilities and resale basis. The FCC recently adopted changes to its rules regarding Section 214 Authorizations, which are intended to reduce certain regulatory requirements. Among other things, the recent order: reduces the waiting period for granting new streamlined applications from 35 days to 14 days; eliminates the requirement for prior approval of pro forma assignments and transfers control of Section 214 authorizations; and simplifies the FCC's process of authorizing the use of private lines to provide switched services (ISR) on particular routes. Domestic interstate common carriers such as the Company are not required to obtain Section 214 or other authorization from the FCC for the provision of domestic interstate telecommunications services. Domestic interstate carriers currently must, however, file and maintain tariffs with the FCC containing the specific rates, terms and conditions applicable to their services. These tariffs are effective upon one day's notice. We have filed a domestic tariff and an international tariff with the FCC. 34 We must also conduct our international business in compliance with the FCC's international settlements policy (the "ISP"). The international settlements policy establishes the permissible boundaries for U.S.-based carriers and their foreign correspondents to settle the cost of terminating each other's traffic over their respective networks. The precise terms of settlement are established in a correspondent agreement, also referred to as an operating agreement. Among other terms, the operating agreement establishes the types of service covered by the agreement, the division of revenues between the carrier that bills for the call and the carrier that terminates the call at the other end, the frequency of settlements (i.e. monthly or quarterly), the currency in which payments will be made, the formula for calculating traffic flows between countries, technical standards, procedures for the settlement of disputes, the effective date of the agreement and the term of the agreement. In accordance with FCC regulations, we have applied for an accounting rate modification on an international route, which application was deemed granted under FCC procedures. The FCC recently approved significant changes to its ISP. Specifically, the FCC removed the ISP for arrangements between U.S. carriers and non-dominant foreign carriers (i.e., foreign carriers that lack market power). In addition, the FCC removed the ISP for arrangements with any carrier (dominant or non-dominant) on certain competitive routes where settlement rates are at least 25% below the FCC's applicable benchmarks. These routes currently include Canada, the United Kingdom, Sweden, Germany, Hong Kong, The Netherlands, Denmark and Norway. Certain confidential filing requirements still apply to dominant carrier arrangements. Employees As of June 3, 1999, the Company had 37 full-time employees, of which ten were engaged in corporate general and administrative, twenty-three in operations and engineering, and four in sales and marketing. Properties The Company's headquarters are located in approximately 10,800 square feet of leased office space in Greenwich, Connecticut. The office space is leased from an unaffiliated third party pursuant to a five-year agreement at an annual rental of approximately $290,000. We also lease approximately 5,600 square feet of office space in Aurora, Colorado where the operations of our subsidiary, VDC Telecommunications, Inc. ("VDC Telecommunications"), are located. The office is leased from an unaffiliated third party pursuant to a five-year agreement at an annual rental of approximately $94,000. 35 The Company also leases an aggregate of approximately 8,500 square feet in New York, Los Angeles and Denver as sites for its switching facilities. The locations are leased from unaffiliated third parties pursuant to ten-year leases at an aggregate annual rental of approximately $199,000. We anticipate that the office space for VDC Telecommunications will be expanded to accommodate this subsidiary's growth. However, this expansion is not expected to result in a material rent increase. Other than its facilities for VDC Telecommunications, we believe that our facilities are adequate to support our current needs and that suitable additional facilities will be available, when needed, at commercially reasonable terms. Legal Proceedings We are not currently involved in any litigation or proceeding which is material, either individually or in the aggregate, and, to our knowledge, no other legal proceeding of a material nature is currently contemplated by any individuals, entities or government authorities. MANAGEMENT Directors and Executive Officers The following table sets forth certain information with respect to each of the executive officers and directors of the Company.
Name Age Position - ---- --- -------- Frederick A. Moran (1) 57 Chairman, Chief Executive Officer, Chief Financial Officer, Secretary and Director James B. Dittman (1) 56 Director Dr. Hussein Elkholy (2) 65 Director Dr. Leonard Hausman (1)(2) 57 Director Clayton F. Moran (2) 28 Vice President, Finance Charles W. Mulloy 34 Vice President, Corporate Development Robert E. Warner 56 Vice President, Sales and Marketing William H. Zimmerling 42 Vice President
(1) Member of Compensation Committee (2) Member of Audit Committee 36 Frederick A. Moran Mr. Moran has served as Chairman, Chief Executive Officer, Chief Financial Officer, Secretary, and Director of the Company since March 6, 1998. Mr. Moran served as the Chairman of Sky King Connecticut from its inception in 1996 through its merger with and into the Company. In 1997, Mr. Moran served as Chairman and Chief Executive Officer of NovoComm, Inc., a privately owned company engaged in the telephony and communications businesses in Russia and Ukraine. Mr. Moran was the co-founder and, from 1990 to 1993, served as Chairman and Chief Executive Officer of International Telcell, Inc. (now part of Metromedia International Group, Inc.). Additionally, Mr. Moran was the founder of and, from 1987 to 1996, served as President of Moran & Associates, Inc. Securities Brokerage, an investment banking and securities brokerage firm ("Moran Brokerage"), and Moran Asset Management, Inc., an investment advisory firm ("Moran Asset"). Mr. Moran has been listed in the "Who's Who of American Business Leaders." Dr. Hussein Elkholy Dr. Elkholy has served as a Director of the Company since July 8, 1998. From 1995 to the present, Dr. Elkholy has served as the Chairman of National Telecom Company and the President and Chief Executive Officer of Satellite Equipment Manufacturing Corporation, both located in Cairo, Egypt. Dr. Elkholy is also a full professor at the Department of Mathematics, Computer Science and Physics at Fairleigh Dickinson University, where he has taught undergraduate and graduate courses in physics, engineering and computer science for over 34 years. From 1979 to 1980, Dr. Elkholy served as acting Dean of the College of Arts and Sciences at Fairleigh Dickinson University. In addition, Dr. Elkholy has conducted research and taught classes in the fields of physics and computer science at several universities and institutes in the United States, Italy, Hungary, Egypt and Sudan. During the past several years, Dr. Elkholy has consulted numerous governmental agencies, private companies and research and educational institutions in the United States and abroad on computer and electronic technology. Dr. Elkholy holds doctorate degrees in natural sciences from Eotvos Lorand University and in solid state physics from the Hungarian Academy of Sciences, and a Bachelor of Science degree in physics from Cairo University. Dr. Leonard Hausman Dr. Hausman has served as a member of the Company's Board of Directors since November 4, 1998. Dr. Hausman is a partner in Middle East Holdings LLC, a company devoted to facilitating trade and investment in the Middle East and North Africa. From 1988 until 1998, Dr. Hausman was the Director of the Institute for Social and Economic Policy in the Middle East at Harvard University. There, he developed a broad program on the social and economic aspects of the Arab-Israeli peace process, as well as micro-economic reform throughout the Middle East and North Africa. Prior to holding this position, Dr. Hausman was the Director of the East Asia Management Studies at the Massachusetts Institute of Technology. Based on his work there and his academic work at the Kennedy School at Harvard, he is now completing a book, with a colleague, entitled: "Social Protection Reform in China." From 1970 to 1988, Dr. Hausman was a professor of economics, holding the Hexter Chair, at Brandies University in Boston. He began his work there on human resources and social protection and initiated two research programs on China and on the Middle East. 37 James B. Dittman Mr. Dittman has served as a member of the Company's Board of Directors since November 4, 1998. Mr. Dittman is President and a principal shareholder of Dittman Incentive Marketing, a motivation and performance improvement company he founded in 1976. The company provides incentive marketing consulting services and programs. Prior to forming Dittman Incentive Marketing, Mr. Dittman held management positions in marketing and communications with such firms as the Bendix Corporation, Litton Industries, and the SCM Corporation. Mr. Dittman's articles on incentive marketing have appeared widely in business publications, and he has been a keynote speaker and conducted incentive workshops and seminars for 25 years. Mr. Dittman is a Past President of the Society of Incentive Travel Executives ("SITE"). In 23 years of SITE involvement, Mr. Dittman has been a member of the Board of Directors and Executive Committee and a Trustee of the SITE Foundation, which funds independent research in the field of incentive marketing. Mr. Dittman was an advisor for 15 years to the Motivation Show, the industry's premier event. In 1985, Mr. Dittman was named "Incentive Travel Executive of the Year" and that same year, earned the designation of Certified Incentive Travel Executive, one of fewer than 40 people in the world to do so. In 1987, Mr. Dittman was named one of the 25 most influential people in the United States travel business a list that included the presidents of Hyatt Hotels, American Airlines, British Airways, Hertz, and National Car Rental, as well as the Secretary of the United States Department of Transportation and a United States Senator. In 1997, Mr. Dittman's company was named by the top industry publication as one of the five most innovative incentive marketing companies in the United States. Clayton F. Moran Mr. Moran has served as Vice President, Finance, of the Company since June 1, 1998. Prior thereto, Mr. Moran was employed by Moran Real Estate Holdings, Inc. and Putnam Avenue Properties, Inc. From 1993 to 1995, Mr. Moran was an equity research analyst with Smith Barney, Inc. Mr. Moran is a graduate of Princeton University, with a Bachelor of Arts degree in economics. Mr. Moran is the adult son of Frederick A. Moran. Charles W. Mulloy Mr. Mulloy has served as Vice President, Corporate Development, of the Company since February 1, 1998. Mr. Mulloy has a broad background as a technologist and business development manager, having worked in California's Silicon Valley business community for over 10 years. From 1996 to 1998, Mr. Mulloy served as a business development and system design executive for the IBM Corporation and managed IBM's strategic relationship with the Intel Corporation. From 1994 to 1996, Mr. Mulloy served as Vice President of Inacom Information Systems. Prior to that, from 1987 to 1994, Mr. Mulloy served as National Sales Manager for California Computer Options. Mr. Mulloy has extensive experience in developing data and telecommunications solutions with a foundation in network strategy and deployment. He has designed and managed business solutions for several telecommunications companies. Mr. Mulloy graduated from San Francisco State University with a Bachelor of Arts degree in telecommunications. 38 Robert E. Warner Mr. Warner has served as Vice President, Sales and Marketing, of the Company since January 29, 1999, and has been an employee of the Company since March 15, 1998. From 1993 to 1998, Mr. Warner served as Director of Marketing for CGI Worldwide, Inc. In that role, Mr. Warner was responsible for the marketing of communications systems in Asia, the South Pacific, and Russia. Additionally, he was the Project Director responsible for major engineering projects, including projects in Hong Kong, China, Saipan, and Ukraine. From 1990 to 1993, Mr. Warner was President of Century Marketing, a Company that provided consulting to independent sales producers of insurance and securities products. From 1988 to 1990, Mr. Warner served as President of the California Division of Rocky Mountain Constructors, Inc. In that role, Mr. Warner was responsible for marketing and estimating operations. William H. Zimmerling Mr. Zimmerling has served as Vice President of the Company since April 1, 1998. Prior to joining the Company, Mr. Zimmerling served as a financial and managerial consultant to telecommunications companies based in Argentina, Colorado, Costa Rica, Panama, the United Kingdom, and Mexico. In this capacity, Mr. Zimmerling surveyed potential markets, capital requirements and regulatory/business issues, and reviewed a variety of business and legal issues related to telecommunications companies. From 1993 to 1996, Mr. Zimmerling served as Vice President for Wells Fargo Bank/First Interstate Bank. From 1986 to 1993, Mr. Zimmerling served as Vice President for Chemical Bank (now Chase Manhattan Bank). In his positions with Wells Fargo Bank and Chemical Bank, Mr. Zimmerling assumed a broad range of responsibilities associated with portfolio management. Involvement in Certain Legal Proceedings In a civil action filed by the Securities and Exchange Commission ("SEC") during June 1995, Frederick A. Moran ("Mr. Moran") and Moran Asset were found by the United States District Court for the Southern District of New York to have violated Section 206(2) of the Investment Advisers Act of 1940 (the "Advisers Act") for negligently allocating shares of stock to Mr. Moran's personal, family and firm accounts at a slightly lower price than shares of stock purchased for Moran Asset's advisory clients the following day. The Court also found that Mr. Moran, Moran Asset and Moran Brokerage had violated the disclosure requirements of Section 204 of the Advisers Act and the corresponding broker-dealer registration requirements of Section 15(b) of the Securities Exchange Act of 1934 (the "Exchange Act") by willfully failing to disclose that Mr. Moran's two eldest sons were members of Moran Asset's and Moran Brokerage's board of directors. Mr. Moran was the President and principal portfolio manager of Moran Asset, as well as the President and Director of Research for Moran Brokerage. As a result of these findings, Mr. Moran, Moran Asset and Moran Brokerage were permanently enjoined from violating Sections 204, 206(2), and 207 of the Advisers Act and Section 15(b) of the Exchange Act. The Court ordered Moran Asset and Moran Brokerage to pay civil monetary penalties in the respective amounts of $50,000 and $25,000. The Court also ordered Mr. Moran to disgorge $9,551.17 plus prejudgment interest and pay a civil monetary penalty in the amount of $25,000. 39 Although Mr. Moran and the other named parties accepted and fully complied with the findings of the District Court, they believe that the outcome of the matter and the sanctions imposed failed to take into account a number of mitigating circumstances, the first of which is that the basis for the violation of Section 206(2) of the Advisers Act was an isolated incident of negligence resulting in the allocation of 15,000 shares of stock to Moran family and firm accounts at a slightly lower price than those purchased for firm clients the following day, resulting in $9,551.17 in higher purchase cost incurred by these clients. In the opinion of Mr. Moran, the scope of this infraction was not properly considered in view of the following circumstances, among others: (i) the extraordinary volume of the daily business undertaken by Moran Asset and Moran Brokerage which, on the date in question, purchased approximately $34,000,000 of stocks for advisory clients and proprietary accounts; (ii) that the appropriate personnel had inadvertently allocated shares to certain personal and family accounts on the belief that all client purchases had been completed; and (iii) shares of an additional stock had been purchased that day for certain personal and family accounts at prices higher than those paid by advisory clients the following day. Second, with respect to the violation of the disclosure requirements of Section 204 of the Advisers Act and Section 15(b) of the Exchange Act, the Court found Mr. Moran and others to be liable for failure to disclose additional directors of Moran Asset and Moran Brokerage. However, the additional directors in question were Mr. Moran's two older sons who had been appointed as directors as a matter of clerical convenience. In fact, they never participated in any Board of Directors meetings, nor made any decisions concerning Moran Asset or Moran Brokerage, and were never informed that they were directors. Furthermore, if their directorships had been disclosed, as the Court had determined to be required, Mr. Moran believes that any such disclosure would have, in fact, enhanced the Form ADV of Moran Asset and the Form BD of Moran Brokerage, since both adult sons were professional securities analysts with major investment banks and held college degrees from prestigious universities. Third, during his twenty-four years as a full time investment professional, Mr. Moran has not otherwise been the subject of any SEC, NASD or other regulatory or judicial matters. To the best of the Company's knowledge, other than the events specified above, there have been no events under any state or federal bankruptcy laws, no criminal proceedings, no judgments, orders, decrees or injunctions entered against any officer or director, and no violations of federal or state securities or commodities laws material to the ability and integrity of any director or executive officer during the past five years. Terms of Officers All officers of the Company serve for terms expiring at the next annual meeting of shareholders following their appointment. Officers' terms are without prejudice to the terms of their employment agreements. Each of the Company's officers, as well as each employee director, devotes substantially full time to the affairs of the Company. 40 Board Composition In accordance with the terms of the Company's Certificate of Incorporation, the terms of office of the Board of Directors are divided into three classes: Class I, whose term will expire at the annual meeting of stockholders to be held in 1999; Class II, whose term will expire at the annual meeting of stockholders to be held in 2000; and Class III, whose term will expire at the annual meeting of stockholders to be held in 2001. The Class I directors are Dr. Hussein Elkholy and James Dittman; the Class II director is Dr. Leonard Hausman; and the Class III director is Frederick A. Moran. At each annual meeting of stockholders after the initial classification, the successors to directors whose term will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. This classification of the Board of Directors may have the effect of delaying or preventing changes in control or changes in management of the Company. See "RISK FACTORS--Anti-Takeover Provisions may Deter Change in Control Transactions" and "DESCRIPTION OF SECURITIES--Anti-Takeover Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware Law." Executive Compensation Report of the Board of Directors on Compensation For the fiscal year ended June 30, 1998 ("Fiscal 1998"), the Company's executive compensation strategy was administered by its Board of Directors. The Board had oversight responsibility for the implementation of executive compensation for the Company. The primary functions of the Board included: (i) reviewing, approving and determining, in its discretion, the annual salary, bonus and other benefits, direct and indirect, of the chief executive officer, directors, all executive officers and other employees; (ii) reviewing stock option issuances; and (iii) establishing and periodically reviewing the Company's policies in the area of management perquisites. Goals: In determining the amount and composition of executive compensation, the Board was guided by the following goals: 1) Attract, motivate and retain the executives necessary to the Company's success by providing compensation comparable to that offered by companies with which the Company competes for such employees; 2) Afford the executives an opportunity to acquire or increase their proprietary interest in the Company through the grant of options that align the interests of the executives more closely with those of the overall goals of the Company; and 3) Ensuring that a portion of the executives' compensation is variable and is tied to short-term goals (annual performance) and long-term measures (stock-based incentives awards) of the Company's performance. 41 The Board considered several factors in establishing the components of the executives' compensation package, including: (i) a base salary which reflects individual performance and is designed primarily to be competitive with salary levels of companies with which the Company competes; (ii) annual discretionary bonuses, if any, tied to the Company's achievement of performance goals; and (iii) long-term incentives in the form of stock options or other Company securities which the Board believes strengthen the mutuality of interest between the executive and the Company's stockholders. The Board may have, in its discretion, applied entirely different factors, particularly different measures of financial performance, in recommending and/or setting executive compensation, but all compensation decisions were designed to further the general goals as indicated above. Base Salary: As a general matter, the Company establishes base salaries for each of its executives based upon their individual performance and contribution to the organization, as measured against executives of comparable position in similar industries and companies. Certain of the Company's executives, including Mr. Moran, the Chief Executive Officer, are employed under employment agreements that were established in connection with the Sky King Connecticut Acquisition. Accordingly, these arrangements were negotiated in the context of an acquisition transaction and are generally based upon the executive's level of compensation prior to the acquisition as well as other factors. Stock Options: During Fiscal 1998, the Company did not have a stock option plan. However, the Board periodically considered the grant of stock options to certain of its executives. The grants were designed to align the interests of each executive with those of the stockholders and provide each individual with a significant incentive to manage the Company from the perspective of an owner with an equity stake in the business. Each grant was intended to permit the executive to acquire shares of the Company's Common Stock at a fixed price per share (typically, the market price on the grant date) over a specified period of time, thus providing a return to the executive only if the market price of the shares appreciates over the option term. The size of the option grant to each executive was intended to take into account the individual's potential for future responsibility over the option term, the individual's personal performance in recent periods and the individual's current holdings of the Company's stock and options. Additional information regarding stock options granted in Fiscal 1998 is included in the "Option/SAR Grants in Last Fiscal Year" table below. Compensation of the Chief Executive Officer: During Fiscal 1998, Frederick A. Moran served as the Chairman of the Board, Chief Executive Officer, Chief Financial Officer, and Secretary of the Company. Mr. Moran's compensation was determined pursuant to the terms of his employment agreement, which was negotiated and entered into by the Company in connection with the Sky King Connecticut Acquisition and was intended to align his interests with those of the stockholders and to compensate him for guiding the Company to achieve its goals and objectives. Additional information regarding Mr. Moran's employment contract is contained in the "EMPLOYMENT ARRANGEMENTS" section below. Employee Compensation Strategy: The Board believes the Company's employee compensation strategy enables the Company to attract, motivate and retain employees by providing competitive total compensation opportunity based on performance. Base salaries that reflect each individual's level of responsibility and annual variable performance-based incentive awards are intended to be important elements of the Company's compensation policy. The Board believes that the grant of options not only aligns the interests of the executive with stockholders, but creates a competitive advantage for the Company as well. The Board believes the Company's executive compensation policies strike an appropriate balance between short and long-term performance objectives. 42 On November 9, 1998, the Company's Board of Directors established a Compensation Committee. The Compensation Committee consists of Frederick A. Moran, James Dittman, and Dr. Leonard Hausman. James Dittman and Dr. Leonard Hausman are non-employee directors within the meaning of Rule 16b-3 under the Exchange Act and outside directors within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended. The Compensation Committee is responsible for administering the Company's stock plans and reviewing and making decisions with respect to the other compensation of executive officers and employees of the Company. Although the Compensation Committee will present a complete report in the Company's 1999 Annual Report, it expects to be guided by the principles set forth above. Compensation Committee: Frederick A. Moran James Dittman Dr. Leonard Hausman The following Summary Compensation Table sets forth the compensation earned by the Company's Chief Executive Officer and three other executive officers who earned (or would have earned) salary and bonus in excess of $100,000 for services rendered in all capacities to the Company and its subsidiaries for each of the fiscal years during the three year period ended June 30, 1998.
SUMMARY COMPENSATION TABLE(1) Long Term Compensation Annual Compensation Awards Payouts Other Securities Annual Restricted Underlying All Other Compen- Stock Award(s) Options/ LTIP Compen- Name and Principal Position Year(s) Salary($) Bonus($) sation ($) ($) SARs(#) Payouts ($) sation($) - --------------------------- ------- --------- -------- ---------- --- ------- ----------- --------- Frederick A. Moran(2) 1998 $40,625.05 (3) - - - - - - Chief Executive Officer, 1997 - - - - - - - Chief Financial Officer, 1996 - - - - - - - Chairman and Director of the Company Dr. James C. Roberts(4) 1998 $41,666.72 (3) - - - - - $12,550 (5) Deputy Chairman, Chief 1997 - - - - - - - Operating Officer and 1996 - - - - - - - Director of the Company Charles W. Mulloy(6) 1998 $33,333.36 (3) - - - 60,000 (7) - - Vice President, Corporate 1997 - - - - - - - Development of the Company 1996 - - - - - - - Graham F. Lacey(8) 1998 $42,367.37 (3) - - $760,937.50 (9) 45,000 (10) - - Former Chief Executive 1997 $35,257 - - $168,750 (11) - - $352,860 (12) Officer, President and 1996 $45,000 - - $117,500 (13) - - - Director of the Company
43 (1) Based upon the fiscal years ending June 30, 1998, 1997 and 1996. (2) Mr. Moran became Chief Executive Officer, Chief Financial Officer, Chairman, and Director of the Company in March 1998 in connection with the Sky King Connecticut Acquisition. Mr. Moran was neither an officer nor a director of the Company prior to the Sky King Connecticut Acquisition. (3) Reflects compensation for partial year employment. (4) Dr. Roberts became Deputy Chairman, Chief Operating Officer, and Director of the Company in March 1998 in connection with the Sky King Connecticut Acquisition. Dr. Roberts was neither an officer nor a director of the Company prior to the Sky King Connecticut Acquisition. On November 19, 1998, subsequent to the merger of VDC Bermuda with and into the Company, Dr. Roberts resigned from all positions held with the Company. (5) Represents house rental payments paid by the Company for Dr. Roberts. The Company shall not make any further rental payments on behalf of Dr. Roberts. (6) Mr. Mulloy became Vice President, Corporate Development, of the Company on February 1, 1998. Mr. Mulloy was not an officer of the Company prior to February, 1998. (7) The Company granted Mr. Mulloy an option to purchase 10,000 shares of the Company Common Stock on February 1, 1998. The Company granted Mr. Mulloy options to purchase 50,000 shares of Company Common Stock on September 2, 1998. Additional information regarding these stock option grants is contained in the "Option/SAR Grants in Last Fiscal Year" table below. (8) Mr. Lacey resigned as Chief Executive Officer, President and Director of the Company in connection with the Sky King Connecticut Acquisition. (9) On March 2, 1998, the Company issued 25,000 shares of Company Common Stock to Mr. Lacey as compensation for his services rendered to the Company as a Director. Said shares were valued at $135,937.50 based upon a closing price of Company Common Stock on March 2, 1998 of $5.4375 per share. On July 1, 1997, the Company issued 28,000 shares of the Company Common Stock to Mr. Lacey as compensation for his services rendered to the Company as a Director. Said shares were valued at $131,250 based upon a closing price of Company Common Stock on July 1, 1997 of $4.6875 per share. On July 31, 1997, the Company issued 100,000 shares of Company Common Stock to Mr. Lacey as compensation for his services rendered to the Company as a Director. Said shares were valued at $493,750 based upon a closing price of Company Common Stock on July 31, 1997 of $4.9375 per share. (10) The Company granted Mr. Lacey warrants to purchase 45,000 shares of Company Common Stock on March 7, 1998. Additional information regarding this warrant grant is contained in the "Option/SAR Grants in Last Fiscal Year" table below. (11) On January 30, 1997, the Company issued 30,000 shares of Company Common Stock to Mr. Lacey as compensation for his services rendered to the Company as Director. Said shares were valued at $168,750 based upon a closing price of Company Common Stock on January 30, 1997 of $5.625 per share. (12) Includes $60,000 applied towards the exercise of warrants during the fiscal year ended 1997, $17,680 of waived accrued interest on a $340,000 note, and $275,000 which represents the difference between market value ($5.75) and exercise price ($3.00) on 100,000 options granted to Mr. Lacey, which were subsequently exercised. (13) The Company issued 20,000 shares of Company Common Stock to Mr. Lacey on June 28, 1996 valued at $117,500, as set forth in the Company's Form 20-F filed with the SEC for the Company's fiscal year ended June 30, 1997. 44 The following table contains information concerning stock option grants made to certain individuals named below for the year ended June 30, 1998.
Option/SAR Grants in Last Fiscal Year Individual Grants Potential Realizable Potential Realizable Value at Assumed Value at Assumed Annual Rates of Annual Rates of Number of Securities % of Total Options/SARs Exercise or Stock Price Stock Price Underlying Options/ Granted to Employees Base Price Expiration Appreciation for Appreciation for Name SARs Granted (#) in Fiscal Year ($/Share)(6) Date Option Term 5% Option Term 10% Charles W. Mulloy 10,000 (1) 4.3% (2) $5.00 2/1/08 31,444.50 79,687 Charles W. Mulloy 50,000 (1) 21.5% (2) $5.75 9/2/08 180,805.87 458,200.25 Graham F. Lacey 45,000 (3) 19.4% (2) $5.00 (4) 23,062.50 (5) 47,250 (5)
(1) The options vest in equal installments over five years commencing on the first anniversary of the date of grant. The options are exercisable upon vesting. (2) Based upon an aggregate of 231,500 shares of Common Stock issuable upon the exercise of options to purchase 186,500 shares of Common Stock and warrants to purchase 45,000 shares of Common Stock granted to employees during Fiscal 1998. (3) The warrants are exercisable upon issuance. (4) The Company extended the expiration date of the warrants from August 30, 1998 to the date that is 30 days following the effective date of a registration statement registering the resale of the shares issuable upon the exercise of the warrants. (5) Assumes the warrants will expire within two years of grant. The warrants will expire 30 days after the date of this Prospectus. (6) For information on repricing see "Ten-Year Option/SAR Repricings."
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options/SARs Options/SARs at FY-End(#) at FY-End($) Shares Acquired Value Exercisable/ Exercisable/ Name on Exercise (#) Realized($) Unexercisable Unexercisable(1) Charles W. Mulloy 0 0 0(E)/10,000(U) 0(E)/$31,250(U) Charles W. Mulloy 0 0 0(E)/50,000(U) 0(E)/$118,750(U) Graham F. Lacey 0 0 45,000(E)/0(U) $140,625(E)/0(U)
(1) Based upon the closing price for Company Common Stock as reported on the OTC Bulletin Board for June 30, 1998 of $8.125 per share. Effective July 7, 1998, Company Common Stock commenced trading on the American Stock Exchange, Inc. 45
Ten-Year Option / SAR Repricings Number of Securites Market Price of Length of Original Underlying Options/ Stock at Time Exercise Price at New Option Term Remaining SARs Repriced or of Repricing or Time of Repricing Exercise at Date of Repricing Name Date Amended (#) Amendment $ or Amendment $ Price $ or Amendment Clayton F. Moran 10/21/98 10,000 $ 4.125 $ 6.00 $ 4.125 115 months Charles W. Mulloy 10/21/98 10,000 $ 4.125 $ 5.00 $ 4.125 111 months Charles W. Mulloy 10/21/98 50,000 $ 4.125 $ 5.75 $ 4.125 118 months Robert E. Warner 10/21/98 5,000 $ 4.125 $ 5.00 $ 4.125 113 months Robert E. Warner 10/21/98 2,500 $ 4.125 $ 5.75 $ 4.125 118 months William H. Zimmerling 10/21/98 26,500 $ 4.125 $ 5.00 $ 4.125 113 months
Explanation of Repricing At the time of the repricing, the Company's Board of Directors was of the opinion that its Common Stock price was low. The Company's stock price was significantly below the exercise prices for options granted to date to employees and non-employee directors. The Company's Board of Directors decided in light of the contributions of its employees and non-employee directors, repricing the exercise price for stock options for employees and non-employee directors serving the Company as of October 21, 1998 was appropriate and in the best interests of the Company. Board of Directors of the Company on October 21, 1998 (1): Frederick A. Moran Dr. Hussein Elkholy (1) Dr. James C. Roberts, who was a director at the time of the repricing and voted in favor of the same, resigned from all positions held with the Company in November 1998. Committees of the Board of Directors On November 9, 1998, the Company's Board of Directors established an Audit Committee and Compensation Committee. Clayton F. Moran, Dr. Hussein Elkholy, and Dr. Leonard Hausman serve on the Audit Committee. The Audit Committee reviews and reports to the Board of Directors with respect to the selection, retention, termination and terms of engagement of the Company's independent public accountants, and maintains communications among the Board of Directors, the independent public accountants, and the Company's internal accounting staff with respect to accounting and audit procedures. The Audit Committee also reviews, with management, the Company's internal accounting and control procedures and policies and related matters. The Compensation Committee consists of Frederick A. Moran, James Dittman, and Dr. Leonard Hausman. James Dittman and Dr. Leonard Hausman are non-employee directors within the meaning of Rule 16b-3 under the Exchange Act and outside directors within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended. The Compensation Committee is responsible for administering the Company's stock plans and reviewing and making decisions with respect to the other compensation of executive officers and employees of the Company. The Board may, from time to time, establish other committees of the Board. 46 Director Compensation As compensation for their service to the Company, each independent Director is granted upon initial appointment options to purchase 25,000 shares of the Company's Common Stock. Other than the stock options granted to independent Directors, Directors do not receive a salary, payment or reimbursement of any kind for their service to the Company. By way of illustration, Directors are not reimbursed for out-of-pocket expenses incurred in the performance of Company duties, nor are they compensated for attending meetings of the Company's Board of Directors, whether by telephone or in person. On November 4, 1998, the Company granted each of Dr. Leonard Hausman and James Dittman options to purchase 25,000 shares of Company Common Stock at an exercise price of $4.00 per share, in connection with their appointment as Directors. The options vest in equal installments over three years commencing on the first anniversary of the date of grant and are contingent upon continued service as a member of the Board of Directors. On July 8, 1998, the Company granted to Dr. Hussein Elkholy an option to purchase 25,000 shares of Company Common Stock at an exercise price of $7.625 per share, in connection with his service as a Director. As originally issued, the options vested in equal installments over five years commencing on the first anniversary of the date of grant and was contingent upon continued service as a member of the Company's Board of Directors. These options were subsequently amended to vest in equal installments over three years commencing on the first anniversary of the date of grant. On October 21, 1998, the Company's Board of Directors repriced the exercise price for all outstanding stock options granted to employees and directors serving the Company as of October 21, 1998 to $4.125. Dr. Elkholy's options were repriced accordingly. On March 2, 1998, the Company issued 25,000 shares of Company Common Stock to Graham F. Lacey as compensation for his services rendered to the Company as a Director. Said shares were valued at $135,937.50 based upon a closing price of Company Common Stock on March 2, 1998 of $5.4375 per share on the OTC Bulletin Board. Mr. Lacey received these shares prior to the change in management accompanying the Sky King Connecticut Acquisition and the adoption of the current management's compensation policy for directors. On July 31, 1997, the Company issued 100,000 shares of Company Common Stock to Mr. Lacey as compensation for his services rendered to the Company as a Director. Said shares were valued at $493,750, based upon a closing price of Company Common Stock on July 31, 1997 of $4.9375 per share. Mr. Lacey received these shares prior to the change in management accompanying the Sky King Connecticut Acquisition and the adoption of the current management's compensation policy for directors. On July 1, 1997, the Company issued 28,000 shares of Company Common Stock to Mr. Lacey as compensation for his services rendered to the Company as a Director. Said shares were valued at $131,250 based upon a closing price of Company Common Stock on July 1, 1997 of $4.6875 per share. Mr. Lacey received these shares prior to the change in management accompanying the Sky King Connecticut Acquisition and the adoption of the current management's compensation policy for directors. 47 Employment Arrangements The Company has employment agreements with Messrs. Frederick A. and Clayton Moran, Mulloy, Warner, and Zimmerling. Each employment agreement provides for year-to-year renewals in the event that neither the employee nor the Company elects to terminate the agreement after the initial term or otherwise and contains non-competition and non-solicitation provisions which survive employment for a term of one (1) year. Other salient provisions of the employment agreement are set forth below.
