<PAGE>
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
U.S. Digital Communications, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1
and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $.01 per share
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
101,710,553 shares of Common Stock*
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$[--------]
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$20,748,953
- --------------------------------------------------------------------------------
(5) Total fee paid:
$4,149.79**
- --------------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials:
- --------------------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the form or
schedule and the date of its filing.
(1) Amount previously paid: (2)Form, Schedule or Registration Statement no.:
- --------------------------------------------------------------------------------
(3)Filing party: (4) Date filed:
- --------------------------------------------------------------------------------
* For purposes of calculation of the filing fee only. [Assumes the purchase,
at a purchase price of $0.204 per share of Common Stock, of
101,710,553 shares of Common Stock of the Registrant, representing
[fifty-one (51%) percent] of such Common Stock outstanding on a fully
diluted basis (assuming the exercise of options and warrants to acquire
shares of Common Stock). The above calculation is based on the most
recent publicly available data for the Registrant.
** The amount of the filing fee equals 1/50th of 1% of the transaction value.
<PAGE>
U.S. DIGITAL COMMUNICATIONS, INC.
2 Wisconsin Circle, Suite 700
Chevy Chase, MD 20815
(301) 961-1540
----------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 7, 2000
TO THE STOCKHOLDERS OF
U.S. DIGITAL COMMUNICATIONS, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of U.S.
Digital Communications Inc., a Nevada corporation (the "Company" or "USDI"),
will be held at Ristorante Terrazza, 2 Wisconsin Circle, Chevy Chase, MD 20815
on Monday, February 7, 2000 at 10:00 a.m. EST (the "Special Meeting"), for the
following purposes:
(i) To consider and vote upon the Agreement and Plan of Merger,
dated as of December 22, 1999, a copy of which is included in
Exhibit A to the Proxy Statement, between the Company, USDI
Acquisition, Inc., a Texas corporation and a wholly owned
Subsidiary of the Company ("Merger Sub") and TELCAM,
Telecommunications Company of the Americas, Inc., a Texas
corporation ("TELCAM"), whereby Merger Sub will be merged with
and into TELCAM. The shareholders of TELCAM will receive
shares representing 51% of the Company's Common Stock in
exchange for all the outstanding shares of TELCAM's Common
Stock owned by them (the "Merger");
(ii) To consider and vote upon an amendment of the Company's
Articles of Incorporation (the "Articles") to increase the
number of authorized shares of its Common Stock, par value
$.01 per share (the "Common Stock"), to 325,000,000 shares
(subject to subsequent decrease of the number of authorized
shares of Common Stock to 81,250,000 through a 1-for-4 reverse
stock split if the stockholders approve Item (iii) below);
(iii) To consider and vote upon an amendment of the Company's
Articles to effect a 1-for-4 reverse stock split of the Common
Stock and thereby to decrease the authorized number of shares
of the Company's Common Stock to 81,250,000; and
(iv) To transact such other business as may properly come before
the Special Meeting or any adjournments or postponements
thereof.
Holders of record of the Company's $0.01 par value Common Stock at the
close of business on December 31, 1999 will be entitled to vote at the Special
Meeting or any adjournments or postponements thereof. All stockholders are
cordially invited to attend the Special Meeting in person. However, whether or
not you expect to attend the Special Meeting in person, it is requested that you
promptly fill in, sign, date and return the enclosed proxy.
By order of the Board of Directors,
EDWARD J. KOPF
EXECUTIVE VICE PRESIDENT AND SECRETARY
<PAGE>
Chevy Chase, Maryland
[________,] 2000
YOU ARE URGED TO FILL IN, SIGN, DATE AND MAIL THE ENCLOSED PROXY. IF YOU ATTEND
THE SPECIAL MEETING AND VOTE IN PERSON, THE PROXY WILL NOT BE USED. IF THE PROXY
IS MAILED IN THE UNITED STATES IN THE ENCLOSED ENVELOPE, NO POSTAGE IS REQUIRED.
THE PROMPT RETURN OF YOUR PROXY WILL SAVE THE EXPENSE INVOLVED IN FURTHER
COMMUNICATION.
<PAGE>
U.S. DIGITAL COMMUNICATIONS, INC.
2 Wisconsin Circle, Suite 700
Chevy Chase, MD 20815
(301) 961-1540
---------------
PROXY STATEMENT
for the Special Meeting of Stockholders
to be held on February 7, 2000
---------------
[_______,] 2000
TO THE STOCKHOLDERS OF
U.S. DIGITAL COMMUNICATIONS, INC.:
This Proxy Statement (the "Proxy Statement") is being furnished to
stockholders of U.S. Digital Communications, Inc., a Nevada Corporation (the
"Company"), in connection with the solicitation of proxies in the accompanying
form by the Board of Directors for use at the Special Meeting of Stockholders
(including any adjournments or postponements thereof, the "Special Meeting") to
be held at Ristorante Terrazza, 2 Wisconsin Circle, Chevy Chase, MD 20815 on
Monday, February 7, 2000 at 10:00 a.m. EDT. The approximate date on which this
Proxy Statement and the accompanying form of proxy will be sent to the
stockholders is January 12, 2000.
All holders of record (the "Stockholders") of the Company's Common
Stock, par value $0.01 per share (the "Common Stock"), at the close of business
on December 31, 1999 (the "Record Date"), are entitled to vote at the meeting
and their presence is desired. Each outstanding share of Common Stock as of the
Record Date is entitled to one vote. At the close of business on the Record
Date, __________ shares of Common Stock were outstanding.
If a Stockholder cannot be present in person at the Special Meeting,
the Board of Directors of the Company requests such Stockholder to execute and
return the enclosed proxy as soon as possible. The person who signs the proxy
must be either (i) the registered Stockholder of such shares of Common Stock or
(ii) a trustee, executor, administrator, guardian, attorney-in-fact, officer of
a corporation or any other person acting in a fiduciary or representative
capacity on behalf of such registered Stockholder. A Stockholder can, of course,
revoke a proxy at any time before it is voted, if so desired, by filing with the
Secretary of the Company an instrument revoking the proxy or by returning a duly
executed proxy bearing a later date, or by attending the Special Meeting and
voting in person. Any such filing should be sent to U.S. Digital Communications,
Inc., 2 Wisconsin Circle, Suite 700, Chevy Chase, MD 20815; Attention:
Secretary. Attendance at the Special Meeting will not by itself constitute
revocation of a proxy.
The Company is paying all costs of the solicitation of proxies,
including the expenses of printing and mailing to its Stockholders this Proxy
Statement, the accompanying Notice of Special Meeting of Stockholders, and the
enclosed proxy.
The Company has retained Morrow & Co. ("Morrow") to solicit proxies in
connection with the Special Meeting. For such services, the Company has agreed
to pay Morrow a fee of $10,000. In addition, if Morrow is requested to make
calls to, or receive calls from, individual record holders or non-objecting
beneficial owners, the Company will pay Morrow $5.00 per each such call. The
Company has
i
<PAGE>
also agreed to reimburse Morrow for costs and expenses incurred in
connection with the distribution and mailing of solicitation materials.
The Company will also reimburse brokerage houses and other custodians,
nominees and fiduciaries for their expenses, in accordance with the regulations
of the Securities and Exchange Commission (the "Commission" or "SEC"), in
sending proxies and proxy materials to the beneficial owners of the Company's
Common Stock. Officers or employees of the Company may also solicit proxies in
person, or by mail, telegram, telegraph, facsimile or telephone, but such
persons will receive no compensation for such work, other than their normal
compensation as such officers or employees.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, the Stockholders will consider and vote upon:
(i) The Agreement and Plan of Merger, dated as of December 22,
1999, a copy of which is included in Exhibit A to the Proxy
Statement, between the Company, USDI Acquisition, Inc., a
Texas corporation and a wholly owned Subsidiary of the Company
("Merger Sub") and TELCAM, Telecommunications Company of the
Americas, Inc., a Texas corporation ("TELCAM"), whereby Merger
Sub will be merged with and into TELCAM. The shareholders of
TELCAM will receive shares representing approximately 51% of
the Company's Common Stock in exchange for all the outstanding
shares of TELCAM's Common Stock owned by them (the "Merger");
(ii) To consider and vote upon an amendment of the Company's
Articles of Incorporation (the "Articles") to increase the
number of authorized shares of its Common Stock, par value
$.01 per share (the "Common Stock"), to 325,000,000 shares
(subject to subsequent decrease of the number of authorized
shares of Common Stock to 81,250,000 through a 1-for-4 reverse
stock split if the stockholders approve Item (iii) below);
(iii) To consider and vote upon an amendment of the Company's
Articles to effect a 1-for-4 reverse stock split of the Common
Stock and thereby to decrease the authorized number of shares
of the Company's Common Stock to 81,250,000; and
(iv) Such other business as may properly come before the Special
Meeting or any adjournments or postponements thereof.
VOTE REQUIRED; PROXIES
The presence in person or by proxy of a majority of the shares of
Common Stock outstanding and entitled to vote as of the Record Date is required
for a quorum at the Special Meeting. Approval of the Merger and amendment of
USDI's Articles requires the affirmative vote of the holders of a majority of
the outstanding shares of USDI Common Stock entitled to vote on these matters.
Abstentions and broker non-votes are not affirmative votes and, therefore, will
have the same effect as votes against approval of the Merger and amendment of
USDI's Articles. In addition, the required vote on these matters is based on the
number of outstanding shares of USDI Common stock, rather than the shares
actually present in person or by proxy at the Special Meeting.
For all other matters submitted to Stockholders at the meeting, if a
quorum is present, the affirmative vote of a majority of the shares represented
at the meeting and entitled to vote is required for approval. As a result,
abstention votes will have the effect of a vote against such matters.
ii
<PAGE>
Shares of Common Stock which are represented by properly executed
proxies, unless such proxies shall have previously been properly revoked, will
be voted in accordance with the instructions indicated in such proxies. If no
contrary instructions are indicated, such shares will be voted in favor of the
proposals.
Shares held by brokers and other Stockholder nominees may be voted on
certain matters but not others. This can occur, for example, when the broker or
nominee does not have the discretionary authority to vote shares of Common Stock
and is instructed by the beneficial owner thereof to vote on a particular matter
but is not instructed on other matters. These are known as "non-voted" shares.
Non-voted shares will be counted for purposes of determining whether there is a
quorum at the meeting, but with respect to the non-discretionary matters as to
which they are "non-voted," they will have the effect of a vote against the
proposal being voted thereon.
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING
Q: When is the Special Meeting? What proposals will be voted on?
A: USDI stockholders will vote on the Merger at USDI's Special Meeting at
Ristorante Terrazza, 2 Wisconsin Circle, Chevy Chase, MD 20815 on Monday
February 7, 2000, at 10:00 a.m., local time. At the Special Meeting, you
will also vote on an amendment to USDI's Articles of Incorporation to
increase the number of authorized shares of its Common Stock to
325,000,000 shares and a subsequent 1-for-4 reverse stock split. USDI is
soliciting proxies from its stockholders prior to the Special Meeting.
FOR ADDITIONAL INFORMATION REGARDING THE TIMING, PURPOSE AND PROCEDURES OF THE
SPECIAL MEETING, SEE PAGE 44.
TO REVIEW THE BACKGROUND AND REASONS FOR THE MERGER IN GREATER DETAIL, SEE
PAGE 46.
Q: What do I need to do now?
A: Please mail your signed proxy card in the enclosed return envelope as
soon as possible, so that your shares may be represented at the Special
Meeting. We prefer that you sign, date and return your completed proxy
card whether or not you attend the Special Meeting in person.
Q: What do I do if I want to change my vote?
A: Just complete, date and sign a new proxy card and mail it to USDI. The
new proxy card must arrive before the Special Meeting. Or, you can come
to the Special Meeting and vote your shares as you wish, regardless of
whether you have already returned a proxy card.
FOR ADDITIONAL INFORMATION REGARDING REVOKING A PROXY, SEE PAGE 44.
Q: If my shares are held in a "street name" by my broker, will my broker
vote my shares for me?
A: Your broker will vote your shares only if you provide a proxy to vote
your shares. In addition, your broker will only vote your shares on the
proposals if you provide instructions on how to vote. You should instruct
your broker to vote your shares, following the directions provided by
your broker.
Q: Whom should I call with questions?
A: If you have any questions about the Merger, please call Timothy D.
Rockwood, Investor Relations of USDI,at (301) 961-1540.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SUMMARY .........................................................................................................1
THE COMPANIES............................................................................................1
THE SPECIAL MEETING......................................................................................7
THE MERGER...............................................................................................9
CONDITIONS TO THE CONSUMMATION OF THE MERGER............................................................11
Termination of the Merger Agreement.....................................................................11
COMPLETION OF MERGER....................................................................................12
MARKET PRICE INFORMATION................................................................................12
NO SOLICITATION.........................................................................................12
ACCOUNTING TREATMENT....................................................................................12
INFORMATION RELATING TO TELCAM..........................................................................12
Who Can Help Answer Your Questions......................................................................13
SELECTED HISTORICAL FINANCIAL DATA...............................................................................14
TELCAM ........................................................................................................16
SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL DATA.............................................................17
UNAUDITED COMPARATIVE PER COMMON SHARE DATA......................................................................20
RISK FACTORS.....................................................................................................21
Risks Related to the Merger.............................................................................21
The issuance of USDI Common Stock in the Merger may be dilutive to USDI's stockholders..................21
Risks Related to USDI and to USDI and Telcam as a Combined Entity.......................................21
Investment Risks........................................................................................22
Early Stages of Development.............................................................................24
Competition.............................................................................................26
Market consolidation may create more formidable competitors.............................................27
Rapid Technological Change; Dependence on Product Development...........................................28
Enforceability of Patents and Similar Rights; Possible Issuance of Patents to Competitors;
Trade Secrets...........................................................................................29
Dependence of Key Satellite Airtime Providers...........................................................29
Dependence on Key Telephone Suppliers...................................................................30
Dependence on Key Telephone Suppliers...................................................................30
Financial Commitments Under the Terms of Supplier Agreements............................................31
Dependence on Key Customers.............................................................................32
Dependence on Key Personnel.............................................................................32
No Dividends............................................................................................33
Limitation on Liability of Directors and Officers.......................................................33
Illiquidity of Trading Market; Risk of Penny Stock Status...............................................34
Indictment of Persons Associated With WS Marketing and Financial Services, Inc..........................34
Significant Dilutive Effect of Shares Eligible For Future Sale..........................................34
</TABLE>
v
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<TABLE>
<S> <C>
Significant Dilutive Effect of Shares To Be Issued in Conjunction with the Merger.......................37
Impact of the Year 2000 Issue...........................................................................37
Risks Associated With Stock Option Grants...............................................................39
Possible Health Risks...................................................................................40
Government Regulation...................................................................................40
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE..................................................................43
THE USDI SPECIAL MEETING.........................................................................................44
DATE, TIME AND PLACE OF MEETING.........................................................................44
PURPOSE OF THE SPECIAL MEETING..........................................................................44
RECORD DATE; VOTING RIGHTS; PROXIES.....................................................................44
SOLICITATION OF PROXIES.................................................................................44
QUORUM..................................................................................................45
REQUIRED VOTE...........................................................................................45
PROPOSAL NO. 1: THE MERGER.....................................................................................46
GENERAL.................................................................................................46
BACKGROUND OF THE MERGER................................................................................46
USDI'S REASONS FOR THE MERGER...........................................................................47
TELCAM'S REASONS FOR THE MERGER.........................................................................50
Changes to Capital Structure of USDI....................................................................51
Management and Operations Following the Merger..........................................................51
Interests of Certain Persons in the Merger..............................................................53
EMPLOYMENT AGREEMENTS...................................................................................54
INDEMNIFICATION ARRANGEMENTS............................................................................54
Limitation on Liability of Directors and Officers.......................................................54
GOVERNMENTAL AND REGULATORY MATTERS.....................................................................54
FEDERAL INCOME TAX CONSIDERATIONS.......................................................................54
Accounting Treatment....................................................................................55
Termination.............................................................................................55
RESALE RESTRICTIONS.....................................................................................55
THE MERGER AGREEMENT.............................................................................................56
The Merger..............................................................................................56
Effective Time of the Merger............................................................................56
Changes to Charter......................................................................................56
Exchange Ratio..........................................................................................56
Exchange of Shares......................................................................................56
Representations and Warranties..........................................................................58
Certain Covenants.......................................................................................59
No Solicitation.........................................................................................61
Management After the Merger.............................................................................62
Conditions to the Merger................................................................................63
Termination.............................................................................................63
Amendment...............................................................................................65
Expenses and Termination Fee............................................................................65
</TABLE>
vi
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<TABLE>
<S> <C>
BUSINESS OF USDI.................................................................................................66
Background..............................................................................................66
General..........................................................................................................67
Industry Background.....................................................................................68
Telecommunications Markets..............................................................................69
Products And Suppliers..................................................................................69
Pricing.................................................................................................71
Sales, Marketing And Distribution.......................................................................72
Customers...............................................................................................72
Competition.............................................................................................72
Government Regulation...................................................................................73
Patents And Trademarks..................................................................................73
Management Information Systems..........................................................................74
Employees...............................................................................................74
BUSINESS OF TELCAM...............................................................................................80
GENERAL.................................................................................................80
OPERATIONS..............................................................................................80
Growth Strategy.........................................................................................81
TELCAM PRODUCTS AND SERVICES............................................................................83
REGULATION AND LICENSING................................................................................83
LEGAL PROCEEDINGS.......................................................................................84
COMPETITION.............................................................................................84
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF USDI....................87
General.................................................................................................87
Results Of Operations...................................................................................87
Liquidity and Capital Resources.........................................................................92
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF TELCAM..................94
GENERAL.................................................................................................94
Results of Operations...................................................................................94
Liquidity and Capital Resources.........................................................................96
COMPARATIVE STOCK PRICE DATA AND DIVIDEND HISTORY................................................................97
DESCRIPTION OF USDI CAPITAL STOCK...............................................................................106
Common Stock...........................................................................................106
Preferred Stock........................................................................................106
Put Option.............................................................................................109
Dividends..............................................................................................110
Transfer Agent.........................................................................................110
</TABLE>
vii
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<TABLE>
<S> <C>
COMPARISON OF RIGHTS OF STOCKHOLDERS OF USDI AND STOCKHOLDERS OF TELCAM.........................................111
PROPOSAL NO. 2: APPROVAL OF INCREASE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK...............................113
Introduction...........................................................................................113
Reasons for Approving the Increase.....................................................................113
Market for Company Stock and Related Security Holder Matters...........................................114
PROPOSAL NO. 3: AUTHORIZATION OF AMENDMENT OF ARTICLES OF INCORPORATION, INCLUDING AUTHORIZATION OF REVERSE
STOCK SPLIT............................................................................................116
INTRODUCTION...........................................................................................116
REASONS FOR APPROVING THE REVERSE SPLIT................................................................116
Vesting Discretion in the Board of Directors...........................................................117
General Effect of Reverse Split........................................................................117
EFFECT ON REGISTRATION.................................................................................118
Effect on the Market for the Common Stock..............................................................118
Exchange of Stock Certificates and Liquidation of Fractional Shares....................................118
FEDERAL INCOME TAX CONSEQUENCES........................................................................119
Rights of Dissenting Stockholders......................................................................119
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................................121
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................................123
General................................................................................................123
Compliance with Section 16(a) of the Securities Exchange Act of 1934...................................123
OTHER MATTERS...................................................................................................123
Index to Financial Statements...................................................................................125
Appendix A: Agreement and Plan of Merger
Appendix B: Certificate of Amendment of Articles of Incorporation
Appendix C: Certificate to Decrease Number of Authorized Shares
</TABLE>
viii
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SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION WHICH IS PROVIDED IN
GREATER DETAIL ELSEWHERE IN THIS DOCUMENT. EVEN THOUGH WE HAVE HIGHLIGHTED WHAT
WE FEEL IS THE MOST IMPORTANT INFORMATION FOR YOU, USDI ENCOURAGES YOU TO READ
THIS DOCUMENT IN ITS ENTIRETY FOR A COMPLETE UNDERSTANDING OF THE MERGER.
THE COMPANIES
U.S. DIGITAL COMMUNICATIONS, INC.
U.S. Digital Communications, Inc. ("USDI" or the "Company") is a
telecommunications company based in Chevy Chase, Maryland. The Company is
primarily a global satellite communications firm that specializes in
corporate applications. Specifically, the Company is a provider of satellite
telephone subscriber equipment and services.
During June 1999, the Company announced that its principal operating
subsidiary, International Satellite Group, Inc., ("INSAT") was curtailing
operations and that the Company was actively seeking specific merger and
asset-sale opportunities in an effort to resolve its urgent liquidity problems.
In July 1999, the Company announced that it had entered into a Memorandum of
Understanding with TELCAM, Telecommunications Company of the Americas, Inc.,
("TELCAM") agreeing in principle to the Merger of the companies.
The Company's focus prior to 1997 was on developing and marketing
"set-top" electronic devices to extend the communications capabilities of
television sets. It incurred significant operating losses in every fiscal
period and terminated this original line of business in 1997. In August 1997,
the Company acquired Skysite Communications Corporation ("Skysite") and
concentrated its business on the global satellite communications market that
Skysite served. Skysite became a wholly owned subsidiary of INSAT in June
1999. The Company's strategy was to continue to operate the Skysite business
of selling geo-synchronous satellite products while preparing for the
expected introduction of Low Earth Orbit Satellite ("LEOS") communications
systems. It was anticipated that technical advantages of the planned LEOS
systems, such as Iridium and Globalstar, would dramatically expand the market
for satellite communications and for the Company's products.
The Company substantially increased expenditures for sales and
marketing and for customer service in the second half of 1998 and the first
and second quarters of 1999. These increases were made in order to take full
advantage of sales opportunities that it expected would be created by the
scheduled commercial launch of the Iridium satellite communications system in
September 1998. It was expected that Iridum products would provide the
majority of the Company's sales by early 1999. These expectations have not
been realized; the Iridium system did not become available commercially on
schedule and, once operating, experienced serious performance problems. The
Company's sales in the second half of 1998 and the first quarter of 1999 fell
well below expectations and its operating loss was unexpectedly large.
Despite some improvement in the second quarter of 1999, the Company's Iridium
sales continued to fall well below expectations and its operating losses
continued. On August 13, 1999, Iridium announced that it is pursuing a
comprehensive financial restructuring and made a voluntary Chapter 11 filing
in the United States Bankruptcy Court in Delaware. Iridium has continued to
sell products and to provide services under Chapter 11 protection. The sales
of Skysite's established business did not grow significantly during this
period and were unable to offset the shortfalls existing in the Iridium
business.
Because Iridium plays an important role in the Company's sales
strategies for 2000, the failure of Iridium's systems to perform adequately or
their unavailability for other reasons would have an immediate adverse effect
on the Company's performance. There can be no assurance that Iridium will
continue as a viable provider of services in the Company's business.
1
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In April 1999, the Company began to implement a program reducing
operating expenditures and attempting to develop additional sources of
revenue to offset the possible effect of any continuing difficulty with
Iridium's operations or public perception of such difficulty. Despite these
efforts, the unexpectedly large operating losses created an imperative need
for the Company to raise short-term capital during the second quarter of
1999. The Company was unable to raise such capital. As a result INSAT, the
Company's principal operating subsidiary, was forced to curtail its field
sales operations and certain other functions in June 1999 in order to reduce
cash requirements.
At the time of the curtailment of INSAT's operations, USDI's Board
of Directors instructed management to explore resolving the liquidity
problems through merger opportunities and/or sale of equipment and
customer-list assets. On July 8, 1999, the Company entered into a Memorandum
of Understanding with TELCAM (the "MOU"), agreeing in principle to the Merger
of the companies. The terms and conditions of the memorandum are described
elsewhere in this Proxy Statement.
TELCAM is providing management for USDI's satellite telephone
operating subsidiaries, International Satellite Group, Inc. , and its
subsidiary corporations (collectively "Subsidiary"), until the consummation
of the Merger or the termination of the MOU. TELCAM has, since July 8, 1999,
been authorized by the Board of Directors of Subsidiary to serve as the
telecommunication contract operations manager of Subsidiary. Subsidiary has
delegated to TELCAM the complete and exclusive authority to perform, in
consultation with USDI, all operational, administrative and management
services for the telecommunication contracts of Subsidiary, subject to the
specific terms and conditions of the MOU. TELCAM has possession of the
business assets of Subsidiary in order to manage the telecommunications
contracts of Subsidiary; however, under the MOU USDI will have at all times
access to all financial, bank and accounting records of Subsidiary which are
maintained by TELCAM. and (ii) the agreements between Subsidiary and its
service providers. TELCAM under the MOU must provide USDI copies of all
documents executed by TELCAM or received by TELCAM relating to said service
agreement during the term of the MOU. TELCAM and USDI have jointly initiated
negotiations with the creditors of USDI to attempt to obtain a standstill,
moratorium and/or modification agreement with the creditors of USDI and
Subsidiary ("Moratorium Agreement"). TELCAM under the MOU may not enter into
any agreements binding Subsidiary or USDI without the written consent of
USDI, except for service agreements with customers to sell inventory and/or
airtime for not less than fair market value. TELCAM under the MOU may not
sell, assign or terminate any customer contract without the written consent
of USDI.
TELCAM, under the MOU, its officers, directors, shareholders and
agents will be indemnified by USDI and Subsidiary from any third party
contractual liability arising from TELCAM's operation of the
telecommunication contracts of USDI and its Subsidiaries pursuant to the
provision of this Section 4, to the greatest extent permitted by applicable
law for all acts taken by it in good faith in its capacity as the
telecommunication contracts manager of Subsidiary, except if due to TELCAM's
negligence or willful misconduct. USDI, its officers, directors, shareholders
and agents will be indemnified by TELCAM from any liability arising from
TELCAM's (i) violation of the terms of the interim agreement, (ii) fraud or
misrepresentation as to USDI, the Subsidiaries or any third parties, or (iii)
violations of law.
Commencement of the sales effort by TELCAM was delayed and has been
hampered due to transition issues with suppliers of satellite telephone
airtime. These issues included providing confirmation to the vendors that
TELCAM was acting under USDI's authority, rescheduling of payment of amounts
payable to the vendors and clarification of the status of the vendors'
agreements with USDI. Management believes that most operational issues with
Iridium North America have been resolved and the Company's telephone service
to Iridium customers has been largely uninterrupted. There remain
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substantial disagreements between the Company and AMSC and normal billing and
service to AMSC customers has been disrupted in recent months. TELCAM is also
providing certain operating loans to USDI and its subsidiaries during the
current period to fund specific business operations. TELCAM has the right at
any time, under certain conditions, to terminate the agreement and with it
the management authority and funding obligations of TELCAM under the terms of
the agreement. See -- "Liquidity Issues."
EARLY STAGES OF DEVELOPMENT; NEW TECHNOLOGIES AND CREATION OF NEW
MARKETS. The Company is in the early stages of development. It has only a
limited operating history and has sold only a limited quantity of products to
date. The likelihood of success must be considered in light of the problems,
expenses, difficulties and delays frequently encountered in connection with a
new business, including, but not limited to, a continually evolving industry
subject to rapid technological and price changes, acceptance of the products
that are marketed and an increasing number of market competitors.
The history of the relatively young satellite telephone industry to
date has been marked by technical difficulties, market resistance and
difficulties in maintaining adequate capital. The establishment of a new
business in the evolving satellite-based telecommunications industry is very
risky. It is likely that further risks will be encountered as the industry
shifts from the development to the commercialization of new products and
services based on innovative technology. There can be no assurance that USDI
will be able to generate revenues or achieve profitable operations given
these factors.
LIQUIDITY ISSUES. The Company has been dependent on a series of
equity fundings to provide the capital required to conduct its business. It
has never produced a positive cash flow from operations. When it abandoned
its initial activities related to production of television set-top electronic
devices in 1997, it did not have sufficient cash on-hand or readily available
to finance its expenses during a repositioning and start-up of its new
satellite telephone business. Its entry into that business has been made
possible by the issuance of three series of convertible preferred stock
during 1997 and 1998. The capital raised in these offerings was sufficient to
fund activities through 1998 and early 1999. But sustained and growing
operating losses nearly exhausted the Company's cash by the end of the third
quarter of 1999.
Cash and cash equivalents were $1,395480 on December 31, 1998. A net
loss of approximately $5,595,000 in the first nine months of 1999 (prior to
depreciation, amortization and goodwill) was partially offset by an increase
in accounts payable of approximately $1,812,000, a depletion of inventory of
approximately $678,000 and other factors. Net cash used in operating
activities in the first nine months of 1999 was approximately $2,809,000. The
Company also made capital expenditures of $792,424 during the nine months.
This combined operating and capital deficit of $3,146,386 was met in large
part by using $1,355,261 of the cash on hand at the start of the year and
through increases in non-trade debt and sales of assets yielding $1,894,721.
The Company increased debt primarily through borrowings of $890,000 from
shareholders and directors and approximately $520,000 from TELCAM. The assets
liquidated by the Company included securities sold for approximately $131,000
and notes receivable for approximately $324,000. Equity transactions during
the first nine months of 1999 provided additional working capital of $416,025.
Cash and cash equivalents were $40,219 on September 30, 1999. The
Company has required cash in excess of $100,000 per month since October to
continue at its current level of operations. The ability of the Company to
raise this additional cash is greatly diminished by its disappointing
operating results and the considerable weakening of its balance sheet in the
first nine months of the year. The Company's
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current expenses in the fourth quarter of 1999 have been met through
additional loans provided by TELCAM in anticipation of the Merger. There can
be no assurance that such funding will continue or that adequate funds will
be available for the Company to meet the substantial costs of consummating
the anticipated Merger. Management of the Company believes that it is
unlikely that the Company could avoid a total suspension of operations or
liquidation if it is unable to consummate the Merger.
For the years ended December 31, 1997 and 1998, the Company's
operating losses were $4,440,822 and $7,446,081 respectively.
The Company expects to experience a net loss in 1999 and possibly
thereafter.
REGULATION AND LICENSING. The Company operates as an indirect,
unlicensed international communications carrier in the wireless
communications industry and therefore falls indirectly under the regulation
of the Federal Communications Commission ("FCC"). The Company is not the
satellite or equipment licensee, and is not required to maintain
manufacturing, service or operational permits to provide product sales or
provision of airtime services.
However, the Company is critically dependent on its equipment and
airtime suppliers who are, in turn, heavily regulated. The allocation and use
of the radio frequency spectrum for the provision of communications services
are subject to international and national regulation. The implementation and
operation of all satellite and wireless systems are dependent upon obtaining
licenses and other approvals. The national administration of each country
decides how the radio frequencies that the International Telecommunications
Union has allocated to particular communications services should be allocated
and assigned domestically to specific radio systems. In addition, the
provision of communications services in most countries is subject to
regulatory controls by the national governments of each country.
The Company is confident that its suppliers will continue to obtain
the approvals and licenses they require to operate globally. There is,
however, no guarantee that the Company's operation and profitability will not
be subject, directly or indirectly, to restrictive national policies or
international regulation or that the Company will not be subject to increased
taxation by federal, state or local agencies in the future.
TELCAM.
TELCAM is a reseller of telecommunications services - primarily
residential long distance telephone service. In 1996, it had revenues in
excess of $11,000,000 and net income of approximately $1,415,000. TELCAM's
revenues and income have declined in each year since then. In June 1999, the
Company was sold to new ownership and new management was put in place with
the intention of making necessary changes and investments to reverse the
Company's decline.
Although TELCAM has a significant operating history, the recent
changes in ownership and management and the Company's intention to pursue new
marketing and operating strategies expose it to many of the risks associated
with new businesses. The likelihood of its success must be considered in
light of the problems, expenses, difficulties and delays frequently
encountered in connection with a new business, including, but not limited to,
a continually evolving industry subject to rapid technological and price
changes, acceptance of the products that are marketed and an increasing
number of market competitors.
TELCAM is now involved exclusively with the front-end marketing of
telecommunications
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products and services. Its current business is concentrated on residential
long-distance telephone and related services but the Company expects much of
its future business to be with commercial customers. Other than marketing,
many of TELCAM's functions are outsourced. There are presently twelve
employees. TELCAM expects to have approximately twenty employees early in
2000.
OPERATIONS. TELCAM outsources most of the non-marketing functions
associated with serving its customers. Its primary source for long-distance
service is Qwest Communications, Inc. ("Qwest"). Phase V of Southwest
Florida, Inc. ("Phase V") in Florida offers "24/7" customer service to
TELCAM's customers. TelOne Telecommunications, Inc. ("TelOne") of Houston,
Texas provides TELCAM with (1) billing services such as rating, electronic
credit formatting and disaster backup, and (2) platform services such as
voicemail, follow-me fax, prepaid phone cards and 1-800 services. Formatted
billing tapes are forwarded from TelOne to Billings Concepts Corp.("BIC"), a
provider of billing clearinghouse services, for inclusion on the customer's
local telephone bill.
Mike Massingill, the CEO of TelOne, is a member of the Board of
Directors of TELCAM. Gregory Hahn the CEO of TELCAM, is a shareholder of
TelOne. William Spencer, a member of the Board of Directors of TELCAM, is a
shareholder in TelOne. The quality and range of services provided to TELCAM
by TelOne are essential to TELCAM's operations; and TELCAM believes that the
close relationship between the companies constitutes a competitive advantage
for TELCAM. Nonetheless, there can be no assurance that the two companies
will be able to maintain an arms-length relationship and that TELCAM will
receive services at competitive market prices from TelOne or that TELCAM will
not be significantly harmed by any disruption of its relationship with TelOne.
TELCAM uses BIC for factoring as well as billing and collection. BIC
advances a portion of expected proceeds of billings to TELCAM until
collections from customers are received after an average of approximately 45
days. TELCAM is negotiating to improve the terms on its factoring.
GROWTH STRATEGY. TELCAM intends to be a low-cost, efficient carrier
operating in defined niche markets in the United States and internationally.
As reselling is increasingly becoming a commodity business, TELCAM is
focusing on the following:
- Providing bundled value added products
- Shifting from retail to small and medium-sized commercial accounts.
- Acquisitions of subscriber bases, and
- Acquisitions of complementary companies such as a clearing-house
and/or channels for international expansion.
During 2000, TELCAM intends to continue to acquire subscriber bases
from companies that have lost their ability to bill directly through
clearinghouses. In October 1998, clearinghouses decided not to bill for
companies that had a record of excessively high customer complaints of
fraudulent billing. TELCAM believes a number of these companies suffered
relatively innocent customer problems subject to correction through improved
account management. As part of its business, TELCAM is seekingi to acquire 10
to 20 additional subscriber bases of this type during the next six months. If
such acquisitions are accomplished, this would increase the subscriber base
and, at the same time, generate immediate cash flow in order to fund
development of a commercial customer base to which it can sell its value
added products. Risks associated with these acquisitions include (1) the
clearinghouses have greatly increased the effort required to bill the Monthly
Recurring Charges ("MRCs"), (2) regulatory or legislative initiatives could
develop that would make it difficult to maintain the MRC subscriber base and
(3)
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TELCAM's ability to acquire "clean" companies.
TELCAM intends to develop a commercial subscriber base by marketing
through independent agents. There are presently two main associations of
independent representatives totaling over 6,500 representatives. TELCAM
estimates that it will be able to get approximately 2,000 representatives to
work with TELCAM (on a non-exclusive basis) early in 2000.
TELCAM plans to offer its commercial customers a wide range of
products in market-driven bundles. The Company believes that it can achieve a
significant marketing advantage by becoming a competitively priced "one-stop
shop" - with unified telecommunications billing and service - for small to
medium-sized companies.
REGULATION AND LICENSING. The terms and conditions under which
TELCAM provides communications services are subject to government regulation.
FCC regulations generally apply to interstate telecommunications, while
particular state regulatory authorities generally have jurisdiction over
telecommunications that originate and terminate within the same state.
TELCAM is not classified by the FCC as a dominant carrier, and
therefore is subject to minimal federal regulation. Non-dominant carriers are
required by statute to offer interstate and international services under
rates, terms, and conditions that are just, reasonable, and not unduly
discriminatory. The FCC imposes only minimal reporting requirements on
non-dominant carriers.
In addition, informal complaints may be lodged from time to time
against TELCAM before the FCC and various state agencies for various reasons.
TELCAM in the past has at times failed to respond timely to such complaints
and has been fined for such delay. Although such complaints could result in
additional legal actions or proceedings being brought against TELCAM, it
believes that such matters would be satisfactorily resolved without a
material adverse impact upon its results of operations; however TELCAM can
not be assured of such resolution. Should TELCAM's belief with respect to any
and all complaints pending, if any, before the FCC or state regulatory
agencies be incorrect, it could be subject to financial penalties and
potential revocation of its operating authority for interstate or intrastate
calls, as applicable.
The FCC has recently called for comment on the practice of billing
telephone customers for MRCs monthly fees that are not directly related to
usage of services - and has indicated some doubt about the desirability of
such charges. Since significantly more than half of TELCAM's revenues have
been, and are expected to be for at least the next year, MRCs, any action by
the FCC or other regulatory or legislative body to restrict or eliminate
their use could have adverse consequences for the Company's revenues and
profitability. See "Risk Factors - Dependence on Key Customer Services, Data
and Billing Service Suppliers; -- "Dependence on Local Exchange Carriers for
Billing".
TELCAM is subject to varying levels of regulation in the states in
which it is currently authorized to provide intrastate telecommunications
services. The most states require TELCAM to apply for certification to
provide intrastate telecommunications services, or to register or to be found
exempt from regulation, before commencing intrastate service. The vast
majority of states also require TELCAM to file and maintain detailed tariffs
listing their rates for intrastate service. Many states also impose various
reporting requirements and/or require prior approval for transfers of control
of certified carriers, and/or for corporate reorganizations; acquisitions of
telecommunications operations; assignments of carrier assets, including
subscriber bases; carrier stock offerings; and assumption by carriers of
significant debt obligations. Certificates of authority can generally be
conditioned, modified, canceled, terminated, or
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revoked by state regulatory authorities for failure to comply with state law
and/or the rules, regulations, and policies of the state regulatory
authorities. Fines and other penalties, including the return of all monies
received for intrastate traffic from residents of a state, may be imposed for
such violations. If state regulatory agencies conclude that TELCAM has taken
steps without obtaining the required authority, they may impose one or more
of the sanctions listed above.
LEGAL PROCEEDINGS. TELCAM has advised USDI that it is not aware of
any legal proceedings that may have a material effect on its operations.
TELCAM has also advised USDI that it is not aware of any regulatory issues
relevant to the Merger.
COMPETITION. The telecommunications industry is highly competitive
and is characterized by frequent technological and marketing innovation. The
principal bases of competition within the industry are price, products and
services. The industry includes major domestic and international companies,
many of which have financial, technical, marketing, sales, distribution and
other resources substantially greater than TELCAM or the combined company and
which provide, or plan to provide, a wider range of services. In response to
competitive pressure from these and other future competitors, USDI and TELCAM
may have to lower selling prices or alter services, which could have a
material adverse effect on the financial position of the combined company.
TELCAM believes that competition in the long-distance telephone market will
become more intense in the near future. In particular, the number of
competitors that are larger and better capitalized than TELCAM is likely to
increase. AT&T, MCI, and Sprint are currently preeminent among such firms.
TELCAM expects that all of the Bell Operating Companies ("BOCs") - newly
eligible to enter the long-distance marketplace - will soon seek to provide
long distance service. Increased competition could result in price
reductions; fewer customer orders; reduced gross margins; longer sales
cycles; and loss of market share.
LIQUIDITY. TELCAM has, in each of the last three years, distributed
to its shareholders, through dividends and stock buybacks, somewhat more than
the cash provided by operations. The result has been that the cash and cash
equivalents available at the end of each year since 1995 has declined from
$883,824 at December 31, 1995 to $413,829 at December 31, 1998. At September
30, 1999, cash and cash equivalents had declined to $11,384.
Since that date TELCAM has arranged the sale of $1,800,000 of its
convertible notes. Of those funds, $900,000 was received in mid-December and
the remainder was released from escrow upon the filing of this Proxy
Statement. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of TELCAM--Liquidity and Capital Resources." The
ability of the TELCAM to continue and expand its operations and to make loans
to USDI needed to complete the Merger was dependent on its receiving these
funds. TELCAM now expects to be able to support these and other necessary
activities from the proceeds of these notes until current revenues from the
receipts of billings to newly acquired customers are sufficient to provide
positive cash flow. There can be no assurance that the funds received from
the notes will in fact be adequate to allow the completion of the Merger or
the uninterrupted continuation or expansion of TELCAM's business. In
addition, the liquidity of the Company after completion of the Merger could
be adversely affected if the holders of the notes opt for their repayment in
cash.
THE SPECIAL MEETING
PURPOSE OF THE SPECIAL MEETING; DATE, TIME, PLACE.
At the Special Meeting, the Stockholders will consider and vote upon:
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(i) The Agreement and Plan of Merger, dated as of December 22,
1999, a copy of which is included in Exhibit A to the Proxy
Statement, between the Company, USDI Acquisition, Inc., a
Texas corporation and a wholly owned Subsidiary of the Company
("Merger Sub")] and TELCAM, Telecommunications Company of the
Americas, Inc., a Texas corporation ("TELCAM"), whereby Merger
Sub will be merged with and into TELCAM. The shareholders of
TELCAM will receive shares representing approximately 51% of
the Company's Common Stock in exchange for all the outstanding
shares of TELCAM's Common Stock owned by them (the "Merger");
(ii) To consider and vote upon an amendment of the Company's
Articles of Incorporation (the "Articles") to increase the
number of authorized shares of its Common Stock, par value
$.01 per share (the "Common Stock"), to 325,000,000 shares
(subject to subsequent decrease of the number of authorized
shares of Common Stock to 81,250,000 through a 1-for-4 reverse
stock split if the stockholders approve Item (iii) below);
(iii) To consider and vote upon an amendment of the Company's
Articles to effect a 1-for-4 reverse stock split of the Common
Stock and thereby to decrease the authorized number of shares
of the Company's Common Stock to 81,250,000; and
(iv) Such other business as may properly come before the Special
Meeting or any adjournments or postponements thereof.
The Special Meeting will be held at Ristorante Terrazza, 2
Wisconsin Circle, Chevy Chase, MD 20815, on Monday, February 7, 2000 at 10:00
a.m EDT.
VOTING REQUIRED; VOTING PROCEDURES; RECORD DATE.
The presence in person or by proxy of a majority of the shares of
Common Stock outstanding and entitled to vote as of the Record Date is
required for a quorum at the Special Meeting. Approval of the Merger and
amendment of USDI's Articles requires the affirmative vote of the holders of
a majority of the outstanding shares of USDI Common Stock entitled to vote on
these matters. Abstentions and broker non-votes are not affirmative votes
and, therefore, will have the same effect as votes against approval of the
Merger and amendment of USDI's Articles. In addition, the required vote on
these matters is based on the number of outstanding shares of USDI Common
stock, rather than the shares actually present in person or by proxy at the
Special Meeting.
