SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1997
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OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)
For the transition period from ______________ to ______________
Commission file number 0-23228
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PORTACOM WIRELESS, INC.
(Exact Name of Registrant as Specified In Its Charter)
Delaware 33-0650673
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10061 Talbert Avenue, Suite 200
Fountain Valley, California 92708
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(Address of principal (Zip Code)
executive offices)
(714) 593-3234
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) X YES NO
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(2) X YES NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Except where otherwise specified, all dollar amounts referenced in this
document are denominated in United States dollars.
As of March 31, 1998, the aggregate market value of the Registrant's Common
Stock held by non-affiliates was $6,846,577 based upon the last sales price on
February 12, 1998 of ($0.80) on the Vancouver Stock Exchange. The shares of
Common Stock are also traded on the NASD Electronic Bulletin Board. See "ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS."
As of March 31, 1998, there were 13,576,970 shares of the Registrant's
Common Stock issued and outstanding.
Transitional Small Business Disclosure Format (check one):
(1) YES X NO
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DOCUMENTS INCORPORATED BY REFERENCE: NONE
PART I
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FORWARD-LOOKING STATEMENTS
Information included in this Annual Report on Form 10-K may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements made by PortaCom
Wireless, Inc. (formerly known as "Extreme Technologies, Inc." and
"International PCBX Systems, Inc." herein referred to alternatively as the
"Company" or the "Registrant") involve known and unknown risks, uncertainties,
and other factors which may cause actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. From time
to time, information provided by the Company or statements made by its employees
may contain other forward-looking statements. Factors that could cause actual
results to differ materially from the forward-looking statements include, but
are not limited to: Bankruptcy Court actions or proceedings related to the
bankruptcy, risks associated with international operations, dependence on
licenses, governmental regulations, technological changes, intense competition,
dependence on management, the outcome of litigation to which the Company is a
party, and those described below under "Special Considerations." Given these
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to forward-
looking statements contained herein to reflect any change in management's
expectation with regard thereto or any change in events, conditions,
circumstances or assumptions underlying such statements.
ITEM 1. BUSINESS
GENERAL
PortaCom Wireless, Inc. has engaged in initial stage efforts to evaluate
the feasibility of, and attempt to secure, licensing opportunities and joint
venture arrangements for the operation of wireless telephone networks as well as
other state-of-the-art mobile radio communication systems and new telephone
technologies. Its corporate objective has been to become a leading independent
provider of wireless and wire line telecommunications services in selected
developing world markets.
The Company was formed as a British Columbia, Canada corporation in 1989.
On December 23, 1996, the Company reincorporated from British Columbia to
Wyoming pursuant to a procedure known as a "continuance", and on December 24,
1996, the Company merged with its wholly owned Delaware subsidiary and thereby
reincorporated into Delaware. The Delaware subsidiary had been formed in 1994
for the purpose of the merger, which had been postponed for business reasons.
During 1997, the Company conducted business operations both directly and through
one majority owned foreign subsidiary, American Cambodian Telecom, Ltd. ("ACT")
Subsequent to year end, the Company sold its equity interest in ACT. (See
"American Cambodian Telecom Ltd."). The Company also has four wholly owned U.S.
subsidiaries which did not operate
during 1997 and which are not presently operating: PortaCom International, Ltd.
("PIL"), Extreme Telecom, Inc. ("Telecom"), PCBX Systems, Inc. ("PCBX"), and
Extreme Laboratories, Inc., formerly known as Spheric Audio Laboratories, Inc.
("Laboratories").
The Company holds a minority interest in Metromedia Asia Corporation
("MAC"), which is comprised of 2,000,000 shares of MAC common stock (presently
held in escrow) and warrants to purchase 4,000,000 shares of MAC common stock at
$4.00 per share. MAC is involved in the build-out of telecommunications
projects in China. See "Metromedia Asia Corporation."
Sale of Principal Asset and Related Financing
On November 25, 1997, the Company and VDC Corporation, Ltd. ("VDC") entered
into an asset purchase agreement (the "Prepetition Asset Purchase Agreement"),
whereby VDC agreed to buy and the Company agreed to sell its minority interest
in MAC to VDC in consideration of up to $700,000 and 5.3 million shares of the
common stock of VDC (the "Asset Sale"). The Prepetition Asset Purchase
Agreement expired by its terms as of March 1, 1998. However, as of February 16,
1998, the parties entered into an amendment to the Prepetition Asset Purchase
Agreement, which extended the date by which the transaction was to be
consummated to April 30, 1998 together with certain additional consideration.
In addition, funding was also provided to the Company by VDC pursuant to
that certain Loan Agreement, Security Agreement, and Pledge Agreement, each
dated November 10, 1997, and other documents, instruments, and notices,
including UCC Financing Statements, executed delivered or recorded in connection
therewith (collectively, the "Prepetition Loan Documents"), whereby VDC agreed
to extend credit and advance funds to the Company in an amount not to exceed
$700,000. The funds, together with all accrued interest, costs and other
charges constitute the Prepetition Indebtedness, which is secured by a lien
granted to VDC in and to the Company's interests in the MAC shares and warrants.
VDC perfected its interest in the MAC warrants by taking possession thereof.
The MAC shares remain in the possession of MAC, which holds such shares to
secure a contingent contractual indemnification obligation of the Company, which
expires on January 1, 1999 assuming certain conditions have been met.
Chapter 11 Reorganization
On March 23, 1998 (the "Petition Date"), the Company filed a voluntary
petition (the "Bankruptcy") for relief under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court, District of Delaware (the
"Bankruptcy Court"). The proceeding is being administered under the caption
"In re: PortaCom Wireless, Inc.", Case No. 98-661 (PJW), pursuant to an order of
the Bankruptcy Court. The following U.S. subsidiaries were not included in the
bankruptcy filings: PIL, Telecom, PCBX, and Laboratories. The petition requests
that the existing directors and officers of the Company be left in possession of
the Company's assets and responsible for the business of the Company.
In 1996, the Company generated revenues of approximately $9,000,000
(approximately $1,000,000 of which were cash revenues) pursuant to a Termination
Agreement between the
Company and Asian American Telecommunications Corporation, the predecessor to
MAC. In 1997, the Company did not generate any revenues. Due to the lack of
capital resources, the Company's reduced its business activities such that
operations virtually ceased. At the same time, the Company faced increasing
pressure from trade creditors and litigation. See "Legal Proceedings."
During the three months ended December 31, 1997, the Company undertook an
informal settlement of its outstanding indebtedness. In certain instances, the
Company was able to extinguish indebtedness by securing claim releases from
creditors in consideration for discounted cash payments. In other instances,
the Company and its creditors or claimants have entered into agreements (the
"Prepetition Settlements") that provide for extinguishment of debt and a claim
release in consideration for a portion of the shares of VDC and/or cash that the
Company expects to receive in connection with the Asset Sale. The Company
believes the Prepetition Settlements are enforceable and will vigorously attempt
to enforce the Prepetition Settlements in the Bankruptcy, to the extent
necessary. As of the Petition Date, the informal settlement would have been
concluded but for a small number of significant creditors and claimants with
whom the Company had been unable to reach agreements.
Following the amendment to the Prepetition Asset Purchase Agreement, the
parties agreed that the transaction could not be consummated within the time
agreed upon. VDC's agreement to extend credit to the Company was intended to
provide the Company with liquidity through the consummation of the Asset Sale,
which was to occur prior to May 1, 1998. Facing a certain default under the
Prepetition Indebtedness to VDC along with the pressures of unresolved claims
and continuing litigation, the Company determined that the commencement of the
Bankruptcy was advisable to maximize the value of its assets for the benefit of
all creditors and equity security holders.
VDC has committed to fund the Company's operations on a secured basis
through the completion of the Asset Sale. Accordingly, the Company and VDC
entered into a certain Debtor In Possession Loan, Security, and Pledge
Agreement, under which VDC agreed to extend credit and advance funds to the
Company (the "DIP Financing").
As a result of the Bankruptcy, absent approval of the Bankruptcy Court, the
Company is prohibited from paying, and creditors are prohibited from attempting
to collect, claims or debts arising prior to the Petition Date. The
consummation of a plan of reorganization is the principal objective of the
Company's Bankruptcy. A plan of reorganization sets forth the means for
satisfying claims and interests in the Company, including the liabilities
subject to compromise. The consummation of a plan of reorganization for the
Company will require the requisite vote of impaired creditors and interest
holders under the Bankruptcy Code and confirmation of the plan by the Bankruptcy
Court.
The Company expects to propose a Chapter 11 plan of reorganization for
itself within the time allowed for such plan to be filed exclusively by the
Company. Although management expects to file a plan of reorganization in 1998,
which would contemplate emergence from the Bankruptcy in 1998, there can be no
assurance at this time that a plan of reorganization will be proposed by the
Company or approved or confirmed by the Bankruptcy Court, or that such plan will
be
consummated. After the expiration of the exclusivity period, creditors of the
Company have the right to propose alternative plans of reorganization.
Notwithstanding the substantial assets of the Company which are expected to be
available following the asset sale for distribution on a pro rata basis to the
Company's equity security holders as part of any plan of reorganization,
substantial likelihood exists that, immediately following such distribution,
material dilution or elimination of the equity of existing shareholders may
occur.
During the Bankruptcy and subject to the approval of the Bankruptcy Court,
the Company intends to consummate the Asset Sale pursuant to Section 363 of the
Bankruptcy Code. The Company believes, based on the current value of the shares
of VDC's common stock, that it will receive substantial value in consideration
of the Asset Sale if consummated pursuant to that certain Post-Petition Asset
Purchase Agreement dated March 23, 1998 between the Company and VDC. The Post-
Petition Asset Purchase Agreement was amended by a stipulation entered by the
Bankruptcy Court on April 6, 1998 which provides for an escrow account in the
amount of $2,600,000 (minimum of $1,250,000 in cash) to be funded by VDC for the
benefit of holders of priority unsecured claims and general unsecured claims.
The number of VDC shares to be delivered to the escrow agent will be the
difference between the value of the 5,300,000 VDC shares and the cash escrow
delivered and indebtedness divided by the value of the VDC stock. The Company,
as of the date of this Annual Report, is soliciting higher and better offers for
the MAC shares and warrants, which may result in one or more bona fide offers
which are tendered in accordance with the court approved bidding procedures and
which are, in the opinion of management, both higher and better than the offer
of VDC. Whether the MAC shares and warrants are sold to VDC or some third
party, the proceeds from the sale will be used to fund the Company's plan of
reorganization.
Inactive Subsidiaries
PIL was formed in 1994 to evaluate the feasibility of, and attempt to
secure, licensing and joint venture arrangements for the operation of wireless
telephone networks, and other communication systems and technologies. As of
December 31, 1996, the operations of PIL had produced no revenues or definitive
licensing arrangements and management believed these operations would likely
continue to remain limited in scope until certain valuable licensing
arrangements or joint venture participation could be secured. During 1997,
management determined that the likelihood of PIL obtaining definitive licensing
arrangements had diminished substantially due to prolonged delays and apparent
lack of progress. Furthermore, the Company elected to discontinue funding of
the development activities of PIL until significant further progress became
evident. Accordingly, due to PIL's exhausted financial resources, there is
considerable doubt that any definitive licensing arrangements will be obtained
by PIL during 1998, or at all.
PCBX Systems developed and marketed a personal computer branch exchange
("PCBX") which permitted the operation of a full-featured telephone network
control system from a centrally located personal computer. The PCBX systems
offered by the Company featured the Company's proprietary integrated circuit
board which fit into a personal computer and allowed a number of fundamental and
advanced features to be programmed into a telephone system. The principal
advantages of the Company's PCBX systems over competing systems were believed by
management
to include low cost per feature, significant flexibility and mobility, and
relative ease of programming, upgrading and maintenance.
Telecom entered into an agreement with Nitsuko America Corporation
("Nitsuko America") to distribute telecommunications products manufactured by
Nitsuko America which were not then being distributed otherwise in the United
States.
Laboratories developed and marketed a line of high quality audio speakers,
as well as a proprietary audio recording and playback technology known as
"SphericSound". "SphericSound" represented a form of audio recording and
playback that featured multi-dimensional imaging that created the realistic
sensation of directional sound movement emanating from stationary speakers.
Because of substantial losses, the associated costs of continued
development, the lack of profitability by competitors and the uncertainty of
marketing costs associated with commercializing both proprietary technologies
and other manufacturers' products, management decided in 1995 to discontinue the
development and marketing activities of PCBX, Telecom and Laboratories.
Funding of the Company's operations since inception has been provided by:
(i) revenues from the sale of PCBX products, and, to a significantly lesser
extent, the products of Telecom and Laboratories; (ii) proceeds from the sale of
securities pursuant to a series of private placement transactions; (iii)
completion of an initial public offering on the Vancouver Stock Exchange during
October 1992; and (iv) revenues generated in 1996 as a result of the AAT
transaction. See "Metromedia Asia Corporation."
Metromedia Asia Corporation
On May 28, 1996, the Company announced an agreement to acquire, in exchange
for shares of common stock of the Company, all of the outstanding shares of
Asian American Telecommunications Corporation ("AAT"), a Cayman Islands
telecommunications services developer which has focused its business activities
on developing PSTN and wireless telecommunications services in China. On July
18, 1996, the Company announced that the terms of the acquisition had been
adjusted to take into account a $25,000,000 financing by AAT. As management
continued to review the proposed transaction, including analysis and discussion
with legal, tax and financial advisors, it was recognized that the proposed
transaction required further modification in order to avoid potentially adverse
tax consequences to both the Company and its shareholders. On September 18,
1996, the Company announced that, due to significant tax and regulatory
considerations, it had elected to receive a direct ownership position in AAT
consisting of 2,000,000 common shares and warrants to acquire 4,000,000 common
shares of AAT at a price of $4.00 per share, plus an immediate payment of
$1,000,000 in cash from AAT to the Company. The 2,000,000 common shares of AAT
are to be held in escrow until January 1, 1999 in the event of any claims
arising out of the original proposed acquisition or the modification and
subsequent termination of that agreement, although as of the date of this
report, management is not aware of any claims or potential claims.
On December 23, 1996 AAT agreed to enter into a Business Combination
Agreement with Metromedia Asia Corporation ("MAC") and Metromedia International
Telecommunications, Inc. ("MITI"). In connection with the Business Combination
Agreement, MAC consummated, on February 28, 1997, an exchange offer for all of
the outstanding shares and warrants of AAT (the "Exchange Offer"). The Company
agreed to exchange all of its shares and warrants pursuant to the terms of the
Exchange Offer. Under the terms of the Exchange Offer, each share of AAT common
stock was exchanged for one share of MAC regular common stock, and each warrant
to acquire AAT common stock at $4.00 per share was exchanged for a warrant to
acquire MAC common stock at $4.00 per share. The 2,000,000 common shares of MAC
will be held in escrow under the same terms and conditions as were applicable to
the AAT shares which were tendered in the Exchange Offer.
American Cambodian Telecom, Ltd.
On December 26, 1996, the Company entered into a joint venture agreement
(the "Cambodian JVA") as the 86% managing partner of American Cambodian
Telecommunications Ltd. ("ACT"), a limited liability company which holds a
twenty-five (25) year renewable license to develop a mobile wireless system in
the Kingdom of Cambodia. ACT had agreed to buy back all of the outstanding
shares of its 14% joint venture partner, Khmer Sameky Telecom, Ltd., on or
before December 26, 1997. Pursuant to the Cambodian JVA, after December 26, 1997
the capital structure of ACT was to change such that the Company would retain a
75% interest in ACT and the Ministry of Posts and Telecommunications of Cambodia
would hold a 25% interest in ACT and would retain the right to purchase any new
ACT shares issued in order to maintain a 25% interest.
By December 26, 1997 and due to the failure to obtain funding, ACT
defaulted on its obligations under the Cambodian JVA and license in that it
failed to consummate the buy back agreement with respect to the shares of Khmer
Sameky Telecom, Ltd. and, as a result, failed to grant the 25% interest in ACT
to the Ministry of Posts and Telecommunications of Cambodia.
Based upon representations by ACT that the Cambodian JVA had been breached
and that an extension of time to remedy such breach had been vigorously pursued
but not obtained, it was determined at December 31, 1997 that the Company's
investment in ACT had experienced an other than temporary decline in value;
furthermore, the likelihood that the $345,454 in loans made by the Company to
ACT would be repaid had significantly decreased. Accordingly, the investment and
advances were written down to their estimated fair value of $-0-.