EMPLOYMENT AGREEMENTS Name Annual Salary Initial Term Frederick A. Moran $125,000 5 years Clayton F. Moran $75,000 3 years Charles W. Mulloy $100,000 3 years Robert E. Warner $72,500 3 years William H. Zimmerling $80,000 3 years
Messrs. Frederick and Clayton Moran, Mulloy, Warner, and Zimmerling have all been granted options to purchase shares of Company Common Stock. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." Stock Options The Company's 1998 Stock Incentive Plan (the "1998 Plan"), which authorizes the issuance of up to 5,000,000 shares of the Company's Common Stock was adopted by the Board of Directors on September 4, 1998. Under its terms, officers, directors, key employees and consultants of the Company are eligible to receive incentive stock options within the meaning of Section 422 of the Internal Revenue Code, as well as non-qualified stock options, stock appreciation rights ("SARs"), restricted stock awards, stock awards, and performance share awards. The 1998 Plan may be administered by the Board of Directors or the Company's Compensation Committee (the "Plan Administrator"). Incentive stock options granted under the 1998 Plan are exercisable for a period of up to 10 years from the date of grant and at an exercise price that is not less than the fair market value of the Common Stock on the date of the grant, except that the term of an incentive stock option granted under the 1998 Plan to a stockholder owning more than 10% of the outstanding Common Stock may not exceed five years from the date of grant and the exercise price of an incentive stock option granted to such stockholder may not be less than 110% of the fair market value of the Common Stock on the date of the grant. Non-qualified stock options may be granted on terms determined by the Plan Administrator. SARs, which give the holder the privilege of surrendering such rights for the appreciation in the Company's Common Stock between the time of grant and the surrender, may be granted on any terms determined by the Plan Administrator. A restricted stock award entitles the recipient to acquire shares of stock subject to such restrictions and conditions as the Plan Administrator may determine at the time of grant. Conditions may be based on continuing employment (or other business relationship) and/or achievement of pre-established performance goals and objectives. A stock award is an award pursuant to which an individual may receive shares of stock free of any vesting restrictions under the Plan. A performance share award is an award entitling the recipient to acquire shares of stock upon the attainment of specified performance goals. The Plan Administrator in its sole discretion shall determine whether and to whom performance share awards shall be made, the performance goals applicable under each such award, the periods during which performance is to be measured, and all other limitations and conditions applicable to the awarded performance shares; provided, however, that the Plan Administrator may rely on the performance goals and other standards applicable to other performance plans of the Company in setting the standards for performance share awards under the 1998 Plan. 48 Stock options with respect to no more than 1,000,000 shares of stock may be granted to any one individual participant during any one calendar year period. Additionally, under the terms of the 1998 Plan, the aggregate fair market value (determined as of the date of grant) of the shares of Common Stock with respect to which incentive stock options are exercisable for the first time by an employee during any calendar year (under all such plans of the Company and any parent and subsidiary corporation of the Company) may not exceed $100,000. Under the 1998 Plan, the Plan Administrator is authorized to impose limitations on 1998 Plan awards, including limitations on transferability. Non-qualified stock options and SARs are not transferable by the participant otherwise than by will or by the laws of descent and distribution or pursuant to a domestic relations order. In addition to other times during which they are exercisable while the participant has a continuing relationship with the Company, options and SARs granted under the 1998 Plan may be exercised within two years after the date of a participant's termination of employment by reason of his death or disability, or within three months after the date of termination by reason of retirement or voluntary termination, but only to the extent the option or SAR was otherwise exercisable at the date of termination. If a participant is terminated for "Cause" (as defined in the 1998 Plan), or if the optionee becomes an officer, director of, or a consultant to or employed by a "Competing Business" (as defined in the 1998 Plan) then any and all options and SARs held by such participant shall terminate and all vested options shall be forfeited. The 1998 Plan provides that, in general, the Plan Administrator, shall, consistent with the 1998 Plan, determine the terms and conditions, including vesting provisions, of any option or SAR granted under the 1998 Plan, and may accelerate the exercisability of any option or SAR. The Board of Directors may alter, amend, suspend or discontinue the 1998 Plan, provided that no such action shall deprive any person without such person's consent of any rights theretofore granted pursuant hereto. As of the date hereof, the Company has granted employees and agents options to purchase 797,500 shares of Company Common Stock under the 1998 Plan, of which 722,000 are outstanding. All of these options vest in equal installments over five years. With the exception of the options granted to Frederick A. Moran, which expire in five years, all options granted to employees expire ten years after the date of grant. Between March 1998 and November 1998, the Company granted certain employees and non-employee directors options to purchase 241,500 shares of Company Common Stock outside of the 1998 Plan, of which 226,500 are outstanding. These options vest in equal installments over five years and expire ten years after the grant. 49 Compensation Committee Interlocks and Insider Participation in Compensation Decisions During Fiscal 1998, Frederick A. Moran and Dr. James C. Roberts served continuously as executive officers and directors of the Company from March 1998 through June 1998. As directors they participated in the Board of Directors' administration of the Company's executive compensation policies. In March 1998, the employment agreements between the Company and Mr. Moran and Dr. Roberts were negotiated and entered into in connection with the Sky King Connecticut Acquisition. Moreover, during Fiscal 1998, Mr. Moran and Dr. Roberts were involved in certain related party transactions. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." Graham F. Lacey served as Chairman and Director of the Company until his resignation in March 1998 in connection with the Sky King Connecticut Acquisition. See "MANAGEMENT." Frederick A. Moran serves as a member of the Company's Compensation Committee. Mr. Moran participated in the Company's deliberations regarding stock option grants to the Company's employees in December, 1998. During those deliberations, the Committee recommended, and the Board of Directors approved, granting Mr. Moran stock options to purchase 200,000 shares of Company Common Stock. Additionally, Mr. Moran participated in the decision to grant his son, Clayton F. Moran, Vice President - Finance of the Company, options to purchase 45,000 shares of Company Common Stock. Finally, Mr. Moran participated in the decision to grant his wife, Joan Moran, also an employee of the Company, options to purchase 10,000 shares of Company Common Stock. All options granted to the Morans, as well as to all other employees, in December 1998, vest in equal installments over five (5) years. Comparison of 5 Year Cumulative Total Returns The following Performance Graph sets forth the Company's total stockholder return (1) as compared to: (i) the University of Chicago Graduate School of Business CRSP Total Return Index for the NASDAQ Stock Market (U.S. & Foreign) ("CRSP Index")(2), and (ii) a Peer Group selected on the Basis of a 3-Digit SIC Group (SIC 4810-4819 U.S. & Foreign). The table assumes that $100 was invested on June 30, 1993 in the Company's Common Stock, the CRSP Index and the peer group index, and that all dividends were reinvested. In addition, the graph weighs the peer group on the basis of its respective market capitalization, measured at the beginning of each relevant time period. (1) The Company became involved in the telecommunications industry on March 6, 1998. Prior to March 6, 1998 the Company was involved in other unrelated industries. The Peer Group reflects the Company's SIC Group and does not reflect the Company's SIC Groups for periods prior to the Sky King Connecticut Acquisition. Consequently, a comparison of the Peer Groups performance to the performance of the Company during the period March 6, 1998 to June 30, 1998 may be meaningful, however, a comparison of the Peer Groups performance to that of the Company for periods prior to the Sky King Connecticut Acquisition is unlikely to be meaningful. Accordingly, the comparisons presented may not be indicative of the Company's performance. (2) The Performance Graph contains a NASDAQ index because the Company's Common Stock traded on NASDAQ during Fiscal 1998. The Company's Common Stock began trading on the American Stock Exchange, Inc. on July 7, 1998. 50
Company Market Market Peer Peer Date Index Index Count Index Count 6/30/93 100.000 100.000 4347 100.000 70 7/30/93 77.778 100.175 4380 102.084 71 8/31/93 88.889 105.387 4422 107.187 74 9/30/93 111.111 108.343 4463 105.061 75 10/29/93 133.333 110.845 4512 106.614 75 11/30/93 127.778 107.349 4596 100.540 75 12/31/93 144.444 110.509 4675 101.382 76 1/31/94 111.111 114.032 4703 106.474 77 2/28/94 77.778 112.796 4745 99.893 79 3/31/94 111.111 105.886 4801 95.517 80 4/29/94 111.111 104.503 4828 96.915 82 5/31/94 66.667 104.628 4870 99.317 84 6/30/94 66.667 100.507 4889 98.287 92 7/29/94 55.556 102.889 4909 100.872 92 8/31/94 38.889 109.145 4926 102.249 90 9/30/94 105.556 108.993 4932 101.377 92 10/31/94 77.778 110.890 4953 101.703 93 11/30/94 55.556 107.003 4970 94.269 96 12/30/94 50.000 107.190 4979 93.037 96 1/31/95 41.667 107.568 4974 94.994 96 2/28/95 38.889 113.068 4976 95.167 96 3/31/95 50.000 116.610 4969 96.208 100 4/28/95 50.000 120.401 4984 98.460 100 5/31/95 44.444 123.360 4986 97.916 101 6/30/95 47.222 133.299 5009 101.587 102 7/31/95 53.611 142.826 5031 105.913 103 8/31/95 51.667 145.616 5055 110.890 100 9/29/95 57.778 149.176 5054 120.663 98 10/31/95 44.444 148.016 5099 118.990 99 11/30/95 44.444 151.478 5134 122.749 99 12/29/95 50.000 150.551 5182 127.074 98 1/31/96 52.222 151.570 5175 129.120 98 2/29/96 52.222 157.525 5207 125.021 103 3/29/96 52.222 157.858 5252 122.913 103 4/30/96 63.889 170.760 5298 126.645 104 5/31/96 75.556 178.541 5354 127.320 107 6/28/96 80.000 170.093 5420 126.985 111 7/31/96 77.778 154.729 5458 116.160 113 8/30/96 73.333 163.594 5489 115.928 113 9/30/96 65.556 175.864 5496 119.412 115 10/31/96 67.778 173.991 5544 118.490 118 11/29/96 55.556 184.576 5595 127.015 122 12/31/96 46.667 184.314 5599 129.954 122 1/31/97 52.222 197.559 5588 133.590 122 2/28/97 52.222 186.988 5603 136.139 126 3/31/97 45.556 174.898 5611 125.764 126 4/30/97 33.333 180.125 5594 130.387 122 5/30/97 30.000 200.468 5589 142.299 122 6/30/97 37.778 206.689 5573 149.243 123 7/31/97 43.889 228.252 5571 156.198 124 8/29/97 44.444 227.673 5562 148.526 125 9/30/97 40.556 241.921 5549 164.887 127 10/31/97 50.000 228.868 5563 169.967 133 11/28/97 45.556 229.341 5588 183.479 135 12/31/97 45.556 225.422 5543 190.091 133 1/30/98 45.556 232.225 5515 202.756 132 2/27/98 45.556 254.344 5498 211.683 135 3/31/98 90.554 264.056 5459 237.151 135 4/30/98 110.336 268.643 5439 235.753 137 5/29/98 98.174 254.336 5431 227.064 142 6/30/98 112.970 270.628 5409 241.492 145
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT Based solely on its review of copies of forms filed pursuant to Section 16(a) of the Exchange Act, and written representations from certain reporting persons, the Company believes that during Fiscal 1998 all reporting persons timely complied with all filing requirements applicable to them, except for certain reports, which were filed late including: (i) a Form 3 for Frederick A. Moran; (ii) a Form 3 for James C. Roberts; (iii) a Form 3 for Thomas W. Wilson, III; and (iv) a Form 3 for William H. Zimmerling. 51 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Loans From Director and Officer Between January and February 1999, Frederick A. Moran, a director and officer of the Company, transferred personal funds totaling $500,000 to the Company. This amount represents a short-term loan to be repaid by the Company in accordance with the terms of a promissory note executed by the Company on January 26, 1999. The promissory note which was to be due on or before July 26, 1999, bore an interest rate of ten percent (10%) per annum. The Company paid the promissory note in full on May 13, 1999. On October 22, 1998, Frederick A. Moran transferred personal funds totaling $65,000 to the Company. This amount represented a short-term loan bearing no interest. The Company paid back the loan in full on October 26, 1998. Private Placement Transactions Through Securities Purchase Agreements dated May 5, 1999, the Company sold an aggregate of 328,170 shares of Company Common Stock, at a price of $3.00 per share, to Frederick A. Moran and Joan B. Moran, Mr. Moran's wife, and certain trusts for the benefit of Mr. and Mrs. Moran's minor children in a non-public offering exempt from registration pursuant to Section 4(2) and Rule 506 of Regulation D of the Act. Through Securities Purchase Agreements dated December 23, 1998, the Company sold an aggregate of 245,159 shares of Company Common Stock, at a price of $3.625 per share, to certain entities associated with and family members of Frederick A. Moran in a non-public offering exempt from registration pursuant to Section 4(2) and Rule 506 of Regulation D of the Act. Through Securities Purchase Agreements dated May 27, 1998, the Company issued an aggregate of 583,430 shares of Company Common Stock, at a price of $6.00 per share, in a non-public offering pursuant to Section 4(2) and Regulation D of the Act, including 308,430 shares of Company Common Stock to certain entities associated with and family members of Frederick A. Moran. Certain Transactions Arising out of Sky King Connecticut Acquisition In connection with the Sky King Connecticut Acquisition, the Company issued shares of Company Series A Convertible Preferred Stock ("Series A Stock") and Series B Convertible Preferred Stock ("Series B Stock") to Frederick A. Moran, and certain family members of and entities associated with Mr. Moran which in the aggregate totaled approximately 5,537,670 shares. Also, the Company issued shares of Series A Stock and Series B stock to the Roberts Family Trust which in the aggregate totaled approximately 2,750,000 shares. James C. Roberts is a former officer and director of the Company. 52 In June 1998, with the approval of the respective Boards of Directors of VDC Bermuda and the Company, 1,512,500 shares of Series B Stock owned by the Roberts Family Trust were converted into 1,512,500 shares of Company Common Stock. All shares of Series B Stock issued in connection with the Sky King Connecticut Acquisition were placed in escrow to be released upon the satisfaction of certain performance criteria set forth in the Escrow Agreement, dated as of March 6, 1998 (the "Escrow Agreement"). In May 1998, the Company released 600,000 shares of Series B Stock from escrow based upon the satisfaction of certain criteria identified on the Escrow Agreement. On August 31, 1998, the Company released an additional 3,900,000 shares of Series B Stock as additional performance criteria were satisfied. Certain members of the management and Board of Directors of VDC Bermuda and the Company, among others, had interests in the Domestication Merger that were in addition to the interests of the members and stockholders of said companies. Upon the consummation of the Domestication Merger, all of the outstanding shares of VDC Bermuda common stock were convertible, on a share-for-share basis, into shares of Company Common Stock. Additionally, all shares of Company Series A Stock and Series B Stock, were automatically converted, on a share-for-share basis, into shares of Company Common Stock. Upon the consummation of the Domestication Merger, Frederick A. Moran, Chairman, Chief Executive Officer, Chief Financial Officer, Secretary and Director of the Company together with his spouse and his minor children, received 2,849,150 of Company Common Stock; a trust for the benefit of Dr. James C. Roberts, an officer and director of the Company and his family received 2,750,000 shares of Company Common Stock; and Clayton F. Moran, Vice President of Finance of the Company, received 1,422,850 shares of Company Common Stock. The Company Common Stock issued upon the conversion of the Series A Stock and Series B Stock to Frederick A. Moran, certain family members of and entities associated with Mr. Moran, and to the Roberts Family Trust were subject to an eighteen month contractual restriction on resale (the "Restriction"). On December 15, 1998, the Company removed the Restriction from all shares of Company Common Stock held by Frederick A. Moran, and family members of and entities associated with Frederick A. Moran (in the aggregate approximately 5,537,670 shares). The Company removed this Restriction in order to permit the Morans more flexibility with regard to providing the Company with future financing. Also, on December 15, 1998 the Company removed the Restriction from all shares held by the Roberts Family Trust in connection with a certain Settlement Agreement by and among the Company, Dr. James C. Roberts, and Frederick A. Moran, dated November 19, 1998 (in the aggregate approximately 750,000 shares), pursuant to which Dr. Roberts resigned from all positions held with the Company and its subsidiaries and surrendered to the Company 1,875,000 shares of Company Common Stock. Certain Transactions and Agreements with PortaCom On June 22, 1998 the Company acquired from PortaCom Wireless, Inc. ("PortaCom") 2 million shares of the common stock of Metromedia China Corporation ("MCC") and warrants to purchase 4 million shares of common stock of MCC at an exercise price of $4.00 per share, for an aggregate purchase price of 5,300,000 shares of Common Stock and approximately $370,000 in cash. 53 In March 1998, PortaCom filed a voluntary petition for bankruptcy relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court District of Delaware. During the course of the bankruptcy proceedings, the acquisition was amended to provide that the Company would fund an escrow account in the amount of up to $2,682,000 (the "Escrow Cash") for the benefit of holders of priority unsecured claims and general unsecured claims against PortaCom's bankruptcy estate. To the extent that the cash escrow was used by PortaCom, PortaCom received proportionally fewer Company shares. The Escrow Cash and 5,300,000 shares (the "Escrow Shares") were placed in escrow pending the resolution of the disputed claims against PortaCom's bankruptcy estate. In October 1998, the Company filed a motion in the United States Bankruptcy Court to block the distribution of escrowed assets in connection with the bankruptcy of PortaCom. The Company filed the motion to permit it to undertake discovery relative to certain aspects of its investment in MCC prior to the distribution of escrowed assets. Following the submission of that motion, the Company, PortaCom, and certain other interested parties, agreed on a stipulation releasing the majority of the Escrow Cash and Escrow Shares, as reduced based upon the use of Escrow Cash, from escrow in accordance with PortaCom's Amended Plan of Reorganization as Modified (the "Plan") and postponing the distribution of certain Escrow Shares to PortaCom and PortaCom shareholders. In November 1998, PortaCom, the Company and Michael Richard, a PortaCom officer charged with certain responsibilities in distributing certain assets in connection with the Plan, entered into a Settlement Agreement pursuant to which 2 million of the Escrow Shares will be retained in escrow for up to eighteen (18) months (the "Retained Shares"). A portion or all of the Retained Shares shall be released to PortaCom contingent upon certain performance criteria. Those shares not so released will be returned to the Company. As of February 1999, PortaCom had used $1,669,839 of the Escrow Cash, resulting in PortaCom's return, or obligation to return, 186,105 Escrow Shares to the Company. The unused Escrow Cash has been returned to the Company. Settlement Agreement with Roberts Pursuant to the terms of a Settlement, Release and Discharge Agreement, dated November 19, 1998, by and among the Company, Dr. James C. Roberts and Frederick A. Moran, Dr. Roberts resigned from all positions he held with the Company and its subsidiaries. Additionally, Dr. Roberts surrendered 1,875,000 shares of Company Common Stock to the Company's treasury. Repricing of Stock Options On October 21, 1998, the Company's Board of Directors voted to reprice the exercise price for stock options held by all employees and non-employee directors serving the Company as of October 21, 1998. The exercise price for the stock options was repriced to $4.125, the closing stock price for shares of Company Common Stock on October 21, 1998. In connection with this repricing, stock options that had previously been granted to Dr. Hussein Elkholy, Clayton F. Moran, Charles W. Mulloy, Robert E. Warner, and William H. Zimmerling were repriced. 54 Securities Issued to Former Directors On March 2, 1998, the Company issued warrants to purchase 45,000 shares of Company Common Stock to Graham Ferguson Lacey, who, at that time, served as the Company's Chairman and was a member of the Company's Board of Directors. On March 2, 1998, the Company issued 25,000 shares of Company Common Stock to Mr. Lacey, who, at that time, served as the Company's Chairman and was a member of the Company's Board of Directors. On March 2, 1998, the Company issued 10,000 shares of Company Common Stock to Robert Alexander, who, at that time, served as the Company's Deputy Chairman and was a member of the Company's Board of Directors. On July 31, 1997, the Company issued 100,000 shares of Company Common Stock to Mr. Lacey, who, at that time, served as the Company's Chairman and was a member of the Company's Board of Directors. On July 1, 1997, the Company issued 28,000 shares of Company Common Stock to Mr. Lacey, who, at that time, served as the Company's Chairman and was a member of the Company's Board of Directors. Options Issued to Officers On December 8, 1998, the Company granted options to purchase shares of Company Common Stock to executive officers as follows: (i) 200,000 shares for Frederick A. Moran; (ii) 45,000 for Clayton F. Moran; (iii) 40,000 for Charles W. Mulloy; (iv) 42,500 for Robert Warner; (v) 33,500 for William H. Zimmerling. The exercise price for these options, other than those granted to Frederick A. Moran, is $3.75 per share. The exercise price for the options granted to Frederick A. Moran is $4.125. These options vest in equal installments over five years and, other than the options granted to Frederick A. Moran, expire ten years from the date of grant (December 8, 2008). The options granted to Frederick A. Moran expire five years from the date of grant (December 8, 2003). On September 2, 1998, the Company issued options to purchase 50,000 shares of Company Common Stock to Charles W. Mulloy. These options have an exercise price of $4.125 per share. These options vest in equal installments over five years and expire ten years from the date of grant (September 2, 2008). On June 1, 1998, the Company issued options to purchase 10,000 shares of Company Common Stock to Clayton F. Moran. These options have an exercise price of $4.125 per share. These options vest over five years and expire ten years from the date of grant (June 1, 2008). 55 On April 1, 1998, the Company issued options to purchase 26,500 shares of Company Common Stock to William H. Zimmerling. These options have an exercise price of $4.125 per share. Options to purchase 9,000 shares vested on April 1, 1998. Options to purchase 17,500 shares vest over five years and expire ten years from the date of grant (April 1, 2008). On February 1, 1998, the Company issued options to purchase 10,000 shares of Company Common Stock to Charles W. Mulloy. These options have an exercise price of $4.125 per share. These options vest in equal installments over five years and expire ten years from the date of grant (February 1, 2008). PRINCIPAL STOCKHOLDERS The following table sets forth, as of June 3, 1999, information with respect to the securities holdings of all persons which the Company, pursuant to filings with the Securities and Exchange Commission, has reason to believe may be deemed the beneficial owners of more than 5% of the Company's outstanding Common Stock. Also set forth in the table is the beneficial ownership of all shares of the outstanding Company Common Stock, as of such date, of all executive officers and directors, individually and as a group.
Amount and Nature of Percent Name and Address of Beneficial Owner Beneficial Ownership(1) of Class Frederick A. Moran 3,343,425 (2) 16.6% 75 Holly Hill Lane Greenwich, CT 06830 Dr. Hussein Elkholy 8,333 (3) * 781 Oneida Trail Franklin Lakes, NJ 07417 Dr. Leonard Hausman 0 (4) * 70 Neshobe Road Waban, MA 02468 James B. Dittman 2,000 (5) * 8 Worthington Ave. Spring Lake, NJ 07762 Robert E. Warner 1,000 (6) * 3025 South Parker Road Suite 711 Aurora, CO 80014 William H. Zimmerling 12,500 (7) * 3025 South Parker Road Suite 711 Aurora, CO 80014 Charles W. Mulloy 2,000 (8) * 75 Holly Hill Lane Greenwich, CT 06830 Clayton F. Moran 1,427,600 (9) 7.1% 75 Holly Hill Lane Greenwich, CT 06830 Frederick W. Moran 1,402,750 (10) 7.0% 230 Park Avenue 13th Floor New York, NY 10169 PortaCom Wireless, Inc. 4,306,878 (11) 21.3% 10061 Talbert Avenue Suite 200 Fountain Valley, CA 92708 All officers and directors 4,796,858 23.7% as a group (8 persons)
56 (*) Less than 1%. (1) The securities "beneficially owned" by an individual are determined in accordance with the definition of "beneficial ownership" set forth in the regulations promulgated under the Securities Exchange Act of 1934, and, accordingly, may include securities owned by or for, among others, the spouse and/or minor children of an individual and any other relative who has the same home as such individual, as well as other securities as to which the individual has or shares voting or investment power or which each person has the right to acquire within 60 days of the date hereof through the exercise of options, or otherwise. Beneficial ownership may be disclaimed as to certain of the securities. This table has been prepared based on 20,173,583 shares of Common Stock outstanding as of June 3, 1999. (2) Includes 527,817 owned directly Mr. Moran as well as 2,815,608 shares owned, directly or indirectly, by certain members of Mr. Moran's family and certain entities associated with Mr. Moran's family, whose ownership is attributed to Mr. Moran. Does not include shares beneficially owned by Mr. Moran's mother. Also, does not include 1,402,750 shares owned by Frederick W. Moran and 1,427,600 beneficially owned by Clayton F. Moran, both of whom are Mr. Moran's adult children. Does not include options to purchase 210,000 shares of Common Stock which may vest on and after December, 1999. (3) Includes options to purchase 8,333 shares which vest in July, 1999. Does not include options to purchase 16,667 shares of Common Stock which may vest on and after July, 2000. (4) Does not include options to purchase 25,000 shares of Common Stock which may vest on or after November 4, 1999. (5) Does not include options to purchase 25,000 shares of Common Stock which may vest on or after November 4, 1999. (6) Includes options to purchase 1,000 shares of Common Stock. Does not include options to purchase 49,000 shares of Common Stock which may vest on and after September 2, 1999. (7) Includes options to purchase 12,500 shares of Common Stock. Does not include options to purchase 47,500 shares of Common Stock which may vest on or after December 8, 1999. (8) Includes options to purchase 2,000 shares of Common Stock. Does not include options to purchase 98,000 shares of Common Stock which may vest on and after September 2, 1999. (9) Includes options to purchase 2,000 shares of Common Stock. An adult son of Frederick A. Moran and employed as Vice-President, Finance of the Company. Does not include options to purchase 53,000 shares of Common Stock which may vest on and after December 8, 1999. (10) An adult son of Frederick A. Moran. (11) Certain of these shares are subject to potential cancellation pursuant to arrangements arising out of the sale of the MCC shares and warrants to the Company. These shares are subject to certain limitations upon resale and redistribution requirements. 57 PortaCom Shares Pursuant to the terms of a Memorandum of Understanding by and among the Company, PortaCom and the Official Committee of Unsecured Creditors of PortaCom Wireless, Inc., dated June 8, 1998, certain of the shares owned by PortaCom are subject to certain contractual restrictions upon resale. Approximately 2,650,000 shares of Common Stock owned by PortaCom may not be resold until on or about September 17, 1999. Additionally, pursuant to the terms of a settlement agreement dated November 1998 (the "Settlement Agreement"), approximately 2,000,000 of the shares of Common Stock that may not be resold until September 17, 1999 are currently being held in escrow, and may be retained in escrow for up to 18 months. A portion or all of these shares may be released to PortaCom contingent upon certain performance criteria set forth in the Settlement Agreement. Those shares not so released will be returned to the Company. DESCRIPTION OF SECURITIES Common Stock The Company is authorized to issue 50,000,000 shares of Common Stock, $.0001 par value per share, of which 20,173,583 are outstanding as of June 3, 1999. Holders of Common Stock have equal rights to receive dividends when and if declared by the Board of Directors, out of funds legally available therefor. Holders of Common Stock have one vote for each share held of record and do not have cumulative voting rights. Holders of Common Stock are entitled upon liquidation of the Company to share ratably in the net assets available for distribution, subject to the rights, if any, of holders of any preferred stock then outstanding. Shares of Common Stock are not redeemable and have no pre-emptive or similar rights. All outstanding shares of Common Stock are fully paid and non-assessable. Preferred Stock Pursuant to the Company's Certificate of Incorporation, the Board of Directors has the authority to issue up to 10,000,000 shares of preferred stock, $.0001 par value per share, in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the Company's stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders and may adversely affect the voting and other rights of the holders of Common Stock. The issuance of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of Common Stock, including the loss of voting control to others. 58 Warrants As of the date hereof, warrants to purchase 1,064,081 shares of Company Common Stock are outstanding (the "Warrants") as follows:
Number of Warrants Exercise Price Expiration Date ------------------ -------------- --------------- 893,546 $4.00 (1) 45,000 $5.00 (1) 4,500 $7.00 August 7, 2001 121,035 $6.00 May, 2002 ------- TOTAL: 1,064,081
(1) Expire 30 days after the date of this Prospectus. Registration Rights This Prospectus has been prepared, in part, pursuant to contractual registration rights granted in connection with the prior sale of certain securities by the Company in private transactions. Anti-Takeover Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware Law Certificate of Incorporation and Bylaws The Company's Certificate of Incorporation, as amended (the "Certificate of Incorporation"), provides that the Board of Directors be divided into three classes of directors, with each class serving a staggered three-year term. The classification system of electing directors may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of the Company and may maintain the incumbency of the Board of Directors, as the classification of the Board of Directors generally increases the difficulty of replacing a majority of the directors. Additionally, the Company's Bylaws, as amended (the "Bylaws"), provide that special meetings of stockholders may only be called by either the Chief Executive Officer or the President, or pursuant to a written request of a majority of the Board of Directors. Special meetings may not be called by the stockholders. These provisions could have the effect of delaying consideration of a stockholder proposal until the next annual meeting. The provisions would also prevent the holders of a majority of the voting power of the capital stock of the Company entitled to vote from unilaterally using the written consent procedure to take stockholder action. Moreover, a stockholder could not force the Board of Directors to call a special meeting of the stockholders prior to the time such persons believe such consideration to be appropriate, except as required by Delaware law. 59 The Bylaws establish advance notice procedures with regard to stockholder proposals and the nomination, other than by or at the direction of the Board of Directors or a committee thereof, of candidates for election as directors. These procedures provide that stockholder nominations for the election of directors at an annual meeting must be in writing and received by the Company's Secretary not less than 50 days nor more than 75 days prior to the meeting; provided, however, that in the event that less than 60 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder must be received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. The notice of nominations for the elections of directors must set forth certain information with respect to the stockholder giving the notice and with respect to each nominee. By requiring advance notice of nominations by stockholders, the foregoing procedures will afford the Board of Directors an opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by the Board of Directors, to inform stockholders about such qualifications. By requiring advance notice of other proposed business, such procedures will provide the Board of Directors with an opportunity to inform stockholders prior to such meetings, of any business proposed to be conducted at such meetings, together with any recommendations as to the Board of Directors' position regarding action to be taken with respect to such business, so that stockholders can better decide whether to attend such a meeting or to grant a proxy regarding the disposition of any such business. Although the Certificate of Incorporation and the Bylaws do not give the Board of Directors any power to approve or disapprove stockholder nominations for the election of directors or proposals for action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal, with regard to whether consideration of such nominee or proposals might be harmful or beneficial to the Company and its stockholders. The Certificate of Incorporation provides that the Bylaws of the Company may be adopted, altered, amended or repealed by the Board of Directors of the Company except as otherwise provided by law. The Certificate of Incorporation also provides that any Bylaw made by the Board of Directors, may be altered, amended or repealed, and new Bylaws made by the affirmative vote of the holders of two-thirds of the combined voting power of the then outstanding shares of stock entitled to vote on the proposed adoption, alteration, amendment or repeal of or to the Bylaws. This provision modifies the default rules of the Delaware General Corporation Law by providing that the Board of Directors may adopt and modify the Bylaws. Additionally, the provision alters the Delaware General Corporation Law by requiring the affirmative vote of two-thirds of the combined voting power of the than outstanding shares, as opposed to a simple majority. 60 The Certificate of Incorporation provides that amendments to the Certificate of Incorporation shall require the affirmative vote of the holders of two-thirds of the combined voting power of the then outstanding shares of stock entitled to vote on any proposed amendment to the Certificate of Incorporation. However, in the event that a resolution to amend the Certificate of Incorporation is adopted by the affirmative vote of at least eighty percent (80%) of the Board of Directors, approval of the amendment shall only require the affirmative vote of the holders of a majority combined voting power of the then outstanding shares of the stock entitled to vote generally on such amendment. This provision modifies the default rules of the Delaware General Corporation Law by requiring, under certain conditions, a higher level of shareholder approval in favor of modifying the Certificate of Incorporation. Pursuant to the Company's Certificate of Incorporation, the Board of Directors has the authority to issue up to 10,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the Company's stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders and may adversely affect the voting and other rights of the holders of Common Stock. The issuance of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of Common Stock, including the loss of voting control to others. The foregoing provisions of the Certificate of Incorporation and Bylaws could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board of Directors and to discourage certain types of transactions that may involve an actual or threatened change of control of the Company. These provisions are designed to reduce the vulnerability of the Company to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for the Company's shares and, as a consequence, they also may inhibit fluctuations in the market price of the Company's shares that could result from actual or rumored takeover attempts. Such provisions also may have the effect of preventing changes in the management of the Company. Delaware Takeover Statute The Company is subject to Section 203 of the Delaware General Corporation Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that such stockholder became an interested stockholder, unless: (i) prior to such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (x) by persons who are directors and also officers and (y) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. 61 Section 203 defines business combination to include: (i) any merger or consolidation involving the corporation and the interested stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; (iii) subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (iv) any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or (v) the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. Transfer Agent The Transfer Agent for the Common Stock is American Stock Transfer & Trust Company. SELLING SECURITY HOLDERS All of the shares of Common Stock of the Company offered by this Prospectus are being sold for the account of the selling security holders identified in the following table (the "Selling Security Holders"). The Selling Security Holders are offering for sale an aggregate of 8,722,618 shares of Common Stock which include: (i) 7,658,537 shares of Common Stock; and (ii) 1,064,081 shares of Common Stock issuable, if at all, upon the exercise of certain Common Stock purchase warrants (the "Warrants"). The following table sets forth the number of Shares being held of record or beneficially (to the extent known by the Company) by such Selling Security Holders and provides (by footnote reference) any material relationship between the Company and such Selling Security Holder, all of which is based upon information currently available to the Company. The shares of Common Stock offered by the Selling Security Holders may be offered for sale from time to time at market prices prevailing at the time of sale or at negotiated prices, and without payment of any underwriting discounts or commissions except for usual and customary selling commissions paid to brokers or dealers. 62
SHARES BENEFICIALLY OWNED SHARES TO BE BENEFICIALLY PRIOR TO OFFERING(1) OWNED AFTER OFFERING NAME NUMBER OF SHARES PERCENT SHARES BEING OFFERED NUMBER OF SHARES PERCENT - ---- ---------------- ------- -------------------- ---------------- ------- Activated Communications Limited Partnership 43,072 * 39,072 4,000 * Adase Partners, L.P. 66,000 * 66,000 (2) 0 0% Alnilam Partners, L.P. 2,185 * 2,185 0 0% Anne Moran Trust 125 (3) * 125 0 0% Bermuda Trust Company, as trustee for the Elanken Family Trust 235,000 1.2% 235,000 (4) 0 0% Dean Brizel and Jeanne Brizel 22,000 * 22,000 (5) 0 0% Stephen Buell 22,000 * 22,000 (5) 0 0% Capital Opportunity Partners One, L.P. 22,000 * 22,000 (5) 0 0% Clifton Capital Ltd. 205,618 1.0% 185,618 (6) 20,000 * Arthur Cooper and Joanie Cooper 44,000 * 44,000 (7) 0 0% Mark Eshman and Jill Eshman trustees for the Eshman Living Trust dated 9/24/90 22,000 * 22,000 (5) 0 0% FAC Enterprises, Inc. 175,852 * 129,852 46,000 * Jeffrey Feingold and Barbara Feingold 22,000 * 22,000 (5) 0 0% Fred Fraenkel 22,000 * 22,000 (5) 0 0% Torunn Garin 66,000 * 66,000 (2) 0 0% Marc Graubart (8) 113,425 * 91,997 21,428 * ING Barings Furman Selz, LLC (9) 4,500 * 4,500 (10) 0 0% Henry D. Jacobs, Jr. 112,740 * 40,740 (11) 72,000 (12) * KAB Investments, Inc. 30,148 * 30,148 0 0% Graham F. Lacey (13) 70,000 * 45,000 (14) 25,000 * Anne Moran 124,689 (15) * 124,689 0 * Clayton F. Moran (16) 1,427,600 7.1% 1,425,600 2,000 * Frederick A. Moran (17) 3,302,045 (18) 16.4% 3,302,045 0 0% Frederick A. Moran and Anne Moran 41,380 * 41,380 0 0% Frederick W. Moran (19) 1,402,750 7.0% 1,402,750 0 0% Paradigm Group, LLC 435,184 2.2% 435,184 (20) 0 0% PGP I Investors, LLC 203,703 1.0% 203,703 (21) 0 0% Tab K. Rosenfeld 18,250 * 18,250 0 0% Steven B. Rosner 78,610 * 41,110 (22) 37,500 * Rozel International Holding Company Limited 431,818 2.1% 431,818 (23) 0 0% Santa Fe Capital Group (NM), Inc. 3,000 * 3,000 0 0% Scott Schenker and Randi Schenker 22,000 * 22,000 (5) 0 0% SPH Equities, Inc. 44,852 * 44,852 0 0% SPH Investments, Inc. 70,000 * 70,000 0 0% Robert Vicas 22,000 * 22,000 (5) 0 0% Ernst Von Olnhausen 11,000 * 11,000 (24) 0 0% Michael Weissman 11,000 * 11,000 (24) 0 0% TOTAL 8,722,618
(*) Less than 1% (1) Based upon 20,173,583 shares of Common Stock outstanding as of June 3, 1999. (2) Includes 6,000 shares issuable, if at all, upon the exercise of outstanding Warrants. (3) A trust for the benefit of Frederick W. Moran, Clayton F. Moran, Kent F. Moran and Luke F. Moran. Does not include 125 shares, the beneficial ownership for which is attributed to Frederick A. Moran. Anne Moran is the mother of Frederick A. Moran. (4) Represents 235,000 shares issuable, if at all, upon the exercise of outstanding Warrants. (5) Includes 2,000 shares issuable, if at all, upon the exercise of outstanding Warrants. (6) Represents 185,618 shares issuable, if at all, upon the exercise of outstanding Warrants. (7) Includes 4,000 shares issuable, if at all, upon the exercise of outstanding Warrants. 63 (8) Former President and Chief Executive Officer of Masatepe Communications, U.S.A., L.L.C., a Delaware limited liability company and wholly-owned subsidiary of the Company. (9) Frederick W. Moran, son of Frederick A. Moran and brother of Clayton F. Moran, is a managing director of ING Barings Furman Selz, LLC. (10) Represents 4,500 shares issuable, if at all, upon the exercise of outstanding Warrants. (11) Includes 3,703 shares issuable, if at all, upon the exercise of outstanding Warrants. (12) Of the 72,000 shares not being offered by Mr. Jacobs hereby, 36,000 are subject to a contractual restriction on resale until September 6, 1999. (13) Former Chief Executive Officer, President and Director of the Company. (14) Represents 45,000 shares issuable, if at all, upon the exercise of outstanding Warrants. (15) Includes shares owned individually and in an IRA by Mrs. Moran. Does not include 125 shares held by the Anne Moran Trust. Does not include 41,380 shares beneficially owned by Frederick A. Moran and Anne Moran. (16) An adult son of Frederick A. Moran and employed as Vice President, Finance, of the Company. (17) Frederick A. Moran serves as Chairman, Chief Executive Officer, Chief Financial Officer, Secretary and Director of the Company. (18) Includes 486,437 owned directly Mr. Moran as well as 2,815,608 shares owned, directly or indirectly, by certain members of Mr. Moran's family and certain entities associated with Mr. Moran's family, whose ownership is attributed to Mr. Moran. Does not include 124,689 shares beneficially owned by Mr. Moran's mother. Does not include 41,380 shares beneficially owned by Frederick A. Moran and Anne Moran. Also, does not include 1,402,750 shares beneficially owned by Frederick W. Moran and 1,427,600 beneficially owned by Clayton F. Moran, both of whom are Mr. Moran's adult children. Does not include options to purchase 210,000 shares of Company Common Stock which may vest on and after December, 1999. (19) An adult son of Frederick A. Moran. (20) Includes 64,814 shares issuable, if at all, upon the exercise of outstanding Warrants. (21) Includes 18,518 shares issuable, if at all, upon the exercise of outstanding Warrants. (22) Represents 41,110 shares issuable, it at all, upon the exercise of outstanding Warrants. (23) Represents 431,818 shares issuable, it at all, upon the exercise of outstanding Warrants. (24) Includes 1,000 shares issuable, if at all, upon the exercise of outstanding Warrants. 64 PLAN OF DISTRIBUTION The Selling Security Holders are offering shares of Common Stock for their own account, and not for the account of the Company. The Company will not receive any proceeds from the sale of the shares of Common Stock by the Selling Security Holders. The Common Stock may be sold from time to time by the Selling Security Holders or by their pledges, donees, transferees or other successors in interest. Such sales may be made on the exchange or market upon which the shares trade at the time, the over-the-counter market or otherwise at prices and at terms then prevailing or at prices related to the then current market price, or in negotiated transactions. The Common Stock may be sold by one or more of the following: (1) a block trade in which the broker or dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; (2) purchases by a broker or dealer for its account pursuant to this Prospectus; and (3) ordinary brokerage transactions and transactions in which the broker solicits purchases. In effecting sales, brokers or dealers engaged by the Selling Security Holders may arrange for other brokers or dealers to participate. Brokers or dealers will receive commissions or discounts from Selling Security Holders in amounts to be negotiated immediately prior to the sale. Such brokers or dealers and any other participating brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act of 1933 (the "Securities Act") in connection with such sales. In addition, any securities covered by this Prospectus that qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this Prospectus. The Company will not receive any of the proceeds from the sale of these shares, although it has paid the expenses of preparing this Prospectus and the related Registration Statement. The Selling Security Holders have been advised that they are subject to the applicable provisions of the Exchange Act, including without limitation, Regulation M thereunder. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Commission a Registration Statement with respect to the Common Stock to be issued hereby, of which this Prospectus constitutes a part. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information, reference is hereby made to the Registration Statement and the exhibits and schedules thereto. Any statements contained herein concerning the contents of any contract, agreement or other document referred to herein and files as an exhibit to the Registration Statement or otherwise filed with the Commission are not necessarily complete. With respect to each such contract, agreement or other document filed with the Commission as an exhibit, reference is made to the exhibit for a more complete description of the matter involved, and each such statement is qualified in its entirety by such reference. 65 Our Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, files reports, proxy statements, registration statements and other information with the Commission. The reports, proxy statements, registration statements and other information filed by the Company with the Commission may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661-2511. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The Commission also maintains a Web Site at http://www.sec.gov which contains reports, proxy statements, registration statements and other information regarding registrants that file electronically with the Commission. VDC's Common Stock is listed on the American Stock Exchange ("AMEX") under the symbol "VDC". LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for us by Buchanan Ingersoll Professional Corporation, Eleven Penn Center, 1835 Market Street, 14th Floor, Philadelphia, Pennsylvania, 19103. EXPERTS The balance sheets as of June 30, 1997 and 1998 and the statements of operations, cash flows, and changes in stockholders' equity for the period January 3, 1996 (inception) to June 30, 1996 and each of the two years in the period ended June 30, 1998 included in this Prospectus have been included herein in reliance on the report of BDO Seidman, LLP, independent accountants, given on the authority of that firm as experts in accounting and auditing. 66 VDC Communications, Inc. Index to Financial Statements Consolidated Statements of the Company Report of BDO Seidman, LLP F-2 Balance sheets at June 30, 1998 and June 30, 1997 F-3 Statements of operations for the years ended June 30, 1998 and 1997 and the period January 2, 1996 (inception) to June 30, 1996 F-4 Statements of stockholders' equity for the years ended June 30, 1998 and 1997 and the period January 2, 1996 (inception) to June 30, 1996 F-5 Statements of cash flows for the years ended June 30, 1998 and 1997 and the period January 2, 1996 (inception) to June 30, 1996 F-6 Notes to consolidated financial statements F-7 - F-23 Interim Financial Statements Consolidated balance sheets as of June 30, 1998 and March 31, 1999 F-24 Consolidated statements of operations and comprehensive loss for the nine-month periods ended March 31, 1998 and 1999 (unaudited) F-25 Consolidated statements of cash flows for the nine-months ended March 31, 1998 and 1999 (unaudited) F-26 Notes to consolidated financial statements (unaudited) F-27 - F-32 67 Report of Independent Certified Public Accountants Board of Directors and Stockholders VDC Corporation Ltd. Greenwich, Connecticut We have audited the accompanying consolidated balance sheets of VDC Corporation Ltd. and subsidiaries (formerly Sky King Communications, Inc.) as of June 30, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for the period January 3, 1996 (inception) to June 30, 1996 and each of the two years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of VDC Corporation Ltd. and subsidiaries at June 30, 1997 and 1998, and the results of their operations and their cash flows for the period January 3, 1996 (inception) to June 30, 1996 and each of the two years in the period ended June 30, 1998 in conformity with generally accepted accounting principles. BDO Seidman, LLP Valhalla, New York September 1, 1998 F-2 68 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Consolidated Balance Sheets
June 30, June 30, Assets 1997 1998 ------------------------- Current Assets: Cash and cash equivalents $1,430 $2,212,111 Marketable securities (Note 3) 451,875 Notes receivable - current (Note 4) 2,800,000 ------------------------- Total current assets 1,430 5,463,986 Property, plant and equipment, less accumulated depreciation (Note 7) 13,570 331,316 Notes receivable, less current portion (Note 4) 1,500,000 Investment in MCC (Note 5) 37,790,877 Deposits (Note 7) 567,775 Other assets 169,730 ------------------------- Total assets $15,000 $45,823,684 ========================= Liabilities and Stockholders' Equity Current Liabilities: Accounts payable and accrued expenses 250 156,185 ------------------------- Total current liabilities 250 156,185 ------------------------- Commitments (Notes 5, 7, 11 and 13) Stockholders' equity: Convertible Preferred Stock Series A (Note 8) 550 399 Convertible Preferred Stock Series B (Note 8) 60 Common stock (Note 8) 22,923,214 Additional paid-in capital 73,331 29,417,561 Accumulated deficit (59,131) (5,323,559) Stock subscriptions receivable (Note 6) (1,425,951) Unrealized gain on marketable securities (Note 3) 75,775 ------------------------- Total stockholders' equity 14,750 45,667,499 ------------------------- Total liabilities and stockholders' equity $15,000 $45,823,684 ========================= See accompanying notes to consolidated financial statements.