For all other matters submitted to Stockholders at the meeting, if a
quorum is present, the affirmative vote of a majority of the shares
represented at the meeting and entitled to vote is required for approval. As
a result, abstention votes will have the effect of a vote against such
matters.
Shares of Common Stock which are represented by properly executed
proxies, unless such proxies shall have previously been properly revoked,
will be voted in accordance with the instructions indicated in such proxies.
If no contrary instructions are indicated, such shares will be voted in favor
of the proposals.
Shares held by brokers and other Stockholder nominees may be voted
on certain matters but not others. This can occur, for example, when the
broker or nominee does not have the discretionary authority to vote shares of
Common Stock and is instructed by the beneficial owner thereof to vote on a
particular matter but is not instructed on other matters. These are known as
"non-voted" shares. Non-
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voted shares will be counted for purposes of determining whether there is a
quorum at the meeting, but with respect to the non-discretionary matters as
to which they are "non-voted," they will have the effect of the vote against
the proposal being voted thereon. The record date for the Special Meeting is
December 31, 1999.
THE MERGER
USDI and TELCAM have entered into an Agreement and Plan of Merger,
dated December 22, 1999 (the "Merger Agreement"). The Merger Agreement
provides that a wholly owned subsidiary of USDI will merge with and into
TELCAM, with TELCAM continuing as the surviving corporation. If the Merger is
approved and consummated TELCAM will become a wholly owned subsidiary of
USDI. USDI and TELCAM are working toward completing the Merger as quickly as
possible. USDI and TELCAM hope to complete the Merger by the end of the first
quarter of 2000.
The Merger Agreement provides that the Merger will take place only
if, among other things, USDI stockholders approve the Merger and Merger
Agreement at USDI's Special Meeting.
WHAT TELCAM STOCKHOLDERS WILL RECEIVE IN THE MERGER. If the Merger
is completed, TELCAM stockholders will receive approximately 51% of the fully
diluted shares of USDI Common Stock outstanding immediately following the
Merger. This is equivalent to approximately $3,400,000 worth of USDI Common
Stock in total, based on the December 15, 1999 closing price of the Common
Stock on the NASD OTC Bulletin Board ("OTC Bulletin Board") and shares of
each company outstanding on that date. The number of shares the TELCAM
stockholders will receive is subject to change based upon the number of fully
diluted shares of capital stock of USDI outstanding at the time of the Merger
and for a period of sixty (60) months following the Merger. The exchange
ratio is more fully discussed under the heading "The Merger
Agreement--Exchange Ratio."
RECORD DATE FOR VOTING ON THE MERGER AND THE OTHER MATTERS PRESENTED
AT THE SPECIAL MEETING. You may vote at the Special Meeting or sign a proxy
card if you owned shares of USDI Common Stock as of the close of business on
December 31, 1999, the record date. On the record date, ________ shares of
USDI Common Stock were outstanding. Of this number, 408,353 shares were held
by directors and officers of USDI or by entities affiliated with the
directors and officers. You have one vote for each share of USDI Common Stock
you owned on the record date.
In addition, 1,330 shares of Series B Preferred Stock ("Series B")
and 2,800 shares of Series C Preferred Stock ("Series C"), were outstanding
as of December 15, 1999. The Preferred Stock is not entitled to vote. On
August 11, 1999, the Company's Series A Preferred Stock ("Series A") was
converted by USDI into 2,394,266 shares of Common Stock pursuant to the terms
of such Preferred Stock. Prior to the consummation of the Merger it is
expected that the outstanding Series B and Series C stock will be exchanged
for Common Stock. Based on the conversion formula for each series set forth
in their respective Certificates of Designation and the closing price history
of the Common Stock on the OTC Bulletin Board as of December 15, 1999, the
Series B stock would be exchanged for approximately 12,500,000 common shares
and the Series C for approximately 26,300,000 common shares. The actual
exchange rate for any conversions of Preferred Stock will be determined by
the actual date of conversion and the price history of the stock through such
date.
STOCKHOLDER VOTE REQUIRED TO APPROVE THE MERGER AND THE OTHER
MATTERS PRESENTED AT THE SPECIAL MEETING. Approval of the Merger, and
amendment of USDI's Articles of Incorporation, requires the affirmative vote
of the holders of a majority of the outstanding shares of USDI Common Stock
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entitled to vote on these matters. The remaining matters presented at the
Special Meeting may be approved by the affirmative vote of a majority of the
shares present in person or by proxy at the Special Meeting.
RISKS OF THE MERGER. In considering whether to approve the Merger
and Merger Agreement, you should consider all of the risks of the Merger,
including the risks that the potential benefits of the Merger may not be
realized, that USDI will be subject to a fundamental change in its business
and management, that the business of the surviving corporation and its
Subsidiaries may not be successful, and that the market price of USDI's
Common Stock may fluctuate and could further decline in the future. Current
stockholders of USDI will be subject to substantial dilution. Consequently
USDI encourages you to read the risk factors set forth in this Proxy
Statement more fully discussed under the heading "Risk Factors."
IMPORTANT FEDERAL INCOME TAX CONSEQUENCES. Subject to limitations
and qualifications described later in this document, in the opinion of
management the exchange of TELCAM capital stock for shares of USDI Common
Stock should be tax-free for federal income tax purposes to the stockholders
of TELCAMUSDI. Neither USDI nor TELCAM should become subject to federal
income taxes solely as a result of the Merger.
USDI'S REASONS FOR THE MERGER; RECOMMENDATION TO USDI STOCKHOLDERS.
USDI's Board of Directors has determined that the terms of the Merger
Agreement and the Merger are advisable, fair to, and in the best interests of
USDI and its stockholders. In reaching its decision, USDI's Board of
Directors identified several potential benefits of the Merger. These benefits
include:
- Liquidity;
- more efficient marketing and operations;
- product line diversification; and
- critical management resources.
The Company believes that the potential for improved liquidity as a
result of the Merger is of critical value to the shareholders of USDI. The
Company estimates that it would have to terminate all operations immediately
in the absence of the loans being provided to it by TELCAM in anticipation of
the Merger and that it would be unable to continue operations after the
Effective Date without the additional cash flow that it expects to realize
from TELCAM's operations.
However, USDI's Board of Directors also recognized that the potential
benefits of the Merger may not be realized and that there are a number of other
risks and uncertainties related to the Merger, as discussed below under the
heading "Risk Factors." USDI's Board of Directors unanimously recommends that
you vote FOR approval of the Merger Agreement and the Merger.
TELCAM'S REASONS FOR THE MERGER. TELCAM's Board of Directors has
determined that the Merger Agreement is in the best interests of TELCAM and its
stockholders. In reaching its decision, TELCAM's Board of Directors identified
several potential advantages of the Merger:
- access to capital markets;
- more efficient marketing and operations; and
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- USDI's management resources .
However, TELCAM's Board of Directors also recognized that the potential
benefits of the Merger may not be realized and that there are a number of other
risks and uncertainties related to the Merger, as discussed below under the
heading "Risk Factors."
CONDITIONS TO THE CONSUMMATION OF THE MERGER
The Merger will be completed if certain conditions, including the
following, are met:
- approval of TELCAM stockholders;
- approval of USDI stockholders;
- conversion of USDI's Preferred Stock into Common Stock;
- amendment to the USDI's bylaws providing that the provisions of
Nevada Revised Statutes 78.378 to 78.3793 regarding change of
control do not apply to USDI,
- reduction of USDI trade and other debt;
- no legal restraints or prohibitions that prevent the completion of the
Merger; and
- no inaccuracies made by USDI or TELCAM in their representations
and warranties in the Merger Agreement that would result in a
material adverse effect on the party making the representation and
warranty;
- the resignation of certain members of the Board of Directors of USDI;
- the cancellation of USDI's STOCK INCENTIVE PLANS and cancellation,
exercise, or expiration of outstanding options;
- the securing of any necessary consents or approvals required in
connection with the merger.
USDI and TELCAM may waive conditions with respect to the other's
obligation to provide accurate representations and warranties, perform its
preclosing obligations, provide opinions of counsel and obtain consents and
approvals. In the event that USDI waives a condition to the Merger involving
material facts or circumstances, USDI will resolicit stockholder approval for
the Merger.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated prior to the effective time of
the Merger by the mutual written consent of USDI and TELCAM. Either TELCAM or
USDI may also terminate the Merger Agreement if:
- the Merger is not consummated by March 1, 2000,
- the Merger is prohibited by a governmental entity;
- the required vote of USDI stockholders is not obtained; or
- the required vote of TELCAM stockholders is not obtained.
USDI may terminate the Merger Agreement if:
- any of TELCAM's representations and warranties in the Merger Agreement
are not true and
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correct in all material respects, and cannot be cured within a
specified period; or
- TELCAM fails to perform a material obligation under the Merger
Agreement, and this failure cannot be cured within a specified period.
TELCAM may terminate the Merger Agreement if:
- any of USDI's representations and warranties in the Merger Agreement
are not true and correct in all material respects, and cannot be cured
within a specified period;
- USDI fails to perform a material obligation under the Merger Agreement
and this failure cannot be cured within a specified period;
- USDI's Board of Directors withdraws or modifies its recommendation of
the Merger; or
- USDI fails to hold the Special Meeting on or prior to March 15, 2000.
Neither USDI nor TELCAM may individually terminate the agreement, however,
if it is the party responsible for a material breach of its obligations under
the Merger Agreement.
COMPLETION OF MERGER
USDI and TELCAM expect to complete the Merger as soon as practicable
after USDI stockholders and TELCAM stockholders approve the Merger and the other
conditions to the Merger have been met. USDI anticipates this will occur on
February 7, 2000, following the Special Meeting.
MARKET PRICE INFORMATION
USDI's Common Stock is quoted on the OTC Bulletin Board under the
symbol "USDI." There is no public market for TELCAM capital stock.
NO SOLICITATION
In connection with the Merger Agreement, USDI and TELCAM agreed that
neither would seek out, enter into, or participate in any negotiations or
discussions regarding, any other merger agreement, or any effectively equivalent
transaction, while the Merger Agreement remains operative.
ACCOUNTING TREATMENT
The Merger will be accounted for as a reverse acquisition using the
purchase method of accounting in accordance with generally accepted accounting
principles. As a reverse acquisition, TELCAM will be deemed to be the acquiring
company for financial reporting purposes. The historical financial statements
for periods prior to the completion of the Merger will not be restated as though
the companies had been combined from inception. USDI's unaudited pro forma
financial statements give effect to the acquisition of USDI by TELCAM under the
purchase method of accounting and are based on the assumptions and adjustments
described in the notes to the unaudited pro forma financial statements.
INFORMATION RELATING TO TELCAM
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TELCAM has provided all information relating to TELCAM contained or incorporated
by reference in this Proxy Statement. Although USDI believes such information is
accurate, USDI has not independently verified such information.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have questions about the Merger you should contact:
Timothy D. Rockwood
Investor Relations
U.S. Digital Communications, Inc.
2 Wisconsin Circle, Suite 700
Chevy Chase, MD 20815
(301) 961-1540
13
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data of TELCAM set forth below should
be read in conjunction with the audited financial statements and the notes to
the financial statements contained in this Proxy Statement. The selected
financial data as of and for the years ended December 31, 1997 and 1998 and for
the year ended December 31, 1996 are derived from the audited financial
statements of TELCAM appearing elsewhere in this Proxy Statement. The selected
financial data as of and for the year ended December 31, 1995 and as of December
31, 1994 and for the period June 12, 1994 (inception) to December 31, 1994 are
derived from audited financial statements of TELCAM not included in this Proxy
Statement. The selected financial data as of September 30, 1998 and 1999 and for
the nine months then ended, are derived from unaudited financial statements of
TELCAM included in this Proxy Statement, which have been prepared by TELCAM on a
basis consistent with the audited financial statements appearing elsewhere in
this Proxy Statement and, in the opinion of TELCAM's management, include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the data. The results of operations for the nine months
ended September 30, 1999, are not necessarily indicative of results to be
expected for any subsequent period.
The selected historical financial data of USDI set forth below should
be read in conjunction with the audited financial statements and the notes to
the financial statements contained in this Proxy Statement. The selected
financial data as of December 31, 1997 and 1998 and for the years ended December
31, 1996, 1997 and 1998 are derived from the audited financial statements of
USDI appearing elsewhere in this Proxy Statement. The selected financial data as
of December 31, 1994, 1995 and 1996 and for the years ended December 31, 1994
and 1995 are derived from audited financial statements of USDI not included in
this Proxy Statement. The selected financial data as of September 30, 1998 and
1999 and for the nine months then ended, are derived from unaudited financial
statements of USDI included in this Proxy Statement, which have been prepared by
USDI on a basis consistent with the audited financial statements appearing
elsewhere in this Proxy Statement and, in the opinion of USDI's management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the data. The results of operations for
the nine months ended September 30, 1999, are not necessarily indicative of
results to be expected for any subsequent period.
14
<PAGE>
USDI
SELECTED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED
---------------------------------------------------------------------------- --------------------
1994 1995 1996 1997 1998 30-SEP-98 30-SEP-99
------------ ------------ ------------ ------------ ------------ ------------ -----------
UNAUDITED UNAUDITED
------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Total Revenues -- $ 629,688 -- $ 486,642 $ 1,179,922 $ 793,709 $ 1,282,182
Cost of goods sold -- 0 -- 412,767 954,365 579,737 1,325,300
------------ ------------ ----------- ------------ ------------ ------------ ------------
Gross profit -- 629,688 -- 73,875 225,557 213,972 (43,118)
Operating Expenses 1,314,364 3,222,489 7,885,929 4,514,697 7,671,638 4,590,264 6,512,299
------------ ------------ ----------- ------------ ------------ ------------ ------------
Loss from operations (1,314,364) (2,592,801) (7,885,929) (4,440,822) (7,446,081) (4,376,292) (6,555,417)
Other income (expense) 3,338 4,748 (170,989) (244,363) 180,925 102,958 74,756
------------ ------------ ----------- ------------ ------------ ------------ ------------
Net Loss available to
common stockholders ($1,311,026) ($2,588,053) ($8,056,918) ($6,315,101) ($11,371,320) ($7,467,984) ($9,546,372)
=========== =========== =========== =========== ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
---------------------------------------------------------------------------- ----------------------------
1994 1995 1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------ ------------ ------------
UNAUDITED UNAUDITED
----------------------------
BALANCE SHEET DATA:
- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total current assets $ 559,451 $ 839,930 $ 59,132 $ 905,266 $ 2,681,868 $ 5,560,106 $ 476,929
Total current
liabilities 170,576 552,217 2,545,323 4,427,928 3,807,742 4,772,171 7,477,668
Non-current
liabilities -- -- 479,865 1,617 600,000 -- --
Stockholders' equity
(deficit) 493,752 706,636 (2,782,886) (2,397,670) (550,925) 1,809,621 (6,129,891)
PER SHARE INFORMATION
Basic net loss per
share $ (0.11) $ (0.15) $ (0.37) $ (0.31) $ (0.69) $ (0.46) $ (0.45)
Shares used in
computing basic net
loss per share 11,775,976 17,190,915 21,914,630 20,676,196 16,567,594 16,311,875 21,092,551
Diluted net loss per
share $ (0.11) $ (0.15) $ (0.37) $ (0.31) $ (0.69) $ (0.46) $ (0.45)
Shares used in
computing diluted
net loss per share 11,775,976 17,190,915 21,914,630 20,676,196 16,567,594 16,311,875 21,092,551
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
TELCAM
Selected Historical Financial Data
YEARS ENDED DECEMBER 31,
FOR THE PERIOD -------------------------------------------
JUNE 12, 1994 NINE MONTHS ENDED
(INCEPTION) --------------------------------
TO DECEMBER 31, 1994 1995 1996 1997 1998 SEPTEMBER 30, SEPTEMBER 30,
1998 1999
-----------------------------------------------------------------------------------------------------
UNAUDITED UNAUDITED
-------------------------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Total Revenues $2,141,373 $11,569,352 $11,244,242 $6,451,129 $4,928,412 $4,288,742 $2,061,859
Cost of sales 1,212,276 6,679,932 4,536,322 3,162,725 1,985,922 1,827,907 1,101,969
-----------------------------------------------------------------------------------------------------
929,097 4,889,420 6,707,920 3,288,404 2,942,490 2,460,835 959,890
Operating Expenses 891,507 4,005,948 5,323,183 3,076,357 2,707,367 2,117,566 1,459,669
-------------------------------------------------------------------- -------------------------------
Income (Loss) from 37,590 883,472 1,384,737 212,047 235,123 343,269 (499,779)
operations
Other income 887 16,898 30,486 12,259 12,013 9,884 3,358
-------------------------------------------------------------------- -------------------------------
NET INCOME (LOSS) $38,477 $900,370 $1,415,223 $224,306 $247,136 353,153 $(496,421)
==================================================================== ===============================
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
-------------------------------------------------------------------- --------------------------------
1994 1995 1996 1997 1998 1998 1999
-------------------------------------------------------------------- --------------------------------
UNAUDITED UNAUDITED
--------------------------------
BALANCE SHEET DATA:
- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total current assets $613,679 $1,220,122 $973,413 $1,017,850 $700,886 $861,972 $ 936,054
Total current 528,304 499,532 444,245 615,556 230,423 300,593 1,013,846
liabilities
Non-current liabilities 7,200 0 0 0 0 0 17,451
Stockholders' equity 181,477 806,984 627,607 473,769 514,812 620,829 18,391
(deficit)
PER SHARE INFORMATION:
Basic net income (loss) $0.06 $1.31 $2.07 $0.45 $0.50 $0.72 ($1.01)
per share
Shares used in computing
basic net income (loss)
per share 637,000 685,000 685,000 495,000 492,500 492,500 492,500
</TABLE>
16
<PAGE>
SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
(UNAUDITED)
The data below reflects selected financial information for the Company
resulting from the Merger of USDI and TELCAM, which is referred to as "pro
forma" information. The selected unaudited pro forma financial data set forth
below assumes that the Merger was accounted for as a reverse acquisition using
the purchase method of accounting and assuming that TELCAM is the acquirer for
accounting purposes and that the companies had been combined for accounting and
financial reporting purposes as of January 1, 1998. The companies anticipate
that the Merger will provide the combined company with certain financial
benefits that include improved operating efficiencies and opportunities to earn
more revenue. However, these anticipated cost savings or benefits are not
reflected in the pro forma information. Therefore, the pro forma information,
while helpful in illustrating the financial characteristics of the combined
company under one set of assumptions, does not attempt to predict or suggest
future results. The pro forma information does not attempt to show how the
combined company would actually have performed had the Merger been completed as
of the dates or for the periods presented. Additionally, no adjustments have
been made to conform any differences in accounting policies between USDI and
TELCAM for the periods presented. The information in the following tables is
qualified in its entirety by, and should be read in conjunction with, the
unaudited pro forma financial statements of USDI and TELCAM included elsewhere
in this document.
17
<PAGE>
<TABLE>
<CAPTION>
USDI AND TELCAM
SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
(UNAUDITED)
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------------------------------------
<S> <C> <C>
Revenue $6,108,334 $3,344,041
Cost of Sales $2,940,287 $2,427,269
------------------------------------------------
Gross Profit 3,168,047 916,772
------------------------------------------------
OPERATING EXPENSES:
Sales and marketing 1,995,875 1,827,490
General and administrative 7,456,571 5,291,471
Goodwill writeoff 5,712,214 10,620,196
Stock option compensation 528,690 ---
Research and development 397,869 187,112
------------------------------------------------
Total operating 16,091,219 17,926,269
------------------------------------------------
Income (loss) from operations (12,923,172) (17,009,497)
OTHER INCOME (EXPENSE):
Interest expense (82,198) (2,259)
Gain / (loss) on investments 339,460 90,049
Interest and other income 2,383 50,327
------------------------------------------------
259,645 138,117
------------------------------------------------
Net Income (loss) (12,663,527) (16,871,380)
Dividends/Beneficial conversion (4,106,164) (3,065,711)
feature
---------------------- ----------------------
Net income (loss) available to
common shareholders ($16,769,691) ($19,937,091)
====================== ======================
Basic loss per common share ($0.47) ($0.46)
Diluted 1oss per common share ($0.47) ($0.46)
18
<PAGE>
Weighted average shares (a)
Basic 35,520,531 43,725,650
Diluted 35,520,531 43,725,650
Balance Sheet Data: (As of September 30)
Total current assets $1,261,072
Total current liabilities (1) $5,084,270
Noncurrent liabilities $17,451
Stockholders' deficit (1) ($2,856,167)
a Assumes a 1:4 reverse stock
split.
</TABLE>
(1) Includes estimated costs associated with the Merger of approximately
$500,000. Such expenses include investment advisory fees, legal and accounting
fees, financial printing costs and other Merger related charges. These costs are
preliminary and therefore subject to change. These charges exclude integration
charges which consist primarily of severance and relocation expenses and
expenses related to the consolidation of facilities. These costs will be charged
to operating expense in the period the Merger is completed.
19
<PAGE>
UNAUDITED COMPARATIVE PER COMMON SHARE DATA
OF USDI AND TELCAM
The following table shows information about USDI's historical loss per
share and book value per share, and similar information reflecting the
completion of the proposed Merger which we refer to as "pro forma" information.
The historical book value per share is computed by dividing total
stockholders' equity (deficit), net of all items pertaining to the preferred
stockholders, by the number of shares of Common Stock outstanding at the end of
the period. The pro forma combined book value per share is computed by dividing
pro forma stockholders' equity by the pro forma number of shares of USDI Common
Stock outstanding at the end of the period.
The information in the following table is based on, and should be read
together with, the historical financial information that we have included
elsewhere in this Proxy Statement and the "Unaudited Pro Forma Condensed
Combined Financial Information" on page 193.
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, 1998 Ended September 30, 1999
----------------- ------------------------
<S> <C> <C>
USDI - HISTORICAL
Basic net loss per share $(0.69) $(0.45)
Diluted net loss per share (0.69) (0.45)
Book value per share (0.033) (0.29)
TELCAM - HISTORICAL
Basic net loss per share 0.50 (1.01)
Diluted net loss per share 0.50 (1.01)
Book value per share 1.05 0.04
PRO FORMA - COMBINED
(Assuming the Merger had been effective at
the beginning of fiscal year 1998)
Basic net loss per share (0.47) (0.46)
Diluted net loss per share (0.47) (0.46)
Book value per share 0.06 (0.07)
EQUIVALENT PRO FORMA USDI
Basic net loss per share (0.46) (0.45)
Diluted net loss per share (0.47) (0.45)
Book value per share 0.06 (0.07)
</TABLE>
20
<PAGE>
RISK FACTORS
THIS PROXY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO FUTURE PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. THESE STATEMENTS MAY BE IDENTIFIED BY THE USE OF
WORDS SUCH AS "EXPECTS," "BELIEVES," "ANTICIPATES," "INTENDS" AND "PLANS" AND
SIMILAR EXPRESSIONS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED
IN THESE STATEMENTS. FACTORS THAT COULD CONTRIBUTE TO THE COMBINED COMPANY'S
FAILURE TO ACHIEVE EXPECTATIONS INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW AND ELSEWHERE IN THIS PROXY STATEMENT. YOU SHOULD CONSIDER THE FOLLOWING
RISK FACTORS IN EVALUATING WHETHER TO APPROVE THE MERGER.
RISKS RELATED TO THE MERGER
If USDI and TELCAM do not effectively integrate their technologies,
operations and personnel, the combined company will not realize the expected
financial and marketing benefits of the Merger. For a description of certain
expected operational, financial and marketing benefits of the Merger, see
"Proposal No. 1: The Merger -- USDI's Reasons for the Merger" and " -- TELCAM's
reasons for the Merger."
Upon completion of the Merger, the companies will be required to
integrate the accounting, billing and other information and operational systems
supporting their respective businesses. Neither company has in place accounting
and other systems fully adequate for the requirements of the combined company.
Nor does either company have a significant in-house information systems staff.
If the combined company is not successful in developing the needed systems
through in-house development or through purchase, its ability to manage its
business effectively and to provide proper disclosure to shareholders could be
seriously impaired.
Costs of the Merger may be higher than expected, which would increase
the combined company's net loss. In addition, the costs of the Merger are not
all currently known, and USDI may incur charges against earnings in subsequent
quarters to reflect Merger-related costs.
THE ISSUANCE OF USDI COMMON STOCK IN THE MERGER MAY BE DILUTIVE TO USDI'S
STOCKHOLDERS.
The issuance of USDI Common Stock in the Merger may have the effect of
effecting negatively USDI's earnings per share from levels otherwise expected
and could reduce the market price of the USDI Common Stock, unless the combined
company can achieve revenue growth or cost savings and other business synergies
sufficient to offset the dilutive effect of issuing stock in the Merger.
Although both companies believe that beneficial synergies will result from the
Merger, the combining of the two company's businesses, even if achieved in an
efficient, effective and timely manner, may not result in better combined
results of operations and financial condition than would have been achieved by
each company independently. . For a description of certain expected operational,
financial and marketing benefits of the Merger, see "Proposal No. 1: The Merger
- -- USDI's Reasons for the Merger" and " -- TELCAM's reasons for the Merger."
RISKS RELATED TO USDI AND TO USDI AND TELCAM AS A COMBINED ENTITY
The combined company currently expects to increase its expenses, and
its operating results will
21
<PAGE>
be harmed if these increased expenses are not accompanied by increased revenues.
Because the combined company's plans to achieve profitability in the
future require it to expand its work force, improve its infrastructure and
acquire and develop new product lines and technologies, failure to successfully
do so could lower the combined company's operating results and cause its stock
price to decrease.
If the combined company cannot execute its growth strategy, its stock
price could decrease. Successful growth depends in part upon the combined
company's ability to:
o expand, train and manage its work force;
o continue to attract, retain and motivate qualified personnel; and
o develop or acquire new businesses, products and technologies.
In addition, if the combined company cannot manage an expanding work
force, improve its reporting systems and customer service infrastructure and
manage the integration of acquired businesses, products or technologies, it will
be unable to continue to manage the growth of its operations, which could harm
its business and financial results.
INVESTMENT RISKS
USDI's Common Stock has a limited trading history and a volatile price.
There can be no assurance that a public market for the Company's Common Stock
will be sustained. In the absence of such a market, purchasers of the Common
Stock may experience substantial difficulty in selling their securities.
The trading price of the Company's Common Stock may be, and has been,
subject to significant fluctuations in response to variations in quarterly
operating results, announcements of technological innovations by the Company or
its competitors, general conditions in the satellite and terrestrial telephone
markets and other factors. Broad market fluctuations, as well as economic
conditions generally and in the telecommunications industry specifically, may
result in material adverse effects on the market price of the combined company's
Common Stock. In addition, general stock market price and volume fluctuations
often have a disproportionate effect on the market prices for small
capitalization and technology-related companies in particular.
There was a substantial drop in the market price of USDI's Common Stock
during the last 12 months. In the past, following periods of volatility in the
market price of a particular company's securities, securities class action
litigation has often been brought against that company. Such litigation may
occur in the future with respect to the combined company, and could result in
substantial costs and a diversion of management's attention and resources, which
could have a material adverse effect upon the combined company's business,
operating results and financial condition.
USDI has experienced and expects to continue to experience significant
fluctuations in quarterly operating results based on a number of factors, many
of which are not within its control. Among other things, USDI's operating
results have fluctuated in the past due to:
22
<PAGE>
o the timing of product enhancements and new product announcements
by its suppliers and itself;
o dependence on suppliers for timely and market-ready product
introductions;
o the lengthy sales cycle of its products;
o market acceptance of and demand for its products;
o capital spending patterns of its customers;
o customer order deferrals in anticipation of enhancements or new
products;
o its ability to attract and retain key personnel;
o the mix of equipment and service revenues;
o highly variable legal and accounting expenses due to litigation
and business issues;
o personnel changes; and
o changes in the timing and level of operating expenses.
In addition, the announcement or introduction of new products by USDI
or its competitors or any change in industry standards may cause customers to
defer or cancel purchases of existing products. Furthermore, the introduction of
products with reliability, quality or compatibility problems could result in
reduced orders, delays in collecting accounts receivable and additional service
costs. Accordingly, the combined company's results of operations may also
fluctuate in the future due to a number of additional factors, including but not
limited to those discussed above, as well as:
o the number and significance of product enhancements and new
product announcements by competitors;
o changes in customer buying patterns related to the year 2000
issue;
o changes in pricing policies by the combined company and its
competitors;
o the ability of the combined company and/or suppliers to develop,
introduce and market new and enhanced versions of its products on
a timely basis;
o customer order deferrals in anticipation of enhancements or new
products offered by competitors;
o non-renewal of service agreements, software defects and other
product quality problems;
23
<PAGE>
o the mix of direct and indirect sales; and currency fluctuations.
Due to these factors, quarterly revenue and operating results are
difficult to forecast and may not meet expectations.
EARLY STAGES OF DEVELOPMENT
USDI is in the early stages of development. It has had only a limited
operating history and has sold only a limited quantity of its products to date.
The Company has not been profitable and is anticipating significant changes to
its product lines, business and management. The likelihood of our success must
be considered in light of the problems, expenses, difficulties and delays
frequently encountered in connection with a new business, including, but not
limited to, a continually evolving industry subject to rapid technological and
price changes, acceptance of the products that the Company markets and an
increasing number of market competitors.
Since USDI's entry into the satellite-based telecommunication industry
in May 1997, it has been engaged primarily in:
o raising funds;
o working with satellite system providers on service and product
development;
o recruiting management and technical personnel; and
o marketing and sales activities related to our products and
services.
The results of these efforts have fallen well below expectations
primarily because of technical and market-related problems with the
newly-introduced Iridium satellite telephone system. In response to limited
revenues, USDI dismissed virtually the entire staff of its operating subsidiary
in June 1999 and suspended active marketing. See "Proposal No. 1: the Merger --
Background of the Merger"; and " -- USDI's Reasons for the Merger." The combined
company's efforts in marketing satellite telephone equipment and services will
require, to a great extent, a relaunch of that effort and will have few of the
advantages associated with the expansion of an established business.
The establishment of a new business in the evolving satellite-based
telecommunications industry is very risky. It is likely that further risks will
be encountered as the industry shifts from the development to the
commercialization of new products and services based on innovative technology.
There can be no assurance that we will be able to generate revenues or achieve
profitable operations from these product lines given these factors.
TELCAM has operated as a marketer of long-distance telephone and
related services since 1995 and cannot be said to be in an early stage of
development. However, after a period of substantial growth in 1995 and 1996,
revenues and net income declined sharply in subsequent years and through the
first nine months of 1999. TELCAM experienced a change in ownership and
management in June 1999. To achieve a full turn-around and future growth, TELCAM
is implementing a revised business strategy and establishing a new management
team. Since June, it has begun to reverse the decline in customer base
24
<PAGE>
and revenue potential. Despite continuity in its long established residential
long-distance marketing business, its new strategy of (1) purchasing rights to
large, existing residential long-distance customer bases and (2) entering
business-to-business telephone services marketing and its management turnover
now expose TELCAM to many of the risks usually associated with an early stage
company.
During parts of 1997 and 1998, USDI did not file certain periodic
reports as required by the rules and regulations promulgated by the Commission
and did not reply to comments from the Commission's staff regarding the filings
that it did make. Beginning with 1998, the Company commenced an effort to become
compliant with the Commission's periodic reporting and accounting requirements.
Although the Company was late in the filing of its report on Form 10Q for the
period ended September 30, 1999, it believes that it is now in compliance with
such reporting requirements.
HISTORY OF OPERATING LOSSES; FUTURE CAPITAL NEEDS
USDI and TELCAM combined on a pro forma basis have a history of net
losses, and the combined company may not be profitable in the future.
USDI has incurred significant operating losses in every fiscal period
since inception. In August 1997, in connection with the acquisition of Skysite
Communications Corporation ("Skysite"), the Company terminated its prior
production and development of electronic television "set-top" devices and
concentrated our efforts on the development of a new business in the global
satellite communications market. Thus, the Company is subject to the risks
inherent in the establishment and growth of a new business enterprise. For the
years ended December 31, 1998, and December 31, 1997, the Company's net losses
were $7,265,156 and $4,685,185, respectively. The Company does not believe
comparison with periods prior to 1997 is meaningful. The Company incurred an
operating loss for the first nine months of 1999 of $6,555,417. It has reduced
expenses sharply beginning in July 1999. But it does not expect its satellite
telephone business to make a positive contribution to the combined company
before the second quarter of 2000 and possibly later.
TELCAM had been profitable through 1998 when it had net income of
$247,136. But it experienced a loss of $496,421 in the first nine months of
1999. Because of the significant changes that have occurred in both USDI and
TELCAM in recent months, it is uncertain what level of profitability, if any,
the combined company can be expected to produce in the remainder of 1999 and
2000.
In order to become profitable, the combined company must successfully
market and sell satellite telephone products and services, long-distance
telephone services and related products at volumes substantially above recent
levels, sell evolving products for new and existing markets, increase gross
margins, expand its distribution capability and manage its operating expenses.
USDI has not yet achieved these objectives to any significant degree and TELCAM
is at the early stages of its effort to do so. There can be no assurance that
the combined company will ever achieve these objectives or profitability. At
present, USDI and TELCAM are both dependent on external financing to fund
operations. The combined company's actual working capital needs will depend upon
numerous factors, including the extent and timing of acceptance of its products
in the market, its operating results, the cost of increasing its sales and
marketing activities, the delay that the combined company may experience in
monetizing revenues due but not yet collected through Local Exchange Carrier
billing, the status of competitive products, the availability of financing
sources and the prevailing conditions in the financial markets, none of which
can be predicted with certainty. As a result, there is no assurance that the
combined company will be able to
25
<PAGE>
obtain adequate financing. There can be no assurance that any additional
financing will be available to the combined company on acceptable terms, or at
all, when required by the combined company. The inability to obtain such
financing would have a material adverse effect on the combined company's
business, financial condition and results of operations. The combined company
could be required to significantly reduce or suspend its operations, seek a
merger partner or sell additional securities on terms that are highly dilutive
to shareholders. For the years ended December 31, 1998, and December 31, 1997,
USDI raised $8,184,900 and $4,306,944 in proceeds (prior to stock issuance
costs) of preferred convertible equity offerings. See "--Significant Dilutive
Effects of Shares Eligible for Future Sale on Market Price of Common Stock,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and Financial Statements.
COMPETITION
The telecommunications industry is highly competitive and is
characterized by frequent technological and marketing innovation. The principle
bases of competition within the industry are price, products and services. The
industry includes major domestic and international companies, many of which have
financial, technical, marketing, sales, distribution and other resources
substantially greater than either USDI or TELCAM or the combined company and
which provide, or plan to provide, a wider range of services. In response to
competitive pressure from these and other future competitors, the combined
company may have to lower its selling prices or alter our services, which could
have a material adverse effect on the financial position of the combined
company. The combined company's products and services compete with a number of
other communications services, including:
o existing satellite services;
o terrestrial air-to-ground services;
o terrestrial land-mobile and fixed services, and
o any new communications services developed in the future utilizing
new technologies.
In addition, the FCC has recently allocated large amounts of additional
spectrum for communications uses or potential uses that could compete with the
Company, and additional allocations of spectrum for such uses may occur in the
future. There can be no assurance that the Company will be able to compete
successfully with such companies. See "Business-Competition."
The Company believes that competition in the long-distance telephone
market will increase in the near future. In particular, the number of
competitors that are larger and better capitalized than TELCAM and the combined
company would be likely to grow. AT&T, MCI, and Sprint are currently preeminent
among such firms. The Company expects that all of BOCs - newly eligible to enter
the long-distance marketplace - will soon seek to provide long distance service
. Certain BOCs have already taken steps to provide service in multiple states.
It is not known when, and under what specific condition, other applications will
be granted by the state regulatory commissions in those states.
Increased competition could result in:
26
<PAGE>
o price reductions;
o fewer customer orders;
o reduced gross margins;
o longer sales cycles; and
o loss of market share.
The combined company or its competitors may announce enhancements to
existing products, or new products embodying new technologies, industry
standards or customer requirements that have the potential to supplant or
provide lower-cost alternatives to USDI's and TELCAM's existing products.
These competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sales of their products than the
combined company. USDI expects additional competition as established and
emerging companies enter into the residential and commercial telecommunications
market and new products and technologies are introduced.
As a re-seller of telecommunications equipment and services, the
combined company will require supply relationships with the producers and
providers of those products. At present, certain of those suppliers also compete
with USDI in the retail marketplace. It is possible that other suppliers may
also create direct sales channels. This could place the combined company at a
serious competitive disadvantage if it is unable to find suitable alternative
suppliers.
MARKET CONSOLIDATION MAY CREATE MORE FORMIDABLE COMPETITORS
Alliances among current and new competitors may emerge and rapidly gain
significant market share. The proposed merger of MCI Worldcom and Sprint is
indicative of the potential scale of such combinations. The failure of the
combined company to compete successfully against current and future competitors
could materially harm its business, operating results and financial condition by
driving down prices and reducing revenue growth. Current and potential
competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties, thereby increasing the
ability of their products to address the needs of our prospective customers.
Current or future indirect channel partners of USDI and TELCAM may establish
cooperative relationships with current or potential competitors, thereby
limiting the combined company's ability to sell its products through particular
distribution channels. Such competition could have a material adverse effect on
the combined entity's ability to obtain new products and services, and
maintenance and support existing products and services, on favorable terms.
Further, competitive pressures may require the combined entity to reduce the
price of its products, which could have a material adverse effect on its
revenues, profitability and business condition.
The combined company's future success will depend upon successful
product development by its suppliers and itself in the face of changing customer
requirements and rapid technological change.
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The combined company's failure to develop or acquire and introduce new
products and product enhancements on a timely basis that meet changing customer
requirements and technological changes could result in reduced demand for or
market acceptance of the combined company's products, which would impact the
combined company's business, operating results and financial condition.
RAPID TECHNOLOGICAL AND MARKETING CHANGE
The market for telecommunications products is characterized by rapidly
changing technology, frequent new product introductions, constantly evolving
marketing strategies and other changes. Accordingly, the combined company's
success will be substantially dependent on a number of factors, including its
ability:
o to identify emerging opportunities in the telephone and other
telecommunications products being brought to market by our
suppliers and their competitors,
o to bring those emerging products to market quickly,
o to differentiate the mix of products it acquires and sells from
those of its competitors, and
o to develop efficient and effective sales and marketing channels.
Given the emerging nature of the telephone market, there can be no
assurance that the products the combined company sells or technology and
services it provides will not be rendered obsolete by alternative technologies.
Nor can there be any assurance that its competitors will not introduce highly
effective marketing strategies that the combined company cannot respond to
effectively for fiscal or other reasons. Furthermore, short product life cycles
expose the combined company's products to the risk of obsolescence and require
frequent new product introductions.
DEPENDENCE ON THIRD PARTY PRODUCT DEVELOPMENT
As re-sellers, USDI and TELCAM are largely dependent on products,
airtime and bandwidth provided by third parties. The combined company's future
success will depend in large part on the ability of its product suppliers to
keep pace with advances in technologies for the telephone market. In order to
compete, the combined company must have favorable supply relationships with
vendors having the ability to, among other things:
o complete development and introduce to the marketplace in a timely
and cost-competitive manner new products and technology;
o continually enhance and improve their current products, services
and technology; and
o successfully develop and market new products, services and
technology.
There can be no assurance that the combined company or its vendors will
be able to identify, market or support such products successfully or will be
able to respond effectively to technological changes or product announcements by
competitors. The combined company is unable to predict with
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certainty which of the many possible future products and services will meet
evolving industry standards and consumer demands. Delays in response by the
combined company or its vendors could have a material adverse effect on its
business, financial condition and results of operations.
USDI and TELCAM's products are subject to all of the risks inherent in
the development of new technology and products including the following risks:
o unanticipated delays;
o expenses;
o technical problems or difficulties; and
o possible insufficiency of funding to complete development.
There is no assurance as to when, or whether, the combined company or
its vendors can successfully complete or implement such developments. Further,
there is no assurance that the combined company or its vendors can develop
products in commercially salable form within projected development or
implementation schedules. There is no assurance that the combined company or its
vendors will be able to complete such development or implementation in a timely
manner, or at all.
ENFORCEABILITY OF PATENTS AND SIMILAR RIGHTS; POSSIBLE ISSUANCE OF PATENTS TO
COMPETITORS; TRADE SECRETS
The Company believes that the products it markets and sells do not
infringe the patents or other proprietary rights of third parties. Further, the
Company is not aware of any patents held by its competitors that will prevent,
limit or otherwise interfere with its ability to make and sell its products.
However, it is possible that competitors may have applied for, or may in the
future apply for and obtain, patents which have an adverse impact on the
Company's ability to make and sell its products. In addition, because USDI is a
relatively new company in the early stages of development, claims that its
products infringe on the proprietary rights of others are more likely to be
asserted after commencement of commercial sales of its products. Defense and
prosecution of patent suits, even if successful, are both costly and time
consuming. An adverse outcome in the defense of a patent suit could subject us
to significant liabilities to third parties, require disputed rights to be
licensed from third parties or require USDI to cease selling its products.
USDI and TELCAM also rely on unpatented proprietary technology. There
is no assurance that others may not independently develop the same or similar
technology or otherwise obtain access to its unpatented technology.
DEPENDENCE OF KEY SATELLITE AIRTIME AND LONG DISTANCE BANDWIDTH PROVIDERS
The Company is dependent on third-party providers for the satellite
airtime we resell to its customers. The Company has been supplied satellite
services, on a non-exclusive basis, primarily pursuant to agreements with
American Mobile Satellite Corporation ("American Mobile") and Iridium North
American, LP. ("Iridium"). During 1998, American Mobile provided substantially
all of the
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airtime that the Company resold to its customers. Its plans for continuance and
expansion of its business during 2000 assumed that American Mobile airtime would
continue to be sold in growing quantities and, particularly, that sales of
Iridium airtime will rapidly grow. Because Iridium began commercial service only
in November, 1998 and its telephone satellite system has experienced technical
problems in its early operations, the Company's reliance on that supplier
exposes us to heightened risks related to new and complex products and services.
The loss of either provider or significant shortcomings in the performance of
its service would have a material adverse affect on the Company. In August 1999,
Iridium L.L.C. filed a voluntary Chapter 11 Bankruptcy Petition. Because Iridium
plays an important role in the Company's sales strategies for 2000, the failure
of Iridium's systems to perform adequately or their unavailability for other
reasons would have an immediate adverse effect on the Company's performance.