The Company has previously disclosed that it would require substantial
additional capital investment to pursue the development of its planned network
in Cambodia and has stated that failure to generate sufficient funds from the
issuance of additional debt or equity on favorable terms and conditions would
have a material adverse effect on the financial condition of the Company. Among
other things, management has attributed the failure to generate sufficient funds
for investment in ACT to the state of political and socioeconomic unrest which
developed during 1997 as a result of a military conflict which arose between the
two ruling parties of Cambodia's coalition government.
On January 15, 1998, the Company executed a prepetition termination and
settlement agreement with a former officer of the Company. Pursuant to this
agreement, the Company agreed to transfer to this officer its equity interest in
ACT and any rights, privileges and interests which it had in the license owned
by ACT, in exchange for the officer's waiver and release of all claims he had
against the Company.
Microwave Communications Limited.
On May 9, 1997, the Company announced that it had signed, subject to
certain conditions, including regulatory approval, agreements in principal to
acquire a controlling interest in Microwave Communications Limited ("MCL"), a
paging telecommunications venture in the Republic of India (the "MCL
Transactions"). Due to the failure of the Company to secure financing
sufficient to consummate the MCL Transactions, the agreements expired pursuant
to their terms on July 15, 1997 and, while the Company vigorously pursued an
extension, such was not obtained.
INDUSTRY OVERVIEW
Demand For Communications Services in Developing Countries.
Many developing countries are experiencing rapid economic growth. Often,
the telecommunications services presently available in these countries are
inadequate to support current demand let alone such growth. To address the
latent demand for communications services and to promote economic growth,
governments in many developing countries have begun deregulating their
telecommunications industries and encouraging the formation of private
communications service providers. As a result, the Company believes there is a
substantial opportunity for privately owned companies to provide wire line and
wireless communications services in these countries.
While the Company believes that the cellular telephony industry is well
established in the developed world, the industry is still in its infancy in the
developing world. The Company believes that wireless cellular telephony has the
potential to grow rapidly in developing countries because of the poor quality of
the existing wireline service, the unsatisfied demand for basic telephone
service and the increasing requirements of users who want the convenience of
cellular telephones. In some countries the cellular telephone network provides
significantly improved access, in terms of call quality and service
establishment time, to the local and international wireline network compared
with the existing wireline service. In addition, developing countries are
expected to benefit both from better technology and lower equipment costs than
those experienced at comparable stages of market development in developed
countries.
Wireline networks involve extensive outside infrastructure in the form of
buried or overhead cable networks, while cellular telephone systems do not
require the same level of construction activities. For developing countries,
cellular telephone systems can represent a faster and more cost-effective method
of expanding telecommunications infrastructure than deployment of traditional
wireline networks.
Role of Wireless Technologies.
A number of wireless technologies provide voice and data services that
address the communications needs of developing countries. These services include
cellular telephony, wireless local loop ("WLL") and paging. The Company
believes that existing and emerging wireless technologies generally compare
favorably to land-line technologies in terms of functions and service, yet
provide lower system deployment costs and the potential for more rapid
deployment.
Cellular Telephony (Mobile Telephony).
Cellular telephony systems are capable of providing high quality voice and
data communications to and from vehicle-mounted and hand-held radio terminals
(cell phones) and are capable of handling a great number of calls at any one
time. Cellular telephony technology is based upon spatial diversity, the
division of a given geographical area into a number of overlapping cells and the
simultaneous re-use of radio channels in non-contiguous cells within the system.
Each cell contains a low power transmitter-receiver as part of a base station
that communicates by radio signal with cellular terminals in that cell. Each
cell is interconnected by wire lines or microwave to a central switching point
or Mobile Switching Center ("MSC") that controls the routing of calls and which,
in turn, is connected to the public switched telephone network. It is the MSC
that allows cellular telephone users to move freely from cell to cell while
continuing their calls.
Cellular telephone systems generally offer subscribers the features offered
by the most up-to-date wireline telephone services. Most cellular telephone
systems are interconnected with the wireline telephone network. Cellular
telephone system operators therefore require an interconnect arrangement with
the local wireline telephone companies and the terms of such arrangements are
material to the economic viability of the system.
Currently, most cellular systems use analog technologies such as AMPS (U.S.
standard), TACS (UK/European standard) or NMT ( a European standard). In some
high density markets analog systems are reaching their capacity limits and are
being supplemented with new digital technologies that offer greater capacity
than analog systems.
Several digital cellular technologies have been developed in the last three
to five years. D-AMPS has been introduced as a digital upgrade for operators of
existing AMPS systems. In Europe, the digital Global System for Mobile
Communication ("GSM") standard has been developed and is widely available
throughout Europe and Asia. GSM provides approximately two to three times the
capacity of analog systems and has the additional benefit of enabling
international roaming due to its broad availability, system compatibility, and
universal terminal compatibility.
Another new digital technology, Code Division Multiple Access ("CDMA"), is
being introduced in the U.S. and several other major countries. CDMA provides
the highest capacity of any digital cellular technology at this point, with six
to ten times analog system capacity in a mobile environment. Its first
commercial deployment in Hong Kong has been successful, and has been deployed in
Personal Communications Services ("PCS") networks in the United States and
elsewhere.
CDMA digital wireless technology provides a universal technology platform
for a wide range of services and applications, including digital cellular, PCS,
wireless local loop, mobile satellite systems, and other types of networks.
Because of its spread spectrum RF characteristic, CDMA is able to provide a mix
of higher data rates simultaneously with lower data rates than certain other
wireless technologies. CDMA also offers superior call and voice quality than
other wireless technologies.
The cellular telephone industry is typically characterized by high fixed
costs and low variable costs. Until technological limitations on total capacity
are approached, additional cellular system capacity can normally be added in
increments that closely match demand and at less than the proportionate cost of
the initial capacity. The industry has also seen declining equipment prices in
real terms. Once revenues exceed fixed costs, incremental revenues are expected
to yield a high incremental operating profit, giving cellular telephone system
operators an incentive to stimulate and satisfy demand for service in the
market. The amount of profit, if any, under such circumstances is dependent on,
among other things, prices and variable marketing costs, which, in turn, are
affected by the amount and extent of competition.
Wireless Local Loop.
WLL refers to a group of technologies designed to provide customer access
to the public switched telephone network using wireless radio technologies
rather than traditional wire or fiber optic lines. A WLL system typically
consists of a number of radio base stations (similar to cell sites used for
cellular telephone) covering the target market area, a switching center, and
fixed subscriber terminals on the subscriber's premises. On the fixed subscriber
terminal a standard telephone jack allows connection to standard telephone
equipment. In some systems portable handsets are available, providing the added
value of wide-area cordless telephone service to the subscriber.
The Company believes that WLL is an attractive technology for the rapid
expansion of telephone facilities in developing countries. The coverage in terms
of service area provided by a single base station can compare favorably with the
coverage of a single cellular base station. The use of digital technology
provides substantially greater capacity than analog alternatives which the
Company believes results in WLL being a cost-effective communications solution.
Several types of technology can be used to provide WLL, including CDMA
technology.
WLL networks provide subscribers with access to the standard land-line
telephone network through wireless transmission from land-line switch to the
telephone site in the home or business rather than through conventional land
lines. This is accomplished by placing small transceivers at the telephone site.
Functionally, WLL operates in the same way as a regular telephone, with the
added possibility of wide area "cordless telephone" use. WLL networks are
generally quicker to install and less expensive than deploying new land-line
systems.
Paging Technology
Paging is a method of wireless communication that uses an assigned radio
frequency to contact a subscriber virtually anywhere within a designated service
area. A subscriber carries a
pager that receives messages by the broadcast of a one-way radio signal. To
send a message to a subscriber, a caller first dials an access code and the
subscribers designated pager number. The call is routed to an electronic paging
terminal which generates a signal that is sent to radio transmitters in the
services area. Depending upon the topography of the service area, the operation
radius of a radio transmitter typically ranges from 30 to 50 kilometers. The
transmitters broadcast a signal that is received by the pager, which alerts the
subscriber by a tone, vibration or flash that there is a message.
There are three basic types of paging services: numeric (digital display);
alphanumeric display, and tone only. Numeric paging services enable a caller,
using a touchtone telephone, to transmit to a subscriber a numeric message
consisting of a telephone number, an account number or coded information.
Numeric pagers have memory capability to store several numeric messages which
can be recalled by a subscriber when desired. Alphanumeric paging services
allow subscribers to receive and store messages consisting of both letters and
numbers. Alphanumeric pagers have sufficient memory to store between 500 and
5,000 characters. Advanced alphanumeric systems also permit the receiving page,
by using a low power transmitter installed in the pager to send a brief reply
back to the sending pager. Tone-only paging service notifies the subscriber
that a call has been received by making a beeping sound or producing a
vibration, but does not display numbers or messages.
BUSINESS STRATEGY
The Company, subject to consummation of a plan of reorganization, emergence
from the Bankruptcy and receipt of adequate financing, intends to become a
significant provider of wireless communications services in selected developing
countries, typically either through a joint venture with a local partner or as a
significant participant in a corporate local venture. In some cases, the
Company's local partners may have previously been granted telecommunications
licences. The Company typically, although not exclusively, will play an active
role in the development and management of its operating companies and
developmental stage projects, and the Company will attempt to negotiate
shareholder agreements that provide the Company with the right to approve key
decisions at the operating company or developmental stage project level. The
Company intends to operate mainly in developing markets, which it believes offer
long-term growth characteristics superior to those in more developed markets.
The economic growth in these markets is characterized by an expanding need for
telecommunications services.
SPECIAL CONSIDERATIONS
Early Stage of Development of Wireless Projects. The successful development and
commercialization of any early stage projects of the Company will depend on a
number of important financial, logistical, technical, marketing, legal and other
factors, the outcome of which cannot be predicted. The implementation of the
Company's projects will require significant amounts of financing to fund capital
expenditures, working capital requirements and other cash needs, including the
costs of obtaining additional licenses. In addition, there can be no assurance
that these projects will not encounter engineering, design or other operational
problems. There can be no assurance that
the Company can successfully develop any of its planned developmental stage
projects or that any of these projects or any of its operating companies will
achieve commercial success.
Negative Operating Cash Flow; Dependence on Additional Financing; No Commitments
For Additional Financing. The Company has incurred net losses since its
inception and had an accumulated deficit of approximately $14 million as of
December 31, 1997 The Company anticipates that its net losses will increase
significantly in the foreseeable future, and there can be no assurance as to
whether or when the Company's operations will become profitable. The Company
used cash in operations and investing activities of approximately $1.4 million
in the year ended December 31, 1997, and expects such negative cash flows to
continue and possibly increase in the period immediately following its planned
emergence from the Bankruptcy. Because of such negative cash flow and negative
working capital and the capital intensive nature of the Company's business, the
Company will require continuing sources of outside debt and equity financing to
fund its working capital needs, investments and other cash requirements. In
addition, the Company intends to pursue aggressively additional opportunities
for wireless projects and anticipates that it will require additional sources of
financing in order to pursue those projects. However, the Company has no
commitments or arrangements for additional financing, and there can be no
assurance that any additional debt or equity financing will be available to the
Company on acceptable terms when required by the Company or at all. If adequate
sources of additional financing are not available, the Company will be forced to
delay, scale back or eliminate its projects or to liquidate any investments it
may acquire.
Joint Venture and Investment Arrangements. The Company intends to conduct its
business operations through joint ventures with local strategic partners and
through investments in local companies that have previously been granted
licenses. Its participation in each joint venture and investment will differ
from market to market and the Company may not have majority ownership interests
in some such joint ventures or investments. Even when the Company does have a
majority ownership interest, the Company's ability to withdraw funds, including
dividends, from its participation in, and to exercise management control over,
joint ventures and investments therein, will be dependent in some cases on
receiving the consent of the other participants, over which the Company may have
no control. While the precise terms of the arrangements will vary, the
Company's joint venture interests or investments may be adversely affected in
the event that disagreements develop with joint venture partners or majority
shareholders in a particular project.
Risks Inherent in Growth Strategy. The Company hopes to grow rapidly, subject
to the availability of additional financing, and is actively seeking and
evaluating new investment opportunities in foreign countries. This strategy
presents the risks inherent in assessing the value, strengths and weaknesses of
development opportunities, in evaluating the costs and uncertain returns of
building and expanding the facilities for operating systems and in integrating
and managing the operations of additional operating systems. The Company's
growth strategy will place significant demands on the Company's operational,
financial and marketing resources and on its management. Any failure to manage
the Company effectively could have a material adverse effect on the Company.
Technological Risk; Risk of Obsolescence. The Company expects that its
developmental stage projects will generally use new and emerging technologies.
Although many of the technologies to
be used in the future by the Company have been developed by large international
telecommunications companies, most are expected to be advanced technologies
which have only recently been developed and commercially introduced. There can
be no assurance that any operating companies and or developmental stage projects
will not experience technical problems in the commercial deployment of these
technologies, particularly because they are being introduced in developing
countries. In addition, the technology used in wireless communications is
evolving rapidly and one or more of the technologies planned to be utilized by
the Company may be unpopular with its customers or may become obsolete, which in
either case would likely have a material adverse effect on the Company. There
can be no assurance that the Company will be able to keep pace with ongoing
technological changes in the wireless telecommunications industry.
Risk of Modification or Loss of Licenses; Uncertainty as to the Availability,
Cost and Terms of Licenses; Restrictions on Licenses. The Company's ability to
obtain new licenses in the future is essential to the Company's operations.
However, these licenses are typically granted by governmental agencies in
developing countries, and there can be no assurance that these governmental
agencies will not seek to unilaterally limit, revoke or otherwise adversely
modify the terms of these licenses in the future, any of which could have a
material adverse effect on the Company, and the Company may have limited or no
legal recourse if any of these events were to occur. In addition, there can be
no assurance that renewals to these licenses will be granted or, if renewed,
that the renewal terms will not be substantially less favorable to the Company
than the original license terms, any of which could have a material adverse
effect on the Company. Likewise, there can be no assurance that the Company's
operating companies and developmental stage projects, if any, will obtain any or
all of the licenses necessary for their proposed operations.
Dependence on Partners. The Company will generally continue to depend on local
partners to obtain required licenses in all of its wireless projects. In
addition, in order to pursue larger scale projects, including certain WLL
projects, the Company is often dependent on strategic partners with resources
beyond those of the Company. In WLL projects, the Company may require the
participation of a larger telecommunications company possessing the substantial
capital and operating resources required to finance and deploy a WLL system. The
failure of the Company to identify and enter into relationships with strong
partners, or the failure of those partners to provide these resources, may have
a material adverse effect on the Company.
Construction Risks. The operating companies and developmental stage projects in
which the Company intends to invest typically will require substantial
construction of new wireless networks and additions to existing wireless
networks. Construction activity will require the operating companies and
developmental stage projects, if any, to obtain qualified subcontractors and
necessary equipment on a timely basis, the availability of which varies
significantly from country to country. Construction projects are subject to cost
overruns and delays not within the control of the operating company or the
developmental stage project or its subcontractors, such as those caused by acts
of governmental entities, financing delays and catastrophic occurrences. Delays
also can arise from design changes and material or equipment shortages or delays
in delivery. Accordingly, there can be no assurance that the operating companies
or developmental stage projects will be able to complete current or future
construction projects within the amount budgeted or within the time periods
projected, or at all. Failure to complete construction within the amount
budgeted or on a
timely basis could jeopardize subscriber contracts, franchises or licenses and
could have a material adverse effect on the Company. In particular,
telecommunications licenses often are granted on the condition that network
construction be completed or commercial operations be commenced by a specified
date. Failure to comply with these deadlines could result in the loss or
revocation of the licenses.
Competition. Although the implementation of advanced wireless technologies is
in the early stages of deployment in most developing countries, the Company
believes that its business will become increasingly competitive, particularly as
businesses and foreign governments realize the market potential of these
wireless technologies. A number of large American, Japanese and European
companies, including U.S.-based regional Bell operating companies and large
international telecommunications companies, are actively engaged in programs to
develop and commercialize wireless technologies in developing countries. In many
cases, the Company will also compete against local land-line carriers, including
government-owned telephone companies. Most of these companies have substantially
greater financial and other resources, including research and development staffs
and technical and marketing capabilities than the Company. The Company
anticipates that there will be increasing competition for additional licenses
and increased competition to the extent such licenses are obtained by others.
Although the Company intends to employ relatively new technologies, there will
be a continuing competitive threat from even newer technologies which may render
the technologies employed by the Company obsolete.