F-3 69 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc) Consolidated Statements of Operations
January 3, 1996 (inception) to Year Ended Year Ended June 30, 1996 June 30, 1997 June 30, 1998 ---------------------------------------------- Revenue (Note 11) $ 4,850 $ 43,248 $ 99,957 Site leasing expense (Note 11) 1,091 22,020 28,460 Selling, general and administrative 30,461 53,657 1,167,429 Non-cash compensation expense (Note 9) -- -- 2,254,000 ---------------------------------------------- Loss from operations (26,702) (32,429) (3,349,932) Interest income -- -- 195,122 ---------------------------------------------- Net loss $ (26,702) $ (32,429) $ (3,154,810) ============================================== Net loss per common share - basic ($0.01) ($0.01) ($0.72) ---------------------------------------------- Weighted average number of shares outstanding 3,699,838 3,699,838 4,390,423 ---------------------------------------------- See accompanying notes to consolidated financial statements.
F-4 70 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Consolidated Statements of Stockholders' Equity
Convertible Convertible Preferred Stock Preferred Stock Series A Series B Common Stock Shares Amount Shares Amount Shares - ----------------------------------------------------------------------------------------------------------------- Balance, January 3, 1996 -- $-- -- $ -- -- Issuance of common stock (Note 2) 5,500,000 550 -- -- -- Capital contribution -- -- -- -- -- Net loss -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------- Balance - June 30, 1996 5,500,000 550 -- -- -- Capital contribution -- -- -- -- -- Net loss -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------- Balance - June 30, 1997 5,500,000 550 -- -- -- Issuance of stock subscription receivable (note 6) -- -- -- -- -- Reverse acquisition (Note 9) -- -- -- -- 3,698,373 collections on stock subscriptions receivable -- -- -- -- -- Release of escrow shares (Note 9) -- -- 600,000 60 -- Issuance of common stock in connection with investment in MCC (Note 5) -- -- -- -- 4,965,828 Issuance of common stock -- -- -- -- 1,130,584 Issuance of stock for notes (Note 6) -- -- -- -- 154,322 Preferred stock conversion to common stock (1,512,500) (151) -- -- 1,512,500 Unrealized gain on marketable securities -- -- -- -- -- Net loss -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------- Balance - June 30, 1998 3,987,500 $ 399 600,000 $ 60 11,461,607 ================================================================================================================= Additional Stock Unrealized Gain Common Stock Paid-in Accumulated Subscriptions on Marketable Amount Capital Deficit Receivable Securities Total - -------------------------------------------------------------------------------------------------------------------------------- Balance, January 3, 1996 $- $- $- $- $- $- Issuance of common stock (Note 2) -- 450 -- -- -- 1,000 Capital contribution -- 41,951 -- -- -- 41,951 Net loss -- -- (26,702) -- -- (26,702) - -------------------------------------------------------------------------------------------------------------------------------- Balance - June 30, 1996 -- 42,401 (26,702) -- -- 16,249 Capital contribution -- 30,930 -- -- -- 30,930 Net loss -- -- (32,429) -- -- (32,429) - -------------------------------------------------------------------------------------------------------------------------------- Balance - June 30, 1997 -- 73,331 (59,131) -- -- 14,750 Issuance of stock subscription receivable (note 6) -- 164,175 -- (164,175) -- -- Reverse acquisition (Note 9) 7,396,724 (237,506) (1,105,524) (465,838) -- 5,587,856 collections on stock subscriptions receivable -- -- -- 287,800 -- 287,800 Release of escrow shares -- 3,258,034 (1,004,094) -- -- 2,254,000 Issuance of common stock in connection with investment in MCC (Note 5) 9,931,678 24,686,946 -- -- -- 34,618,624 Issuance of common stock 2,261,168 3,722,336 -- -- -- 5,983,504 Issuance of stock for notes (Note 6) 308,644 775,094 -- (1,083,738) -- -- Preferred stock conversion to common stock 3,025,000 (3,024,849) -- -- -- -- Unrealized gain on marketable securities -- -- -- -- 75,775 75,775 Net loss -- -- (3,154,810) -- -- (3,154,810) - -------------------------------------------------------------------------------------------------------------------------------- Balance - June 30, 1998 $ 22,923,214 $ 29,417,561 $(5,323,559) $(1,425,951) $75,775 $ 45,667,499 ================================================================================================================================ See accompanying notes to consolidated financial statements
F-5 71 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Consolidated Statements of Cash Flows Increase (Decrease) in Cash and Cash Equivalents
Period Ended June 30, 1996 Year Ended Year Ended (since inception) June 30, 1997 June 30, 1998 ----------------------------------------------------- Cash flows from operating activities: Net loss $ (26,702) $ (32,429) $ (3,154,810) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation 1,540 3,390 6,205 Non-cash compensation expense -- -- 2,254,000 Changes in operating assets and liabilities: Prepaid expenses and other assets (466) 466 122,770 Deposits -- -- (78,624) Accounts payable and accrued expenses 250 -- (8,931) ----------------------------------------------------- Net cash flows used by operating activities (25,378) (28,573) (859,390) Cash flows from investing activities: Purchase of investment securities - - (288,600) Proceeds from repayment of notes receivable - - 700,000 Cash paid for investment in MCC - - (2,799,731) Deposits on fixed assets - - (489,151) Fixed asset acquisition - - (323,951) ----------------------------------------------------- Net cash flows used by investing activities - - (3,201,433) Cash flows from financing activities: Proceeds from issuance of common stock 1,000 -- 6,271,504 Capital contribution 26,551 27,830 -- ----------------------------------------------------- Net cash flows from financing activities 27,551 27,830 6,271,504 Net increase (decrease) in cash and cash equivalents 2,173 (743) 2,210,681 Cash and cash equivalents, beginning of period -- 2,173 1,430 ----------------------------------------------------- Cash and cash equivalents, end of period $ 2,173 $ 1,430 $ 2,212,111 ===================================================== Supplemental schedule of non-cash investing and financing activities: Net assets acquired in exchange for capital stock $- $- $5,587,856 Investment in MCC in exchange for capital stock - - 34,618,624 Investment in MCC in exchange for loan receivable - - 372,522 Stock subscription for common stock - - 1,083,738 Fixed assets contributed by stockholders 15,400 3,100 - ===================================================== See accompanying notes to consolidated financial statements.
F-6 72 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Notes to Consolidated Financial Statements 1. Organization and VDC Corporation Ltd. (formerly Sky King Business Operations Communications, Inc.) (the "Company") was incorporated in Connecticut on January 3, 1996 to engage in the international telecommunications and wireless communications businesses. 2. Significant Accounting (a) Basis of Presentation Policies On March 6, 1998 ("Effective date"), Sky King Communications, Inc. ("Sky King") entered into a merger agreement with VDC Corporation Ltd. ("VDC") and VDC (Delaware), Inc. ("Sub", a wholly-owned subsidiary of VDC). Under the agreement, all of the outstanding shares of Sky King's common stock were exchanged for Sub preferred stock convertible into up to 10 million newly issued shares of Sub common stock. Sub Preferred Stock Series A that is convertible into 5.5 million shares of Sub common stock was issued at the closing, and Sub Preferred Stock Series B convertible into the remaining 4.5 million shares of Sub common stock was placed and held in escrow pending the achievement of certain performance criteria. The Merger Agreement requires the Company to use diligent efforts to domesticate as a United States corporation within one year following the Effective Date. The domestication is anticipated to occur through the merger of the Company into the Sub (the "Domestication Merger"). Upon the occurrence of the Domestication Merger, the shares of Sub Preferred Stock issued to the former Sky King shareholders in the Merger would automatically convert into shares of Sub Common Stock. In the event that the Domestication Merger does not occur within one year following the Effective Date, the Sub Preferred Stock would be converted for common shares of the Company (the "Company Common Shares"), on a share for share basis, resulting in the issuance of up to 10,000,000 Company Common Shares. Based upon the number of Company Common Shares outstanding as of the Effective Date, the former Sky King Shareholders would become the majority shareholders of the Company Common Shares through either the Domestication Merger or through the issuance of Company Common Shares in lieu of the Domestication Merger. Simultaneous with the merger, Sub changed its name to Sky King Communications, Inc. This transaction was accounted for as a reverse acquisition whereby Sky King is the acquirer for accounting purposes. Accordingly, the historical financial statements presented are those of Sky King prior to the merger on March 6, 1998 and reflect the consolidated results of Sky King and VDC, and VDC's wholly-owned subsidiary subsequent to the merger. For periods prior to the merger, the Sky King shares outstanding have been retroactively restated to reflect the number of shares and par value of VDC (Delaware), Inc. shares received in the merger. In September 1998, Sky King Communications, Inc. changed its name to VDC Communications, Inc. 73 (b) Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At June 30, 1998, cash equivalents of $2,158,159 was held in money market funds. F-7 74 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Notes to Consolidated Financial Statements (c) Investments Investments in marketable securities are classified as available-for-sale and are reported at fair values in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The fair values are based on quoted market prices, and any unrealized gains or losses are excluded from earnings and reported in stockholders' equity. Realized gains and losses are recorded in the income statement and the cost assigned to securities sold is based on the specific identification method. The Company's investment in MCC has been recorded under the cost method (see Note 5) (d) Property, Plant and Equipment and Depreciation Property, plant and equipment are stated at cost. Depreciation is computed over the estimated lives of the assets using the straight-line method. (e) Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments. The Company's cash investments are placed with high credit quality financial institutions and may exceed the amount of federal deposit insurance. (f) Principles of Consolidation The financial statements include the consolidated accounts of the company and subsidiaries with significant intercompany accounts and transactions eliminated. (g) Income Taxes Deferred income taxes are provided, when applicable, on differences between the financial reporting and income tax bases of assets and liabilities based upon statutory tax rates enacted for future periods. F-8 75 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Notes to Consolidated Financial Statements (h) Use of Estimates In preparing the financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. The Investment in MCC was valued based on criteria discussed at Note 5. Actual results could differ from those estimates. (i) Financial Instruments The carrying amounts of financial instruments including cash and cash equivalents and accounts payable approximated fair value as of June 30, 1998, because of the relatively short maturity of these financial instruments. The carrying value of long-term notes receivable, including the current portion, approximated fair value as of June 30, 1998, based upon quoted market prices for similar debt issues. The Investment in MCC approximated fair value as of June 30, 1998 based on valuation criteria discussed at Note 5. (j) Loss Per Share of Common Stock During February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share," which replaces the presentation of primary earnings per share ("EPS"), with basic EPS. It also requires dual presentation of basic and diluted EPS. The Company adopted SFAS 128 as of July 1, 1997. The adoption of SFAS 128 did not affect the Company's financial statement disclosures. Loss per common share-basic is computed using the weighted average number of shares outstanding. If dilutive, common equivalent shares (common shares assuming exercise of options and warrants) utilizing the treasury stock method, as well as the conversion of convertible preferred stock are considered in presenting diluted earnings per share. Diluted loss per share is not presented because the effect of the convertible securities is antidilutive. Warrants to purchase 938,546 shares of common stock at prices ranging from $4.00 to $5.00 are not included in the computation of diluted loss per share because they are antidilutive due to the net loss. If the preferred shares issued were considered to be common shares, loss per share would have been $(0.00), $(0.00) and $(0.44) for the periods ended June 30, 1996, June 30, 1997 and June 30, 1998. F-9 76 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Notes to Consolidated Financial Statements (k) Long-Lived Assets The Company reviews certain long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In that regard, the Company assesses the recoverability of such assets based upon estimated non- discounted cash flow forecasts. (l) Revenue and Cost Recognition Revenues are derived under sub-lease agreements for radio tower and antenna space. Revenues and the associated site-leasing costs are recognized under the terms of the operating lease agreements. (m) Recent Accounting Standards Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income," established standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be recognized under current accounting standards as components of comprehensive income and reported in a financial statement that is displayed with the same prominence as other financial statements. Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information", which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise" establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographical areas and major customers. SFAS No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. F-10 77 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Notes to Consolidated Financial Statements Both SFAS Nos. 130 and 131 are effective for financial statements for fiscal years beginning after December 15, 1997 and require comparative information for earlier years to be restated. The adoption of SFAS No. 130 is not expected to have a material effect on the Company's financial statement disclosures. The Company is currently reviewing the effect of SFAS No. 131 but has yet been unable to fully evaluate the impact, if any, it may have on future financial statement disclosures. 3. Marketable Securities Marketable equity securities, which are available for sale are measured at fair value, with net unrealized gains and losses included as a component of stockholders' equity. Gross unrealized holding gains of $75,775 were included as changes in the component of stockholders' equity during the periods ended June 30, 1998 ($0 in 1996 and 1997). The Company uses the specific identification method to determine the cost of securities sold. 4. Notes Receivable Notes receivable which resulted from the sale of certain VDC Corporation, Ltd. investments to unrelated parties prior to the March 6, 1998 merger (Note 9) have repayment terms through September, 1999 and bear interest at 8%. The notes are with recourse against the general assets of the debtors and are collateralized by the related investments sold which consisted of its investments in private and publicly-traded companies. As of June 30, 1998, the notes receivable and related collateral consisted of the following: $3,500,000 due from Rozel International Holdings Limited, collateralized by 3,972,877 shares of netValue, Inc., notes in the aggregate principal amount of $200,000 due from netValue, 100,000 shares of Informatix, Inc., and $700,000 principal amount note due from Informatix. $800,000 due from Tasmin Limited, collateralized by 15,836,364 shares of Tamaris PLC, a note in the principal amount of $167,842 due from Silk Securities, notes receivable in the aggregate principal amount of $161,990 due from MJZ Securities Ltd., advances amounting to $119,264 due from EPSOM Investment Services and an investment in FIP Holdings, Ltd. in the aggregate amount of $330,000. Under the agreements, principal payments due under these notes are $450,000 in June 1998, $1,350,000 in February 1999, $1,000,000 in May 1999, $1,000,000 in August 1999 and $500,000 in September 1999. The borrowers have made payments of $1,000,000 since the inception of these notes, including $700,000 through June 30, 1998. Interest of $161,333 has been accrued on these notes through June 30, 1998. F-11 78 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Notes to Consolidated Financial Statements 5. Investment in MCC On June 8, 1998 the Company acquired from Portacom Wireless, Inc. ("PortaCom") two million shares of common stock of Metromedia China Corporation (formerly Metromedia Asia Corporation) ("MCC") and warrants to purchase four million shares of common stock of MCC at $4.00 per share. The warrants expire on September 13, 1999. MCC operates joint ventures in China under the direction of its majority owner, Metromedia International Group. The joint ventures invest in network construction and development of telephony networks in China and participate in project cooperation contracts with local partners that enable the joint ventures to receive certain percentages of the projects' distributable cash flows. The purchase price and number of shares under the warrant agreemen t are subject to adjustments based on capital changes of MCC. The investment was recorded at cost, based on the consideration given which included 4,915,828 common shares of the Company at the market value of $6.98125, the elimination of a loan receivable and accrued interest of $390,522 and $2,781,731 in cash. The Company's management has stated that they intend to raise the necessary funds to exercise the warrants. The MCC common shares and warrants represent a potential 8.7% interest in the outstanding common stock of MCC on a fully exercised basis. In connection with the MCC acquisition, the Company incurred an investment advisory fee of 50,000 common shares at $6.00 per share. In March 1998, PortaCom filed a voluntary petition for bankruptcy relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court. In connection with PortaCom's bankruptcy proceedings, the acquisition agreement provides that the Company will fund an escrow account in the amount of up to $2,682,000 (included in the $2,781,731 noted above) for the benefit of holders of priority unsecured claims and general unsecured claims against PortaCom's bankruptcy estate. The extent that the cash escrow is used by PortaCom, it will receive fewer VDC shares. The number of VDC shares that will ultimately be issued shall be the difference between 5,300,000 shares and the principal amount of the cash escrow divided by the value of the Company's stock. The escrow fund and VDC shares shall be held in escrow pending the resolution of the disputed claims against PortaCom's bankruptcy estate. F-12 79 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Notes to Consolidated Financial Statements In the event that on the one year anniversary of the closing date of the acquisition agreement with PortaCom, MCC is a publicly held company whose shares are registered with the Securities and Exchange Commission under the securities act of 1933, the Company may be required to pay PortaCom additional purchase consideration in accordance with an agreed upon formula as follows: (MCC Market Price/$12) - (VDC Market Price/$5) X $5,000,000. 6. Stock Subscriptions In December 1997, a shareholder acquired 465.3 shares of Sky King Communications, Receivable Inc. for a note amounting to $164,175. These shares were subsequently exchanged for VDC (Delaware), Inc. Preferred Stock issued in connection with the Merger (See Note 9). The note, which bears interest at 8%, matures in December, 1999. This note has been presented as a reduction of stockholders' equity. In March 1998, prior to the merger ( Note 9), 253,000 shares of VDC were issued in exchange for a $632,500 note which bears interest at 8% and is due in March, 1999. The stock subscription receivable arose in connection with the merger as a component of the capital structure of VDC Corporation Lrd., which was assumed in the reverse acquisition merger. It was entered into with an unrelated third party at fair value prior to the merger. The unpaid balance at June 30, 1998 of $344,700 has been presented as a reduction of stockholders' equity. In May 1998, 583,430 shares of VDC were issued in exchange for $3,500,580. As of June 30, 1998, $917,076 had not yet been funded and has been presented as a reduction of stockholders' equity. 7. Property, Plant and Major classes of property, plant and equipment Equipment consist of the following:
June 30, 1997 June 30, 1998 Long distance communication equipment $ - $ 115,538 Computers and office equipment 11,900 191,219 Furniture and fixtures 6,600 34,442 ----- ------ 18,500 341,199 Less accumulated depreciation 4,930 9,883 ----- ----- $13,570 $331,316 ======= ========
F-13 80 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Notes to Consolidated Financial Statements The Company had approximately $444,000 on deposit, and has additional firm purchase commitments in the amount of $946,000 for long distance communication equipment at June 30, 1998. 8. Capital Stock and Capital stock is comprised of the following: Capital Transactions
30-Jun-97 30-Jun-98 Convertible Preferred Stock Series A of VDC (Delaware), Inc., non-voting, $.0001 par value, shares authorized, 5,500,000 at June 30, 1997 and 3,987,500 at June 30, 1998(a) $550 $399 Convertible Preferred Stock Series B of VDC (Delaware), Inc. non-voting $.0001 par value shares authorized 4,500,000 issued and outstanding 600,000 at June 30, 1998(a) - $60 Common stock of VDC Corporation, Ltd. $2 par value, shares authorized 50,000,000, issued and outstanding 11,461,607 at June 30, 1998 - $22,923,214
(a) The convertible preferred stock, which is non voting, is convertible into up to 10 million newly issued shares of VDC (Delaware), Inc. common stock upon the domestication of VDC Corporation Ltd. into VDC (Delaware), Inc. If the domestication does not occur within one year of the merger (Note 9), the convertible preferred stock will be exchangeable into common stock of VDC Corporation Ltd. on a share for share basis. There are 3.9 million shares of Series B Preferred Stock held in escrow at June 30, 1998 under the merger agreement (See Note 9). In June, 1998, with the approval of the Boards of Directors of VDC and Sub, 1,512,500 shares of Convertible Preferred Stock Series A were converted into 1,512,500 shares of VDC Corporation Ltd. Common Stock. The Exchange was accounted for on a share for share basis with the cumulative difference in par values reflected as an adjustment to additional paid in capital. On March 6, 1998, Sky King Communications, Inc. entered into a merger agreement with VDC Corporation Ltd. and VDC (Delaware), Inc. wherein all of the outstanding shares of Sky King Communications, Inc. were exchanged for preferred shares of VDC (Delaware), Inc. (See Note 9). For periods prior to the merger, the Sky King Communications, Inc. shares outstanding have been retroactively restated to reflect the number of shares and par value of VDC (Delaware), Inc. shares received in the merger. F-14 81 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Notes to Consolidated Financial Statements On March 31, 1998, the Company sold 100,000 shares of common stock at $5.50 and on March 24, 1998, 600,000 shares of common stock at $4.75, each to unrelated investors for total cash consideration of $3,400,000 less an investment fee of $85,500. The 600,000 shares have not been issued, but for financial statement purposes such shares have been treated as if they had been issued and outstanding. During the year ended June 1998, the Company issued options to purchase an aggregate of 61,500 common stock shares of VDC Corporation, Ltd. for prices ranging from $5.00 to $6.00 per share. 9,000 of these options vest immediately. The remaining options vest over five years. All the options expire after ten years. At June 30, 1998, the Company had outstanding warrants to acquire an aggregate of 938,546 shares of common stock at prices ranging from $4.00 to $5.00. These warrants were issued prior to the March 6, 1998 merger in connection with obligations arising prior to that date. The warrants were assumed by Sky King in the merger. The warrants originally were to expire in August 1998. At that date, they were extended until 30 days following the effective date of a registration statement for the underlying common stock. In May, 1998 the Company sold 275,000 shares of common stock to unrelated investors and 308,430 shares to the Chief Executive Officer and his family for $6.00 per share less an investment banking fee of $31,500. These shares have not been issued, but for financial statement purposes such shares have been treated as if they had been issued and outstanding. In June 1998, the Company issued to escrow 5,300,000 shares of common stock for PortaCom in exchange for the investment in MCC (See Note 5). 4,915,828 shares have been reflected as outstanding under the agreement as of June 30, 1998. In addition, as of June 30, 1998 50,000 common shares representing an investment advisory fee had not been issued, but for financial statement purposes such shares have been treated as if they had been issued and outstanding. The Company is obligated to pay investment banking fees in connection with the merger in an aggregate amount equal to 5% of the total merger consideration or 444,852 common shares of VDC Corporation, Ltd. (Note 9). The issuance of the shares is subject to the satisfaction of certain contingencies relating to the collection of stock subscriptions receivable existing at the date of merger which have not yet been satisfied. Upon issuance, the shares will be accounted for as an additional cost of acquiring the net monetary assets of VDC Corporation, Ltd. This will result in the recognition of the shares at the fair value as of the date of the merger ($2.50 a share) and a corresponding increase in accumulated deficit. F-15 82 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Notes to Consolidated Financial Statements 9. Merger On March 6, 1998, Sky King Communications, Inc. entered into a merger agreement with VDC Corporation Ltd. and VDC (Delaware), Inc.(See Note 2). This transaction is being accounted for as a reverse acquisition whereby Sky King is the acquirer for accounting purposes. Since the assets and liabilities of VDC Corporation Ltd. acquired were monetary in nature, the merger has been recorded at the value of the net monetary assets. VDC Corporation Ltd. operated as an investment company prior to the merger. Its assets and liabilities consisted of cash, notes receivable, investments in and advances to PortaCom and accounts payable. Operations of VDC Corporation Ltd. consisted of the management of its investments. The consideration paid to the former Sky King Shareholders in the Merger consisted of the issuance of 10 million newly-issued shares of preferred stock of the Sub (the "Sub Preferred Stock") which is convertible, in the aggregate, into 10,000,000 shares of common stock of Sub (the "Sub Common Stock"). Of the consideration paid to the Sky King Shareholders, Sub Preferred Stock convertible in the aggregate into 4,500,000 shares of Sub Common Stock (the "Escrow Shares") was placed in escrow to be held and released from time to time as the Sub achieves certain performance criteria described below. To the extent that any of the Escrow Shares have not been released at the expiration of an escrow period of five (5) years (the "Escrow Period"), the remaining Escrow Shares shall be surrendered to the Company for cancellation. The historical financial statements presented are those of Sky King prior to the merger and reflect the consolidated results of Sky King and VDC, and VDC's wholly-owned subsidiaries subsequent to the merger. Pro forma unaudited consolidated results of operations as if the merger had taken place as of July 1, 1996, rather than at March 6, 1998 are as follows:
Years ended June 30, 1997 1998 Revenue $ 43,248 $ 99,957 Loss before extraordinary items $(1,205,416) $(4,764,998) Net loss $(1,637,691) $(4,764,998) Net loss per common share - basic $ (0.44) $ (1.09)
F-16 83 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Notes to Consolidated Financial Statements Escrow shares will be released to the Sky King shareholders from time to time in accordance with the following schedule: Number of Shares to be Released(1) Performance Criteria ---------------------------------- -------------------- 500,000 Upon each procurement of one or more frequency, operating and/or business licenses ("Licenses") to provide the following types of services (the "Services") to an aggregate minimum population of 500,000 people: wireless or wired telephony, local loop telephony, and in country long distance telephony services, international long distance telephony gateways or internet service provision; plus - -------------------------------------------------------------------------------- 100,000 for each 100,000 people in excess of the aggregate minimum population of 500,000 covered by the Licenses. - -------------------------------------------------------------------------------- 500,000 The provision of billing services at an average rate of 100,000 bills per month for a consecutive three month period. - -------------------------------------------------------------------------------- 100,000 Upon each procurement of $1,000,000 of appropriate financing for the provision of Services or for capital expenditures or other expenses associated with the Services; or procurement of $200,000 of appropriate financing for the provision of paging services or for capital expenditures or other expenses associated with the provision of paging services. - -------------------------------------------------------------------------------- 100,000 Upon each procurement of one or more for Licenses to provide paging services an aggregate minimum population of 500,000 people; plus - -------------------------------------------------------------------------------- 100,000 for each 100,000 people in excess of the aggregate minimum population of $500,000 covered by the Licenses. 84 (1) The aggregate number of shares of Sub Common Stock (or if the Domestication Merger does not occur within one year after the Effective Date, the VDC (Common Shares) to be released resulting from the conversion of Escrow Shares. During the year ended June 30, 1998, 600,000 shares were released from escrow. Of the 600,000 shares released, 415,084 shares were considered to be compensatory resulting in non-cash compensation of $2,254,000 based on the fair value of the Company's common stock when released. Compensatory shares are related to members of the Company's management, their family trusts and minor children and two employees. Non-compensatory shares released related to former Sky King shareholders who are neither employee shareholders nor minor children of employee shareholders where beneficial ownership does not exist. The non-compensatory shares have been accounted for as a stock dividend in which the issued stock is recorded at fair value on the date of release through a charge to accumulated deficit. The future release of escrow shares which are considered compensatory could have a significant impact on the Company's future operating results. F-17 85 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Notes to Consolidated Financial Statements 10. Income Taxes The Company has net operational loss carryforwards in the amount of approximately $900,000 at June 30, 1998 which expire in 2018. As of June 30, 1998, the Company had deferred tax assets of approximately $360,000, for which a valuation allowance has been established. Deferred income taxes result primarily from net operating loss carryforwards. 11. Leases The Company leases radio tower and antenna space under various operating leases. The future remaining minimum lease payments under these leases are as follows:
Years ending June 30, --------------------- 1999 $35,460 2000 35,973 2001 31,686 2002 21,307 2003 2,135 ----- Total $126,561 --------
The Company sub-leases the radio tower and antenna space with future remaining minimum lease payments due to the Company as follows:
Years ending June 30, --------------------- 1999 $72,709 2000 83,519 2001 41,361 2002 15,159 ------ Total $212,748 --------
F-18 86 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Notes to Consolidated Financial Statements 11. Lease (continued) The Company occupies office and equipment space and equipment pursuant to operating leases expiring through 2008. Future minimum lease payments are as follows:
Year ending June 30, -------------------- 1999 $935,213 2000 953,803 2001 959,678 2002 965,181 2003 970,590 Thereafter 1,036,702 --------- $5,821,167 ==========
Rent expense for the years ended June 30, 1998 and 1997 and period ended June 30, 1996 was not material to the financial statements. 12. Stock Option Plans The Company granted 61,500 stock options during the year ended June 30, 1998. All stock options have been granted to employees at exercise prices equal to the market value on the date of the grant. The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its stock option plan by recording as compensation expense the excess of the fair market value over the exercise price per share as of the date of grant. Under APB Opinion 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation cost is recognized. In September 1998, VDC Communications, Inc. established the Voice and Data Communications 1998 Stock Option Plan (the "1998 Plan"). The 1998 Plan provides for the grant of incentive stock options to purchase up to 5,000,000 shares of common stock to employees of VDC Communications, Inc. and non-qualified stock options to employees, officers, directors and consultants of VDC Communications, Inc. The 1998 Plan is administered by a committee appointed by the Board which determines the terms of the options granted, including the exercise price, the number of shares subject to option, and the option vesting period. The exercise price of all options granted under the Plan must be at least 100% of the fair market value on the date of the grant. Options generally vest in equal annual increments over a five-year period. F-19 87 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Notes to Consolidated Financial Statements SFAS No. 123 requires the Company to provide pro forma information regarding net loss per share as if compensation cost for the Company's stock option plan has been determined in accordance with the fair value based method prescribed in FASB 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes pricing model with the following weighted-average assumptions used for grants in 1998.
Years ended June 30, 1998 -------------------- ---- Dividend yield 0.0% Risk free interest rate 5.6% Expected volatility 46.5% Expected lives 6 years
Under the accounting provisions of FASB Statement 123, the Company's net loss and net loss per share would have been adjusted to the pro forma amounts indicated below:
Year ended June 30, 1998 ------------------- ---- Pro forma results Net loss: As reported $(3,154,810) Pro forma $(3,188,260) Loss per common share-basic As reported $(0.72) Pro forma $(0.73)
F-20 88 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Notes to Consolidated Financial Statements A summary of status of the Company's stock option plan as of June 30, 1998 and changes for the year ending June 30, 1998 is presented below:
Weighted Average Exercise Stock option Plan Grants Shares Price ------------------------ ------ ----- Outstanding at June 30, 1997 -- -- Granted 61,500 $5.16 Outstanding at June 30, 1998 61,500 $5.16 Options exercisable and weighted average fair-value of options granted during the year ended June 30, 1998 is shown below: Options exercisable at year-end 9,000 Weighted average exercise price $5.00 Weighted average fair value of options granted during the year $2.88
The following table summarizes information about stock options outstanding at June 30, 1998.