As a result of the Company's financial difficulties, it has not made
payments due to Iridium and AMSC on a timely basis. Each of these suppliers has
informed the Company that it considers a default to have occurred under the
terms of its agreement with the Company. AMSC has demanded payment of a
termination fee under its agreement of $2.7 million. Iridium has continued to
support the Company's customers who use Iridium services. AMSC has placed
restrictions on the services available to the Company's customers and has
withheld billing records from the Company. Management believes that the
Company's relationship with Iridium can be restored to a normal basis without
disrupting its marketing of Iridium products. It believes that the AMSC
relationship may not be repairable and is negotiating an alternative source of
supply of North American airtime from TMI Communications. These difficulties in
relationships with suppliers has had an adverse effect on the Company's
operations and can be expected to continue to do so for the foreseeable future..
USDI and TELCAM are also dependent on third-party providers of
long-distance bandwidth. TELCAM has recently entered into a favorably priced
contract with Qwest for the provision of long-distance bandwidth and expects the
bulk of the long distance telephone services it provides to be routed through
Qwest facilities. The loss of Qwest as a provider or significant shortcomings in
the performance of its service would have a material adverse affect on the
combined company.
DEPENDENCE ON KEY TELEPHONE SUPPLIERS
The Company is a nonexclusive dealer for manufacturers of satellite
telephones, which include Westinghouse Electric Corporation ("Westinghouse"),
Kyocera Corporation ("Kyocera")and Motorola, Inc. ("Motorola"). For the year
ended December 31, 1998, retail sales by the Company of Westinghouse products
accounted for approximately 23% of the Company's revenues and sales of Motorola
products accounted for approximately 12% of the Company's revenue. Since a
material amount of the Company's revenues are derived from selling air time, the
use of which requires products from these suppliers, the unavailability of these
products would have a material adverse effect on the Company's business and
prospects. The loss of any supplier could have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
there can be no assurance that current suppliers or other providers will
continue to provide products to the Company at attractive prices, or at all, or
on the scale and within the time frames required by the Company. Further, there
can be no assurance that any of the Company's suppliers will not enter into
exclusive arrangements or arrangements on more favorable terms with the
Company's competitors (some of whom may transact substantially higher volumes of
business with such suppliers) or cease selling these components to the Company
at commercially reasonable prices, or at all. Any failure to obtain such
products on a timely basis at an
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affordable cost, or any significant delays or interruptions of supply, would
have a material adverse effect on the Company's business, financial condition or
results of operations.
DEPENDENCE ON KEY CUSTOMER SERVICE, DATA AND BILLING SERVICE SUPPLIERS
TELCAM outsources services in several key areas. Customer service is
outsourced to Phase V in Florida, call rating is outsourced to TelOne in
Houston, and billing, collection and factoring are outsourced to a leading
telephone billing clearinghouse - BIC. Unless and until TELCAM develops the
ability to provide perform these functions internally, it will be dependent on
these or other providers of these services. The failure of the providers of
these services to perform on a timely and acceptable basis could have severe
adverse effects on TELCAM's:
- Service to current customers,
- Relationship with the Local Exchange Carriers who currently
present TELCAM bills to their customers as part of their monthly
billings,
- Prompt compliance with Public Utility Commission ("PUC") and FCC
standards for operations, and
- Ability to control working capital requirements for accounts
receivable.
TELCAM's business and potential for profitability would be severely
threatened if TELCAM were unable to obtain such services on acceptable terms, or
at all, from its current or other vendors and were to remain unable to perform
the services for itself.
DEPENDENCE ON LOCAL EXCHANGE CARRIERS FOR BILLING
TELCAM's customers currently receive their billing from the Company on
the monthly bill distributed by the customers' Local Exchange Carriers ("LECs")
- - the dominant providers of local telephone service. USDI bills its customers
directly. The Company plans to extend direct billing to TELCAM customers in the
future. But this is a costly, complicated and lengthy process that cannot be
immediately initiated. Until the time that it is, TELCAM remains dependent on
the LECs for this critical function.
In addition to conventional commercial risks of relying on a critical
billing vehicle not controlled by the Company, there are political and
regulatory considerations inherent in this relationship. In April, 1998, the
Chairman of the FCC met with industry leaders, including large LECs, to discuss
problems in telephone billing practices. A subsequent "workshop" devised an
informal set of guidelines designed to reduce the impact of certain of these
practices. In December 1998, Bell Atlantic - a key LEC - suspended the right of
a significant number of telecommunications service providers to participate in
its customer billing process. Bell Atlantic asserted that these service
providers had engaged in "cramming," the practice of submitting or including
bogus miscellaneous charges on a customer's local telephone bill. In response to
this suspension, a coalition of telephone clearinghouses, such as BIC, suspended
additional suspected offenders.
TELCAM, and other long distance marketers like it that were not
directly affected by
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suspensions, effectively must now conduct their marketing and billing in a
manner that complies with the anti-cramming guidelines. In addition to absorbing
certain expenses associated with record keeping and reporting on customer
accounts and substantial delays in its ability to bill new customers, the
Company has no assurance that additional informal industry billing guidelines
could not create additional costs or even delay or disrupt its ability to bill
its customers. If this were to occur, it could have a severe negative impact on
the combined company's profitability.
FINANCIAL COMMITMENTS UNDER THE TERMS OF SUPPLIER AGREEMENTS.
USDI's subsidiary, Skysite, is subject to a "take-or-pay" provision
pursuant to an agreement with a supplier of private network satellite products
and services. The agreement requires Skysite to take (purchase and resell) or
pay (even when its payment exceeds the value of time resold) amounts totaling
approximately $9.4 million dollars during the period from 1999 to 2005.
Satisfaction of annual commitments are evaluated quarterly, beginning with a
minimum commitment of $33,000 in the first quarter of 1998 plus increases in
subsequent quarterly commitments of $20,000 each. Notwithstanding these
commitments, Skysite may terminate its agreement with the supplier upon 90 days
written notice, in which case Skysite is required to pay a termination fee equal
to 30% of the remaining unpaid balance as of the date of cancellation.
In August 1998, the Company's subsidiary, Project 77 Corp. (Project
77"), entered into a take or pay minute of use commitment for three million
minutes with Iridium North America. The minutes must be taken or paid within
fifteen months following the commercial launch of the Iridium System. The impact
on the consolidated financial statements cannot be determined due to potential
fluctuations in future rates.
The failure of Skysite and Project 77 to resell sufficient time to meet
their commitments would require them to make potentially material payments to
the suppliers with no revenue stream to offset those payments. This could have a
significant adverse effect on the financial performance and condition of these
subsidiaries and of the combined company.
The termination of normal operations by INSAT and its Skysite and
Project 77 subsidiaries and related events make it highly unlikely that the
volume purchase targets of the contracts described above will be met and may
have constituted events of default under the supply contracts described here.
Both of the suppliers in question have required that the Company agree to meet
certain payment schedules and other conditions if they are to continue to
provide service. The Company has received a demand letter for $2.7 million in
payment of a termination fee from AMSC. TELCAM, on behalf of USDI, has been
negotiating a restoration of normal supply relationships once the Merger is
completed. However there can be no assurance that prior to, or after, the Merger
availability of airtime from these providers will not be interrupted or
terminated or that one or both of them will not attempt to enforce a presumed
right to substantial payments due in the event of default.
DEPENDENCE ON KEY CUSTOMERS
During the year ended December 31, 1998, USDI's net sales to its three
largest customers accounted for approximately 33% of total net sales. For the
year ended December 31, 1998, the Royal Bahamas Police Force represented
approximately 17% of the USDI's net sales. Other than the foregoing, no one
customer accounted for 10% or more of net sales for the period. In addition, the
satellite
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telephone market experiences rapidly changing technology and frequent new
product introductions which may result in loss of customers or uncollectibility
of accounts receivables of any major customer.
In addition, as of December 31, 1998, Wolf Coach accounted for
approximately 11% of trade receivables outstanding. Other than the foregoing, no
one customer accounted for 10% or more of trade receivables at any time in 1998.
The loss of or significant decrease in sales to any one of the USDI's major
customers or uncollectibility of any accounts receivable of any major customer
could have a material adverse effect on USDI's business, financial condition and
results of operations.
DEPENDENCE ON KEY PERSONNEL
USDI and TELCAM are dependent upon their executive officers and certain
key employees, the loss of any one of whom could have a material adverse effect
on the combined company's business, financial condition and results of
operations. Their future success will depend in significant part upon the
continued service of certain key personnel, and the combined company's
continuing ability to attract, assimilate and retain highly qualified
managerial, technical and sales and marketing personnel. There can be no
assurance that the combined company can retain the existing key managerial,
technical or sales and marketing personnel of either USDI or TELCAM or that it
can attract, assimilate and retain such employees in the future. The relocation
of USDI's executive functions to Houston, Texas may increase the difficulty of
retaining key personnel now located at USDI's Chevy Chase, Maryland offices.
The loss of key personnel or the inability to hire, assimilate or
retain qualified personnel in the future could have a material adverse effect
upon the combined company's business, financial condition or results of
operations. With the exception of its Chief Executive Officer, USDI does not
have employment contracts with its officers or key employees. Moreover, USDI
does not have key-man life or disability insurance on any of its officers or key
employees. In the event of their death or disability or in the event they are
otherwise unable to render services to USDI, there can be no assurance that USDI
will be able to recruit and retain replacements. See "--Management and
Operations following the Merger."
NO DIVIDENDS
USDI has not paid any cash dividends on its Common Stock to date.
Payment of dividends on its Common Stock is within the discretion of the Board
of Directors and will depend upon its earnings, its capital requirements and
financial condition, and other relevant factors. USDI does not intend to declare
any dividends on its Common Stock in the foreseeable future. Instead, USDI and,
upon the consummation of the Merger, the combined company plan to retain any
earnings received for development of business operations.
LIMITATION ON LIABILITY OF DIRECTORS AND OFFICERS
USDI's Certificate of Incorporation provides that:
o it will indemnify any of its directors, officers, employees or
agents against actions, suits or proceedings relating to the
Company; and
o subject to certain limitations, a director shall not be personally
liable for monetary damages for breach of his fiduciary duty.
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In addition, USDI has entered into an indemnification agreement with
each of its directors. Such indemnification agreement provides that a director
is entitled to indemnification to the fullest extent permitted by law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing and the provisions of Sections 78.502(1)and
78.502(2) of the General Corporation Law of the State of Nevada, or otherwise,
the Company has been advised that in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted against
the Company by such director, officer or controlling person, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
ILLIQUIDITY OF TRADING MARKET; RISK OF PENNY STOCK STATUS
USDI's Common Stock is traded on the OTC Bulletin Board. Consequently,
the liquidity of the Common Stock has been in the past, and could be in the
future, impaired, not only in the number of shares of Common Stock which could
be bought and sold, but also through delays in the timing of the transactions,
reductions in security analysts' and the news media's coverage of the Company,
and lower prices for the Common Stock than might otherwise be attained. We are
subject to the Commission's "penny stock" rules. Securities are exempt from this
rule if, among other things, the market price is at least $5.00 per share.
Consequently, an investor will find it more difficult to dispose of, or to
obtain accurate quotations as to the price of, the Company's securities. The
penny stock rules under the Securities Exchange Act of 1934, as amended ("the
Exchange Act"), impose additional sales practice and market-making requirements
on broker-dealers who sell and/or make a market in such securities. For
transactions covered by the penny stock rules, a broker-dealer must make special
suitability determinations for purchasers other than established customers and
must have received the purchasers' written consent to the transactions prior to
sale. In addition, prior to any transaction involving a penny stock, unless
exempted, the rules require delivery of a disclosure schedule to the Commission
relating to the penny stock. Disclosure is also required to be made about
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stocks. The rules
on penny stocks could affect the ability or willingness of broker-dealers to
sell and/or make a market in the Company's securities and therefore could
severely adversely affect the market liquidity for the Company's securities. See
"Market for Company's Stock and Related Shareholder Matters."
INDICTMENT OF PERSONS ASSOCIATED WITH WS MARKETING AND FINANCIAL SERVICES, INC.
In September 1998, The Company became aware that persons associated
with WS Marketing and Financial Services, Inc., the placement agent for the
Company's Series B and Series C Preferred Stock, are currently under Federal
indictment concerning matters unrelated to WS Marketing and Financial
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Services, Inc.'s relationship with the Company. The criminal indictment, filed
in the United States District Court, Southern District of Texas, Houston
Division, Criminal No. H-97-262-SS, includes allegations of conspiracy, wire
fraud and money laundering. There can be no assurance that the foregoing
indictment will not affect the Company's liquidity or capital resources. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Liquidity and Capital Resources."
SIGNIFICANT DILUTIVE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON MARKET PRICE
OF COMMON STOCK
As of December 15, 1999, there were 2,714,822 shares of Common Stock
issuable upon the exercise of options under the Company's 1996 Non-Employee
Directors' Stock Option Plan and the 1998 Stock Option, Deferred Stock and
Restricted Stock Plan. In addition, as of December 31, 1998, there were 695,200
shares of Common Stock issuable upon the exercise of options under the stock
option plan adopted by the Company in 1995. Finally, as of December 31, 1998,
there were 1,288,000 shares of Common Stock issuable upon the exercise of
options granted outside any of the Company's stock option plans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
In addition, as of December 31, 1998, the Company had issued and
outstanding 3,701,332 shares of Series A Preferred Stock, 3,000 shares of Series
B Preferred Stock, and 3,000 shares of Series C Preferred Stock, which are all
convertible into shares of Common Stock. Each share of Series A Preferred Stock
is convertible into one share of Common Stock, whereas each share of Series B
and Series C Preferred Stock is convertible into a number of shares as
determined by the Series B and Series C conversion formula. Holders of Series A
Preferred Stock may convert up to 25% of their shares 90 days following the date
the shares were issued, and up to an additional 25% of their shares at the end
of each of the three consecutive 90-day periods thereafter. Holders of Series A
Preferred Stock also possess conversion rights exercisable upon acquisition of
the Company by another entity. Further, the Series A Preferred Stock is
automatically converted into Common Stock upon the consummation of the Company's
sale of its Common Stock in a firm commitment underwritten public offering, or
upon acquisition of the Company, if, in connection with such acquisition, the
holders of Series A Preferred Stock receive an amount per share greater than
$1.50. Under the terms of the offering, holders of Series B Preferred Stock may
convert 50% of their shares into Common Stock on the effective date of
registration of the underlying Common Stock and the remaining 50% 45 days
thereafter. The Company has offered to redeem portions of the Series B Preferred
Stock with payment in Common Stock on several occasions during 1999. As of
December 15, 1999, the holders of the Series B Preferred Stock have the right to
redeem all of their holdings. Holders of Series C Preferred Stock have the right
to convert 50% of their shares into Common Stock upon the earlier of the
effective date of registration of the underlying Common Stock, or 120 days after
issuance of the Series C Preferred Stock and the remaining 50% upon the earlier
of 45 days following the effective date of registration of the underlying Common
Stock, or 165 days after issuance of the Preferred Stock.
In connection with the sale of the Series A, Series B and Series C
Preferred Stock, the Company issued, as of December 31, 1998, 2,169,216, and
500,000 and 495,000 warrants, respectively, convertible into an aggregate of
3,164,216 shares of Common Stock. Lastly, in connection with each of the
offerings of the Series B and Series C Preferred Stock, the Company issued
250,000 warrants, for a total of
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500,000 warrants, to the placement agent thereof. The warrants include certain
dilution adjustments resulting from the subsequent issuance of Common Stock or
securities converting into Common Stock. All of the Common Stock, to the extent
that they are eligible or appear to be eligible for sale in the public market,
could have a material adverse effect on the market price of the Common Stock and
therefore make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company
deems appropriate.
The Series B Preferred Stock subscription agreements contain a "put"
provision for Common Stock which allows the Company to raise an additional
$3,000,000 in certain circumstances. The provision specifies that 75 days after
the effective date of the registration of additional common shares to be used
under this provision, the Company may sell Common Stock (the "Put Stock") to the
Series B subscribers. The price of the Put Stock is determined by taking the
lower of (1) 80 percent of the lowest closing bid price for the previous 20
trading days prior to funding or (2) 80 percent of the closing bid price on the
day of funding. The minimum draw is $250,000 and the maximum draw is $750,000.
If the price of the Company's Common Stock for the 20 trading days prior to the
funding is less than $1.25 and the average trading volume is less than $300,000
per day for the previous 20 trading days, the Series B shareholders have the
option not to fund the requested draw. These minimums increase as the amount of
the funds requested by the Company increase from $250,000 to $750,000.
The Company, on August 11, 1999, exercised its right under the terms of
the Series A Convertible Preferred Stock offering to convert all of the
2,393,666 outstanding shares of that series into its Common Stock with one
common share issued for each preferred share held. The former holders of those
Preferred Shares have retained their rights to approximately $800,000 of
dividends accrued as of the date of conversion. As of December 15, 1999, holders
of 1670 shares of the Series B Convertible Preferred Stock and 400 shares of the
Series C Convertible Preferred Stock have converted those shares into a total of
11,653,955 shares of the Company's Common Stock.
The Company has issued in the past, and expects to issue in the future,
additional equity securities in order to fund working capital requirements. To
the extent the Company does so, existing shareholders of the Company will
experience substantial dilution, particularly if the terms of such issuance
include discounts to market prices or the issuance of warrants. In addition, to
the extent the Company issues securities at a discount to the then current
market price, the Company will be required to record a stock compensation
expense or other charge for such issuances in its financial statements, which
may adversely affect the Company's operating results for the period in which
such stock is issued.
In addition, the holders of Series B and Series C Convertible Preferred
Stock and related warrants are entitled to registration rights with respect to
the shares of Common Stock underlying their respective securities. Pursuant to
the registration rights agreement between the Company and the holders of Series
B and Series C Preferred Stock, the Company is required to file a registration
statement covering the resale of the shares of the Company's Common Stock,
together with any capital shares issued in replacement of or in exchange for
such Common Shares, issuable or issued upon conversion of the Series B or Series
C Preferred Stock and warrants, pursuant to each offering. The registration
rights agreements also grant holders piggyback and demand registration rights.
To the extent that such holders convert their existing securities into Common
Stock, following the effective date of the Registration Statement related
thereto, such shares will be immediately eligible to be sold in the public
market without restriction under Rule 144 under the Securities Act of 1933, as
amended (the "Securities Act"), which, given the relatively low
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trading volumes for the Company's Common Stock, would likely have a significant
depressant effect of the per share market price of the Company's Common Stock.
As of December 31, 1998, over 120 days had passed since the closing of the
Series C Preferred Stock offering and the Company had not filed a registration
statement with the Securities and Exchange Commission as provided for in the
Series C Registration Agreement. As a result the holders of its Series C
Preferred Stock were entitled to certain adjustments that will increase the
number of common shares to which they are entitled upon conversion of their
preferred shares -- 50% of which were eligible for conversion as of the end of
December 1998 and all of which are eligible for conversion as of this date.
SIGNIFICANT DILUTIVE EFFECT OF SHARES TO BE ISSUED IN CONJUNCTION WITH THE
MERGER ON MARKET PRICE OF COMMON STOCK AND ON THE ADEQUACY OF THE CURRENT NUMBER
OF AUTHORIZED COMMON SHARES
The terms of the proposed Merger provide for the shareholders of TELCAM
to be issued common shares of USDI equal to at least 51% of the fully diluted
common shares outstanding. In addition, the Merger Agreement provides that
TELCAM can withdraw from the transaction if the liabilities of USDI are not
reduced to an acceptable level. In relation to these two requirements, USDI
intends to consummate a number of transactions prior to, and in relation with,
the Merger to convert debt and convertible securities into Common Stock of the
Company. (See "The Merger Agreement" and "The Merger Agreement -- Changes to
capital structure of USDI.")
To the extent the Company completes the transactions related to the
Merger as anticipated and issues the common shares due to TELCAM under the terms
of the Merger, existing shareholders of the Company will experience substantial
dilution, particularly since the terms of such issuances include discounts to
market prices. In addition, to the extent the Company issues securities at a
discount to the then current market price, the Company may be required to record
a stock compensation expense or other charge for such issuances in its financial
statements, which may adversely affect the Company's operating results. All of
the Common Stock to be issued in conjunction with the Merger, to the extent that
it is eligible or appears to be eligible for sale in the public market, could
have a material adverse effect on the market price of the Common Stock and
therefore make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company
deems appropriate.
At the time of this filing, the Company has approximately 40,525,000
shares of Common Stock outstanding. The Company's Series B and Series C
Preferred Stock is all currently eligible for conversion at a discount from
the market price of the underlying common stock. Conversion of all of the
Company's outstanding Preferred Stock is required by the terms of the Merger
Agreement. Based on a market price for the Company's Common Stock at the
lower end of its recent trading range, $0.18, full conversion of its Series B
and C Preferred Stock would result in the issuance of approximately
34,600,000 additional shares of Common Stock. The Company estimates that it
will need to issue approximately 22,500,000 shares of Common Stock in order
to reduce its debt through debt-equity swaps to a level consistent with the
requirements of the Merger Agreement. Thus, the Company anticipates that
approximately it will have nearly 98 million shares of Common Stock
outstanding on the eve of the Merger.
Issuance of sufficient shares of Common Stock to TELCAM to provide
it with ownership of the required 51% of the Common Stock outstanding after
the Merger will increase the total shares outstanding to approximately
199,000,000. As a result, the current holders of the Company's Common Stock
may experience a reduction in their ownership of that stock from 100% of the
total outstanding to approximately 20%. These are only estimates; the actual
reduction may be more or less.
In order to permit these additional Common Stock issuances, an
increased authorization for common shares will be proposed at the Special
Meeting. If the Company fails, due to the unavailability of sufficient
authorized shares prior to the Meeting, to meet its contractual obligation
for prompt conversion of Preferred Stock or sale of shares under option, it
could be it subject to claims from parties having rights to such conversions
or exercise of options.
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IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue results from a programming convention in which
computer programs use two digits rather than four to define the applicable year.
Software, hardware or firmware may recognize a date using "00" as the year 1900,
rather than the year 2000. Such an inability of computer programs to
recognize a year that begins with "20" could result in system failures,
miscalculations or errors causing disruptions of operations or other business
problems, including, among others, a temporary inability to process
transactions, send invoices or engage in similar normal business activities. The
Company has established a Year 2000 Program (the "Y2K Program") to address the
Year 2000 issue with respect to the following:
o its information technology and operating systems;
o its non-information technology systems (such as buildings, plant,
equipment and other infrastructure systems that may contain
embedded microcontroller technology);
o certain systems of its major vendors and material service
providers (insofar as they relate to the Company's business
activities with such parties); and
o its material clients (insofar as the Year 2000 issue relates to
the Company's ability to provide services to such clients).
The Y2K Program is divided into five major phases: Awareness; Inventory
and Risk Assessment; Repair and Renovation; Verification and Validation; and
Implementation and Monitoring.
The Awareness Phase is intended to ensure the establishment of the
program and the awareness of potential risks and Year 2000 issues. This phase,
which involves communicating the status and progress of the program within the
Company and to third parties, is an on-going activity and will continue as we
proceed through the other phases.
The Inventory and Risk Assessment Phase involves the performance of an
initial inventory of all hardware, software and infrastructure, as well as
material vendors, to identify potential Year 2000 issues and to determine the
action required, if any, to mitigate the risk to the Company. We have contacted
third party service providers to determine the Year 2000 status of their
systems, as well as their plans to bring them into compliance. Material items
are those believed by us to have a significant impact on the business from a
customer service, financial or legal perspective. Our internal Y2K team has
performed this phase. This phase was substantially complete by the end of the
third quarter in 1999.
The Repair, Replacement and Renovation Phase is intended to ensure that
the appropriate items as identified in the final inventory and risk assessment
are upgraded to meet Year 2000 compliance criteria. This may include software
updates, hardware upgrades, development of new processes, new business
practices, training programs, etc. While completion of the various elements of
this phase is tied to corresponding elements within the assessment phase,
material repairs, replacements and renovations were substantially complete by
late1999 for systems under the direct control of the Company and not under its
direct control, and for which third parties such as service providers are
responsible.
The Verification and Validation Phase ensures that critical business
processes, systems and infrastructure are verified and tested to ensure Year
2000 issues will not cause major disruption in the ongoing operation of the
Company's business. Verification and testing of those systems under its direct
control will be performed by its internal Y2K team with the support of its
technicians and certain of the principal suppliers of those systems. This phase
is ongoing, but we expect all testing of those systems
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under the Company's direct control to be substantially complete in the fourth
quarter of 1999.
Finally, during the Implementation and Monitoring Phase, the Year 2000
upgrades will be installed into the Company's operating systems, as necessary.
In addition, the monitoring activity will be employed in an effort to ensure
that unforeseen Year 2000 critical items are appropriately prioritized for
correction. While the implementation component of this phase is scheduled to be
complete by the end of 1999, monitoring activities will be on going.
STATE OF READINESS
The Company's progress towards achieving substantial Y2K readiness is
on schedule to be completed in the last quarter of 1999, however there remains
some general uncertainty involved in the attempt to evaluate the Year 2000
problem because of the uncertainty of the readiness of third party suppliers and
vendors.
COSTS
The Company will utilize both internal and external resources to
reprogram, or replace, and test software for Year 2000 modifications. Total cost
associated with required modifications to become Year 2000 compliant is not
expected to be material to its consolidated results of operations and financial
position in any given year.
RISKS
In a reasonably likely worst case scenario, the failure to correct a
material Year 2000 problem could result in an interruption in, or a failure of,
certain normal business activities or operations, including operations that are
essential to the provision of the Company's services. Such failures could
materially and adversely affect its results of operations, liquidity and
financial condition. Due to the general uncertainty inherent in the Year 2000
problem, resulting in major part from the present state of the Company's
knowledge concerning the Year 2000 readiness of third-parties such as its
service providers, we are unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on its results of
operations, liquidity or financial condition. The Y2K Program is expected to
significantly reduce the level of uncertainty about the Year 2000 problem and,
in particular, about the Year 2000 compliance and readiness of the Company's
material partners. We believe that, with the completion of the Y2K Program as
scheduled, the potential of significant interruptions of normal operations
should be reduced.
CONTINGENCY PLANS
After reviewing information gathered in the Inventory and Risk
Assessment Phase, and to prepare for the possibility that certain information
systems or third party partners and vendors will not be Year 2000 compliant, we
intend to develop contingency plans, as appropriate. These plans may include the
establishment of teams to monitor and correct disruptions, utilization of
back-up processes including data back up and storage, and the development of
manual "work-around" solutions.
TELCAM
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The Company has been informed by TELCAM that TELCAM is Y2K compliant
and that its mission critical suppliers have informed it that they are also Y2K
compliant.
RISKS ASSOCIATED WITH STOCK OPTION GRANTS
The Company has adopted three stock option plans under which options
have been granted to employees, directors and others to purchase an aggregate of
4,968,750 shares of the Company's Common Stock. See "Executive
Compensation--Stock Option Plans." In addition, it granted additional options to
purchase 4,539,400 shares of Common Stock outside of any stock option plan (in
addition to the options issued to the Series A Preferred Stock Placement Agent
which were exercised in March 1999). To date, the shares underlying the stock
options have not been registered with the Commission, or under the securities
laws of any applicable state. The Company has granted the foregoing options and
permitted the issuance of 2,208,603 shares of Common Stock upon the exercise of
certain stock options in reliance on the exemption from registration found in
Section 4(2) of the Securities Act or Rules 505 or 506 promulgated thereunder
and similar state securities exemptions. Section 4(2) of the Securities Act
exempts from the registration requirements of Section 5 of the Securities Act
those transactions by an issuer not involving a public offering. If it is
determined at a later date that the grant of the aforementioned stock options or
the issuance of Common Stock pursuant to the exercise thereof involved a public
offering for which the Company cannot find an exemption, then the Company will
have committed a Section 5 violation, or a violation of similar state securities
laws, and may be subject to suit by shareholders pursuant to Section 12 of the
Securities Act or such other similar state securities laws. A successful suit
under Sections 5 or 12 of the Securities Act or their state securities law
counterparts could have a material adverse effect on the Company's business,
financial condition or results of operations.
POSSIBLE HEALTH RISKS
Recently, lawsuits have been filed alleging a link between the
non-thermal electromagnetic field emitted by cellular telephones and two-way
radios and the development of cancer. To date, there have been relatively few
medical studies relating to the effects of non-thermal electromagnetic fields on
health, and there are not any widely accepted theories regarding how exposure to
a non- thermal electromagnetic field could threaten health. Future medical
studies may produce findings that could have a material adverse effect upon the
wireless communications industry and the Company.
GOVERNMENT REGULATION
From time to time, the FCC amends its regulations governing the
licensing or sale of the communication equipment distributed by the Company, the
frequencies that such equipment uses, and the requirements for operating such
equipment. The FCC has from time to time submitted proposals relating to
licensing, use and regulation of frequency bands that could affect operation on
certain of the frequency bands where equipment marketed by the Company operates.
It is uncertain what impact, if any, these or future proposals may have on the
Company's operations.
The terms and conditions under which the Company and, to a greater
extent, TELCAM provides communications services are subject to government
regulation. Federal laws and FCC regulations generally apply to interstate
telecommunications, while state regulatory authorities generally have
jurisdiction over telecommunications that originate and terminate within the
same state.
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FEDERAL
TELCAM is classified by the FCC as a non-dominant carrier, and
therefore is subject to minimal federal regulation. After the recent
reclassification of AT&T as a non-dominant carrier in its provision of domestic
services, only the LECs are classified as dominant carriers for the provision of
interstate access services. As a consequence, the FCC regulates many of the
rates, charges, and services of the LECs to a greater degree than TELCAM. The
FCC has proposed that the BOCs offering out-of-region interstate interexchange
services be regulated as non-dominant carriers, as long as such services are
offered by an affiliate of the BOC that complies with certain structural
separation requirements, which may make it easier for the BOCs to compete
directly with TELCAM for long distance subscribers.
The FCC generally does not exercise direct oversight over cost
justification and the level of charges for service of non-dominant carriers,
such as TELCAM, although it has the statutory power to do so. Non-dominant
carriers are required by statute to offer interstate and international services
under rates, terms, and conditions that are just, reasonable, and not unduly
discriminatory. The FCC imposes only minimal reporting requirements on
non-dominant carriers, although TELCAM is subject to certain reporting,
accounting, and record keeping obligations. A number of these requirements are
imposed, at least in part, on all carriers and others are imposed on carriers,
not including TELCAM at this time, whose annual operating revenues exceed $100
million.
In addition, informal complaints are lodged from time to time against
TELCAM before the FCC and various state agencies for various reasons. TELCAM in
the past has at times failed to respond timely to such complaints and has been
fined for such delay . Although such complaints could result in additional legal
actions or proceedings being brought against TELCAM, TELCAM believes that such
matters would be satisfactorily resolved without a material adverse impact upon
TELCAM's results of operations; however TELCAM can not be assured of such
resolution. Should TELCAM's belief with respect to any and all complaints
pending, if any, before the FCC or state regulatory agencies be incorrect,
TELCAM could be subject to financial penalties and potential revocation of its
operating authority for interstate or intrastate calls, as applicable.
Although the tariffs of non-dominant carriers, and the rates and
charges they specify, are subject to FCC review, they are presumed to be lawful
and are seldom contested. Resale carriers, like all other interstate carriers,
are also subject to a variety of miscellaneous FCC regulations that, for
instance, govern the documentation and verifications necessary to change a
subscriber's long distance carrier, limit the use of "800" numbers for
pay-per-call services, require disclosure of certain information if operator
assisted services are provided, and govern interlocking directors and
management.
The FCC has recently called for comment on the practice of billing
telephone customers for MRCs monthly fees that are not directly related to usage
of services - and has indicated some doubt about the desirability of such
charges. Since significantly more than half of TELCAM's revenues have been, and
are expected to be at least for the next year, MRCs, any action by the FCC or
other regulatory or legislative body to restrict or eliminate their use could
have adverse consequences for TELCAM revenues and profitability. See ""Risk
Factors - Dependence on Key Customer Service, Data and Billing Service
Suppliers"; "-- Dependence on Local Exchange Carriers for Billing".
STATE
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TELCAM is subject to varying levels of regulation in the states in
which it is currently authorized to provide intrastate telecommunications
services. Most states require TELCAM to apply for certification to provide
intrastate telecommunications services, or to register or to be found exempt
from regulation, before commencing intrastate service. Most states also require
TELCAM to file and maintain detailed tariffs listing their rates for intrastate
service. Many states also impose various reporting requirements and/or require
prior approval for transfers of control of certified carriers, and/or for
corporate reorganizations; acquisitions of telecommunications operations;
assignments of carrier assets, including subscriber bases; carrier stock
offerings; and assumption by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, canceled,
terminated, or revoked by state regulatory authorities for failure to comply
with state law and/or the rules, regulations, and policies of the state
regulatory authorities. Fines and other penalties, including the return of all
monies received for intrastate traffic from residents of a state, may be imposed
for such violations. If state regulatory agencies conclude that TELCAM has taken
steps without obtaining the required authority, they may impose one or more of
the sanctions listed above.
In September 1996, the governor of the State of California signed into
law a statute affecting the manner in which carriers such as TELCAM can effect a
change in a residential subscriber's local or long distance service. Under this
new law, which became effective on January 1, 1997, a residential subscriber's
decision to change his or her telephone service provider must be confirmed by an
independent third-party verification company. This law appears to conflict with
the FCC's rules governing changes in carriers, which allow carriers to confirm a
subscriber's choice through several different mechanisms including obtaining the
subscriber's written authorization, which is the method currently employed by
TELCAM. It is possible that this law will be challenged as being inconsistent
with the FCC's existing rules. TELCAM has advised USDI that it is in the process
of evaluating the effect of the California statute upon its operations. In
addition, a number of states are considering adopting their own third-party
verification rules which, like California, may be inconsistent with the FCC's
rules.
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FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This Proxy Statement contains "forward-looking statements" within the
meaning of section 27A of the Securities Act and section 21E of the Exchange Act
. These statements, which include statements regarding expected advantages and
other effects of the Merger described in "The Merger--General; USDI's Reasons
for the Merger" and elsewhere in this Proxy Statement, expectations concerning
year 2000 compliance, and expectations concerning matters that are not
historical facts. Words such as "projects," "believes," "anticipates," "plans,"
"expects," "intends," "estimates" and similar words and expressions are intended
to identify forward-looking statements. Important factors that could cause
actual results to differ materially from expectations include:
o difficulties in successfully implementing the Merger and fully
integrating the operations of each company with the other;
o a highly competitive telecommunications market;
o difficulties in achieving sales, gross-margin and
operating-expense targets based on competitive market factors;
o difficulties in accurately gauging the rate of product transitions
and introducing new products in the face of abrupt and changing
technology cycles;
o difficulties in utilizing indirect sales channels;
o difficulties in differentiating products from those of
competitors; and
o difficulties in competing successfully in the markets for new
products with established and emerging competitors, many of whom
have significantly greater financial and other resources..
These and other factors are disclosed in this document, in the section
entitled "Risk Factors" beginning on page 21. All forward-looking statements
are expressly qualified by these risk factors in this Proxy Statement. USDI
undertakes no obligation to update any forward-looking statements.
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THE USDI SPECIAL MEETING
DATE, TIME AND PLACE OF MEETING
The USDI Special Meeting will be held at Ristorante Terrazza, 2
Wisconsin Circle, Chevy Chase, MD 20815, on February 7, 2000, at 10:00 a.m.,
local time.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, you will consider and vote upon the following
proposals:
1. To approve the Merger Agreement and the Merger;
2. To approve an amendment of USDI's Articles of Incorporation to
increase the number of shares of Common Stock authorized to 325,000,000;
3. To approve an amendment of USDI's Articles of Incorporation to
effect a 1-for-4 reverse stock split; and
4. To vote on any other matter that is properly raised for
consideration at the meeting.
The USDI Board of Directors has unanimously approved the adoption of
the proposals listed above. In particular, the USDI Board of Directors believes
that the terms of the Merger Agreement are advisable, fair to, and in the best
interests of USDI and its stockholders, and unanimously recommends that holders
of shares of USDI Common Stock vote FOR the Merger and each of the other
proposals.
RECORD DATE; VOTING RIGHTS; PROXIES
Only holders of USDI Common Stock at the close of business on December
31, 1999 are entitled to notice of and to vote at the Special Meeting. As of
December 15, 1999, there were 36,237,858 shares of USDI Common Stock issued and
outstanding. Each share entitles the holder to one vote.
All shares of USDI Common Stock represented by properly executed
proxies will, unless the proxies have been previously revoked, be voted in
accordance with the instructions indicated in the proxies. If no instructions
are indicated, the shares of USDI Common Stock represented by the proxies will
be voted FOR the Merger and the other proposals. USDI does not know of any
matters other than those described above that are to come before the Special
Meeting. If any other matter or matters are properly presented for action at the
Special Meeting, the persons named in the enclosed form of proxy will have the
discretion to vote on those other matters in accordance with their best
judgment. A stockholder who has given a proxy may revoke it at any time prior to
its exercise by giving written notice to the secretary of USDI, by signing and
returning a later dated proxy, or by voting in person at the Special Meeting.
However, mere attendance at the Special Meeting will not have the effect of
revoking the proxy. Votes cast by proxy or in person at the Special Meeting will
be tabulated by the inspector of election appointed for the meeting.
SOLICITATION OF PROXIES
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Proxies are being solicited by and on behalf of the USDI Board of
Directors. USDI will bear all expenses in connection with solicitation of these
proxies. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of USDI in person or by
telephone, telegram or other means of communication. Directors, officers and
employees will not be additionally compensated for, but may be reimbursed for
out-of-pocket expenses incurred in connection with, this solicitation. USDI has
also made arrangements with brokerage firms, banks, custodians, nominees and
fiduciaries for the forwarding of proxy and solicitation materials to owners of
USDI Common Stock held of record, and USDI will reimburse these firms for
reasonable expenses incurred in forwarding these materials.
QUORUM
The presence in person or by properly executed proxy of holders of a
majority of all the issued and outstanding shares of USDI Common Stock entitled
to vote is necessary to constitute a quorum at the Special Meeting. For purposes
of determining whether a majority is present, the inspector of election will
count the shares of holders who abstained from voting on any particular matter.
REQUIRED VOTE
VOTE REQUIRED TO APPROVE THE MERGER AND AMENDMENT OF USDI'S ARTICLES OF
INCORPORATION. Approval of the Merger and amendment of USDI's Articles of
Incorporation requires the affirmative vote of the holders of a majority of the
outstanding shares of USDI Common Stock entitled to vote on these matters.
Abstentions and broker non-votes are not affirmative votes and, therefore, will
have the same effect as votes against approval of the Merger and amendment of
USDI's Articles of Incorporation. In addition, the required vote on these
matters is based on the number of outstanding shares of USDI Common Stock,
rather than the shares actually present in person or by proxy at the Special
Meeting. Therefore, yits failure to submit a proxy or a vote at the Special
Meeting will have the same effect as a vote against approval of the Merger and
amendment of USDI's Articles of Incorporation.
VOTE REQUIRED TO APPROVE REMAINING MATTERS. The affirmative vote of a
majority of the shares presented in person or represented by proxy at the
Special Meeting approves the remaining matters presented at the Special Meeting.
The matters to be considered at the Special Meeting are of great
importance to the stockholders of USDI. Accordingly, you are urged to read and
carefully consider the information presented in this Proxy Statement, and to
complete, date, sign and promptly return the enclosed proxy in the enclosed
postage-paid envelope.
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PROPOSAL NO. 1: THE MERGER
GENERAL
If the Merger is completed, a wholly owned subsidiary of USDI formed
for the purpose of the Merger will merge with TELCAM. TELCAM will continue as
the surviving entity and will become a wholly owned subsidiary of USDI.
This section of the Proxy Statement describes aspects of the proposed
Merger. The discussion of the Merger in this document and the description of the
principal terms of the Merger Agreement is qualified in its entirely by
reference to the complete text of the Merger Agreement , a copy of which is
attached to this Proxy Statement as Appendix A We encourage you to read the
Merger Agreement and the other appendices to this Proxy Statement in their
entirety.
USDI's Board of Directors unanimously recommends that you vote FOR
approval of the Merger.
BACKGROUND OF THE MERGER
USDI experienced a severe disruption of its business plans in the final
months of 1998 and the first five months of 1999. Those plans had focused on the
anticipated commercial introduction of the Iridium satellite telephone
communications system in September 1998. USDI had made significant investments
starting in the summer of 1998 in personnel, promotional materials and inventory
designed to support sales of Iridium telephone handsets and global telephone
service. The Company believed that the Iridium system - intended to be the first
telephone system to provide high quality, global, two-way communications through
a handheld apparatus - would provide an outstanding opportunity to expand the
satellite telephone business of its INSAT subsidiary.
After repeated delays, the Iridium system became marketable in January,
1999. But even at that time the quality of service available was below
consumer's expectations and requirements. Problems with Iridium persisted and
USDI's sales of Iridium products were negligible throughout the first half of
1999.
In its report on Form 10-Q filed on March 31, 1999 with the Commission,
USDI reported that its sales shortfalls had "created an imperative need for the
Company to raise short-term capital during the second quarter of 1999." It added
that "in the event that such additional capital is not raised on a timely basis,
the Company would have to implement cost-cutting measures that would seriously
disrupt its business plan or might be unable to carry on its business at all."
The Board of Director's of USDI held a regular meeting on May 6, 1999.
Senior financial and operating officers reported to the Board that the Company
had raised some needed capital since March but not enough to change its
precariously undercapitalized position. The Board ordered that a variety of
avenues be explored for obtaining investment funds. To preserve capital while
those efforts proceeded, the Board directed management to develop and implement
a plan that would materially reduce the corporation's expenses. It also directed
that possible merger partners capable of providing USDI's operations with needed
cash-flow be identified.
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A presentation was made at that Board meeting by Robert Lee and Preston
Reiner, then the senior managers of TELCAM. They proposed that USDI invest in
TELCAM. The Board of Directors, in light of current conditions, declined to
consider an investment despite universal interest in the TELCAM business
concept. Management was directed to explore other modes of collaboration between
the two companies.
USDI was unable to identify adequate capital sources in the following
weeks and, on June 8, 1999, it announced that "the Company's principal operating
subsidiary, International Satellite Group, Inc., is curtailing operations [and]
is forced to lay off ... employees and wind down operations."
Management of USDI intensified efforts to find a suitable merger
partner in June 1999. Discussions continued with TELCAM. TELCAM had been
acquired by new ownership in June 1999 and was committed to a rapid expansion of
its long distance and related telephone service offerings. It had recently
acquired new long distance customer bases that more than tripled its clientele.