Regulation. The wireless services of the Company's developmental stage
projects, if any, are subject to governmental regulation, which may change from
time to time. There can be no assurance that material and adverse changes in the
regulation of the Company's future operating companies or developmental stage
projects will not occur in the future. Such regulations can encompass foreign
ownership restrictions, service requirements, restrictions on interconnection of
wireless systems to government-owned or private telephone networks, subscriber
rate-setting, technology and construction requirements, among others. These
regulations may be difficult to comply with, particularly given demographic,
geographic or other issues in a particular market. Further, changes in the
regulatory framework may limit the ability to add subscribers to developing
systems. An operating company's or developmental stage project's failure to
comply with applicable governmental regulations or operating requirements could
result in the loss of licenses or otherwise could have a material adverse effect
on the Company.
Inflation; Currency Devaluations and Fluctuations. Many developing countries
have experienced substantial, and in some periods extremely high, rates of
inflation and resulting high interest rates for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain developing countries
and could have an adverse effect on the operating companies and developmental
stage projects in those countries, including an adverse effect on their ability
to obtain financing. The value of the Company's investment in an operating
company or developmental stage project will be affected by the currency exchange
rate between the U.S. dollar and the applicable local currency. In general, the
Company does not hedge against foreign currency exchange rate risks. As a
result, the Company may experience economic loss with respect to its investments
and fluctuations in its results of operations solely as a result of currency
exchange rate fluctuations.
Foreign Corrupt Practices Act. The Company is subject to the Foreign Corrupt
Practices Act ("FCPA"), which generally prohibits U.S. companies and their
intermediaries from bribing foreign officials for the purpose of obtaining or
keeping business or licenses or otherwise obtaining favorable treatment.
Although the Company has taken precautions to comply with the FCPA, there can be
no assurance that such precautions will protect the Company against liability
under the FCPA, particularly as a result of actions which may in the past have
been taken or which may be taken in the future by agents and other
intermediaries for whose actions the Company may be held liable under the FCPA.
In particular, the Company may be held responsible for actions taken by its
strategic or local partners even though such strategic or local partners are
themselves typically foreign companies which are not subject to the FCPA; and
the Company has no ability to control such strategic or local partners. Any
determination that the Company has violated the FCPA could have a material
adverse effect on the Company.
Possible Changes in Regulatory Agencies and Political Structure; Political
Instability. The Company intends to acquire interests in wireless telephone
licenses around the world, and will likely be subject to government regulation
in each market it enters. The governments of these countries are likely to
differ widely with respect to structure, constitution and stability, and some of
such countries may lack mature legal and regulatory systems. To the extent the
Company's operations depend on governmental approval and regulatory decisions,
the operations may be adversely affected by changes in the political structure
or government representatives in each of the markets in which the Company will
operate. No assurance can be given that factors such as these will not have a
material adverse effect on the Company's operations in particular countries.
Government actions in the future could have a significant adverse effect on
economic conditions in a developing country or may otherwise have a material
adverse effect on the Company and its operating companies and developmental
stage projects. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other developments could materially
adversely affect the value of the Company's interests in operating companies and
developmental stage projects in particular developing countries. The Company
has been and may continue to be adversely affected by political or social unrest
or instability in foreign countries. Such unrest or instability resulting from
political, economic, social or other conditions in foreign countries has had and
could continue to have a material adverse effect on the Company.
The Company does not have political risk insurance in the countries in
which it currently conducts business. Moreover, applicable agreements relating
to the Company's interests in its operating companies are frequently governed by
foreign law. As a result, in the event of a dispute, it may be difficult for the
Company to enforce its rights. Accordingly, the Company may have little or no
recourse upon the occurrence of any of these developments or if any of its
partners seek to re-negotiate existing or future agreements. To the extent that
any of the operating companies seeks to make a dividend or other distribution to
the Company, or to the extent that the Company seeks to liquidate its investment
in an operating company or developmental stage project and repatriate monies
from a relevant country, local taxes, foreign exchange controls or other
restrictions may effectively prevent the transfer of funds to the Company or the
exchange of local currency for U.S. dollars.
COMPETITION
Because the implementation of wireless technologies is at an early stage of
development in many developing countries, the Company believes there are
significant opportunities to form, develop and operate companies that deploy
these technologies. The Company believes its business will become increasingly
competitive, particularly as businesses and foreign governments realize the
market potential of wireless technologies. A number of large American, Japanese
and European companies, including regional Bell operating companies and major
international carriers, are actively engaged in programs to develop and
commercialize wireless technologies in developing countries. Most of these
companies have substantially greater financial and other resources, research and
development staffs and technical and marketing capabilities than the Company.
The Company's operating companies and developmental stage projects will
frequently compete against traditional land-line companies (i.e. local telephone
companies), cellular telephone companies and direct competitors using the same
wireless technologies as the operating companies. The Company's competitive
strategy depends on the service offered and the competitor. For example, the
Company's strategy is to form CDMA operating companies to compete against
cellular telephone service providers by offering greater functionality at lower
cost, particularly for business users, to compete against traditional land-line
carriers by offering better service, faster deployment and lower construction
costs and to compete against direct competitors, including those formed by large
American, Japanese and European companies, by relying on local partners to
obtain operating licenses and provide access to existing telecommunications
asset bases. There will, however, be increasing competition for licenses; and
there will be increased competition once licenses are obtained from both other
wireless operators and, in some cases, from government-owned telephone
companies. Although the Company intends to employ new technologies, there will
be a continuing competitive threat that even newer technologies will render the
wireless systems employed by certain operating companies obsolete. There is no
assurance that any of the Company's operating companies or developmental stage
projects, if any, will compete successfully in the marketplace.
PATENTS AND PROPRIETARY TECHNOLOGY
The Registrant has applied for, and subsequently elected to abandon
applications for, copyrights and patents on several of its products, and trade
names and trademarks related to discontinued lines of business which are no
longer material to the operations of the Registrant. The Registrant does not
have or use patents, trademarks, or proprietary technology in its current or
projected business operations.
EMPLOYEES
As of December 31, 1997, the Registrant employed three persons who were
each executive officers of the Registrant.
ITEM 2. DESCRIPTION OF PROPERTY
The Registrant's executive offices are located at 10061 Talbert Ave, Suite
#200, Fountain Valley, CA 92708. These facilities, which consist of a rented
office and telephone equipment, are occupied pursuant to a month to month
arrangement at a rental expense of $530 per month.
In the opinion of management as at December 31, 1997, the Registrant's
properties were adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
During 1997, one of the Company's vendors, JMS North America, Inc. ("JMS")
filed a Motion for Judgment with the Circuit Court of the County of Fairfax,
Commonwealth of Virginia, seeking $836,614 in allegedly due consulting fees,
finance charges and travel expenses. JMS further seeks $2,250,000 for alleged
breach of contract and $1,500,000 for alleged fraud. The Company has disputed
and intends to dispute in trial a material portion of the amounts billed and or
claimed by JMS for consulting fees, finance charges and travel expenses.
Additionally, the Company believes that the claims of JMS with respect to
alleged fraud and alleged breach of contract are without merit and will
vigorously contest them.
During 1997, J. Michael Christiansen ("Christiansen"), filed a Complaint
with the Superior Court of the State of California, seeking in excess of
$350,000 plus interest, costs and undetermined exemplary and punitive damages in
connection with the alleged breach by the Company of a Release and Settlement
Agreement dated October 2, 1996, pursuant to which the Company was to have
issued Christiansen 75,000 shares of the common stock of the Company. The
Company believes that the issuance of such shares to Christiansen has been
necessarily delayed pursuant to certain regulatory constraints, the removal of
which the Company has continued to seek without success. The Company is
presently attempting to engage legal counsel to review and opine on the merit of
Christiansen's claims and to vigorously pursue any and all defenses and
counterclaims determined to be available to the Company with respect to certain
of the allegations set forth by Christiansen and to certain past actions of
Christiansen.
On March 23, 1998, the Company filed a voluntary petition pursuant to
Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code").
Accordingly, pursuant to 11 U.S.C. (S) 362, the proceedings described above have
been automatically stayed. The Company intends to object to the claims of JMS
and Christiansen and to pursue its rights, remedies and defenses in the
bankruptcy case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
1. MARKET INFORMATION
------------------
The Registrant's common stock is currently listed on the Vancouver Stock
Exchange under the symbol "PCW". The Registrant's securities became publicly
traded by virtue of an initial public offering of 1,000,000 shares of the
Company's common stock completed on October 1, 1992. On October 5, 1993,
pursuant to an exemption of the Securities Exchange Act of 1934 (the "Exchange
Act") under Rule 12 g 3-2(b) promulgated under the Exchange Act, the Registrant
commenced trading of its common stock within the United States on the over-the-
counter market on the NASD Electric Bulletin Board ("EBB") under the symbol
"IPCBF." The Company subsequently waived its exemption and registered under the
Exchange Act. For the period of July 30, 1996 to December 31, 1996, the trading
symbol on the EBB was "PCWIF" and, since December 31, 1996, the trading symbol
on EBB has been "PCWR." The following table sets forth the high and low bid
prices of the Registrant's common stock as reported by the Vancouver Stock
Exchange daily trading summary for the Registrant's last two fiscal years for
the period ended December 31, 1997.
VANCOUVER STOCK EXCHANGE
-------------------------------
(EXPRESSED IN CANADIAN DOLLARS)
Calendar Quarter High Low
- ---------------- ---- ---
First Quarter, 1996 $4.00 $1.30
Second Quarter, 1996 $8.40 $3.20
Third Quarter, 1996 $6.25 $3.80
Fourth Quarter, 1996 $4.25 $2.75
First Quarter, 1997 $5.30 $3.30
Second Quarter, 1997 $4.50 $3.01
Third Quarter, 1997 $3.15 $0.70
Fourth Quarter, 1997 $1.60 $0.75
On February 13, 1998, trading of the Company's common stock was halted on
the Vancouver Stock Exchange due to the occurrence of a transaction subject to
the review and prior approval of the Vancouver Stock Exchange. On March 2, 1998,
the Vancouver Stock Exchange suspended the Company's common stock from trading
due to nonpayment of its annual fees.
The following table sets forth the high and low bid prices as reported by
the EBB for each quarterly period for the Registrant's last two fiscal years for
the period ended December 31, 1997.
UNITED STATES BULLETIN BOARD/(1)/
------------------------------------
(EXPRESSED IN UNITED STATES DOLLARS)
Calendar Quarter High Low
- ---------------- ---- ---
First Quarter, 1996 $2.95 $1.00
Second Quarter, 1996 $7.45 $2.42
Third Quarter, 1996 $4.50 $2.75
Fourth Quarter, 1996 $3.32 $2.34
First Quarter, 1997 $3.87 $2.25
Second Quarter, 1997 $3.12 $2.00
Third Quarter, 1997 $2.25 $0.50
Fourth Quarter, 1997 $1.09 $0.44
(1) The table sets forth the high and low bid prices as reported by the EBB for
each quarterly period in 1996, and the high and low bid prices as reported
by the EBB for each quarterly period in 1997.
2. HOLDERS
-------
The number of record holders of the common stock as of December 31, 1997
was 109. The Registrant believes it has over 2,000 beneficial holders of its
common stock.
3. DIVIDENDS
---------
The Registrant has not paid any cash dividends on its common stock to date,
and does not anticipate or contemplate paying cash dividends in the foreseeable
future. It is the present intention of management to utilize all available
funds for the development of the Registrant's business. Furthermore, the
declaration and payment of any cash dividends will be subject to approval by the
Bankruptcy Court.
4. RECENT SALES OF UNREGISTERED SECURITIES.
---------------------------------------
On January 27, 1997, the Company issued 26,862 shares of common stock to an
accredited individual in consideration for the conversion of a convertible
promissory note for $75,000.
On February 3, 1997, the Company issued 42,755 shares of common stock to
Morris Magid, an accredited individual, in consideration for loans which had
been made to the Company.
On February 7, 1997, the Company granted to certain employees options to
acquire an aggregate of 90,000 shares of common stock at an exercise price of
$3.61 per share.
On February 14, 1997, the Company issued 72,993 Units, each comprised of
one share of common stock and the one warrant to purchase shares of the
Company's common stock, for cash in a private placement for consideration of
$200,000.
On May 20, 1997, the Company issued 15,384 shares of common stock to an
accredited individual for cash in consideration for the exercise of a stock
purchase warrant for 29,999 shares of common stock.
On June 30, 1997, the Company issued 60,241 Units, each comprised of one
share of common stock and one warrant to purchase shares of the Company's Common
Stock, to an accredited investor for cash in a private placement for
consideration of $200,000.
The issuance of all such securities was exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof and Regulation D
promulgated thereunder.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial information of the Company is
qualified by reference to and should be read in conjunction with the financial
statements and notes thereto included elsewhere herein. The selected financial
information set forth below for the fiscal year ended December 31, 1997 is
derived from the financial statements of the Company audited by Cogen Sklar LLP,
independent public accountants, which are included elsewhere herein. The
selected financial information set forth below for the fiscal year ended
December 31, 1996, the fiscal transition period ended December 31, 1995, and the
fiscal years ended March 31, 1995, and 1994 is derived from the financial
statements of the Company audited by KPMG, independent public accountants, which
are not included in this report.
DECEMBER DECEMBER DECEMBER MARCH 31, MARCH 31,
31, 1997 31, 1996 (1) 31, 1995 (2) 1995 1994
--------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND WEIGHTED AVERAGE DATA)
Net sales or operating -- 9,014 56 (212) 375
revenues
Income (loss) from (4,141) 4,732 (1,880) (7,145) (3,205)
continuing operations
Income (loss) from (0.32) 0.38 (0.20) (0.90) (0.48)
continuing operations per
share of common stock
Weighted average common 12,866 12,622 9,000 7,975 6,742
shares and equivalents (3)
Total assets 8,022 8,226 988 337 2,331
Long term obligations -- -- -- -- 1,037
(1) Results for 1996 were significantly affected by the acquisition of cash and
common stock of MAC. See "Item 1.: Business; Business of PortaCom
Wireless, Inc."
(2) Nine month fiscal transition period ending December 31, 1995
(3) Expressed in thousands of common shares.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
In 1995 the Company changed its fiscal year end from March 31 to December
31. Accordingly, the discussion set forth below includes a comparison of the
fiscal year ended December 31, 1996 to the nine month transition period ended
December 31, 1995 (the "Transition Period") and a comparison of the Transition
Period to the fiscal year ended March 31, 1995. Because the Company
discontinued its previous business in 1995, the Company does not believe such
presentation is meaningful, and, in addition, the Company believes that
historical results are not indicative of future results.
RESULTS OF OPERATIONS
- ---------------------
Fiscal Year Ended December 31, 1997 Compared with the Fiscal Year Ended December
- --------------------------------------------------------------------------------
31, 1996
- --------
For the year ended December 31, 1997, the Company had no revenues and
reported a net loss of ($4,099,619), or ($0.32) per share. This compares to net
income of $5,139,662, or $0.41 per share for 1996. Net income in 1996 was
solely and directly attributable to an agreement between the Company and AAT
pursuant to which the Company received $1,000,000 in cash in addition to common
stock (presently held in escrow) and warrants to purchase common stock at $4.00
per share valued at $8,000,000. There were no sales in 1997 due to the fact
that the Company did not acquire any operating business nor did its Cambodia
project become operational. In addition, its revenue-producing subsidiaries
(which were also generating significant net losses) were discontinued in 1995
and remained inactive through 1997. No sales are expected for 1998 and the
Company's near term operations, if any, are not expected to generate revenues in
the foreseeable future unless the Company earlier acquires one or more
controlling interests in businesses which produce ongoing revenue from
operations. No assurances can be given as to the consummation of any future
acquisitions of any such businesses.
Operating expenses decreased slightly in the year ended December 31, 1997
to $4,141,208 from $4,281,558 in the year ended December 31, 1996, a decrease of
$140,350. While the overall decrease in operating expenses is not material,
significant increases in certain expense categories from 1996 to 1997 did occur,
the most significant of which was in legal and accounting expense (discussed
below).
The decrease in operating expenses in 1997 occurred while the activities of
the Company were focused upon investigating and negotiating the MCL
Transactions, the Asset Sale, and related efforts to obtain financing, as well
as expenses incurred related to the planned deployment of ACT's wireless system
in Cambodia as compared with the general increases experienced in 1996 related
to the activities of the Company with respect to the proposed acquisition of
wireless interests in China, and to the other expenses discussed below. The
individual increases in certain operating expenses over 1996 were partially
offset by a decrease in placement fees related to capital raising activities to
$-0- (1996: $106,000), a significant decrease in interest, bank and financing
charges to $182,161 in 1997 from $627,234 reported in 1996 (a decrease of
$445,073), and a more significant
decrease in write-down of promissory notes receivable and investment to $360,721
from $1,046,710 in 1996 (a decrease of $685,989).