Weighted Weighted Average Average Number Remaining Exercise Range of Prices Outstanding Contractual Life Price --------------- ----------- ---------------- ----- $5 to $6 61,500 9.8 years $5.16
During the initial phase-in period of SFAS 123, the effects on the pro-forma results are not likely to be representative of the effect on pro forma results in future years since options vest over several years and additional awards could be made each year. F-21 89 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Notes to Consolidated Financial Statements 13. Commitments Employment Agreements The Company has entered into eleven multi-year employment agreements expiring through 2003 with officers of the Company, which provide for aggregate annual base salaries as follows:
Years ended June 30, -------------------- 1999 $996,000 2000 990,000 2001 861,000 2002 269,000 2003 188,000 ---- ------- $3,304,000 ==========
14. Subsequent Events Asset Purchases On July 31, 1998 the Company acquired Masatepe Communications USA, L.L.C. ("Masatepe") for $1,140,043 in cash and stock. The consideration has been placed in escrow pending Federal Communications Commission approval. Masatepe provides voice and data telecommunications services between the United States and Central American markets. In addition, there may be compensation due a former 20% shareholder of Masatepe who is now a current employee of VDC that is contingent upon future cash flows (as defined) under the following formula: Cash flows of Masatepe for the twelve months prior to July 31, 2001 plus, cash flows for the three months prior to July 31, 2001 times four. This product is divided by two and multiplied by 2.4. A finders fee consisting of warrants to purchase 4,504 shares of Company common stock at $7.00 per share was issued in connection with the transaction. In July 1998, the Company entered into a preliminary agreement, which is subject to due diligence review, to acquire substantially all the assets of World Lynx, Inc. ("WL") for $3,100,000 in common stock and $500,000 in debt assumption. WL is an Internet service provider based in Little Rock, Arkansas. F-22 90 VDC Corporation Ltd. and Subsidiaries (Formerly Sky King Communications, Inc.) Notes to Consolidated Financial Statements 15. Fourth Quarter During the fourth quarter of the year ended Financial Information June 30, 1998, the Company recorded non-cash compensation expense of $1,453,000, related to the release of Preferred Series B shares from escrow (See Note 9). F-23 91
PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS VDC COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, 1999 June 30, 1998 (Unaudited) Assets Current: Cash and cash equivalents $ 241,507 $ 2,212,111 Restricted cash (Note 10) 411,713 - Marketable securities 103,630 451,875 Accounts receivable 396,991 - Notes receivable - current 1,254,979 2,800,000 ------------------------------------ Total current assets 2,408,820 5,463,986 Property and equipment, less accumulated depreciation 5,747,236 331,316 Notes receivable, less current portion - 1,500,000 Investment in MCC (Note 4) 4,340,000 37,790,877 Intangible assets less accumulated amortization 756,369 - Investment - at equity (Note 7) 96,092 - Other assets 324,623 737,505 ------------------------------------ ==================================== Total assets $13,673,140 $ 45,823,684 ==================================== Liabilities and Stockholders' Equity Current: accounts payable and accrued expenses $3,516,106 $ 156,185 current portion of capitalized lease obligations (Note 13) 554,996 note payable - officer (Note 12) 500,000 - ------------------------------------ Total current liabilities 4,571,102 156,185 long-term portion of capitalized lease obligations (Note 13) 913,503 - ------------------------------------ Total liabilities 5,484,605 156,185 Stockholders' equity: convertible preferred stock series B - 60 common stock 1,881 1,545 additional paid-in capital 64,290,814 51,234,105 accumulated deficit (55,285,127) (4,218,035) treasury stock - at cost (Note 6) (164,175) - stock subscriptions receivable (344,700) (1,425,951) accumulated comprehensive income (loss) (310,158) 75,775 ------------------------------------ ------------------------------------ Total stockholders' equity 8,188,535 45,667,499 ------------------------------------ ==================================== Total liabilities and stockholders' equity $13,673,140 $ 45,823,684 ====================================
See accompanying notes to consolidated financial statements. F-24 92 VDC COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
nine-months ended March 31, 1998 1999 revenue $ 62,741 $ 1,425,952 direct costs of revenues (exclusive of depreciation) 26,546 2,159,210 ------ --------- gross margin 36,195 (733,258) selling, general and administrative 463,744 3,768,885 depreciation and amortization 4,953 704,166 non-cash compensation expense (Note 5) 801,000 16,146,000 ------- ---------- total operating expenses 1,269,697 20,619,051 --------- ---------- operating loss (1,233,502) (21,352,309) other income (expense) writedown of investment in MCC (Note 4) -- (19,388,641) loss on note restructuring (Note 9) -- (1,598,425) other income (expense) 6,325 (84,000) ----- ------- total other income (expense) 6,325 (21,071,066) equity in loss of affiliate (Note 7) -- (664,717) -------- net loss (1,227,177) (43,088,092) ========== =========== Other comprehensive income (loss), net of tax: Unrealized gain (loss) on marketable securities 25,025 (385,933) ------ -------- Comprehensive loss $(1,202,152) $(43,474,025) =========== ============ net loss per common share - basic $ (0.33) $ (2.45) ----------- ------------ weighted average number of shares outstanding 3,713,342 17,604,937 --------- ----------
See accompanying notes to consolidated financial statements. F-25 93 VDC COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
nine-months ended March 31, 1998 1999 Cash flows from operating activities: Net loss $ (1,227,177) $ (43,088,092) Adjustments to reconcile net loss to net cash Provided by operating activities: Depreciation and amortization 4,953 704,166 Writedown of investment in MCC - 19,388,641 Non-cash compensation expense 801,000 16,146,000 Loss on note restructuring - 1,598,425 Equity in losses of affiliate - 664,717 Impairment loss-fixed assets - 479,199 Non-cash severance - 391,875 Changes in operating assets and liabilities: Resticted cash - (411,713) Accounts receivable - (396,991) Other assets (35,230) 531,300 Accounts payable and accrued expenses 27,201 1,427,889 --------------------------------------- Net cash used by operating activities (429,253) (2,564,584) Cash flows from investing activities: Proceeds from return of escrow in connection with the investment in MCC - 1,012,155 Payment for purchase of subsidiary - (589,169) Investment in affiliate - (760,809) Proceeds from repayment of notes receivable 885,700 1,446,596 Purchase of investment securities (288,600) - Advances under loan receivable (122,000) - Fixed asset acquisition (12,527) (2,628,191) --------------------------------------- Net cash flows (used in) provided by investing activities 462,573 (1,519,418) Cash flows from financing activities: Proceeds from issuance of common stock 3,749,286 888,701 Collections on stock subscription receivables - 917,076 Repayment of note payable - (192,379) Proceeds from issuance of short-term debt 500,000 --------------------------------------- Net cash flows provided by financing activities 3,749,286 2,113,398 --------------------------------------- Net increase (decrease) in cash and cash equivalents 3,782,606 (1,970,604) Cash and cash equivalents, beginning of period 1,430 2,212,111 --------------------------------------- Cash and cash equivalents, end of period $ 3,784,036 $ 241,507 =======================================
See accompanying notes to consolidated financial statements. F-26 94 VDC Communications, Inc. and Subsidiaries Notes to consolidated financial statements 1. Basis of Presentation The financial statements presented are those of VDC Communications, Inc. (the "Company") which is the successor to VDC Corporation Ltd. ("VDC Bermuda") by way of a domestication merger (the "Domestication Merger") that occurred on November 6, 1998. The Domestication Merger was accounted for as a capital reorganization in which 11,810,862 issued and outstanding shares of common stock of VDC Bermuda, $2.00 par value per share, were exchanged, and 8,487,500 issued and outstanding shares of preferred stock of the Company, $.0001 par value per share, were converted, on a one for one basis, into a total of 20,298,362 shares of common stock of the Company, $.0001 par value per share ("Common Stock"). The Domestication Merger reflects the completion of a series of transactions that commenced on March 6, 1998 when the Company (then a wholly-owned subsidiary of VDC Bermuda) acquired Sky King Communications ("Sky King Connecticut") by merger. This merger transaction was accounted for as a reverse acquisition whereby Sky King Connecticut was the acquirer for accounting purposes. Accordingly, the historical financial statements presented are those of Sky King Connecticut before the merger on March 6, 1998 and reflect the consolidated results of Sky King Connecticut , VDC Bermuda, and VDC Bermuda's wholly-owned subsidiaries after the merger. On November 6, 1998, the Domestication Merger, whereby VDC Bermuda merged with and into the Company, was consummated. The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results for the nine-month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ended June 30, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 1998, as filed with the Securities and Exchange Commission. 2. Summary of Significant Accounting Policies (a) Principles of Consolidation The consolidated financial statements represent all companies of which the Company directly or indirectly has majority ownership. Significant intercompany accounts and transactions have been eliminated. The Company's consolidated financial statements include the accounts of wholly owned subsidiaries VDC Telecommunications, Inc. ("VDC Telecommunications"), Masatepe Communications U.S.A., L.L.C. ("Masatepe"), Voice & Data Communications (Hong Kong) Limited ("VDC Hong Kong") Sky King Communications, Inc. and WorldConnectTelecom.com, Inc. ("World ConnectTelecom.com"). F-27 95 (b) Revenue Recognition The Company records revenues for telecommunications sales at the time of customer usage. Additionally, the Company records revenues from renting its network facilities on a monthly basis and from the management of tower sites that provide transmission and receiver site locations for wireless communications companies. (c) Direct costs of revenues (exclusive of depreciation and amortization) Direct costs of revenue for wholesale long distance services represent direct charges from vendors that the Company incurs to deliver service to its customers. These include leasing costs for dedicated phone lines and rate-per-minute charges from other carriers that terminate traffic on behalf of the Company. These costs also include salaries and overhead attributable to operations. (d) Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. (e) Loss Per Share of Common Stock Loss per common share is computed on the weighted average number of shares outstanding. If dilutive, common equivalent shares (common shares assuming exercise of options and warrants) utilizing the treasury stock method, as well as the conversion of convertible preferred stock are considered in presenting diluted earnings per share. Warrants to purchase 938,546 shares of Company Common Stock at prices ranging from $4.00 to $5.00 are not included in the computation of diluted loss per share because they are antidilutive due to the net loss. (f) Goodwill and Amortization Goodwill is amortized using the straight-line method over its estimated useful life. (g) Recent Accounting Standards In June1998, the AICPA issued statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities". We have not yet analyzed the impact of this new standard. We will adopt this standard in July of 2000. F-28 96 3. Domestication Merger On November 6, 1998, the Company completed the Domestication Merger with VDC Bermuda. The effect of the Domestication Merger was that members of VDC Bermuda became stockholders of the Company. The primary reason for the Domestication Merger was to reorganize VDC Bermuda, which had been a Bermuda company, as a publicly traded U.S. corporation domesticated in the State of Delaware. In connection with the Domestication Merger, 11,810,862 issued and outstanding shares of common stock of VDC Bermuda, $2.00 par value per share, were exchanged, and 8,487,500 issued and outstanding shares of preferred stock of the Company, $.0001 par value per share, were converted, on a one-for-one basis, into an aggregate 20,298,362 shares of Common Stock of the Company, $.0001 par value per share. The Domestication Merger has been accounted for as a reorganization which has been given retroactive effect in the financial statements for all periods presented. 4. Metromedia China Corporation Investment On June 22, 1998 the Company acquired from PortaCom Wireless, Inc. ("PortaCom"), 2 million shares of the common stock of Metromedia China Corporation ("MCC") and warrants to purchase 4 million shares of common stock of MCC at an exercise price of $4.00 per share. The consideration given for the investment in MCC consisted of 5,110,810 common shares at $6.98125, $1,669,839 in cash, the elimination of a loan receivable of $390,522 and 50,000 investment advisory shares valued at $6.00 per share. MCC operates joint ventures in China under the direction of its majority owner, Metromedia International Group. Currently, legal restrictions in China prohibit foreign ownership and operations in the telecommunications sector. MCC's investments in joint ventures have been made through a structure known as Sino-Sino-Foreign ("SSF") joint venture, a widely used method for foreign investment in the Chinese telecommunications industry, in which the SSF venturer is a provider of telephony equipment, financing and technical services to telecommunications operators and not a direct provider of telephone service. The joint ventures invest in telephony system construction and development networks being undertaken by the local partner, China Unicom. The completed systems are operated by China Unicom. MCC receives payments from China Unicom based on revenues and profits generated by the systems in return for their providing financing, technical advice and consulting and other services. In November 1998, the Company and PortaCom settled a dispute regarding the June 22, 1998 transaction. Pursuant to this settlement, PortaCom agreed to place 2 million VDC Bermuda shares in escrow for up to eighteen months. These shares will be released from escrow contingent upon certain performance criteria. The 2 million escrow shares have been recorded as a reduction in common shares outstanding at their original issue price of $6.98125 (fair market value as determined at the date of acquisition) and a corresponding reduction in the investment in MCC. F-29 97 In March 1999, the Company recorded a $19,388,641 writedown of the investment in MCC. VDC had previously assessed the investment in MCC for impairment by applying a valuation technique commonly used in the telecommunications industry to assess market potential. Although the Company believes this method is an appropriate method for assessing the potential of the investment, it is not definitive enough to assess the investment's current market value given the recent developments in China. There has been uncertainty regarding possible significant changes in the regulation of and policy concerning foreign participation in and financing of the telecommunications industry in China, including the continued viability of the SSF structure and associated service and consulting arrangements with China Unicom. Additionally, the Company has been unable to obtain the MCC financial information necessary to assess the investment for impairment. Financial information such as historical stand-alone financial statements and financial projections have not been available for the Company's review. The Company has therefore adjusted the carrying value of the investment to an amount relative to Metromedia International Group's (majority owner) carrying amount. 5. Non-cash Compensation The merger between VDC Bermuda, the Company and Sky King Connecticut on March 6, 1998 was accounted for as a reverse acquisition whereby Sky King Connecticut was the acquirer for accounting purposes. Since the assets and liabilities of VDC Corporation Ltd. acquired were monetary in nature, the merger was recorded at the value of the net monetary assets. The consideration paid to the former Sky King Connecticut shareholders in the merger consisted of the issuance of 10 million newly-issued shares of preferred stock of the Company which were convertible, and have been converted, in the aggregate, into 10 million shares of Common Stock of the Company. Of this consideration, preferred stock convertible in the aggregate into 4.5 million shares of Common Stock of the Company (the "Escrow Shares") was placed in escrow to be held and released from time to time as the Company achieved certain performance criteria. As of March 31, 1999, all of the performance criteria had been met. Accordingly, 4.5 million shares have been released from escrow. During the nine-months ended March 31, 1999, 3.9 million shares were released from escrow. Of the shares released, approximately 2.7 million shares were considered compensatory to the extent of the trading value of the shares on the date of the release. This resulted in a non-cash compensation charge of $16,146,000 for the nine-months ended March 31, 1999. Compensatory shares are related to former Sky King Connecticut shareholders who are members of the Company's management, their family trusts and minor children and an employee. Non-compensatory shares released related to non-employee shareholders and non-minor children of employee shareholders where beneficial ownership does not exist. The non-compensatory shares have been accounted for as a stock dividend in which the issued stock is recorded at fair value on the date of release through a charge to accumulated deficit. 6. Shares Surrendered In November 1998, an executive officer and member of the Company's Board of Directors ("Officer") resigned. In connection with the resignation, the Officer surrendered 1,875,000 common shares in exchange for the elimination of a subscription receivable for $164,175. The transaction has been accounted for as the purchase of 1,875,000 shares of treasury stock using the cost method. The subscription receivable represented the Officer's basis in his 27.5% ownership in Sky King Connecticut . F-30 98 7. Investment in Masatepe Comunicaciones, S.A. Masatepe owns a 49% interest in Masatepe Comunicaciones, S.A. ("Masacom"), a Nicaraguan company. Masacom supports the development of Masatepe's operations in Central America. Masatepe accounts for the investment using the equity method considering 100% of Masacom's losses, since the recovery of 51% of the losses is not reasonably assured. The following is Masacom's summary of financial position at March 31, 1999 and results of operations from inception through March 31, 1999:
Assets $ 163,303 Liabilities $ 28,510 Results of operations $ (664,717)
8. Private Placement In December 1998, the Company sold 245,159 shares at $3.625, the public market price at that time. The Chairman and CEO and certain family members and entities associated with the Chairman and CEO participated as the sole investors in the private placement. 9. Restructured Note Receivable During the nine-months ended March 31, 1999, the Company restructured notes receivable from debtors by reducing the principal due by $1,598,425 which has been charged to operations. The Company believes this step will maximize the recovery of its investment and expedite payment on the notes. The debt is scheduled to be repaid in installments through June 1999. 10. Line of Credit In August 1998, the Company entered into a $1,000,000 revolving conditional line of credit to be used for the purposes of issuing certain letters of credit ("LC") to secure payment of certain activities of the Company. Principal payments are due on demand and the interest rate is two percent above the prime rate. The aggregate face amount of all LCs must be collateralized in the form of cash equivalents held by the issuing bank. Collateral at March 31, 1999 consisted of approximately $412,000 in the form of three-month U.S. Government bonds. Each LC expires no later than one year from the date of issuance. As of March 31, 1999, there were no advances issued under the revolving line of credit. 11. Issuance of Investment Banking Shares During the nine-months ended March 31, 1999, the Company issued 290,000 shares of Company Common Stock to investment bankers in connection with the March 6, 1998 merger of Sky King Connecticut, VDC Bermuda and the Company. The shares were issued at the fair market value as of the date of the merger ($2.50 per share) and a corresponding charge to accumulated deficit. 12. Note Payable-Officer In February 1999, the Chairman and CEO loaned the Company $500,000. The note bore interest at 10% per annum and was due in July 1999. The Company paid the note in full on May 13, 1999. F-31 99 13. Capital Leases The Company entered into several equipment leases during the nine-months ended March 31, 1999 with lease terms ranging from one to five years. Leased capital assets included in property and equipment at March 31, 1999 were $1,525,339. Future minimum lease payments under capital leases are as follows:
Year ending March 31, 2000 $686,742 2001 364,502 2002 364,502 2003 249,843 2004 112,300 ------- Total minimum lease payment 1,777,889 less: amount representing interest 309,390 ------- present value of minimum lease payments 1,468,499 less: current portion 554,996 ------- long-term capital lease obligations $913,503 =======
14. Supplemental Disclosure of Cash Flow Information schedule of non-cash investing and financing activities:
Nine Months Ended March 31, 1999 1998 Net assets acquired in exchange for stock -- $5,871,071 Equipment financed through trade accounts payable $1,932,031 -- Equipment acquired through capital lease obligation 1,525,399 -- Equipment exchanged for note 192,379 -- Release of investment banking shares 290,000 -- Common stock placed in escrow in connection with investment in MCC 13,962,500 -- Stock subscription for common stock -- 164,175 Treasury stock acquired in exchange for subscription receivable 164,175 -- Acquisition of subsidiary: Fair value of assets acquired 1,290,044 -- Common stock issued 700,875 -- ------- Cash paid 589,169 -- -------
F-32 100 8,722,618 Shares [Logo] VDC COMMUNICATIONS, INC. Common Stock ------------------ Prospectus ------------------ June ___, 1999 101 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the American Stock Exchange listing fee.
SEC Registration fee $ 7,578 American Stock Exchange listing fee 0 Printing and engraving expenses 15,000 Legal fees and expenses 30,000 Accounting fees and expenses 10,000 Transfer agent fees 5,000 Miscellaneous fees and expenses 5,000 -------- Total $ 72,578
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Certificate of Incorporation generally provides that officers, directors and certain others will be indemnified by the Company against any liability incurred in any civil, criminal, administrative or investigative proceeding if such individual acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. In addition, to the extent that a director, or officer has been successful on the merits or otherwise in defense of any proceeding referred to above or in defense of any claim, issue or matter therein, he or she will be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in a successful defense of any action, suit or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issuer. The Company does not currently have liability insurance for the benefit of its directors and officers. II-1 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES RECENT SALES OF UNREGISTERED SECURITIES In May 1999, the Company sold 1,265,947 shares of Company Common Stock and granted warrants to purchase 121,035 shares of Company Common Stock in a non-public offering exempt from registration pursuant to Section 4(2) and Rule 506 of Regulation D of the Securities Act of 1933 (the "Act") as follows:
Shareholder Number of Shares Consideration Warrants (1) - ----------- ---------------- ------------- ------------ Adase Partners, L.P. 60,000 162,000.00 6,000 Alnilam Partners, LP 2,185 (2) Dean Brizel and Jeanne Brizel 20,000 54,000.00 2,000 Stephen Buell 20,000 54,000.00 2,000 Capital Opportunity Partners One, LP 20,000 54,000.00 2,000 Arthur Cooper and Joanie Cooper 40,000 108,000.00 4,000 Mark Eshman & Jill Eshman trustees for the 20,000 54,000.00 2,000 Eshman Living Trust dated 9/24/90 Jeffrey Feingold and Barbara Feingold 20,000 54,000.00 2,000 Fred Fraenkel 20,000 54,000.00 2,000 Torunn Garin 60,000 162,000.00 6,000 Henry D. Jacobs Jr. 37,037 99,999.90 3,703 Frederick A. Moran and Joan B. Moran 280,000 840,000.00 - Kent F. Moran Trust 24,160 72,480.00 - Luke F. Moran Trust 24,010 72,030.00 - Ernst Von Olnhausen 10,000 27,000.00 1,000 Paradigm Group, LLC 370,370 999,999.00 64,814 (3) PGP I Investors, LLC 185,185 499,999.50 18,518 Santa Fe Capital Group (NM), Inc. 3,000 (2) Scott Schenker and Randi Schenker 20,000 54,000.00 2,000 Michael Weissman 10,000 27,000.00 1,000 Robert Vicas 20,000 54,000.00 2,000 ------ ----- Total 1,265,947 121,035
(1) The warrants have an exercise price of $6.00 per share and expire three years from the date of grant (May, 2002). (2) In consideration for investment banking services rendered in connection with private placement. (3) Includes warrant to purchase 27,777 shares granted in consideration for consulting services rendered in connection with private placement. In May 1999, the Company issued, in a non-public offering exempt from registration pursuant to Section 4(2) and Rule 506 of Regulation D of the Act, warrants to purchase 4,500 shares of Company Common Stock at an exercise price of $7.00 per share to ING Barings Furman Selz ("ING") in consideration for investment banking services rendered by ING in connection with the Company's acquisition of the membership interests of Masatepe Communications, U.S.A., L.L.C. ("Masatepe"). The warrants expire on August 7, 2001. In April 1999, the Company issued, in a non-public offering exempt from registration pursuant to Section 4(2) and Rule 506 of Regulation D of the Act, 76,750 shares of Company Common Stock in the name of Marc Graubart and 18,250 shares of Company Common Stock in the name of Tab K. Rosenfeld, in consideration for Mr. Graubart's resignation from positions held with Masatepe, the release of various claims, and other consideration set forth more particularly in a Settlement, Release and Discharge Agreement by and among the Company, Masatepe, and Marc Graubart, dated March 9, 1999 (the "Release Agreement"). Of the shares issued in the name of Marc Graubart, 7,500 will be held in escrow for a period of one (1) year following the date of the Release Agreement (the "Escrow Shares"). The Escrow Shares will be released from escrow, if at all, in the event that Marc Graubart has complied with certain terms of the Release Agreement during the one (1) year following the date of the Release Agreement. II-2 In connection with the Company's acquisition of Sky King Connecticut, the Company agreed to issue to SPH Equities Inc. ("SPH Equities"), KAB Investments Inc. ("KAB"), FAC Enterprises, Inc. ("FAC"), and SPH Investments Inc. ("SPH Investments") an aggregate of 444,852 shares of Company Common Stock as an investment banking fee, subject to certain conditions (the "Investment Banking Shares"). In partial satisfaction of this obligation, on December 22, 1998, the Company issued 129,852 shares of Company Common Stock in the name of FAC, 70,000 shares of Company Common Stock in the name of SPH Investments, and 40,148 shares of Company Common Stock in the name of SPH Equities in a non-public offering exempt from registration pursuant to Section 4(2) and Rule 506 of Regulation D of the Act. On February 16, 1999, in further satisfaction of this commitment, the Company issued 19,852 shares of Company Common Stock in the name of SPH Equities and 30,148 shares of Company Common Stock in the name of KAB in a non-public offering exempt from registration pursuant to Section 4(2) and Rule 506 of Regulation D of the Act. On December 23, 1998, the Company sold 245,159 shares of Company Common Stock, to certain entities associated with and family members of Frederick A. Moran in a non-public offering exempt from registration pursuant to Section 4(2) and Rule 506 of Regulation D of the Act as follows:
Shareholder Number of Shares Price per Share - ----------- ---------------- --------------- Anne Moran 35,310 $3.625 Anne Moran, IRA 49,379 $3.625 Frederick A. Moran & 41,380 $3.625 Anne Moran Frederick A. Moran, IRA 331 $3.625 Frederick W. Moran 100,000 $3.625 Joan Moran, IRA 248 $3.625 Kent Moran 8,221 $3.625 Luke Moran 9,352 $3.625 Moran Equity Fund, Inc. 938 $3.625 ---------------- TOTAL 245,159
In August 1998, the Company issued, in a non-public offering exempt from registration pursuant to Section 4(2) and Rule 506 of Regulation D of the Act, 78,697 shares of Company Common Stock (the "Activated Shares") to Activated Communications Limited Partnership ("Activated") and 21,428 shares of Company Common Stock to Marc Graubart (the "Graubart Shares") in connection with the Company's acquisition of the membership interests of Masatepe (the "Masatepe Acquisition") pursuant to the terms of a Purchase Agreement dated July 31, 1998, by and among the Company, Masatepe, Activated and Marc Graubart (the "Purchase Agreement"). The Activated Shares were issued in escrow as partial consideration for Activated's membership interest in Masatepe. The Graubart Shares were issued in escrow as consideration for investment banking services rendered by Graubart in connection with the Masatepe Acquisition. Both the Activated Shares, less 14,160 shares returned to the Company for a claim made by the Company, and the Graubart Shares were released from escrow. Both the Activated Shares and the Graubart Shares were subject to upward adjustment due to price adjustment rights. In June 1999, in connection with these rights, the Company issued, in a non-public offering exempt from registration pursuant to Section 4(2) and Rule 506 of Regulation D of the Act, 39,072 shares of Company Common Stock to Activated and 15,247 shares of Company Common Stock to Mr. Graubart. II-3 In June 1998, the Company issued 5,300,000 shares of Company Common Stock, pursuant to an exemption from registration provided by Section 1145 of Chapter 11 of the United States Bankruptcy Code, to PortaCom Wireless, Inc. ("PortaCom") in consideration of the issuance by PortaCom to the Company of 2 million shares of common stock of Metromedia China Corporation ("MCC") and warrants to purchase 4 million shares of common stock of MCC at an exercise price of $4.00 per share (the "PortaCom Warrants"). The PortaCom Warrants currently have an expiration date of September 1999. In May 1998, the Company issued 583,430 shares of Company Common Stock in a non-public offering exempt from registration pursuant to Section 4(2) and Rule 506 of Regulation D of the Act as follows:
Shareholder Number of Shares Price Per Share - ----------- ---------------- --------------- Lancer Offshore, Inc. 150,000 $6.00 Lancer Voyager Fund 25,000 $6.00 Anne Moran 39,333 $6.00 Anne Moran Trust 250 $6.00 Anne Moran, IRA 11,667 $6.00 Moran Equity Fund, Inc. 27,000 $6.00 Frederick A. Moran 85,667 $6.00 Frederick A. Moran 23,667 $6.00 & Joan B. Moran Frederick A. Moran Trust 180 $6.00 Frederick W. Moran 100,000 $6.00 Kent Moran 10,000 $6.00 Kent Moran, IRA 333 $6.00 Luke Moran 10,000 $6.00 Luke Moran, IRA 333 $6.00 Alan B. Snyder 100,000 $6.00 ----------------- TOTAL 583,430
In March 1998, and prior to the merger of Sky King Connecticut and VDC Bermuda whereby Frederick A. Moran became Chairman and C.E.O., the Company issued 1,490,902 shares of Company Common Stock in non-public offerings exempt from registration as follows:
Shareholder Number of Shares Consideration Exemption - ----------- ---------------- ------------- --------- Robert Alexander 10,000 (1) (2) FAC Enterprises, Inc. 30,000 $75,000 (3) (2) FYL Service Limited 10,000 (4) (2) Gibralt Holdings Limited 100,000 $250,000 (2) HPC Corporate Services Limited 122,027 $305,069 (3) (5) HPC Corporate Services Limited 132,000 (6) (5) HPC Corporate Services Limited 253,000 (7) (5) KAB Investments, Inc. 75,000 (8) (2) Graham Lacey 25,000 (1) (2) Lancer Offshore, Inc. 390,000 $1,852,500 (2) Lancer Partners LP 132,000 $627,000 (2) Lancer Voyager Fund 58,500 $277,875 (2) Michael Lauer 19,500 $92,625 (2) Rozel International Holdings Limited 5,290 $13,225 (3) (5) SPH Equities, Inc. 28,585 (4) (2) Alan Snyder 100,000 $550,000 (2) ------------------ TOTAL 1,490,902
II-4 (1) In consideration for services rendered as a member of the Company's Board of Directors. (2) Issued in a non-public offering exempt from registration pursuant to Section 4(2) of the Act. (3) Debt conversion. (4) In consideration for services rendered in arranging for financing transactions. (5) Issued in a non-public offering exempt from registration pursuant to Rules 901-904, inclusive, of Regulation S of the Act. (6) In consideration for services rendered in arranging certain business transactions. (7) In consideration for subscription agreement for $632,500 purchase price due in March 1999. (8) In consideration for services rendered in connection with arranging the Company's acquisition of certain MCC securities from PortaCom Wireless, Inc. In March 1998, prior to the merger of Sky King Connecticut and VDC Corporation, the Company issued warrants to purchase 938,546 shares of Company Common Stock in consideration for services rendered and various other claims, in a non-public offering exempt from registration pursuant to Section 4(2) and Rule 506 of Regulation D of the Act as follows:
Number of Shares Warrant Holder Underlying Warrants Exercise Price Consideration - -------------- ------------------- -------------- ------------- Bermuda Trust Company Limited 85,000 $4.00 (1) Clifton Capital Ltd. 285,618 $4.00 (2) Graham F. Lacey 45,000 $5.00 (3) HPC Corporate Services Limited 50,000 $4.00 (4) Steven B. Rosner 41,110 $4.00 (5) Rozel International Holding Company Limited 431,818 $4.00 (2) ------- ----- -- TOTAL 938,546
(1) Issued in connection with raising additional working capital. (2) Issued in connection with previous financing transactions and in connection with subscription agreements dated February 1, 1997. (3) Issued in connection with services rendered to the Company as Director. (4) Issued in connection with previous financing transactions. (5) Issued pursuant to subscription agreement dated February 1, 1997. II-5 On March 6, 1998, the Company issued 10 million shares of preferred stock (the "Preferred Stock") to the former shareholders of Sky King Connecticut in consideration of the merger of Sky King Connecticut with and into the Company in a non-public offering exempt from registration pursuant to Section 4(2) and Regulation D of the Act. 4.5 million shares of the Preferred Stock were issued in escrow. The shares of Preferred Stock were converted, on a one-for-one basis, into shares of Company Common Stock in connection with the Domestication Merger. During the period from January 1997 to October 1997, the Company issued in the aggregate 921,386 shares of Company Common Stock in non-public offerings exempt from registration as follows:
Shareholder Number of Shares Consideration Exemption - ----------- ---------------- ------------- --------- Channel Hotel and Properties Limited 49,375 $197,500 (1) (2) Channel Hotel and Properties Limited 49,375 $197,500 (1) (2) Clifton Capital Ltd. 49,000 (3) $134,750 (4) (2) Clifton Capital Ltd. 30,000 (3) $82,500 (4) (2) Clifton Capital Ltd. 100,000 $275,000 (4) (2) Gibralt Holdings Ltd. 40,000 (6) (5) Gibralt Holdings Ltd. 49,091 $130,000 (4) (2) HPC Corporate Services Limited 70,000 $180,000 (4) (2) Graham Lacey 30,000 (7) (2) Graham Lacey 50,000 $150,000 (8) (2) Graham Lacey 50,000 $150,000 (8) (2) Graham Lacey 28,000 (7) (2) Graham Lacey 100,000 (8) (2) Radway Investments Inc. 90,909 (3) $249,999.75 (4) (5) Rozel International Holdings Limited 30,000 (3) $82,500 (4) (5) Rozel International Holdings Limited 32,909 (3) $90,499.75 (4) (5) Steven Rosner 72,727 (3) $199,999.25 (4) (5) ---------------------- TOTAL 921,386
(1) Pursuant to the exercise of warrants dated April 17, 1995. (2) Issued in a non-public offering exempt from registration pursuant to Rules 901-904, inclusive, of Regulation S of the Act. (3) Additionally, pursuant to the terms of Security Purchase Agreements, for each share of common stock issued, the purchaser was granted one common stock purchase warrant exercisable at any time prior to February 1, 2001 at an exercise price of $3.50 per share. II-6 (4) Debt conversion. (5) Issued in a non-public offering exempt from registration pursuant to Section 4(2) of the Act. (6) In consideration for services rendered in arranging for financing transaction. (7) In consideration for services rendered as a member of the Company's Board of Directors. (8) Pursuant to an exercise of options dated January 17, 1997. During the period from June 1996 to November 1996, the Company issued in the aggregate 725,175 shares of Common Stock in non-public offerings exempt from registration as follows:
Shareholder Number of Shares Consideration Exemption - ----------- ---------------- ------------- --------- Robert Alexander 10,000 - (1) (2) Audley Investment Group 49,347 $107,082.99 (3) (2) Bel Cal Holdings Inc. 86,364 $475,002 (2) Campden Financial Services Ltd. 2,500 - (5) (2) Harold Chaffe 10,000 - (6) (2) Clifton Capital Ltd. 144,364 $794,002 (4) Comprehensive Claims Corp. 34,274 $74,374.58 (3) (2) David Crane 1,875 - (7) (2) Crawsfield Limited 114,067 $247,525.39 (3) (2) Diversified Securities Fund 48,963 $106,249.71 (3) (2) Harvey Glicker 24,442 $53,039.14 (3) (2) Andrew Gordon 5,000 - (8) (2) HST Partners 49,347 $107,082.99 (3) (2) Herb Josephart 4,896 $10,624.32 (3) (2) Graham Lacey 20,000 - (1) (2) Graham Lacey 50,000 $200,000 (2) Graham Lacey 50,000 $200,000 (2) Sid Sands and Edith Sands 4,934 $10,706.78 (3) (2) Gloria Sax 4,934 $10,706.78 (3) (2) Weston Investors 9,868 $21,413.56 (3) (2) ---------------------- TOTAL 725,175
(1) In consideration for services rendered as a member of the Company's Board of Directors. (2) Issued in a non-public offering exempt from registration pursuant to Rules 901-904, inclusive, of Regulation S of the Act. (3) Represents debt conversion. (4) Issued in a non-public offering exempt from registration pursuant to Section 4(2) of the Act. (5) In consideration for the rent-free use of office facilities. (6) In consideration for services rendered regarding the administration of Company accounts. (7) In consideration for services rendered as a real estate broker for the sale of a Company property. (8) In consideration for services rendered in connection with acquisition of certain securities in a business transaction. II-7 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS. The following Exhibits are attached hereto and incorporated herein by reference.