Management of both USDI and TELCAM believed that their businesses were
complementary and that TELCAM's projected cash flow could facilitate their
combined growth.
On July 8, 1999 USDI and TELCAM announced that they had "entered into a
Memorandum of Understanding... agreeing in principle to the merger of the
companies." Following due diligence and the drafting of definitive Merger
documents, USDI's Board of Directors met on August 17, 1999 and unanimously
approved the Merger Agreement and the Merger, and recommended that the
stockholders of USDI approve and adopt the Merger Agreement and the Merger.
Subsequently in August, 1999, TELCAM experienced significant management
turnover. Robert Lee, formerly CEO and an equity owner of TELCAM, left the
employ of the Company and sold his interest in TELCAM as the result of
differences with the TELCAM Board of Directors over the management of Company.
Two other members of the TELCAM management team associated with Mr. Lee were
dismissed as well. The submission of the Merger to a vote of the Company's
stockholders was delayed until uncertainties about the management of TELCAM
were resolved, as well as an acceptable resolution of the liquidity problems
at TELCAM.
On December 27, 1999, USDI's Board of Directors met, reviewed the
current status of TELCAM's management and liquidity (described further in this
Proxy Statement) and unanimously approved the Merger Agreement and the Merger,
and recommended that the stockholders of USDI approve and adopt the Merger
Agreement and the Merger.
USDI'S REASONS FOR THE MERGER
USDI's Board of Directors based its approval of the Merger and its determination
that the Merger Agreement is advisable, fair to and in the best interests of
USDI and its stockholders upon a number of factors, including the following
advantages of the Merger:
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o LIQUIDITY. The potential for improved liquidity as a result of the
Merger has been identified as being of critical value to the
shareholders of USDI. The Company estimates that it would have to
terminate all operations immediately in the absence of the loans
being provided to it by TELCAM in anticipation of the Merger and
that it would be unable to continue operations after the Effective
Date without the additional cash flow that it expects to realize
from TELCAM's operations. TELCAM's expanding residential customer
base is projected to produce positive cash-flows sufficient to
fund the continued operation of USDI's satellite-based product
lines and to support growth of TELCAM's commercial sales.
o MORE EFFICIENT MARKETING AND OPERATIONS. TELCAM has recently
greatly expanded its residential long distance telephone customer
base and expects this business to be highly profitable during the
coming years. It believes that an even greater and longer-term
opportunity exists in marketing of commercial telephone services.
TELCAM considers that one of its key competitive advantages in
this growing market is its ability to offer an array of telephone
and telephone-related services that will allow small to medium
sized companies to make TELCAM their "one-stop shop" for
communications. USDI believes that satellite telephony can best
be sold to this extensive segment of the commercial market as part
of such a package offering. By "piggy-backing" on TELCAM's
planned distribution of its products through a nationwide network
of independent agents, USDI's satellite-based products should
achieve broad exposure while sharing marketing expense with other
TELCAM products.
The Merger should produce administrative as well as marketing
efficiencies for the combined companies. With a broad range of
revenue-producing product lines sharing billing, legal, accounting
and other administrative resources, the burden on the
profitability on each should be reduced.
o PRODUCT LINE DIVERSIFICATION. USDI's nearly exclusive focus on
satellite telephony might have been successful if Iridium had met
its expectations. In fact, Iridium's failures had an extremely
negative impact on USDI. By combining its specialized product
offering with TELCAM's wider array of products, USDI believes it
will be less vulnerable to problems that may be experienced in
future introductions of individual new products or obsolescence of
older ones.
o CRITICAL MANAGEMENT RESOURCES. TELCAM's owners and management
bring considerable expertise in business generally and
telecommunications specifically to the combined companies. USDI
lost a number of senior managers with telecommunications
backgrounds when it curtailed INSAT's operations. The USDI Board
believes that the TELCAM management team can meet the need to
offset those losses and, indeed, provide the Company with far
stronger operational leadership than in the past.
USDI's Board also considered the following potentially negative factors:
o LIQUIDITY RISK. USDI has concluded that implementation of TELCAM's
business plan if successfully implemented is likely to produce
positive cash-flows over the next three years at a minimum.
However the considerable revenues anticipated from TELCAM's
residential and commercial customers may not be realized. If these
revenues are not produced, USDI's
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shareholders could lose much or all of the projected benefit from
the Merger. Many of the potentially negative factors listed below
could result in failure to fully achieve the goals of TELCAM's
business plan.
o The period immediately before and after the Merger may present a
heightened liquidity risk. USDI has minimal revenues and cannot
be certain that it will be able to raise funds to cover salaries
and other resources required to consummate the Merger. TELCAM
has experienced delays in realizing revenues expected from initial
billings in August to newly acquired customers. These delays have
been due to unanticipated liabilities associated with the newly
acquired customer lists. Despite TELCAM's efforts to prevent such
problems from arising again, it is possible that they could recur
in connection with the customer lists that TELCAM is now expecting
to meet its cash flow needs beginning in March 2000. The failure
of either party to the Merger or the combined companies to
maintain adequate liquidity in the coming weeks and months could
make it impossible to complete the Merger and to implement
essential marketing programs.
o MANAGEMENT. TELCAM has experienced turnover among top management
since merger talks were initiated, is still putting together its
new management team and could be unable to attract and retain the
employees required to carry out its business plan.
o REGULATORY ISSUES. A large portion of TELCAM's projected revenues
from residential customers consists of monthly recurring charges.
The FCC has asked for public comment on the desirability of
allowing telephone service providers to make such charges which
are not directly related to service usage. This or other
regulatory issues could disrupt the merged companies' expected
revenue streams.
o RELIANCE ON OUTSIDE SERVICES. TELCAM's marketing plan relies to
a substantial extent on the sales performance of a network of
independent agents. The Company is not facilities-based and must
resell telephone services that are, for the most part, provided by
wholesalers of those services. These service vendors may be both
suppliers of TELCAM and of the Company on a retail level. Billing
of customers is dependent on data-processing, clearinghouse and
bill presentation services provided by vendors to the Company.
TELCAM's dependence on these outside resources could put the
efficiency and continuity of its business at risk if key vendors
prove unable or unwilling to continue to provide services.
o COMPETITION. Even after the Merger, the combined companies will be
substantially smaller and have far smaller capital resources than
many of its competitors in the telecommunications industry.
o OTHER RISKS. See "Risk Factors."
After considering the foregoing factors, USDI's Board of Directors
unanimously approved the Merger Agreement and the Merger, and recommended that
the stockholders of USDI approve and adopt the Merger Agreement and the Merger.
In view of the wide variety of factors considered, both positive and negative,
USDI's Board did not find it practicable to, and did not, quantify or otherwise
assign relative weights to the specific factors considered.
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TELCAM'S REASONS FOR THE MERGER
TELCAM's Board of Directors has based its approval of the Merger and
its determination that the Merger Agreement is in the best interests of TELCAM
and its stockholders upon a number of factors, including the following
advantages of the Merger:
o ACCESS TO CAPITAL MARKETS. TELCAM will benefit from becoming part
of a public company given the relatively greater sources of
capital available for its growth. The creation of a strong
management team to direct rapid growth will be facilitated by the
availability of attractive stock incentives for employees,
directors and key outsiders. TELCAM will benefit as well from the
creditability associated with the extensive disclosure required as
an SEC reporting company.
o MORE EFFICIENT MARKETING AND OPERATIONS. TELCAM's marketing and
administrative operations should benefit from the same
efficiencies and other advantages described above in the
discussion of USDI's reasons for the Merger.
o MANAGEMENT. Several key employees of USDI are expected to remain
with the merged entities either as executives or consultants -
providing management resources in accounting, finance, investor
and public relations and strategic management that TELCAM will
require and does not now have available. Robert Wussler, a
prominent and respected executive in broadcasting and
communications, will remain Chairman of the Board of USDI
following the Merger.
TELCAM's Board of Directors also considered the following potentially
negative factors:
o COSTS OF THE MERGER AND OF PUBLIC OWNERSHIP. TELCAM's Board
believes that TELCAM's limited capital and human resources are
needed at this time to strengthen marketing efforts and
operational infrastructure. The legal, accounting and other
expenses of the Merger, as well as its demands on management time,
draw resources required elsewhere. After the completion of the
Merger, the combined companies will experience the considerable
demands of being a public company. These include SEC reporting
requirements, investor relations and the risk of shareholder
suits.
o UNANTICIPATED LIABILITIES OF USDI. At the beginning of 1998, USDI
was subject to an unusual number of legal claims from former
employees and others. Most of these claims have settled over the
last 24 months. These claims may have been generated by the
business practices of former executives and there may be a greater
than normal risk of additional unanticipated claims being made in
the future.
o POTENTIAL OF THE SATELLITE TELEPHONE INDUSTRY. TELCAM's reasons
for the Merger include its belief that satellite telephone
products will provide substantial revenues for the merged
companies in the future. If current technical and capitalization
problems of the satellite telephone system operators are not
resolved, however, this potential may never be realized.
o OTHER RISKS. See "Risk Factors."
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CHANGES TO CAPITAL STRUCTURE OF USDI
TELCAM, under the terms of the Memorandum of Understanding and the
Merger Agreement, is not obliged to consummate the Merger unless the Company can
1) assure TELCAM of delivery of 51% of the fully diluted Common Stock of the
Company at the time of the effectiveness of the Merger and 2) reduce the
Company's debt and Preferred Stock to certain levels acceptable to TELCAM.
In order to meet these objectives, the Company has taken and will take
prior to the Merger a series of steps to restructure its capitalization.
SERIES A PREFERRED STOCK. Under the terms of the Certificate of
Designation for the Company's Series A Preferred Stock, the Company declared a
conversion on August 11, 1999 of the 2,393,666 shares of that class of preferred
stock then outstanding into an equal number of Common Shares.
As of August 31, 1999, the Company will have accrued approximately
$804,000 in dividends payable to holders of its Series A Preferred Stock. It
plans to offer to convert this amount at a rate of $0.18 per share, or greater,
into a maximum of approximately 4,397,393 shares of its Common Stock.
SERIES B AND C PREFERRED STOCK. The Company has offered to convert or
redeem the 3,660 shares of its Series B and C Preferred Stock outstanding in
accord with the conversion formula defined in the offering for each of the
classes. See "Significant Dilutive Effect of Shares to be Issued in
Conjunction with the Merger on Market Price of the Common Stock..."
STOCK OPTIONS. It is a condition of the Merger that the Company
cancel USDI's Stock Incentive Plans and obtain the cancellation exercise or
expiration of outstanding options.
LOANS AND ACCOUNTS PAYABLE. The Company plans to offer to convert
$3,328,378 of notes and accounts payable into a maximum of 18,187,858 shares of
its Common Stock at a rate of one share for each $0.183, or greater, converted.
The Company plans to offer, in the case of approximately $1,150,000 of those
loans, an option to convert at a rate based on the market price of the Common
Stock at a date subsequent to the Merger. The Company has proposed to its trade
creditors, in general, a settlement based on payment of $0.15 per dollar of
outstanding payables.
In the event that some or all of these proposed transactions can not be
completed in part or in their entirety, the Company believes that it may not be
possible to consummate the Merger. The Board of Directors has authorized the
Company to adjust the offers described here if necessary in order to satisfy the
requirements of the Merger and of TELCAM.
MANAGEMENT AND OPERATIONS FOLLOWING THE MERGER
Following the Merger, USDI plans to integrate the operations,
facilities and personnel of the two companies. The result will be a single
sales, marketing and administrative organization. In eliminating duplicative
operations, the companies currently anticipate the layoff of certain TELCAM and
USDI employees.
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The structure of the surviving company will include USDI, continuing as
the holding company and TELCAM surviving as the operating subsidiary.
Robert Wussler, the current CEO and Chairman of USDI, will retain the
position of Chairman of USDI. It is anticipated that the current vice presidents
of USDI will either continue in their positions or will serve as consultants to
the Company through at least the first quarter of 2000 and participate in the
selection of, and orderly transition to, their successors.
The officers of USDI and of TELCAM, the operating company, will
include:
President and CEO Gregory Hahn
VP Operations Seth Straayer
The Board of Directors of USDI will include three current USDI
directors: Mr. Wussler, Henrikas Iouchkiavitchious and Thomas Glenndahl. Four
additional directors will be designated by TELCAM
GREGORY J. HAHN. Mr. Hahn has over 20 years of telecommunications
experience, beginning with MCI when it was a little-known start-up. He later
became involved with the cellular telephone business, first with GTEMobilenet.
Hahn subsequently worked with USLD (now Qwest) as director of carrier support,
where he met Mike Massingill in 1994. Since that time, Mr. Hahn and Mr.
Massingill have enjoyed successful and profitable careers in all areas of
telephone service provision and marketing of enhanced services. Mr. Hahn is a
graduate of Southern Methodist University.
SETH J. STRAAYER. Mr. Straayer began his professional career in
computer sciences and computer-aided graphic design. He is a veteran of several
platforms of satellite telephone communications, having worked at USDI's Skysite
subsidiary since 1996. Mr. Straayer has expertise in geosynchronous satellite
connectivity, such as Inmarsat and AMSC, as well as in the low earth orbit
platforms, such as Iridium and Globalstar. On the hardware side, Mr. Straayer is
technically proficient with equipment from Westinghouse, Mitsubishi, Motorola,
Kyocera, and Qualcomm.
ROBERT WUSSLER. Mr. Wussler has been Chairman of the Board since March
1997, a Director of the Company since May 1996 and President and Chief Executive
Officer of the Company since July 1998. Mr. Wussler has been a Director of
Skysite since August 1997. From June 1995 to May 1998, Mr. Wussler was the
President and Chief Executive Officer of Affiliate Enterprises, Inc., a
television syndication company. Since February 1992, Mr. Wussler has been the
President and Chief Executive Officer of the Wussler Group, a media consulting
group. From 1989 to 1992, he was the President and Chief Executive Officer of
COMSAT Video Enterprises, which was in the business of satellite delivery of
entertainment to the U.S. lodging industry. Mr. Wussler is the former President
of CBS Television and of CBS Sports and is the former Senior Executive Vice
President of Turner Broadcasting System, Inc. Mr. Wussler is a member of the
Board of Directors of the following public companies: EDnet, INC. (OTC - DNET);
Nostalgia Network, Inc. (OTC - NNET); The Translation Group, Ltd. (OTC - THEO);
and Beachport Entertainment Corporation (OTC - BPRT).
THOMAS GLENNDAHL. Mr. Glenndahl was elected to the Board of Directors
in August 1996 and has been a director of Skysite since August 1997. He is the
founder and, since 1982, has been the Chief Executive Officer of the Aspect
Group, an international education group.
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HENRIKAS IOUCHKIAVITCHIOUS. Mr. Iouchkiavitchious has been a Director
of the Company since February 1998. Since September 1990, Mr. Iouchkiavitchious
has been an assistant director-general of UNESCO, a division of the United
Nations.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of USDI's Board of Directors with
respect to the Merger, USDI's stockholders should be aware that certain of
USDI's directors and officers have interests respecting the Merger separate from
their interests as holders of USDI Common Stock, including those referred to
below.
BOARD SEATS ON THE USDI BOARD OF DIRECTORS. In the Merger Agreement,
USDI and TELCAM have agreed that the Board of Directors of USDI immediately
following the Merger will consist of seven members and will be reconstituted to
include three current members of USDI's Board of Directors, including Robert
Wussler, Henrikas Iouchkiavitchious and Thomas Glenndahl and four additional
directors to be chosen by TELCAM. Two current members of USDI's Board of
Directors, Frans Heideman and Lawrence Siegel, have announced their intention to
retire from the Board of Directors concurrently with the consummation of the
Merger.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL SEVERANCE AGREEMENTS.
In December 1998, USDI entered into an employment agreement with the
Mr. Wussler, the current President and Chief Executive Officer of USDI. The term
of the agreement was five years starting on June 1, 1998. In addition to an
annual salary and bonus starting at $325,000, subject to increases each year,
the agreement provides for the granting of 200,000 options annually at a price
of $2.00 per share and additional options upon the achievement of certain
performance measures. Pursuant to the agreement, USDI was to advance $150,000 to
Mr. Wussler to be used to exercise options to purchase Common Stock held by him
at December 31, 1998. This advance has not yet been made. Pursuant to the
employment agreement, USDI cannot terminate Mr. Wussler without cause except in
the event of a change in control of USDI, in which case Mr. Wussler is to
continue to receive all compensation through May 1, 2003. Mr. Wussler is engaged
in negotiations with the management of TELCAM to supersede this existing
contract with one more appropriate to his anticipated post-Merger role as
non-executive Chairman of the Board. The new contract is expected to be
concluded prior to the Effective Date and to reduce the value of the Company's
obligations to Mr. Wussler.
USDI does not have employment contracts with any of its other Named
Executive Officers.
The Company also expects to enter into consulting agreements with
Lawrence Siegel and A. Frans Heideman, the retiring Directors. The terms and
conditions of those agreements have not been definitely agreed upon.
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EMPLOYMENT AGREEMENTS
See "-- Interests of Certain Persons in the Merger -- Employment
Agreements and Change of Control Severance Agreements."
INDEMNIFICATION ARRANGEMENTS
See " Risk Factors -- Limitation on Liability of Directors and
Officers."
GOVERNMENTAL AND REGULATORY MATTERS
See "Risk Factors -- Government Regulation."
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes various federal income tax
considerations of the Merger that are generally applicable to holders of USDI
Common Stock. The following discussion is based on currently existing provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed Treasury Regulations, current judicial authority and administrative
rulings and practice, all of which are subject to change. The Internal Revenue
Service ("IRS") could still adopt a contrary position. In addition, future
legislative, judicial or administrative changes or interpretations could
adversely affect the accuracy of the statements and conclusions set forth in
this discussion. Any changes or interpretations could be applied retroactively
and could affect the tax consequences of the Merger as described in this Proxy
Statement-prospectus to USDI, TELCAM and/or their respective stockholders.
ACCORDINGLY, YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR AS TO THE SPECIFIC
TAX CONSEQUENCES TO YOU OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES TO YOU OF THE MERGER.
The Merger is intended to qualify as a reorganization within the
meaning of Section 368(a) of the Code, with each of USDI and TELCAM intending to
qualify as a "party to the reorganization" under Section 368(b) of the Code. If
the Merger qualifies as a reorganization:
o You will recognize no gain or loss in connection with the Merger
o Neither USDI (or Merger Sub) nor TELCAM will recognize any gain or
loss in connection with the Merger.
Neither USDI nor TELCAM has requested a ruling from the IRS or an
opinion from counsel that the Merger will be treated as a tax-free
reorganization, and there can be no assurances that the IRS will not adopt a
contrary position. Even if the IRS were to successfully challenge the
reorganization status of the Merger, the Merger would be treated as a sale of
TELCAM capital stock to USDI and neither USDI (or Merger Sub), TELCAM nor the
shareholders of USDI would recognize any gain or loss in connection with the
transaction
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As a result of the Merger, the Company's ability to apply federal
income tax net operating loss carryforwards against future taxable income that
may be generated may be limited. In particular, the Company will likely undergo
a change in ownership under Section 382 of the Code as a result of the Merger.
By virtue of such a change in ownership, an annual limitation (generally equal
to the pre-change value of the stock of the Company multiplied by the adjusted
federal tax-exempt rate (set monthly by the IRS based on prevailing interest
rates and equal to 5.72% for December 1999) will be applied to the use of those
net operating loss carryforwards against future taxable income.
ACCOUNTING TREATMENT
The Merger will be accounted for as a reverse acquisition using the
purchase method of accounting in accordance with generally accepted accounting
principles. As a reverse acquisition, TELCAM will be deemed to be the acquiring
company for financial reporting purposes. The historical financial statements
for periods prior to the completion of the Merger will not be restated as though
the Company had been combined from inception. USDI's unaudited pro forma
financial statements give effect to the acquisition of USDI by TELCAM under the
purchase method of accounting and are based on the assumptions and adjustments
described in the notes to the unaudited pro forma financial statements.
TERMINATION
See "The Merger Agreement--Termination" for a description of the
termination procedures under the Merger Agreement.
RESALE RESTRICTIONS
There will be substantial restrictions on the transferability of the
Company's Common Stock issued pursuant to the terms of the Merger Agreement;
that stock will not be, and investors in the Company have no right to require
that the stock be, registered under the 1933 Act; there may be no public market
for the stock; holders of the stock may not be able to avail themselves of the
provisions of Rule 144 or Rule 237, adopted by the Securities and Exchange
Commission under the 1933 Act, with respect to the resale of the stock; and
accordingly, may have to hold the stock indefinitely and it may not be possible
for the holder to liquidate his investment in the Company.
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THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement and is qualified in its entirety by the complete text of the Merger
Agreement a copy of which is attached as Appendix A to this Proxy Statement and
is incorporated herein by reference.
THE MERGER
According to the terms of the Merger Agreement, and as long as all the
conditions in the agreement are met and/or waived, at the effective time of the
Merger, a wholly owned subsidiary of USDI will be merged with TELCAM. TELCAM
will be the surviving corporation and become a wholly owned subsidiary of USDI.
EFFECTIVE TIME OF THE MERGER
Pursuant to the Merger Agreement, unless the Merger Agreement has been
terminated, as soon as practicable after the satisfaction or waiver of the
conditions contained therein, the Company will file the Articles of Merger with
the Secretary of State of Texas in accordance with the Texas Business
Corporation Law, specifying that the Merger shall become effective at the time
the Articles of Merger are filed, or such later date as set forth in such
filing, unless extended in accordance with the terms of the Merger Agreement.
The time at which the Merger becomes effective is referred to as the Effective
Time.
CHANGES TO CHARTER
As a result of the Merger, the Certificate of Incorporation and Bylaws
of TELCAM will be the surviving corporation's Certificate of Incorporation and
Bylaws. USDI's Articles of Incorporation and Bylaws will remain in place, except
as modified by the approval of USDI's stockholders of Proposals 2 and 3 of this
Proxy Statement, which approval is a condition to the consummation of the
Merger.
EXCHANGE RATIO
All issued and outstanding shares of TELCAM common stock at the
Effective Time shall be converted into the number of shares of USDI Common Stock
which represents not less than 51% of the USDI Common Stock issued at the
Effective Time (including the shares of USDI Common Stock issued pursuant to the
Merger). If within 60 calendar months following the Effective Time, USDI issues,
agrees to issue or is subject to any agreement (written or oral), understanding
(written or oral) or court order to issue USDI Common Stock for any security
convertible into Common Stock, then each holder of TELCAM common stock shall be
entitled to receive and shall receive for each share of TELCAM common stock held
at the Effective Time 1.041 shares of USDI Common Stock for each share of USDI
Common Stock which may be issued in conversion of, in exchange for or in
settlement of a security convertible into Common Stock which existed at the
Effective Time. As a result of the Merger, existing USDI stockholders will
suffer significant dilution. See "Significant Dilutive Effect of Shares to be
Issued in Conjunction with the Merger on Market Price of the Common Stock..."
EXCHANGE OF SHARES
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As soon as reasonably practicable after the effective time of the
Merger, Corporate Stock Transfer, the exchange agent for the Merger, will mail
to each holder of record of TELCAM capital stock:
- a letter of transmittal; and
- instructions for use in effecting the surrender of the
certificates in exchange for certificates representing shares of
USDI Common Stock.
Upon surrender of a certificate to the exchange agent together with
such letter of transmittal, duly executed, the holder of such certificate will
be entitled to receive in exchange a certificate representing that number of
whole shares of USDI Common Stock.
TELCAM stockholders should not send in their certificates until they
receive a letter of transmittal.
USDI will not issue fractional shares of USDI Common Stock pursuant to
the Merger. Instead, the fraction of a share of USDI Common Stock that would
otherwise be issuable to a holder of record of TELCAM stock will be rounded up
to the nearest whole share.
USDI will not pay dividends, if any, on shares of USDI Common Stock to
persons entitled to receive certificates representing shares of USDI Common
Stock until such persons surrender their certificates. Upon surrender of the
certificates, USDI will pay dividends, if any, that have become payable between
the effective time of the Merger and the surrender of the certificate to the
person in whose name the certificates representing the shares of USDI Common
Stock will be issued. In no event will the person entitled to receive such
dividends be entitled to receive interest on such dividends.
If any certificates for shares of USDI Common Stock are to be issued in
a name other than that in which the certificate surrendered in exchange is
registered, the transfer must be proper and legal, and the person requesting
such exchange must pay to the exchange agent any transfer fees or taxes required
by reason thereof.
In the event that any certificate has been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
certificate to be lost, stolen or destroyed, USDI will issue or cause to be
issued in replacement for the lost, stolen or destroyed certificate the number
of whole shares of USDI Common Stock including fractional shares rounded up to
the nearest whole share, into which the shares of TELCAM common stock
represented by the certificate are converted in the Merger.
TELCAM stockholders are entitled to dissent from the Merger and demand
appraisal of any TELCAM Common Stock in accordance with the provisions of
Articles 5.11 and 5.12 of the Texas Business Corporation Act, as amended (the
"TBCA"). Shares held by a party exercising these rights will not be converted
and instead the party will receive cash in accordance with the provisions of
Article 5.12 of the TBCA.
Under the Nevada General Corporation Law, stockholders of the Company
are not entitled to any rights of appraisal or dissenters' rights in connection
with the adoption of Proposal No. 3 - Authorization Of Amendment Of Articles Of
Incorporation, Including Authorization Of Reverse Stock Split.
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REPRESENTATIONS AND WARRANTIES
USDI. The Merger Agreement also contains representations and
warranties by USDI relating to, among other things:
- USDI's due organization, valid existence and good standing;
- USDI's subsidiaries due organization, valid existence and good
standing;
- USDI's capital structure;
- the authorization, execution, delivery and enforceability of the Merger
Agreement;
- noncontravention and required consents, approvals, licenses;
- the accuracy of information and compliance with the provisions of the
Securities Act and the Exchange Act with respect to reports filed with
the Commission;
- the accuracy of information and compliance with the provisions of the
Securities Act and the Exchange Act with respect to the Proxy
Statement;
- absence of certain changes or events;
- liabilities;
- absence of litigation;
- labor matters, employee arrangements and benefit plans;
- tax matters;
- intellectual property;
- compliance with applicable environmental law and certain environmental
matters;
- transactions with affiliates;
- brokers;
- material contracts and agreements;
- compliance with applicable law; and
- tangible property.
TELCAM. The Merger Agreement contains certain representations and
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warranties by TELCAM relating to among other things:
- TELCAM's due organization, valid existence and power;
- TELCAM's capital structure;
- the authorization, execution, delivery and enforceability of the Merger
Agreement;
- noncontravention and required consents, approvals, licenses;
- the accuracy of information stated in the Proxy Statement;
- absence of certain changes or events;
- liabilities;
- absence of litigation;
- labor matters, employee arrangements and benefit plans;
- tax matters;
- intellectual property;
- compliance with applicable environmental law and certain environmental
matters;
- transactions with affiliates;
- brokers;
- material agreements and contracts;
- compliance with applicable law; and
- tangible property.
CERTAIN COVENANTS
AFFIRMATIVE COVENANTS. USDI and TELCAM have each agreed that, prior to
the effective time of the Merger, it (excluding its subsidiaries) will, among
other things:
- conduct its business in the ordinary course; and
- use its best efforts to preserve intact its business organization and
to preserve its present relationship with customers, suppliers and
other persons having significant business relationship with it and to
keep available the services of the present officers, employees and
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consultants.
NEGATIVE COVENANTS. USDI and TELCAM have each agreed that, prior to the
effective time of the Merger, it will not do or propose or commit to do any of
the following:
- declare, set aside or pay any dividends on, or make any other
distributions in respect, of any its capital stock;
- split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities;
- purchase, redeem or otherwise acquire any shares of capital stock or
any other securities or any rights, warrants or options to acquire any
such shares or other securities;
- authorize the issuance of, issue, deliver, sell or agree or commit to
issue, sell or deliver, pledge or otherwise encumber any shares of its
capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any
such shares, voting securities or other securities or any other
securities or equity equivalents;
- amend its organizational or other comparable documents, except as set
forth in this Proxy Statement, subject to stockholder approval;
- materially increase the compensation of its directors, officers or
employees;
- acquire or agree to acquire any business or any corporation,
partnership, joint venture, association or other business organization
or division, or any assets;
- incur or assume any indebtedness except as contemplated by the Merger
Agreement;
- authorize or expend any funds for capital expenditures;
- enter into, amend, terminate, rescind, waive or release any material
contract;
- knowingly violate or fail to perform any material obligation or duty
imposed upon it by any applicable federal, state or local law;
- adopt a plan of liquidation, dissolution, merger, consolidation, or
reorganization;
- revalue in any material respect any of its material assets;
- make or revoke any tax election or settle or compromise any tax
liability;
- settle or compromise any litigation as a defendant or settle, pay or
compromise any claims not required to be paid, or settle or compromise
any pending or threatened suit, action or claim; or
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- pay any liabilities or obligations.
USDI AND SUBSIDIARIES. USDI and its subsidiaries have agreed that,
prior to the effective time of the Merger, neither USDI nor any Subsidiaries
shall engage in any activities except as provided, or in connection with, the
Merger Agreement.
USDI, SUBSIDIARIES AND TELCAM. USDI and its subsidiaries and TELCAM
have agreed to notify each other party in the event that it receives any
administrative or other order or notification relating to any violation of any
governmental or regulatory entity affecting to consummate the Merger Agreement
and to use all reasonable efforts to take the necessary steps to remove such
impediment.
USDI AND TELCAM. USDI and TELCAM have agreed to give a written notice
of any event which would cause any representation or warranty to be untrue or
inaccurate or of any failure which would cause any covenant, condition or
agreement continued in the Merger Agreement not to be complied with.
TELCAM. TELCAM has agreed to manage the operations of USDI's
subsidiaries prior to the effective time.
NO SOLICITATION
Pursuant to the Merger Agreement, USDI has agreed, and USDI has agreed
to direct and use its best efforts, to cause the officers, directors, employees,
representatives, agents and affiliates of USDI and its subsidiaries to,
immediately cease any discussions or negotiations with any parties that may be
ongoing with respect to any Transaction Proposal (as defined below). USDI has
agreed not to, and has agreed not to permit any of its subsidiaries to, or
authorize or permit any of its officers, directors or employees or any
investment banker, financial advisor, attorney, accountant or other
representative retained by it or any of its subsidiaries to, directly or
indirectly, (i) solicit, initiate or knowingly encourage any inquiries or the
making of any proposal which constitutes, or may reasonably be expected to lead
to, any Transaction Proposal or (ii) enter into or participate in any
discussions or negotiations regarding any Transaction Proposal;
Except as set forth below, or for other good cause as required by the
Board of Directors' fiduciary duties and obligations, the Board of Directors of
USDI has agreed not to (i) withdraw or modify, or propose publicly to withdraw
or modify, in a manner adverse to TELCAM, its approval or recommendation of the
Merger or the Merger Agreement, (ii) approve or recommend, or propose publicly
to approve or recommend, any Transaction Proposal or (iii) cause USDI or the
Merger Sub to enter into any letter of intent, agreement in principle,
acquisition agreement or other similar agreement related to any Transaction
Proposal. Notwithstanding the foregoing, if the Board of Directors of USDI
determines in good faith that it has received a Superior Proposal (as defined
below), the Board of Directors of USDI may, prior to the receipt of USDI
stockholder approval, withdraw or modify its approval or recommendation of the
Merger and the Merger Agreement, approve or recommend a Superior Proposal or
terminate the Merger Agreement, but in each case, only at a time that is at
least ten business days after TELCAM's receipt of written notice advising TELCAM
that the Board of Directors of USDI has received a Transaction Proposal that may
constitute a Superior Proposal, specifying the material terms and conditions of
such Superior Proposal and the names of the person or persons making
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such Superior Proposal.
Notwithstanding the foregoing, USDI Board of Directors shall be
permitted to take and disclose to its shareholders a position contemplated by
Rules 14d-9 and 14e-2 promulgated under the Exchange Act and make any disclosure
to USDI's shareholders which, in the good faith judgment of the Board of
Directors of USDI, after consultation with outside counsel, is necessary in
order to comply with its fiduciary duties to USDI's shareholders under
applicable law or is otherwise required under applicable law.
A "Transaction Proposal" means any bona fide inquiry, proposal or offer
from any person relating to any direct or indirect acquisition or purchase of
more than 50% of the assets of USDI, USDI's subsidiaries or the Merger Sub or
more than 50% of the voting power of the shares of USDI's Common Stock then
outstanding or any merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving
USDI, the Merger Sub or the USDI's subsidiaries, other than the transactions
contemplated by the Merger Agreement.
A "Superior Proposal" means any proposal determined by the Board of
Directors of USDI in good faith, after consultation with outside counsel, to be
a bona fide proposal and made by a third party to acquire, directly or
indirectly, for consideration consisting of cash, property and/or securities,
more than 50% of the voting power of the shares USDI's Common Stock then
outstanding or more than 50% of the assets of USDI, the Merger Sub or USDI's
subsidiaries and otherwise on terms which the Board of Directors of USDI
determines in its good faith judgment, after consultation with outside counsel
and with a financial advisor of nationally recognized reputation, to be more
favorable to USDI's stockholders than the Merger (taking into account all
factors relating to such proposal deemed relevant by the Board of Directors of
USDI, including, without limitation, the financing of such proposal, any
regulatory issues related thereto and all other conditions to closing).
MANAGEMENT AFTER THE MERGER
Pursuant to the Merger Agreement, USDI's Board of Directors will
consist of seven members at the Effective Time, three of whom will be current
members of the Board of Directors of USDI, including Robert Wussler, Henrikas
Iouchkiavitchious and Thomas Glenndahl, and four of whom will be designated by
TELCAM prior to the Effective Time. Two current members of USDI's Board of
Directors, Frans Heideman and Lawrence Siegel, have announced their intention to
retire from the Board of Directors concurrently with the consummation of the
Merger.
Pursuant to the Merger Agreement, Mr. Wussler, the current President,
Chief Executive Officer and Chairman of USDI, will retain the position of
Chairman of the Board of USDI. The Merger Agreement also provides that the
current officers of TELCAM, Greg Hahn and Seth Straayer will become officers of
USDI. It is anticipated that the current vice presidents of USDI will either
continue in their positions or will serve as consultants to the Company through
at least the first quarter of 2000 and participate in the selection of, and
orderly transition to, their successors.
The Merger Agreement further provides that the current directors and
officers of TELCAM will remain as directors and officers of the surviving
corporation and include:
President and CEO Gregory Hahn
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VP Operations Seth Straayer
For a description of the business experience of Mr. Hahn, Mr. Straayer, Mr.
Wussler, Mr. Glenndahl and Mr. Iouchkiavitchious see "The Merger - Management
and Operations Following the Merger."
CONDITIONS TO THE MERGER
USDI and TELCAM's obligations to effect the Merger are subject, among
other things, to the following:
- Approval of the Merger Agreement by the stockholders of each of USDI
and TELCAM; and
- No legal restraints or prohibitions that prevent the completion of the
Merger.
In addition to the mutual conditions described above, USDI's obligation
to effect the Merger is subject to the following:
- Representations and warranties of TELCAM being true and correct; and
- - Performance of all material obligations of TELCAM.
In addition to the mutual conditions described above, TELCAM's
obligation to effect the Merger is subject to the following:
- Representations and warranties of USDI being true and correct;
- Performance of all material obligations of USDI and USDI Acquisition,
Inc.;
- USDI shall have obtained the resignations of Lawrence Siegel and A.
Frans Heideman from USDI's Board of Directors;
- Receipt of all required consents or approvals by USDI;
- All creditors of and claimants against USDI shall have entered into
creditors' agreements; and
- USDI's Preferred Stock shall have been converted into Common Stock;
- USDI's bylaws shall have been amended to provide that the provisions of
Nevada Revised Statutes 78.378 to 78.3793 regarding change of control
do not apply to USDI,
- TELCAM shall have completed its due diligence.
TERMINATION
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The Merger Agreement may be terminated and the Merger may be abandoned
at any time prior to the Effective Time, notwithstanding approval of the Merger
by the stockholders of USDI and:
- by mutual written consent of USDI and TELCAM;
- by USDI, so long as USDI is not then in material breach of its
obligations under the Merger Agreement, upon a breach of any material
representation, warranty, covenant or agreement on the part of TELCAM
set forth in the Merger Agreement, or if any such representation or
warranty of TELCAM shall have been or become untrue, in each case such
that USDI's conditions to effecting the Merger would not be satisfied
and subject to a cure period under certain circumstances;
- by TELCAM, so long as TELCAM is not then in material breach of its
obligations under the Merger Agreement, upon a breach of any material
representation, warranty, covenant or agreement on the part of USDI set
forth in the Merger Agreement, or if any such representation or
warranty of USDI shall have been or become untrue, in each case such
that the TELCAM's conditions to effecting the Merger would not be
satisfied and subject to a cure period under certain circumstances;
- by either USDI or TELCAM if any permanent injunction or other order,
decree, ruling or action by any governmental entity preventing the
consummation of the Merger shall have become final and nonappealable;
provided that such right of termination shall not be available to any
party if such party shall have failed to make reasonable efforts to
prevent or contest the imposition of such injunction or other order,
decree, ruling or action and such failure materially contributed to
such imposition;
- by either USDI or TELCAM if (other than due to the willful failure of
the party seeking to terminate the Merger Agreement to perform its
obligations under the Merger Agreement required to be performed at or
prior to the Effective Time) the Merger shall not have been consummated
on or prior to March 15, 2000;
- by either USDI or TELCAM, if approval of the Merger Agreement and the
Merger by the stockholders of USDI required for the consummation of the
Merger shall not have been obtained at a duly held meeting of
shareholders or at any adjournment thereof; or
- by TELCAM, if (i) the Board of Directors of USDI (A) shall have
withdrawn, modified or changed its approval or recommendation of the
Merger Agreement or the Merger in any manner which is adverse to
TELCAM, (B) shall have approved or have recommended to the shareholders
of USDI a Transaction Proposal or (C) shall have resolved to do the
foregoing; or (ii) USDI shall have willfully failed to hold the Special
Meeting on or prior to March 15, 2000; provided that such date shall be
automatically extended for each day with respect to which the failure
to hold the Special Meeting (x) is attributable to a lack of reasonable
cooperation and assistance by TELCAM or its affiliates or (y) is the
result of any injunction or similar action or any action of the SEC, in
each case preventing or delaying the holding of such meeting.
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Subject to limited exceptions, including the survival of the agreement
by USDI to pay a termination fee to TELCAM under certain circumstances, as
discussed below, in the event of a termination of the Merger Agreement, the
Merger Agreement shall become void and there shall be no liability on the part
of USDI or TELCAM to the other, except that no party will be relieved from its
obligations with respect to any misrepresentation or breach of any covenants or
agreements under the Merger Agreement.
AMENDMENT
The Merger Agreement may be amended by USDI or TELCAM by action taken
by the respective Boards of Directors of USDI and TELCAM at any time prior to
the Effective Time; provided, however, that, after approval of the Merger by the
shareholders of USDI, no amendment may be made which would reduce the amount or
change the type of consideration into which each share of USDI Common Stock
shall be converted upon consummation of the Merger. The Merger Agreement may not
be amended except by an instrument in writing signed by the parties thereto.
EXPENSES AND TERMINATION FEE
Except as set forth below, all fees and expenses incurred in connection
with the Merger, the Merger Agreement and the transactions contemplated by the
Merger Agreement will be paid by the party incurring such fees or expenses,
whether or not the Merger is consummated.
The Merger Agreement provides that USDI will pay, or cause to be paid,
in same day funds to TELCAM the amounts set forth below (which amounts shall
constitute full satisfaction of all of USDI's obligations and liabilities to
TELCAM under the Merger Agreement) under the circumstances and at the times
specified: If TELCAM terminates the Merger Agreement as a result of a willful
breach of a material representation, warranty or covenant by USDI, and within
320 days thereafter, (A) USDI or Merger Sub enters into a merger agreement,
acquisition agreement or similar agreement (including, without limitation, a
letter of intent) with respect to a Transaction Proposal, or a Transaction
Proposal is consummated, or (B) USDI or Merger Sub enters into a merger
agreement, acquisition agreement or similar agreement (including, without
limitation, a letter of intent) with respect to a Superior Proposal, or a
Superior Proposal is consummated, which in the case of either (A) or (B) above
will result in shareholders of USDI becoming entitled to receive upon
consummation of such Transaction Proposal or Superior Proposal consideration
with a value (determined in good faith by the Board of Directors of USDI) per
share of USDI Common Stock greater than the value afforded the shareholders of
USDI in the event the Merger were consummated then, in the case of either (A) or
(B) above, USDI shall pay to TELCAM upon the consummation of such Transaction
Proposal or Superior Proposal (i) a fee of $100,000 per month for TELCAM's
management of the operations of the Subsidiaries from July 5, 1999 through the
date of termination of the Merger Agreement, (ii) reimbursement of the expenses
of TELCAM incurred in connection with the transactions contemplated by the
Merger Agreement upon demand, and (ii) all amounts payable under the terms of
the loan agreements between USDI and TELCAM upon demand.
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BUSINESS OF USDI
Unless the context otherwise requires, all references to the "Company" or
"we" herein refer to U.S. Digital Communications, Inc. ("USDI") and its wholly
owned subsidiary, International Satellite Group, Inc. ("INSAT"), and INSAT's two
wholly owned subsidiaries, Skysite Communications Corp. ("Skysite") and Project
77 Corp. ("Project 77"). On October 24, 1997, U.S. Digital changed its name from
Viscorp. During January 1999, INSAT changed its name from U.S. Digital
Satellite, Inc.
BACKGROUND
USDI is a telecommunications company based in Chevy Chase, Maryland.
The Company is primarily a global satellite communications firm that specializes
in corporate applications. Specifically, we are a provider of satellite
telephone subscriber equipment and services.
Visual Information Services Corp., a predecessor to the Company, was
originally incorporated in Illinois in May 1990, and was founded to develop an
electronic device capable of adding modem, video data and telephone features to
an ordinary television receiver over a telephone line. On November 28, 1995,
shareholders of Visual Information Services Corp. acquired outstanding shares of
Global Telephone and Communications, Inc., a Nevada corporation ("GTCI"), in
exchange for their shares of Visual Information Services Corp. (the
"Transaction"). GTCI was incorporated in May 1984 to provide consulting services
for the public and private sectors. To its knowledge, GTCI never operated as a
consultant nor carried on any type of business at any time prior to the
Transaction. The Transaction was consummated because the Common Stock of GTCI
traded on the OTC Bulletin Board, and thus, the Transaction provided us with an
entity with an existing public presence. Pursuant to the Transaction, each share
of Common Stock of Visual Information Services Corp. was exchanged for fits
shares of Common Stock of GTCI. Following the Transaction, GTCI changed its name
to Viscorp.