During the year ended December 31, 1997, legal and accounting expenses rose
to $1,267,109 from $727,882 recorded in 1996 (an increase of $539,227). This
increase was primarily related to the terminated MCL Transactions, the Asset
Sale and related transactions, due diligence work performed with respect to
prospective transactions that were not consummated, the activities of ACT, as
well as to the extensive preparation, review and revision of disclosure
incorporated into the Company's public filings and other related disclosure
documents.
Travel and entertainment expenses increased in the year ended December 31,
1997 to $544,961 from the $273,726 recorded in 1996 (an increase of $271,235).
This increase was related to the deployment of ACT's wireless system in
Cambodia, and to the terminated MCL Transactions.
During the year ended December 31, 1997, consulting fees rose to $849,309
from $619,292 recorded in 1996 (an increase of $230,017). This increase was
primarily related to engineering consulting services charged with respect to the
deployment of ACT's wireless system in Cambodia.
Fiscal Year Ended December 31, 1996 Compared with the Nine Month Fiscal
- -----------------------------------------------------------------------
Transition Period Ended December 31, 1995 (the "Transition Period")
- -------------------------------------------------------------------
For the fiscal year ended December 31, 1996, the Company reported net
income of $5,139,662 with sales of $10,000 and other income of $9,003,943
compared to a loss in the Transition Period of $1,334,480 on sales of $143,652
and no other income. Expressed in terms of earnings (loss) per share of common
stock, results from operations for 1996 as compared with those for the
Transition Period were $0.41 per share and ($0.14) per share, respectively.
Other income is directly and solely attributable to an agreement between
the Company and AAT pursuant to which the Company received $1,000,000 in cash,
common stock (presently held in escrow) valued at $8,000,000 and 4,000,000
warrants to purchase common stock at $4.00 per share. Although the possibility
exists that the Company could enter into one or more similar transactions in
1997, no assurances can be given to this effect. Accordingly, the improvement
in the Company's financial condition resulting from the AAT transaction may not
be, and should not be construed to be, indicative of future results.
The reported decrease in net sales was due to the fact that the Company's
revenue-producing subsidiaries (which were also generating significant net
losses) were discontinued in 1995 and remained inactive throughout 1996.
Additionally, the Company's revenue-producing activities from ongoing
operations, with the exception of those directly related to the AAT agreement,
remained limited in scope throughout 1996. Sales are expected to remain at
substantially the same level for the current year and the Company's operations
are not expected to generate revenues until 1998.
All of the 1996 sales were attributable to consulting activities of the
Company, whereas substantially all of the sales in the Transition Period were
attributable to the Company's PCBX
systems and related products, with Telecom and Laboratories accounting for a
nominal portion of Transition Period Sales.
Cost of sales fell in 1996 to $-0- from $87,391 in the Transition Period.
This decline in cost of sales was primarily due to the Company's current
business development activities not including the manufacture or resale of
equipment as was the case in the Transition Period. Furthermore, the cost of
sales for 1996 is not comparable to that of prior periods due to the closure of
the Company's revenue producing subsidiaries in August 1995.
Operating expenses increased in 1996 to $4,281,558 from $1,936,665 in the
Transition Period, an increase of $2,344,893. Of this increase, the most
significant factor was a write down of promissory notes receivable and
investment related to PIL and PWC.
The increases in operating expenses were primarily related to the increase
in activities of the Company with respect to the acquisitions and proposed
acquisitions of wireless telecommunications interests in China, Cambodia, and
Vietnam as compared with a general reduction in these expense categories
throughout the Transition Period as a direct result of downsizing related to the
closure of the Company's revenue producing subsidiaries in August 1995.
During the fiscal year ended December 31, 1996, interest and bank charges
rose to $627,234 from $73,394 recorded in the Transition Period. This $553,840
increase was primarily related to interest accrued on the $2,417,000 in
convertible promissory notes.
Additional factors included increases in legal and accounting, consulting
fees, general and administrative, and travel expenses. Legal and accounting
expenses increased to $727,882 from $273,665 (an increase of $454,217).
Consulting expenses increased to $619,292 from $327,132 (an increase of
$292,160). General and administrative expenses increased to $306,950 from
$114,526 (an increase of $192,424). These increases were partially offset by
decreases in depreciation, bad debt, rent, wages and benefits, advertising and
promotion, and research and development expenses. The Company's operating
expenses as a percentage of sales in 1996 are not comparable to the prior period
due to the closure of the Company's revenue-producing subsidiaries in August
1995.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During 1997, the Company's cash and cash equivalents decreased by $99,205.
Although the Company generated $1,274,368 from financing activities, the
Company's operations utilized net cash of $1,373,573. These activities
contributed to a net working capital deficit as of December 31, 1997 of
$3,553,421, which is up $2,867,563 from $685,858 at December 31, 1996.
The Company has incurred cumulative losses from inception through December
31, 1997 of $13,879,846 and has not achieved revenues sufficient to offset
direct expenses and corporate overhead.
Since inception, a substantial portion of the Company's operating capital
has been provided through financing activities which have included an initial
public offering, a series of private
placements of common stock, unsecured debt financing, and more recently, secured
debt financing. During 1997, the Company sold 469,707 shares of common stock and
190,388 common stock purchase warrants in private placement transactions, upon
the exercise of outstanding warrants, and upon the conversion of convertible
promissory notes. Although no assurances can be given, it is expected that,
upon emergence from the Bankruptcy, the Company will be required to obtain
financing through offerings of securities in order for the Company to continue
as a going concern. Furthermore, the resumption by the Company of activities
associated with pursuing new opportunities would necessitate an immediate
continuing material increase in general office overhead and other costs such as
general and administrative, legal and accounting, and travel and entertainment.
Failure to obtain sufficient financing will have a material adverse effect upon
the reorganized Company.
Between December 19, 1995 and December 11, 1996, the Company arranged,
subject to regulatory approval, private placements of convertible promissory
notes having an aggregate principal amount of $2,417,000. As of December 31,
1996, convertible notes aggregating $2,267,000 were converted into common stock.
As of December 31, 1997, the remaining convertible notes aggregating $150,000
had also been converted to common stock. As of December 31, 1997, accrued
interest on the convertible promissory notes aggregating $188,003 was payable by
the Company. In addition, the Company has offered to issue, subject to the
removal of the Company from the jurisdiction of both the Vancouver Stock
Exchange and the British Columbia Securities Commission, 115,296 "bonus"
warrants to purchase shares of the Company's common stock, exercisable at $2.70,
expiring between December 31, 1999 and February 14, 2000. In the opinion of
management, the likelihood can be considered to be remote that the conditions
under which the "bonus" warrants may be issued will ever arise.
As of December 31, 1997, the Company had 625,000 options and 473,134
warrants outstanding which, upon exercise, would yield to the Company additional
proceeds in excess of approximately $2.9 million. The exercise of existing
options or warrants is impossible to predict with any certainty. Accordingly,
management can render no assurances that any material funds will be realized
upon the exercise of such options or warrants, or whether such will be exercised
at all.
Rental expense accounts for approximately $550 of fixed expenses on a
monthly basis. Personnel costs, which could increase substantially during 1998
should the Company emerge from the Bankruptcy during 1998, presently account for
less than $7,500 of fixed expenses on a monthly basis. Additional variable
expenses, such as consulting fees, legal and accounting, travel and
entertainment, utilities and miscellaneous equipment purchases (or rentals) are
expected to account for between approximately $30,000 and $50,000 per month.
Management does not believe that in 1998 the Company's operations, if any,
will generate sufficient cash flow to finance its working capital and any
capital expenditure requirements. The Company will remain dependent on
management's ability to obtain additional debt and equity financing (including
from the DIP Financing facility). The Company has been able to secure financing
in the past through loans from certain stockholders, although management has no
reason to believe that similar arrangements will be available in the future.
While the Company will continue to seek both debt and equity financing, there
can be no assurance that any such financing
will be available on terms acceptable to the Company or at all. Without such
additional sources of financing, the Company will not be able to continue as a
going concern once it emerges from the Bankruptcy.
The political systems of the countries in which the Company may seek to
establish joint venture operations are in many cases emerging from legacies of
totalitarianism or civil unrest. In addition, many of the economies are weak,
volatile and reliant on foreign assistance. Free market reforms undertaken by
some of these countries face uncertain success and may lead to further economic
instability. These factors may adversely affect the Company's future business
activities and results of operations. The laws, rules and regulations
applicable to the Company's activities in developing countries are generally
new, subject to change and incomplete. There can be no assurance that local
laws, rules and regulations will become stable or complete in the future, or
that changes thereto will not materially adversely affect the operations of the
Company. All of the Company's joint venture operations are expected to be
outside the United States. As a result, such operations are exposed to currency
fluctuations and the need to comply with a variety of foreign laws, including
laws that control currency exchanges and currency repatriation. The Company
does not hedge its foreign currency risks. There can be no assurance that the
Company's future operations will not be adversely affected by such factors.
Investment in ACT
Although the Company held an 86% interest in ACT at December 31, 1997, at
such date it was determined that this investment had experienced an other than
temporary decline in value and a significantly decreased likelihood that the
$345,454 in loans would be repaid. Accordingly, the investment and advances were
written down to their estimated fair value of $-0-. In addition, ACT advised the
Company that equipment aggregating $61,221 was found to be missing and presumed
stolen during the political coup that occurred in Cambodia in 1997 and that, as
of December 31, 1997, ACT had breached the terms of its joint venture contract,
raising substantial doubt as to the recoverability of the $200,000 deposit which
ACT had paid to the Ministry of Posts and Telecommunications in Cambodia earlier
in the year. Accordingly, these assets have been written off, and a loss of
$360,721 has been charged to operations in 1997. ACT was sold in January 1998 as
part of the consideration for a prepetition termination and settlement agreement
with a former officer to whom the Company owed unpaid wages and expenses.
Bonus Shares and Warrants
In connection with the issuance of certain short-term debt by the Company
in January 1995 and May 1996, the Company has offered to issue, subject to
regulatory approval, 85,590 "bonus" shares of common stock and 166,667 common
stock purchase warrants, exercisable at $3.30, expiring one year after issuance.
During 1996, regulatory approval was received for the issuance of 25,833 of
these shares which were then issued by the Company. During 1997, regulatory
approval was received for the issuance of 42,757 of these share which were then
issued by the Company. As of December 31, 1997, the issuance of the remaining
17,000 shares and 166,667 warrants continued to be subject to regulatory
approval. In the opinion of management, the
likelihood can be considered to be remote that the conditions under which the
remaining shares and warrants may be issued will ever arise.
EFFECTS OF INFLATION
- --------------------
The Company does not expect inflation to materially affect its results of
operations. However, it is expected that operating costs and the cost of capital
equipment to be acquired in the future may be subject to general economic and
inflationary pressures.
ITEM 8. FINANCIAL STATEMENTS
The consolidated financial statements and schedules required to be filed
under this item are presented on the following pages. The Company does not
believe that issued, but not yet effective, accounting standards will materially
impact its financial position or results of operations upon adoption.
INDEPENDENT AUDITORS' REPORT
To the Stockholders
PortaCom Wireless, Inc.
We have audited the accompanying consolidated balance sheet of PortaCom
Wireless, Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1997
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PortaCom Wireless,
Inc. and Subsidiaries as of December 31, 1997 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that PortaCom Wireless, Inc. will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the company has had recurring
losses from operations and had a working capital deficit of approximately
$3,553,000 at December 31, 1997. In addition, on March 23, 1998, the company
filed a voluntary petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. These matters raise substantial doubt about the company's
ability to continue as a going concern. Management's plans in regard to these
matters are also discussed in Note 1. As a result of the reorganization
proceedings, the company may sell or otherwise realize assets and liquidate or
settle liabilities for amounts other than those reflected in the consolidated
financial statements. Further, the confirmation of a plan of reorganization
could materially change the amounts currently recorded in the consolidated
financial statements. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
COGEN SKLAR LLP
Bala Cynwyd, Pennsylvania
April 10, 1998
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of PortaCom Wireless, Inc. as at
December 31, 1996 and 1995 and the consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for the year ended December 31,
1996, the nine month period ended December 31, 1995 and the year ended March 31,
1995. 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
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material mis-
statement. 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1996
and 1995 and the results of their operations and the changes in their cash flows
for the year ended December 31, 1996, the nine month period ended December 31,
1995 and the year ended March 31, 1995 in accordance with generally accepted
accounting principles in the United States.
KPMG
Chartered Accountants
Vancouver, Canada
January 15, 1997
COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
note 1 to the consolidated financial statements. Our report to shareholders
dated January 15, 1997 is expressed in accordance with Canadian reporting
standards which do not permit a reference to such events and conditions in the
auditors' report when these are adequately disclosed in the financial
statements.
KPMG
Chartered Accountants
Vancouver, Canada
January 15, 1997
PORTACOM WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1997 1996
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 15,070 $ 114,275
INVESTMENTS 8,000,000 8,099,500
EQUIPMENT, Net 6,181 12,427
OTHER ASSETS 520 -
------------ -----------
TOTAL ASSETS $ 8,021,771 $ 8,226,202
============ ===========
CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 3,209,001 $ 650,133
Notes payable 359,490 150,000
------------ -----------
TOTAL CURRENT LIABILITIES 3,568,491 800,133
------------ -----------
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, 100,000,000 shares authorized;
13,576,970 and 13,118,181 shares issued and outstanding 13,576 13,118
Preferred stock, $.001 par value, 5,000,000 shares authorized;
no shares issued - -
Additional paid-in capital 18,319,550 17,193,178
Accumulated deficit (13,879,846) (9,780,227)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 4,453,280 7,426,069
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,021,771 $ 8,226,202
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
PORTACOM WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Nine Months
----------------------------- Ended
December 31, December 31, December 31,
1997 1996 1995
------------- ------------- -----------
SALES, Net $ - $ 10,000 $ 143,652
COST OF GOODS SOLD - - 87,391
----------- ----------- -----------
- 10,000 56,261
----------- ----------- -----------
OPERATING EXPENSES
Advertising and promotion 2,625 3,545 60,820
Bad debts - 2,513 80,628
Consulting fees 849,309 619,292 327,132
Depreciation 4,664 2,127 143,786
General and administrative 345,140 306,950 114,526
Interest, bank charges and financing charges 182,161 627,234 73,394
Legal and accounting 1,267,109 727,882 273,665
Management fees 97,569 86,013 49,436
Placement fees - 106,000 -
Rent 52,050 40,371 141,568
Research and development - 4,530 60,437
Travel 544,961 273,726 97,948
Wages and benefits 434,899 434,665 513,325
Write-down of promissory notes receivable and
investment 360,721 1,046,710 -
----------- ----------- -----------
4,141,208 4,281,558 1,936,665
----------- ----------- -----------
LOSS FROM OPERATIONS (4,141,208) (4,271,558) (1,880,404)
OTHER INCOME 595 9,003,943 -
----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (4,140,613) 4,732,385 (1,880,404)
GAIN ON SETTLEMENT OF DEBT 40,994 407,277 545,924
----------- ----------- -----------
NET INCOME (LOSS) FOR THE PERIOD $(4,099,619) $ 5,139,662 $(1,334,480)
=========== =========== ===========
Income (loss) before extraordinary item $ (0.32) $ 0.38 $ (0.20)
Extraordinary item - 0.03 0.06
----------- ----------- -----------
NET INCOME (LOSS) $ (0.32) $ 0.41 $ (0.14)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
STOCK OUTSTANDING 12,865,535 12,621,945 8,999,863
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
PORTACOM WIRELESS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Additional
Common Paid-In Accumulated
Stock Capital Deficit
------- ----------- ------------
BALANCE, MARCH 31, 1995 - After giving retroactive
effect to change in authorized common stock $15,215 $10,070,455 $(13,585,409)
NINE MONTHS ENDED DECEMBER 31, 1995
Common stock issued
For cash 1,025 1,229,806 -
On settlement of debt 1,256 2,511,864 -
NET LOSS FOR THE PERIOD - - (1,334,480)
------- ----------- ------------
BALANCE, DECEMBER 31, 1995 17,496 13,812,125 (14,919,889)
YEAR ENDED DECEMBER 31, 1996
Common stock issued
For cash 299 552,847 -
On settlement of liabilities 176 306,353 -
On conversion of promissory notes 1,097 2,265,903 -
Common stock cancelled (5,950) 5,950 -
Value ascribed to warrants - 250,000 -
NET INCOME FOR THE YEAR - - 5,139,662
------- ----------- ------------
BALANCE, DECEMBER 31, 1996 13,118 17,193,178 (9,780,227)
YEAR ENDED DECEMBER 31, 1997
Common stock issued
For cash 413 914,465 -
On conversion of promissory notes 56 149,944 -
As consideration for loans 43 169,259 -
Adjustment to reclassify shares to be issued
on settlement of debt (54) (107,296) -
NET LOSS FOR THE YEAR - - (4,099,619)
------- ----------- ------------
BALANCE, DECEMBER 31, 1997 $13,576 $18,319,550 $(13,879,846)
======= =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
PORTACOM WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Nine Months
----------------------------- Ended
December 31, December 31, December 31,
1997 1996 1995
--------- ------------- ------------
OPERATING ACTIVITIES
Net income (loss) for the period $(4,099,619) $ 5,139,662 $(1,334,480)
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Depreciation 4,664 2,127 143,786
Fair value of investments received on settlement - (8,000,000)
Write-down of promissory notes receivable and
investment 99,500 1,046,710 -
Loss on disposition of equipment 1,582 - -
Share capital issuable in settlement of financing
charges 169,302 328,399 -
(Increase) decrease in assets
Accounts and promissory notes receivable - (199,527) (782,060)
Inventory - - 58,852
Prepaid expenses - - 6,680
Other assets (520) - -
Increase (decrease) in accounts payable and accrued
liabilities
2,451,518 (228,852) 1,405,889
----------- ----------- -----------
Net cash used in operating activities (1,373,573) (1,911,481) (501,333)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Equipment, net - (14,554) 13,792
Investments - (124,500) -
----------- ----------- -----------
Net cash provided by (used in) investing activities - (139,054) 13,792
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issue of common stock for cash 914,878 553,145 1,230,830
Bridge financing - 2,500,000 -
Repayment of bridge financing - (2,500,000) -
Convertible promissory notes - 1,817,000 600,000
Repayment of promissory note payable - - (37,500)
Loans payable 359,490 (371,000) (1,213,508)
----------- ----------- -----------
Net cash provided by financing activities 1,274,368 1,999,145 579,822
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (99,205) (51,390) 92,281
CASH AND CASH EQUIVALENTS - BEGINNING OF
PERIOD 114,275 165,665 73,384
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 15,070 $ 114,275 $ 165,665
=========== =========== ===========
SUPPLEMENTARY INFORMATION
Interest paid $ - $ 25,000 $ -
============ =========== ===========
Income taxes paid $ - $ - $ -
============ ========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
PORTACOM WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 - FUTURE OPERATIONS
PortaCom Wireless, Inc. (the "company") was incorporated on July 7, 1989 under
the Company Act (British Columbia) and was inactive until April 1990. Effective
December 24, 1996, the company emigrated its corporate charter from British
Columbia to Delaware, which resulted in the retroactive restatement of the
company's authorized common and preferred stock.