Exhibit No. Description Method of Filing 2.1 Amended and Restated Agreement and Plan of Merger, (1) dated as of December 10, 1997, by and among VDC Corporation Ltd., VDC Communications, Inc. (f/k/a VDC (Delaware), Inc.) and Sky King Communications, Inc. 2.2 Amendment to Amended and Restated Agreement and (1) Plan of Merger, dated as of March 6, 1998, by and among VDC Corporation Ltd., VDC Communications, Inc. (f/k/a VDC (Delaware), Inc.) and Sky King Communications, Inc. 2.3 Agreement and Plan of Merger, made as of October 5, (2) 1998, by and between VDC Corporation Ltd. and VDC Communications, Inc. (f/k/a Sky King Communications, Inc.) 2.4 Certificate of Merger of Sky King Communications, (1) Inc. into VDC Communications, Inc. (formerly known as VDC (Delaware), Inc.) 2.5 Certificate of Merger of VDC Corporation Ltd. into (3) VDC Communications, Inc. 3.1 Certificate of Incorporation, as amended of VDC (2) Communications, Inc. 3.2 Amended and Restated Bylaws of VDC Communications, (2) Inc. 4.1 Specimen of Common Stock Certificate (4) 4.2 1998 Stock Incentive Plan (4) 5.1 Opinion of Buchanan Ingersoll Professional (5) Corporation II-8 10.1 Purchase Agreement, dated as of July 31, 1998, by (6) and among VDC Corporation Ltd., Masatepe Communications U.S.A., L.L.C, Activated Communications Limited Partnership and Marc Graubart 10.2 Bridge Loan Agreement, dated as of August 1, 1998, (6) by and among Masatepe Communications U.S.A., L.L.C. and VDC Corporation Ltd. 10.3 Bridge Note, dated as of August 1, 1998, made by (6) Masatepe Communications U.S.A., L.L.C. in favor of VDC Corporation Ltd. 10.4 Guaranty, dated as of August 1, 1998, by Activated (6) Communications Limited Partnership to VDC Corporation Ltd. 10.5 Amended and Restated Asset Purchase Agreement (8) between VDC Corporation Ltd. and PortaCom Wireless, Inc., dated as of March 23, 1998, as amended by two Bankruptcy Court Stipulations and Orders in Lieu of Objection, dated as of April 3, 1998 and April 23, 1998, respectively 10.6 Escrow Agreement by and among VDC Corporation Ltd., (8) PortaCom Wireless, Inc., the Official Committee of Unsecured Creditors of PortaCom Wireless, Inc. and Klehr, Harrison, Harvey, Branzburg & Ellers, LLP, dated as of April __, 1998 10.7 Memorandum of Understanding, dated June 8, 1998, by (9) and among VDC Corporation Ltd., PortaCom Wireless, Inc. and the Official Committee of Unsecured Creditors of PortaCom Wireless, Inc. 10.8 Closing Escrow Agreement, dated June 8, 1998, by (9) and among VDC Corporation Ltd., PortaCom Wireless, Inc., Metromedia China Corporation, the Official Committee of Unsecured Creditors of PortaCom Wireless, Inc. and Klehr, Harrison, Harvey, Branzburg & Ellers LLP 10.9 Promissory Note, dated June 9, 1998, made by VDC (9) Corporation Ltd. in favor of PortaCom Wireless, Inc. II-9 10.10 Assignment, dated June 8, 1998, by PortaCom (9) Wireless, Inc. 10.11 Loan Agreement, dated November 10, 1997, between (9) VDC Corporation Ltd. and PortaCom Wireless, Inc. 10.12 Pledge Agreement, dated November 10, 1997, between (9) VDC Corporation Ltd. and PortaCom Wireless, Inc. 10.13 Security Agreement, dated November 10, 1997, (9) between VDC Corporation Ltd. and PortaCom Wireless, Inc. 10.14 Debtor-in-Possession Loan, Pledge and Security (9) Agreement, dated March 23, 1998 between VDC Corporation Ltd and PortaCom Wireless, Inc. 10.15 Waiver, dated June 8, 1998, by VDC Corporation Ltd. (9) 10.16 Asset Purchase Agreement between VDC Corporation (1) Ltd. and Rozel International Holdings Limited, dated December 18, 1997, including Exhibits thereto 10.17 Asset Purchase Agreement between VDC Corporation (1) Ltd. and Tasmin Limited, dated February 10, 1998, including Exhibits thereto 10.18 Promissory Note from HPC Corporate Services (1) Limited, dated March 2, 1998 10.19 Employment Agreement of Frederick A. Moran, as (1) amended 10.20 Employment Agreement of Dr. James C. Roberts (1) 10.21 Employment Agreement of Charles W. Mulloy (6) 10.22 Option to Purchase 10,000 Shares Granted to Charles (6) W. Mulloy 10.23 Option to Purchase 50,000 Shares Granted to Charles (6) W. Mulloy 10.24 Registration Rights Agreements between VDC (6) Corporation Ltd. and Charles W. Mulloy II-10 10.25 Employment Agreement of Clayton F. Moran (6) 10.26 Option to Purchase 10,000 Shares Granted to Clayton (6) F. Moran 10.27 Registration Rights Agreement between VDC (6) Corporation Ltd. and Clayton F. Moran 10.28 Director Agreement with Dr. Hussein Elkholy (6) 10.29 Option to Purchase 25,000 Shares Granted to Dr. (6) Hussein Elkholy 10.30 Registration Rights Agreement between VDC (6) Corporation Ltd. and Dr. Hussein Elkholy 10.31 Warrant to Purchase 45,000 Shares Granted to Graham (6) Ferguson Lacey 10.32 Settlement, Release and Discharge Agreement, by and (10) among VDC Communications, Inc., Dr. James C. Roberts, and Frederick A. Moran, dated November 19, 1998 10.33 Settlement Agreement between VDC Communications, (10) Inc., PortaCom Wireless, Inc., and Michael Richards, dated November 24, 1998 10.34 Director Agreement with Dr. Leonard Hausman, dated (11) November 4, 1998 10.35 Option to Purchase 25,000 shares granted to Dr. (11) Leonard Hausman, dated November 4, 1998 10.36 Registration Rights Agreement between VDC (11) Corporation Ltd. and Dr. Leonard Hausman, dated November 4, 1998 10.37 Director Agreement with James Dittman, dated (11) November 4, 1998 10.38 Option to Purchase 25,000 shares granted to James (11) Dittman, dated November 4, 1998 10.39 Registration Rights Agreement between VDC (11) Corporation Ltd. and James Dittman, dated November 4, 1998 II-11 10.40 Settlement, Release and Discharge Agreement, by and (12) among VDC Communications, Inc., Masatepe Communications, U.S.A., L.L.C., and Marc Graubart, dated March 9, 1999 10.41 Form of Securities Purchase Agreement, dated (12) December 23, 1998 10.42 Form of Securities Purchase Agreement, dated May 5, (12) 1999 10.43 Form of Securities Purchase Agreement, dated May 7, (12) 1999 10.44 Securities Purchase Agreement, between PGP I (12) Investors, LLC and VDC Communications, Inc., dated May 12, 1999 10.45 Securities Purchase Agreement, between Paradigm (3) Group, LLC, and VDC Communications, Inc., dated May 17, 1999 10.46 Form of Employment Agreement (3) 10.47 Form of Option Agreement (3) 10.48 Form of Registration Rights Agreement (3) 10.49 Form of Incentive Stock Option Agreement (3) 10.50 Incentive Stock Option Agreement between Frederick (3) A. Moran and VDC Communications, Inc., dated December 8, 1998 16.1 Letter to the SEC from Neville Russell dated (7) May 21, 1998 16.2 Letter to the SEC from Neville Russell dated (7) June 19, 1998 21.1 Subsidiaries of Registrant (3) 23.1 Consent of BDO Seidman LLP, independent accountants (3) 27.1 Financial Data Schedule (3)
II-12 (1) Filed as an Exhibit to VDC Corporation Ltd.'s Current Report on Form 8-K, dated March 6, 1998, and incorporated by reference herein. (2) Filed as an Exhibit to Registrant's registration statement on Form S-4, filed with the SEC on September 9, 1998, and incorporated by reference herein. (3) Filed herewith. (4) Filed as an Exhibit to Registrant's registration statement on Form 8-A/A, filed with the SEC on January 19, 1999, and incorporated by reference herein. (5) To be filed in an amendment hereto. (6) Filed as an Exhibit to VDC Corporation Ltd.'s Form 10-K for the year ended June 30, 1998, as amended by Form 10-K/A filed with the SEC on February 17, 1999, and incorporated herein by reference. (7) Filed as an Exhibit to VDC Corporation Ltd.'s Current Report on Form 8-K, dated May 21, 1998, as amended by Form 8-K/A, filed with the SEC on June 19, 1998, and incorporated by reference herein. (8) Filed as an Exhibit to VDC Corporation Ltd.'s Form 10-Q for the quarter ended March 31, 1998, and incorporated by reference herein. (9) Filed as an Exhibit to VDC Corporation Ltd.'s Current Report on Form 8-K, dated June 22, 1998, and incorporated by reference herein. (10) Filed as an Exhibit to Registrant's Current Report on Form 8-K dated November 19, 1998, and incorporated by reference herein. (11) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended December 31, 1998, and incorporated herein by reference. (12) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended March 31, 1999, and incorporated herein by reference. II-13 SIGNATURES In accordance with the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Greenwich, State of Connecticut, on this 7th date of June, 1999. VDC COMMUNCATIONS, INC. By:/s/ Frederick A. Moran ------------------------- Chairman of the Board, Chief Executive Officer, Chief Financial Officer, and Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Frederick A. Moran, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. /s/ Frederick A. Moran Dated: June 4, 1999 - ------------------------------------ ----------------------- Frederick A. Moran Chairman of the Board, Chief Executive Officer, Director, and Chief Financial Officer (Principal Executive, Financial and Accounting Officer) /s/ Hussein Elkholy Dated: June 6, 1999 - ------------------------------------ ----------------------- Dr. Hussein Elkholy Director /s/ James B. Dittman Dated: June 7, 1999 - ------------------------------------ ----------------------- James B. Dittman Director /s/ Leonard Hausman Dated: June 4, 1999 - ------------------------------------ ----------------------- Dr. Leonard Hausman Director II-14 EXHIBIT INDEX Exhibit Number Page Number in (Referenced to Rule 0-3(b) Item 601 of Sequential Reg. S-K) Numbering System Where Exhibit Can Be Found 2.5 Certificate of Merger of VDC Corporation Ltd. into VDC Communications, Inc. 5.1 Opinion of Buchanan Ingersoll Professional Corporation* 10.45 Securities Purchase Agreement, between Paradigm Group, LLC, and VDC Communications, Inc., dated May 17, 1999 10.46 Form of Employment Agreement 10.47 Form of Option Agreement 10.48 Form of Registration Rights Agreement 10.49 Form of Incentive Stock Option Agreement 10.50 Incentive Stock Option Agreement between Frederick A. Moran and VDC Communications, Inc., dated December 8, 1998 21.1 Subsidiaries of Registrant 23.1 Consent of BDO Seidman LLP, independent accountants 27.1 Financial Data Schedule * To be filed in an amendment to the Registration Statement. II-15 EX-2.5 2 EX-2.5 CERTIFICATE OF MERGER VDC CORPORATION LTD. INTO VDC COMMUNICATIONS, INC. The undersigned corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That the name and state/country of incorporation of each of the constituent corporations of the merger is as follows: NAME STATE/COUNTRY OF INCORPORATION VDC Corporation Ltd. Bermuda VDC Communications, Inc. Delaware SECOND:That an Agreement of Merger between the parties to the merger has been approved, adopted, certified, executed and acknowledged by each of the constituent corporations in accordance with the requirements of Section 253 of the General Corporation Law of the State of Delaware. THIRD: That the surviving corporation of the merger is VDC Communications, Inc. FOURTH:That the certificate of incorporation of Vdc Communications, Inc., a Delaware Corporation, the surviving corporation, shall be the Certificate of Incorporation of the surviving corporation. FIFTH: That the executed Agreement of Merger is on file at the principal place of business of the surviving corporation. The address of the principal place of business of the surviving corporation is 75 Holly Hill Lane, Greenwich, CT 06830. SIXTH: That a copy of the Agreement of Merger will be furnished by the surviving corporation, on request and without cost to any stockholder of any constituent corporation. SEVENTH: The authorized capital stock for VDC Corporation Ltd. is 50,000,000 shares of common stock at $2.00 par value per share. IN WITNESS WHEREOF, VDC Communications, Inc. has caused the Certificate to be signed by Frederick A. Moran, its authorized officer, this 5th day of November, 1998. VDC COMMUNICATIONS, INC. By: /s/ Frederick A. Moran ------------------------ Frederick A. Moran, President EX-10.45 3 EX-10.45 VDC COMMUNICATIONS, INC. ---------- SECURITIES PURCHASE AGREEMENT ---------- SHARES OF COMMON STOCK AT $2.70 PER SHARE AND COMMON STOCK PURCHASE WARRANTS ---------- MAY 17, 1999 CONFIDENTIAL - ------------ SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT (the "Agreement") is entered into as of the 17th day of May, 1999, by and between VDC Communications, Inc., a Delaware corporation ("VDC" or the "Company"), and the investor whose name appears at the end of this Agreement ("Purchaser" or "Subscriber"). R E C I T A L S: ---------------- The Company wishes to obtain additional working capital and the Purchaser desires to provide such working capital to the Company through the purchase of certain shares of the Company's common stock, $.0001 par value per share (the "Common Stock"), being privately offered by the Company. NOW, THEREFORE, in consideration of the premises hereof and the agreements set forth herein below, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Sale and Purchase of Shares and Warrants. Subject to the terms and conditions hereof, the Company agrees to issue and sell, and the Purchaser agrees to purchase that number of shares of Common Stock (the "Shares") identified on the signature page hereof at a purchase price of $2.70 per share. The total purchase price is set forth on the signature page hereof (the "Purchase Price"). The Purchase Price is payable upon subscription in cash, check or wire transfer. If paying by check, the check should be made payable to "VDC Communications, Inc." and delivered to VDC Communications, Inc. at 75 Holly Hill Lane, Greenwich, Connecticut, 06830. For every full block of ten (10) Shares purchased pursuant to this Agreement, the Purchaser shall be entitled to receive from the Company, and the Company shall grant to the Purchaser, one (1) Common Stock Purchase Warrant (the "Warrants") upon substantially the terms set forth in the document attached hereto as Exhibit "A." The sale of Shares and Warrants evidenced by this Agreement is part of an overall private placement transaction being undertaken by the Company of a maximum principal amount of $1,499,998.50. See Section 3 hereafter. No broker, investment banker or any other person, other than Paradigm Group LLC ("Paradigm") and Santa Fe Capital Group (NM), Inc. ("Santa Fe"), will receive from the Company any compensation as a broker, finder, adviser or in any other capacity in connection with the purchase of the Shares and Warrants hereunder. As a consulting fee, for every full block of twenty (20) Shares purchased by "accredited investors," as that term is defined in Rule 501 of Regulation D of the Securities Act of 1933, as amended (the "Act") introduced to the Company exclusively by Paradigm ("Paradigm Purchasers"), Paradigm shall be entitled to receive from the Company, and the Company shall grant to the Paradigm, one (1) Warrant. The Company shall pay Santa Fe an investment banking fee (the "Santa Fe Fee") based upon gross proceeds paid to the Company by Paradigm Purchasers (the "Proceeds"). Specifically, Santa Fe is entitled to: five percent (5%) of the first $1,000,000 in Proceeds; four percent (4%) of the second $1,000,000 in Proceeds; three percent (3%) of the third $1,000,000 in Proceeds; two percent (2%) of the fourth $1,000,000 in proceeds; and one percent (1%) for all Proceeds in excess of $4,000,000. Twenty percent (20%) of the Santa Fe Fee shall be paid to Santa Fe in shares of Company Common valued at $2.70 per share. 2. Description of the Securities. (a) Restricted Securities. The Shares, Warrants and shares of Common Stock issuable upon exercise of the Warrants (the "Warrant Shares") being offered hereby (collectively, the "Securities") shall be "restricted securities" as that term is defined under Rule 144 promulgated under the Act and may not be offered for sale or sold or otherwise transferred in a transaction which would constitute a sale thereof within the meaning of the Act unless (i) such Security has been registered for sale under the Act and registered or qualified under applicable state securities laws relating to the offer and sale of securities; or (ii) exemptions from the registration requirements of the Act and the registration or qualification requirements of all such state securities laws are available and the Company shall have received an opinion of counsel, prepared at Purchaser's expense, that the proposed sale or other disposition of such securities may be effected without registration under the Act and would not result in any violation of any applicable state securities laws relating to the registration or qualification of securities for sale, such counsel and such opinion to be satisfactory to the Company. (b) Voting Rights; Dividends. Holders of Common Stock of the Company have equal rights to receive dividends when, as, and if declared by the Board of Directors out of funds legally available therefor. Holders of Common Stock of the Company have one vote for each share held of record and do not have cumulative voting rights. (c) Liquidation; Redemption. Holders of Common Stock of the Company are entitled upon liquidation of the Company to share ratably in the net assets available for distribution, subject to the rights, if any of holders of any preferred stock of the Company then outstanding. Shares of Common Stock of the Company are not redeemable and have no preemptive or similar rights. All outstanding shares of Common Stock of the Company are fully paid and nonassessable. (d) Description of Warrants. Each Warrant entitles the holder to purchase one (1) share of Common Stock at an exercise price of $6.00 per share, exercisable for a three year period from the date of Closing. Prior to the exercise of the Warrants, holders of the Warrants shall not be entitled to any right whatsoever, either in law or equity, of a stockholder of the Company, including without limitation, the right to receive dividends or to vote or to consent or to receive notice as a stockholder in respect of the meetings of stockholders or the election of directors of the Company or any other matter. (e) Restriction Upon Resale. The Subscriber hereby agrees that the Securities shall be subject to restrictions upon the transfer, sale, encumbrance or other disposition of the Securities. See "UNDERSTANDING OF INVESTMENT RISKS" AND "REGISTRATION RIGHTS". 2 3. Securities Offered in a Private Placement Transaction. The Securities offered by this Agreement are being offered as a non-public offering (the "Offering") pursuant to Section 4(2) and Regulation D of the Act ("Regulation D") by the Company on a "best efforts" basis of a maximum principal amount of $1,499,998.50 (the "Maximum Offering") to be offered to the Paradigm Purchasers. Accordingly, there can be no assurances as to the number of securities that will be sold in the Offering. The Company may, in its sole discretion, reject, in whole or part, subscriptions from Paradigm Purchasers to the extent such subscriptions, when aggregated with other subscriptions from Paradigm Purchasers exceed the Maximum Offering. Additionally, the Company may, in its sole discretion, reject any subscription from any Paradigm Purchaser to the extent funds for such subscription are not received by the Company on or before 5 p.m. Eastern Standard Time on Wednesday, May 26, 1999, (the "Outside Payment Date"). The Company is concurrently offering up to 700,000 shares of Common Stock and up to 70,000 three-year warrants to purchase one (1) share of Common Stock at an exercise price of $6.00 per share in a private placement at a purchase price of between $2.70 and approximately $4.00 per share of Common Stock with the right to receive one (1) warrant for every full block of ten (10) shares of Common Stock (the "Concurrent Offering"). The proceeds of this Offering and the Concurrent Offering are intended to raise working capital for the Company. 4. Binding Effect of Agreement; The Closing. This Agreement shall not be binding on the Company unless and until an authorized executive officer of the Company has evidenced acceptance thereof by executing the signature page at the end hereof. The Company may accept or reject this Agreement in its sole discretion if the Purchaser does not meet the suitability standards established herein. Additionally, even if accepted, this Agreement shall be voidable, in the Company's sole discretion, if the Purchase Price is received by the Company after 5 p.m. Eastern Standard Time on the Outside Payment Date, and the Company shall have no obligation to issue the Securities, or any one of them. In the event the Company rejects this Agreement, or this Agreement is voided in accordance with the provisions above, the Purchaser's funds, to the extent received by the Company, will be returned without deduction of any costs and without interest. A closing (the "Closing") will occur contemporaneously with the acceptance of this Agreement by the Company and the Company's receipt of the Purchase Price. The Company shall deliver to the Purchaser within fifteen business (15) days after the Closing: (a) A stock certificate representing the number of Shares purchased, bearing applicable restrictive legends, duly executed by the appropriate officer(s) and registered on the books of the Company in Purchaser's name; and (b) The Warrants in substantially the form set forth at Exhibit "A" duly executed by the appropriate officer(s) and registered on the books of the Company in the Purchaser's name. 3 5. Representations and Warranties of the Purchaser. The Purchaser represents and warrants to the Company as follows: (a) Accredited Investor. The Purchaser has such knowledge and experience in business and financial matters such that the Purchaser is capable of evaluating the merits and risks of purchasing the Securities. The Purchaser is either an "accredited investor" as that term is defined in Rule 501 of Regulation D of the Act or a "qualified institutional buyer" as that term is defined in Rule 144A of the Act, and represents that he satisfies the suitability standards identified in Section 10 hereof; (b) Loss of Investment. The Purchaser('s) (i) overall commitment to investments which are not readily marketable is not disproportionate to his net worth; (ii) investment in the Company will not cause such overall commitment to become excessive; (iii) can afford to bear the loss of his entire investment in the Company; and (iv) has adequate means of providing for his current needs and personal contingencies and has no need for liquidity in his investment in the Company; (c) Special Suitability. The Purchaser satisfies any special suitability or other applicable requirements of his state of residence and/or the state in which the transaction by which the Securities are purchased occurs; (d) Investment Intent. The Purchaser hereby acknowledges that the Purchaser has been advised that this offering has not been registered with, or reviewed by, the Securities and Exchange Commission ("SEC") because this offering is intended to be a non-public offering pursuant to Section 4(2) and Regulation D of the Act. The Purchaser represents that the Purchaser's Securities are being purchased for the Purchaser's own account and not on behalf of any other person, for investment purposes only and not with a view towards distribution or resale to others. The Purchaser will not attempt to sell, transfer, assign, pledge or otherwise dispose of all or any portion of the Securities unless they are registered under the Act or unless in the opinion of counsel an exemption from such registration is available, such counsel and such opinion to be satisfactory to the Company. The Purchaser understands that the Securities have not been registered under the Act by reason of a claimed exemption under the provisions of the Act which depends, in part, upon the Purchaser's investment intention; (e) State Securities Laws. The Purchaser understands that no securities administrator of any state has made any finding or determination relating to the fairness of this investment and that no securities administrator of any state has recommended or endorsed, or will recommend or endorse, the offering of the Securities; (f) Authority; Power; No Conflict. The execution, delivery and performance by the Purchaser of the Agreement are within the powers of the Purchaser, have been duly authorized and will not constitute or result in a breach or default under, or conflict with, any order, ruling or regulation of any court or other tribunal or of any governmental commission or agency, or any agreement or other undertaking, to which the Purchaser is a party or by which the Purchaser is bound, and, if the Purchaser is not an individual, will not violate any provision of the charter documents, Bylaws, indenture of trust or partnership agreement, as applicable, of the Purchaser. The signatures on the Agreement are genuine, and the signatory, if the Purchaser is an individual, has legal competence and capacity to execute the same, or, if the Purchaser is not an individual, the signatory has been duly authorized to execute the same; and the Agreement constitutes the legal, valid and binding obligations of the Purchaser, enforceable in accordance with its terms; 4 (g) No General Solicitation. The Purchaser acknowledges that no general solicitation or general advertising (including communications published in any newspaper, magazine or other broadcast) has been received by him and that no public solicitation or advertisement with respect to the offering of the Securities has been made to him; (h) Advice of Tax and Legal Advisors. The Purchaser has relied solely upon the advice of his own tax and legal advisors with respect to the tax and other legal aspects of this investment; (i) Broker Fees. The Purchaser is not aware that any person, and has been advised that no person, will receive from the Company any compensation as a broker, finder, adviser or in any other capacity in connection with the purchase of the Securities other than as declared herein; (j) Access to Information. Purchaser has had access to all material and relevant information concerning the Company, its management, financial condition, capitalization, market information, properties and prospects necessary to enable Purchaser to make an informed investment decision with respect to its investment in the Securities. Purchaser has carefully read and reviewed, and is familiar with and understands the contents thereof and hereof, including, without limitation, the risk factors described in this Agreement. See "UNDERSTANDING OF INVESTMENT RISKS." Purchaser acknowledges that it has had the opportunity to ask questions of and receive answers from, and to obtain additional information from, representatives of the Company concerning the terms and conditions of the acquisition of the Securities and the present and proposed business and financial condition of the Company, and has had all such questions answered to its satisfaction and has been supplied all information requested; (k) Review of Reports. The Purchaser acknowledges that it has been provided with an opportunity to review: (i) a copy of the Company's Annual Report on Form 10-K for the year ended June 30, 1998; (ii) a copy of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1998; (iii) a copy of the Company's Registration Statement on Form S-4, pursuant to which VDC Corporation Ltd., a Bermuda company, merged with and into the Company; and (iv) all other recent reports filed by the Company with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (collectively, the "Reports"). (l) Understanding the Nature of Securities. The Purchaser understands and acknowledges that: 5 (i) The Securities have not been registered under the Act or any state securities laws and are being issued and sold in reliance upon certain exemptions contained in the Act; (ii) The Securities are "restricted securities" as that term is defined in Rule 144 promulgated under the Act; (iii) The Securities cannot be sold or transferred without registration under the Act and applicable state securities laws, or unless the Company receives an opinion of counsel reasonably acceptable to it (as to both counsel and the opinion) that such registration is not necessary; and (iv) The Securities and any certificates issued in replacement therefor shall bear the following legend, in addition to any other legend required by law or otherwise: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION FROM REGISTRATION, UNDER THE ACT, BASED ON AN OPINION LETTER OF COUNSEL SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION." 6. Indemnification. The Purchaser shall indemnify and hold harmless the Company and the Company's officers, directors and employees from and against any and all loss, damage or liability (including attorneys' fees), due to, or arising out of, a breach or inaccuracy of any representation or warranty contained in Section 5. 7. Understanding of Investment Risks. Any investment in the Securities should not be made by a Purchaser who cannot afford the loss of his entire Purchase Price. THE PURCHASER ACKNOWLEDGES THAT THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSIONS, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ADEQUACY OR ACCURACY OF THIS AGREEMENT OR ANY EXHIBIT HERETO. PRIOR TO MAKING AN INVESTMENT IN THE SECURITIES, THE PURCHASER HAS FULLY CONSIDERED, AMONG OTHER THINGS, THE FINANCIAL AND OTHER INFORMATION SET FORTH IN THE REPORTS AS WELL AS THE RISK FACTORS ATTACHED HERETO AS EXHIBIT "B" AND ACKNOWLEDGES THAT SUCH INFORMATION HAS BEEN CONSIDERED PRIOR TO MAKING THIS INVESTMENT DECISION. 8. Registration Rights. The Company has agreed to advise the Purchaser by written notice at least ten (10) calendar days prior to the filing of a registration statement under the Act (excluding registration on Forms S-8, S-4 or any successor forms thereto), covering securities of the Company to be offered and sold to the public generally (whether on behalf of the Company or selling security holders) and shall, upon the request of the Purchaser given at least five (5) calendar days prior to the filing of such registration statement, include in any such registration statement such information as may be required to permit the public resale of the Shares and Warrant Shares; provided, however, that in the event the resale of the Shares and Warrant Shares has not been previously included within a registration statement, the Company shall in any event file a registration statement under the Act within one year of the Closing, the purpose of which is to register the resale of the Shares and Warrant Shares. The registration rights associated with the Shares and Warrants Shares are described more particularly and are subject in full to the terms of a Registration Rights Agreement substantially in the form attached hereto as Exhibit "C." 6 The Company shall use its best efforts to file, within thirty (30) days of the Outside Payment Date, a registration statement on Form S-1 on behalf of certain Company security holders which, if filed, will include the Shares and Warrant Shares referenced in this Agreement. The Company's obligation to register the Shares and the Warrant Shares extends only to the inclusion of the Shares and the Warrant Shares in a registration statement which covers the public resale thereof. In all events, the Company shall have no obligation: (i) to assist or cooperate in the offering or disposition of such Shares or Warrant Shares; (ii) to obtain a commitment from an underwriter relative to the sale of such Shares or Warrant Shares; or (iii) to include such Shares or Warrant Shares within an underwritten offering of the Company. The Company shall assume no responsibility for the manner of sale, timing of sale, or sales price relating to the resale of the Shares and Warrant Shares. 9. Representations and Warranties of the Company. The Company hereby represents and warrants to Purchaser as follows: (a) Organization and Standing of the Company. The Company is a duly organized and validly existing corporation in good standing under the laws of the State of Delaware with adequate power and authority to conduct the business in which it is now engaged and has the corporate power and authority to enter into this Agreement, and is duly qualified and licensed to do business as a foreign corporation in such other jurisdictions as is necessary to enable it to carry on its business, except where failure to do so would not have a material adverse effect on its business; (b) Corporate Power and Authority. The execution and delivery of this Agreement and the transactions contemplated hereby have been duly authorized by the Board of Directors of the Company. No other corporate act or proceeding on the part of the Company is necessary to authorize this Agreement or the consummation of the transactions contemplated hereby. When duly executed and delivered by the parties hereto, this Agreement will constitute a valid and legally binding obligation of the Company enforceable against it in accordance with its terms, except as such enforceability may be limited by (i) bankruptcy, insolvency, moratorium, reorganization or other similar laws and legal and equitable principles limiting or affecting the rights of creditors generally; and/or (ii) general principles of equity, regardless of whether considered in a proceeding in equity or at law; 7 (c) Noncontravention. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not, to the best of the Company's knowledge and belief, (i) permit the termination or acceleration of the maturity of any material indebtedness or material obligation of the Company; (ii) permit the termination of any material note, mortgage, indenture, license, agreement, contract, or other instrument to which the Company is a party or by which it is bound or the Certificate of Incorporation or Bylaws of the Company; (iii) except as expressly provided in this Agreement and except for state "blue sky" approvals that may be required and those consents and waivers which already have been obtained by the Company, require the consent, approval, waiver or authorization from or registration or filing with any party, including but not limited to any party to a material agreement to which the Company is a party or by which it is bound, or any regulatory or governmental agency, body or entity except where failure to obtain such consent, approval, waiver or authorization would not have a material adverse effect on the Company's business; (iv) result in the creation or imposition of any lien, claim or encumbrance of any kind or nature on any material properties or assets of the Company; or (v) violate in any material aspect any statue, law, rule, regulation or ordinance, or any judgment, decree, order, regulation or rule of any court, tribunal, administrative or governmental agency, body or entity to which the Company or its properties is subject except where such violation would not have a material adverse effect on the Company's business. 10. IMPORTANT CONSIDERATIONS: SUITABILITY STANDARDS - WHO SHOULD INVEST. INVESTMENT IN THE SECURITIES INVOLVES A HIGH DEGREE OF RISK AND IS SUITABLE ONLY FOR PERSONS OF SUBSTANTIAL FINANCIAL RESOURCES WHO HAVE NO NEED FOR LIQUIDITY IN THEIR INVESTMENT. A substantial number of state securities commissions have established investor suitability standards for the marketing within their respective jurisdictions of restricted securities. Some have also established minimum dollar levels for purchases in their states. The reasons for these standards appear to be, among others, the relative lack of liquidity of securities of such programs as compared with other securities investments. Investment in the Securities involves a high degree of risk and is suitable only for persons of substantial financial means who have no need for liquidity in their investments. The Company has adopted as a general investor suitability standard the requirement that each Subscriber for Securities represents in writing that the Subscriber: (a) is acquiring the Securities for investment and not with a view to resale or distribution; (b) can bear the economic risk of losing its entire investment; (c) its overall commitment to investments which are not readily marketable is not disproportionate to its net worth, and an investment in the Securities will not cause such overall commitment to become excessive; (d) has adequate means of providing for its current needs and personal contingencies and has no need for liquidity in this investment in the Securities; (e) has evaluated all the risks of investment in the Company; and (f) has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of investing in the Company or is relying on its own purchaser representative in making an investment decision. 8 In addition, all of the Subscribers for Securities must be: (1) extremely sophisticated investors with substantial net worth and experience in making investments of this nature; and (2) "accredited investors," as defined in Rule 501 of Regulation D under the Act, by meeting any of the following conditions: (i) he or she has an individual income in excess of $200,000 in each of the two most recent years or joint income with his or her spouse in excess of $300,000 in each of those years, and he or she reasonably expects an income in excess of the aforesaid levels in the current year, or (ii) he or she has an individual net worth, or a joint net worth with his or her spouse, at the time of his or her purchase, in excess of $1,000,000 (net worth for these purposes includes homes, home furnishings and automobiles), or (iii) he or she otherwise satisfies the Company that he or she is an accredited investor, as defined in Rule 501 under the Act. Other categories of investors included within the definition of accredited investor include the following: certain institutional investors, including certain banks, whether acting in their individual or fiduciary capacities; certain insurance companies; federally registered investment companies; business development companies (as defined under the Investment Company Act of 1940); Small Business Investment Companies licensed by the Small Business Administration; certain employee benefit plans; private business development companies (as defined in the Investment Advisers Act of 1940); tax exempt organizations (as defined in Section 501(c)(3) of the Internal Revenue Code) with total assets in excess of $5,000,000; entities in which all the equity owners are accredited investors; and certain affiliates of the Company. A partnership Subscriber, which satisfies the requirements set forth in clauses (a) through (f) above shall satisfy the suitability standards if it is an accredited investor by reason of clause (iii) above, or if all of its partners are accredited investors. A corporate subscriber, which satisfies the requirements set forth in clauses (a) through (f) above shall satisfy the investor suitability standards if it is an accredited investor by reason of clause (iii) above, or if all of its shareholders are accredited investors. Corporate subscribers must have net worth of at least three (3) times the amount of their investment in the Securities. The suitability standards referred to above represent minimum suitability requirements for prospective purchasers and the satisfaction of such standards by a prospective purchaser does not necessarily mean that the Securities are a suitable investment for such purchaser. The Company may, in circumstances it deems appropriate, modify such requirements. The Company may also reject subscriptions for whatever reasons, in its sole discretion, it deems appropriate. Securities Purchase Agreements may not necessarily be accepted in the order in which received. Purchasers who are residents of certain states may be required to meet certain additional suitability standards. 9 THE ACCEPTANCE OF A SUBSCRIPTION FOR THE SECURITIES BY THE COMPANY DOES NOT CONSTITUTE A DETERMINATION BY THE COMPANY THAT AN INVESTMENT IN THE SECURITIES IS SUITABLE FOR A PROSPECTIVE INVESTOR. THE FINAL DETERMINATION OF THE SUITABILITY OF INVESTMENT IN THE SECURITIES MUST BE MADE BY THE PROSPECTIVE INVESTOR AND HIS OR HER ADVISERS. 11. State Law Considerations for Residents of All States. IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THE DESCRIPTION OF BUSINESS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. 12. Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested (provided that facsimile notice shall be deemed received on the next business day if received after 5:00 p.m. local time), or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): If to the Company: VDC Communications, Inc. 75 Holly Hill Lane Greenwich, CT 06830 Attention: Frederick A. Moran Chairman & C.E.O. Facsimile: (203) 552-0908 10 with a copy to: VDC Communications, Inc. 75 Holly Hill Lane Greenwich, CT 06830 Attention: Louis D. Frost, Esq. VDC Corporate Counsel Facsimile: (203) 552-0908 If to Purchaser: to the address set forth at the end of this Agreement or to such other addresses as may be specified in accordance herewith from time to time. 13. Survival of Representations and Warranties. Representations and warranties contained herein shall survive the execution and delivery of this Agreement. 14. Parties in Interest. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and permitted assigns of the parties hereto, provided that this Agreement and the interests herein may not be assigned by either party without the express written consent of the other party. 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the state of Delaware without regard to the principles of conflict of laws. 16. Arbitration. All controversies which may arise between the parties including, but not limited to, those arising out of or related to this Agreement shall be determined by binding arbitration applying the laws of the State of Delaware. Any arbitration between the parties shall be conducted at the Company's offices in Greenwich, Connecticut, or at such other location designated by the Company, before the American Arbitration Association (the "AAA"). If the Parties are unable to agree on a single arbitrator with fifteen (15) days of a demand for arbitration being filed with the AAA by one of the parties, each party shall select an arbitrator and the two (2) arbitrators shall mutually select a third arbitrator, the three of whom shall serve as an arbitration panel. The decision of the arbitrator(s) shall be final and binding upon the Parties and shall not be required to include written findings of law and fact, and judgment may be obtained thereon by either party in a court of competent jurisdiction. Each party shall bear the cost of preparing and presenting its own case. The cost of the arbitration, including the fees and expenses of the arbitrator(s), shall be shared equally by the parties hereto unless the award otherwise provides. Nothing in this section will prevent either party from resorting to judicial proceedings if interim injunctive relief under the laws of the State of Delaware from a court is necessary to prevent serious and irreparable injury to one of the parties, and the parties hereto agree that the state courts in Stamford, Connecticut and the United States District Court in the District of Connecticut in Bridgeport, Connecticut shall have exclusive subject matter and in personam jurisdiction over the parties for purposes of obtaining interim injunctive relief. 11 17. Sections and Other Headings. The section and other headings contained in this Agreement are for the convenience of reference only, and do not constitute part of this Agreement or otherwise affect any of the provisions hereof. 18. Pronouns. Whenever the context of this Agreement may require, any pronoun will include the corresponding masculine, feminine and neuter form, and the singular form of nouns and pronouns will include the plural. 19. Signatures in Counterpart and Facsimile. This Agreement may be executed in multiple counterparts and by facsimile signature, each of which shall constitute an original, but all of which counterparts taken together shall constitute one and the same instrument. 20. Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. 21. Entire Agreement; Amendments. This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Purchaser make any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement. 22. Construction. This Agreement and any related instruments will not be construed more strictly against one party then against the other by virtue of the fact that drafts may have been prepared by counsel for one of the parties, it being recognized that this Agreement and any related instruments are the product of negotiations between the parties and that both parties have contributed to the final preparation of this Agreement and all related instruments. 23. Agreement Read and Understood. Both parties hereto acknowledge that they have had an opportunity to consult with an attorney, and such other experts or consultants as they deem necessary or prudent, regarding this Agreement and that they, or their designated agents, have read and understand this Agreement. 24. United States Dollars. All dollar amounts stated herein refer to and are payable solely in United States Dollars. 12 IN WITNESS WHEREOF, intending to be legally bound, the parties hereto have caused this Agreement to be signed. Purchaser: Paradigm Group, LLC 370,370 Shares/$999,999.00 - -------------------------- Number and dollar amount By:/s/ Randall S. Goulding of Shares purchased - -------------------------- Purchase Price Its: Managing Director ----------------- Address/Residence of Purchaser: 3000 W. Dundee Suite 105 ------------------------ 37,037 Northbrook, IL 60062 - ------ ------------------- Warrants Employer Identification No.: 36-4207221 Accredited Investor Certification (Place initials on the appropriate line(s)) ____ (i) I am a natural person who had individual income of more than $200,000 in each of the most recent two years or joint income with my spouse in excess of $300,000 in each of the most recent two years and reasonably expect to reach that same income level for the current year ("income", for purposes hereof, should be computed as follows: individual adjusted gross income, as reported (or to be reported) on a federal income tax return, increased by (1) any deduction of long-term capital gains under Section 1202 of the Internal Revenue Code of 1986 (the "Code"), (2) any deduction for depletion under Section 611 et seq. of the Code, (3) any exclusion for interest under Section 103 of the Code and (4) any losses of a partnership as reported on Schedule E of Form 1040); _____ (ii) I am a natural person whose individual net worth (i.e., total assets in excess of total liabilities), or joint net worth with my spouse, will at the time of purchase of the Securities be in excess of $1,000,000; _____ (iii) The Purchaser is an investor satisfying the requirements of Section 501(a)(1), (2) or (3) of Regulation D promulgated under the Securities Act, which includes but is not limited to, a self-directed employee benefit plan where investment decisions are made solely by persons who are "accredited investors" as otherwise defined in Regulation D; 13 _____ (iv) The Purchaser is a "qualified institutional buyer" as that term is defined in Rule 144A of the Securities Act; _____ (v) The Purchaser is a trust, which trust has total assets in excess of $5,000,000, which is not formed for the specific purpose of acquiring the Securities offered hereby and whose purchase is directed by a sophisticated person as described in Rule 506(b)(ii) of Regulation D and who has such knowledge and experience in financial and business matters that he is capable of evaluating the risks and merits of an investment in the Securities; _____ (vi) I am a director or executive officer of the Company; or - ----- (vii) The Purchaser is an entity (other than a trust) in which all of the equity owners meet the requirements of at least one of the above subparagraphs. Agreed and Accepted by VDC COMMUNICATIONS, INC. By: /s/ Frederick A. Moran ---------------------- Frederick A. Moran Chairman & C.E.O. Dated: May 17, 1999 ------------ 14 EXHIBIT "A" Warrant No. 1999-W^ THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION FROM REGISTRATION, UNDER THE ACT, BASED ON AN OPINION LETTER OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION. FORM OF WARRANT TO PURCHASE COMMON STOCK OF VDC COMMUNICATIONS, INC. Void after 5:00 p.m. Eastern Standard Time on May ^, 2002 This is to verify that, FOR VALUE RECEIVED, the undersigned, or its registered assigns (hereinafter referred to as the "Holder"), is entitled to purchase, subject to the terms and conditions hereof, from VDC COMMUNICATIONS, INC., a Delaware corporation (the "Company"), that number of shares of Common Stock, par value $.0001 per share of the Company (the "Common Stock") set forth on the signature page hereto at any time during the period commencing at 9:00 a.m., Eastern Standard Time on May ^, 1999 (the "Commencement Date") and ending at 5:00 p.m. Eastern Standard Time on May ^, 2002 (the "Termination Date") at an exercise price of $6.00 per share of Common Stock. The number of shares of Common Stock purchasable upon exercise of this Warrant (the "Warrant(s)") and the exercise price per share shall be subject to adjustment from time to time upon the occurrence of certain events as set forth below. The shares of Common Stock or any other shares or other units of stock or other securities or property, or any combination thereof then receivable upon exercise of this Warrant, as adjusted from time to time, are sometimes referred to hereinafter as "Exercise Shares". The exercise price per share as from time to time in effect is referred to hereinafter as the "Exercise Price". 