Between November 1995 and August 1997, we developed two products: the
Universal Internet Television Interface Device ("UITI") and the Electronic
Device ("ED") (together, the "Initial Products"). UITI is a technology designed
to give the home television viewer access to the Internet, World Wide Web and
other on-line services. ED is a device which, in addition to on-line services,
was designed to feature such capabilities as telephone reception and dial-up,
facsimile, pay-per-view options and electronic mail. We decided in 1997 not to
take any further steps to develop this technology or to market these products,
based on its determination that the market for these technologies would be
inadequate.
In May 1997, we became involved in operating Skysite. Skysite was
initially created to market a new satellite-based telecommunications system
called Mobilesat, or MSAT (MSAT is a trademark term used as an abbreviation by
the American Mobile Satellite Corporation in the United States). In June 1997,
we entered into an Agreement and Plan of Reorganization providing for the
acquisition of 100% of the outstanding shares of Common Stock of Skysite in
exchange for securities and warrants of the Company. The stock of Skysite was
transferred to the Company on August 26, 1997. Subsequent to the acquisition,
disputes arose relating to the sale. See "Legal Proceedings."
On October 24, 1997, the Company changed its name from Viscorp to U.S.
Digital Communications, Inc. In July 1998, we created INSAT to oversee its
satellite communications operations
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and transferred the Common Stock of Skysite to INSAT and incorporated Project 77
as INSAT's other wholly owned subsidiary.
GENERAL
Through our INSAT subsidiary, we market satellite and wireless digital
communications equipment and services. INSAT has two subsidiaries. Skysite
operates as a marketer of satellite telephone products and services and Project
77 specializes in Iridium satellite personal communications technology. Through
its subsidiaries, we work closely with satellite telephone manufacturers and
systems operators to provide solutions to communications needs of international
business travelers and companies with global, emergency and/or remote
operations.
Since the beginning of 1998, the Company has focused its efforts and
investments on preparing to take full advantage of sales opportunities that it
expected would be created by the commercial launch of the Iridium satellite
communications system. These opportunities have not been realized. At the time
of commercial launch of the Iridium system in November, 1998 and for some time
after, the ability of users to successfully initiate a call ("call
establishment") and to complete a call without unintended disconnection
(avoiding a "dropped call") appears to have been well below consumer
expectations. The Company's Iridium sales in the first half of 1999 fell well
below expectations and its operating loss was unexpectedly large. Its heavy
reliance on Iridium exposed us to the heightened risks related to new and
complex products and services.
In April 1999, the Company began to implement a program reducing
operating expenditures and attempting to develop additional sources of revenue
to offset the possible effect of any continuing difficulty with Iridium's
operations or public perception of such difficulty. Despite these efforts, the
unexpectedly large operating losses created an imperative need for the Company
to raise short-term capital during the second quarter of 1999. The Company being
unable to raise adequate funds, INSAT, its principal operating subsidiary, was
forced to curtail its field sales operations and certain other functions in
June, 1999 in order to reduce cash requirements. INSAT has been able to continue
to provide its existing customer base with uninterrupted satellite telephone
services and to make direct sales on a limited basis.
The USDI Board of Directors instructed management to explore resolving
the liquidity problems through merger opportunities and/or sale of equipment and
customer-list assets. USDI engaged in merger discussions with more than one
potential partner and was approached by a number of potential purchasers of key
assets. On July 8, 1999, the Company entered into a Memorandum of Understanding
with TELCAM agreeing in principle to the Merger. The consummation of the Merger
is subject to a number of conditions, including drafting of definitive
documents, satisfactory conclusion of due diligence, negotiation of reductions
in USDI's obligations to creditors, and approval by the shareholders of each
company. If the Merger is realized, the current shareholders of TELCAM will own
not less than 51% of the fully diluted common shares, and will name four of
seven members of the Board of Directors of USDI --the surviving, publicly-traded
entity. USDI and TELCAM entered into a definitive Merger Agreement on
December 28, 1999.
TELCAM is providing management
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for USDI's satellite telephone operating subsidiaries until the consummation of
the Merger or the termination of the agreement. TELCAM is also providing
certain operating loans to USDI and its subsidiaries during that period to
fund specific business operations.
The Company's corporate offices are located in Chevy Chase, Maryland.
It has closed its other offices that were located in Burbank, California, and
Washington, D.C. While the Company has developed a revenue stream from satellite
telephone customers over the past two years, it is still in the early stages of
development and has not been profitable. The satellite telephony industry is
still in its infancy and the eventual profitability of the Company will be
dependent on, among other things, the acceptance of the new communications
technologies it will provide. See "Risk Factors-- Dependence on Key Telephone
Suppliers."
Prior to its difficulties with its Iridium marketing effort, the
Company sought opportunities to acquire companies with existing corporate and
customer bases within its niche markets, which include the media, government,
oil exploration, transportation and disaster recovery. We also sought to
increase its global presence through the acquisition of suitable companies
located in other major markets outside of the United States. On April 8, 1998,
we entered into a non-binding memorandum of understanding with Eurotelecom
Communications, Inc., a Delaware corporation ("Eurotelecom"), to purchase all of
the issued and outstanding shares of Eurotelecom in exchange for approximately
1.7 million shares of the Company's Common Stock. As a part of that agreement,
we agreed to provide up to $1.0 million to Eurotelecom for operating
expenditures. Eurotelecom owns 100% of Eurotelecom Corporation Limited,
incorporated in England and Wales, which, in turn, owns 100% of the stock of
Eurotelecom Secure Networks Limited, also incorporated in England and Wales. The
memorandum of understanding also provided for employment agreements with key
employees which were to include shares of the Company's Common Stock as part of
the compensation terms. A condition to the closing was the acquisition by
Eurotelecom of Optilan (UK) Limited, Easy-IP Limited and Intelligent Networks,
Limited, all incorporated in England and Wales. It was also the parties'
intention that Eurotelecom be represented on its Board of Directors. In April
1998 and in August 1998, we loaned $260,000 and $250,000, respectively, for a
total of $510,000, to Eurotelecom for operating expenses.
On August 4, 1998, we terminated the memorandum of understanding with
Eurotelecom due to a change in the proposed structure of the acquisitions. We
continued negotiating with EuroTelecom Corporation Limited, the wholly owned
subsidiary of Eurotelecom, to purchase all of the issued and outstanding shares
of Eurotelecom Secure Networks Limited, Optilan Limited, Easy IP Limited and
Intelligent Networks Limited. However, such negotiations stalled. In December
1998, we resumed discussions regarding an acquisition transaction with
Eurotelecom. We agreed to extend the term of its outstanding loans to
Eurotelecom during the negotiations. The negotiations are not now active and
Eurotelecom repaid $100,000 of its outstanding debt to the Company during
February 1999. The remainder of the debt has been sold by the Company at a
discount to a third party.
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INDUSTRY BACKGROUND
The Company operates in the global personal voice, paging and data
satellite communications industry. Potential customers for the products and
services provided by the industry include international corporations,
professionals and others (i) who travel outside their "home" wireless network's
roaming area, (ii) find it important to be able to make or receive calls, or
receive pages, at any time by means of a single phone or pager, with a single
phone or pager number or (iii) are located where terrestrial landline or
wireless services are not available or do not offer an attractive or convenient
option.
Global satellite communications systems are designed to address two
broad trends in the communications market: (i) the worldwide growth in the
demand for portable wireless communications; and (ii) the growing demand for
communications services to and from areas where landline or terrestrial wireless
service is not available or accessible.
TELECOMMUNICATIONS MARKETS
The Company believes that its products and services are applicable to
six distinct market segments:
- Transportation;
- Broadcast Media and Motion Picture Industry;
- Disaster Recovery;
- Government and Public Safety;
- Natural Resource Extraction-Petroleum, Mining & Utilities; and
- Rural, Remote and Mobile Telephony.
Under the management of TELCAM, INSAT has resumed selling satellite
telephone and related products and services on a limited basis to the markets
listed above.
PRODUCTS AND SUPPLIERS
The Company is primarily a global satellite communications firm that
specializes in corporate applications. Specifically, the Company is a provider
of satellite telephone subscriber equipment and services, including Low Earth
Orbit and Geostationary Digital Satellite Telephone Systems.
Low Earth Orbit and Geostationary Digital Satellite Telephone Systems
are mobile satellite services for voice, fax and data, that span land-mobile,
fixed- site, transportable and maritime applications. Subscribers on the MSAT
System (i.e., mobile satellite) dial direct, through a communications satellite,
using a variety of satellite terminals. These mobile terminals are built by
leaders in wireless electronic communications, which include Westinghouse
Wireless Solutions Company, Mitsubishi Electronics of America, Cal Corporation,
KVH Maritime Products, Kyocera and Motorola. The Company is a distributor for
Westinghouse mobile terminals and Motorola and Kyocera
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satellite telephones.
Pursuant to its agreement with AMSC Subsidiary Corporation ("AMSC"), a
wholly owned subsidiary of American Mobile Satellite Corporation, the Company
has purchased and resold mobile satellite service on a private network basis.
This telephone service provides traditional voice, fax and data service through
satellite terminals that are similar to cellular phones. Telephone calls made
through the Skysite Satellite Telephone System on these mobile satellite
terminals initiate contact with the outside world through one L-Band (1.5Ghz)
GM/Hughes communications satellite in geo-synchronous orbit 22,300 miles above
the equator. The satellite is downlinked into the Public Switched Telephone
Network through a Westinghouse-built Communications Ground Segment ("CGS") earth
station located in Reston, Virginia. Within the satellite coverage area, which
encompasses most of North and Central America, Hawaii, the western Atlantic and
eastern Pacific oceans, the entire Caribbean basin and the northern portion of
Columbia and Venezuela, a subscriber can make or receive direct dial calls
generally to or from anywhere in the world. This is a dial-up-on-demand system
that charges the subscriber for the time actually used. .
AMSC has informed the Company that it considers USDI to have defaulted
under the terms of their agreement and the continued availability of AMSC
products to the Company is highly uncertain.
The Company also offers, on a non-exclusive basis, Iridium services
throughout the world pursuant to its agreement for a term of three years with
Iridium North America, L.P. Iridium has indicated that it considers the Company
to have defaulted under the terms of their agreement but continues to supply the
Company and its customers. The Iridium system is a satellite-based, digital
communications system that is designed to provide subscribers with worldwide
voice, paging, data and fax capability using a hand-held telephone and pager
linked to a constellation of low-earth orbiting satellites. With 66 satellites
forming a cross-linked grid above the Earth, the Iridium system is the first
low-Earth-orbiting system for wireless telephone service. At 780 km (485 miles)
high, these satellites work differently from those at a much higher orbit
(36,000 km) in two major ways. First, they are close enough to receive the
signals of a handheld device; and second, they act like cellular towers in the
sky - where wireless signals can move overhead instead of through ground-based
calls.
The Iridium phone is the primary means by which callers communicate
directly through the Iridium network. Its multi-mode capability allows the
telephone to work as a typical cellular telephone (in areas where compatible
cellular service exists) and as a satellite telephone. For Iridium subscribers,
this means one handheld phone providing both cellular and satellite access.
Iridium now offers, or plans to offer the following services:
- Iridium World Satellite Service provides a direct satellite link for
both incoming and outgoing communications in remote areas, poorly
covered regions, and locations outside terrestrial networks.
- Iridium World Roaming Service allows roaming across multiple wireless
protocols, allowing one telephone number to receive and one telephone
bill to charge for calls made anywhere on earth.
- The Iridium World Page Service provides global alphanumeric messaging.
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- Commercial service on the Iridium system was initiated in the fourth
quarter of 1998.
When the Company began selling and shipping Iridium services and
equipment in December 1998, there were initial technical issues that dampened
demand for these products. It is its belief that these issues have been
substantially addressed by Iridium but are still not completely resolved. Unless
or until they are fully resolved, they could continue to depress demand. See
"Risk Factors-- Dependence on Key Telephone Suppliers."
The Company's failure since Spring, 1999 to pay Iridium on a timely
basis for the services it has purchased and other consequences of USDI's
liquidity crisis may constitute defaults under USDI's agreement with Iridium.
TELCAM management is currently discussing the status of the Company's agreement
with Iridium. Iridium has continued to provide services to the Company as these
discussions have proceeded. But there is no assurance that TELCAM will be
able to reach a satisfactory resolution with Iridium or that Iridium will
continue to provide services to USDI.
Satellite telephony customers also have the opportunity to subscribe
for advanced services. These offerings include voice mail, conference circuit
services, and disaster recovery telephone testing and audit services. Unlike
cellular, a satellite telephone cannot be monitored. The Company's services also
include full STU 3 encryption, which scrambles voice communication, when
required. With the special security system unique to the AMSC 1 satellite, the
telephone cannot be "cloned," which is the leading cause of fraud among cellular
roaming customers.
In addition to dial-up telephone service, the Company also offers a
half- duplex, push-to-talk ("PTT") dispatch system that can be set up on a
channeled basis into talk groups organized along hierarchical, geographical or
task- related lines. When in this mode, users activating their talk group
channel are put directly in contact with each other, without interfacing with
the Public Switched Telephone or Data Networks.
The Company, pursuant to an agreement with PTT Telecom BV (as
represented by Station 12, the satellite division of PTT Telecom BV) also offers
Inmarsat and other satellite services provided by Station 12, which services are
marketed under the brand name of "Altus."
A key element of the Company's marketing strategy is to add to the
value of the products and services it sells by integrating them into business
solutions that utilize its own proprietary technology. The Company acquired
technologies in December 1998 from Global Positioning Technologies, Inc ("GPT")
and hired its principal to continue developing those technologies. GPT's
technologies involve advanced uses of the Global Positioning System in
conjunction with satellite telephones and transmission of real-time single-frame
video using Iridium and similar telephones. The Company has also engaged in
development of a "front-end" for satellite and other telephone systems that
manages a user's phone call, voice mail and facsimile needs. Development of
these technologies was suspended and the principal of GPT has not been in the
Company's employ since the Company terminated many of its operations in June,
1999.
PRICING
As a distributor, the Company purchases products and services on a bulk
basis based on agreed upon prices with its suppliers and then resells those
products and services to its customers. The Company has a distinct pricing
strategy for each of its major product lines, equipment and telephone services
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("airtime"). Retail pricing for satellite terminal equipment is highly
competitive and is characterized by the low gross margins associated with
commodity products. The Company competes aggressively in this arena, in part, to
establish customer relationships that may result in higher margin airtime sales.
The Company's pricing schedule for airtime is primarily determined by the
charges established for satellite system operators' and any intermediary
distributor's bulk airtime with whom it deals.
The Company offers fixed-site, land-mobile, transportable and maritime
telephone equipment ranging in price from approximately $1,500 to $4,500 per
unit. System price varies depending upon durability, power, battery life and
antenna gain.
The Company's geostationary satellite-based Satellite Telephone
Services ("STS") is a dial-up-on-demand system that only charges the subscriber
for the time actually used. For example, if there is a three-minute call made or
received, the subscriber is charged for only three minutes. Basic subscriber
rates begin at $25.00 per month for voice telephone service. Data service is
available for a small premium. These rates include an assigned, toll- free
number for each subscriber.
STS fixed-site, land-mobile, transportable and maritime subscribers pay
a non-discounted rate of only $1.45 per minute of use. Industry-specific
enhanced service plans provide bulk minutes and full dispatch channels at a
variety of per minute/channel rates. The Company provides special "bundled"
service packages by industry group to meet the unique needs of the Company's
varied subscriber base. When a Mobile Terminal makes or receives a call to or
from anywhere in the continental United States, there is no additional
long-distance charge. International long-distance calling is charged as air time
plus international toll from Reston, Virginia.
The Company's PTT dispatch system is charged out on either a talk group
channel, virtual or dedicated satellite channel basis.
Iridium airtime varies in cost depending on the origin and destination
of the call. It has been reduced substantially from its initial pricing in light
of market resistance, and now ranges from approximately $1.79 per minute within
North America and $2.99 per minute for calls between South America and Asia.
SALES, MARKETING AND DISTRIBUTION
Prior to curtailing active marketing, the Company had predominately
sold its telephone equipment and airtime services via a direct-sales force and
to a lesser extent via authorized agents.
Since the closing of INSAT's offices in Burbank, California, the
Company's products are warehoused, tested and shipped to customers from TELCAM's
facilities in Houston, Texas.
CUSTOMERS
The Company's customers are generally corporations with significant
sales or government entities. The Company has very few individual customers.
During 1998, the Company's largest customer was the Royal Bahamas Police Force
which accounted for approximately 17% of sales.
COMPETITION
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The wireless communications industry is highly competitive and is
characterized by frequent technological innovation. The principal bases of
competition within the industry are price, products and services. The industry
includes major domestic and international companies, many of which have
financial, technical, marketing, sales, distribution and other resources
substantially greater than ithe Company's and which provide or plan to provide,
a wider range of services. In response competitive pressure from these and other
future competitors, the Company may have to lower its selling prices or alter
its services, which could have a material adverse effect on the financial
position of the Company. The Company's satellite products and services compete
with a number of other communications services including cellular telephone and
other wireless data services. In addition, there are a number of planned
satellite systems using new technologies expected to be commercially available
in the next few years, including Globalstar. Furthermore, the FCC is considering
applications for satellite systems that currently operate in Canada to provide
commercial service in the United States. There can be no assurance that the
Company will be able to enter into agreements to market these and other emerging
products or, if it cannot, to compete successfully with those companies that do.
Such competition could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company, as a non-exclusive
service provider for AMSC and Iridium, competes against other service providers
of these products. For the AMSC products and services, the Company's major
competitor is AMSC's direct sales force and Stratos Global Corporation. The list
of Iridium service providers includes, among others, Allied Signal, Bearcom,
CellularOne Paging, GST Telecom, IWL Communications, Pagenet and Motorola
Cellular.
GOVERNMENT REGULATION
The Company operates as an indirect, unlicensed international
communications carrier in the wireless communications industry and therefore
falls indirectly under the regulation of the FCC. The Company is not the
satellite or equipment licensee, and is not required to maintain manufacturing,
service or operational permits to provide product sales or provision of airtime
services.
However, the Company is critically dependent on its equipment and
airtime suppliers who are, in turn, heavily regulated. The allocation and use of
the radio frequency spectrum for the provision of communications services are
subject to international and national regulation. The implementation and
operation of all satellite and wireless systems are dependent upon obtaining
licenses and other approvals. The national administration of each country
decides how the radio frequencies that the International Telecommunications
Union has allocated to particular communications services should be allocated
and assigned domestically to specific radio systems. In addition, the provision
of communications services in most countries is subject to regulatory controls
by the national governments of each country.
The Company is confident that its suppliers will continue to obtain the
approvals and licenses they require to operate globally. There is, however, no
guarantee that the Company's operation and profitability will not be subject,
directly or indirectly, to restrictive national policies or international
regulation or that the Company will not be subject to increased taxation by
federal, state or local agencies in the future.
PATENTS AND TRADEMARKS
The Company filed a patent application on March 4, 1999 for a method
and system for transmitting global position data over a telephone communication
network. This technology, in addition
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to other uses, enhances satellite telephone services by enabling emergency
location services in conjunction with "911" calls.
The Company has held five patents relating to its ED and UITI
technology. The Company also owns trademarks on ED in the United States and
France, and on UITI and UITI TV in the United States. In August 1998, the
Company, pursuant to a settlement agreement, granted Raquel Velasco an option to
purchase the aforementioned intellectual property for $50,000 which Ms. Velasco
exercised in November 1998. See "--Legal Proceedings." INSAT's products are not
branded, as INSAT is primarily a reseller and service provider.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that the capacity of its existing data processing
and management information systems is sufficient to allow the Company to
maintain its business without significant additional capital expenditures. In
addition, the Company has conducted a review of its systems to identify those
systems that could be affected by the Year 2000 problem and modifications to the
Company's systems have been made. See "--Risk Factors: Impact of Year 2000
Issue."
EMPLOYEES
The Company currently has 5 full-time employees located at its offices
in Chevy Chase. They are engaged primarily in the completion of Merger or asset
sales activities. Its satellite telephone business is operated on its behalf by
TELCAM and TELCAM employees.
LEGAL PROCEEDINGS
WILLIAM H. BUCK V. VISCORP & VISUAL INFORMATION SERVICES CORP. On or about
June 2, 1997, the Company filed a complaint against William H. Buck , the
Company's former Chief Executive Officer and Director, in the United States
District Court, Northern District of Illinois, Eastern Division, Case No. 97 C
3390, entitled VISCORP AND VISUAL INFORMATION SERVICES CORP. V. WILLIAM H. BUCK,
alleging breach of fiduciary duty, breach of employment agreement, accounting as
to severance agreement and conspiracy to defraud arising out of Mr. Buck's
conduct as Chief Executive Officer of the Company. On June 23 1997, Mr. Buck
filed a complaint against Viscorp, et. al., in the United States District Court,
Northern District of Illinois, Eastern Division, Case No. 97 C 4480. Mr. Buck
sought a declaratory judgment permitting him to sell 220,000 shares of Common
Stock of the Company. On September 19, 1997, Mr. Buck filed a counterclaim
against the Company, alleging partial rescission of his severance agreement,
dated January 8, 1997, breach of severance agreement, rescission of lock-up
agreement, breach of lock-up agreement and tortious interference with economic
advantage. On November 12, 1997, Raquel Velasco filed a complaint against the
Company, in the United States District Court, Northern District of Illinois,
Eastern Division, Case Number 97-C-7897, entitled RAQUEL VELASCO V. VISCORP,
seeking $220,000 in damages and expenses from alleged rescission for breach of
written severance agreement, or in the alternative, breach of severance
agreement. On June 9, 1998, the Company filed a counterclaim against Ms. Velasco
relating to her alleged employment agreement with the Company. The
aforementioned matters were consolidated for purposes of discovery. On August
31, 1998, the Company entered into settlement agreements with Mr. Buck and Ms.
Velasco. Pursuant to the Company's settlement agreement with Mr. Buck, Mr. Buck
is permitted to sell 350,000 shares of the Company's
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common stock that he already owns, pursuant to a tradability schedule. Mr. Buck
returned all other shares to the Company for cancellation. Mr. Buck's stock
options have been canceled. Pursuant to the Company's settlement agreement with
Ms. Velasco, Ms. Velasco retained 350,000 shares of the Company's common stock,
formerly held by Mr. Buck, also subject to a tradability schedule. Ms. Velasco
has also been granted an option to purchase certain property from the Company,
including the ED and UITI technologies, for $50,000 which she exercised in
November 1998.
DONALD GILBREATH V. USDI, VISCORP AND CORPORATE STOCK TRANSFER, INC. On
December 19, 1997, Donald Gilbreath, a former director of the Company, filed a
complaint against the Company in the United States District Court, District of
Colorado, Case No. 97-WY-2667-CB, alleging a claim against the Company for
failing to remove restrictive legends on shares owned by Mr. Gilbreath. Mr.
Gilbreath requested that the Court hold that he was the lawful owner of
1,000,000 unrestricted shares of Common Stock of the Company, and 237,800
unrestricted options to acquire common shares. On July 2, 1998, the Company
entered into a settlement agreement with Mr. Gilbreath, whereby 500,000 of Mr.
Gilbreath's shares in the Company are unrestricted, and Mr. Gilbreath retained
75,000 options, which must be and were in their entirety exercised by January 1,
1999. Pursuant to the settlement agreement, the remaining 500,000 shares have
been canceled. Further, Mr. Gilbreath is permitted to sell his shares pursuant
to a tradability schedule.
ROGER AND BONNIE REMILLARD V. U.S. DIGITAL COMMUNICATIONS, INC. F/K/A
VISCORP AND CORPORATE STOCK TRANSFER, INC. On or about June 1, 1998, Roger and
Bonnie Remillard filed a complaint in the United States District Court, District
of Colorado, Case No. 98-WY-1217-CH, alleging that the Company failed to remove
restrictive legends from the Remillards' shares in the Company, in violation of
Nevada Revised Statute 104.8401. Pursuant to a settlement agreement, dated July
2, 1998, the Remillards retained 820,000 shares of the Company's Common Stock.
Further, the Remillards retained 200,000 out of 288,000 stock options, which
must be exercised before January 1, 1999. As of December 31, 1998, 150,000 of
those options have been exercised. The remaining 50,000 were the subject of a
dispute and may be exercisable in the future. The Remillards are permitted to
sell their shares pursuant to a tradability schedule.
JAMES GOODNOW V. VISCORP. On February 9, 1998, James Goodnow filed a
complaint in the Nevada County Superior Court, State of California, against the
Company, alleging breach of contract, fraud, unfair business practices and money
on open book account, based on the alleged breach of a software consulting
agreement dated July 17, 1997. Mr. Goodnow sought damages in the amount of
$20,219.40. In June, 1998, the Company and Mr. Goodnow entered into a settlement
agreement whereby the Company agreed to pay Mr. Goodnow $16,000, which was
subsequently paid.
COCHRAN RANCH, ITG AND RUBIN KITAY V. U.S. DIGITAL COMMUNICATIONS INC.
AND LARRY SIEGEL. In January 1998, plaintiffs, former shareholders of Skysite,
filed a request for mediation and demand for arbitration with the American
Arbitration Association in Los Angeles, California, case number 72 174 00098 98
GS, requesting mediation and arbitration in connection with the Company's
alleged breach of the Agreement and Plan of Reorganization, dated June 20, 1997,
whereby the Company acquired Skysite. Plaintiffs alleged that the Company failed
to issue shares in consideration of the acquisition. Under the Agreement, we
were to issue 750,000 shares of our common stock to the shareholders of Skysite,
as well as options to purchase an additional 500,000 shares of our common stock
at an exercise price of $0.40 per
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share, in exchange for 100% of the outstanding shares of common stock of
Skysite. The stock of Skysite was transferred to the Company on August 26, 1997.
Subsequent to the acquisition, disputes arose between us and the former
shareholders of Skysite, including former shareholder and President of Skysite,
Tom D. Soumas, related to the value of Skysite at the time of the acquisition
and representations made to the Company as to the business and liabilities of
Skysite. As a result of the dispute, the Company withheld its shares. On May 28,
1998, we entered into an amended agreement with the former shareholders, except
for Mr. Soumas to settle this matter. Under the terms of the amended agreement,
the other shareholders' shares and options were placed in an escrow account in
October 1998. The shareholders will have all rights attributable to these
escrowed shares, however, they have agreed that at such time when they elect to
sell these shares, the first $200,000 of related proceeds will be paid to the
Company, and the remaining shares and options will be released to the other
shareholders. In connection with the acquisition of Skysite, the sellers of
Skysite incurred an obligation to pay a broker's commission of options to
purchase 200,000 shares of our common at $0.40 per share to be paid from the
500,000 options issued to them by the Company. See "Legal Proceedings--Tom
Soumas."
NOLAN BUSHNELL V. VISCORP. On December 13, 1994, Nolan Bushnell filed a
complaint against the Company, in San Mateo Superior Court, case number 390474,
alleging breach of fiduciary duties, breach of contract, wrongful termination
and other causes of action in connection with Mr. Bushnell's employment with
Company. On February 3, 1998, the Company and Nolan and Nancy Bushnell entered
into a settlement, the terms of which, by agreement of the parties thereto, are
confidential. The Company believes that the terms of such settlement agreement
would not have a material adverse effect on the Company.
CBS (FORMERLY WESTINGHOUSE) V. SKYSITE. On April 1, 1998, CBS filed a
complaint, in Los Angeles County Superior Court, case number 188569, alleging
that Skysite breached a distribution agreement with CBS dated December 21, 1996,
and a subsequent settlement agreement between CBS and Skysite, dated March 6,
1997, seeking monies allegedly owed under the distribution agreement. In June
1998, CBS and the Company entered into a settlement agreement whereby Skysite
agreed to pay CBS $430,000, which was paid soon thereafter.
WITTER PUBLISHING V. SKYSITE. On February 6, 1997, Witter Publishing
filed a complaint in Los Angeles Municipal Court, case number 97K02741, alleging
open book account and account stated, and seeking money damages. On December 12,
1997, Witter Publishing and Skysite entered a stipulation for entry of judgment
whereby Skysite agreed to pay Witter Publishing $19,037.96 between December 20,
1997 and November 20, 1998.
TOM SOUMAS V. SKYSITE. On October 6, 1997, Tom Soumas, a former
employee of Skysite, filed a complaint with the Labor Commissioner of the State
of California, seeking damages for vacation pay and wellness days he alleges he
was due upon termination, in the amount of $9,300. A hearing on Mr. Soumas'
claim was held on June 2, 1998, pursuant to which the Labor Commissioner issued
a decision in favor or Mr. Soumas in the amount of $2,500.
INTELLIGENT DATA SYSTEMS, INC. On August 4, 1998, counsel for Intelligent
Date Systems, Inc. ("IDS") made a demand on the Company for (i) rescission of a
technology licensing agreement dated January 1, 1995 and (ii) return of
consideration to IDS, in the amount of $968,750. No complaint has been filed.
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TOM SOUMAS V. USDI. On or about January 29, 1999, Tom Soumas, a former
employee of Skysite, filed a complaint against the Company in Superior Court of
the California, Los Angeles County, Case No. BC204576, alleging multiple claims,
including breach of contract, breach of fair dealing, fraud, negligent
misrepresentation, specific performance, conversion and trespass. On or about
February 16, 1999, Mr. Soumas filed an Amended Complaint in the above-referenced
matter containing the same claims as those in the original Complaint. The claims
arise out of the August 26, 1997 acquisition by the Company of all of the stock
of Skysite, pursuant to the terms of an Agreement and Plan of Reorganization
dated June 20, 1997. Due to disputes between the Company and Mr. Soumas, the
240,000 shares due to Mr. Soumas under the original agreement remain unissued,
and we do not intend to issue such shares. See "Legal Proceedings--Cochran
Ranch." The Company alleged that numerous misrepresentations were made in the
Agreement. These defenses will be raised as a setoff to the former President's
claim for stock and any damages related thereto. Given the early stages of the
case, it is not possible to determine the likelihood of an unfavorable outcome
on this matter. Therefore, the Company has not included an accrual for any
possible loss in the accompanying financial statements.
VISUAL INFORMATION SERVICE CORP. V. INTERACTIVE VIDEO PUBLISHING, INC. On
July 25, 1996, the Company filed a lawsuit in the United States District Court
for the Northern District of California, San Jose Division, case number C
96-20593 RMW (EAI), against Interactive Video Publishing, Inc., David Serlin,
Steve Owens and Kaori Kuwata ("Defendants") for injunctive relief and damages of
approximately $7 million for misappropriation of trade secrets, conversion and
breach of fiduciary duty. Defendants filed counterclaims for declaratory relief,
intentional interference with economic advantage, breach of contract and unfair
competition claiming damages yet to be determined. On November 20, 1996, David
Serlin and Marvin Lerch filed suit against the Company and its former officer,
Jerome Greenberg, in the United States District Court, Northern District of
California, San Jose Division. The case is captioned SERLIN V. VISUAL
INFORMATION SERVICE CORP., case number C 96-21073. David Serlin and Marvin Lerch
claimed damages in excess of $6.5 million in connection with the alleged breach
of their employment contracts, alleging breach of employment contracts, breach
of the implied covenant of good faith and fair dealing, fraud, deceit and
negligent misrepresentation among several causes of action. On June 25, 1997, a
settlement conference was held in VISUAL INFORMATION SERVICE CORP. V.
INTERACTIVE VIDEO PUBLISHING, INC. and SERLIN V. VISUAL INFORMATION SERVICE
CORP. and a settlement was reached with all parties in both actions. On
September 26, 1997, Messrs. Serlin and Lerch entered into a settlement agreement
with the Company whereby the Company agreed to pay Messrs. Serlin and Lerch
$25,000 each, and granted each 400,000 stock options with an exercise price of
$1.50. The Company was unable to comply with the requirement because the Company
did not then and does not now have an effective registration statement. On
February 3, 1999, a new settlement agreement was reached. Under the terms of the
new Settlement Agreement and Release, which supercedes the June 25, 1997
agreement, the U.S. District Court ordered the Company to issue to each of the
individuals 245,000 shares of unrestricted stock. These shares will be subject
to a tradability schedule set forth in the new Settlement Agreement and Release.
The Company has recorded a liability of $266,000 as of December 31, 1998,
related to the original settlement. In April 1999 the Company issued the shares
of unrestricted stock.
HARRISON V. U.S. DIGITAL COMMUNICATIONS, INC. Michael Harrison brought suit
against the Company and Corporate Stock Transfer, Inc., in the U.S. District
Court for the District of California alleging that the Company has wrongfully
Refused to permit transfer of 160,000 shares of Common
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Stock in the Company which he claims were purchased by him from a third-party
for $50,000, said third-party being Raquel Velasco GmbH. In addition, Mr.
Harrison alleges that the Company violated various federal securities laws. Mr.
Harrison has dismissed this case without prejudice and therefore there is no
claim pending.
PRIVATINVEST BANK, A.G., PLAINTIFF, V. JOSEPH B. LAROCCO, DEFENDANT, THIRD
PARTY PLAINTIFF, V. USDI AND WEST AMERICA SECURITIES, INC., THIRD PARTY
DEFENDANTS. On March 9, 1999, Plaintiff, PrivatInvest Bank, A.G. ("Plaintiff,"
or "Bank") filed a complaint in the Superior Court, Judicial District of
Fairfield at Bridgeport, against Joseph B. LaRocco ("Defendant" or "LaRocco"),
alleging damages arising out of the acquisition of shares of stock of USDI, then
known as VisCorp. The Bank's Complaint alleges damages "in excess of Fifteen
Thousand dollars." LaRocco filed a Third Party Complaint against USDI and West
America Securities, alleging that USDI and/or West America Securities is liable
in full or in part for damages claimed by the Bank. The matter was removed to
United States District Court, District of Connecticut by Third Party Defendant
West America Securities, Inc. on July 15, 1999,Case No. 3:99 CV 1337 (DJS). In
the transaction which gives rise to Plaintiff's complaint, LaRocco, an attorney,
was retained by the Bank to provide advice and counsel and to act on the Bank's
behalf with respect to a prospective purchase of USDI stock under an Off-Shore
Purchase Agreement from the stock certificate owners, Roger Remillard and Bonnie
Remillard. LaRocco was to opine that the sale of the shares fell within the
Securities Act, Regulation S "Safe Harbor" provisions, which would permit the
Bank to transfer the shares after a forty (40) day holding period. Following the
Bank's purchase of the stock from the Remillards, the Bank discovered that the
stock did not qualify as an exempt transfer under Regulation S. The Bank,
therefore, was required to hold the stock for a period of one (1) year, during
which time the value of the stock declined, thereby, according to the Bank,
causing the Bank to be damaged. The Bank alleges, inter alia, that LaRocco
failed to adequately investigate and perform due diligence, thereby failing to
ascertain that the safe harbor provisions were not applicable to the stock
transfer. LaRocco filed his Third Party Complaint, alleging that USDI
misrepresented or failed to disclose certain facts to LaRocco, presumably
thereby causing him to issue an incorrect opinion letter as to the tradability
of the shares. This case has been settled without USDI paying any monies or
other consideration to any party.
DAVID ROSEN V. U.S. DIGITAL COMMUNICATIONS, INC. On or about July 27, 1998,
David Rosen filed a Verified Complaint for Damages in the Superior Court of the
State of California, County of San Francisco, Case No. 996762, in which Mr.
Rosen alleges breach of contract, breach of the implied covenant of good faith
and fair dealing, violation of California Labor Code ss.ss.201, 226 and 227.3,
and conversion. Mr. Rosen's claims arise out of the Company's alleged breach of
its Employment Agreement with Mr. Rosen. Mr. Rosen asserts that he was entitled
to in excess of $100,000.00 based upon claims for unpaid wages and severance
pay, and that he is entitled to 100,000 stock options. This case has been
removed by the Company to the United States District Court for the Northern
District of California, Case No. C-98-3771. This case is in the preliminary
stage of litigation, with limited discovery having been taken. Trial is
scheduled for March 2000. The Company intends to vigorously defend this action.
The Company contends that Mr. Rosen's employment was terminated for cause and,
therefore, pursuant to the Employment Agreement, he is not entitled to severance
pay and that his options would have expired. In addition, the former president
of the Company, William H. Buck, whose signature appears on the Employment
Agreement on behalf of the Company, has stated that he may, in fact, have not
signed the Employment Agreement and that the Employment Agreement may be a "cut
& paste job."
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WORLDCOM, INC. V. ENHANCED PERSONAL COMMUNICATIONS, INC. On or
about December 1, 1999, WorldCom, Inc. filed a Complaint against USDI and INSAT
in the Circuit Court for Montgomery County, Maryland, Case No. 205711, alleging
Breach of Contract and Quantum Meruit. The Complaint alleges that USDI assumed
the obligations of Enhanced Personal Communication, Inc. under a certain Service
Agreement with WorldCom. The allegation is based upon a letter from Preston
Riner on INSAT letterhead that INSAT was assuming the "accounts payable" to
WorldCom. The Company denies that Mr. Riner had the authority to make such a
commitment. There are no documentation provided or referred to in the Complaint
that specifically references USDI's (as opposed to INSAT) assumption of the
Service Agreement. INSAT may have used the services of WorldCom for a period of
time that is the subject of the Complaint. The Complaint seeks damages in the
amount of $79,445.27.
TOMMY WILLIAMS V. SKYSITE COMMUNICATIONS. On or about December
16, 1999, Tommy Williams filed a Amendment to Complaint against USDI, Skysite
and INSAT in the Circuit Court of Shelby County, Alabama, Case No. CV 99-853,
alleging that Skysite breached its Employment Agreement with him and that USDI
and INSAT should also be liable thereunder since Skysite is a mere
instrumentality of USDI and INSAT. The Amended Complaint does not allege the
amount of damages claimed. An Application of Entry of Default is pending. The
Company does not believe that the Circuit Court of Shelby County, Alabama has
personal jurisdiction over Skysite, USDI or INSAT. In addition, the Company does
not believe USDI or INSAT have any liability under the alleged Employment
Agreement between Tommy Williams and Skysite.
T.T.E. OF MARYLAND V. US DIGITAL COMMUNICATIONS, INC. T.T.E. of Maryland
filed a Complain in the District Court of Maryland for Montgomery County, Case
No. 06020022702199, against USDI alleging breach of a contract to pay for long
distance services. The amount claimed is $6,807.77
PRINTCOM, INC. V. US DIGITAL COMMUNICATIONS, PRINTCOM (T/C MINUTEMAN PRESS)
sued USDI Skysite and INSAT in the Municipal Court of California, County of Los
Angeles, Van Nuys Branch, Case No. 99E07838 for breach of contract claiming
$15,304.76 in damages
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BUSINESS OF TELCAM
GENERAL
In the mid-1990's, TELCAM was a small yet relatively successful reseller of
telecommunications services. At that time, there were three principal partners
including Mike Massingill. Due to a dispute among the partners, Massingill left
TELCAM in 1996 and formed TelOne Telecommunications, Inc. ("TelOne"). Since
1996, TELCAM's business has declined. The two remaining partners did not
reinvest profits in TELCAM. TELCAM did not have a CFO or Controller and billing
was disorganized. Revenue declined until it was sold in June 1999 for $600,000.
The principal new owners are John Minter, Gregory Hahn and Mike Massingill.
Although TELCAM has a significant operating history, the recent changes in
ownership and management and the Company's intention to pursue new marketing and
operating strategies expose it to many of the risks associated with new
businesses. The likelihood of success must be considered in light of the
problems, expenses, difficulties and delays frequently encountered in connection
with a new business, including, but not limited to, a continually evolving
industry subject to rapid technological and price changes, acceptance of the
products that are marketed and an increasing number of market competitors
TELCAM is now involved exclusively with the front-end marketing of
telecommunications products and services. Its current business is concentrated
on residential long-distance telephone and related services but the Company
expects much of its future business to be with commercial customers. Other than
marketing, many of TELCAM's functions are outsourced. TELCAM has leased 14,000
square foot of office space at $8.00 per square foot in the NASA Bay area of
Houston. There are presently twelve employees. TELCAM expects to have
approximately twenty employees early in 2000.
OPERATIONS
TELCAM markets telecommunications services including long-distance and
voicemail, follow-me fax, prepaid phone cards and 1-800 services. It is
currently expanding its customer base through purchase of customer relationships
from other independent long-distance companies. The consideration paid by TELCAM
for these purchases is primarily a percentage share of future revenues for the
seller.
TELCAM outsources most of the non-marketing functions associated with
serving its customers. Its primary source for long-distance service is Qwest.
Phase V in Florida offers "24/7" customer service to TELCAM's customers.
TelOne, located in Houston, Texas, provides TELCAM with (1) billing
services such as rating, electronic credit formatting and disaster backup, and
(2) platform services such as voicemail, follow-me fax, prepaid phone cards and
1-800 services. On June 7, 1999, TELCAM signed a 60 month agreement with TelOne.
The agreement provides that TELCAM will pay the following fees to TelOne: $0.50
per ANI (Automatic Number Identification) per month, 8% mark-up on all network
services and 2% of collected revenue for billing services.
Mike Massingill, the CEO of TelOne, is a member of the Board
of Directors of TELCAM.
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Gregory Hahn the CEO of TELCAM, is a shareholder of TelOne. William Spencer, a
member of the Board of Directors of TELCAM, is a shareholder in TelOne. The
quality and range services provided to TELCAM by TelOne are essential to
TELCAM's operations; and TELCAM believes that the close relationship between the
companies constitutes a competitive advantage for TELCAM. Nonetheless, there can
be no assurance that the two companies will be able to maintain an arms-length
relationship and that TELCAM will receive services at competitive market prices
from TelOne or that TELCAM will not be significantly harmed by any disruption of
its dependent relationship with TelOne.
Formatted billing tapes are forwarded from TelOne to Billings Concepts
Corp.("BIC"), a provider of billing clearinghouse services. It is efficient for
smaller long-distance marketers such as TELCAM to bill their customers by
"piggybacking" on the ubiquitous bill for local telephone services presented by
the RBOCs (Regional Bell Operating Companies) and other LECs (Local Exchange
Carriers). Each of over 2,000 LECs requires a separate agreement for such
billing and separate data formatting and communications arrangements. Since it
is impractical for smaller service providers to meet these extensive
requirements, billing clearinghouses aggregate the billing records of many
service providers for transmission to LECs nationwide.