The company's current business is focused upon concluding an asset sale
transaction with VDC Corporation (the "VDC transaction") for the sale of the
company's interest in Metromedia Asia Corporation ("MAC"), which is active in
the build-out of telecommunications in China, pursuant to a reorganization of
its affairs under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware.
Due to the inability to obtain sufficient financing, the company, in the current
period, found it necessary to abandon the pursuit of business ventures as a
developer, financier and operator of companies providing cellular, wireless and
PSTN telecommunications services in selected developing world markets. The
company had intended to make investments primarily in wireless, cellular, PSTN
and long distance networks in order to provide coverage and high-quality service
in selected emerging markets. The company's principal interests were focused on
these technologies in Cambodia and other emerging markets which represent a
single industry segment.
The company entered into a joint venture on December 26, 1996 as the managing
partner of American Cambodian Telecom Ltd. ("ACT") a limited liability company
which holds a twenty-five year renewable license to develop a mobile wireless
system in the Kingdom of Cambodia (the "License"). ACT has advised the company
that, on December 26, 1997, ACT breached certain terms of its Joint Venture
agreement which ACT believes has rendered the License null and is void. The
breach by ACT resulted indirectly from the company's inability to obtain
financing for ACT due to the coup which occurred in mid-1997 and the significant
ongoing political and civil unrest. The company also holds 2,000,000 shares of
MAC common stock and warrants to purchase an additional 4,000,000 common shares
of MAC. The MAC warrants are currently pledged to VDC as collateral for loans
which are being used to meet general working capital requirements and to
conclude debt settlements with creditors and claimants. The MAC shares are
pledged to MAC to secure a contingent contractual indemnity obligation.
At December 31, 1997 the company had a working capital deficiency of $3,553,421.
At the date of these consolidated financial statements, the company has not
generated cash flow from recurring operating activities and it is considered
unlikely that it will ever generate such a cash flow. In addition, the
company's largest recorded asset is restricted until January 1, 1999.
Accordingly, there is substantial doubt as to the nature and extent of the
company's future obligations.
At the close of business on March 23, 1998 (the "Petition Date"), PortaCom
Wireless, Inc. filed a petition for reorganization under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware.
After a long period of negotiation, the Company was unable to reach out-of-court
settlements with all of its creditors. Accordingly, a bankruptcy petition was
filed in order to obtain an opportunity to reorganize and begin implementing the
company's strategies while working to restructure its indebtedness.
The company expects to reorganize its affairs under the protection of Chapter 11
and to propose a plan of reorganization for itself. Although management expects
to file a plan of reorganization in 1998, which would contemplate emergence in
1998, there can be no assurance at this time that a plan of reorganization will
be proposed by the company or approved or confirmed by the Bankruptcy Court or
that such plan will be consummated. After the expiration of the company's
exclusivity period for such filing, creditors of the company have the right to
propose alternative plans of reorganization. Any plan of reorganization, among
other things, is likely to result in material dilution or elimination of the
equity of existing shareholders.
PORTACOM WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 - FUTURE OPERATIONS (Continued)
As a result of the Chapter 11 filing, absent approval of the Bankruptcy Court,
the company is prohibited from paying, and creditors are prohibited from
attempting to collect, claims or debts arising pre-petition. The consummation
of a plan of reorganization is the principal objective of the company's Chapter
11 case. A plan of reorganization sets forth the means for satisfying claims
and interests in the company, including the liabilities subject to compromise.
The consummation of a plan of reorganization for the company will require the
requisite vote of impaired creditors and stockholders under the Bankruptcy Code
and confirmation of the plan by the Bankruptcy Court.
The accompanying consolidated financial statements have been prepared assuming
the company will continue to operate as a going concern which requires the
realization of assets and settlement of liabilities in the ordinary course of
business. However, as a result of the Chapter 11 filing and circumstances
relating to this event, including the company's losses from operations, such
realization of assets and liquidation of liabilities is subject to significant
uncertainty. While under the protection of Chapter 11, the company may sell or
otherwise dispose of assets, and liquidate or settle liabilities, for amounts
other than those reflected in the financial statements. Further, a plan of
reorganization could materially change the amounts reported in the financial
statements, which do not give effect to all adjustments of the carrying value of
assets or liabilities that might be necessary as a consequence of a plan of
reorganization.
The appropriateness of using the going concern basis is dependent upon, among
other things, confirmation of a plan of reorganization, future profitable
operations, the ability to comply with the terms of the Debtor In Possession
loan facility and the ability to generate sufficient cash from operations and
financing arrangements to meet its obligations.
NOTE 2 - CHANGE IN FISCAL YEAR
In 1995, the company changed the date on which its fiscal year ends from March
31 to December 31, 1995. Accordingly, results of operations and cash flows for
the transition period, which ended December 31, 1995, cover a nine-month period.
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States. Prior to 1996,
as a company incorporated in Canada, it reported to its shareholders based on
Canadian accounting principles. Due to the emigration to Delaware, the
company is now required to file regulatory reports under United States
accounting principles. The change from Canadian to United States generally
accepted accounting principles did not impact reported amounts for total assets,
stockholders' equity (deficiency) or net income (loss) for either the 1996 or
prior reporting periods. Under Canadian accounting principles, earnings (loss)
per share would be calculated including escrowed shares as indicated in the
heading "Net Income (Loss) Per Share".
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the company and
its wholly-owned and majority-owned subsidiaries from the dates of acquisition
or formation. The company's wholly owned subsidiaries are: PortaCom
International, Ltd., PCBX Systems, Inc., Extreme Laboratories, Inc. and Extreme
Telecom, Inc. The company also held an 86% interest in ACT which was disposed of
in January, 1998. All significant intercompany transactions have been
eliminated in consolidation. Other investments are accounted for at cost.
PORTACOM WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period. With
respect to the company's operations, these estimates primarily relate to the
underlying value of investments which will only be determinable based upon
future events. Management has applied its judgment to the information available
to the date of issuance of these consolidated financial statements in making
such judgment. Actual results could differ from those estimates.
Cash Equivalents
- ----------------
The company considers all short-term securities purchased with a maturity of
three months or less to be cash equivalents.
Depreciation
- ------------
The cost of equipment is depreciated over the estimated useful lives of the
related assets. Depreciation is computed using the straight-line method.
Income Taxes
- ------------
The company accounts for its income taxes under SFAS No. 109, "Accounting for
Income Taxes", which requires recognition of deferred tax liabilities and assets
for the estimated future tax effects of events that have been recognized in the
financial statements or income tax returns. Under this method, deferred tax
liabilities and assets are determined based on differences between the financial
accounting and income tax bases of assets and liabilities, and the use of
carryforwards, if any, using enacted tax rates in effect for the years in which
the differences and carryforwards are expected to reverse and be utilized.
Net Income (Loss) Per Share
- ---------------------------
Effective year ended December 31, 1997, the company implemented SFAS No. 128,
"Earnings Per Share". This statement establishes standards for computing and
presenting EPS, replacing the presentation of currently required primary EPS
with a presentation of Basic EPS. For entities with complex capital structures,
the statement requires the dual presentation of both Basic EPS and Diluted EPS
on the face of the statement of operations. Under this new standard, Basic EPS
is computed based on weighted average shares outstanding and excludes any
potential dilution; Diluted EPS reflects potential dilution from the exercise or
conversion of securities into common stock and is similar to the currently
required fully diluted EPS. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods,
and earlier application is not permitted. Adoption of SFAS 128 is not expected
to have a material effect on the company's loss per share.
Prior year amounts for net income (loss) per common share were recomputed in
accordance with SFAS No. 128; however, such recomputed amounts were unchanged
from those previously reported.
Basic earnings (loss) per share includes the weighted average number of common
shares outstanding during the year, which number of shares exclude the escrowed
shares that are contingently returnable to the company's treasury. If the
escrowed shares become issuable, net income (loss) per share will be
retroactively restated. Diluted earnings (loss) per share include the weighted
average number of shares outstanding and dilutive potential common shares, such
as convertible notes, warrants and options. Assumed conversion of the
convertible notes, warrants and options would be either immaterial or
antidilutive, therefore basic and diluted earnings (loss) per share are the
same.
PORTACOM WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Potentially dilutive shares not included in computation of diluted earnings per
share:
1997 1996 1995
--------- --------- ---------
Antidilutive
Options (incremental shares) - shares 304,250 shares 106,110 shares
Warrants (incremental shares) - 274,844 -
Convertible promissory notes - 18,750 402,685
--------- --------- ---------
- 597,844 508,795
--------- --------- ---------
Exercise price in excess of average
market price
Options 625,000 353,750 225,000
Warrants 473,134 171,882 483,457
--------- --------- ---------
1,098,134 525,632 708,457
--------- --------- ---------
1,098,134 shares 1,123,476 shares 1,217,252 shares
========= ========= =========
Revenue Recognition
- -------------------
The company recognizes revenue when the customer accepts delivery of the product
and there is reasonable assurance as to the collectibility of any receivables.
Accounting for Stock-Based Compensation
- ---------------------------------------
Compensation costs attributable to stock option and similar plans are recognized
based on any difference between the quoted market price of the stock on the date
of the grant over the amount the employee is required to pay to acquire the
stock (the intrinsic value method under Accounting Principles Board Opinion 25).
Such amount, if any, is accrued over the related vesting period, as appropriate.
Effective January 1, 1996, the company implemented SFAS No. 123, "Accounting for
Stock-Based Compensation." The Statement encourages employers to account for
stock compensation awards based on their fair value on their date of grant.
Entities may choose not to apply the new accounting method but instead, disclose
in the notes to the financial statements the pro forma effects on net income and
earnings per share as if the new method had been applied. The company has
adopted the disclosure-only approach of the Standard.
Recently Issued Accounting Pronouncements
- -----------------------------------------
During June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This statement establishes standards for reporting and display of
comprehensive income and its components. The reporting and display requirements
of SFAS No. 130 are effective for fiscal years beginning after December 15,
1997. The company presently intends to comply with this statement for its year
ended December 31, 1998.
During June 1997, the FASB issued SFAS No. 131, "Disclosures About Segment of an
Enterprise and Related Information". This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and related disclosures about products
and services, geographic areas and major customers. The reporting and disclosure
requirements of SFAS No. 131 are effective for periods beginning after December
15, 1997. The company presently intends to comply with this statement for its
year ended December 31, 1998.
PORTACOM WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 4 - PROMISSORY NOTES RECEIVABLE
At December 31, 1995, promissory notes receivable bore interest at 10% per
annum, were unsecured and without specific dates for repayment. The promissory
notes receivable were due from entities which are related to the company through
common directors and management. All amounts were written off in 1996 as they
were determined to be uncollectible.
NOTE 5 - INVESTMENTS
December 31, December 31,
1997 1996
------------ ------------
Metromedia Asia Corporation $8,000,000 $8,000,000
American Cambodian Telecom Ltd., a joint venture, 86% interest - 99,500
---------- ----------
$8,000,000 $8,099,500
========== ==========
On May 28, 1996, the company announced that it had entered into a contract to
acquire all of the outstanding shares of Asian American Telecommunications
Corporation ("AAT"), an unrelated Los Angeles-based telecommunications service
developer. By an agreement made as of September 11, 1996, AAT and the company
agreed to terminate all rights and obligations of either party under the
proposed business combination. As consideration for this termination, AAT
issued to the company 2,000,000 restricted common shares and warrants to acquire
4,000,000 common shares of AAT for a period of three years at a price of $4.00
per share. The company paid no cash consideration for the shares or warrants.
The company's investment is recorded at the estimated fair value of the assets
received in excess of the consideration payable to exercise the warrants. This
fair value was established by reference to capital stock issuances made by AAT
for cash consideration. In addition, AAT paid the company non-refundable cash
consideration of $1,000,000 as part of this termination agreement.
The receipt of cash and common stock pursuant to the termination agreement was
recorded as income in the consolidated statement of operations for the year
ended December 31, 1996.
The 2,000,000 common shares have been pledged by the company to AAT until
January 1, 1999 pursuant to the company's indemnification obligations under the
termination agreement. These indemnification obligations provide that the
company grants to AAT a first priority lien on the common shares against any
costs or losses arising to AAT, or specified related parties, arising from
certain claims or potential claims related to the original proposed acquisition
or the termination agreement. At the date of these consolidated financial
statements, no claims under this indemnification agreement have arisen and the
likelihood of such is considered to be remote.
In February, 1997, the company agreed to exchange its shares and warrants of AAT
for equivalent shares and warrants of MAC in connection with a business
combination between AAT and MAC and a related exchange offer by MAC. As of the
date of this report, and based on representations by MAC, these shares represent
a minimal interest in MAC.
On October 8, 1997, the company signed a letter of intent with VDC Corporation,
Ltd. ("VDC") to sell its interest in MAC to VDC for 5.3 million shares of VDC
common stock and up to $700,000 in cash. On November 10, 1997, the company and
VDC executed three agreements (specifically, a Loan Agreement, a Pledge
Agreement, and a Security Agreement hereinafter referred to collectively as the
"Pre-Petition Loan Agreements") pursuant to which the company granted VDC a
perfected first priority lien upon, and security interest in, its shares and
warrants of MAC to the extent that VDC provides loans to the company or effects
payments authorized by the company on its behalf to its creditors. On November
19, 1997, the company and VDC executed a definitive agreement with respect to
the asset purchase which was subject to shareholder consent, the completion
of due diligence, regulatory approvals and filings and other necessary
conditions, including resolving a majority of the company's current debts and
obligations. There is no assurance that the transaction will be consummated in
accordance with the terms set forth in the letter of intent or the definitive
agreements, or at all.