1. Exercise of Warrant: Issuance of Exercise Shares. (a) Exercise of Warrant. This Warrant may be exercised in whole or in part at any time or from time to time on or after the Commencement Date and until and including the Termination Date, upon surrender on any business day to the Company at its principal office, presently located at the address of the Company set forth in Section 8 hereof (or such other office of the Company, if any, as shall theretofore have been designated by the Company by written notice to the Holder), together with: (i) a completed and executed Notice of Warrant Exercise in the form set forth in Appendix A hereto and made a part hereof and (ii) payment of the full Exercise Price for the amount of Exercise Shares set forth in the Notice of Warrant Exercise, in lawful money of the United States of America by certified check or cashier's check, made payable to the order of the Company. 15 In the event that this Warrant shall be duly exercised in part prior to the Termination Date, the Company shall issue a new Warrant or Warrants of like tenor evidencing the rights of the Holder thereof to purchase the balance of the Exercise Shares purchasable under the Warrant so surrendered that shall not have been purchased. No adjustments shall be made for any cash dividends on Exercise Shares issuable upon exercise of the Warrant. The Company shall cancel Warrant Certificates surrendered upon exercise of Warrants. (b) Issuance of Exercise Shares: Delivery of Warrant Certificate. The Company shall, within fifteen (15) business days or as soon thereafter as is practicable of the exercise of this Warrant, issue in the name of and cause to be delivered to the Holder (or such other person or persons, if any, as the Holder shall have designated in the Notice of Warrant Exercise) one or more certificates representing the Exercise Shares to which the Holder (or such other person or persons) shall be entitled upon such exercise under the terms hereof. Such certificate or certificates shall be deemed to have been issued and the Holder (or such other person or persons so designated) shall be deemed to have become the record holder of the Exercise Shares as of the date of the due exercise of this Warrant. (c) Exercise Shares Fully Paid and Non-assessable. The Company agrees and covenants that all Exercise Shares issuable upon the due exercise of the Warrant represented by this Warrant Certificate will, upon issuance in accordance with the terms hereof, be duly authorized, validly issued, fully paid and non-assessable and free and clear of all taxes (other than taxes which, pursuant to Section 2 hereof, the Company shall not be obligated to pay) or liens, charges, and security interests created by the Company with respect to the issuance thereof. (d) Reservation of Exercise Shares. At the time of or before taking any action which would cause an adjustment pursuant to Section 5 hereof increasing the number of shares of capital stock constituting the Exercise Shares, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company have remaining, after such adjustment, a number of shares of such capital stock unissued and unreserved for other purposes sufficient to permit the exercise of all the then outstanding Warrants of like tenor immediately after such adjustment; the Company will also from time to time take action to increase the authorized amount of its capital stock constituting the Exercise Shares if at any time the number of shares of capital stock authorized but remaining unissued and unreserved for other purposes shall be insufficient to permit the exercise of the Warrants then outstanding. The Company may but shall not be limited to reserve and keep available, out of the aggregate of its authorized but unissued shares of capital stock, for the purpose of enabling it to satisfy any obligation to issue Exercise Shares upon exercise of Warrants, through the Termination Date, the number of Exercise Shares deliverable upon the full exercise of this Warrant and all other Warrants of like tenor then outstanding. 16 (e) Fractional Shares. The Company shall not be required to issue fractional shares of capital stock upon the exercise of this Warrant or to deliver Warrant Certificates which evidence fractional shares of capital stock. In the event that any fraction of an Exercise Share would, except for the provisions of this subparagraph (e), be issuable upon the exercise of this Warrant, the Company shall pay to the Holder exercising the Warrant an amount in cash equal to such fraction multiplied by the current market value of the Exercise Share. For purposes of this subparagraph (e), the current market value shall be determined as follows: (i) if the Exercise Shares are traded in the over-the-counter market and not on any national securities exchange and not in the NASDAQ Reporting System, the average of the mean between the last bid and asked prices per share, as reported by the National Quotation Bureau, Inc., or an equivalent generally accepted reporting service, for the last business day prior to the date on which this Warrant is exercised, or if not so reported, the average of the closing bid and asked prices for an Exercise Share as furnished to the Company by any member of the National Association of Securities Dealers, Inc., selected by the Company for that purpose; or (ii) if the Exercise Shares are listed or traded on a national securities exchange or in the NASDAQ National Market System, the closing price on the principal national securities exchange on which they are so listed or traded or in the NASDAQ National Market System, as the case may be, on the last business day prior to the date of the exercise of this Warrant. The closing price referred to in this clause (ii) shall be the last reported sales price or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices, in either case on the national securities exchange on which the Exercise Shares are then listed or in the NASDAQ Reporting System; or (iii) if no such closing price or closing bid and asked prices are available, as determined in any reasonable manner as may be prescribed by the Board of Directors of the Company. 2. Payment of Taxes. (a) The Company will pay all documentary stamp taxes, if any, attributable to the initial issuance of Exercise Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issue of any Warrant Certificates or any certificates for Exercise Shares in a name other than that of the Holder of a Warrant Certificate surrendered upon the exercise of a Warrant, and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (b) Upon exercise of a Warrant, the Company shall have the right to require the Holder to remit to the Company an amount sufficient to satisfy federal, state and local tax withholding requirements prior to the delivery of any certificate for Exercise Shares issuable pursuant to the exercise of such Warrant. 17 (c) A Holder who is obligated to pay the Company an amount required to be withheld under applicable tax withholding requirements may pay such amount (i) in cash; (ii) in the discretion of the Company's Chief Executive Officer, through the delivery to the Company of previously-owned shares of common stock of the Company having an aggregate current market value equal to the tax obligation, provided that the previously owned shares delivered in satisfaction of the withholding obligations must have been held by the Holder for at least six (6) months; (iii) in the discretion of the Company's Chief Executive Officer, through the withholding of shares of common stock of the Company otherwise issuable to the Holder in connection with the exercise of a Warrant; or (iv) in the discretion of the Company's Chief Executive Officer, through a combination of the procedures set forth in clauses (i), (ii) and (iii) of this Section 2(c). 3. Mutilated or Missing Warrant Certificates. In case any Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company may in its discretion issue, in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and in substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate or Warrant Certificates of like tenor and in the same aggregate denomination, but only (i) in the case of loss, theft or destruction, upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of such Warrant Certificate and indemnity or bond, if requested, also satisfactory to them and (ii) in the case of mutilation, upon surrender of the mutilated Warrant. Applicants for such substitute Warrant Certificates shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company or its counsel may prescribe. 4. Rights of Holder. The Holder shall not, by virtue of anything contained in this Warrant Certificate or otherwise, be entitled to any right whatsoever, either in law or equity, of a stockholder of the Company, including without limitation, the right to receive dividends or to vote or to consent or to receive notice as a shareholder in respect of the meetings of shareholders or the election of directors of the Company or any other matter. 5. Adjustment of Exercise Shares and Exercise Price. The Exercise Price and the number and kind of Exercise Shares purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the happening of certain events as hereinafter provided. The Exercise Price in effect at any time and the number and kind of securities purchasable upon exercise of each Warrant shall be subject to adjustment as follows: (a) In case the Company shall (i) pay a dividend on its shares of Common Stock in shares of Common Stock, (ii) subdivide its outstanding Common Stock into a greater number of shares, or (iii) combine its outstanding Common Stock into a smaller number of shares, the Exercise Price and number of securities purchasable under this Warrant in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification, shall be proportionally adjusted so that the Holder of this Warrant exercised after such date shall be entitled to receive the aggregate number and kind of shares which, if this Warrant had been exercised by such Holder immediately prior to such date, he would have owned upon such exercise and been entitled to receive upon such dividend, subdivision, combination or reclassification. For example, if the Company declares a 2 for 1 stock dividend or stock split and the Exercise Price immediately prior to such event was $5.00 per share, the adjusted Exercise Price immediately after such event would be $2.50 per share. Additionally, the number of securities purchasable under this Warrant would be adjusted accordingly. Such adjustment shall be made successively whenever any event listed above shall occur. 18 (b) If at any time while this Warrant, or any portion thereof, is outstanding and unexpired there shall be (i) a capital reorganization pursuant to which the shares of the Company's capital stock outstanding immediately prior to such reorganization are converted by virtue of such reorganization into other property, whether in the form of new securities, cash or otherwise (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), (ii) a merger or consolidation of the Company with or into another corporation in which the Company is not the surviving entity, or a reverse triangular merger in which the Company is the surviving entity but the shares of the Company's capital stock outstanding immediately prior to the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, or (iii) a sale or transfer of all or substantially all of the Company's properties and assets as, or substantially as, an entirety to any other person, then, as a part of such capital reorganization, merger, consolidation, sale or transfer, lawful provision shall be made so that the holder of this Warrant shall thereafter be entitled to receive upon payment of the Exercise Price then in effect, the number of shares of stock or other securities or property of the successor corporation resulting from such capital reorganization, merger, consolidation, sale or transfer that a holder of the shares deliverable upon exercise of this Warrant would have been entitled to receive in such capital reorganization, consolidation, merger, sale or transfer if this Warrant had been exercised immediately before such capital reorganization, merger, consolidation, sale or transfer, all subject to further adjustment as provided in Section 5. The foregoing provisions of this Subsection 5(b) shall similarly apply to successive capital reorganizations, consolidations, mergers, sales and transfers and to the stock or securities of any other corporation that are at the time receivable upon the exercise of this Warrant. If the per-share consideration payable to the Holder hereof for shares in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be determined in good faith by the Company's Board of Directors. In all events, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after the transaction, to the end that the provisions of this Warrant shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon exercise of this Warrant. (c) Whenever the Exercise Price payable upon exercise of each Warrant is adjusted pursuant to subsections (a) and (b) above, the number of Exercise Shares purchasable upon exercise of this Warrant shall simultaneously be adjusted by multiplying the number of Exercise Shares initially issuable upon exercise of this Warrant by the Exercise Price in effect on the date hereof and dividing the product so obtained by the Exercise Price, as adjusted. (d) No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least twenty-five cents ($0.25) in such price; provided, however, that any adjustments which by reason of this subsection (d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. All calculations under this Section 5 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. 19 (e) Whenever the Exercise Price is adjusted, as herein provided, the Company shall promptly cause a notice setting forth the adjusted Exercise Price and adjusted number of Exercise Shares issuable upon exercise of each Warrant to be mailed to the Holders, at their last addresses appearing on the books of the Company. The Company may retain a firm of independent certified public accountants selected by the Board of Directors (who may be the regular accountants employed by the Company) to make any computation required by this Section 5, and a certificate signed by such firm shall be conclusive evidence of the correctness of such adjustment. (f) Irrespective of any adjustments in the Exercise Price or the number or kind of Exercise Shares purchasable upon exercise of this Warrant, Warrants theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the similar Warrants initially issuable pursuant to this Warrant. (g) Whenever the Exercise Price shall be adjusted as required by the provisions of the foregoing Section 5, the Company shall forthwith file in the custody of its Secretary or an Assistant Secretary at its principal office an officer's certificate showing the adjusted Exercise Price determined as herein provided, setting forth in reasonable detail the facts requiring such adjustment, including a statement of the number of additional shares of Common Stock, if any, and such other facts as shall be necessary to show the reason for and the manner of computing such adjustment. Each such officer's certificate shall be made available at all reasonable times for inspection by the Holder and the Company shall, forthwith after each such adjustment, mail a copy by certified mail of such certificate to the Holder. 6. Transfers, Exchanges, and Certain Restrictions. (a) The Warrant shall be transferable, subject to the provisions of Section 6 hereof, only upon the books of the Company, if any, to be maintained by it for that purpose, upon surrender of the Warrant to the Company at its principal office accompanied (if so required by it) by a written instrument or instruments of transfer in form satisfactory to the Company and duly executed by the Holder thereof or by the duly appointed legal representative thereof or by a duly authorized attorney and upon payment of any necessary transfer tax or other governmental charge imposed upon such transfer. In all cases of transfer by an attorney, the original letter of attorney, duly approved, or an official copy thereof, duly certified, shall be deposited and remain with the Company. In case of transfer by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be produced, and may be required to be deposited and remain with the Company in its discretion. Upon any such registration of transfer, a new Warrant Certificate shall be issued to the transferee named in such instrument of transfer, and the surrendered Warrant Certificate shall be canceled by the Company. (b) The Warrant may be exchanged, at the option of the Holder thereof and without change, when surrendered to the Company at its principal office, or at the office of its transfer agent, if any, for another Warrant or other Warrants of like tenor and representing in the aggregate the right to purchase from the Company a like number and kind of Shares as the Warrant surrendered for exchange or transfer, and the Warrant so surrendered shall be canceled by the Company or transfer agent, as the case may be. 20 (c) The Holder of this Warrant, by acceptance hereof, acknowledges that this Warrant and the Shares to be issued upon exercise hereof are being acquired solely for the Holder's own account and not as a nominee for any other party, and for investment, and that the Holder will not offer, sell or otherwise dispose of this Warrant or any Shares to be issued upon exercise hereof except under circumstances that will not result in a violation of applicable federal and state securities laws. Upon exercise of this Warrant, the Holder shall, if requested by the Company, execute the Company's standard Investor Representation Letter which shall, among other things, confirm in writing that the Exercise Shares so purchased are being acquired solely for the Holder's own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale. (d) Neither this Warrant nor any Exercise Share may be offered for sale or sold, or otherwise transferred or sold, unless (i) such security has been registered for sale under the Securities Act of 1933, as amended (the "1933 Act") and registered or qualified under applicable state securities laws relating to the offer and sale of securities, or (ii) exemptions from the registration requirements of the 1933 Act and the registration or qualification requirements of all such state securities laws are available and the Company shall have received an opinion of counsel, prepared at Holder's expense, reasonably satisfactory to the Company that the proposed sale or other disposition of such securities may be effected without registration under the 1933 Act and would not result in any violation of any applicable state securities laws relating to the registration or qualification of securities for sale, such counsel and such opinion to be satisfactory to the Company. (e) All Shares issued upon exercise hereof shall be stamped or imprinted with a legend in substantially the following form (in addition to any legend required by law or otherwise deemed necessary or appropriate by Company's counsel, including, but not limited to, an affiliate legend). "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION FROM REGISTRATION, UNDER THE ACT, BASED ON AN OPINION LETTER OF COUNSEL SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION." The Company is hereby authorized to notify its transfer agent of the status of the Exercise Shares and to take such other action including, but not limited to, the placing of a "stop-transfer" order on the transfer agent's books and records to assure compliance with the Act. (f) Holder recognizes that investing in the Warrant and the Exercise Shares involves a high degree of risk, and Holder is in a financial position to hold the Warrant and the Exercise Shares indefinitely and is able to bear the economic risk and withstand a complete loss of its investment in the Warrant and the Exercise Shares. The Holder is a sophisticated investor and is capable of evaluating the merits and risks of investing in the Company. The Holder has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management, has been given full and complete access to information concerning the Company, and has utilized such access to its satisfaction for the purpose of obtaining information or verifying information and have had the opportunity to inspect the Company's operation. Holder has had the opportunity to ask questions of, and receive answers from, the management of the Company (and any person acting on its behalf) concerning the Warrant and the Shares and the agreements and transactions contemplated hereby, and to obtain any additional information as Holder may have requested in making its investment decision. The initial Holder of this Warrant is an "accredited investor", as defined by Regulation D promulgated under the 1933 Act. 21 (g) The Holder agrees to indemnify and hold harmless the Company against any loss, damage, claim or liability arising from any inaccuracy in the provisions of Section 6 hereof or the disposition of this Warrant or any Exercise Share held by such holder or any interest therein in violation of the provisions of Section 6 hereof. 7. Registration Rights. The shares of Common Stock or other equity securities of the Company that may be issued to the Holder upon the exercise of the Warrants are entitled to the registration rights set forth in the Registration Rights Agreement of even date herewith between the Company and the Holder. 8. Notices. All notices or other communications under this Warrant Certificate shall be in writing and shall be deemed to have been given on the day of delivery if delivered by hand, on the fifth day after deposit in the mail if mailed by certified mail, postage prepaid, return receipt requested, or on the next business day after mailing if sent by a nationally recognized overnight courier such as federal express, addressed as follows: If to the Company: VDC Communications, Inc. 75 Holly Hill Lane Greenwich, CT 06830 Attn: Frederick A. Moran, Chief Executive Officer and to the Holder at the address of the Holder appearing on the books of the Company or the Company's transfer agent, if any. Either of the Company or the Holder may from time to time change the address to which notices to it are to be mailed hereunder by notice in accordance with the provisions of this Section 8. 9. Supplements and Amendments. The Company may from time to time supplement or amend this Warrant Certificate without the approval of any holders of Warrants in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision, or to make any other provisions in regard to matters or questions herein arising hereunder which the Company may deem necessary or desirable and which shall not materially adversely affect the interests of the Holder. 22 10. Successors and Assigns. This Warrant shall inure to the benefit of and be binding on the respective successors, assigns and legal representatives of the Holder and the Company. 11. Severability. If for any reason any provision, paragraph or terms of this Warrant Certificate is held to be invalid or unenforceable, all other valid provisions herein shall remain in full force and effect and all terms, provisions and paragraphs of this Warrant shall be deemed to be severable. 12. Governing Law. This Warrant shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of said jurisdiction without regard to such jurisdiction's conflicts of laws provisions. 13. Headings. Paragraph and subparagraph headings used herein are included herein for convenience of reference only and shall not affect the construction of this Warrant Certificate nor constitute a part of this Warrant Certificate for any other purpose. 14. Counterparts. This Warrant may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 23 IN WITNESS WHEREOF, the Company has caused these presents to be duly executed as of the ^th day of May, 1999 defined herein as the "Commencement Date." Number of Warrants: VDC COMMUNICATIONS, INC. By: ------------------------ Frederick A. Moran Chief Executive Officer Acknowledged and Agreed to by the undersigned this ____ day of May 1999. - ---------------------------------- - ---------------------------------- - ---------------------------------- - ---------------------------------- 24 APPENDIX A NOTICE OF WARRANT EXERCISE Pursuant to a Warrant by and between the undersigned and VDC COMMUNICATIONS, INC., a Delaware corporation (the "Company"), dated as of May ^, 1999, the undersigned hereby irrevocably elects to exercise its warrant to the extent of purchasing _______________ shares of Common Stock, $.0001 par value (the "Warrant Shares"), of the Company as provided for therein. The undersigned hereby represents and agrees that the Warrant Shares purchased pursuant hereto are being purchased for investment and not with a view to the distribution or resale thereof, and that the undersigned understands that said Warrant Shares have not been registered under the Securities Act of 1933, as amended. Payment of the full Purchase Price of the Warrant Shares is enclosed herewith, in the form of a check made payable to the Company. The undersigned requests that a certificate for the Warrant Shares be issued in the name of: -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- (Please print name, address and social security number) Dated:_______________________________________ Address: __________________________________________________ -------------------------------------------------- -------------------------------------------------- Signature:_________________________________________________ 25 EXHIBIT "B" RISK FACTORS An investment in Company Common Stock and Warrants to purchase Company Common Stock involves a high degree of risk. Purchasers of such securities should carefully review the following risk factors. This following Risk Factors contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although forward-looking statements are based on assumptions made, and information believed, by management to be reasonable, no assurance can be given that such statements will prove to be correct. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, projected or expected. Some, but not all, of such risks and uncertainties are described in the risk factors set forth below. 1. WE ARE A DEVELOPMENT STAGE COMPANY. We have only recently commenced our present operations, and therefore, have only a limited operating history upon which you can evaluate our business. We have strategically placed telecommunications equipment in cities that we believe will enable us to efficiently transport telecommunications services. Now we are building our customer base as rapidly as we can in order to achieve greater revenues and market penetration. We will also add additional telecommunications equipment in other areas of the world. We have not yet determined with certainty where those areas will be. 2. WE ARE LOSING MONEY. We have not yet experienced a profitable quarter and may not ever achieve profitability. By virtue of the early stage of our development, we have yet to build sufficient volume of telecommunications voice and facsimile traffic to reach profitability. Our current expenses are greater than our revenues. This will probably continue until we reach a greater level of maturity and it is possible that our revenues may never exceed our expenses. If operating losses continue for longer than the short-term, then our continued operation will be in jeopardy. However, we believe that what we have developed over the past year is valuable and has the potential to generate revenues greater than expenses. 3. NUMEROUS CONTINGENCIES COULD HAVE A MATERIAL ADVERSE EFFECT ON US. Because we are a development stage company, and because of the nature of the industry in which we operate, there are numerous contingencies over which we have little or no control, any one of which could have a material adverse effect on us. The contingencies include, but are not limited to, the addition or loss of major customers, whether through competition, merger, consolidation or otherwise; the loss of economically beneficial routing options for the termination of our telecommunications traffic; financial difficulties of major customers; pricing pressure resulting from increased competition; and technical difficulties with or failures of portions of our network that could impact our ability to provide service to or bill our customers. 26 4. OUR ABILITY TO IMPLEMENT OUR PLAN SUCCESSFULLY IS DEPENDENT ON A FEW KEY PEOPLE. We are particularly dependent upon Frederick A. Moran, Chairman, Chief Executive Officer, Chief Financial Officer, Secretary and Director of the Company. Mr. Moran is also a significant beneficial shareholder of the Company. The Company has an employment agreement with Mr. Moran. We believe the combination of his employment agreement and equity interest keeps Mr. Moran highly motivated to remain with the Company. 5. THE INTERNATIONAL TELECOMMUNICATIONS MARKET IS RISKY. The international nature of the our operations involves certain risks, such as changes in U.S. and foreign government regulations and telecommunications standards, dependence on foreign partners, tariffs, taxes and other trade barriers, the potential for nationalization and economic downturns and political instability in foreign countries. At the current time, we are particularly dependent on Central and North America. In addition, our business could be adversely affected by a reversal in the current trend toward the deregulation of the telecommunications industry. We will be increasingly subject to these risks to the extent that we proceed with the planned expansion of international operations. 6. GOVERNMENT INVOLVEMENT IN INDUSTRY COULD HAVE AN ADVERSE EFFECT. We are subject to various U.S. and foreign laws, regulations, agency actions and court decisions. Our U.S. international telecommunications service offerings are subject to regulation by the Federal Communications Commission (the "FCC"). The FCC requires international carriers to obtain certificates of public convenience and necessity prior to acquiring international facilities by purchase or lease, or providing international service to the public. Prior FCC approval is also generally required to transfer control of a certificated carrier. We must file reports and contracts with the FCC and must pay regulatory and other fees, which are subject to change. We are also subject to the FCC policies and rules discussed below. The FCC could determine, by its own actions or in response to a third party's filing, that certain of our services, termination arrangements, agreements with foreign carriers, transit or refile arrangements or reports did not comply with FCC policies and rules. If this occurred, the FCC could order us to terminate arrangements, fine us or revoke our authorizations. Any of these actions could have a material adverse effect on our business, operating results and financial condition. 7. POTENTIAL FOR TECHNICAL FAILURE. Our services are dependent on our own and other companies' ability to successfully integrate technologies and equipment. In connecting with other companies' equipment we take the risk of not being able to provide service due to their error. In addition, there is the risk that our equipment may malfunction or that we could make an error which negatively affects our customers' service. We are also dependent on the protection of our hardware and other equipment from damage from natural disasters such as fires, floods, hurricanes and earthquakes, other catastrophic events such as civil unrest, terrorism and war and other sources of power loss and telecommunications failures. We have taken a number of steps to prevent our service from being affected by natural disasters, fire and the like. We have built redundant systems for power supply to our equipment. Even though, there can be no assurance that any such systems will prevent the switches from becoming disabled in the event of an earthquake, power outage or otherwise. The failure of our network, or a significant decrease in telephone traffic resulting from effects of a natural or man-made disaster, could have a material adverse effect on our relationship with our customers and our business, operating results and financial condition. 27 8. THE LONG DISTANCE AND INTERNATIONAL LONG DISTANCE TELEPHONE INDUSTRY IS HIGHLY COMPETITIVE. We are a small company in an industry with many companies that have more experience and greater resources than us. International telecommunications providers compete mainly on the basis of price, but also customer service, transmission quality, breadth of service offerings and value-added services. Our operating history is probably not long enough for you to make a judgment about our ability to compete in this industry. 9. TECHNOLOGICAL ADVANCEMENT COULD RENDER OUR INFRASTRUCTURE OBSOLETE. The international telecommunications industry is highly competitive and subject to the introduction of new services facilitated by advances in technology. We expect that the future will bring technological change. It is possible that these changes could result in more advanced telecommunications equipment that could render our current equipment obsolete. If this were to happen, we would most likely have to invest significant capital into this new technology. 10. WE HAVE LIMITED CAPITAL. Being a small company in a capital intensive industry, our position of limited capital is a significant risk to our future viability. We are currently seeking financing alternatives that would put us in a better position financially. There is no guarantee that we will be able to do this. We may sell additional shares of our stock in order to provide the capital needed for our operations. 11. WE HAVE A SIGNIFICANT INVESTMENT IN A PRIVATE COMPANY THAT WE DO NOT CONTROL. We have a non-controlling investment in a private company, Metromedia China Corporation ("MCC"). Since this company is private and in development, it is difficult to place a value on its worth. We currently value our ownership interest based on extrapolating the value placed on MCC by its majority shareholder, Metromedia International Group. As of March 31, 1999, that equaled $4.34 million. Our total assets were $13.7 million. The value of our interest in MCC may change in the future. The value of MCC may be unfavorably influenced by negative operating results, the Chinese telecommunications market and/or other factors. Furthermore, changes in governmental policy towards foreign investment in telecommunications in China could also adversely effect the value of our investment. We have decreased the value placed on this asset, in large part, due to the uncertainty of the future of foreign participation in the Chinese telecommunications market. Even so, there is still the possibility that this asset will be worth less in the future than we believe is a fair value currently. 12. OUR STOCK IS HIGHLY VOLATILE. Our stock price fluctuates significantly. We believe that this will most likely continue. Historically, the market prices for securities of emerging companies in the telecommunications industry have been highly volatile. Future announcements concerning us or our competitors, including results of operations, technological innovations, government regulations, proprietary rights or significant litigation, may have a significant impact on the market price of our stock. 28 13. ADDITIONAL SHARES WILL BE AVAILABLE FOR SALE IN THE PUBLIC MARKET. We registered stock in connection with the domestication merger of VDC Corporation Ltd. ("VDC Bermuda") with and into us (the "Domestication Merger"). The effect of the Domestication Merger was that members/shareholders of VDC Bermuda became shareholders of the Company which then became the publicly traded company. In addition, we issued shares in connection with the MCC investment and other additional business related matters. These stock issuances and future registration statements will have the effect of significantly increasing the number of shares eligible for public trading. Sales of substantial amounts of the stock in the public market could have an adverse effect on the price of the stock and may make it more difficult for us to sell stock in the future. Although it is impossible to predict market influences and prospective values for securities, it is possible that the substantial increase in the number of shares available for sale, in and of itself, could have a depressive effect on the price of our stock. 14. WE HAVE NOT PAID ANY DIVIDENDS TO OUR STOCKHOLDERS AND DO NOT EXPECT TO ANY TIME IN THE NEAR FUTURE. Instead, we plan to retain earnings for investment back into the company. 15. THE YEAR 2000 PROBLEM COULD HAVE A MATERIAL ADVERSE EFFECT ON US. The Year 2000 issue is a matter of worldwide concern for carriers and affects many aspects of telecommunications technology, including the computer systems and software applications that are essential for operations. A significant portion of the devices that we use to provide our basic services use date-sensitive processes which affect functions such as service activation, service assurance and billing processes. We are currently evaluating the Year 2000 readiness of our computer systems, software applications and telecommunications equipment. We are sending Year 2000 compliance inquiries to certain third parties (i.e. vendors, customers, outside contractors) with whom we have a relationship. These inquiries include, among other things, requests to provide documentation regarding the third party's Year 2000 programs, and questions regarding how the third party specifically examined the Year 2000 effect on their equipment and operations and what remedial actions will be taken with regard to these problems. Since we are a new company, our key systems have just recently been implemented. Most of the vendors of such systems have represented to us that the systems are compliant with the Year 2000 issues without any modification. We will, however, continue to require confirmation of Year 2000 compliance in our future requests for proposals from equipment and software vendors. The failure of the Company's computer systems and software applications to accommodate the Year 2000, could have a material adverse effect on our business, financial condition and results from operations. 29 Further, if the software and equipment of those on whose services we depend are not Year 2000 functional, it could have a material adverse effect on our operations. While most major domestic telecommunications companies have announced that they expect all of their network and support systems to be Year 2000 functional by the middle of 1999, other domestic and international carriers may not be Year 2000 functional. We intend to continue to monitor the performance of our accounting, information and other systems and software applications to identify and resolve any Year 2000 issues. Currently, through our discovery process, we have identified an estimated $84,000 of expenditures associated with updating systems to be Year 2000 compliant. However, we expect we will find additional expenses pending the finalization of our Year 2000 investigation. We believe that the most reasonably likely worst case scenario resulting from the century change could be the inability to efficiently send voice and facsimile calls at current rates to desired locations. We do not know how long this might last. This would have a material adverse effect on our results from operations. 16. CERTAIN ANTI-TAKEOVER CONSIDERATIONS. Certain provisions of our Certificate of Incorporation, as amended (the "Certificate of Incorporation"), and Bylaws, as amended (the "Bylaws"), and the General Corporation Law of the State of Delaware (the "GCL") could deter a change in our management or render more difficult an attempt to obtain control of us. For example, we are subject to the provisions of the GCL that prohibit a public Delaware corporation from engaging in a broad range of business combinations with a person who, together with affiliates and associates, owns 15% or more of the corporation's outstanding voting shares (an "interested stockholder") for three years after the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The Certificate of Incorporation includes undesignated Preferred Stock, which may enable the Board to discourage an attempt to obtain control of us by means of a tender offer, proxy contest, merger or otherwise. In addition, the Certificate of Incorporation provides for a classified Board of Directors such that approximately only one-third of the members of the Board will be elected at each annual meeting of stockholders. Classified boards may have the effect of delaying, deferring or discouraging changes in control of us. Further, certain other provisions of the Certificate of Incorporation and Bylaws and of the GCL could delay or make more difficult a merger, tender offer or proxy contest involving us. Additionally, certain federal regulations require prior approval of certain transfers of control of telecommunications companies, which could also have the effect of delaying, deferring or preventing a change in control. 30 EXHIBIT "C" FORM OF ------- REGISTRATION RIGHTS AGREEMENT ----------------------------- This Registration Rights Agreement (this "AGREEMENT") is dated as of May ^, 1999 by and between VDC COMMUNICATIONS, INC., a Delaware corporation (the "COMPANY"), and the undersigned (the "HOLDER" or the "INVESTOR"). W I T N E S S E T H: -------------------- WHEREAS, simultaneously with the execution and delivery of this Agreement, the Investor is purchasing from the Company, pursuant to a Securities Purchase Agreement dated the date hereof (the "PURCHASE AGREEMENT"), certain shares of the Company's common stock (the "SHARES") and Warrants to purchase certain shares of the Company's common stock (the "WARRANTS") (the Shares and Warrants are collectively referred to as the "SECURITIES" of the Company); WHEREAS, all capitalized terms not hereinafter defined shall have that meaning assigned to them in the Purchase Agreement; and WHEREAS, the Company desires to grant to the Holder the registration rights set forth herein with respect to the Securities. NOW, THEREFORE, the parties hereto agree as follows: 1. Definitions. (a) "CLOSING" shall mean the closing provided for in the Purchase Agreement. (b) "COMMON STOCK" shall mean the common stock of the Company, par value $.0001 per share. (c) "COMPANY" shall mean VDC Communications, Inc. (d) "OFFERING" shall mean that private placement transaction pursuant to which the Company shall offer shares of Common Stock and Warrants to purchase shares of Common Stock upon terms and conditions set forth in the Purchase Agreements. (e) "PERSON" means an individual, a partnership (general or limited), corporation, limited liability company, joint venture, business trust, cooperative, association or other form of business organization, whether or not regarded as a legal entity under applicable law, a trust (inter vivos or testamentary), an estate of a deceased, insane or incompetent person, a quasi-governmental entity, a government or any agency, authority, political subdivision or other instrumentality thereof, or any other entity. (f) "PRINCIPAL MARKET" means the OTC Electronic Bulletin Board, the Nasdaq National Market, the Nasdaq Small Cap Stock Market, the American Stock Exchange or the New York Stock Exchange, whichever is at the time the principal trading exchange or market for the Common Stock. 31 (h) "REGISTRATION STATEMENT" shall mean the Registration Statement of the Company filed with the SEC pursuant to the provisions of Section 2 of this Agreement which covers the resale of the Shares and the shares of Common Stock underlying the Warrants (the "Warrant Shares") on Form S-1, SB-2 or any other appropriate form then permitted by the SEC to be used for such registration and the sales contemplated to be made thereby under the Securities Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such Registration Statement, including any pre-and post- effective amendments thereto, in each case including the prospectus contained therein, all exhibits thereto and all materials incorporated by reference therein. (i) "RESTRICTED STOCK" shall mean the Shares, the Warrant Shares, and any additional shares of Common Stock or other equity securities of the Company issued or issuable after the date hereof in respect of any such securities (or other equity securities issued in respect thereof) by way of a stock dividend or stock split, in connection with a combination, exchange, reorganization, recapitalization or reclassification of Company securities, or pursuant to a merger, division, consolidation or other similar business transaction or combination involving the Company; provided that: as to any particular shares of Restricted Stock, such securities shall cease to constitute Restricted Stock (i) when a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of thereunder, or (ii) when and to the extent such securities are permitted to be distributed pursuant to subparagraph (k) of Rule 144 (or any successor provision to such Rule) promulgated under the Securities Act or are otherwise freely transferable to the public without further registration under the Securities Act. (j) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any similar or successor federal statute, and the rules and regulations of the SEC thereunder, all as the same shall be in effect at any relevant time. (k) "SEC" shall mean the United States Securities and Exchange Commission. (l) "TRADING DAY" means a day on which the Principal Market on which the Common Stock is listed or admitted to trading is open for the transaction of business or, if the Common Stock is not listed or admitted to trading on any national securities exchange, any day other than a Saturday, Sunday, or a day on which banking institutions in the State of Delaware are authorized or obligated by law or executive order to close. 2. Registration Rights. (a) Piggyback Registration Rights. 32 The Company shall advise the Holder by written notice at least ten (10) calendar days prior to the filing of a Registration Statement under the Securities Act (excluding registration on Forms S-8, S-4, or any successor forms thereto), covering securities of the Company to be offered and sold (whether by the Company or any stockholder thereof) and shall, upon the request of the Holder given at least five calendar (5) days prior to the filing of such Registration Statement, include in any such Registration Statement such information as may be required to permit the public distribution of the Restricted Stock. The Holder shall furnish such information as may be reasonably requested by the Company in order to include such Restricted Stock in the Registration Statement. In the event that any registration pursuant to this Section 2 shall be, in whole or in part, an underwritten public offering of Common Stock on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the Company, the Company shall include in such registration (i) first, the securities the Company proposes to sell, and (ii) second, the Restricted Stock and any other securities eligible and requested to be included in such registration to the extent that the number of shares to be registered will not, in the opinion of the managing underwriters, adversely affect the offering of the securities pursuant to clause (i), pro rata among the holders of such securities, including the Holder of the Restricted Stock, on the basis of the number of shares eligible for registration which are owned by all such holders. Notwithstanding the foregoing, the Company may withdraw any registration statement referred to in this Section 2 without thereby incurring liability to the holders of the Restricted Stock. (b) Shelf Registration. In the event that the Restricted Stock is not otherwise included within a Registration Statement filed pursuant to Section 2(a) above, the Company shall use its best efforts to prepare and file, not later than twelve (12) months following the Closing of the Offering, a Registration Statement with the SEC and use its best efforts to, as promptly as possible, have such Registration Statement declared effective for the purpose of facilitating the public resale of the Restricted Stock. (c) Notwithstanding anything to the contrary contained herein, the Company's obligation in Section 2(a) and 2(b) above shall extend only to the inclusion of the Restricted Stock in a Registration Statement filed under the Securities Act. The Company shall have no obligation to assure the terms and conditions of distribution, to obtain a commitment from an underwriter relative to the sale of the Restricted Stock or to otherwise assume any responsibility for the manner, price or terms of the distribution of the Restricted Stock. Furthermore, the Company shall not be restricted in any manner from including within the Registration Statement the distribution, issuance or resale of any of its or any other securities. 