Currently, the average collection period from bill presentment is
approximately 43 days - at which time TELCAM could expect to receive payment
from BIC. Due to limitations in working capital, TELCAM must use factoring to
accelerate its collection of customer payables. TELCAM uses BIC for factoring
as well as billing and collection. BIC was advanced approximately 50-60% of net
GAAP billed revenues per month. BIC advances proceeds to TELCAM at the prime
rate plus 4% until collection. BIC charges TELCAM a fee based upon a percentage
of the monthly net GAAP revenue for billing and collection and allocates a
percentage of such revenue for bad debt allowance, uncollectibles and
chargebacks which are allocated on a pari passu basis to TELCAM. TELCAM is
negotiating to improve the terms on its factoring.
GROWTH STRATEGY
TELCAM intends to be a low-cost, efficient carrier operating in defined
niche markets in the United States and internationally. As part of its strategy,
TELCAM is focusing on the following:
- Providing bundled value added products
- Shifting from retail to small and medium-sized commercial accounts.
- Acquisitions of subscriber bases, and
- Acquisitions of complementary companies such as a clearing house and/or
channels for international expansion.
During 2000, TELCAM intends to continue to acquire subscriber bases from
companies that have lost their ability to bill directly through clearinghouses.
In October 1998, the clearinghouses decided not to bill for companies that had a
record of excessively high customer complaints of fraudulent billing. Some of
these companies were also effectively blacklisted by the FCC. The clearinghouses
have also stopped billing MRCs that do not meet certain standards of
transparency for the customer. See "Risk
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Factors -- Dependence on Local Exchange Carriers for Billing". TELCAM believes
that approximately 1,000 such companies lost their ability to bill. Many of
these companies may well have conducted their businesses in a fraudulent manner.
But, perhaps 300 are thought by TELCAM to be companies with more innocent
customer problems subject to correction through meticulous account management
These are targets of interest to TELCAM. The average such company has
approximately 150,000 subscribers.
As part of its business strategy, TELCAM is seeking to acquire 10 to 20
additional subscribers bases of this type during the next six months. If such
acquisitions are completed, this would increase the subscriber base and, at the
same time, generate immediate cash flow in order to fund development of a
commercial customer base to which it can sell its value added products. Risks
associated with these acquisitions include (1) the clearinghouses have greatly
increased the effort required to bill MRC's, (2) a regulatory or legislative
initiatives could develop that would make it difficult to maintain the MRC
subscriber base and (3) TELCAM's ability to acquire "clean" companies.
TELCAM intends to develop a commercial subscriber base by marketing through
independent agents. There are presently two main associations of independent
representatives totaling over 8,000 representatives. TELCAM believes that it
will be able to get approximately 2,000 representatives to work with TELCAM (on
a non-exclusive basis) beginning January 2000 given the following:
- High commission payment of 15% versus 10% for the industry.
- Attractive pricing due to low cost structure of Qwest contract
(approximately $.045 per minute).
- Broad range of value added products.
TELCAM
The following are further possible growth areas considered by TELCAM:
- Become a low-cost, efficient carrier operating in defined niche markets
in the united States and internationally.
- Maintain the existing high margin retail customer base while acquiring
new retail subscriber bases.
- Establish a stable, quality small and medium-size commercial ("SME")
customer base that will subscribe to bundled value added products and
services.
- Develop methods for improving efficiency such as direct billing.
- Seek to develop broad new market initiatives such as international
expansion through Planet Telecom.
- Develop new complementary business areas that would expand the revenue
base such as acquiring a clearinghouse.
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- Establish recognition of USDI as a quality, emerging growth
telecommunications stock. Meet the requirements for changing from the
OTC Bulletin Board to Nasdaq.
TELCAM PRODUCTS AND SERVICES
TELCAM plans to offer its commercial customers a wide range of products
in market-driven bundles. The Company believes that it can achieve a
significant marketing advantage by becoming a competitively priced
"one-stop shop" - with unified billing and service - for small to
medium-sized companies. Among the products TELCAM now markets or is
preparing to market are: Switched long distance (residential and
commercial) including one plus dialing (Intrastate, Interstate and
International), toll free and Zero plus dialing.
Calling cards (residential and commercial) including travel cards and
prepaid cards.
Dedicated Services including usage based one plus (DS1, DS3, etc.),
private line, point-to-point (DS0, DS1, DS3, etc.), frame relay and
ATM.
Virtual Office including toll free access, voice mail and conference
call.
Satellite telephone services.
REGULATION AND LICENSING
The terms and conditions under which TELCAM provides communications
services are subject to government regulation. FCC regulations generally apply
to interstate telecommunications, while particular state regulatory authorities
generally have jurisdiction over telecommunications that originate and terminate
within the same state.
FEDERAL
TELCAM is not classified by the FCC as a dominant carrier, and therefore is
subject to minimal federal regulation. The FCC generally does not exercise
direct oversight over cost justification and the level of charges for service of
non-dominant carriers, such as TELCAM, although it has the statutory power to do
so. Non-dominant carriers are required by statute to offer interstate and
international services under rates, terms, and conditions that are just,
reasonable, and not unduly discriminatory. The FCC imposes only minimal
reporting requirements on non-dominant carriers, although TELCAM is subject to
certain reporting, accounting, and record keeping obligations. A number of these
requirements are imposed, at least in part, on all carriers and others are
imposed on carriers, not including TELCAM at this time, whose annual operating
revenues exceed $100 million.
In addition, informal complaints may be lodged from time to
time against TELCAM before the FCC and various state agencies for various
reasons. TELCAM in the past has at times failed to respond timely to such
complaints and has been fined for such delay. Although such complaints could
result in additional legal actions or proceedings being brought against TELCAM,
it believes that such matters would be satisfactorily resolved without a
material adverse impact upon its results of operations; however TELCAM can not
be assured of such resolution. Should TELCAM's belief with respect to any and
all
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complaints pending, if any, before the FCC or state regulatory agencies be
incorrect, it could be subject to financial penalties and potential revocation
of its operating authority for interstate or intrastate calls, as applicable.
Although the tariffs of non-dominant carriers, and the rates
and charges they specify, are subject to FCC review, they are presumed to be
lawful and are seldom contested. Resale carriers, like all other interstate
carriers, are also subject to a variety of miscellaneous FCC regulations that,
for instance, govern the documentation and verifications necessary to change a
subscriber's long distance carrier, limit the use of "800" numbers for
pay-per-call services, require disclosure of certain information if operator
assisted services are provided, and govern interlocking directors and
management.
The FCC has recently called for comment on the practice of billing
telephone customers for MRCs - monthly fees that are not directly related to
usage of services - and has indicated some doubt about the desirability of such
charges. Since significantly more than half of TELCAM's revenues have been, and
are expected to be at least for the next year, MRCs, any action by the FCC or
other regulatory or legislative body to restrict or eliminate their use could
have adverse consequences for the Company's revenues and profitability. See
"Risk Factors - Dependence on Key Customer Service, Data and Billing Service
Suppliers"; "-- Dependence on Local Exchange Carriers for Billing.".
STATE
TELCAM is subject to varying levels of regulation in the states in which it
is currently authorized to provide intrastate telecommunications services. Most
states require TELCAM to apply for certification to provide intrastate
telecommunications services, or to register or to be found exempt from
regulation, before commencing intrastate service. Most states also require
TELCAM to file and maintain detailed tariffs listing their rates for intrastate
service. Many states also impose various reporting requirements and/or require
prior approval for transfers of control of certified carriers, and/or for
corporate reorganizations; acquisitions of telecommunications operations;
assignments of carrier assets, including subscriber bases; carrier stock
offerings; and assumption by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, canceled,
terminated, or revoked by state regulatory authorities for failure to comply
with state law and/or the rules, regulations, and policies of the state
regulatory authorities. Fines and other penalties, including the return of all
monies received for intrastate traffic from residents of a state, may be imposed
for such violations. If state regulatory agencies conclude that TELCAM has taken
steps without obtaining the required authority, they may impose one or more of
the sanctions listed above.
LEGAL PROCEEDINGS
TELCAM has advised USDI that it is not aware of any legal proceedings that
may have a material effect on its operations.
COMPETITION
The telecommunications industry is highly competitive and is characterized
by frequent technological and marketing innovation. The principal bases of
competition within the industry are price, products and services. The industry
includes major domestic and international companies, many of
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which have financial, technical, marketing, sales, distribution and other
resources substantially greater than TELCAM or the combined company and which
provide, or plan to provide, a wider range of services. In response to
competitive pressure from these and other future competitors, we may have to
lower its selling prices or alter its services, which could have a material
adverse effect on the financial position of the combined company. The Company's
products and services compete with a number of other communications services,
including:
- existing satellite services;
- terrestrial air-to-ground services;
- terrestrial land-mobile and fixed services, and
- any new communications services developed in the future utilizing new
technologies.
In addition, the FCC has recently allocated large amounts of additional
spectrum for communications uses or potential uses that could compete with
TELCAM, and additional allocations of spectrum for such uses may occur in the
future. There can be no assurance that the TELCAM will be able to compete
successfully with such companies.
TELCAM believes that competition in the long-distance telephone market will
increase in the near future. In particular, the number of competitors that are
larger and better capitalized than TELCAM is likely to grow. AT&T, MCI, and
Sprint are currently preeminent among such firms. The proposed merger of MCI
Worldcom and Sprint is indicative of the potential scale of such competitors.
TELCAM expects that all of the BOCs - newly eligible to enter the long-distance
marketplace - will soon seek to provide long distance service. Certain of them
have already taken steps to provide service in multiple states. It is not known
when, and under what specific condition, other applications will be granted by
the state regulatory commissions in those states.
Increased competition could result in:
- price reductions;
- fewer customer orders;
- reduced gross margins;
- longer sales cycles; and
- loss of market share.
The combined company or its competitors may announce
enhancements to existing products, or new products embodying new technologies,
industry standards or customer requirements that have the potential to supplant
or provide lower-cost alternatives to TELCAM's existing products.
These competitors may be able to respond more quickly to new
or emerging technologies and
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changes in customer requirements or devote greater resources to the development,
promotion and sales of their products than the combined company. TELCAM expects
additional competition as other established and emerging companies enter into
the residential and commercial telecommunications market and new products and
technologies are introduced.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF USDI
The Company may from time to time make written or oral
forward-looking statements. Written forward-looking statements may appear in
documents filed with the Commission, in press releases, and in reports to
shareholders. The Private Securities Reform Act of 1995 contains a safe harbor
for forward-looking statements on which the Company relies in making such
disclosures. Forward- looking statements can be identified by the use of words
such as "believes," "anticipates," "plans," "expects," "may," "will," "intends,"
"estimates" and the negatives thereof and similar expressions. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in "Risk Factors" and elsewhere in this report.
The following discussion should be read in conjunction with the financial
statements and related notes, and the other financial information, included
elsewhere in this Statement.
GENERAL
During June 1999, the Company announced that its principal
operating subsidiary, INSAT, was curtailing operations and that the Company was
actively seeking specific merger and asset-sale opportunities in an effort to
resolve its urgent liquidity problems. In July 1999, the Company announced that
it had entered into a Memorandum of Understanding with TELCAM, agreeing in
principle to the Merger .
The Company has incurred significant operating losses in every fiscal
period since inception. Commencing in August 1997, the Company concentrated its
business on the global satellite communications market. The Company's global
satellite communications business has only limited operating history. The
Company is thus subject to the risks inherent in the establishment and growth of
a new business enterprise. The likelihood of success of the Company must be
considered in light of the problems, expenses, difficulties and delays
frequently encountered in connection with a new business, including, but not
limited to, a continually evolving industry subject to rapid technological and
price changes, acceptance of the products that INSAT markets and an increasing
number of market competitors. The Company's prospects must be considered in
relation to the uncertainties regarding the completion of its proposed Merger
with TELCAM and the potential benefits and risks of that Merger if consummated.
For the years ended December 31, 1997 and 1998, the Company's net losses were
$4,685,185 and $7,265,156. The Company expects to experience losses in 1999, the
first quarter of 2000 and possibly longer. The information contained herein
should be read in conjunction with the Company's more detailed reports on Form
10-K for fiscal year 1998 filed on March 31, 1999 and on Form 10-Q for the nine
months ending September 30, 1999 filed on December 28, 1999 .
RESULTS OF OPERATIONS
The Company substantially increased expenditures for sales and marketing
and for customer service in the last quarter of 1998 and the first and second
quarter of 1999. These increases were made in order to take full advantage of
sales opportunities that it expected would be created by the commercial launch
of the Iridium satellite communications system. These opportunities have not
been realized; the Company's sales in the first three quarters of 1999 fell well
below expectations and its operating loss was
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unexpectedly large.
The Company is dependent on third-party providers for the satellite airtime
it resells to its customers. It is supplied by satellite services, on a non-
exclusive basis, primarily pursuant to agreements with American Mobile Satellite
Corporation (American Mobile) and Iridium North America, LP (Iridium). During
1998, American Mobile provided substantially all of the airtime that the Company
resold to its customers.
Plans for continuance and dramatic expansion of the Company's business
during late 1998 and 1999 assumed that American Mobile airtime would continue to
be sold in growing quantities and, particularly, that sales of Iridium airtime
would grow very rapidly and substantially exceed those of American Mobile
airtime. At the time of commercial launch of the Iridium system in November,
1998 and for some time thereafter, the ability of users to successfully initiate
and complete a call was below consumer expectations. Despite some improvement in
the second quarter, the Company's Iridium sales in each of the first two
quarters of 1999 fell well below expectations and its operating loss was
unexpectedly large. In April 1999, the Company began to implement a program
reducing operating expenditures and attempting to develop additional sources of
revenue to offset the possible effect of any continuing difficulty with
Iridium's operations or public perception of such difficulty. Despite these
efforts, the unexpectedly large operating losses created an imperative need for
the Company to raise short-term capital during the second quarter of 1999. The
Company was unable to raise adequate fund. As a result INSAT, the Company's
principal operating subsidiary, was forced to curtail its field sales operations
and certain other functions in June 1999 in order to reduce cash requirements.
On August 13, 1999, Iridium announced that it is pursuing a comprehensive
financial restructuring and made a voluntary Chapter 11 filing in the United
States Bankruptcy Court in Delaware.
At the time of the curtailment of INSAT operations, the USDI Board of
Directors instructed management to explore resolving the liquidity problems
through merger opportunities and/or sale of equipment and customer-list assets.
On July 8, 1999, the Company entered into a Memorandum of Understanding with
TELCAM, agreeing in principle to the Merger. The consummation of the Merger is
subject to a number of conditions, including drafting of definitive documents,
satisfactory conclusion of due diligence, negotiation of reductions in USDI's
obligations to creditors, and approval by the shareholders of each company. If
the Merger is realized, the current shareholders of TELCAM will own not less
than 51% of the fully diluted Common Stock, and will name four of seven members
of the Board of Directors of USDI.
The agreement provides for a 60-day period of due diligence and subsequent
closing within 15 days. USDI agreed not to pursue any competing transactions
while due diligence is underway. Consistent with the terms of the agreement and
subject to certain restrictions, TELCAM is providing management for USDI's
satellite telephone operating subsidiaries until the consummation of the Merger
or the termination of the agreement. Commencement of the sales effort under
TELCAM has been delayed due to transition issues with suppliers of satellite
telephone airtime. Management believes that most operational issues with Iridium
North America have been resolved and the Company's telephone service to Iridium
customers has been largely uninterrupted. There remain substantial disagreements
between the Company and AMSC and normal billing and service to AMSC customers
has been disrupted in recent months. TELCAM is also providing certain operating
loans to USDI and its subsidiaries during that period to fund specific business
operations. TELCAM has the right at any time, under certain conditions,
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to terminate the agreement and with it the management authority and funding
obligations of TELCAM under the terms of the agreement. . USDI and TELCAM
mutually observed the principal terms of the MOU even after their formal
expiration and entered into a definitive Merger Agreement on December 27, 1999.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998.
The Company had $129,997 in revenue from sales of satellite equipment and
services in the third quarter of fiscal 1999 compared to $267,552 in the third
quarter of fiscal 1998. This decrease resulted primarily from INSAT's
termination of outside sales efforts for equipment related to the Iridium system
and other satellite telephone systems. Sales of telephone services declined
approximately $30,000 or 20% from the year earlier period but approximately 70%
from the second quarter of 1999. The sharp decline from the previous period was
accounted for by a combination of reduced sales effort of the Company and
uncertainties in billing in the third quarter, both resulting from staff and
other cost reductions.
During the third quarter of 1999, the Company's shortage of working capital
caused it to fall further behind on payments to key vendors and, as a result,
had increasing difficulty in maintaining a reliable flow of products and in
maintaining adequate inventories of telephone equipment. This supply could be
further adversely affected by trade accounts payable of approximately $3.2
million at the end of the third quarter of fiscal 1999.
Costs of goods sold were $335,097 in the third quarter of fiscal 1999
compared to $205,451 in the third quarter of fiscal 1998. The gross margin in
the 1999 period was negative as opposed to approximately 23% in
the 1998 period. The gross loss on sales in the third quarter of 1999 resulted
in large part from write-downs of the value of Iridium telephone equipment in
inventory due to rapidly declining retail pricing for such goods.
Research & development expense was $2,087 in the third quarter of fiscal
1999 compared to no such expense for the second quarter of fiscal 1998. The
Company was undertaking no significant research and development efforts in
either period. Financial pressure in the third quarter of 1999 forced the
Company to terminate a research and development program that it had instituted
during the last quarter of 1998 and the first half of 1999.
Sales and marketing expense in the third quarter of fiscal 1999 was $25,854
compared to $423,986 in the third quarter of fiscal 1998. The decline resulted
from the Company's termination of outside sales efforts in the 1999 period.
General and administrative expenses, including travel and
entertainment expenses, legal fees and consulting fees, as well as certain other
expenses, were to $750,418 in the third quarter of fiscal 1999, compared to
$1,783,139 in the third quarter of fiscal 1998. This decrease was principally
due to the termination of most operations of INSAT and its subsidiaries. The
remaining expense was primarily related to corporate management's efforts to
complete the proposed Merger with TELCAM.
The Company did not grant any stock options during the third quarter of
fiscal 1999.
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Net loss for the third quarter of fiscal 1999 was $996,171 as compared to
$2,129,563 in the third quarter of fiscal 1998. The decrease in the loss was
primarily due to the termination of most activities of INSAT. The reductions in
costs were larger than the loss in gross margin revenues caused by the cutbacks.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998.
The Company had $1,282,182 in revenue from sales of satellite equipment and
services in the 1999 period compared to $793,709 in the 1998 period. The
increase is primarily attributable to the introduction of Iridium products in
1999. However all of the increase was experienced in the first half of 1999
prior to the Company's sharp reduction in sales and other operating efforts
during the third quarter.
Costs of goods sold was $1,325,300 in the first nine months of 1999
compared to $579,737 in the first nine months of 1998. The gross margin in the
1999 period was negative as opposed to 27% in the 1998 period.Lower gross
margins resulted from aggressive discounts required to sell Iridium equipment in
an extremely weak market and from write-down of inventory of that equipment.
Sales and marketing expense in the 1999 period was $1,726,226 compared to
$813,410 in the 1998 period. The increase primarily reflects intensified efforts
in marketing Iridium products during 1999. Since these staff additions and other
expenditures did not produce anticipated revenue, the ratio of sales and
marketing expense to revenues was well above normal and anticipated levels in
1999.
Research and development expense was $187,112 in the first nine months of
1999 as compared to no expense in 1998. This expense in 1999 reflected the
Company's efforts in the first half of 1999 to develop products and services
that are complementary to its satellite telephone business in ways that benefit
customers in the Company's targeted markets. In the first nine months of 1998,
the Company had not yet implemented this effort. This effort was terminated in
the third quarter of 1999 as part of the Company's general retrenchment.
General and administrative expenses, including travel and entertainment
expenses, legal fees and consulting fees, as well as certain other expenses,
increased to $3,933,066 in the 1999 period, compared to $3,407,375 in the 1998
period. This increase was primarily related to an increase in the legal and
accounting fees incurred in the 1999 period versus the prior year period. These
professional fees are attributable to the Company's one-time need to resolve
legal and accounting issues that had emerged during management transitions in
1997, to largely unsuccessful efforts to raise needed capital and to the
on-going Merger efforts. The Company's rate of spending on other general and
administrative expenses dropped substantially in the third quarter of 1999
primarily in light of the cutbacks at INSAT.
The Company wrote off $665,895 of goodwill in the first nine months of 1999
as compared to none in the first nine months of 1998. The 1999 write off
represented an impairment of the value attributed to Skysite at the time of its
acquisition. The Company estimated that this portion of the goodwill would not
be realized during the amortization period.
Net loss for the first nine months of 1999 was $6,480,661 as compared to
$4,273,334 in the comparable 1998 period. Significant factors contributing to
the increase in the net loss were increased sales and marketing and general and
administrative expense as described above, the disappointing results of Iridium
sales efforts and the 1999 write off of goodwill. These expenses were offset to
some degree
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by a reduction in stock compensation expense and the third quarter reduction in
operating expenditures.
FISCAL 1998 COMPARED TO FISCAL 1997
The Company had $1,179,922 in revenue from sales of satellite equipment and
services in the 1998 compared to $486,642 in 1997. The increase of $693,280
primarily reflects the fact that the results include nine months of sales and
expenses for Skysite in 1998 and approximately four months for 1997. Skysite was
not acquired by the Company until August 26, 1997. Sales on a pro forma basis
(including Skysite's activity prior to the acquisition) for the first three
quarters of 1998 versus the same period in 1997 declined by approximately 5%.
This reflected, in part, a substantial decline in equipment sales that was fully
attributable to a reduction in sales to a single key customer. However equipment
sales to other customers and airtime sales increased - almost offsetting the
decline in equipment sales.
Costs of goods sold was $954,365 in 1998 compared to $412,767 in 1997.
These costs were associated with the sales generated by Skysite. The increase of
$541,598 was primarily related to the greater period of operation for Skysite
included in the 1998 period. It also reflects an improved sales mix in 1998
weighted toward higher gross margin airtime sales. The gross margin in 1998 was
18.9% as opposed to 15.2% in 1997
Sales and marketing expense in 1998 was $1,499,802 compared to $286,258 in
1997. The expense was 127% of revenues in 1998 compared to 59% in 1997. The
increase of $1,213,544 primarily reflects intensified efforts in preparation for
the marketing of Iridium products during the second half of 1998. Since staff
additions and other expenditures did not, and were not expected to, produce
revenue prior to the commercial launch of Iridium, the ratio of sales and
marketing expense to revenues was, as expected, well above normal levels in
1998. But the delay in that launch and the subsequent technical problems
depressed sales and caused the expense ratio to exceed the high level
anticipated. The increase in expense is also related to the greater period of
operation for Skysite included in the 1998 period versus the prior year period.
Research and development expense was $397,869 in 1998 as compared to no
expense in 1997. This expense in 1998 reflected the Company's efforts to develop
products and services that are complementary to its satellite telephone business
in ways that benefit customers in the Company's targeted markets. In 1997, the
Company had not yet implemented this effort.
General and administrative expenses, including travel and entertainment
expenses, legal fees and consulting fees, as well as certain other expenses,
increased to $5,245,277 in 1998, compared to $2,975,782 in 1997. This increase
of $2,269,495 was primarily related to the greater period of operation for
Skysite included in 1998 versus the prior year and to an increase in the legal
and accounting fees incurred in 1998 versus the prior year. These professional
fees are attributable to the Company's one-time need to resolve legal and
accounting issues that had emerged during management transitions in 1997.
The Company granted stock options to various employees and other
individuals during 1998. In connection with the granting of these options, the
Company recorded a stock option compensation expense in the amount of $528,690.
The amount recorded represents the difference between the exercise price and the
fair market value of the Company's Common Stock, as determined by reference to
the publicly traded value of the stock, as of the date the options were granted.
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Net loss for 1998 was $7,265,156 as compared to $4,685,185 in
1997. Significant factors contributing to the increase in the net loss by
$2,579,971 were increased sales and marketing and general and administrative
expense as described above. These expenses were offset to some degree by a
reduction in stock compensation expense.
FISCAL 1997 COMPARED TO FISCAL 1996
The Company had $486,642 in revenue from sales of satellite equipment and
services in fiscal 1997 compared to no such revenue in fiscal 1996. There were
no revenues produced prior to the acquisition of Skysite. The revenue in 1997
was derived entirely from the newly acquired operations of Skysite in the second
half of the year.
Costs of goods sold was $412,767 in fiscal 1997 compared to no cost of
goods sold in fiscal 1996. These costs were associated with the sales generated
by Skysite.
Sales and marketing expense for fiscal 1997 was $286,258 compared to no
such expense in fiscal 1996. These costs were associated with the operations of
Skysite during the second half of the year.
The Company had no research and development expenses for fiscal 1997, as
compared to $955,570 for fiscal 1996. This decrease was due to the Company's
decision to terminate the development of the ED device and related products.
General and administrative expenses, including travel and
entertainment expenses, legal fees and consulting fees, as well as certain other
expenses, were $2,975,782 for fiscal 1997, compared to $2,985,039 for fiscal
1996. This slight decrease of $9,257 reflected a reduction in general corporate
overhead offset by the Company's assumption of Skysite's general and
administrative expenses pursuant to the Company's acquisition of Skysite.
The Company granted stock options to various employees and other
individuals during fiscal 1996 and1997. In connection with the granting of these
options, the Company recorded stock option compensation expense in the amount of
$1,252,657 in fiscal 1997 as compared to $2,927,083 in fiscal 1996. The amount
recorded represents the difference between the exercise price and the fair
market value of the Company's Common Stock, as of the date the options were
granted.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been dependent on a series of equity fundings to provide
the capital required to conduct its business. It has never produced a positive
cash flow from operations. When it abandoned its initial activities related to
production of television set-top electronic devices in 1997, it did not have
sufficient cash on-hand or readily available to finance its expenses during a
repositioning and start-up of its new satellite telephone business. Its entry
into that business has been made possible by the issuance of three series of
convertible preferred stock during 1997 and 1998. The capital raised in these
offerings was sufficient to fund activities through 1998 and early 1999. But
sustained and growing operating losses nearly exhausted the Company's cash by
the end of the third quarter of 1999.
Cash and cash equivalents were $1,395,480 on December 31, 1998. A net loss
of approximately $5,575,000 in the first nine months of 1999 (prior to
depreciation, amortization and goodwill) was
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partially offset by an increase in accounts payable of approximately $1,812,000,
a depletion of inventory of approximately $678,000 and other factors. Net cash
used in operating activities in the nine months of 1999 was $2,809,130. The
Company also made capital expenditures of $792,424 during the nine months. This
combined operating and capital deficit of $3,601,554 was met in large part by
using $1,355,261 of the cash on hand at the start of the year and through
increases in non-trade debt and sales of assets yielding $1,894,721. The Company
increased debt primarily through borrowings of $890,000 from shareholders and
directors and approximately $520,000 from TELCAM. The assets liquidated by the
Company included securities sold for approximately $131,000 and notes receivable
for approximately $324,000. Equity transactions during the first nine months of
1999 provided additional working capital of $416,025.
Cash and cash equivalents were $40,219 on September 30, 1999.
The Company has required cash in excess of $100,000 per month since October to
continue at its current level of operations. The ability of the Company to raise
this additional cash is greatly diminished by its disappointing operating
results and the considerable weakening of its balance sheet in the nine months
of the year. The Company's current expenses in the fourth quarter have been met
through additional loans provided by TELCAM in anticipation of the Merger. There
can be no assurance that such funding will continue or that adequate funds will
be available for the Company to meet the substantial costs of consummating the
Merger. Management of the Company believes that it is unlikely that the Company
could avoid a total suspension of operations or liquidation if it is unable to
consummate the Merger.
The Company's prospects must be considered in relation to the uncertainties
regarding the completion of the Merger and the potential benefits and risks of
the Merger if consummated. For the years ended December 31, 1997 and 1998, the
Company's net losses were $4,685,185 and $7,265,156, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF TELCAM
GENERAL
TELCAM was incorporated in June, 1994. Since fiscal year 1997,
it has experienced a decline in revenues and net income. This decline
accelerated in the first nine months of fiscal 1999 resulting in a net loss of
almost $500,000 for that period. TELCAM's management believes that the negative
pattern is attributable to several factors. There has been no reinvestment of
earnings in the Company and this has resulted in a diminished marketing effort
in recent periods. Inefficient billing practices have resulted in delayed or
lost revenues. TELCAM changed ownership and management in June, 1999. Current
management has increased investment in marketing and other business development
activities. Through purchase of customers from other long-distance service
providers, customer count has increased from approximately 117,127 at June 30,
1999 to 442,560 at July 31, 1999. It is TELCAM's management's belief that the
reduced customer base of the Company in June, 1999 will limit for the immediate
future - while new customers are being qualified and receiving initial billings
- - any substantial increase in revenues.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30
1998
TELCAM earned $2,061,859 in revenue from the sale of long-distance services
in the 1999 period compared to $4,288,742 in the first nine months of 1998. The
decrease of $2,226,883 is the result of a decrease in subscribers during the
first half of 1999 and inefficient billing practices during the first nine
months of 1999.
Cost of goods sold decreased from $1,827,907 during the 1998 period to
$1,101,969 in the first nine months of 1999. The gross margin declined from
approximately 57% in the 1998 period to 47% in the 1999 period. TELCAM's
management believes that this is attributable to the general low level of
attention to the business by former management in the first half of 1999.
Sales and marketing expense in the first nine months of 1999 was $101,264
compared to $430,569 in the 1998 period. The decrease reflects the decreasing
investment of former management in marketing and promotion during the 1999
period.
General and administrative expenses decreased from $1,686,997 in the 1998 period
to $1,358,405 in the first nine months of 1999. Salaries expense, included in
general and administrative expense, decreased 56% from 1998 to 1999 which
reflects the turnover of management and office personnel during 1999.
TELCAM earned $3,358 of interest income during the 1999 period compared to
$9,884 during the corresponding period in 1998. The decrease of $2,419 or 43% is
consistent with the decrease in cash and cash equivalents during the periods.
94
<PAGE>
Net income was $353,153 for the first nine months of 1998 compared to a net loss
of $496,421 for the 1999 period. The decrease reflects the decrease in
subscriber revenue greater than the decreases in sales and marketing and general
and administrative expenses.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
TELCAM earned $4,928,412 in revenue from the sale of long-distance services in
1998 compared to $6,451,129 in 1997. The decrease of $1,522,717 or 24% reflects
the decrease in subscribers in 1998.
Cost of goods sold decreased from $3,162,725 during 1997 to $1,985,922 in 1998.
The gross margin increased from 51% to 60% from 1997 to 1998. Although the
reasons for this increase are uncertain, the increase in gross margin may have
resulted from lower long-distance carrier costs consistent with the pricing
trend in the industry.
Sales and marketing expense in the 1998 was $496,073 compared to $575,500 in
1997. The decrease of $79,427 or 14% reflects the decrease in marketing and
promotion during 1998 as compared to 1997.
General and administrative expenses decreased from $2,500,857 in 1997 to
$2,211,294 in 1998, a decrease of $289,563 or 12%. Salaries expense, included in
general and administrative expense, decreased 24% from 1997 to 1998 which
reflects the turnover of management and office personnel during 1998. The
decrease in salaries expense is offset by the recording of the settlement of
litigation and corresponding legal fees in 1998.
TELCAM earned $12,013 of interest income during 1998 compared to $12,259 during
1997. Cash and cash equivalents during 1997 and 1998 remained constant.
Net income was $224,306 for 1997 compared to $247,136 for 1998. The increase of
$22,830 or 12% reflects the decrease in subscriber revenue offset by decreases
in sales and marketing and general and administrative expenses.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
TELCAM earned $11,244,242 in revenue from the sale of long-distance services in
1996 compared to $6,451,129 in 1997. The decrease of $4,793,113 or 43% reflects
the decrease in subscribers in 1997.
Cost of goods sold decreased from $4,536,322 during 1996 to $3,162,725 during
1997. The gross margin decreased from 60% to 51% from 1996 to 1997. The decrease
resulted from higher long-distance carrier costs in 1996 compared to 1997
consistent with the decrease in subscribers and services provided to the
subscribers in 1997.
Sales and marketing expense in the 1997 was $152,005 compared to $575,500 in
1997. The increase of $423,495 or 278% reflects the increase in marketing and
promotion during 1997 as compared to 1996.
95
<PAGE>
General and administrative expenses decreased from $5,171,178 in 1996 to
$2,500,857 in 1997, a decrease of $2,670,321 or 52%. The decrease reflects the
decrease in billing fees charged by the third-party billing and collection
provider due to the decrease in billings to subscribers in 1997.
TELCAM earned $30,486 of interest income during 1997 compared to $12,259 during
1997. The decrease of $18,227 or 60% results from the decrease in cash and cash
equivalents during 1997 as compared to 1996.
Net income was $1,415,223 for 1996 compared to $224,306 for 1997. The decrease
of $1,190,917 or 84% reflects the decrease in subscriber revenues in 1997 as
compared to 1996.
LIQUIDITY AND CAPITAL RESOURCES
TELCAM has, in each of the last three years, distributed to
its shareholders, through dividends and stock repurchases, somewhat more than
the cash provided by operations. The result has been that the cash and cash
equivalents available at the end of each year since 1995 have declined from
$883,824 at December 31, 1995 to $413,829 at December 31, 1998. At September 30,
1999, cash and cash equivalents had declined to $11,384.
Since that date TELCAM has arranged the sale of $1,800,000 of its
convertible notes. Of those funds, $900,000 was received in mid-December and the
remainder was released from escrow upon the filing of this Proxy Statement. The
terms of the notes include, in addition to other customary provisions,
provisions that (a) if the Merger is completed before December 31, 1999, TELCAM
will convert the notes into common stock of TELCAM equal in total to the product
of (i) the total amount advanced to TELCAM under the notes divided by
$2,150,000, multiplied by (ii) 25% of the number of shares of common stock of
TELCAM issued and outstanding immediately prior to the consummation of the
Merger, (b) if the Merger is not completed by December 31, 1999, each holder of
the notes may elect to convert its notes into common stock of TELCAM by
providing written notice of conversion to TELCAM before January 31, 2000, in
which event TELCAM shall deliver to the holder the number of shares of common
stock of TELCAM equal to the product of (i) the total amount advanced to TELCAM
oration under its note divided by $2,150,000, multiplied by (ii) 25% of the
number shares of common stock of TELCAM issued and outstanding immediately prior
to such conversion, (c) if the Merger is not completed by December 31, 1999 and
a holder of the notes has not delivered written notice of conversion to TELCAM
before January 31, 2000, then that holder shall be deemed to have forever waived
its conversion option and the amount advanced under its note shall be due and
payable in twenty-four (24) consecutive quarterly installments commencing on
April 1, 2000 and continuing on the first day of each three-month period
thereafter and (d) the notes will bear no rate of interest.
The ability of the TELCAM to continue and expand its operations and to make
loans to USDI needed to complete the Merger was dependent on its receiving these
funds. TELCAM now expects to be able to support these and other necessary
activities from the proceeds of these notes until current revenues from the
receipts of billings to newly acquired customers are sufficient to provide
positive cash flow. There can be no assurance that the funds received from the
notes will in fact be adequate to allow the completion of the Merger or the
uninterrupted continuation or expansion of TELCAM's business. In addition, the
liquidity of the Company after completion of the Merger could be adversely
affected if the
96
<PAGE>
holders of the notes opt for their repayment in cash.
COMPARATIVE STOCK PRICE DATA AND DIVIDEND HISTORY
The Company's Common Stock has been traded on a limited basis on the OTC
Bulletin Board under the symbol USDI since October 29, 1997. Prior to October 29
1997, and subsequent to December 8, 1995, the Company's Common Stock had been
traded on the OTC Bulletin Board under the symbol VICP. The following table sets
forth the range of high and low bid prices as reported on the OTC Bulletin
Board. These prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
First Quarter $ 2.06 $ 1.06
Second Quarter $ 1.59 $ 0.31
Third Quarter $ 2.44 $ 0.61
Fourth Quarter $ 2.65 $ 0.67
1998
First Quarter $ 1.61 $ 0.67
Second Quarter $ 5.25 $ 0.77
Third Quarter $ 7.00 $ 2.25
Fourth Quarter $ 5.44 $ 2.31
1999
First Quarter $ 3.91 $ 1.44
Second Quarter $ 2.16 $ 0.53
Third Quarter $ 0.84 $ 0.18
Fourth Quarter through $ 0.40 $ 0.14
December 15, 1999
</TABLE>
There were ____ shareholders of record of the Common Stock as of December
31, 1999. As of December 15, 1999, the closing bid price of the Company's Common
Stock was $0.18 as quoted on the OTC Bulletin Board.
97
<PAGE>
USDI AND TELCAM
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
USDI TELCAM ADJUSTMENTS PRO FORMA
----------------- --------------- ------------ -------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $40,219 $11,384 $51,603
Accounts receivable, net 255,365 772,759 1,028,124
Inventory 117,297 --- 117,297
Prepaid Expenses 64,048 --- 64,048
Due from USDI and subsidiary 151,911 a (151,911) 0
----------------- --------------- ------------ -------------
Total current assets 476,929 936,054 -- 1,261,072
----------------- --------------- ------------ -------------
Property and Equipment, net 717,446 95,561 813,007
Other noncurrent assets 153,402 18,073 j 171,475
----------------- --------------- ------------ -------------
$1,347,777 $1,049,688 -- $2,245,554
----------------- --------------- ------------ -------------
----------------- --------------- ------------ -------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current Liabilities
Notes payable, current $2,324,835 $8,360 b ($2,324,835) $8,360
portion
Accounts payable 3,180,526 530,704 a,f 348,089 4,059,319
Accrued expenses --- 474,782 474,782
Deferred revenue 91,809 -- 91,809
Dividends payable 803,788 -- b (844,417) --
Stockholder loans, current 500,000 -- b (500,000) --
portion
Accrued interest on 126,710 -- c (106,709) --
stockholder loans
Other current liabilities 450,000 -- 450,000
----------------- --------------- ------------ -------------
</TABLE>
98
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Total current liabilities 7,477,668 1,013,846 (3,427,872) 5,084,270
-------------- --------------- -------------- -------------
Notes payable, net of current portion -- 17,451 -- 17,451
-------------- --------------- -------------- -------------
Stockholders' Equity (Deficit)
Preferred Stock 52 -- d (52) --
Common Stock 337,458 293,000 b,c,d,e,g,h,i (193,202) 437,256
Additional Paid In Capital 28,698,913 -- b,c,d,e,f,g,h,i (28,698,913) 0
Treasury Stock (10) (482,269) e 482,279 --
Common Stock Warrants 6,653,218 -- 6,653,218
Stockholders' receivable (200,000) -- (200,000)
Retained Earnings (Accum (41,619,522) 207,660 b,c,g,k 31,665,221 (9,746,641)
Deficit)
-------------- --------------- -------------- -------------
(6,129,891) 18,391 3,255,333 (2,856,167)
-------------- --------------- -------------- -------------
$1,347,777 $1,049,688 -- $2,245,554
-------------- --------------- -------------- -------------
-------------- --------------- -------------- -------------
</TABLE>
99
<PAGE>
USDI AND TELCAM
NOTES TO PROFORMA CONDENSED COMBINED BALANCE SHEETS
SEPTEMBER 30, 1999
(UNAUDITED)
a Adjustment to eliminate advances between USDI and TELCAM.
b Adjustments to reflect the conversion of dividends payable and shareholder
loans to Common Stock at a price of $.183 per share.
<TABLE>
<S> <C>
Dividends payable, September 30, 1999 $803,788
Dividends accrued during 1999 (219,711)
------------------------
Dividends payable, January 1, 1999 584,077
Price of Common Stock to be exchanged $0.183
------------------------
Common stock to be issued 3,191,678
Par value per share 0.01
------------------------
$31,917
========================
Stockholder loan, January 1, 1999 $500,000
Notes payable, June 30, 1999 2,324,835
------------------------
2,824,835
Price of Common Stock to be exchanged $0.183
------------------------
Common stock to be issued 15,436,257
Par value per share 0.01
------------------------
$154,364
========================
</TABLE>
c Adjustment to reverse accrual of interest for 1999 on stockholder loan
converted into Common Stock and reflect conversion of accrued interest into
Common Stock.
<TABLE>
<S> <C>
Accrued interest, September 30, 1999 $126,710
Interest accrued during 1999 (60,003)
--------------------
$66,707
Price of Common Stock to be exchanged $0.183
--------------------
Common stock issued 364,519
Par value per share 0.01
--------------------
$3,645
====================
</TABLE>
d Adjustments to reflect the conversion of 520,000 shares of preferred stock,
$.01 par value, into 38,866,198 shares of Common Stock $.01 par value.
e Adjustment to record cancellation of 5,902,200 shares of treasury stock
recorded at $10.
100
<PAGE>
<TABLE>
<S> <C>
Treasury stock cancelled (5,902,200)
Par value per share 0.01
--------------------
($59,022)
====================
</TABLE>
f Adjustment to record anticipated expenses of $500,000 in connection with
the Merger of USDI and TELCAM.
g Adjustment to reflect adjustment to TELCAM Common Stock, 293,000 shares
outstanding, no par value, and USDI accumulated deficit in connection with
the Merger of USDI and TELCAM.
h Adjustment to record the issuance of common shares sufficient for TELCAM
stockholders to have a 51% ownership of the combined company.
<TABLE>
<S> <C>
Estimated USDI shares outstanding
pre-Merger and stock split 85,702,274
USDI exchange ratio 1.0408
--------------------
Issuance of Common Stock to TELCAM
stockholders 89,200,327
Par value per share 0.01
--------------------
$892,004
====================
</TABLE>
i Adjustment to reflect 1:4 reverse stock split and adjustment to Common
Stock outstanding.
<TABLE>
<S> <C>
Common stock outstanding after
conversions and retirement of
treasury stock 174,902,599
Reverse stock split ratio 1 for 4
--------------------
Common stock outstanding post-
Merger and stock split 43,725,650
====================
Common stock outstanding post-
Merger and stock split 43,725,650
Common stock outstanding prior to
stock split 174,902,599
--------------------
Decrease in Common Stock outstanding (131,176,949)
Par value per share 0.01
--------------------
($1,311,769)
====================
</TABLE>
j Adjustment to write-off goodwill resulting from Merger.