PORTACOM WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 5 - INVESTMENTS (Continued)
During the Bankruptcy and subject to the approval of the Bankruptcy Court, the
Company intends to consummate the Asset Sale pursuant to Section 363 of the
Bankruptcy Code. The Company believes, based on the current value of the shares
of the VDC's common stock, that it will receive substantial value in
consideration of the Asset Sale if consummated pursuant to that certain
Post-Petition Asset Purchase Agreement dated March 23, 1998 between the Company
and VDC. The Post-Petition Asset Purchase Agreement was amended by a stipulation
entered by the Bankruptcy Court on April 6, 1998 which provides for an escrow
account in the form of $2,600,000 (minimum of $1,250,000 in cash) to be funded
by VDC for the benefit of holders of priority unsecured claims and general
unsecured claims. The number of VDC shares to be delivered to the escrow agent
will be the difference between the value of the 5,300,000 VDC shares and the
cash escrow delivered and indebtedness divided by the value of the VDC stock.
The Company, as of the date of this Annual Report, is soliciting higher and
better offers for the MAC shares and warrants, which may result in one or more
bona fide offers which are tendered in accordance with the court approved
bidding procedures and which are, in the opinion of management, both higher and
better than the offer of VDC. Whether the MAC shares and warrants are sold to
VDC or some third party, the proceeds from the sale will be used to fund the
Company's plan of reorganization. The Postpetition Asset Purchase Agreement
provides that, if VDC is not the successful bidder with respect to the purchase
of all of the MAC shares and warrants (including a determination that a
competing bidder is the successful bidder), then the Company is required to pay
a break-up fee equal to $1,000,000 (the "Break-Up Fee") to VDC. The Company is
required to pay the Break-Up Fee in consideration of VDC's efforts and expenses
incurred in connection with the Postpetition Asset Purchase Agreement and the
DIP Financing.
Management believes that there has been no impairment in the carrying value of
its $8,000,000 investment in MAC and further believes that the fair market value
of this investment exceeds its carrying value based on the anticipated value of
the VDC stock to be received in exchange for its investment in MAC, which is
dependent upon the successful auction by VDC and approval by the Bankruptcy
Court.
On December 26, 1996, the company acquired an 86% non-controlling ownership
interest in American Cambodian Telecom Ltd. ("ACT"), a to be formed entity
pursuant to a Joint Venture agreement with another party under the consent of
the Ministry of Posts and Telecommunications in Cambodia ("MPT"). ACT was
inactive to December 31, 1996.
Under the Joint Venture agreement, the company was required to contribute
capital to ACT of at least 50 million Cambodian Riel (approximately $20,000).
In addition, the company was required to provide to the MPT a refundable deposit
of $200,000 within 45 business days of December 31, 1996. As of December 31,
1996 no capital or deposit had been contributed. Accordingly, the company's
investment in ACT was accounted for at cost in 1996. During 1997, ACT's assets,
liabilities and results of operations have been included in the consolidated
statements of the company.
The company reviews the underlying value of all investments on an ongoing basis
and provides for declines in value that are other than temporary as they are
identified. Any impairments are charged to earnings and a new cost basis for
the security is established. During 1997, the company initiated a plan to
dispose of its equity interest in ACT. The sale of such interest was completed
on January 15, 1998. In connection with the plan of disposal, the company
determined that the fair value of ACT's organizational costs aggregating $99,500
had declined to $-0-. In addition, ACT advised the company that equipment
aggregating $61,221 was found to be missing and presumed stolen during the
political coup that occurred in Cambodia in 1997 and that, as of December 26,
1997, ACT had breached the terms of its joint venture contract, raising
substantial doubt as to the recoverability of the $200,000 deposit which ACT had
paid to the MPT earlier in the year. Accordingly, these assets have been
written off, and a loss of $360,721 has been charged to operations in 1997. ACT
was sold in January 1998 as part of the consideration for a prepetition
termination and settlement agreement with a former officer to whom the company
owed unpaid wages and expenses.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Included in accounts payable and accrued liabilities at December 31, 1997 is
$225,575 in accrued salaries payable and $418,687 in consulting fees and
unreimbursed expenses and unreimbursed expenses payable to related parties.
Management fees due to a director (formerly an officer) of the company
previously included in accrued liabilities ceased to accrue as of October 31,
1995. This liability was settled for common stock in the nine month period
ended December 31, 1995.
Prior to the bankruptcy, the company had undertaken an informal plan to
settle its outstanding indebtedness. Between November 1997 and December 1997,
certain vendors whose claims against the company comprised an aggregate of
$56,094 of accounts payable agreed to accept $15,100 in full satisfaction of the
company's outstanding indebtedness to them, $15,100 of which had been paid by
the company as of December 31, 1997. The company intends to obtain settlements
of substantially all of its remaining indebtedness, although no assurances can
be given as to whether additional settlements will be obtainable on terms
favorable to the company, or at all.
Included in accounts payable and accrued liabilities at December 31, 1997 was
$203,214 in accrued interest payable on promissory notes.
PORTACOM WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 7 - NOTES PAYABLE
December 31, December 31,
1997 1996
------------ ------------
Convertible promissory notes $ - $150,000
Unsecured note payable 276,585 -
Secured notes payable to VDC Corporation, Ltd. 82,905 -
-------- --------
$359,490 $150,000
======== ========
Convertible Promissory Notes
- ----------------------------
Between December 19, 1995 and December 11, 1996, the company arranged, private
placements of convertible promissory notes having an aggregate principal amount
of $2,417,000. The promissory notes were due and payable after two years which
ranged to December 1998, or after six months upon demand of the holder, and bore
interest at 10% per annum with interest payable upon maturity or conversion.
The promissory notes were convertible at the holders' option into shares of
common stock of the company at conversion prices ranging from $1.49 to $3.25 per
share. Pursuant to the debt subscription agreements, the company also agreed to
issue to the investors non-transferable warrants to purchase up to an aggregate
of 461,203 shares of common stock of the company for a period of two years at a
price equal to the conversion price of the notes. The conversion and warrant
exercise prices were based on the market price of the company's common stock at
the date of the offering.
As of December 31, 1996, convertible notes aggregating $2,267,000 were converted
to common stock. As of March, 1997, the remaining convertible notes aggregating
$150,000 had also been converted to common stock. As of December 31, 1997,
accrued interest on the convertible promissory notes aggregating $182,753 was
payable by the company. In addition, the company has offered to issue, subject
to the removal of the company from the jurisdiction of both the Vancouver Stock
Exchange and the British Columbia Securities Commission, 115,296 "bonus"
warrants to purchase shares of the company's common stock, exercisable at $2.70,
expiring between December 31, 1999 and February 14, 2000. The likelihood that
the conditions under which the bonus warrants may be issued will ever arise is
considered remote.
Unsecured Notes Payable
- -----------------------
During 1997, the company borrowed an aggregate of $90,000 from Rozel
International Holdings Ltd., issuing promissory notes therefor, which bear
interest at a rate of ten percent per annum. The promissory notes became due
and payable between October 29, 1997 and November 28, 1997 and remain unpaid as
of the date of this report. In addition, the company borrowed $186,585 from
Banque SCS Alliance, issuing a demand promissory note therefor, bearing
interest at a rate of ten percent per annum.
VDC Corporation, Ltd.
- ---------------------
During 1997, the company entered into agreements to borrow up to $700,000 from
VDC, the collateral securing the aggregate amount of such borrowings being a
first priority lien on and security interest in the company's MAC warrants and a
junior lien on, and security interest in, the company's MAC shares. The unpaid
principal balance, together with all accrued and unpaid interest on the unpaid
principal balance, which accrues at a rate of ten percent per annum, is payable
in full upon the earlier to occur of: (i) the date the VDC transaction has been
terminated by either the company or VDC; (ii) the date of closing of the VDC
transaction; or (iii) May 10, 1998. As of December 31, 1997, $82,905 had been
advanced by VDC under the terms of the loan agreements.
Bridge Financing
- ----------------
During 1996, the company completed a Bridge Financing to raise $2,500,000 to
provide interim financing pending the completion of a private placement of the
convertible promissory notes described above. The Bridge Financing was due on
demand after 30 days and bore interest at 12% per annum. In addition, 166,667
warrants were issuable to the lenders.
In the year ended December 31, 1996, the warrants were recorded at their
estimated fair value of $250,000 with a corresponding reduction in the recorded
value of the Notes. This resulted in deemed interest expense of $250,000, which
was included in interest expense in the consolidated statement of operations for
the year ended December 31, 1996 as all of the Notes were repaid. As of
December 31, 1997, the issuance of the 166,667 warrants continued to be subject
to the removal of the company from jurisdictions of both the Vancouver Stock
Exchange and the British Columbia Securities Commission, the likelihood of which
is considered remote.
PORTACOM WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 8 - COMMON STOCK
Issued common stock:
- --------------------
Number Per Share Total
of Shares Consideration Consideration
----------- ------------- --------------
Balance, March 31, 1995 15,214,818 - 10,085,670
Issue for cash:
Free-trading shares 204,878 1.36 277,490
On exercise of stock options 820,267 1.16 953,340
Issued on settlement of debt 1,256,559 2.00 2,513,121
---------- ---- ----------
Balance, December 31, 1995 17,496,522 - 13,829,621
Canceled (5,950,000) - -
Issued for cash:
Free-trading shares 97,500 1.11 108,225
On exercise of warrants 97,878 2.98 291,500
On exercise of stock options 103,050 1.49 153,420
Issued as consideration for
Loans payable 25,833 3.03 78,400
Settlement of debt 96,560 1.25 120,780
Convertible promissory notes 1,097,163 2.07 2,267,000
Fair value of warrants issuable in consideration
for bridge financing - - 250,000
To be issued on settlement of debt 53,675 2.00 107,350
---------- ---- ----------
Balance December 31, 1996 13,118,181 - 17,206,296
Issued for cash:
On private placement 190,388 3.03 577,750
On exercise of warrants 223,457 1.51 337,128
Issued as consideration for:
Loans payable 42,757 3.96 169,302
Convertible promissory notes 55,862 2.69 150,000
Adjustment to reclassify shares to be issued on
settlement of debt (53,675) 2.00 (107,350)
---------- ---- ----------
Balance December 31, 1997 13,576,970 - 18,333,126
========== ==== ==========
Upon emigration to Delaware (Note 1), the company's authorized common stock was
changed from 94,050,000 common shares without par value to 100,000,000 shares of
capital stock with a par value of $0.001 per share.
PORTACOM WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 8 - COMMON STOCK (Continued)
Performance Shares
- ------------------
Included in the issued and outstanding common stock are 600,000 shares which are
subject to an escrow agreement. These shares are releasable from escrow on
satisfaction of certain predetermined tests set out by regulatory authorities
related to the generation of positive cash flow from operations. Shares not
released from escrow by September 9, 2002 will be cancelled. Pursuant to the
escrow agreement, holders of the shares may exercise all voting rights attached
thereto except on a resolution to cancel any of the shares, and have waived
their rights to receive dividends or to participate in the assets and property
of the company on a winding up or dissolution of the company. Upon release of
the shares from escrow, compensation expense will be recorded. The likelihood
of the release of these shares from escrow is remote.
In October 1995, certain shareholders agreed to surrender their 5,950,000
escrowed shares which were then held under the escrow arrangement. In
consideration therefor, the company offered to issue 314,762 shares of common
stock at a deemed price of $2.00 per share. Although the escrowed shares have
been irrevocably cancelled by the company during 1996, the issuance of the
314,762 shares continues to be subject to the removal of the company from the
jurisdiction of both the Vancouver Stock Exchange and the British Columbia
Securities Commission. The likelihood that the company will be removed from the
jurisdiction of both the Vancouver Stock Exchange and the British Columbia
Securities Commission is remote.
Option changes for the period April 1, 1995 to December 31, 1997 were as
follows:
Outstanding and exercisable as of March 31, 1995 1,244,000
Granted at C$1.90 per share 75,000
Granted at C$2.09 per share 400,000
Granted at C$2.41 per share 150,000
Exercised at C$1.25 per share (461,767)
Exercised at C$2.09 per share (358,500)
Canceled (431,300)
---------
Outstanding and exercisable as of December 31, 1995 617,433
Granted at U$3.80 90,000
Granted at U$3.00 472,899
Granted at U$2.68 290,000
Exercised at C$1.25 (16,800)
Exercised at C$1.90 (75,000)
Exercised at U$3.00 (11,250)
Canceled (231,099)
---------
Outstanding and exercisable as of December 31, 1996 1,136,183
Granted at U$3.61 per share 90,000
Canceled (125,000)
Expired (476,183)
---------
Outstanding and exercisable as of December 31, 1997 625,000
=========
PORTACOM WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 8 - COMMON STOCK (Continued)
Stock options are issued at the average market price per share for the ten
trading days prior to the date of issuance. Accordingly, no compensation cost
has been recognized for options granted. Had compensation cost for the
company's stock options for 1997 and 1996 grants been determined consistent with
FASB No. 123, the company's net income (loss) and income (loss) per share would
have been adjusted to the proforma amounts indicated below:
Year Ended Year Ended
December 31 December 31,
1997 1996
------------- ------------
Net income (loss):
As reported $(4,099,619) $5,139,662
Proforma (4,191,613) 4,289,482
Net income (loss) per share:
As reported $ (0.32) $ 0.41
Proforma (0.33) 0.34
The fair value of each warrant and option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1997: dividend yield of 0%; expected
volatility of 0%; risk free interest rate of 5.5%; and expected lives of 1 to 5
years.
Warrants
- --------
On February 14, 1997, the company, in connection with a private placement,
issued warrants to purchase 72,993 shares of common stock at $2.74 per share if
exercised by January 28, 1998 and $3.15 if exercised thereafter to January 28,
1999. As of December 31, 1997, none of these warrants had been exercised.
On June 12, 1997, the company in connection with private placements, issued
warrants to purchase a total of 57,154 shares of common stock at $3.11 per share
if exercised by February 19, 1998 and $3.58 if exercised thereafter to February
20, 1999. As of December 31, 1997, none of these warrants had been exercised.
On June 30, 1997, the company, in connection with a private placement, issued
warrants to purchase a total of 60,241 shares of common stock at $3.32 per share
if exercised by February 10, 1998 and $3.82 if exercised thereafter to February
11, 1999. As of December 31, 1997, none of these warrants had been exercised.
During the year ended December 31, 1996, the company issued warrants to purchase
97,500 shares of common stock at $1.11 per share if exercised by November 1996
and $1.28 if exercised thereafter to November 1997. Of these warrants, 30,000
were exercised during 1997 and the remainder of the warrants expired. In
addition, the company issued 461,203 warrants attached to convertible promissory
notes at prices ranging from $1.49 to $3.25 per share if exercised by dates
ranging from December 19, 1997 to May 7, 1998. During 1997, 161,073 of these
warrants were exercised at $1.49 per share, and 15,384 were exercised at $1.95
per share. In addition, the company has offered to issue, subject to the removal
of the company from the jurisdiction of both the Vancouver Stock Exchange and
the British Columbia Securities Commission, 115,296 "bonus" warrants to purchase
shares of the company's common stock, exercisable at $2.70, expiring between
December 31, 1999 and February 14, 2000.
The company has, in prior periods, issued warrants to purchase up to 204,878
shares of its common stock at prices between $1.28 and $1.47 per share. Of these
warrants, 37,878 were exercised during 1996, 17,000 were exercised during 1997,
and the remaining 150,000 expired during 1997.
In addition, pursuant to the Bridge Financing (Note 7), 166,667 share purchase
warrants exercisable at U$3.30 per share to May 31, 1997 are issuable. The
warrants have been recorded at their estimated fair value of $250,000. At
December 31, 1997, no warrants have been exercised.
PORTACOM WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 8 - COMMON STOCK (Continued)
Shares to be Issued for Loans
- -----------------------------
In connection with the issuance of certain short-term debt by the company in
January 1995 and May 1996, the company offered to issue, subject to regulatory
approval, 85,590 shares of common stock and 166,667 share purchase warrants,
exercisable at $3.30 per share until May 31, 1997. During 1996, regulatory
approval was received for the issuance of 25,833 of these shares which were then
issued by the company. During 1997, regulatory approval was received for the
issuance of 42,757 of these shares which were then issued by the company. At
December 31, 1997, the issuance of the remaining 17,000 shares and 166,667
warrants continued to be subject to receipt of regulatory approval. The
likelihood of receipt of regulatory approval is remote.
In connection with the issuance of certain short-term debt by the company in
February, 1997, the company had offered to issue, subject to the removal of the
company from the jurisdiction of both the Vancouver Stock Exchange and the
British Columbia Securities Commission, 120,000 "bonus" warrants to purchase
shares of the company's common stock, exercisable at $2.75, expiring on February
19, 1999. The likelihood of removal of the company from the jurisdiction of
both the Vancouver Stock Exchange and the British Columbia Securities Commission
is remote.