3. Registration Procedures. Whenever it is obligated to register any Restricted Stock pursuant to this Agreement, the Company shall: (a) prepare and file with the SEC a Registration Statement with respect to the Restricted Stock in the manner set forth at Sections 2(a) or 2(b) hereof and use its best efforts to cause such Registration Statement to become effective as promptly as possible and to remain effective for that period identified in Section 3(g) hereafter; (b) prepare and file with the SEC such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for the period specified in Section 3(g) below and to comply with the provisions of the Securities Act with respect to the disposition of all Restricted Stock covered by such Registration Statement in accordance with the Holders intended method of disposition set forth in such Registration Statement for such period; 33 (c) furnish to the Holder and to each underwriter, if any, such number of copies of the Registration Statement and the prospectus included therein (including each preliminary prospectus), as such person may reasonably request in order to facilitate the public sale or other disposition of the Restricted Stock covered by such Registration Statement; (d) use its best efforts to register or qualify the Restricted Stock covered by such Registration Statement under the securities or blue sky laws of such jurisdictions as the Holder, or, in the case of an underwritten public offering, the managing underwriter shall reasonably request; provided, however, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction; (e) promptly notify the Holder under such Registration Statement and each underwriter, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus contained in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required or necessary to be stated therein in order to make the statements contained therein not misleading in light of the circumstances under which they were made; (f) make available for inspection by any underwriter participating in an underwritten disposition on behalf of any Holder, and any attorney, accountant or other agent retained by such underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by the underwriter, attorney, accountant or agent in connection with such Registration Statement; (g) for purposes of Sections 3(a) and 3(b) above, the period of distribution of Restricted Stock shall be deemed to extend until the earlier of: (A) in an underwritten public offering of all of the Restricted Stock, the period in which each underwriter has completed the distribution of all securities purchased by it; (B) in any other registration, the earlier of the period in which all shares of Restricted Stock covered thereby shall have been sold or three (3) years from the date of Closing. (h) if the Common Stock of the Company is listed on any securities exchange or automated quotation system, the Company shall use its best efforts to list (with the listing application being made at the time of the filing of such Registration Statement or as soon thereafter as is reasonably practicable) the Restricted Stock covered by such Registration Statement on such exchange or automated quotation system; (i) enter into normal and customary underwriting arrangements or an underwriting agreement and take all other reasonable and customary actions if the Holder sells its shares of Restricted Stock pursuant to an underwriting (however, in no event shall the Company, in connection with such underwriting, be required to undertake any special audit of a fiscal period in which an audit is normally not required); 34 (j) notify the Holder if there are any amendments to the Registration Statement, any requests by the SEC to supplement or amend the Registration Statement, or of any threat by the SEC or state securities commission to undertake a stop order with respect to sales under the Registration Statement; and (k) cooperate in the timely removal of any restrictive legends from the shares of Restricted Stock in connection with the resale of such shares covered by an effective Registration Statement. 4. Expenses. (a) For the purposes of this Section 4, the term "REGISTRATION EXPENSES" shall mean: all expenses incurred by the Company in complying with Sections 2 and 3 of this Agreement, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, "blue sky" fees, fees of the National Association of Securities Dealers, Inc. ("NASD"), fees and expenses of listing shares of Restricted Stock on any securities exchange or automated quotation system on which the Company's shares are listed and fees of transfer agents and registrars. The term "SELLING EXPENSES" shall mean: all underwriting discounts and selling commissions applicable to the sale of Restricted Stock and all accountable or non-accountable expenses paid to any underwriter in respect of the sale of Restricted Stock. (b) Except as otherwise provided herein, the Company will pay all Registration Expenses in connection with the Registration Statements filed pursuant to Section 2 of this Agreement. All Selling Expenses in connection with any Registration Statements filed pursuant to Section 2 of this Agreement shall, in the case of an underwritten offering, be borne by the participating Holders in proportion to the number of shares sold by each, or, in all other instances, shall be borne by the Holder incurring such expenses. 5. Obligations of Holder. (a) In connection with each registration hereunder, each selling Holder will furnish to the Company in writing such information with respect to such seller and the securities held by such seller, and the proposed distribution by him or them as shall be reasonably requested by the Company in order to assure compliance with federal and applicable state securities laws, as a condition precedent to including such seller's Restricted Stock in the Registration Statement. Each selling Holder also shall agree to promptly notify the Company of any changes in such information included in the Registration Statement or prospectus as a result of which there is an untrue statement of material fact or an omission to state any material fact required or necessary to be stated therein in order to make the statements contained therein not misleading in light of the circumstances then existing. 35 (b) In connection with each registration pursuant to this Agreement, the Holder whose shares are included therein will not effect sales thereof until notified by the Company of the effectiveness of the Registration Statement, and thereafter will suspend such sales after receipt of telegraphic or written notice from the Company to suspend sales to permit the Company to correct or update a Registration Statement or prospectus. At the end of any period during which the Company is obligated to keep a Registration Statement current, the Holder included in said Registration Statement shall discontinue sales of shares pursuant to such Registration Statement upon receipt of notice from the Company of its intention to remove from registration the shares covered by such Registration Statement which remain unsold, and such Holder shall notify the Company of the number of shares registered which remain unsold immediately upon receipt of such notice from the Company. 6. Information Blackout. At any time when a Registration Statement effected pursuant to Section 2 relating to Restricted Stock is effective, upon written notice from the Company to the Holder that the Company has determined in good faith that sale of Restricted Stock pursuant to the Registration Statement would require disclosure of non-public material information, the Holder shall suspend sales of Restricted Stock pursuant to such Registration Statement until such time as the Company notifies the Holder that such material information has been disclosed to the public or has ceased to be material or that sales pursuant to such Registration Statement may otherwise be resumed. 7. Indemnification. (a) The Company agrees to indemnify, to the extent permitted by law, each Holder of Restricted Stock, its officers and directors and each Person who controls such Holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses caused by any untrue statement of material fact contained in any Registration Statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished to the Company by such Holder for use therein or by such Holder's failure to deliver a copy of the Registration Statement or prospectus or any amendments or supplements thereto after the Company has furnished such Holder with a sufficient number of copies of the same. (b) In connection with any Registration Statement in which a Holder of Restricted Stock is participating, each such Holder shall furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any such Registration Statement or prospectus and, to the extent permitted by law, shall indemnify the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses resulting from: (i) any untrue or alleged untrue statement of material fact contained in the Registration Statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, (but only to the extent that such untrue statement or omission is contained in any information or affidavit so furnished by such Holder); or (ii) any disposition of the Restricted Stock in a manner that fails to comply with the permitted methods of distribution identified within the Registration Statement; provided that the obligation to indemnify (if there shall be more than one Holder) shall be individual, not joint and several, for each Holder and shall be limited to the net amount of proceeds received by such Holder from the sale of Restricted Stock pursuant to such Registration Statement. 36 (c) Any Person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification (provided that the failure to give prompt notice shall not impair any Person's right to indemnification hereunder to the extent such failure has not prejudiced the indemnifying party) and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party shall not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. (d) The indemnification provided for under this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling Person of such indemnified party and shall survive the transfer of securities. The Company also agrees to make such provisions, as are reasonably requested by any indemnified party, for contribution to such party in the event the Company's indemnification is unavailable for any reason. 8. Miscellaneous Provisions. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware with regard to principles of conflicts of laws. (b) Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. (c) Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given without the written consent of the Company and the Holder. (d) Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested (provided that facsimile notice shall be deemed received on the next business day if received after 5:00 p.m. local time), or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties) 37 (i) if to the Company to: VDC Communications, Inc. 75 Holly Hill Lane Greenwich, CT 06830 Attn: Frederick A. Moran, Chief Executive Officer Telephone: (203) 869-5100 Facsimile: (203) 552-0908 (ii) if to the Holder, to the address identified on the books and records of the Company (e) Successors and Assigns; Holders as Beneficiaries. This Agreement shall inure to the benefit of and be binding upon the parties and their respective successors and assigns, and the agreements of the Company herein shall inure to the benefit of the Holders and their respective successors and assigns. (f) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (g) Entire Agreement; Survival; Termination. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. (h) Construction. This Agreement and any related instruments will not be construed more strictly against one party then against the other by virtue of the fact that drafts may have been prepared by counsel for one of the parties, it being recognized that this Agreement and any related instruments are the product of negotiations between the parties and that both parties have contributed to the final preparation of this Agreement and all related instruments. (i) Arbitration. All controversies which may arise between the parties including, but not limited to, those arising out of or related to this Agreement shall be determined by binding arbitration applying the laws of the State of Delaware. Any arbitration between the parties shall be conducted at the Company's offices in Greenwich, Connecticut, or at such other location designated by the Company, before the American Arbitration Association (the "AAA"). If the Parties are unable to agree on a single arbitrator with fifteen (15) days of a demand for arbitration being filed with the AAA by one of the parties, each party shall select an arbitrator and the two (2) arbitrators shall mutually select a third arbitrator, the three of whom shall serve as an arbitration panel. The decision of the arbitrator(s) shall be final and binding upon the Parties and shall not be required to include written findings of law and fact, and judgment may be obtained thereon by either party in a court of competent jurisdiction. Each party shall bear the cost of preparing and presenting its own case. The cost of the arbitration, including the fees and expenses of the arbitrator(s), shall be shared equally by the parties hereto unless the award otherwise provides. Nothing in this section will prevent either party from resorting to judicial proceedings if interim injunctive relief under the laws of the State of Delaware from a court is necessary to prevent serious and irreparable injury to one of the parties, and the parties hereto agree that the state courts in Stamford, Connecticut and the United States District Court in the District of Connecticut in Bridgeport, Connecticut shall have exclusive subject matter and in personam jurisdiction over the parties for purposes of obtaining interim injunctive relief. 38 (j) Agreement Read and Understood. Both parties hereto acknowledge that they have had an opportunity to consult with an attorney, and such other experts or consultants as they deem necessary or prudent, regarding this Agreement and that they, or their designated agents, have read and understand this Agreement. IN WITNESS WHEREOF, intending to be legally bound, the parties hereto have caused this Agreement to be signed. ATTEST: VDC COMMUNICATIONS, INC. ______________________________ By:________________________________ Frederick A. Moran Chief Executive Officer WITNESS: - ------------------------------ -------------------------------- ^ 39 EX-10.46 4 EX-10.46 The following Form of Employment Agreement was entered into with the following executive officers:
Name Start Date Term Salary Positions Other Significant Changes Robert Warner 03/15/98 3 years $60,000 Senior Account Section 5.b, Termination Executive/Director by Company without of Carrier Sales "Cause", eliminated William Zimmerling 04/01/98 3 years $80,000 Vice President/ Section 5.b, Termination Executive Vice by Company without President "Cause", eliminated
FORM OF EMPLOYMENT AGREEMENT ---------------------------- AGREEMENT made as of the ___ day of ______, 1998, by and between ____________, an adult individual residing at ___________________________________ (hereinafter referred to as "Executive") and VDC Corporation Ltd., a Bermuda corporation having a registered office at 44 Church Street, Hamilton HM FX Bermuda (hereinafter referred to as the" Company"). WITNESSETH ---------- WHEREAS, on even date herewith, through its wholly-owned subsidiary, Blue Sky Telecommunications, Inc., (the "Sub"), the Company completed the purchase of the assets, business and operations of Blue Sky International, L.L.C., a Colorado limited liability company ("LLC"); WHEREAS, the purchase of LLC was accomplished pursuant to the terms of an Asset Purchase Agreement entered into among the parties hereto on even date herewith ("Asset Purchase Agreement"); and WHEREAS, pursuant to the terms of the Asset Purchase Agreement, the Company agreed to employ Executive and Executive agreed to become employed by the Company, each upon the terms and conditions contained within this Employment Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Employment Term, Duties and Acceptance a. The Company hereby retains the Executive as ___________________, to render his services to the Company upon the terms and conditions herein contained, in such executive capacity, subject to the direction of the Company through its principal executive officers (including its Chief Executive, Chief Operating or Chief Financial Officers), or its Board of Directors. b. In recognition that the Company desires to continue the operation of the historic business of LLC through the Sub, the Company also assigns to the Executive the position as _______________________ of the Sub, and Executive accepts such position and agrees to render such services to the Sub in such executive capacities as are assigned to him by, and subject to the discretion of, the Board of Directors of Sub. c. The Executive hereby accepts the foregoing employment and agrees to devote his full time, best efforts, energy and skill to such employment. d. The Executive shall not engage in any other business endeavor or activity during the Employment Period. e. The Executive hereby agrees that any and all business opportunities which are similar to or in competition with the Business of the Company (as such term is used and defined in Section 6(a) below) and are available as of the date hereof or become available to the Executive during the Employment Period shall automatically become the sole property of the Company without any obligation of the Company to compensate or otherwise pay the Executive for such opportunities. f. The term of the Executive's employment hereunder (the "Employment Period") shall commence on the date hereof and shall end on the third anniversary hereof, unless sooner terminated as provided herein, provided, however, that the Employment Period shall be extended and this Agreement shall be automatically renewed for successive one-year periods unless: (i) this Agreement is terminated as otherwise provided herein; or (ii) Executive provides written notice to the Company of his desire not to extend the Employment Period at least sixty (60) days prior to the expiration of the then lapsing term. 2. Compensation and Expense Reimbursement a. As base compensation for the Executive duly rendering his services to the Company and the Sub pursuant to the terms of this Agreement, Company agrees to pay and Executive agrees to accept a base salary ("Base Salary") of _________ Dollars ($___________) per annum to be paid in accordance with the general payroll practices of the Company as from time to time in effect. The Base Salary will be subject to merit increases annually as determined by the Board of Directors. b. Any bonus or other compensation provided for herein shall at all times be exclusive of Executive's interest in and to the options granted by the Company to him as set forth in the Option to Purchase Common Shares entered into by the Executive and the Company and dated of even date herewith (the "Option Agreement"), as well as any stock option plan(s) that may in the future be adopted by the Company for its management personnel. c. The Company will pay or reimburse Executive for all reasonable and necessary out-of-pocket expenses incurred by him in the performance of his duties under this Agreement, including all of the Executive's travel, hotel, meal and other incidental expenses during the Executive's travel on behalf of the Company. Executive shall keep detailed and accurate records of expenses incurred in connection with the performance of his duties hereunder and reimbursement therefor shall be in accordance with policies and procedures to be established from time to time by the Board. 3. Fringe Benefits a. Executive shall be entitled, subject to the terms and conditions of particular plans and programs, to all fringe benefits generally afforded to other employees of the Company at the level of Executive, including, but not by way of limitation, the right to participate in any pension, stock option, retirement, major medical, group health, disability, accident and life insurance, and other employee benefit programs made generally available, from time to time, by the Company. 2 b. During the term of this Agreement, the Company shall include Executive and his family in family health insurance coverage provided for executive level employees of the Company. 4. Vacations Executive shall be entitled to compensated vacation in each fiscal year, to be taken at times which do not unreasonably interfere with the performance of Executive's duties hereunder and otherwise in accordance with the Company's vacation policies in effect from time to time as applied to other executives of the Company. 5. Termination a. Termination by Company for "Cause". In addition to any other remedies which the Company may have at law or in equity, the Board of Directors may upon the affirmative vote of no less than a majority of its members, terminate Executive's employment under this Agreement by giving Executive written notice of such termination upon or at any time following the occurrence of any of the following events, and each such termination shall constitute a termination for "cause," provided, however, that Executive has first been given written notice of the facts or circumstances constituting the determination of "cause" and a reasonable opportunity (in no event less than fifteen (15) days) to cure, rectify or reverse such facts or circumstances and Executive shall have failed to do so: (a) any act or failure to act (or series or combination thereof) by Executive done with the intent to harm in any material respect the interests of the Company or any affiliate thereof; (b) the commission by Executive of a felony for which he is convicted by a court of competent jurisdiction; (c) the finding by a court of competent jurisdiction that Executive perpetrated a dishonest act or common law fraud against the Company or any affiliate thereof; or (d) a grossly negligent act or failure to act (or series or combination thereof) by Executive detrimental to a material extent to the interests of the Company or any affiliate thereof; or (e) the continued refusal to follow the directives of the Board or the Company's Chief Executive Officer which are consistent with Executive's duties, responsibilities and covenants hereunder unless the failure to follow such directives were either: (i) based upon the advice of counsel; or (ii) based upon the Executive's judgment in good faith that such directives would not be in the best interests of the Company or its members. Upon the early termination of Executive's employment under this Agreement by the Company for "cause," the Company shall pay to Executive: (i) an amount equal to Executive's Base Salary accrued through the effective date of termination at the rate in effect at the time of termination, payable at the time such payment is due; and (ii) any expense reimbursement amounts accrued to the effective date of termination, payable on the effective date of termination. Upon payment of such amounts, the Company shall have no further obligation to Executive under this Agreement. 3 b. Termination by Company without "Cause". At any time after the six month anniversary of the date of this Agreement, the Company may terminate this Agreement for any reason or no reason other than for cause upon thirty (30) days written notice to the Executive. Upon the early termination of the Executive's employment under this Agreement by the Company "without cause," the Company shall pay to the Executive: (i) an amount equal to the Executive's Base Salary accrued through the effective date of termination at the rate in effect at the time of termination, payable at the time such payment is due; (ii) a lump sum payment at the time of termination equal to three month's Base Salary, payable on the effective date of termination; and (iii) any expense reimbursement amounts accrued to the effective date of termination, payable on the effective date of termination. Upon payment of such amounts, the Company shall have no further obligation to Executive under this Agreement, and Executive shall have no further rights under this Agreement. c. Incapacity of Executive. Subject to applicable law, if Executive shall become ill or be injured or otherwise become incapacitated such that, in the opinion of the Board of Directors, he cannot fully carry out and perform his duties hereunder, and such incapacity shall continue for a period of 180 consecutive days, the Board of Directors may, at any time thereafter, by giving Executive twenty (20) days' prior written notice, fully and finally terminate his employment under this Agreement. Termination under this Section 5(c) shall be effective as of the date provided in such notice, which date shall not be fewer than thirty (30) days after such notice is delivered to Executive or his representative, and on the effective date of termination, the Company shall pay the Executive (i) his Base Salary accrued to the effective date of termination at the rate in effect at the time of such notice, payable at the time such payment is due; and (ii) any expense reimbursement amounts accrued to the effective date of termination, payable on the effective date of termination. Upon payment of such amounts, the Company shall have no further obligation to Executive under this Agreement, and Executive shall have no further rights under this Agreement. d. Death of Executive. This Agreement shall automatically terminate upon the death of Executive. Upon the early termination of this Agreement as a result of death, the Company shall pay the Executive's estate: (i) an amount equal to the Executive's Base Salary accrued through the effective date of termination at the rate in effect at the effective date of termination, payable at the time such payment is due; and (ii) any expense reimbursement amounts accrued to the effective date of termination, payable on the effective date of termination. Upon payment of such amounts, the Company shall have no further obligation to Executive under this Agreement, and Executive shall have no further rights under this Agreement. 4 e. Termination by Employee. At any time after the six month anniversary of the date of this Agreement, the Executive may terminate this Agreement by giving at least thirty (30) days' prior written notice to the Company. f. Mitigation. The Executive shall not be required to mitigate the amount of any payment or other benefits provided for under this Agreement by seeking other employment and none of these payments or other benefits may be reduced by any salary or other benefits that Executive may earn. 6. Covenant Not to Compete a. The Executive recognizes and acknowledges that the Company is placing its confidence and trust in the Executive. The Executive, therefore, covenants and agrees that during the Applicable Non-Compete Period (as defined below), the Executive shall not, either directly or indirectly, without the prior written consent of the Board of Directors: (i) engage in or carry on any business or in any way become associated with any business which is similar to or is in competition with the Business of the Company (as such term is used and defined below); (ii) solicit the business of any person or entity, on behalf of himself or any other person or entity, which is or has been at any time during the term of this Agreement a material customer or material supplier of the Company including, but not limited to, former or present customers or suppliers with whom the Executive has had personal contact during, or by reason of, his relationship with the Company; (iii) be or become an employee, agent, consultant, representative, director or officer of, or be otherwise in any manner associated with, any person, firm, corporation, association or other entity which is engaged in or is carrying on any business which is similar to or in competition with the Business of the Company; (iv) solicit for employment or employ any person employed by the Company at any time during the 12-month period immediately preceding such solicitation or employment; or (v) be or become a shareholder, joint venturer, owner (in whole or in part), partner, or be or become associated with or have any proprietary or financial interest in or of any firm, corporation, association or other entity which is engaged in or is carrying on any business which is similar to or in competition with the Business of the Company. Notwithstanding the preceding sentence above, the following shall not be deemed to violate this Section 6: i. passive equity investments by Executive of $25,000 or less in any entity or affiliated group of any entity which is engaged in or is carrying on any business which is similar to or in competition with the Business of the Company; or ii. passive equity investments by Executive in excess of $25,000 in any entity or affiliated group of any entity which is engaged in or is carrying on any business which is similar to or in competition with the Business of the Company, so long as and only to the extent that Executive has obtained the prior written consent of the Company to make such investments; or 5 iii. an equity investment by Executive of up to 5% in any publicly traded company which is engaged in or is carrying on any business which is similar to or in competition with the Business of the Company. b. As used in this Agreement, the term "Business of the Company" shall include all material business activities in which the Company is engaged now or during the Applicable Non-Compete Period, which are: (i) telephony gateways in the United States, Ukraine, Kazakhstan, Russia, China and Egypt; (ii) the acquisition of Alaska Telecom; (iii) cellular, PCS or other wireless telephony licenses and businesses for the United States, Egypt, Kazakhstan, Ukraine, China and various republics and regions of Russia; (iv) Internet service provision and local loop opportunities in the United States, Egypt, Kazakhstan, Ukraine, China and Russia; (v) funding and/or vendor financing from NTS, Qualcomm, Ericcson and Motorola; (vi) paging and cable TV licenses for the entire country of Ukraine; (vii) a billing system the United States, Egypt, Kazakhstan, Ukraine, China and Russia; (viii) a long distance in country project for the national railway system of Ukraine; (ix) communications tower site management business in the United States, Ukraine, Kazakhstan, Egypt, China and Russia; and (x) Internet service provision in the United States, Egypt, Kazakhstan, Ukraine, China and Russia. The term "Business of the Company" shall not include the business and activity currently conducted by Blue Sky International L.L.C., which consists entirely of (i) marketing and reselling telecommunications services and (ii) providing consulting services to carriers, networks, telephone companies and prepaid telephone card companies (the "Business of Blue Sky"). c. Executive hereby recognizes and acknowledges that the existing Business of the Company extends throughout a number of countries, including Ukraine, Russia, China, Egypt and Kazakhstan and most states of the United States, and therefore agrees that the covenants not to compete contained in this Section 6 shall be applicable in and throughout such countries and states, as well as throughout such additional areas, states or countries in which the Company may be (or has prepared written plans to be) doing business as of the date of termination of the Executive's employment. The Executive further warrants and represents that, because of his varied skill and abilities, he does not need to compete with the Business of the Company and that this Agreement will not prevent him from earning a livelihood and acknowledges that the restrictions contained in this Section 6 constitute reasonable protections for the Company. d. As used in this Section 6, "Applicable Non-Compete Period" shall mean all periods of employment hereunder and that period of one year following the termination of Executive's employment hereunder. 6 7. Trade Secrets and Confidential Information Executive recognizes and acknowledges that certain information including, without limitation, information pertaining to the financial condition of the Company, its systems, methods of doing business, agreements with customers or suppliers or other aspects of the Business of the Company or which is sufficiently secret to derive economic value from not being disclosed ("Confidential Information") may be made available or otherwise come into the possession of the Executive by reason of his employment with the Company. Accordingly, the Executive agrees that he will not at any time disclose any Confidential Information to any person, firm, corporation, association or other entity for any reason or purpose whatsoever or make use to his personal advantage or to the advantage of any third party, of any Confidential Information, without the prior written consent of the Board of Directors. The Executive shall, upon termination of employment, return to the Company all documents which reflect Confidential Information (including copies thereof). Notwithstanding anything heretofore stated in this Section 7, the Executive's obligations under this Section 7 shall not, after termination of the Executive's employment with the Company, apply to information which has become generally available to the public without any action or omission of the Executive (except that any Confidential Information which is disclosed to any third party by an employee or representative of the Company who is not authorized to make such disclosure shall be deemed to remain confidential and protectable by the Executive under this Section 7). 8. Severability The invalidity or unenforceability of any term of this Agreement shall not affect the validity or enforceability of this Agreement or any of its other terms; and this Agreement and such other terms shall be construed as though the invalid or unenforceable term(s) were not included herein, unless the effect would be to vitiate the parties' fundamental purposes in entering into this Agreement. 9. Breach The Executive hereby recognizes and acknowledges that irreparable injury or damage shall result to the Company in the event of a breach or threatened breach by the Executive of any of the terms of provisions Section 6 or 7 hereunder, and the Executive therefore agrees that the Company shall be entitled to an injunction restraining Executive from engaging in any activity constituting such breach or threatened breach. Nothing contained herein shall be construed as prohibiting the Company from pursuing any other remedies available to the Company at law or in equity for breach or threatened breach of this Agreement, including but not limited to, the recovery of damages from the Executive and, if the Executive is an employee of the Company, the termination of his employment with the Company in accordance with the terms and provisions of this Agreement. 10. Arbitration All controversies which may arise between the parties hereto including, but not limited to, those arising out of or related to this Agreement shall be determined by binding arbitration applying the laws of the State of Delaware as set forth in Section 14 hereof. Any arbitration pursuant to this Agreement shall be conducted in Philadelphia, Pennsylvania before the American Arbitration Association in accordance with its arbitration rules. The arbitration shall be final and binding upon all the parties (so long as the award was not procured by corruption, fraud or undue means) and the arbitrator's award shall not be required to include factual findings or legal reasoning. Nothing in this Section 10 will prevent either party from resorting to judicial proceedings if interim injunctive relief under the laws of the State of Delaware from a court is necessary to prevent serious and irreparable injury to one of the parties, and the parties hereto agree that the federal and state courts located in Philadelphia, Pennsylvania shall have exclusive subject matter and in personam jurisdiction over the parties and any such claims or disputes arising from the subject matter contained herein. 7 11. Remedies Cumulative Except as otherwise expressly provided herein, each of the rights and remedies of the parties set forth in this Agreement shall be cumulative with all other such rights and remedies, as well as with all rights and remedies of the parties otherwise available at law or in equity. 12. Counterparts This Agreement may be executed via facsimile transmission signature and in counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 13. Waiver The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. To be effective, any waiver must be contained in a written instrument signed by the party waiving compliance by the other party of the term or covenant as specified. The waiver by either party of the breach of any term or covenant contained herein, whether by conduct or otherwise, in any one or more instances, shall not be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 14. Governing Law This Agreement shall be governed by the laws of the State of Delaware without regard to principles of conflict of laws. 15. Complete Agreement This Agreement constitutes the complete and exclusive agreement between the parties hereto which supersedes all proposals, oral and written, and all other communications between the parties relating to the subject matter contained herein. 16. Warranties The Executive represents, warrants, covenants and agrees that he has a right to enter into this Agreement, that he is not a party to any agreement or understanding whether or not written which would prohibit or restrict his performance of his obligations under this Agreement and that he will not use in the performance of his obligations hereunder any proprietary information of any other party which he is legally prohibited from using. 8 17. Notice Any notice required to be given pursuant to the provisions of this Agreement shall be in writing and sent by registered mail or nationally recognized overnight carrier, to the parties at the following addresses: To the Company at: Frederick A. Moran, Chief Executive Officer VDC Corporation Ltd. 27 Doubling Road Greenwich, CT 06830 with a copy to: Stephen M. Cohen, Esquire Buchanan Ingersoll Professional Corporation Eleven Penn Center, 14th Floor 1835 Market Street Philadelphia, PA 19103 To the Executive at: -------------------------------- -------------------------------- -------------------------------- 18. Key Man Insurance The Company shall have the right to obtain what is commonly known as "Key Man Insurance" on the life of the Executive in such amount as the Company deems appropriate. The Executive agrees to cooperate in all manner in the obtaining of such a policy. All expenses involved in connection with the obtaining and maintaining of such a policy shall be that of the Company. 19. Due Authorization The Company represents to the Executive that this Agreement has been duly authorized and approved by the Board of Directors of the Company. 20. Assignment This Agreement shall inure to the benefit of and be binding upon the Company, its successors and assigns. This Agreement may not be assigned to any third party without the written consent of all parties to the assignment. 9 IN WITNESS WHEREOF, the parties have executed this Agreement as of this __ day of ______, 1998. ATTEST: VDC CORPORATION LTD. _______________________________ By:_________________________________ , Secretary Frederick A. Moran, Chief Executive Officer WITNESS: EXECUTIVE: - ------------------------------- ----------------------------------- 10 EX-10.47 5 EX-10.47 The following Form of Option Agreement was entered into with the following executive officers:
Exercise Name Date Options Vesting Price Expiration ---- ---- ------- ------- ----- ---------- Robert Warner 04/01/98 5,000 20% per year for five years $5.00 04/01/08 Robert Warner 09/02/98 2,500 20% per year for five years $5.75 09/02/08 William Zimmerling 04/01/98 26,500 9,000 immediately $5.00 04/01/08 17,500, 20% per year for five years
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION FROM REGISTRATION, UNDER THE 1933 ACT, BASED ON AN OPINION LETTER OF COUNSEL SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION. FORM OF OPTION TO PURCHASE COMMON SHARES OF VDC CORPORATION LTD. Void after _____, 2008 This certifies that, for value received, __________ ("Holder"), is entitled, subject to the terms set forth below and prior to the Expiration Date (as hereinafter defined), to purchase from VDC Corporation Ltd. (the "Company"), a Bermuda corporation, Common Shares of the Company (as defined below), commencing on the date hereof (the "Option Issue Date"), with the Notice of Exercise attached hereto duly executed, and simultaneous payment therefor in lawful money of the United States, at the Exercise Price as set forth in Section 2 below. The number, character and Exercise Price of the shares are subject to adjustment as provided below. The options granted hereunder are intended to be treated as non-qualified stock options and will not be treated as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended. 1. TERM OF OPTION. Subject to compliance with the vesting provisions identified at Paragraph 2.3 hereafter, this Option shall be exercisable, in whole or in part, during the term commencing on the Option Issue Date and ending at 5:00 p.m. on _____, 2008 (the "Expiration Date"), and shall be void thereafter. 2. EXERCISE PRICE, NUMBER OF SHARES AND VESTING PROVISIONS. 2.1 NUMBER OF SHARES. The number of shares of the Company's Common Shares, $2.00 par value per share ("Common Shares"), which may be purchased pursuant to this Option shall be _____ shares, as adjusted pursuant to Section 11 hereof. 2.2 EXERCISE PRICE. The Exercise Price at which this Option may be exercised shall be $_____ per common share, as adjusted pursuant to Section 11 hereof. 2.3 VESTING. The Options granted hereunder shall vest in accordance with the following schedule on an aggregate basis: (i) _____ provided Holder remains continuously employed by the Company from _____, 1998 through _____, 1999; (ii) _____ provided Holder remains continuously employed by the Company from _____, 1998 through _____, 2000; (iii) _____ provided Holder remains continuously employed by the Company from _____, 1998 through _____, 2001; (iv) _____ provided Holder remains continuously employed by the Company from _____, 1998 through _____, 2002; and (v) _____ provided Holder remains continuously employed by the Company from _____, 1998 through _____, 2003. Except as otherwise specifically provided herein, Holder's right in and to any Options that do not vest at the date of termination of Holder's employment with the Company shall lapse and terminate. 2.4. DEATH OF HOLDER AND TERMINATION. (a) If the Holder shall die or h is employment is terminated due to incapacity pursuant to Section 5(c) of the Employment Agreement, dated _____, 1998, by and between the Company and the Holder (the "Employment Agreement"), he or his estate, personal representatives, or beneficiary, as applicable, shall have the right, subject to the provisions of this Paragraph 2 hereof, to continue to vest and exercise the Options as if no termination of employment had occurred. (b) In the event Holder's employment by the Company is terminated without "cause" or for "cause", as such terms are defined in the Employment Agreement, or H older voluntarily terminates his employment with the Company, Holder shall have 30 days in which to exercise the Options (only to the extent that the Holder would have been entitled to do so as of the date of his termination) and thereafter, Holder's right in and to the Options shall lapse and terminate. 3. EXERCISE OF OPTION. (a) The Exercise Price shall either be payable in cash or by bank or certified check; or by cashless exercise through the delivery by the Holder to the Company of Common Shares for which Holder is the record and beneficial owner which have been held for at least six (6) months, or by delivering to the Company a notice of exercise with an irrevocable direction to a broker/dealer registered under the Securities Exchange Act of 1934 to sell a sufficient portion of the shares and deliver the sale proceeds directly to the Company to pay the Exercise Price, or by any combination thereof. If Common Shares of the Company are tendered as payment of the Exercise Price, the value of such shares shall be their "market value" as of the trading date immediately preceding the date of exercise. The "market value" shall be: (i) If the Company's Common Shares are traded in the over-the-counter market and not on any national securities exchange nor in the NASDAQ Reporting System, the market value shall be the average of the mean between the last bid and ask prices per share, as reported by the National Quotation Bureau, Inc., or an equivalent generally accepted reporting service, for the consecutive 20 trading days immediately preceding the date of exercise, or if not so reported, the average of the closing bid and asked prices for a share for the consecutive 20 trading days immediately preceding the date of exercise, as furnished to the Company by any member of the National Association of Securities Dealers, Inc., selected by the Company for that purpose. 2 (ii) If the Company's Common Shares are traded on a national securities exchange or in the NASDAQ Reporting System, the market value shall be either (1) the simple average of the high and low prices at which a share of the Company's Common Shares traded, as quoted on the NASDAQ-NMS or its other principal exchange, for the consecutive 20 trading days immediately preceding the date of exercise or (2) the average price of the last sale of a Common Share as similarly quoted for the consecutive 20 trading days immediately preceding the date of exercise, whichever is higher, and rounding out such figure to the next higher multiple of 12.5 cents (unless the figure is already a multiple of 12.5 cents). If such tender would result in an issuance of a whole number of shares and a fractional Common Share, the value of such fractional share shall be paid to the Company in cash or by check by the Holder. (b) The purchase rights represented by this Option are exercisable by the Holder in whole or in part, at any time, or from time to time, by the surrender of this Option and the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company). (c) This Option shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the Common Shares issuable upon such exercise shall be treated for all purposes as the holder of record of such shares as of the close of business on such date. As promptly as practicable on or after such date and in any event within ten (10) days thereafter, the Company at its expense shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of shares issuable upon such exercise. In the event that this Option is exercised in part, the Company at its expense will execute and deliver a new Option of like tenor exercisable for the number of shares for which this Option may then be exercised. 4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Option. In lieu of any fractional share to which the Holder would otherwise be entitled, the Company shall make a cash payment equal to the Exercise Price multiplied by such fraction. 5. REPLACEMENT OF OPTION. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Option and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and substance to the Company or, in the case of mutilation, on surrender and cancellation of this Option, the Company at its expense shall execute and deliver, in lieu of this Option, a new Option of like tenor and amount. 