101
<PAGE>
USDI AND TELCAM
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MERGER
----------------------------
HISTORICAL HISTORICAL
TELCAM USDI ADJUSTMENTS PRO FORMA
------------ --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue $2,061,859 $1,282,182 $3,344,041
Cost of Sales 1,101,969 1,325,300 $2,427,269
------------ --------------- -------------- ----------------
Gross Profit 959,890 (43,118) --- 916,772
------------ --------------- -------------- ----------------
OPERATING EXPENSES:
Sales and marketing 101,264 1,726,226 1,827,490
General and administrative 1,358,405 3,933,066 5,291,471
Goodwill writeoff --- 665,895 a 9,954,301 10,620,196
Research and development --- 187,112 187,112
------------ --------------- -------------- ----------------
Total operating 1,459,669 6,512,299 9,954,301 17,926,269
------------ --------------- -------------- -------------------
Income (loss) from operations (499,779) (6,555,417) (9,954,301) (17,009,497)
OTHER INCOME (EXPENSE):
Interest expense --- (62,262) b 60,003 (2,259)
Gain / (loss) on investments --- 90,049 90,049
Interest and other income 3,358 46,969 50,327
------------ --------------- -------------- ----------------
3,358 74,756 60,003 138,117
------------ --------------- -------------- -------------------
Net Income (loss) ($496,421) (6,480,661) ($9,894,298) ($16,871,380)
Dividends/Beneficial conversion
feature --- (3,065,711) (3,065,711)
------------ --------------- -------------- ----------------
Net income (loss) available to
common shareholders ($496,421) ($9,546,372) ($9,894,298) ($19,937,091)
============ =============== ============== ================
Basic loss per common share ($1.01) ($0.45) ($0.46)
Diluted 1oss per common share ($1.01) ($0.45) ($0.46)
</TABLE>
102
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Weighted average shares (c)
Basic 492,500 21,092,551 43,725,650
Diluted 492,500 21,092,551 43,725,650
</TABLE>
a Adjustment to write off goodwill resulting from Merger.
b Adjustment to reverse the accrual of interest for the period January 1,
1999 through September 30, 1999 on Stockholder loan converted into Common
Stock.
c Assumes a 1:4 reverse stock split.
103
<PAGE>
USDI AND TELCAM
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MERGER
--------------------------------
HISTORICAL HISTORICAL
TELCAM USDI ADJUSTMENTS PRO FORMA
-------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Revenue $4,928,412 $1,179,922 $6,108,334
Cost of Sales 1,985,922 954,365 $2,940,287
-------------- --------------- -------------- ----------------
Gross Profit 2,942,490 225,557 --- 3,168,047
-------------- --------------- -------------- ----------------
OPERATING EXPENSES:
Sales and marketing 496,073 1,499,802 1,995,875
General and administrative 2,211,294 5,245,277 7,456,571
Write off of goodwill --- --- a 5,712,214 5,712,214
Stock option compensation --- 528,690 528,690
Research and development --- 397,869 397,869
-------------- --------------- -------------- ----------------
Total operating 2,707,367 7,671,638 5,712,214 16,091,219
-------------- --------------- -------------- ----------------
Income (loss) from operations 235,123 (7,446,081) (5,712,214) (12,923,172)
OTHER INCOME (EXPENSE):
Interest expense (148,905) b 66,707 (82,198)
Gain / (loss) on investments 339,460 339,460
Interest and other income 12,013 (9,630) 2,383
-------------- --------------- -------------- ----------------
12,013 180,925 66,707 259,645
-------------- --------------- -------------- ----------------
Net Income (loss) 247,136 (7,265,156) (5,645,507) (12,663,527)
Dividends/Beneficial conversion feature --- (4,106,164) (4,106,164)
-------------- --------------- -------------- ----------------
Net income (loss) available to
common shareholders $247,136 ($11,371,320) ($5,645,507) ($16,769,691)
============== =============== ============== ================
Basic income (loss) per common share $0.50 ($0.69) ($0.47)
</TABLE>
104
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Diluted income (1oss) per common share $0.50 ($0.69) ($0.47)
Weighted average shares (c)
Basic 492,500 16,567,594 35,520,531
Diluted 492,500 16,567,594 35,520,531
</TABLE>
a Adjustment to write off goodwill resulting from Merger.
b Adjustment to reverse the accrual of interest for 1998 on stockholder loan
converted into Common Stock. stockholder loan converted into Common Stock.
C Assumes a 1:4 reverse stock split.
105
<PAGE>
DESCRIPTION OF USDI CAPITAL STOCK
The Company is authorized by its Articles of Incorporation, as amended,
to issue 46,426,777 shares of Common Stock and 10,000,000 shares of Preferred
Stock, par value $.01 per share (the "Preferred Stock"), which Preferred Stock
may be issued with such rights, designations and privileges as the Board of
Directors may from time to time determine. As of the date hereof, there were
40,524,577 outstanding shares of Common Stock and 3,660 (preferred) shares
of Preferred Stock outstanding.
The following summary descriptions are, to the extent applicable,
qualified in their entirety by reference to the Company's Articles of
Incorporation, as amended.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voting for the election of
directors can elect all of the directors then up for election. The holders of
Common Stock are entitled to receive ratably such dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. In
the event of liquidation, dissolution or winding up of the Company, the holders
of Common Stock are entitled to share ratably in all assets remaining which are
available for distribution to them after payment of liabilities and after
provision has been made for each class of stock, if any, having preference over
the Common Stock. Holders of Common Stock, as such, have no conversion,
preemptive or other subscription rights, and there are no redemption provisions
applicable to the Common Stock. All of the outstanding shares of Common Stock
are validly issued, fully paid and nonassessable.
PREFERRED STOCK
SERIES A PREFERRED STOCK. In December 1996 and again in August 1997,
the Company offered and subsequently issued, through private offerings under
Regulation S, 8% cumulative convertible preferred stock ("Series A Preferred
Stock"), $0.01 par value per share. The Series A Preferred Stock is nonvoting.
The Company issued 4,338,832 total shares of Series A Preferred Stock in the two
offerings.
Series A preferred stockholders have the right to convert each share
into one share of Common Stock as follows: (a) 25 percent of the shares 90 days
following the date the shares were issued (the "Series A Initial Conversion
Date") and (b) 25 percent of the shares at the end of each of the three
consecutive 90-day periods following the Series A Initial Conversion Date. The
Company converted 637,500 shares of Series A Preferred Stock to an equal number
of shares of Common Stock through December 31, 1998.
Six months after the date of issuance of the Series A preferred shares,
the Company has the option to require each Series A preferred stockholder to
convert each of such shares into one share of Common Stock. Upon such
conversion, all of the warrants attached to such shares become fully
exercisable. The Company exercised that option on August 11, 1999 in relation to
all of the outstanding shares of Series A Convertible Preferred Stock.
106
<PAGE>
Each Series A preferred stockholder was entitled to receive quarterly
dividends on the last day of March, June, September and December in an amount
equal to 8% per annum of the stated value of the Series A Preferred Stock and
dividends of approximately $804,000 accrued prior to the full conversion of the
series remain due.
Upon any voluntary or involuntary liquidation, dissolution or winding
up of the Company (a "Liquidation"), the holders of the Series A Preferred Stock
were entitled to be paid, before any distribution or payment is made in respect
of any other subordinate class of Preferred Stock or Common Stock as to
distribution on liquidation, dissolution or winding up, an amount in cash equal
to the aggregate stated value ($1.50 per share) of all shares outstanding plus
all accrued but unpaid dividends. Pursuant to the terms of the Certificate of
Designation for the Company's Seires A Preferred Stock, the Company delcared
a conversion on August 11, 1999 of the 2,485,997 shares of that class of
perferred stock then outstanding into an equal number of Common Shares.
Following that conversion, as of August 31, 1999, the Company accrued
approximately $804,000 in dividends payable to holders of its Series A
Preferred Stock. It plans to offer to convert this amount at a rate of $0.18
per share, or greater, into a maximum of approximately 4,397,393 shares of its
Common Stock.
SERIES B PREFERRED STOCK. In April 1998, the Company created a
Series B issue of Preferred Stock, which it offered in a Regulation D private
placement. The Company offered and sold 3,000 shares of the 10,000,000
authorized shares of Preferred Stock at a purchase price of $1,000 per share.
Each share has a stated value of $1,000 ("Series B Stated Value") and a par
value of $0.01 per share ("Series B Preferred Stock"). The Series B Preferred
Stock does not pay dividends and is nonvoting stock. Each share of Series B
Preferred Stock is convertible into shares of the Company's Common Stock
based upon a conversion formula, as defined in the offering agreement pursuit
to which such Series B Preferred Stock was offered and sold.
Each holder of Series B Preferred Stock has the right to convert their
shares as follows: (a) 50 percent of the shares on the effective date of
registration ("Series B Conversion Date") at the Series B Conversion Price
(lesser of (i) 25% off of the five-day average Closing Bid Price for the
Company's Common Stock immediately before conversion or (ii) 100 percent of
Closing Bid Price for the Company's Common Stock on the date of closing, but not
less than $.50 per share of the Company's Common Stock) and (b) 50% of the
shares on the forty-fifth (45th) day after the effective date of registration at
the Series B Conversion Price. The holder shall be entitled to an additional
discount privilege equal to 1% per month, or fraction of a month, from the time
of closing until the Series B Conversion Date for any conversion thirty (30)
days after the Series B Conversion Date and 0.5% per month or fraction of a
month for any conversions thereafter ("Series B Additional Discount"). All
shares outstanding on May 1, 2001 will be automatically converted into Common
Stock in accordance with the conversion formula, at the Series B Conversion
Price.
The Company has the right, in its sole discretion, to redeem in whole
or in part any shares of Series B Preferred Stock submitted for conversion. The
redemption price per share of Common Stock after conversion of the Series B
Preferred Stock will be calculated as 133% of the face value plus any accrued
Series B Additional Discount. The Company offered on June 22, 1999 to redeem 20%
of the holdings of each Series B Preferred stockholder at a rate of 2,822 shares
of the Company's Common Stock per share of preferred stock redeemed. None of the
Series B shares was eligible at that time for conversion at the option of the
holder under the offering agreement. Six hundred shares of Series B Preferred
Stock were redeemed on this basis during June and July 1999. The Company has
since offered to redeem the remaining Series B shares at various conversion
rates. An additional 1,070 shares of Series B Preferred Stock have been redeemed
on this basis.
In the event of a Liquidation, the holders of shares of the Series B
Preferred Stock then issued and outstanding shall be entitled to be paid out of
the assets of the Company available for distribution to
107
<PAGE>
its shareholders, whether from capital, surplus or earnings, before any payment
shall be made to the holders of shares of the Common Stock or upon any other
series of Preferred Stock of the Company with a liquidation preference
subordinate to the liquidation preference of the Series A Preferred Stock. The
amount of the pay-out will be an amount per share equal to the Series B Stated
Value.
The Series B Preferred Stock subscription agreements contain a "put"
provision for Common Stock which specifies that 75 days after the effective date
of the registration of additional common shares to be used under this provision,
the Company may sell Common Stock (the "Put Stock") to the Series B subscribers.
The price of the Put Stock is determined by taking the lower of (1) 80 percent
of the lowest closing bid price for the previous 20 trading days prior to
funding or (2) 80 percent of the closing bid price on the day of funding. The
minimum draw is $250,000 and the maximum draw is $750,000. If the price of the
Company's Common Stock for the 20 trading days prior to the funding is less than
$1.25 and the average trading volume is less than $300,000 per day for the
previous 20 trading days, the Series B shareholders have the option not to fund
the requested draw. These minimums increase as the amount of the funds requested
by the Company increase from $250,000 to $750,000.
SERIES C PREFERRED STOCK. In August 1998, the Company created a Series
C issue of Preferred Stock. The Company offered 4,000 shares, however when the
offering ended on September 1, 1998, the Company had issued 3,000 shares at a
purchase price of $1,000. In a second offering ended February 28, 1999, an
additional 200 shares were purchased at the same price. Each Share has a stated
value of $1,000 ("Series C Stated Value") and no par value ("Series C Preferred
Stock"). The Series C Preferred Stock does not pay dividends and is nonvoting
stock.
Fifty percent of each share of Series C Preferred Stock shall be
convertible on the earlier of the effective date of registration of the
Company's Common Stock ("Series C Conversion Date") or one-hundred and twenty
(120) days from the closing of the Series C Preferred Stock Offering. The
remaining fifty percent shall be convertible on the earlier of the
forty-fifth (45th) day after the effective date of registration or
one-hundred and sixty-five (165) from the closing of the Series C Preferred
Stock Offering. The Series C Conversion Price shall be either the discounted
price (twenty-five percent off of the five-day closing bid price) or $3.94,
whichever is less. However, in no event shall the conversion price be less
than $1.875 per share. In the event the stock is trading below $1.875 for
five consecutive days prior to the conversion date, the floor price will be
adjusted to the lowest closing bid price for the Company's Common Stock
during such five-day period from which the holder shall be entitled to an
additional discount. The holder shall be entitled to an additional discount
privilege equal to one percent (1%) per month, or fraction of a month, from
the time of closing until the Series C Conversion Date for any conversion
thirty (30) days after the Series C Conversion Date and one-half percent
(.5%) per month or fraction of a month for any conversions thereafter
("Series C Additional Discount"). All shares outstanding on June 1, 2001,
will be automatically converted into Common Stock on such date in accordance
with the Conversion Formula and the Series C Conversion Price then in effect.
During August 1999, 400 shares of Series C Preferred Stock were converted
into 1,566,519 common shares. Two-thousand six-hundred shares of Series C
Preferred Stock remain outstanding as of this date.
The Company has the right in its sole discretion, to redeem, prior to
receipt of a notice of conversion from the holder in whole or in part any shares
of Series C Preferred Stock. The redemption price per share of Series C
Preferred Stock shall be the greater of (i) as 133 percent of the Series C
Stated Value [plus any unpaid penalty should the Company not effect the date of
registration 150 days from
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<PAGE>
Closing] or (ii) the amount derived by multiplying the number of shares of
Common Stock into which the Series C Preferred Shares could have been converted
at the date of notice of conversion, by the closing asking price of the Common
Stock as of the date of notice. The Company shall not have a redemption
privilege if the Common Stock is trading above $3.50 per share unless the holder
agrees in writing to allow the Company to redeem such shares.
In the event of a Liquidation, the holders of shares of the Series C
Preferred Stock then issued and outstanding shall be entitled to be paid out of
the assets of the Company available for distribution to its shareholders,
whether from capital, surplus or earnings, before any payment shall be made to
the holders of shares of the Common Stock or upon any other series of Preferred
Stock of the Company with a liquidation preference subordinate to the
liquidation preferences of the Series A and B Preferred Stock. The amount of the
pay-out will be an amount per share equal to the Series C Stated Value.
WARRANTS
In conjunction with the Series B offering, 500,000 warrants were issued
to the Series B shareholders proportionate to each investor's number of shares
purchased to the total shares offered. Each warrant entitles the holder to
purchase shares of the Company's Common Stock at a price 110% of the closing bid
price as of the closing of the Series B offering. The exercise price is $4.34.
The exercise price and number of shares to be purchased may be adjusted from
time to time based on computations included in the warrant agreement. Such
warrants are exercisable for three years after closing of the Series B offering.
Under the terms of the placement agent agreement related to the issuance of
Series B preferred stock, the placement agent was issued warrants to purchase
250,000 shares of Common Stock at a price and under the conditions of the Series
B preferred stock investors' warrants.
In conjunction with the Series C offering, 511,667 warrants were issued
to the Series C shareholders proportionate to each investor's number of shares
purchased to the total shares offered. Each warrant entitles the holder to
purchase shares of the Company's Common Stock at a price of $4.34. The exercise
price and numbers of shares to be purchased may be adjusted from time to time
based on computations included in the warrant agreement. Such warrants are
exercisable for three years after closing of the Series C offering. Under the
terms of the placement agent agreement related to the issuance of Series C
preferred stock, the placement agent was issued warrants to purchase 250,000
shares of Common Stock at a price and under the conditions of the Series C
preferred stock investors' warrants.
PUT OPTION
The Series B preferred stock subscription agreements contain a "put"
provision for Common Stock which allows the Company to raise an additional
$3,000,000. The provision specifies that 75 days after the effective date of the
registration of additional common shares to be used under this provision, the
Company may from time to time sell Common Stock (the "put stock") to the Series
B subscribers. The price of the put stock is determined by taking the lower of
(1) 80% of the lowest closing bid price for the previous 20 trading days prior
to funding or (2) 80% of the closing bid price on the day of funding. The Series
B shareholders have the option not to fund any requested draw or some defined
part thereof if the price of the Company's Common Stock for the 20 trading days
prior to the funding is less than defined levels and the average trading volume
is less than defined levels per day for the previous 20 trading days. The Series
B shareholders may opt not to fund a requested draw in any amount if the price
of the Company's Common Stock for the 20 trading days prior to that funding is
less than $1.25 and the average
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<PAGE>
trading volume is less than $300,000 per day for the previous 20 trading days .
The amount that the Company can require to be funded by the Series B
shareholders in a given draw increases from a minimum of $250,000 when the
minimum levels stated above are met to $750,000 as higher price and trading
volume criteria are met.
DIVIDENDS
To date, the Company has not declared or paid any dividends on its
Common Stock. The payment by the Company of dividends, if any, is within the
discretion of the Board of Directors and will depend on the Company's earnings,
if any, its capital requirements and financial condition, as well as other
relevant factors. The Board of Directors does not intend to declare any
dividends in the foreseeable future, but instead intends to retain earnings for
use in the Company's business operations.
TRANSFER AGENT
The transfer agent for the Common Stock is Corporate Stock Transfer,
Republic Plaza, 370 17th Street, Denver, Colorado.
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<PAGE>
COMPARISON OF RIGHTS OF STOCKHOLDERS OF USDI AND
STOCKHOLDERS OF TELCAM
The table below shows summary historical financial data for TELCAM and
USDI, as well as pro forma information. The "equivalent pro forma" and the "pro
forma combined" information assume the Merger will be treated as a purchase for
financial reporting purposes in accordance with generally accepted accounting
principles. In accordance with the provisions of Accounting Principles Board
Opinion No. 16, "Business Combinations," TELCAM will be considered the acquiring
enterprise for financial reporting purposes. USDI's unaudited "pro forma"
financial statements give effect to the acquisition of USDI by TELCAM under the
purchase method of accounting and are based on the assumptions and adjustments
described in the notes of the USDI unaudited pro forma financial statements. The
USDI "pro forma equivalent" were calculated by multiplying the corresponding pro
forma combined data by the USDI exchange ratio of .9804 (1/1.02). This
information shows how each share of Common Stock would have participated in net
earnings, cash dividends and book value of TELCAM's Common Stock if the
companies had been combined for accounting and financial reporting purposes as
of January 1, 1998. The data set forth below should be read in conjunction with
the TELCAM and USDI audited consolidated financial statements. The data should
also be read in conjunction with the USDI unaudited consolidated financial
statements. The data should also be read in conjunction with the USDI unaudited
pro forma financial statements, including notes thereto. However, these amounts
do not necessarily reflect future per share levels of earnings, cash dividends
or book value.
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, 1998 Ended September 30, 1999
----------------- ------------------------
<S> <C> <C>
USDI - HISTORICAL
Basic net loss per share $(0.69) $(0.45)
Diluted net loss per share (0.69) (0.45)
Book value per share (0.033) (0.29)
TELCAM - HISTORICAL
Basic net loss per share 0.50 (1.01)
Diluted net loss per share 0.50 (1.01)
Book value per share 1.05 0.04
PRO FORMA - COMBINED
(Assuming the Merger had been effective at
the beginning of fiscal year 1998)
Basic net loss per share (0.47) (0.46)
Diluted net loss per share (0.47) (0.46)
Book value per share 0.06 (0.07)
EQUIVALENT PRO FORMA USDI
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Basic net loss per share (0.46) (0.45)
Diluted net loss per share (0.46) (0.45)
Book value per share 0.06 (0.07)
</TABLE>
The Board of Directors Unanimously Recommends A Vote for Proposal No. 1:
The Merger.
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<PAGE>
PROPOSAL NO. 2: APPROVAL OF INCREASE IN NUMBER OF AUTHORIZED SHARES OF
COMMON STOCK
INTRODUCTION
The Board of Directors of the Company has unanimously adopted a
resolution that submits for stockholder approval at the Special Meeting an
amendment (the "Pre-Merger Amendment") to the Company's Articles of
Incorporation that would increase the total number of authorized shares of
capital stock to 335,000,000 of which 325,000,000 shall be designated Common
Stock, par value $.01 and 10,000,000 shares shall be designated preferred stock
(the "Increase") (assuming approval of Proposal No. 1 - see the next succeeding
paragraph). A copy of the Company's Pre-Merger Amendment to its Articles of
Incorporation is attached hereto as Appendix B. A vote in favor of Proposal
No.2 will constitute a vote in favor of the proposed amendment as shown in said
Appendix.
If the Pre-Merger Amendment is approved by the stockholders of the
Company, the Board of Directors will then vote upon the Pre-Merger Amendment.
Management of the Company anticipates that the Pre-Merger Amendment will be
approved by the Board of Directors if Proposal No. 1 is approved by the
stockholders of the Company. If Proposal No. 1 is not approved by the
stockholders of the Company, the Board of Directors will not approve the
Increase. If the Board of Directors approves the Pre-Merger Amendment, then
pursuant to the Pre-Merger Amendment the total number of authorized shares of
capital stock shall be increased to 335,000,000 shares. The Effective Date will
be the date on which the Pre-Merger Amendment is filed with the Secretary of
State of the State of Nevada.
REASONS FOR APPROVING THE INCREASE
The Company's Articles authorizes the issuance of 60,000,000 shares of
capital stock consisting of 50,000,000 shares designated "Common Stock", par
value $.01 and 10,000,000 shares designated "Preferred Stock." The Articles
generally permits the Board to create and issue shares of Preferred Stock in
series or classes, with such number of shares, designation, par value, relative
voting, dividend, liquidation and other rights, preferences and limitations as
shall be determined by action by the Board of Directors pursuant to the
provisions of the Nevada Business Corporation Act. As of the date of this Proxy
Statement, 6,200 shares of Preferred Stock have been created or issued by the
Board consisting of 3,000 shares of Series B Convertible Preferred Stock and
3,200 shares of Series C Convertible Preferred Stock.
As of December 15, 1999, the Company had 36,237,858 shares of Common
Stock outstanding. In addition, as of such date, the Company had reserved
6,540,000 shares of Common Stock for the purposes of the Company's Stock Option
Plans and 7,000,000 for purposes of its convertible preferred stock. After
giving effect to the prior issuances of Common Stock and the prior reservations
of Common Stock, the Company has 222,142 shares of Common Stock remaining which
are authorized but not yet reserved or issued.
The Company expects to issue in excess of 150,000,000 shares in
connection with the Merger and related conversions and debt-related
transactions.
As a result, the number of authorized shares of Company Stock not
otherwise issued and outstanding or reserved for issuance is less than the
number of shares which the Company will require to
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meet its outstanding obligations if the Merger is consummated.
If this proposal is adopted, Article IV of the Company's Articles of
Incorporation will be amended to read as follows:
1. The total number of shares of capital stock which the
Corporation is authorized to issue is 310,000,000 shares of
which 325,000,000 shares shall be designated Common Stock, par
value $.01 ("Common Stock") and 10,000,000 shares shall be
designated preferred stock ("Preferred Stock"). The Board of
Directors of the Corporation is authorized to create and issue
shares of Preferred Stock in series or classes, with such number
of shares, designations, par value, relative voting, dividend,
liquidation and other rights, preferences and limitations as
shall be determined by action by the Board of Directors pursuant
to the provisions of the Nevada General Corporation Law. The
authority granted to the Board of Directors hereunder with
respect to each class or series shall include, but not be
limited to, the ability to determine the following:
(i) The extent of cumulative, non-cumulative or partially cumulative
dividends;
(ii) The rights of holders to receive dividends payable on a parity
with subordinate to or in preference to dividends payable on any
other class or series;
(iii) The preferential rights of holders upon the distribution of the
assets of or on liquidation of the Corporation;
(iv) The terms and conditions of redemption privileges of holders, if
any;
(v) The terms and conditions of voting rights of holders, if any;
and
(vi) Any other rights, preferences and limitations as may be
determined from time to time by action of the Board of Directors
of the Corporation pursuant to the Nevada General Corporation
Law.
The Board of Directors shall also have such authority to change from
time to time the designation or number of Preferred Stock or the relative
rights, preferences and limitations of the shares of Preferred Stock as shall be
permitted by the Nevada General Corporation Law.
The Board of Directors of the Company recommends increasing the
authorized shares of Common Stock to 325,000,000 shares, thereby increasing
total number of Common Stock and Preferred Stock shares authorized to
335,000,000 shares.
MARKET FOR COMPANY STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's shares have been traded on a limited basis on the OTC
Bulletin Board under the symbol USDI since October 29, 1997. Prior to October 29
1997, and subsequent to December 8, 1995, the Company's shares had been traded
on the OTC Bulletin Board under the symbol VICP. The following table sets forth
the range of high and low bid prices as reported on the OTC Bulletin Board.
These prices reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not
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represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1997
First Quarter $2.06 $1.06
Second Quarter $1.59 $0.31
Third Quarter $2.44 $0.61
Fourth Quarter $2.65 $0.67
1998
First Quarter $1.61 $0.67
Second Quarter $5.25 $0.77
Third Quarter $7.00 $2.25
Fourth Quarter $5.44 $2.31
1999
First Quarter $3.91 $1.44
Second Quarter $2.16 $0.53
</TABLE>
There were ___ shareholders of record of the Common Stock as of
December 31, 1999. As of December 15, 1999, the closing bid price of the
Company's Common Stock was $0.18 as quoted on the OTC Bulletin Board.
The Board of Directors Unanimously Recommends a vote for Proposal No. 2:
Approval of Increase in Number of Authorized Shares of Common Stock
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<PAGE>
PROPOSAL NO. 3: AUTHORIZATION OF AMENDMENT OF ARTICLES OF
INCORPORATION, INCLUDING AUTHORIZATION OF REVERSE STOCK SPLIT
INTRODUCTION
The Board of Directors of the Company has unanimously adopted a
resolution that submits for stockholder approval at the Special Meeting an
amendment (the "Amendment") to the Company's Articles of Incorporation that
would effect a 1-for-4 reverse stock split of the Common Stock and thereby
decrease the authorized number of shares of the Company's Common Stock to
81,250,000 (the "Reverse Split") (assuming approval of Proposal No. 2 see the
next succeeding paragraph). A copy of the Company's Amendment to its Articles of
Incorporation is attached hereto as Appendix B. A vote in favor of Proposal
No.3 will constitute a vote in favor of the proposed amendment as shown in said
Appendix.
If the Amendment is approved by the stockholders of the Company, the
Board of Directors will then vote upon the Amendment. Management of the Company
anticipates that the Amendment will be approved by the Board of Directors if
Proposal No. 2 is approved by the stockholders of the Company. If Proposal No. 2
is not approved by the stockholders of the Company, the Board of Directors will
not approve the Reverse Split. If the Board of Directors approves the Amendment,
then pursuant to the Amendment each 4 shares of Common Stock outstanding at the
effective date of the Reverse Split (the "Effective Date") will be converted
into one post-Reverse Split share of the Company's Common Stock (the "New Common
Stock"). The Effective Date will be the date on which the Amendment is filed
with the Secretary of State of the State of Nevada.
No scrip or fractional certificates will be issued in connection with
the proposed Reverse Split. Rather, the Company will round up to the nearest
whole share any fraction of a share that any stockholder would otherwise
receive.
REASONS FOR APPROVING THE REVERSE SPLIT
While management of the Company believes that the actual issuances of
Common Stock in connection with the Merger and conversion of Preferred Stock and
debt are in the best interests of the Company and its stockholders, it also
believes that upon conversion of Preferred Stock and debt and issuance of Common
Stock pursuant to the Merger Agreement, there will be too many shares of Common
Stock issued and outstanding for a corporation of the Company's size. At
current trading prices, the trading price of the Company's stock would be
very low. Even if the Company returns to profitability, it will likely report
very low earnings per share and book value per share because there will be so
many shares of Common Stock outstanding. This could have an adverse effect on
the marketability and trading price of the Common Stock.
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<PAGE>
In addition, even if the Reverse Split is implemented, there can be no
assurance that brokerage firms will be more inclined to recommend the Common
Stock or that institutional investors will be more included to invest in the
Common Stock or that an increased price will facilitate any possible raising of
additional capital. If the market value of the Common Stock does not adjust
proportionately, a significant loss of stockholder value could result. In
addition, a Reverse Split reduces the number of shares of Common Stock
outstanding, thereby adversely affecting liquidity and possibly depressing the
price of the Common Stock. For the reasons set forth above, the Board of
Directors believes that stockholder approval of the Amendment to effect the
Reverse Split is advisable at this time.
VESTING DISCRETION IN THE BOARD OF DIRECTORS
At present, the Board of Directors expects to direct management to file
the Amendment as promptly as practicable if approved by stockholders of the
Company. However, the Board would not be obligated to direct management to file
the Amendment, and would direct management not to file the portion of the
Amendment related to the Reverse Split if Proposal No. 2 with respect to the
amendment to the Company's Articles of Incorporation to increase the amount of
authorized Common Stock is not approved by the stockholders.
GENERAL EFFECT OF REVERSE SPLIT
The New Common stock will not be different from the Common Stock, and
the holders of the New Common stock or options or warrants to purchase the New
Common Stock will have the same relative rights following the Effective Date as
they have prior thereto.
The following table shows the effect of the Reverse Split on the
aggregate number of shares of the Company's Common Stock and on the
stockholders' equity section of the Company's balance sheet, on a pro forma
basis, as of December 15, 1999, assuming that the Merger and related equity and
debt transactions had been completed as contemplated in this Proxy and that
Proposal No. 2 had been adopted on or prior to that date.
<TABLE>
<CAPTION>
Prior to Proposed After Proposed
Number of Shares Reverse Split Reverse Split(1)
- ---------------- ----------- ----------
<S> <C> <C>
Common Stock
Authorized 325,000,000 81,250,000
Issued and outstanding 199,249,978 49,812,492
Available for issuance 100,075,003 25,187,508
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Stockholders' Equity
Common Stock $1,992,499 $498,124
Additional paid-in capital 0 1,494,375
Deficit (600,000) (600,000)
Employee purchase and option plans 0 0
Total stockholders' equity 490,000 490,000
Stockholders' equity per common share
outstanding $0.00 $0.02
</TABLE>
- ----------
(1) The number of shares shown above as being outstanding after the Reverse
Split do not reflect any adjustments that may result from rounding up
to the nearest whole share any fraction of a share that any stockholder
would otherwise receive.
EFFECT ON REGISTRATION
The Common Stock is currently registered under Section 12(b) of the
Exchange Act, and as a result, the Company is subject to the periodic reporting
and other requirements of the Exchange Act. The Reverse Split will not affect
the registration of the Common Stock under the Exchange Act.
EFFECT ON THE MARKET FOR THE COMMON STOCK
The Company's Common Stock has been traded on a limited basis on the
OTC Bulletin Board under the symbol "USDI" since October 29, 1997. The closing
bid price for the Common Stock on the OTC Bulletin Board on December 15, 1999,
was $0.18. The following table sets forth the high and low closing sale prices
for the Common Stock on the OTC Bulletin Board for each calendar quarter during
the 1998 and 1999 to-date.
<TABLE>
<CAPTION>
QUARTER 1998 1999
---------------------- -----------------------
High Low High Low
----- ----- ----- -----
<S> <C> <C> <C> <C>
First $1.61 $0.67 $4.13 $1.41
Second $5.25 $0.77 $2.16 $0.52
Third $7.00 $2.25 $0.84 $0.18
Fourth (1) $5.44 $2.31 $0.40 $0.14
</TABLE>
(1) In 1999, through December 15.
Management anticipates that after the Effective Date, the market price
of shares of New Common Stock will increase as a result of the decrease in the
number of shares outstanding. However, there is no assurance that such an
increase will occur and, if so, it cannot be predicted whether any such increase
will be in proportion to the Reverse Split.
EXCHANGE OF STOCK CERTIFICATES AND ELIMINATION OF FRACTIONAL SHARES
As soon as practicable after the Effective Date, the stockholders will
be notified and requested to surrender their certificates representing shares of
Common Stock to the Company's transfer agent so that
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certificates representing the appropriate number of shares of New Common Stock.
No scrip or fractional certificates will be issued in connection with the
proposed Reverse Split. Rather, the Company will round up to the nearest whole
share any fraction of a share that any stockholder would otherwise receive.
FEDERAL INCOME TAX CONSEQUENCES
A summary of the material federal income tax consequences of the
proposed Reverse Split is set forth below. The following discussion is based
upon present federal tax law and does not purport to be a complete discussion of
such consequences for all stockholders in all circumstances, nor does it address
state, local or foreign tax consequences or considerations. ACCORDINGLY,
STOCKHOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS FOR MORE DETAILED
INFORMATION REGARDING THE EFFECTS OF THE PROPOSED REVERSE SPLIT ON THEIR
INDIVIDUAL TAX STATUTES.
1. The proposed Reverse Split will not be a taxable transaction to the
Company.
2. A stockholder will not recognize any gain or loss as a result of the
Reverse Split. unless the stockholder receives cash in lieu of a fractional
share. Although it is impossible to predict with certainty the tax consequences
to any stockholder who receives cash in lieu of a fractional share, such
stockholder, depending on the circumstances, will either (i) recognize gain or
loss as a result of the Company's purchase of a fractional share based upon the
amount realized for the fractional share less the holder's proportionate
adjusted basis in such fractional share, or (ii) recognize dividend income in
any amount not in excess of the amount of proceeds received from the sale of the
fractional share.
3. The aggregate tax basis of the New Common Stock received by a
stockholder pursuant to the Reverse Split will equal the aggregate tax basis of
the stockholder's Common Stock prior to the Effective Date (except that such
basis will be reduced by any basis allocated to a fractional share redeemed by
the Company with respect to which the stockholder recognizes gain or loss as
described in clause (i) of paragraph 2 above). The holding period of the New
Common Stock received by the stockholder will include the holding period of the
stockholder's Common Stock before the Reverse Split, provided the shares of
Class A Common Stock were a capital asset in the hands of such stockholder.
Special taxation and withholding rules may apply to any stockholder that
is a nonresident alien or a foreign corporation. Those rules are beyond the
scope of this discussion and should be discussed with a personal tax advisor.
Stockholders will be required to provide their social security or other taxpayer
identification numbers (or, in some instances, certain other information) to the
transfer agent in connection with the Reverse Split to avoid backup withholding
requirements that might otherwise apply. See "Exchange of Certificates and
Elimination of Fractional Shares." The letter of transmittal will require each
stockholder to deliver such information when the Common Stock certificates are
surrendered following the Effective Date of the Amendment.
Failure to provide such information may result in backup withholding.
RIGHTS OF DISSENTING STOCKHOLDERS
TELCAM stockholders are entitled to dissent from the Merger and demand
appraisal of any TELCAM Common Stock in accordance with the provisions of
Articles 5.11 and 5.12 of the Texas Business Corporation Act, as amended (the
"TBCA"). Shares held by a party exercising these rights will
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not be converted and instead the party will receive cash in accordance with the
provisions of Article 5.12 of the TBCA.
Under the Nevada General Corporation Law, stockholders of the Company
are not entitled to any rights of appraisal or dissenters' rights in connection
with the adoption of Proposal No. 3 - Authorization Of Amendment Of Articles Of
Incorporation, Including Authorization Of Reverse Stock Split.
The Board Of Directors Unanimously Recommends A Vote For Proposal No. 3:
Authorization Of Amendment Of Incorporation, Including Authorization Of Reverse
Stock Split.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below is based on information obtained from the Company's
records or from the persons named below with respect to the shares of Common
Stock beneficially owned, as of December 15, 1999 (except as noted below), by
(i) each person known by the Company to be the owner of more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the Named Executive Officers and (iv) all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
Number of Shares Percentage of Shares
Beneficially Owned (2) Beneficially Owned (3)
---------------------------- ---------------------------
Name of Beneficial Owner(1)(5)(6)
- ------------------------------------
<S> <C> <C>
Robert Wussler 544,500 1.5
Charles Maynard (4) 120,000 *
Philip Kernan (4) 108,000 *
Thomas Glenndahl 460,197 1.9
Lawrence Siegel 536,000 1.4
A. Frans Heideman 368,000 *
Henrikas Iouchkiavitchious 368,000 *
All directors and executive officers as a group (9 2,695,050 7.0
persons)
</TABLE>
- ------------------
* Less than one percent.
(1) To the Company's knowledge, except as set forth in the footnotes to
this table and subject to applicable community property laws, each
person named in the table has or would have sole voting and investment
power with respect to the shares of Common Stock set forth opposite
such person's name. Each of such persons may be reached through the
Company at 2 Wisconsin Circle, Chevy Chase, Maryland 20815.
(2) For each of such persons except Mr. Glenndahl, represents currently
vested but unexercised options to purchase Common Stock. Mr.
Glenndahl's ownership consists of 408,353 shares of Common Stock and
270,197 currently vested but unexercised options to purchase Common
Stock.
(3) The percentage of beneficial ownership is calculated using 36,237,858
shares of Common Stock which were outstanding on December 15, 1999.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to the securities. In computing the
number of shares beneficially owned by a person and the percentage of
ownership of that person, shares of Common Stock subject to options
held by that person that are currently exercisable within 60 days of
August 23, 1999 are deemed outstanding. Such shares, however, are not
deemed outstanding for purposes of computing percentage ownership of
any other person.
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<PAGE>
(4) Mr. Kernan served as an officer of the Company's INSAT subsidiary
through December 31, 1998. Mr. Maynard served as an officer of the
Company's INSAT subsidiary through June 1999. Mr. Kernans' and Mr.
Maynard's shares beneficially owned are therefore not included in the
listing of shares owned by all directors and executive officers as a
group.
(5) In connection with two private offerings of the Company's Series A
Preferred Stock, the Company's placement agent, Wincap, Ltd., an
International Business Company incorporated in the Bahamas ("Wincap"),
received the right to acquire 2,380,000 shares of Common Stock. On
March 19, 1999, Wincap exercised such right and directed the Company to
issue Wincap 840,000 shares of Common Stock and to issue the remaining
1,540,000 shares to each of eight sub-agents. Each of Wincap and the
eight sub-agents has separately advised the Company that it disclaims
beneficial ownership with respect to any securities not actually issued
to it.
(6) As of August 23, 1999, Irving Goldstein and Thomas Wheeler, former
directors of the Company who resigned in June 1999, did not
beneficially own any shares of the Company's Common Stock.
The Company believes that upon the completion of the Merger, the following may
be holders of 5% or more of the Company's Common Stock: John Minter, Mike
Massingill, Gregory Hahn, RBB Bank and Mohamed Khalifa.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GENERAL
JEROME GREENBERG
On June 20, 1997, Jerome Greenberg agreed to contribute to the
Company's treasury 5,902,200 shares of Common Stock that he beneficially owned
in exchange for $10 and an agreement by the Company to use 6% of the funds
raised from the sale of its Series A Preferred Stock to repay outstanding notes
payable owed to Mr. Greenberg. As a result of this contribution, Mr. Greenberg
retained 655,800 shares (plus options to purchase an aggregate of 100,000 shares
of Common Stock). The Company entered into a settlement agreement with Mr.
Greenberg on August 24, 1998 whereby the Company agreed to grant 200,000 shares
of Common Stock to Mr. Greenberg and to pay him an aggregate of $750,000 in
three equal installments on September 1, 1998 and January 5 and February 28,
1999 as payment in full for the Company's outstanding obligation. As of January
31, 1999, the Company has only paid the first installment which was due on
September 1, 1998.
ROBERT WUSSLER
In March 1997, the Board of Directors agreed to pay Robert Wussler a
consulting fee of $8,000 per month. This consulting fee arrangement was
discontinued when Mr. Wussler was appointed President and Chief Executive
Officer of the Company in July 1998. In December, 1998, the Board of Directors
approved an employment agreement between the Company and Mr. Wussler. See page 9
in this Proxy Statement for a description of that agreement.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities, to file reports of ownership and change in
ownership with the Securities and Exchange Commission. Officers, directors and
greater than 10% shareholders are required by Securities and Exchange Commission
regulations to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on its understanding of the Section 16(a) filing requirements
and the absence of forms furnished to the Company, the Company believes that
during fiscal 1998 the following individuals failed to meet the Section 16(a)
filing requirements applicable to its directors, officers and greater than 10%
beneficial owners by not timely filing a Form 3, Initial Statement of Beneficial
Ownership of Securities and/or a Form 4, Statement of Changes of Beneficial
Ownership of Securities and/or a Form 5, Annual Statement of Beneficial
Ownership of Securities: Mr. Glenndahl, Hugh Jencks, Jerome Greenberg, Mr.
Wussler, Mr. Siegel, Mr. Maynard, Mr. Kernan, Mr. Kopf, Mr. Ives, Mr. Heideman,
and Mr. Iouchkiavitchious.
OTHER MATTERS
The Board of Directors knows of no other matters to be presented for action at
the Special Meeting. If any other matters should properly come before the
Special Meeting, it is intended that votes will be cast pursuant to the proxy in
respect thereto in accordance with the best judgment of the persons acting as
proxies. The Company's independent auditors for the fiscal
123
<PAGE>
year ended December 31, 1998 were Reznick Fedder & Silverman P.C., independent
public accountants. The Board of Directors has appointed and Shareholders
approved Reznick Fedder & Silverman P.C. to audit the financial statements of
the Company for the fiscal year ending December 31, 1999. It is expected that
representatives of Reznick Fedder & Silverman P.C. will be present at the
Special Meeting to respond to appropriate questions, and will have the
opportunity to make a statement if they chose to do so.
INFORMATION RELATING TO TELCAM
TELCAM has provided all information relating to TELCAM contained or incorporated
by reference in this Proxy Statement. Although USDI believes such information is
accurate, USDI has not independently verified such information.