NOTE 9 - CONTINGENT LIABILITIES
During 1997, one of the company's vendors, JMS North America, Inc. ("JMS") filed
a Motion for Judgement with the Circuit Court of the County of Fairfax,
Commonwealth of Virginia, seeking $836,614 in consulting fees, finance charges
and travel expenses. JMS further seeks $2,250,000 for breach of contract and
$1,500,000 for alleged fraud. The company has disputed and intends to dispute at
trial a material portion of the amounts billed and or claimed by JMS for
consulting fees, finance charges and travel expenses. Additionally, the company
believes that the claims of JMS with respect to fraud and breach of contract are
without merit and will vigorously contest them.
During 1997, J. Michael Christiansen ("Christiansen"), filed a Complaint with
the Superior Court of the State of California, seeking in excess of $350,000
plus interest, costs and undetermined exemplary and punitive damages in
connection with the breach by the company of a Release and Settlement Agreement
dated October 2, 1996, pursuant to which the company was to have issued
Christiansen 75,000 shares of the common stock of the company. The company
believes that the issuance of such shares to Christiansen has been necessarily
delayed pursuant to certain regulatory constraints, the removal of which the
company has continued to seek without success. The company is presently
attempting to engage legal counsel to review and opine on the merit of
Christiansen's claims and to vigorously pursue any and all defenses and
counterclaims determined to be available to the company with respect to certain
of the allegations set forth by Christiansen and to certain past actions of
Christiansen.
On March 23, 1998, the company filed a voluntary petition pursuant to Chapter 11
of Title 11 of the United States Code (the "Bankruptcy Code"). Accordingly,
pursuant to 11 U.S.C. (S) 362 the proceedings described above have been
automatically stayed. The company intends to object to the claims of JMS and
Christiansen and to pursue its rights, remedies and defenses in the bankruptcy
case.
NOTE 10 - INCOME TAXES
There is no income tax benefit for operating losses for years ended December 31,
1997 and 1996 due to the following:
Current tax benefit - the operating losses cannot be carried back to
earlier years.
Deferred tax benefit - the deferred tax assets were offset by a valuation
allowance. Management believes that a valuation allowance is considered
necessary since it is more likely than not that the deferred tax asset will
not be realized through future taxable income.
PORTACOM WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 10 - INCOME TAXES (Continued)
The components of the net deferred tax assets (liabilities) are as follows:
1997 1996
------------ ------------
Net operating loss carryforwards $ 6,200,000 $ 3,600,000
Valuation allowance (6,200,000) (3,600,000)
----------- -----------
$ - $ -
=========== ===========
The use of net operating loss carryforwards for United States income tax
purposes is limited when there has been a substantial change in ownership (as
defined) during a three year period. In this event, the use of net operating
losses each year would be restricted to the value of the Company on the date of
such change multiplied by the federal long-term rate ("annual limitation");
unused annual limitations may then be carried forward without this limitation.
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $15.6 million for U.S. income tax purposes, which if not used will
expire during the years 2011 through 2012.
NOTE 11 - RELATED PARTY TRANSACTIONS
Related party transactions not disclosed elsewhere in these consolidated
financial statements include:
(a) Accounts payable at December 31, 1997 includes approximately $418,687
(December 31, 1996 - $24,000) owing to related parties.
(b) Management and consulting fees have predominantly been charged by related
parties.
(c) Included in bad debts expense for the year ended December 31, 1997 is $-0-
(year ended December 31, 1996 - $-0-; period ended December 31, 1995 -
$21,386) recorded as provisions against employee loans.
(d) The company has reimbursed expenses incurred by directors and officers on
its behalf during the periods presented.
(e) In addition to amounts included in compensation paid to the Chief
Executive Officer, expenses of approximately $189,000 are included in
various other accounts for the year ended December 31, 1997 (year ended
December 31, 1996 - $50,000 and nine months ended December 31, 1995
- $-0-).
NOTE 12 - CONSOLIDATED STATEMENTS OF CASH FLOWS
During the periods presented the company has entered into non-cash financing and
investing transactions which are not disclosed in the consolidated statements of
cash flows. For each of the periods presented these are as follows:
(a) In the year ended December 31, 1997, the company issued common stock as
consideration for financing costs on loans payable, on conversion of
promissory notes, all in the amounts as set out in Note 7;
(b) In the year ended December 31, 1996, the company issued common stock as
consideration for financing costs on loans payable, in settlement of debt,
on conversion of promissory notes, all in the amounts as set out in Note
8; and
(c) In the nine months ended December 31, 1995, the company issued 1,256,559
common stock having an assigned value of $2,513,121 in settlement of
indebtedness in an equivalent amount.
PORTACOM WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 13 - CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the company to significant
concentrations of credit risk consist primarily of cash equivalents. The
company maintains cash equivalents with various financial institutions. These
financial institutions are located in Canada and the United States. The
company's policy is to limit the exposure at any one financial institution and
to invest solely in highly liquid investments that are readily convertible to
contracted amounts of cash.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 4, 1998, KPMG, the Company's former independent accountants,
informed the Company that they would be unable to perform the annual audit of
the Company's financial statements for the fiscal year ended December 31, 1997.
In prior years, KPMG had conducted its audit of the Company out of KPMG's
Vancouver, British Columbia office. In December 1996, the Company emigrated from
Canada and became domiciled in the State of Delaware. Accordingly, KPMG
informed the Company that KPMG could not conduct the audit from KPMG's Vancouver
office. As a result, the Company engaged a new firm of independent
accountants. On February 11, 1998, the Company, with the approval of its board
of directors, engaged the accounting firm of Cogen Sklar LLP of Bala Cynwyd,
Pennsylvania to be the Company's independent accountants and to conduct the 1997
audit. Prior to this retention of Cogen Sklar LLP by the Company, the Company
did not consult with Cogen Sklar LLP regarding any financial or accounting
matters.
During the past two fiscal years and the period up to and including the
date of this report, there were no disagreements between the Company and KPMG on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure. During the same period, there were
no "reportable events", as that term is defined in Item 304(a)(1)(v) of
Regulation S-K. KPMG's reports on the Company's financial statements for the
fiscal years ended December 31, 1996 and December 31, 1995 do not contain
adverse, qualified or disclaiming opinions. However, the report for the fiscal
year ended December 31, 1996 does contain the following statement:
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when the
financial statements are affected by conditions and events that cast
substantial doubt on the Company's ability to continue as a going concern,
such as those described in note 1 to the consolidated financial statements.
Our report to the shareholders dated January 15, 1997 is expressed in
accordance with Canadian reporting standards which do not permit a
reference to such events and conditions in the auditors' report when these
are adequately disclosed in the financial statements.
Note 1 to such financial statements contains the following statement:
At December 31, 1996, the Company had a working capital deficiency of
$685,858. At the date of these consolidated financial statements, the
Company has not generated cash flow from recurring operating activities and
it is uncertain when it will commence to generate such a cash flow. In
addition, the Company's largest recorded asset is restricted until January
1, 1999 (note 5(a)). Accordingly, there can be considered to be doubt as
to the nature and extent of the Company's future operations.
PART III
--------
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------------------------
The following table identifies all of the current directors and executive
officers of the Registrant and its subsidiaries. Directors serve until the next
annual meeting or until their successors are elected and qualified. Officers
serve at the discretion of the Board of Directors.
NAME AGE POSITION
- ---- --- --------
Thomas P. Madden 39 Vice President, Investor Relations and
Director.
Michael A. Richard 29 President, Chief Executive Officer, Vice
President, Accounting and Director.
Steven B. Rosner 47 Director.
THOMAS P. MADDEN
----------------
Mr. Madden has been a Director of the Registrant since March 8, 1998, and
Vice President-Investor Relations of the Registrant since September 1995. Since
February 1992, Mr. Madden served as an Investor Relations Consultant as
President of Madden Consulting.
MICHAEL A. RICHARD
------------------
Mr. Richard has been a Director of the Registrant since March 8, 1998, the
Chief Executive Officer of the Registrant since March 10, 1998, the Vice
President, Accounting of the Registrant since October 1996 and has been with the
Company since 1991, serving as its Controller (1995 to 1996) and as an
Accounting Manager for PCBX, Telecom and PIL (1991 to 1995). He has also served
as Treasurer (1994 to present), Secretary (1996 to present) and as a Director of
PIL (1996 to present).
STEVEN B. ROSNER
----------------
Mr. Rosner has been a director of the Registrant since March 8, 1998. Mr.
Rosner is the sole
shareholder of SLD Capital Corporation, which specializes in providing
consulting and investment banking services. Previously, Mr. Rosner served as
President of Centaur Financial Corporation, an investment banking firm, from
1984 to 1996. He also serves as a director of Tradewinds, Inc., Informatix,
Inc. and netValue, Inc. Mr. Rosner was also a director and President of Pacific
Rim Entertainment from December 1996 to December 1997.
During the last five years, except with respect to the voluntary petition
filed by the Company pursuant to Chapter 11 of the Bankruptcy Code, none of the
Company's executive officers, directors, promoters or control persons has (i)
had any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time; (ii) been convicted in a
criminal proceeding or been subject to a pending criminal proceeding (excluding
traffic violations and other minor offenses); (iii) been subject to any order,
judgment, or decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of business,
securities, commodities or banking activities; or (iv) been found by a court of
competent jurisdiction (in a civil action), the Commission, or the Commodity
Futures Trading Commission to have violated a federal or state securities or
commodities law, which judgment has not been reversed, suspended, or vacated.
SECTION 16(a) REPORTS
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and any persons who own more than 10% of a
registered class of the Company's equity securities to file with the Securities
and Exchange Commission reports of ownership and changes in ownership of Common
Stock and other equity securities of the Company. Officers, directors and
greater than 10% shareholders are required by Securities and Exchange Commission
regulation to furnish the Company with copies of all Section 16(a) forms they
file. Mr. MacLellan did not timely file with the SEC Forms 4, Statement of
Changes in Beneficial Ownership, with respect to his purchases of common stock
of the Company on February 24 and 25, 1997 and March 24, 1997. The Forms 4 with
respect to such transactions were due no later than March 10, 1997 and April 10,
1997, respectively. Thomas Scichili, who was an officer during 1997, did not
timely file with the SEC Form 4 with respect to an issuance by the Company of
warrants to purchase shares of the Company's common stock to Lake Forest
Partners, Ltd. (of which he is a general partner) pursuant to a private
placement transaction. In addition, Thomas Scichili did not timely file with
the SEC Form 4 with respect to an issuance by the Company of options to purchase
shares of the Company's common stock. The Forms 4 with respect to both such
transactions were due no later than March 10, 1997. Morris Magid, who was an
officer during 1997, did not timely file with the SEC Form 4 with respect to his
receipt from the Company of shares of its common stock pursuant to a loan bonus
agreement. In addition, Mr. Magid did not timely file with the SEC Form 4 with
respect to the sale by the Magid Family Trust of certain of its shares of the
Company's common stock which were beneficially owned by Mr. Magid. The Forms 4
with respect to both such transactions were due no later than March 10, 1997 and
September 10, 1997, respectively. Each of the above transactions was reported on
an SEC Form 5 which was timely filed. The Company intends to revise its program
to enhance compliance by directors and officers with future 16(a) reporting
obligations.
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses, for the fiscal years ended December 31,
1997, 1996 and 1995, individual compensation information relating to the
Company's Chief Executive Officers serving during the period. No other
executive officers earned more than $100,000.
Summary Compensation Table
===================================================================================================================
Annual Compensation Long-Term Compensation
------------------- ----------------------
====================================
Awards Payouts
- -------------------------------------------------------------------------------------------------------------------
Name and Other Securities All Other
Principal Annual Restricted Underlying Compen-
Position of Fiscal Compen- Stock Options/ LTIP sation ($)
Executive Year or Salary Bonus sation Awards SARS Payouts
Officer Transition ($) ($) ($) ($) (#) ($)
Period
Ending
- -------------------------------------------------------------------------------------------------------------------
Douglas C. Dec 31,
MacLellan, 1997 192,000 25,000 nil nil nil nil nil
President and
CEO of the Dec 31,
Registrant (1) 1996 168,000 nil 30,000 nil 200,000 nil nil
Dec 31,
1995 28,000 nil nil nil nil nil nil
===================================================================================================================
(1) Mr. MacLellan served as Chief Executive Officer from November 1995 to
March 1998.
The terms and conditions of the employment contracts or arrangements with
the above mentioned executive officer are as follows:
No grants or repricing of stock options or other stock appreciation
rights were made during 1997. Accordingly, there is no Options/SAR Grants
Table set out in this Annual Report.
No LTIP has been instituted by the Company and none are proposed at
this time. Accordingly, there is no LTIP Awards Table set out in this
Annual Report.
No pension plans or retirement benefit plans have been instituted by
the Company and none are proposed at this time. Accordingly, there is no
Pension Plan Table set out in this Annual Report.
The Company currently has no Compensation Committee. During 1997, the
Company had a Compensation Committee comprised of Messrs. Keith Hay, Stephen
Leahy and Stephen Stephens, who were directors of the Company during 1997 who
had each resigned prior to the date of this report. The directors of the
Company and its Compensation Committee have never set any specific policies for
determining compensation of executive officers. Rather, the Company has
historically determined executive compensation based on salaries paid to
comparable executives in similar companies. Although the Company has no
contractual bonus arrangements, bonuses are granted at the discretion of
management. It is expected that the directors will form a new Compensation
Committee during 1998 to formulate more detailed policies with respect to
officer compensation.
In January 1997, the Registrant entered into an employment agreement with
Douglas C. MacLellan, which provided for his employment as its President and
Chief Executive Officer on a month to month basis, and, subject to the approval
of the Vancouver Stock Exchange, payment of a base salary of $192,000 per annum
plus reimbursement of expenses. Additionally, in the event it is permissible to
do so without receiving approval of the Vancouver Stock Exchange, Mr. MacLellan
was to be paid compensation equivalent to four month's salary in the event that
his employment was terminated by the Company. In November 1995, the Registrant
had entered into a verbal employment agreement with Mr. MacLellan whereby he was
employed under similar terms to those in the January, 1997 agreement except that
the base salary to be paid was $168,000 per annum and there was no provision for
additional compensation upon termination. Effective March 10, 1998, Mr.
MacLellan resigned his director and officer positions with the Registrant and
his employment agreement with the Registrant was terminated.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES TABLE
The following table shows information regarding the exercise of stock
options during 1997 by the named executive officers and the number and value of
any unexercised stock options held by them as of December 31, 1997:
- -------------------------------------------------------------------------------------
Number of
securities Value of
underlying unexercised in-
unexercised the-money
options/SARs at options/SARs at
fiscal year end fiscal year end
(#) ($)
Name Shares Value ------------------------------------
acquired on Realized Exercisable/ Exercisable/
exercise (#) ($) unexercisable unexercisable
(a) (b) (c) (d) (e)
- -------------------------------------------------------------------------------------
Douglas MacLellan 0 0 200,000/0 -0-(1)
- -------------------------------------------------------------------------------------
(1) The value of the options is calculated based upon the market price of
the Company's Common Stock as of December 31, 1997 of $0.70 (C$0.98)
per share, as reported by the Vancouver Stock Exchange.
DIRECTORS FEES
The Company does not pay independent directors who attend a regularly
scheduled or special meeting of its Board of Directors. None of the directors
of the Company were compensated by the Company or its subsidiaries during the
most recently completed financial year for their services in their capacity as
directors. Messrs. Keith Hay and Stephen Stephens, who were directors during
1997, each charged consulting fees of $2,500 per month for their services as
consultants or experts independent of their attendance at meetings of the
Company's Board of Directors. Furthermore, Mr. Stephen Leahy, who was also a
director during 1997, owns 50% of Mustang Management Ltd., which charged
approximately $50,000 for management and administrative services during 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1997, Messrs. Hay, Leahy and
Stephens, all of whom were also directors of the Company during 1997, were the
members of the Company's compensation committee. Mr. Leahy was also the
Secretary of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 13, 1998, information with
respect to the beneficial ownership (as calculated pursuant to Rule 13d-3(d)(1)
promulgated under the Exchange Act) of Common Stock owned by (i) all persons
which the Registrant has reason to believe may be deemed the beneficial owners
of more than 5% of the Registrant's outstanding Common Stock (ii) each director
of the Registrant, (iii) the Named Executive Officer, and (iv) all directors and
executive officers of the Registrant as a group. As of April 13, 1998, an
aggregate of 13,576,970 shares of Common Stock were issued and outstanding. For
purposes of computing the percentages under this table, it is assumed that all
options and warrants to acquire Common Stock which have been issued to the
directors, executive officers and holders of more than 5% of the Common Stock
and are fully vested or will become fully vested within 60 days of the date of
this Annual Report have been exercised by these individuals and the appropriate
number of shares of Common Stock have been issued to these individuals.