3 6. RIGHTS OF STOCKHOLDER. The Holder shall not be entitled to vote or receive dividends or be deemed the holder of Common Shares or any other securities of the Company that may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value, or change of stock to no par value, consolidation, merger, conveyance or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until the Option shall have been exercised as provided herein. 7. TRANSFER OF OPTION. 7.1. NON-TRANSFERABILITY. Prior to vesting in accordance with paragraph 2 herein, the Option shall not be assigned, transferred, pledged or hypothecated in any way, nor subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution. To the extent the Options have vested, transfers thereof which comply with the remaining provisions of this paragraph 7 may be undertaken upon the prior written consent of the Company, which consent shall not be unreasonably withheld. Any attempted assignment, transfer, pledge, hypothecation or other disposition of the Option contrary to the provisions hereof, and the levy of an execution, attachment, or similar process upon the Option, shall be null and void and without effect. 7.2. EXCHANGE OF OPTION UPON A TRANSFER. On surrender of this Option for exchange, properly endorsed, the Company at its expense shall issue to or on the order of the Holder a new Option or Options of like tenor, in the name of the Holder or as the Holder (on payment by the Holder of any applicable transfer taxes) may direct, of the number of shares issuable upon exercise hereof. 7.3. COMPLIANCE WITH SECURITIES LAWS; RESTRICTIONS ON TRANSFERS. (a) The Holder of this Option, by acceptance hereof, acknowledges that this Option and the Shares to be issued upon exercise hereof are being acquired solely for the Holder's own account and not as a nominee for any other party, and for investment (unless such shares are subject to resale pursuant to an effective prospectus), and that the Holder will not offer, sell or otherwise dispose of this Option or any Shares to be issued upon exercise hereof except under circumstances that will not result in a violation of applicable federal and state securities laws. Upon exercise of this Option, the Holder shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the Common Shares so purchased are being acquired solely for the Holder's own account and not as a nominee for any other party, for investment (unless such shares are subject to resale pursuant to an effective prospectus), and not with a view toward distribution or resale. 4 (b) Neither this Option nor any Common Shares issued upon exercise of this Option may be offered for sale or sold, or otherwise transferred or sold in any transaction which would constitute a sale thereof within the meaning of the Securities Act of 1933, as amended (the "1933 Act"), unless (i) such security has been registered for sale under the 1933 Act and registered or qualified under applicable state securities laws relating to the offer an sale of securities, or (ii) exemptions from the registration requirements of the 1933 Act and the registration or qualification requirements of all such state securities laws are available and the Company shall have received an opinion of counsel satisfactory to the Company that the proposed sale or other disposition of such securities may be effected without registration under the 1933 Act and would not result in any violation of any applicable state securities laws relating to the registration or qualification of securities for sale, such counsel and such opinion to be satisfactory to the Company. (c) All Common Shares issued upon exercise hereof shall be stamped or imprinted with a legend in substantially the following form (in addition to any legend required by state securities laws). "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF EXEMPTION FROM REGISTRATION, UNDER THE 1933 ACT, BASED ON AN OPINION LETTER OF COUNSEL SATISFACTORY TO THE COMPANY OR A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION." 8. RESERVATION AND ISSUANCE OF STOCK; TAXES. (a) The Company covenants that during the term that this Option is exercisable, the Company will reserve from its authorized and unissued Common Shares a sufficient number of shares to provide for the issuance of the shares upon the exercise of this Option, and from time to time will take all steps necessary to amend its Memorandum of Association to provide sufficient reserves of Common Shares issuable upon the exercise of the Option. (b) The Company further covenants that all Common Shares issuable upon the due exercise of this Option will be free and clear from all taxes or liens, charges and security interests created by the Company with respect to the issuance thereof, however, the Company shall not be obligated or liable for the payment of any taxes, liens or charges of Holder, or any other party contemplated by Paragraph 7, incurred in connection with the issuance of this Option or the Common Shares upon the due exercise of this Option. The Company agrees that its issuance of this Option shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Common Shares upon the exercise of this Option. The Common Shares issuable upon the due exercise of this Option, will, upon issuance in accordance with the terms hereof, be duly authorized, validly issued, fully paid and non-assessable. (c) Upon exercise of the Option, the Company shall have the right to require the Holder to remit to the Company an amount sufficient to satisfy federal, state and local tax withholding requirements prior to the delivery of any certificate for Common Shares purchased pursuant to the Option. 5 (d) A Holder who is obligated to pay the Company an amount required to be withheld under applicable tax withholding requirements may pay such amount (i) in cash; (ii) in the discretion of the Company's Chief Executive Officer, through the delivery to the Company of previously-owned Common Shares having an aggregate market value equal to the tax obligation provided that the previously owned shares delivered in satisfaction of the withholding obligations must have been held by the Holder for at least six (6) months; (iii) in the discretion of the Company's Chief Executive Officer, through the withholding of Common Shares otherwise issuable to the Holder in connection with the Option exercise; or (iv) in the discretion of the Company's Chief Executive Officer, through a combination of the procedures set forth in subsections (i), (ii) and (iii) of this Paragraph 8(d). 9. NOTICES. (a) Whenever the Exercise Price or number of shares purchasable hereunder shall be adjusted pursuant to Section 11 hereof, the Company shall issue a certificate signed by its Chief Executive Officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Exercise Price and number of shares purchasable hereunder after giving effect to such adjustment, and shall cause a copy of such certificate to be mailed (by first-class mail, postage prepaid) to the Holder of this Option. (b) All notices, advices and communications under this Option shall be deemed to have been given, (i) in the case of personal delivery, on the date of such delivery and (ii) in the case of mailing, on the third business day following the date of such mailing, addressed as follows: If to the Company: VDC Corporation Ltd. 75 Holly Hill Lane Greenwich, CT 06830 Attn: Frederick A. Moran, Chief Executive Officer With a Copy to: Stephen M. Cohen, Esquire Buchanan Ingersoll Professional Corporation Eleven Penn Center 1835 Market Street, 14th Floor Philadelphia, PA 19103 and to the Holder: at the address of the Holder appearing on the books of the Company or the Company's transfer agent, if any. 6 Either of the Company or the Holder may from time to time change the address to which notices to it are to be mailed hereunder by notice in accordance with the provisions of this Paragraph 9. 10. AMENDMENTS. (a) Any term of this Option may be amended with the written consent of the Company and the Holder. Any amendment effected in accordance with this Section 10 shall be binding upon the Holder, each future holder and the Company. (b) No waivers of, or exceptions to, any term, condition or provision of this Option, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. 11. ADJUSTMENTS. The number of Shares purchasable hereunder and the Exercise Price are subject to adjustment from time to time upon the occurrence of certain events, as follows: 11.1. REORGANIZATION, MERGER OR SALE OF ASSETS. If at any time while this Option, or any portion thereof, is outstanding and unexpired there shall be (i) a reorganization (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), (ii) a merger or consolidation of the Company with or into another corporation in which the Company is not the surviving entity, or a merger in which the Company is the surviving entity but the shares of the Company's capital stock outstanding immediately prior to the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, or (iii) a sale or transfer of substantially all of the Company's properties and assets as, or substantially as, an entirety to any other person, then, as a part of such reorganization, merger, consolidation, sale or transfer, lawful provision shall be made so that the holder of this Option shall upon such reorganization, merger, consolidation or sale or transfer, have the right by exercising such Option, to purchase the kind and number of Common Shares or other securities or property (including cash) otherwise receivable upon such reorganization, merger, consolidation or sale or transfer by a holder of the number of Common Shares that might have been purchased upon exercise of such Option immediately prior to such reorganization, merger, consolidation or sale or transfer. The foregoing provisions of this Section 11.1 shall similarly apply to successive reorganizations, consolidations, mergers, sales and transfers and to the stock or securities of any other corporation that are at the time receivable upon the exercise of this Option. If the per-share consideration payable to the Holder hereof for shares in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be determined in good faith by the Company's Board of Directors. In all events, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Option with respect to the rights and interests of the Holder after the transaction, to the end that the provisions of this Option shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon exercise of this Option. 7 11.2. RECLASSIFICATION. If the Company, at any time while this Option, or any portion thereof, remains outstanding and unexpired, by reclassification of securities or otherwise, shall change any of the securities as to which purchase rights under this Option exist into the same or a different number of securities of any other class or classes, this Option shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities that were subject to the purchase rights under this Option immediately prior to such reclassification or other change and the Exercise Price therefor shall be appropriately adjusted, all subject to further adjustment as provided in this Section 11. 11.3. SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the Company at any time while this Option, or any portion thereof, remains outstanding and unexpired shall split, subdivide or combine the securities as to which purchase rights under this Option exist, into a different number of securities of the same class, the Exercise Price and the number of shares issuable upon exercise of this Option shall be proportionately adjusted. 11.4. ADJUSTMENTS FOR DIVIDENDS IN STOCK OR OTHER SECURITIES OR PROPERTY. If while this Option, or any portion hereof, remains outstanding and unexpired the holders of the securities as to which purchase rights under this Option exist at the time shall have received, or, on or after the record date fixed for the determination of eligible Stockholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (other than cash) of the Company by way of dividend, then and in each case, this Option shall represent the right to acquire, in addition to the number of shares of the security receivable upon exercise of this Option, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities or property (other than cash) of the Company that such holder would hold on the date of such exercise had it been the holder of record of the security receivable upon exercise of this Option on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock, other securities or property available by this Option as aforesaid during such period. 11.5 NECESSARY OR APPROPRIATE ACTION. The Company will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 11 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holders of this Option against impairment. 12. REGISTRATION RIGHTS. The Holder shall be entitled to the registration rights set forth in that certain Registration Rights Agreement of even date herewith by and between the Company and such Holder. 8 13. SEVERABILITY. Whenever possible, each provision of this Option shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Option is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of any other provision of this Option in such jurisdiction or affect the validity, legality or enforceability of any provision in any other jurisdiction, but this Option shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 14. GOVERNING LAW. The corporate law of the current jurisdiction of incorporation of the Company shall govern all issues and questions concerning the relative rights of the Company and its stockholders. All other questions concerning the construction, validity, interpretation and enforceability of this Option and the exhibits and schedules hereto shall be governed by, and construed in accordance with, the laws of the current jurisdiction of incorporation of the Company, without giving effect to any choice of law or conflict of law rules or provisions that would cause the application of the laws of any jurisdiction other than those of the current jurisdiction of incorporation of the Company. For the purposes of this Section 14, the term "current" shall mean the time at which any dispute, issue or question shall arise hereunder. 15. JURISDICTION. The Holder and the Company agree to submit to personal jurisdiction and to waive any objection as to venue in the federal or state courts located in Philadelphia, Pennsylvania. Service of process on the Company or the Holder in any action arising out of or relating to this Option shall be effective if mailed to such party at the address listed in Section 9 hereof. 16. ARBITRATION. If a dispute arises as to interpretation of this Option, it shall be decided finally by three arbitrators in an arbitration proceeding conforming to the Rules of the American Arbitration Association applicable to commercial arbitration. The arbitrators shall be appointed as follows: one by the Company, one by the Holder and the third by the said two arbitrators, or, if they cannot agree, then the third arbitrator shall be appointed by the American Arbitration Association. The third arbitrator shall be chairman of the panel and shall be impartial. The arbitration shall take place in Philadelphia, Pennsylvania. The decision of a majority of the Arbitrators shall be conclusively binding upon the parties and final, and such decision shall be enforceable as a judgment in any court of competent jurisdiction. Each party shall pay the fees and expenses of the arbitrator appointed by it, its counsel and its witnesses. The parties shall share equally the fees and expenses of the impartial arbitrator. 17. CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The execution, delivery and performance by the Company of this Agreement: (i) are within the Company's corporate power; (ii) have been duly authorized by all necessary or proper corporate action; (iii) are not in contravention of the Company's memorandum of association or bye-laws; (iv) will not violate in any material respect, any law or regulation, including any and all Federal and state securities laws, or any order or decree of any court or governmental instrumentality; and (v) will not, in any material respect, conflict with or result in the breach or termination of, or constitute a default under any agreement or other material instrument to which the Company is a party or by which the Company is bound. 9 18. SUCCESSORS AND ASSIGNS. This Option shall inure to the benefit of and be binding on the respective successors, assigns and legal representatives of the Holder and the Company. IN WITNESS WHEREOF, the Company has caused this Option to be executed by its officers thereunto duly authorized. Dated: _____, 1998 VDC CORPORATION LTD. --------------------------------- Frederick A. Moran, Chief Executive Officer HOLDER: -------------------------------- 10 NOTICE OF EXERCISE TO: [_____________________________] (1) The undersigned hereby elects to purchase _______ Common Shares of VDC Corporation Ltd. pursuant to the terms of the attached Option, and tenders herewith payment of the purchase price for such shares in full. (2) In exercising this Option, the undersigned hereby confirms and acknowledges that the Common Shares to be issued upon conversion thereof are being acquired solely for the account of the undersigned and not as a nominee for any other party, and for investment (unless such shares are subject to resale pursuant to an effective prospectus), and that the undersigned will not offer, sell or otherwise dispose of any such Common Shares except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. (3) Please issue a certificate or certificates representing said Common Shares in the name of the undersigned or in such other name as is specified below: ----------------------------------- (Name) ----------------------------------- (Name) - -------------------------- ----------------------------------- (Date) (Signature) 11 EX-10.48 6 EX-10.48 The following Form of Registration Rights Agreement was entered into with: William Zimmerling as of April 1, 1998, Robert Warner as of April 1, 1998, and Robert Warner as of September 2, 1998. FORM OF REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT made and entered into as of this ___ day of _____, 1998, by and between VDC Corporation Ltd., a Bermuda corporation (the "Company"), and _____, an individual residing at ______ ("Holder"). BACKGROUND ---------- WHEREAS, pursuant to an Option to Purchase Common Shares of VDC Corporation Ltd. dated _____, 1998, by and between the Company and the Holder, the Company has agreed to issue to Holder options to purchase Common Shares of the Company, par value $2.00 per share ("Common Stock") in accordance with the terms of the Option Agreement. WHEREAS, in order to induce Holder and the Company to enter into the foregoing transactions, the Company has agreed to provide Holder with the registration rights set forth in this Agreement. ARTICLE 1 CERTAIN DEFINITIONS. In addition to the other terms defined in this Agreement, the following terms shall be defined as follows: "Brokers' Transactions" has the meaning ascribed to such term pursuant to Rule 144 under the Securities Act. "Business Day" means any day on which the New York Stock Exchange ("NYSE") is open for trading. "Common Stock" means any outstanding Common Shares of the Company. "Company" means VDC Corporation Ltd., a Bermuda corporation, or any successor thereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC thereunder, all as the same shall be in effect at the relevant time. "Holder" means Holder for so long as (and to the extent that) he owns any Registrable Securities, and each of his heirs and personal representatives who become registered owners of Registrable Securities or securities exercisable, exchangeable or convertible into Registrable Securities. "Outstanding" means with respect to any securities as of any date, all such securities therefore issued, except any such securities therefore canceled or held by the Company or any successor thereto (whether in its treasury or not) or any affiliate of the Company or any successor thereto shall not be deemed "Outstanding" for the purpose of this Agreement. "Person" means an individual, a partnership (general or limited), corporation, limited liability company, joint venture, business trust, cooperative, association or other form of business organization, whether or not regarded as a legal entity under applicable law, a trust (inter vivos or testamentary), an estate of a deceased, insane or incompetent person, a quasi-governmental entity, a government or any agency, authority, political subdivision or other instrumentality thereof, or any other entity. "Registrable Security(ies)" means the Common Stock issued to the Holder pursuant to the Option Agreement, and any additional shares of Common Stock or other equity securities of the Company issued or issuable after the date hereof in respect of any such securities (or other equity securities issued in respect thereof) by way of a stock dividend or stock split, in connection with a combination, exchange, reorganization, recapitalization or reclassification of Company securities, or pursuant to a merger, division, consolidation or other similar business transaction or combination involving the Company; provided that: as to any particular Registrable Securities, such securities shall cease to constitute Registrable Securities (i) when a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of thereunder, or (ii) when and to the extent such securities are permitted to be publicly sold pursuant to Rule 144 (or any successor provision to such Rule) under the Securities Act or are otherwise freely transferable to the public without further registration under the Securities Act, or (iii) when such securities shall have ceased to be Outstanding and, in the case of clause (ii), the Company shall, if requested by the Holder or Holders thereof, have delivered to such Holder or Holders the written opinion of independent counsel to the Company to such effect. "Registration Expenses" means all expenses incident to the Company's performance of or compliance with the registration requirements set forth in this Agreement including, without limitation, the following: (i) the fees, disbursements and expenses of the Company's counsel(s), accountants, and experts in connection with the registration under the Securities Act of Registrable Securities; (ii) all expenses in connection with the preparation, printing and filing of the registration statement, any preliminary prospectus or final prospectus, any other offering documents and amendments and supplements thereto, and the mailing and delivery of copies thereof to the underwriters and dealers, if any; (iii) the cost of printing or producing any agreement(s) among underwriters, underwriting agreement(s) and blue sky or legal investment memoranda, any selling agreements, and any other documents in connection with the offering, sale or delivery of Registrable Securities to be disposed of; (iv) any other expenses in connection with the qualification of Registrable Securities for offer and sale under state securities laws, including the fees and disbursements of counsel for the underwriters in connection with such qualification and in connection with any blue sky and legal investment surveys; (v) the filing fees incident to securing any required review by the NASDAQ Stock Market of the terms of the sale of Registrable Securities to be disposed of and any blue sky registration or filing fees, and (vi) the fees and expenses incurred in connection with the listing of Registrable Securities on each securities exchange (or the NASDAQ Stock Market) on which Company securities of the same class are then listed; provided, however, that Registration Expenses with respect to any registration pursuant to this Agreement shall not include (x) expenses of any Holder's counsel, or (y) any underwriting discounts or commissions attributable to Registrable Securities, each of which shall be borne by the Holder. 2 "SEC" means the United States Securities and Exchange Commission, or such other federal agency at the time having the principal responsibility for administering the Securities Act. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder, all as the same shall be in effect at the relevant time. ARTICLE 2 PIGGYBACK REGISTRATIONS. (a) Right to Piggyback. If at any time after the date hereof, the Company proposes to file a registration statement under the Securities Act (except with respect to registration statements on Forms S-4, S-8, or any other form not available for registering the Registrable Securities for sale to the public), with respect to an offering of newly issued Common Stock for its own account, then the Company shall in each case give written notice of such proposed filing to the Holders of Registrable Securities at least 45 days before the anticipated filing date of the registration statement with respect thereto (the "Piggyback Registration"), and shall, subject to Sections 2(b) and 2(c) below, include in such Piggyback Registration such amount of Registrable Securities as the Holder may request within 20 days of the receipt of such notice. (b) Priority on Primary Registrations. If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriter advises the Company in writing that in its opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the Company, the Company shall include in such registration (i) first, the securities the Company proposes to sell, (ii) second, the Registrable Securities requested to be included in such registration to the extent that the number of shares to be registered will not, in the opinion of the managing underwriter, adversely affect the offering of the securities pursuant to clause (i), pro rata among the Holders of such Registrable Securities on the basis of the number of shares owned by such Holder and (iii) third, provided that all Registrable Securities requested to be included in the registration statement have been so included, any other securities requested to be included in such registration. (c) Priority on Secondary Registrations. If a Piggyback Registration is an underwritten secondary registration on behalf of holders of the Company's securities other than the Holders of Registrable Securities, and the managing underwriter advises the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the holders initially requesting such registration, the Company shall include in such registration (i) first, the securities requested to be included therein by the holders requesting such registration, (ii) second, the Registrable Securities requested to be included in such registration, to the extent that the number of shares to be registered will not, in the opinion of the managing underwriter, adversely affect the offering of the securities pursuant to clause (i), pro rata among the Holders of such securities on the basis of the number of shares so requested to be included therein owned by each such Holder, and (iii) third, other securities requested to be included in such registration. 3 ARTICLE 3 HOLDBACK AGREEMENTS. The Holder of Registrable Securities shall not effect any public sale or distribution (including sales pursuant to Rule 144) of equity securities of the Company, or any securities convertible into or exchangeable or exercisable for such securities, during the 60 days prior to and the 120-day period beginning on the effective date of any underwritten primary registration undertaken by the Company (except as part of such underwritten registration), unless the underwriter managing the registered public offering otherwise agrees. ARTICLE 4 REGISTRATION PROCEDURES. Whenever the Holder of Registrable Securities has requested that any Registrable Securities be registered pursuant to this Agreement, the Company shall use its best efforts to effect the registration of the resale of such Registrable Securities and pursuant thereto the Company shall as soon as practicable: (a) prepare and file with the SEC a registration statement with respect to the resale of such Registrable Securities and use its best efforts to cause such registration statement to become effective thereafter (provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company shall furnish to the counsel selected by the Holder of the Registrable Securities covered by such registration statement copies of all such documents proposed to be filed, which documents shall be subject to the review and consent of such counsel); (b) notify the Holder of Registrable Securities of the effectiveness of each registration statement filed hereunder and prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than 180 days and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement; (c) furnish to each seller of Registrable Securities such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller; (d) use its best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions as Holder reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition of the Registrable Securities owned by the sellers in such jurisdictions (provided that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph, (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction); 4 (e) notify each seller of such Registrable Securities, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any such seller, the Company shall prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; (f) cause all such Registrable Securities to be listed on each securities exchange or trading system on which similar securities issued by the Company are then listed; (g) provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement; (h) enter into such customary underwriting agreements (containing terms acceptable to the Company) as the Holder of Registrable Securities being sold or the underwriters, if any, reasonably requests (although the Company has no obligation to secure any underwriting arrangements on behalf of the Holder); and (i) make available for inspection during normal business hours by any seller of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement. ARTICLE 5 REGISTRATION EXPENSES. All Registration Expenses in connection with any of the registration events identified within this Agreement shall be borne by the Company. All other expenses shall be borne by the Holder. ARTICLE 6 INDEMNIFICATION. (a) The Company agrees to indemnify, to the extent permitted by law, the Holder of Registrable Securities, its officers and directors and each Person who controls such Holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses caused by any untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished to the Company by such Holder for use therein or by such Holder's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished such holder with a sufficient number of copies of the same. In connection with an underwritten offering, the Company shall provide reasonable and customary indemnification to such underwriters, their officers and directors and each Person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the Holder of Registrable Securities. 5 (b) In connection with any registration statement in which the Holder of Registrable Securities is participating, such Holder shall furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any such registration statement or prospectus and, to the extent permitted by law, shall indemnify the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement of material fact contained in the registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information or affidavit so furnished by such Holder. (c) Any Person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification (provided that the failure to give prompt notice shall not impair any Person's right to indemnification hereunder to the extent such failure has not prejudiced the indemnifying party) and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party shall not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. (d) The indemnification provided for under this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling Person of such indemnified party and shall survive the transfer of securities. The Company also agrees to make such provisions, as are reasonably requested by any indemnified party, for contribution to such party in the event the Company's indemnification is unavailable for any reason. 6 ARTICLE 7 OBLIGATION OF HOLDERS. (a) In connection with each registration hereunder, Holder will furnish to the Company in writing such information with respect to such Holder and the securities held by such Holder, and the proposed distribution by them as shall be reasonably requested by the Company in order to assure compliance with federal and applicable state securities laws, as a condition precedent to including such Holder's Registrable Securities in the registration statement. Each Holder also shall agree to promptly notify the Company of any changes in such information included in the registration statement or prospectus as a result of which there is an untrue statement of material fact or an omission to state any material fact required or necessary to be stated therein in order to make the statements contained therein not misleading in light of the circumstances then existing. (b) In connection with each registration pursuant to this Agreement, the Holder included therein will not effect sales thereof until notified by the Company of the effectiveness of the registration statement, and thereafter will suspend such sales after receipt of telegraphic or written notice from the Company to suspend sales to permit the Company to correct or update a registration statement or prospectus. At the end of any period during which the Company is obligated to keep a registration statement current, the Holder included in said registration statement shall discontinue sales of shares pursuant to such registration statement upon receipt of notice from the Company of its intention to remove from registration the shares covered by such registration statement which remain unsold, and such Holder shall notify the Company of the number of shares registered which remain unsold immediately upon receipt of such notice from the Company. ARTICLE 8 INFORMATION BLACKOUT. (a) At any time when a registration statement effected pursuant to this Agreement relating to Registrable Securities is effective, upon written notice from the Company to the Holders that the Company has determined in good faith that sale of Registrable Securities pursuant to the registration statement would require disclosure of non-public material information not otherwise required to be disclosed under applicable law (an "Information Blackout"), all Holders shall suspend sales of Registrable Securities pursuant to such registration statement until the earlier of: (i) thirty (30) days after the Company makes such good faith determination; and (ii) such time as the Company notifies the Holders that such material information has been disclosed to the public or has ceased to be material or that sales pursuant to such registration statement may otherwise be resumed (the number of days from such suspension of sales by the Holders until the day when such sale may be resumed hereunder is hereinafter called a "Sales Blackout Period"). (b) Notwithstanding the foregoing, there shall be no more than two (2) Information Blackouts during the term of this Agreement and no Sales Blackout Period shall continue for more than thirty (30) consecutive days. 7 ARTICLE 9 MISCELLANEOUS. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the current jurisdiction of incorporation of the Company without regard to that jurisdiction's conflict of laws provisions. For the purposes of this paragraph, the term "current" shall mean the time at which any dispute, issue or question shall arise hereunder. (b) Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. (c) Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given without the written consent of the Company and the Holders. (d) Notices. All communications under this Agreement shall be sufficiently given if delivered by hand or by overnight courier or mailed by registered or certified mail, postage prepaid, addressed, (i) if to the Company, to: VDC Corporation Ltd. 75 Holly Hill Lane Greenwich, CT 06830 Attention: Frederick A. Moran, Chief Executive Officer with a copy to: Stephen M. Cohen, Esquire Buchanan Ingersoll Professional Corporation 11 Penn Center, 14th Floor 1835 Market Street Philadelphia, PA 19103 or, in the case of the Holders, at such address as each such Holder shall have furnished in writing to the Company; or at such other address as any of the parties shall have furnished in writing to the other parties hereto. (e) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (f) Entire Agreement; Survival; Termination. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 8 IN WITNESS WHEREOF, intending to be legally bound hereby, the parties have executed this Agreement as of the date first written above. VDC CORPORATION LTD. By:_________________________________ Frederick A. Moran Chief Executive Officer HOLDER: By:_________________________________ 9 EX-10.49 7 EX-10.49 The following Form of Incentive Stock Option Agreement was entered into with the following executive officers:
Number of Shares Underlying Expiration Name Option Vesting Exercise Price Grant Date Date - ---- ------ ------- -------------- ---------- ---- Clayton F. Moran 45,000 20% per year $3.75 12/08/98 12/08/08 for five years Charles W. Mulloy 40,000 20% per year $3.75 12/08/98 12/08/08 for five years Robert E. Warner 42,500 20% per year $3.75 12/08/98 12/08/08 for five years William H. Zimmerling 33,500 20% per year $3.75 12/08/98 12/08/08 for five years
------------------------- Optionee VDC COMMUNICATIONS, INC. FORM OF INCENTIVE STOCK OPTION AGREEMENT UNDER THE VDC COMMUNICATIONS, INC. 1998 STOCK INCENTIVE PLAN (THE "PLAN") This Agreement is made as of December 8, 1998, (the "Grant Date") by and between VDC Communications, Inc., a Delaware corporation (the "Corporation") and (the "Optionee"). WHEREAS, Optionee is a valuable employee of the Corporation or one of its subsidiaries and the Corporation considers it desirable and in its best interest that Optionee be given an inducement to acquire a proprietary interest in the Corporation and an incentive to advance the interests of the Corporation by granting the Optionee an option to purchase shares of common stock of the Corporation (the "Common Stock"); NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree that as of the Grant Date, the Corporation hereby grants Optionee an option to purchase from it, upon the terms and conditions set forth in the Plan (a copy of which is attached hereto), that number of shares of the authorized and unissued Common Stock of the Corporation as is set forth on Schedule A hereto. 1. Terms of Stock Option. The option to purchase Common Stock granted herein is subject to the terms, conditions, and covenants set forth in the Plan as well as the following: (a) This option shall constitute an Incentive Stock Option which is intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended; (b) The per share exercise price for the shares subject to this option shall be the 100% of the Fair Market Value (as defined in the Plan) of the Common Stock on the Grant Date, which exercise price is set forth on Schedule A hereto; (c) This option shall vest in accordance with the vesting schedule set forth on Schedule A hereto; and (d) No portion of this option may be exercised more than ten (10) years from the Grant Date. 2. Payment of Exercise Price. The option may be exercised, in part or in whole, only by written request to the Corporation accompanied by payment of the exercise price in full either: (i) in cash for the shares with respect to which it is exercised; (ii) by delivering to the Corporation a notice of exercise with an irrevocable direction to a broker-dealer registered under the Securities Exchange Act of 1934, as amended, to sell a sufficient portion of the shares and deliver the sale proceeds directly to the Corporation to pay the exercise price; (iii) in the discretion of the Plan Administrator, through the delivery to the Corporation of previously-owned shares of Common Stock having an aggregate Fair Market Value equal to the option exercise price of the shares being purchased pursuant to the exercise of the Option; provided, however, that shares of Common Stock delivered in payment of the option price must have been held by the Optionee for at least six (6) months in order to be utilized to pay the option price; (iv) in the discretion of the Plan Administrator, through an election to have shares of Common Stock otherwise issuable to the Optionee withheld to pay the exercise price of such Option; or (v) in the discretion of the Plan Administrator, through any combination of the payment procedures set forth in Subsections (i) - (iv) of this paragraph. 3. Miscellaneous. (a) This Agreement is binding upon the parties hereto and their respective heirs, personal representatives, successors and assigns. (b) This Agreement will be governed and interpreted in accordance with the laws of the State of Delaware, and may be executed in more than one counterpart, each of which shall constitute an original document. (c) No alterations, amendments, changes or additions to this agreement will be binding upon either the Corporation or Optionee unless reduced to writing and signed by both parties. In witness whereof, the parties have executed this Agreement as of the Grant Date. VDC COMMUNICATIONS, INC. By: ------------------------ Frederick A. Moran Chief Executive Officer OPTIONEE ------------------------ 2 ------------------------ Optionee SCHEDULE A 1. Grant Date: ------------------------ 2. Number of Shares of Common Stock covered by the Option:---------------------- 3. Exercise Price (100% of Fair Market Value of Common Stock on the Grant Date): ------------------------ 4. The Option shall vest in accordance with the following schedule: (i) ----- shares shall vest on the first anniversary of the Grant Date; (ii) ----- shares shall vest on the second anniversary of the Grant Date; (iii) ----- shares shall vest on the third anniversary of the Grant Date; (iv) ----- shares shall vest on the fourth anniversary of the Grant Date; and (v) ----- shares shall vest on the fifth anniversary of the Grant Date. ------------------------ Initials of Authorized Officer of VDC Communications, Inc. ------------------------ Optionee's Initials 3 EX-10.50 8 EX-10.50 Frederick A. Moran Optionee VDC COMMUNICATIONS, INC. ------------------------ INCENTIVE STOCK OPTION AGREEMENT UNDER THE VDC COMMUNICATIONS, INC. 1998 STOCK INCENTIVE PLAN (THE "PLAN") This Agreement is made as of December 8, 1998, (the "Grant Date") by and between VDC Communications, Inc., a Delaware corporation (the "Corporation") and Frederick A. Moran (the "Optionee"). WHEREAS, Optionee is a valuable employee of the Corporation or one of its subsidiaries and the Corporation considers it desirable and in its best interest that Optionee be given an inducement to acquire a proprietary interest in the Corporation and an incentive to advance the interests of the Corporation by granting the Optionee an option to purchase shares of common stock of the Corporation (the "Common Stock"); NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree that as of the Grant Date, the Corporation hereby grants Optionee an option to purchase from it, upon the terms and conditions set forth in the Plan (a copy of which is attached hereto), that number of shares of the authorized and unissued Common Stock of the Corporation as is set forth on Schedule A hereto. 1. Terms of Stock Option. The option to purchase Common Stock granted herein is subject to the terms, conditions, and covenants set forth in the Plan as well as the following: (a) This option shall constitute an Incentive Stock Option which is intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended; (b) The per share exercise price for the shares subject to this option shall be the 110% of the Fair Market Value (as defined in the Plan) of the Common Stock on the Grant Date, which exercise price is set forth on Schedule A hereto; (c) This option shall vest in accordance with the vesting schedule set forth on Schedule A hereto; and (d) No portion of this option may be exercised more than five (5) years from the Grant Date. 2. Payment of Exercise Price. The option may be exercised, in part or in whole, only by written request to the Corporation accompanied by payment of the exercise price in full either: (i) in cash for the shares with respect to which it is exercised; (ii) by delivering to the Corporation a notice of exercise with an irrevocable direction to a broker-dealer registered under the Securities Exchange Act of 1934, as amended, to sell a sufficient portion of the shares and deliver the sale proceeds directly to the Corporation to pay the exercise price; (iii) in the discretion of the Plan Administrator, through the delivery to the Corporation of previously-owned shares of Common Stock having an aggregate Fair Market Value equal to the option exercise price of the shares being purchased pursuant to the exercise of the Option; provided, however, that shares of Common Stock delivered in payment of the option price must have been held by the Optionee for at least six (6) months in order to be utilized to pay the option price; (iv) in the discretion of the Plan Administrator, through an election to have shares of Common Stock otherwise issuable to the Optionee withheld to pay the exercise price of such Option; or (v) in the discretion of the Plan Administrator, through any combination of the payment procedures set forth in Subsections (i) - (iv) of this paragraph. 3. Miscellaneous. (a) This Agreement is binding upon the parties hereto and their respective heirs, personal representatives, successors and assigns. (b) This Agreement will be governed and interpreted in accordance with the laws of the State of Delaware, and may be executed in more than one counterpart, each of which shall constitute an original document. (c) No alterations, amendments, changes or additions to this agreement will be binding upon either the Corporation or Optionee unless reduced to writing and signed by both parties. In witness whereof, the parties have executed this Agreement as of the Grant Date. VDC COMMUNICATIONS, INC. By: /s/ Frederick A. Moran ---------------------- Frederick A. Moran Chief Executive Officer OPTIONEE /s/ Frederick A. Moran ---------------------- Frederick A. Moran 2 Frederick A. Moran Optionee SCHEDULE A 1. Grant Date: December 8, 1998 2. Number of Shares of Common Stock covered by the Option: 200,000 3. Exercise Price (110% of Fair Market Value of Common Stock on the Grant Date): $4.125 ------ 4. The Option shall vest in accordance with the following schedule: (i) 40,000 shares shall vest on the first anniversary of the Grant Date; (ii) 40,000 shares shall vest on the second anniversary of the Grant Date; (iii) 40,000 shares shall vest on the third anniversary of the Grant Date; (iv) 40,000 shares shall vest on the fourth anniversary of the Grant Date; and (v) 40,000 shares shall vest on the fifth anniversary of the Grant Date. /s/ FAM ----------------------------------- Initials of Authorized Officer of VDC Communications, Inc. /s/ FAM ----------------------------------- Optionee's Initials 3 EX-21.1 9 EX-21.1 SUBSIDIARES OF REGISTRANT 1. Masatepe Communications, U.S.A., L.L.C., a Delaware limited liability company 2. Sky King Communications, Inc., a Delaware corporation 3. VDC Telecommunications, Inc., a Delaware corporation (d/b/a Voice and Data Communications) 4. Voice & Data Communications (Hong Kong) Limited, a Hong Kong corporation EX-23.1 10 EX-23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS VDC Communications, Inc. Greenwich, Connecticut We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated September 1, 1998, relating to the consolidated financial statements of VDC Corporation Ltd., which is contained in that Prospectus. We also consent to the reference to us under the caption "Experts" in the Prospectus. /s/ BDO Seidman, LLP - -------------------- BDO Seidman, LLP Valhalla, New York June 4, 1999 EX-27 11 FDS --
5 This schedule contains Summary Financial information extracted from the Financial Statements for the nine-months ended March 31, 1999 and is qualified in its entirety by reference to such statements. 1000 9-MOS JUN-30-1999 MAR-31-1999 653 104 1652 0 0 2409 6083 336 13673 4571 1968 0 0 2 8187 13673 0 1426 0 2159 37921 0 0 (42423) 0 (43088) 0 0 0 (43088) (2.45) (2.45)
EX-27 12 FDS --
5 This schedule contains Summary Financial information extracted from the Financial Statements for the Year Ended June 30, 1998 and is qualified in its entirety by reference to such statements. 1000 YEAR JUN-30-1998 JUN-30-1998 2212 452 4300 0 0 5464 341 10 45824 156 0 0 1 22923 22743 45824 0 100 0 3450 0 0 0 (3350) 0 (3350) 0 0 0 (3155) (.72) (.72)
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