Name and Address of Amount and Nature % of
Beneficial Owner of Beneficial Ownership Ownership
- ------------------- ----------------------- ---------
Douglas C. MacLellan 8,000 (1) *
8324 Delgany Avenue
Playa del Rey, CA 90293
Thomas P. Madden 150,500 (2) *
c/o 10061 Talbert Ave. #200
Fountain Valley, CA 92708
Morris J. Magid 1,016,352 (3) 7.3%
1054 Selby Avenue
Los Angeles, CA 90024
Michael Marcus 723,852 (4) 5.2%
300 South 4th. Street
Suite 1100
Las Vegas, NV 89101
Michael A. Richard 1,500 *
c/o 10061 Talbert Ave. #200
Fountain Valley, CA 92708
Steven B. Rosner 10,000 *
c/o 10061 Talbert Ave. #200
Fountain Valley, CA 92708
All Directors and Executive 162,000 (5) 1.2%
Officers as a group (3 persons)
_______________________
(1) Mr. MacLellan, who served as Chief Executive Officer of the Registrant
during all of 1997, is a "named executive officer" for the purpose of this
Item 12.
(2) Includes 150,000 shares of common stock of the Registrant issuable upon
the exercise of certain outstanding options held by Mr. Madden which are
currently exercisable at a price of C$2.41.
(3) Includes 384,928 shares held by 380144 B.C. Ltd., a British Columbia
corporation owned 60% by Morris Magid and 40% by Marvin Magid. Morris and
Marvin Magid are brothers.
(4) Includes 194,772 shares of common stock issuable upon the exercise of
certain warrants held by Will's Wei Corporation which are currently
exercisable at prices ranging between $2.74 and $3.32 per share. Includes
20,000 shares held by Can Mark Trading Company.
(5) Includes 150,000 shares of common stock of the Registrant issuable upon
the exercise of outstanding options owned by the directors and executive
officers of the Registrant.
* Less than 1%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
1. MAC Transaction
---------------
As of December 31, 1996, Douglas C. MacLellan owned 500,000 shares of MAC.
See "Item 1: Business; Metromedia Asia Corporation."
2. Acquisition of PortaCom Wireless Communications, Inc.
-----------------------------------------------------
Pursuant to an agreement dated November 3, 1995 (the "PWC Agreement"), the
Registrant agreed to acquire PortaCom Wireless Communications, Inc., a Delaware
corporation, ("PWC") in exchange for shares of the Registrant's common stock.
Of the shareholders of PWC, Douglas C. MacLellan, who, during 1997 was the
President and a director of the Registrant, was to receive 682,000 shares,
Stephen O. Stephens, who during 1997 was a director of the Registrant , was to
receive 136,400 shares, J. Michael Christianson, who, during 1996 was a Chief
Financial Officer of the Registrant, was to receive 341,000, and PJL
Communications, Inc. was to receive 409,200 shares. On July 18, 1996, the
Registrant terminated the acquisition of PWC as it had not yet received
regulatory approval. The Registrant has determined, however, that it will issue
shares of its common stock to Messrs. MacLellan and Stephens and to PJL, in the
same amounts as previously provided in the PWC Agreement, in the event it is
permissible to do so without receiving approval of the Vancouver Stock Exchange.
In the opinion of management, the likelihood can be considered to be remote that
the conditions under which the above shares may be issued will ever arise.
Additionally, certain Prepetition Settlements expected to be consummated under
the plan of reorganization contemplate the provision to the Company of claim
releases with respect to the respective issuances to Messrs. MacLellan and
Stephens referred to above.
3. Funds Advanced and Repaid
-------------------------
In January 1994, a company controlled by Morris Magid pledged 1,128,415
shares of common stock to guarantee a loan for the benefit of the Company. In
connection with such and with advances and loans made in prior periods, the
Company agreed, subject to regulatory approval, to issue a total of 42,757 bonus
shares to Mr. Magid. During 1997, regulatory approval for the issuance of 42,757
shares was received and the Company then issued the shares.
4. Compensatory Shares Contingently Issuable Pursuant to Cancellation of
---------------------------------------------------------------------
Performance Shares
------------------
As compensation for the agreement by Messrs. Morris Magid, Robert Alexander
and Howard Frantom to surrender their 5,950,000 performance shares which were
held under an escrow agreement, the Registrant has offered to issue, at a deemed
price of $2.00 per share, 43,516 common
shares, 271,245 common shares and 1 common share each to Mr. Magid, Mr.
Alexander, and Mr. Frantom, respectively. As of the date of this filing, none
of the aforementioned shares have been issued. The Registrant does not expect
to issue any of the compensatory shares while it remains subject to the
jurisdiction of the Vancouver Stock Exchange and the British Columbia Securities
Commission. In the opinion of management, the likelihood can be considered to
be remote that the conditions under which the above shares may be issued will
ever arise.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are filed as part of this Report:
Exhibit Description
No.
2.1 The Registrant's Voluntary Petition for Relief under Chapter 11 of the
United States Bankruptcy Code, filed March 23, 1998 in the United
States Bankruptcy Court, District of Delaware, Case #98-661 (PJW)/(1)/
2.2 Form of Interim Order Authorizing Debtor To Obtain Secured
Post-Petition Financing Pursuant To U.S.C. (S) 364(c)*
2.3 Form of Motion and Order (A) Establishing Bidding Procedures and
Approving A Break-Up Fee In Connection with the Sale of the Debtor's
Interest In Certain Property of the Estate And (B) Approving the Form
and Manner of Notice*
2.4 Form of Stipulation and Order in Lieu of objection Amending the Post
Petition Asset Purchase Agreement between the Registrant and VDC
Corporation, Ltd.*
3.1 Certificate of Incorporation of the Registrant/(2)/
3.2 Amendment to Certificate of Incorporation dated May 1, 1990/(3)/
3.3 Amendment to Certificate of Incorporation dated September 10,
1991/(4)/
3.4 Amendment to Certificate of Incorporation dated November 1, 1994/(5)/
3.5 Amendment to Certificate of Incorporation dated December 5, 1995/(6)/
3.6 Amended and Restated Certificate of Incorporation dated December 10,
1996/(7)/
3.7 By-Laws of the Registrant/(8)/
4.1 Specimen Stock Certificate/(9)/
4.2 Form of Escrow Agreement dated September 30, 1991/(10)/
4.3 Form of Escrow Agreement dated June 30, 1992/(11)/
10.1 Participation Agreement between Hoang Ly Huu, Sonny Luu, CMC
International, Inc., Asia Telecom, Inc., and the Registrant/(12)/
10.2 Agreement For Cancellation of Performance Shares between the
Registrant and Morris J. Magid, Robert B. Alexander, and Howard B.
Frantom/(13)/
10.3 Form of Stock Purchase Agreement between the Registrant and Stephen O.
Stephens, Douglas C. MacLellan, J. Michael Christiansen, PJL
Communications, Inc., and PortaCom Wireless Communications, Inc./(14)/
10.4 Separation and Consulting Agreement between the Registrant and Francis
T. Phalen/(15)/
10.5 Stock Option Agreement between the Registrant and Keith A.J. Hay/(16)/
10.6 Stock Option Agreement between the Registrant and Robert Flitton/(17)/
10.7 Stock Option Agreement between the Registrant and Stephen O.
Stephens/(18)/
10.8 Form of Termination Agreement between the Registrant and Asian
American Telecommunications Corporation/(19)/
10.9 Form of Employment Agreement between the Registrant and Douglas C.
MacLellan/(20)/
10.10 Form of Employment Agreement between the Registrant and Michael A.
Richard/(21)/
10.11 Joint Venture Agreement for the Establishment of a Joint Venture
Enterprise for a CDMA Based Telecommunications System in the Kingdom
of Cambodia/(22)/
10.12 License for the Provision and Operation of a CDMA Based
Telecommunications System Within the Kingdom of Cambodia/(23)/
10.13 Stock Option Agreement between the Registrant and R. Keith
Alexander/(24)/
10.14 Stock Option Agreement between the Registrant and Douglas C.
MacLellan/(25)/
10.15 Stock Option Agreement between the Registrant and Stephen M.
Leahy/(26)/
10.16 Employment Agreement between the Registrant and Thomas P. Scichili. A
verbal agreement was entered into between the Registrant and Thomas P.
Scichili whereby the Registrant agreed to pay Mr. Scichili a salary of
up to $8,000 per month on a month-to-month basis, plus reimbursement
of reasonable expenses, terminable mutually at will, to serve as the
Registrant's Vice President-General Counsel. Effective July 31, 1997,
Mr. Scichili resigned his position with the Registrant and his
employment agreement with the Registrant was terminated.
10.17 Employment Agreement between the Registrant and Paul Robert Carr. A
verbal agreement was entered into between the Registrant and Paul
Robert Carr whereby the Registrant agreed to pay Mr. Carr a salary of
$6,000 per month on a month-to-month basis, plus reimbursement of
reasonable expenses, terminable mutually at will, to serve as the
Registrant's Vice President-Asia Pacific. Effective January 15, 1998,
Mr. Carr resigned his position with the Registrant and his employment
agreement with the Registrant was terminated.
10.18 Employment Agreement between the Registrant and Thomas P. Madden. A
verbal agreement was entered into between the Registrant and Thomas P.
Madden whereby the Registrant agreed to pay Mr. Madden a salary of
$6,000 per month on a month-to-month basis, plus reimbursement of
reasonable expenses, terminable mutually at will, to serve as the
Registrant's Vice President-Investor Relations.
10.19 Acquisition Agreement and Plan of Reorganization between the
Registrant and Asian American Telecommunications Corporation/(27)/
10.20 Form of First Amendment to Acquisition Agreement and Plan of
Reorganization between the Registrant and Asian American
Telecommunications Corporation/(28)/
10.21 Form of Second Amendment to Acquisition Agreement and Plan of
Reorganization between the Registrant and Asian American
Telecommunications Corporation/(29)/
10.22 Agreement between the Registrant and Howard B. Frantom acknowledging
cancellation of Employment Agreement/(30)/
10.23 Stock Option Agreement between the Registrant and Michael Marcus *
10.24 Stock Option Agreement between the Registrant and Thomas Scichili *
10.25 Form of Post Petition Asset Purchase Agreement between the Registrant
and VDC Corporation, Ltd. *
10.26 Debtor-In-Possession Loan, Pledge and Security Agreement between the
Registrant and VDC Corporation, Ltd. *
10.27 Letter of Intent between the Registrant and VDC Corporation, Ltd. *
10.28 Asset Purchase Agreement between the Registrant and VDC Corporation,
Ltd. *
10.29 First Amendment to Asset Purchase Agreement between the Registrant and
VDC Corporation, Ltd. *
10.30 Loan Agreement between the Registrant and VDC Corporation, Ltd. *
10.31 Pledge Agreement between the Registrant and VDC Corporation, Ltd. *
10.32 Security between the Registrant and VDC Corporation, Ltd. *
10.33 Agreement Re: Transfer Of Interest Of PortaCom Wireless, Inc. In
American Cambodian Telecom, Ltd. *
16 Letter from KPMG to the United States Securities and Exchange
Commission regarding the change in the Company's certifying accountant
dated April 9, 1998/(31)/
21 Subsidiaries of the Registrant *
27 Financial Data Schedule *
* Filed herewith
/(1)/ Incorporated by reference to Exhibit 2 to Form 8-K filed with the
Securities and Exchange Commission on March 30, 1998.
/(2)/ Incorporated by reference to Exhibit 3.1 to Form 10-SB filed with the
Securities and Exchange Commission on January 18, 1994 (the "Form 10-
SB").
/(3)/ Incorporated by reference to Exhibit 3.3 to Amendment #1 to Form 10-SB
filed with the Securities and Exchange Commission on September 8, 1994
(the "Amendment #1 to Form 10- SB").
/(4)/ Incorporated by reference to Exhibit 3.4 to Amendment #1 to Form 10-SB.
/(5)/ Incorporated by reference to Exhibit 3.4 to Form 10-KSB for the fiscal
year ended March 31, 1995.
/(6)/ Incorporated by reference to Exhibit 3.5 to Form 10-KSB for the fiscal
year ended March 31, 1995.
/(7)/ Incorporated by reference to Exhibit 3.6 to Form 10-K for the fiscal year
ended December 31, 1996.
/(8)/ Incorporated by reference to Exhibit 3.7 to Form 10-K for the fiscal year
ended December 31, 1996.
/(9)/ Incorporated by reference to Exhibit 4.1 to Form 10-K for the fiscal year
ended December 31, 1996.
/(10)/ Incorporated by reference to Exhibit 4.5 to Form 10-SB.
/(11)/ Incorporated by reference to Exhibit 4.6 to Form 10-SB.
/(12)/ Incorporated by reference to Exhibit 10.5 to Form 10-KSB for the fiscal
year ended March 31, 1995.
/(13)/ Incorporated by reference to Exhibit 10.8 to Form 10-KSB for the fiscal
year ended March 31, 1995.
/(14)/ Incorporated by reference to Exhibit 10.9 to Form 10-KSB for the fiscal
year ended March 31, 1995.
/(15)/ Incorporated by reference to Exhibit 10.10 to Form 10-KSB for the fiscal
year ended March 31, 1995.
/(16)/ Incorporated by reference to Exhibit 10.17 to Form 10-KSB for the fiscal
year ended March 31, 1995.
/(17)/ Incorporated by reference to Exhibit 10.18 to Form 10-KSB for the fiscal
year ended March 31, 1995.
/(18)/ Incorporated by reference to Exhibit 10.19 to Form 10-KSB for the fiscal
year ended March 31, 1995.
/(19)/ Incorporataed by reference to Exhibit 10.02 to Form 10-QSB for the
quarter and nine months ended September 30, 1996.
/(20)/ Incorporated by reference to Exhibit 10.24 to Form 10-K for the fiscal
year ended December 31, 1996.
/(21)/ Incorporated by reference to Exhibit 10.25 to Form 10-K for the fiscal
year ended December 31, 1996.
/(22)/ Incorporated by reference to Exhibit 10.26 to Form 10-K for the fiscal
year ended December 31, 1996.
/(23)/ Incorporated by reference to Exhibit 10.27 to Form 10-K for the fiscal
year ended December 31, 1996.
/(24)/ Incorporated by reference to Exhibit 10.28 to Form 10-K for the fiscal
year ended December 31, 1996.
/(25)/ Incorporated by reference to Exhibit 10.29 to Form 10-K for the fiscal
year ended December 31, 1996.
/(26)/ Incorporated by reference to Exhibit 10.30 to Form 10-K for the fiscal
year ended December 31, 1996.
/(27)/ Incorporated by reference to Exhibit 10.2 to Form 10-KSB for the fiscal
year ended March 31, 1995.
/(28)/ Incorporated by reference to Exhibit 10.3 to Form 10-KSB for the fiscal
year ended March 31, 1995.
/(29)/ Incorporated by reference to Exhibit 10.01 to Form 10-QSB for the quarter
and nine months ended September 30,1996.
/(30)/ Incorporated by reference to Exhibit 10.3 to Form 10-KSB for the fiscal
year ended March 31, 1995.
/(31)/ Incorporated by reference to Exhibit 16 to Form 8-K/A filed with the
Securities and Exchange Commission on April 10, 1998.
(b) Reports on Form 8-K:
The following report on Form 8-K was filed during the last quarter of
the period covered by this Report:
Date of Report Subject Matter
- -------------- --------------
10/8/97 Letter of Intent Signed for Sale of Principal Asset to VDC
Corporation
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report on Form 10-K for the fiscal
year ended December 31, 1997 to be signed on its behalf by the undersigned,
thereunto duly authorized, in Fountain Valley, California, on April 14, 1998.
PORTACOM WIRELESS, INC.
By: /s/ Michael A. Richard
----------------------------------
Michael A. Richard
Chief Executive Officer and Vice
President, Accounting (principal
financial officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K for the fiscal year ended December 31, 1997 has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Thomas P. Madden Director and April 14, 1998
- ------------------------ Vice President, Investor Relations
Thomas P. Madden
/s/ Michael A. Richard Director, Chief Executive Officer April 14, 1998
- ------------------------ and Vice President, Accounting
Michael A. Richard (principal financial officer)
/s/ Steven B. Rosner Director April 14, 1998
- ------------------------
Steven B. Rosner