The Board of Directors
[_________], 1999
124
<PAGE>
INDEX TO FINANCIAL STATEMENTS
USDI and TELCAM Unaudited Pro Forma Statements..............................F-1
TELCAM Consolidated Financial Statements....................................F-7
USDI Consolidated Financial Statements.....................................F-22
<PAGE>
USDI AND TELCAM
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Historical Historical
USDI Telcam Adjustments Pro Forma
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $40,219 $11,384 $51,603
Accounts receivable, net 255,365 772,759 1,028,124
Inventory 117,297 -- 117,297
Prepaid Expenses 64,048 -- 64,048
Due from USDI and subsidiary 151,911 a (151,911) 0
---------------- --------------- --------------- ----------------
Total current assets 476,929 936,054 (151,911) 1,261,072
---------------- --------------- --------------- ----------------
Property and Equipment, net 717,446 95,561 813,007
Other noncurrent assets 153,402 18,073 j 171,475
---------------- --------------- --------------- ----------------
$1,347,777 $1,049,688 $(151,911) $2,245,554
---------------- --------------- --------------- ----------------
---------------- --------------- --------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current Liabilities
Notes payable, current $2,324,835 $8,360 b ($2,324,835) $8,360
portion
Accounts payable 3,180,526 530,704 a,f 348,089 4,059,319
Accrued expenses -- 474,782 474,782
Deferred revenue 91,809 -- 91,809
Dividends payable 803,788 -- b (803,788) ---
Stockholder loans, current 500,000 -- b (500,000) ---
portion
Accrued interest on 126,710 -- c (126,710) ---
stockholder loans
Other current liabilities 450,000 -- 450,000
---------------- --------------- --------------- ----------------
Total current liabilities 7,477,668 1,013,846 (3,407,244) 5,084,270
---------------- --------------- --------------- ----------------
Notes payable, net of current portion -- 17,451 -- 17,451
---------------- --------------- --------------- ----------------
Stockholders' Equity (Deficit)
Preferred Stock 52 -- d (52) ---
Common Stock 337,458 293,000 b,c,d,e,g,h,i (193,202) 437,256
Additional Paid In Capital 28,698,913 --- b,c,d,e,f,g,h,i (28,698,913) 0
Treasury Stock (10) (482,269) e 482,279 ---
Common Stock Warrants 6,653,218 -- 6,653,218
Stockholders' receivable (200,000) -- (200,000)
Retained Earnings (Accum (41,619,522) 207,660 b,c,g,k 31,665,221 (9,746,641)
Deficit)
---------------- --------------- --------------- ----------------
(6,129,891) 18,391 3,255,333 (2,856,167)
---------------- --------------- --------------- ----------------
$1,347,777 $1,049,688 $(151,911) $2,245,554
---------------- --------------- --------------- ----------------
---------------- --------------- --------------- ----------------
</TABLE>
F-1
<PAGE>
USDI AND TELCAM
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Historical Historical Merger
Telcam USDI Adjustments Pro Forma
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenue $2,061,859 $1,282,182 $3,344,041
Cost of Sales 1,101,969 1,325,300 2,427,269
------------- ----------------- ---------------
Gross Profit 959,890 (43,118) -- 916,772
------------- ----------------- ---------------
OPERATING EXPENSES:
Sales and marketing 101,264 1,726,226 1,827,490
General and administrative 1,358,405 3,933,066 5,291,471
Goodwill writeoff -- 665,895 a 9,954,301 10,620,196
Research and development -- 187,112 187,112
------------- ----------------- ---------------
Total operating 1,459,669 (6,512,299) 9,954,301 17,926,269
------------- ----------------- ---------------
Income (loss) from operations (499,779) (6,555,417) (9,954,301) (17,009,497)
OTHER INCOME (EXPENSE):
Interest expense -- (62,262) b 60,003 (2,259)
Gain / (loss) on investments -- 90,049 90,049
Interest and other income 3,358 46,969 50,327
------------- ----------------- ---------------
3,358 74,756 60,003 138,117
------------- ----------------- ---------------
Net Income (loss) (6,480,661) (9,894,298) (16,871,380)
Dividends/Benefical conversion feature (3,065,711) (3,065,711)
Net Income (loss) available to
common shareholders ($496,421) ($9,546,372) ($9,894,298) ($19,937,091)
============= ================= ===============
Basic loss per common share ($1.01) ($0.45) ($0.46)
Diluted 1oss per common share ($1.01) ($0.45) ($0.46)
Weighted average shares (c)
Basic 492,500 21,092,551 43,725,650
Diluted 492,500 21,092,551
43,725,650
</TABLE>
a Adjustment to write off goodwill resulting from merger.
b Adjustment to reverse the accrual of interest for the period
January 1, 1999 through September 30, 1999 on stockholder loan
converted into common stock.
c Assumes a 1:4 reverse stock split.
F-2
<PAGE>
USDI AND TELCAM
NOTES TO PROFORMA CONDENSED COMBINED BALANCE SHEETS
SEPTEMBER 30, 1999
(UNAUDITED)
a Adjustment to eliminate advances between USDI and Telcam.
b Adjustments to reflect the conversion of dividends payable and
shareholder loans common stock at a price of $.183 per share.
<TABLE>
<S> <C>
Dividends payable, September 30, 1999 $803,788
Dividends accrued during 1999 (219,711)
------------------------
Dividends payable, January 1, 1999 584,077
Price of common stock to be exchanged $0.183
------------------------
Common stock to be issued 3,191,678
Par value per share 0.01
------------------------
$31,917
========================
Stockholder loan, January 1, 1999 $500,000
Notes payable, June 30, 1999 2,324,835
------------------------
2,824,835
Price of common stock to be exchanged $0.183
------------------------
Common stock to be issued 15,436,257
Par value per share 0.01
------------------------
$154,364
========================
</TABLE>
c Adjustment to reverse accrual of interest for 1999 on stockholder loan
converted into common stock and reflect conversion of accrued interest
into common stock.
<TABLE>
<S> <C>
Accrued interest, September 30, 1999 $126,710
Interest accrued during 1999 (60,003)
--------------------
$66,707
Price of common stock to be exchanged $0.183
--------------------
Common stock issued 364,519
Par value per share 0.01
--------------------
$3,645
====================
</TABLE>
d Adjustments to reflect the conversion of 520,000 shares of preferred
stock, $.01 par value, into 38,866,198 shares of common stock $.01 par
value.
e Adjustment to record cancellation of 5,902,200 shares of treasury stock
recorded at $10.
<TABLE>
<S> <C>
Treasury stock cancelled (5,902,200)
Par value per share 0.01
--------------------
($59,022)
====================
</TABLE>
f Adjustment to record anticipated expenses of $500,000 in connection with
the merger of USDI and Telcam.
F-3
<PAGE>
g Adjustment to reflect adjustment to Telcam common stock, 293,000 shares
outstanding, no par value, and USDI accumulated deficit in connection
with the merger of USDI and Telcam.
h Adjustment to record the issuance of common shares sufficient for Telcam
stockholders to have a 51% ownership of the combined company.
<TABLE>
<S> <C>
Estimated USDI shares outstanding
pre-merger and stock split 85,702,274
USDI exchange ratio 1.0408
--------------------
Issuance of common stock to Telcam
stockholders 89,200,327
Par value per share 0.01
--------------------
$892,004
====================
</TABLE>
i Adjustment to reflect 1:4 reverse stock split and adjustment to common
stock outstanding.
<TABLE>
<S> <C>
Common stock outstanding after
conversions and retirement of
treasury stock 174,902,599
Reverse stock split ratio 1 for 4
--------------------
Common stock outstanding post-
merger and stock split 43,725,650
====================
Common stock outstanding post-
merger and stock split 43,725,650
Common stock outstanding prior to
stock split 174,902,599
--------------------
Decrease in common stock outstanding (131,176,949)
Par value per share 0.01
--------------------
($1,311,769)
====================
</TABLE>
j Adjustment to write-off goodwill resulting from merger.
F-4
<PAGE>
USDI AND TELCAM
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Historical Historical Merger
TELCAM USDI Adjustments Pro forma
------------- -------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Revenue $4,928,412 $1,1179,922 $6,108,334
Cost of Sales 1,985,922 954,365 $2,940,287
------------- -------------- ------------------ -----------------
Gross Profit 2,942,490 225,557 -- 3,168,047
------------- -------------- ------------------ -----------------
OPERATING EXPENSES:
Sales and marketing 496,073 1,499,802 1,995,875
General and administrative 2,211,294 5,245,277 7,456,571
Write off of goodwill -- -- a 5,712,214 5,712,214
Stock option compensation -- 528,690 528,690
Research and development -- 397,869 397,869
------------- -------------- ------------------ -----------------
Total operating 2,707,367 7,671,638 5,712,214 16,091,219
------------- -------------- ------------------ ------------------
Income (loss) from operations 235,123 (7,446,081) (5,712,214) (12,923,172)
OTHER INCOME (EXPENSE):
Interest expense (148,905) b 66,707 (82,198)
Gain / (loss) on investments 339,460 339,460
Interest and other income 12,013 (9,630) 2,383
------------- -------------- ------------------ ------------------
12,013 180,925 66,707 259,645
------------- -------------- ------------------ ------------------
Net Income (loss) 247,136 (7,265,156) (5,645,507) (12,663,527)
Dividends/Benefical conversion feature (4,106,164) (4,103,164)
------------- -------------- ------------------ -----------------
Net Income (loss) available to
common shareholders $247,136 $11,371,320) ($5,645,507) ($16,769,691)
============= ================== =================
Basic income (loss) per common share $0.50 ($0.69) ($0.47)
Diluted income (1oss) per common share $0.50 ($0.69) ($0.47)
Weighted average shares (c)
Basic 492,500 16,567,594 35,520,531
Diluted 492,500 16,567,594 35,520,531
</TABLE>
a Adjustment to write off goodwill resulting from merger.
b Adjustment to reverse the accrual of interest for 1998 on stockholder
loan converted into common stock.
c Assumes a 1:4 reverse stock split.
F-5
<PAGE>
TELCAM AND USDI
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited pro forma condensed combined financial statements assume
consummation of the transaction described in this proxy statement/prospectus,
all the outstanding USDI preferred shares and warrants will be converted into
USDI common stock concurrent or prior to the transaction and all shareholder
obligations, including dividends payable, are converted to common stock.
Following the merger, Telcam will continue operations as a wholly owned
subsidiary of USDI.
The unaudited pro forma condensed combined financial statements combine
the historical financial statements of Telcam and USDI for all periods presented
assuming that the merger was accounted for as a reverse acquisition using the
purchase method of accounting and assuming that Telcam is the acquirer for
accounting purposes. No adjustments have been made to conform any differences in
accounting policies between USDI and Telcam for the periods presented.
The unaudited pro forma condensed combined financial statements
included in this proxy statement/prospectus have been prepared by Telcam and
USDI, without audit, following the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted complying with such rules
and regulations. However, Telcam and USDI believe that the disclosures are
adequate to make the information presented not misleading.
The preparation of unaudited pro forma condensed combined financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the unaudited pro forma condensed combined financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. Merger Related Expenses of Telcam and USDI
Telcam and USDI estimate that they will incur approximately $500,000 of
merger-related expenses, consisting of transaction costs for investment bankers,
attorneys, accountants, financial printing and other related charges. These
costs are a preliminary estimate and therefore subject to change. These charges
do not include any integration charges, which may be incurred as a result of the
merger, such as severance, relocation and consolidation of facilities. The
estimate is subject to change. These non-recurring expenses will be charged to
operations during the period in which the merger occurs. The pro forma condensed
combined balance sheets reflect the merger-related expenses as if they had been
incurred as of December 31, 1998 and September 30, 1999, but the pro forma
condensed combined statements of operations do not reflect the non-recurring
expenses of integration.
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
TELCAM, Telecommunications Company of the Americas, Inc.
We have audited the accompanying balance sheet of TELCAM,
Telecommunications Company of the Americas, Inc. as of December 31, 1998, and
the related statements of operations, changes in 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
theses financial statements based on our audit. The financial statements of
TELCAM, Telecommunications Company of the Americas, Inc. as of December 31, 1997
and for each of the two the years in the period ended December 31, 1997 were
audited by other auditors whose report, dated February 28, 1999, except for Note
6, which is as of July 27, 1999, expressed an unqualified opinion on those
statements.
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 1998 financial statements referred to above present
fairly, in all material respects, the financial position of TELCAM,
Telecommunications Company of the Americas, Inc. as of December 31, 1998, and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
REZNICK FEDDER & SILVERMAN
Bethesda, Maryland
July 27, 1999
F-7
<PAGE>
BILL SPENCER
CERTIFIED PUBLIC ACCOUNTANT
=============================
822 WEST PASADENA BOULEVARD
DEER PARK, TEXAS 77536-5749
PHONE: 281/479-7798 FAX:281/479-5980
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of TELCAM, Telecommunications Company of the Americas, Inc.
I have audited the accompanying balance sheet, and statement of
stockholders' equity of TELCAM, Telecommunications Company of the Americas,
Inc. as of December 31, 1997, and the related statements of operations, and
cash flows for the period from January 1, 1997 through December 31, 1997.
These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I 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. I believe that my audit provides a
reasonable basis for my opinion.
In my opinion, the financial statements referred to above present
fairly, in all material respects, the balance sheet, and stockholders' equity
of TELCAM, Telecommunications Company of the Americas, Inc. as of December
31, 1997, and its operations and cash flows for the period then ended.
As more fully described in note 6, subsequent to the issuance of the
Company's 1997 financial statements and my report thereon dated February 27,
1999, I became aware that those financial statements did not reflect certain
accounts receivable and related revenue. In my original report, I expressed
an unqualified opinion on the 1997 financial statements, and my opinion on
the revised statements, are expressed herein, remains unqualified.
/s/ Bill Spencer
------------------------------------
Bill Spencer, C.P.A.
February 27, 1998, except for note 6
which is dated July 27, 1999
F-8
<PAGE>
TELCAM, Telecommunications Company of the Americas, Inc.
BALANCE SHEETS
December 31, 1997 and 1998 and September 30, 1999
ASSETS
<TABLE>
<CAPTION> 1999
1997 1998 (Unaudited)
----------------- ------------------ -----------------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 421,479 $ 413,829 $ 11,384
Accounts receivable, net 582,011 280,413 772,759
Notes receivable - - 151,911
Prepaid expenses 14,360 6,644 -
----------------- ------------------ -----------------
Total current assets 1,017,850 700,886 936,054
EQUIPMENT, NET 63,453 37,178 95,561
OTHER NONCURRENT ASSETS 8,022 7,171 18,073
----------------- ------------------ -----------------
Total assets $ 1,089,325 $ 745,235 $ 1,049,688
================= ================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable, current portion $ - $ - $ 8,360
Accounts payable 559,967 134,512 530,704
Accrued expenses 55,589 95,911 474,782
----------------- ------------------ -----------------
Total current liabilities 615,556 230,423 1,013,846
----------------- ------------------ -----------------
NOTE PAYABLE, NONCURRENT PORTION - - 17,451
----------------- ------------------ -----------------
COMMITMENTS - - -
STOCKHOLDERS' EQUITY
Common stock - no par, 1,000,000 shares authorized, 887,000 shares
issued and 495,000 outstanding at December 31, 1997; 887,000
issued and 492,500 outstanding at December 31, 1998 and
September 30, 1999 293,000 293,000 293,000
Treasury stock (392,000 shares in 1997 and 394,500
shares in 1998 and 1999 of common stock, at cost) (480,144) (482,269) (482,269)
Retained earnings 660,913 704,081 207,660
----------------- ------------------ -----------------
Total stockholders' equity 473,769 514,812 18,391
----------------- ------------------ -----------------
Total liabilities and stockholders' equity $ 1,089,325 $ 745,235 $ 1,049,688
================= ================== =================
</TABLE>
See notes to financial statements
F-10
<PAGE>
TELCAM, Telecommunications Company of the Americas, Inc.
STATEMENTS OF OPERATIONS
Years ended December 31, 1996, 1997 and 1998 and the
nine months ended September 30, 1998 and 1999
<TABLE>
<CAPTION>
December 31, September 30,
---------------------------------------------------- ----------------------------------
1996 1997 1998 1998 1999
(Unaudited) (Unaudited)
---------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenue $ 11,244,242 $ 6,451,129 $ 4,928,412 $ 4,288,742 $ 2,061,859
Cost of sales 4,536,322 3,162,725 1,985,922 1,827,907 1,101,969
---------------- ---------------- ---------------- ---------------- ----------------
Gross profit 6,707,920 3,288,404 2,942,490 2,460,835 959,890
---------------- ---------------- ---------------- ---------------- ----------------
Operating expenses
Sales and marketing 152,005 575,500 496,073 430,569 101,264
General and administrative 5,171,178 2,500,857 2,211,294 1,686,997 1,358,405
---------------- ---------------- ---------------- ---------------- ----------------
Total operating expenses 5,323,183 3,076,357 2,707,367 2,117,566 1,459,669
---------------- ---------------- ---------------- ---------------- ----------------
Income (loss) from operations 1,384,737 212,047 235,123 343,269 (499,779)
Other income
Interest income 30,486 12,259 12,013 9,884 3,358
---------------- ---------------- ---------------- ---------------- ----------------
Net income (loss) $ 1,415,223 $ 224,306 $ 247,136 $ 353,153 $ (496,421)
================ ================ ================ ================ ================
</TABLE>
See notes to financial statements
F-11
<PAGE>
TELCAM, Telecommunications Company of the Americas, Inc.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1997 and 1998 and the
nine months ended September 30, 1999
<TABLE>
<CAPTION>
Common stock Treasury stock Total
---------------------- ------------------------ Retained stockholders'
Shares Amount Shares Amount earnings equity
------- --------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 887,000 $ 293,000 (202,000) $ (102,000) $ 619,633 $ 810,633
Dividends paid - - - - (1,598,249) (1,598,249)
Net income - - - - 1,415,223 1,415,223
------- --------- -------- ---------- --------- ---------
Balance, December 31, 1996 887,000 293,000 (202,000) (102,000) 436,607 627,607
Repurchase of common stock - - (190,000) (378,144) - (378,144)
Net income - - - - 224,306 224,306
------- --------- -------- ---------- --------- ---------
Balance, December 31, 1997 887,000 293,000 (392,000) (480,144) 660,913 473,769
Repurchase of common stock - - (2,500) (2,125) - (2,125)
Dividends paid - - - - (203,968) (203,968)
Net income - - - - 247,136 247,136
------- --------- -------- ---------- --------- ---------
Balance, December 31, 1998 887,000 $ 293,000 (394,500) $ (482,269) $ 704,081 $ 514,812
Net loss - - - - (496,421) (496,421)
------- --------- -------- ---------- --------- ---------
Balance, September 30, 1999 (Unaudited) 887,000 $ 293,000 (394,500) $ (482,269) $ 207,660 $ 18,391
------- --------- -------- ---------- --------- ---------
------- --------- -------- ---------- --------- ---------
</TABLE>
See notes to financial statements
F-12
<PAGE>
TELCAM, Telecommunications Company of the Americas, Inc.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1997 and 1998 and the
nine months ended September 30, 1998 and 1999
<TABLE>
<CAPTION>
December 31, September 30,
-------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
(Unaudited) (Unaudited)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 1,415,223 $ 224,306 $ 247,136 $ 353,153 $ (496,421)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities
Depreciation 27,603 27,603 27,007 20,779 9,747
Loss on disposal of equipment -- -- -- -- 18,249
Changes in assets and liabilities
(Increase) decrease in
accounts receivable (4,364) (386,023) 301,598 58,266 (492,346)
(Increase) decrease in prepaid
expenses (7,062) 8,342 7,716 (787) 6,644
(Increase) decrease in other
noncurrent assets 1,747 (39) 851 -- (4,256)
Increase (decrease) in accounts
payable (55,287) 370,235 (425,455) (314,040) 396,192
Increase (decrease) in accrued
expenses 130,937 (198,924) 40,322 (8,945) 378,871
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities 1,508,797 45,500 199,175 108,426 (183,320)
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities
Deposits refunded 2,655 -- -- -- --
Advances to USDI and subsidiary -- -- -- -- (151,911)
Capital expenditures (42,303) (600) (732) (732) (65,125)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (39,648) (600) (732) (732) (217,036)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities
Dividends paid (1,598,249) -- (203,968) (203,968) --
Purchase of treasury stock -- (378,144) (2,125) (2,125) --
Principal payments on notes payable -- -- -- -- (2,089)
------------ ------------ ------------ ------------ ------------
Net cash used in financing activities (1,598,249) (378,144) (206,093) (206,093) (2,089)
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (129,100) (333,244) (7,650) (98,399) (402,445)
Cash and cash equivalents, beginning 883,823 754,723 421,479 421,479 413,829
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents, end $ 754,723 $ 421,479 $ 413,829 $ 323,080 $ 11,384
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
F-13
<PAGE>
TELCAM, Telecommunications Company of the Americas, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1999 and 1998 and for the
nine months then ended are unaudited)
1. ORGANIZATION
TELCAM, Telecommunications Company of the Americas, Inc. ("TELCAM" or the
"Company") was incorporated on June 13, 1994 under the laws of the State of
Texas. The Company is licensed by the Federal Communications Commission and
operates under a contract with a long distance provider to provide
communication services to the Company's subscribers throughout the United
States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. At December 31,
1998 and September 30, 1999, the funds are maintained in two financial
institutions. The balance in one institution exceeds federally insured
limits. The Company does not believe that it is exposed to any significant
credit risk on cash equivalents at either financial institution.
ACCOUNTS RECEIVABLE
Accounts receivable consist of validated call records submitted on a
periodic basis to the billing service provider. The Company uses the
allowance method for doubtful accounts. Management, in conjunction with the
billing service provider, reviews accounts and makes additions to the
allowance when doubt arises regarding the collectibility of account
balances. The Company receives partial payment from its billing service
provider in advance of collection of its accounts receivable. The advance
payments, in addition to billing service fees, financing fees and estimated
uncollectible accounts, are netted against the accounts receivable.
F-14
<PAGE>
TELCAM, Telecommunications Company of the Americas, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1999 and 1998 and for the
nine months then ended are unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EQUIPMENT
Equipment is recorded at cost and is being depreciated over the estimated
useful lives of the assets, ranging from five to seven years, using
accelerated methods.
REVENUE RECOGNITION
The Company recognizes revenue from its long distance subscribers when
billing records are validated by its billing service provider. Call records
are obtained from its long distance carrier periodically and are rated and
submitted to the billing service provider. Subscribers are billed and
collected by their local telephone company.
INCOME TAXES
The stockholders have elected to have the Company treated as an S
Corporation for income tax purposes, whereby the taxable income or loss
flows through to, and is reportable by, the stockholders individually.
Accordingly, no provision or benefit for income taxes has been recorded in
the accompanying financial statements.
3. ACCOUNTS RECEIVABLE
As of December 31, 1997, 1998 and September 30, 1999, accounts receivable
consists of the following:
F-15
<PAGE>
TELCAM, Telecommunications Company of the Americas, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1999 and 1998 and for the
nine months then ended are unaudited)
<TABLE>
<CAPTION>
December 31,
----------------------------------------- September 30,
1997 1998 1999
------------------ -------------------- --------------------
(Unaudited)
<S> <C> <C> <C>
Accounts receivable $ 1,266,531 $ 933,065 $ 1,293,740
Advances from billing servicer (545,177) (466,398) (246,002)
------------------ -------------------- --------------------
721,354 466,667 1,047,738
Allowance for uncollectible accounts
and billing charges (139,343) (186,254) (274,979)
------------------ -------------------- --------------------
$ 582,011 $ 280,413 $ 772,759
================== ==================== ====================
</TABLE>
F-16
<PAGE>
TELCAM, Telecommunications Company of the Americas, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1999 and 1998 and for the
nine months then ended are unaudited)
4. EQUIPMENT
As of December 31, 1997 and 1998, and September 30, 1999 equipment consists
of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------------- September 30,
1997 1998 1999
------------------ -------------------- --------------------
(Unaudited)
<S> <C> <C> <C>
Office furniture and equipment $ 37,301 $ 45,529 $ 60,064
Computer equipment 104,493 96,992 116,434
Automobile - - 34,153
Less accumulated depreciation (78,340) (105,343) (115,090)
------------------ -------------------- --------------------
$ 63,454 $ 37,178 $ 95,561
================== ==================== ====================
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1997 and 1998
and for the nine months ended September 30, 1998 and 1999 totaled $27,603,
$27,603, $27,007, $20,779 and $9,747 , respectively.
5. LEASES
The Company is obligated under various operating leases, which include
minimum rent and certain expense passthroughs and expire at certain times
through 2001, for its office space and equipment. As of December 31, 1998
and September 30, 1999, the Company had the following commitment for minimum
lease payments year ending:
<TABLE>
<CAPTION>
December 31, September 30,
------------------- ------------------
(Unaudited)
<S> <C> <C>
1999 $ 132,541 $ -
2000 94,764 103,512
2001 15,432 61,728
------------------- ------------------
$ 242,737 $ 165,240
=================== ==================
</TABLE>
Total rent expense for the years ended December 31, 1996, 1997 and 1998 and
for the nine months ended September 30, 1998 and 1999 totaled $90,591,
$139,083, $153,499, $73,989, and $116,354 respectively.
F-17
<PAGE>
TELCAM, Telecommunications Company of the Americas, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1999 and 1998 and for the
nine months then ended are unaudited)
6. COMMITMENTS
The Company has contracted with a billing servicer to provide long distance
billing and financing services. Pursuant to the agreement, which expires in
July 1999 and was extended through July 2000, validated call records are
submitted by the servicer on behalf of the Company to various local
telephone companies for billing and collection. The agreement provides that
60% of the validated call records will be paid to the Company within five
days. These advances accrue interest at the prime rate plus four percent
(11.75% and 12.25% at December 31, 1998 and September 30, 1999,
respectively). The long distance provider charges various fees which are
deducted along with the accrued interest on the advances from the 40% of the
billing that is paid when collected from the local telephone company.
The Company purchases substantially all of its long distance services from
one carrier, pursuant to a two-year agreement expiring July 1999 and
renewable for an additional one year, unless terminated by either party. The
agreement was extended for an additional one year, through July 2000. Under
the terms of the agreement, the Company is charged for long distance
services based on usage at predetermined rates. Payment for these services
is secured by the assets of the Company.
7. PENSION PLAN
During 1998, the Company adopted a Savings Incentive Match Plan for
Employees of Small Employers (the "Plan") under Section 408(p) of the
Internal Revenue Code. The Plan covers all employees who will achieve a
minimum specified compensation level in the current year. The Plan requires
an annual minimum matching contribution by the Company. During the year
ended December 31, 1998 and the nine months ended September 30, 1998 and
1999, the Company made matching contributions totalling $15,843, $13,500 and
$7,121, respectively. No liability exists as of December 31, 1998 and June
30, 1999.
8. RELATED PARTY TRANSACTIONS
In 1995, the Company entered into a management agreement with an affiliate
of the stockholders of the Company. The agreement provides for the
affiliate to provide management, payroll and other services to the Company.
During the year ended December 31, 1996, the Company incurred and paid
$3,085,323 for services from the affiliate. No such services were provided
in 1997, 1998 and 1999.
F-18
<PAGE>
9. SUBSEQUENT EVENTS
LITIGATION
In May 1999, the Company agreed to a settlement with the Illinois Attorney
General's office in connection with consumer complaints in 1998. Under the
terms of the Final Judgment Consent Decree, the Company is required to
provide restitution to certain consumers in Illinois and pay the Illinois
Attorney General's office a sum of $40,000, which was subsequently paid by
the Company. The Company has recorded a liability of $40,000 as of December
31, 1998 related to the settlement.
EMPLOYMENT AGREEMENTS
During 1999, the Company entered into employment agreements with certain
officers and employees of the Company. The agreements expire at various
times during 2003 and provide for total annual salaries of approximately
$405,000.
NOTE PAYABLE
In June 1999, the Company entered into a note agreement in connection with
the purchase of an automobile. The note, in the amount of $27,900, bears
interest at 10.499% and is payable in monthly principal and interest
installments of $907 through maturity in June 2002. The note is secured by
the underlying asset. Future minimum payments as of September 30, 1999 are
as follows:
<TABLE>
<CAPTION>
September 30,
-------------------
(Unaudited)
<S> <C>
Year ending:
2000 $ 7,624
2001 9,300
2002 10,326
-------------------
$ 27,250
===================
</TABLE>
F-19
<PAGE>
TELCAM, Telecommunications Company of the Americas, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1999 and 1998 and for the
nine months then ended are unaudited)
9. SUBSEQUENT EVENTS (Continued)
BILLING AND SERVICES AGREEMENTS
In June 1999, the Company entered into an agreement with an affiliate of a
stockholder of the Company for billing and related back office services to
be provided to the Company. The agreement expires in June 2004 and provides
for compensation for services based on usage and the number of subscribers
billed by the affiliate.
In June 1999, the Company entered into an agreement with an unrelated
company to provide customer service support to the Company's subscribers.
The agreement is renewable on an on-going basis and provides for
compensation based on customer usage.
PURCHASES OF CUSTOMER BASES
In June 1999, the Company purchased the customer bases of two unrelated
companies. As consideration, the Company will compensate the companies a
percentage of collected revenue related to the customer bases through June
2002.
PROPOSED MERGER
In July 1999, the Company entered into a Memorandum of Understanding (the
"Memorandum") with U.S. Digital Communications, Inc. ("USDI"), a
publicly-traded satellite telecommunications company. Subject to the
approval of USDI's stockholders, the Company and USDI will enter into a
combination in the form of a tax-free, reverse triangular reorganization
under Section 368(a)(1)(B) of the Internal Revenue Code pursuant to which a
newly-formed, wholly-owned subsidiary of USDI would be merged into the
Company and the Company's stockholders would exchange 100% of the issued and
outstanding common stock of the Company for shares of USDI. In connection
with the Memorandum, the Company made advances to USDI totaling $151,911,
secured by the assets of USDI.
F-20
<PAGE>
TELCAM, Telecommunications Company of the Americas, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1999 and 1998 and for the
nine months then ended are unaudited)
9. SUBSEQUENT EVENTS (Continued)
LEASE
On July 1, 1999, the Company entered into a lease agreement for office space
expiring in June 2002. In addition to scheduled annual rent escalations, the
agreement is subject to increases in the Consumer Price Index. Future
minimum lease payments are as follows:
<TABLE>
<S> <C>
Year ending December 31, 1999 $ 46,795
2000 116,010
2001 135,348
2002 70,896
------------------
$ 369,049
==================
</TABLE>
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
U.S. Digital Communications, Inc.
We have audited the accompanying consolidated balance sheets of U.S.
Digital Communications, Inc. and Subsidiary as of December 31, 1997 and 1998,
and the related consolidated statements of operations and comprehensive loss,
changes in stockholders' equity (deficit) and cash flows for the years then
ended. The consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. The consolidated
financial statements of U.S. Digital Communications, Inc. for the year ended
December 31, 1996 were audited by other auditors whose report, dated April 4,
1997, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of U.S. Digital
Communications, Inc. and Subsidiary as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
F-22
<PAGE>
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
A to the consolidated financial statements, the Company has suffered recurring
losses from operations and its total liabilities exceed its total assets. This
raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note A. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
REZNICK FEDDER & SILVERMAN
Bethesda, Maryland
March 1, 1999, except for Note P,
which is dated December 27, 1999
F-23
<PAGE>
U.S. Digital Communications, Inc.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998 and September 30, 1999
ASSETS
<TABLE>
<CAPTION>
1997 1998 1999
----------------- ----------------- -----------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 545,790 $ 1,395,480 $ 40,219
Trade accounts receivable, net of
allowance for uncollectible accounts
of $19,000 and $13,330 209,073 187,223 255,365
Inventory 107,967 795,117 117,297
Notes receivable 25,000 100,000 -
Prepaid expenses 17,436 204,048 64,048
----------------- ----------------- -----------------
Total current assets 905,266 2,681,868 476,929
INVESTMENTS 9,750 20,312 -
PROPERTY AND EQUIPMENT, NET 122,500 237,883 717,446
INTANGIBLE ASSETS, NET 981,327 771,039 -
OTHER NONCURRENT ASSETS 13,032 145,715 153,402
----------------- ----------------- -----------------
Total assets $ 2,031,875 $ 3,856,817 $ 1,347,777
================= ================= =================
</TABLE>
F-24
<PAGE>
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, 1997 and 1998 and September 30, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
1997 1998 1999
------------------ ----------------- -----------------
(Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES
Notes payable, current portion $ 329,458 $ 314,835 $ 2,324,835
Accounts payable and accrued expenses 1,766,838 1,368,408 3,180,526
Deferred revenue 107,267 12,615 91,809
Dividends payable 135,931 584,077 803,788
Stockholder loans, current portion 962,385 500,000 500,000
Accrued interest on stockholder loans 147,623 66,707 126,710
Minimum royalty obligation 450,000 450,000 450,000
Due to former officers and shareholders 528,426 511,100 -
------------------ ----------------- -----------------
Total current liabilities 4,427,928 3,807,742 7,477,668
NOTES PAYABLE AND STOCKHOLDERS LOANS, net of
current portion 1,617 600,000 -
------------------ ----------------- -----------------
Total liabilities 4,429,545 4,407,742 7,477,668
------------------ ----------------- -----------------
COMMITMENTS AND CONTINGENCIES - - -
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock - $.01 par, 10,000,000 shares authorized;
2,882,232, 3,707,332 and 520,000 issued and outstanding at
December 31, 1997 and 1998 and September 30, 1999;
liquidation preference of $6,147,261 28,822 37,073 52
Common stock - $.01 par, 50,000,000 shares authorized;
22,298,000 issued and 16,395,800 outstanding at
December 31, 1997; 22,732,200 issued and 16,830,000 outstanding
at December 31, 1998; 33,745,822 issued and 27,843,622
outstanding at September 30, 1999 222,980 227,325 337,458
Additional paid-in capital 16,332,314 24,579,138 28,698,913
Common stock warrants 1,581,337 6,899,337 6,653,218
Accumulated other comprehensive income (loss) (31,200) (20,638) -
Treasury stock (5,902,200 shares of common stock at cost) (10) (10) (10)
Deferred compensation (19,648) - -
Shares to be issued (including additional paid-in capital) 389,583 - -
Shareholders' receivable (200,000) (200,000) (200,000)
Accumulated deficit (20,701,848) (32,073,150) (41,619,522)
------------------ ----------------- -----------------
Total stockholders' equity (deficit) (2,397,670) (550,925) (6,129,891)
------------------ ----------------- -----------------
Total liabilities and stockholders' equity (deficit) $ 2,031,875 $ 3,856,817 $ 1,347,777
================== ================= =================
</TABLE>
See notes to consolidated financial statement
F-25
<PAGE>
U.S. Digital Communications, Inc.CONSLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS
Years ended December 31, 1996, 1997 and 1998 and the nine months ended
September 30, 1998 and 1999
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997 1998 1998 1999
(Unaudited)
<S> <C> <C> <C> <C> <C>
Sales
Equipment $ -- $ 285,047 $ 566,494 $ 301,682 $ 430,291
Airtime services -- 201,595 613,428 492,027 851,891
------------- ------------- ------------ ------------- ------------
Total sales -- 486,642 1,179,922 793,709 1,282,182
Cost of goods sold -- 412,767 954,365 579,737 1,325,300
------------- ------------- ------------ ------------- ------------
Gross profit -- 73,875 225,557 213,972 (43,118)
------------- ------------- ------------ ------------- ------------
Operating expenses
Sales and marketing -- 286,258 1,499,802 813,410 1,726,226
Research and development 955,570 -- 397,869 -- 187,112
Minimum royalty expense 900,000 -- -- -- --
Goodwill write-off -- -- -- 665,895
Fund-raising fees for failed offering 118,237 -- -- -- --
General and administrative 2,985,039 2,975,782 5,245,277 3,407,375 3,933,066
Stock option compensation 2,927,083 1,252,657 528,690 369,479 --
------------- ------------- ------------ ------------- ------------
Total operating expenses 7,885,929 4,514,697 7,671,638 4,590,264 6,512,299
------------- ------------- ------------ ------------- ------------
Loss from operations (7,885,929) (4,440,822) (7,446,081) (4,376,292) (6,555,417)
------------- ------------- ------------ ------------- ------------
Other income (expense)
Interest expense (47,618) (183,593) (148,905) (128,905) (62,262)
Interest and other income 7,385 23,280 339,460 63,982 46,969
Income on repayment of debt -- -- -- 167,881 --
Gain (loss) on investments and disposal of equipment (130,756) (84,050) (9,630) -- 90,049
Total other income (expense), net (170,989) (244,363) 180,925 102,958 74,756
------------- ------------- ------------ ------------- ------------
Net loss (8,056,918) (4,685,185) (7,265,156) (4,273,334) (6,480,661)
------------- ------------- ------------ ------------- ------------
Dividends and beneficial conversion feature on
preferred stock -- (1,629,916) (4,106,164) (3,194,650) (3,065,711)
------------- ------------- ------------ ------------- ------------
Net loss available to common shareholders (8,056,918) (6,315,101) (11,371,320) (7,467,984) (9,546,372)
Other comprehensive income (loss) 345,313 (31,200) 10,562 (650) 20,638
------------- ------------- ------------ ------------- ------------
Comprehensive loss available to common
stockholders $ (7,711,605) $ (6,346,301) $(11,360,758) $ (7,468,634) $ (9,525,734)
============= ============ ============ ============ ============
Net loss per common share
Basic $ (0.37) $ (0.31) $ (0.69) $ (0.46) $ (0.45)
Diluted $ (0.37) $ (0.31) $ (0.69) $ (0.46) $ (0.45)
Weighted average shares of common
stock outstanding 21,914,630 20,676,196 16,567,594 16,311,875 21,092,551
</TABLE>
See notes to consolidated financial statement
F-26
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
Year Ended December 31, 1996, 1997 and 1998 and the nine months ended September
30, 1999
<TABLE>
<CAPTION>
Common stock
Preferred stock par value
------------------------------ ----------------------------
Shares Amount Shares Amount
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 -- $ -- 21,208,000 $ 212,080
Net loss -- (8,056,918) (8,056,918)
Unrealized gain on securities 345,313 -- 345,313
Sale of stock for cash -- -- 920,000 9,200
Stock issuance costs -- -- -- --
Options issued to placement agent -- -- -- --
Deferred compensation related to
grant of stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
----------- ------------- ----------- -------------
Balance, December 31, 1996 -- -- 22,128,000 221,280
Net loss -- (4,685,185) (4,685,185)
Unrealized loss on securities (31,200) -- (31,200)
Sale of stock and warrants for cash 2,882,232 28,822 -- --
Issuance of stock for noncash transactions -- -- 170,000 1,700
Stock issuance costs -- -- -- --
Options issued to Placement Agent -- -- -- --
Deferred compensation related to
grant of stock options -- -- -- --
Cancellation of options -- -- -- --
Amortization of deferred compensation -- -- -- --
Preferred dividends and beneficial
conversion feature -- -- -- --
Repurchase of common stock -- -- -- --
Shareholders' receivable -- -- -- --
Shares to be issued (including --
additional paid-in capital) -- -- -- --
----------- ------------- ----------- -------------
Balance, December 31, 1997 2,882,232 28,822 22,298,000 222,980
Net loss -- (7,265,156) (7,265,156)
Unrealized gain on securities 10,562 -- 10,562
Sale of stock and warrants for cash 1,462,600 14,626 -- --
Issuance of stock for noncash transactions -- -- 350,000 3,500
Stock issuance costs -- -- 50,000 500
Exercise of stock options -- -- 505,000 5,050
Exercise of warrants -- -- 286,000 2,860
Cancellation of stock in connection with
legal settlements -- -- (1,904,000) (19,040)
Conversion of preferred stock to common
stock (637,500) (6,375) 637,500 6,375
Amortization of deferred compensation -- -- -- --
Preferred dividends and beneficial
conversion feature -- -- -- --
Common stock transferred to escrow -- -- 510,000 5,100
----------- ------------- ----------- -------------
Balance, December 31, 1998 3,707,332 37,073 22,732,500 227,325
Net loss -- (5,484,490) (5,484,490)
Unrealized gain on securities 20,638 -- 20,638
Sale of stock and warrants for cash 200 2 666,666 6,667
Issuance of stock for noncash transactions -- -- 615,000 6,150
Stock issuance costs -- -- -- (34,900)
Exercise of stock options -- -- 2,684,603 26,846
Exercise of warrants -- -- 86,000 860
Conversion of preferred stock to common
stock (3,702,332) (37,023) 6,961,051 69,611
Preferred dividends and beneficial
conversion feature -- -- -- --
----------- ------------- ----------- -------------
Balance, September 30, 1999 (unaudited) 5,200 $ 52 33,745,822 $ 337,458
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
Additional paid-in Treasury stock
capital Common Stock -------------------------- Deferred
warrants Shares Cost compensation
------------------- -------------- --------- ------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 7,169,698 $ -- -- $ -- $ --
Net loss
Unrealized gain on securities
Sale of stock for cash 1,290,800 -- -- -- --
Stock issuance costs (2,805,000) -- -- -- --
Options issued to placement agent 2,800,000 -- -- -- --
Deferred compensation related to
grant of stock options 6,640,625 -- -- -- (6,640,625)
Amortization of deferred compensation -- -- -- -- 2,927,083
------------ ----------- ----------- ----------- ----------
Balance, December 31, 1996 15,096,123 -- -- -- (3,713,542)
Net loss
Unrealized loss on securities
Sale of stock and warrants for cash 2,696,785 1,581,337 -- -- --
Issuance of stock for noncash transactions 107,900 -- -- -- --
Stock issuance costs (1,785,888) -- -- -- --
Options issued to Placement Agent 1,278,631 -- -- -- --
Deferred compensation related to
grant of stock options 879,596 -- -- -- (879,596)
Cancellation of options (3,320,833) -- -- -- 3,320,833
Amortization of deferred compensation -- -- -- -- 1,252,657
Preferred dividends and beneficial
conversion feature 1,380,000 -- -- -- --
Repurchase of common stock -- -- (5,902,200) (10) --
Shareholders' receivable -- -- -- -- --
Shares to be issued (including
additional paid-in capital) -- -- -- -- --
------------ ----------- ----------- ----------- ----------
Balance, December 31, 1997 16,332,314 1,581,337 (5,902,200) (10) (19,648)
Net loss
Unrealized gain on securities
Sale of stock and warrants for cash 2,885,274 5,285,000 -- -- --
Issuance of stock for noncash transactions 842,773 -- -- -- --
Stock issuance costs (1,451,709) 497,000 -- -- --
Exercise of stock options 263,700 -- -- -- --
Exercise of warrants 1,319,140 (464,000) -- -- --
Cancellation of stock in connection with
legal settlements 345,163 -- -- -- --
Conversion of preferred stock to common
stock -- -- -- -- --
Amortization of deferred compensation -- -- -- -- 19,648
Preferred dividends and beneficial
conversion feature 3,658,000 -- -- -- --
Common stock transferred to escrow 384,483 -- -- -- --
------------ ----------- ----------- ----------- ----------
Balance, December 31, 1998 24,579,138 6,899,337 (5,902,200) (10) --
Net loss
Unrealized gain on securities
Sale of stock and warrants for cash 381,451 11,881 -- -- --
Issuance of stock for noncash transactions 293,392 -- -- -- --
Stock issuance costs -- -- -- -- --
Exercise of stock options 149,258 -- -- -- --
Exercise of warrants 515,140 (258,000) -- -- --
Conversion of preferred stock to common
stock (16,926) -- -- -- --
Preferred dividends and beneficial
conversion feature 2,832,360 -- -- -- --
------------ ----------- ----------- ----------- ----------
Balance, September 30, 1999 (unaudited) $ 28,698,913 $6,653,218 (5,902,200) $ (10) $ --
============ =========== =========== =========== ===========
</TABLE>
F-28
<PAGE>
<TABLE>
<CAPTION>
Accumulated
other com- Total
Share to be Stockholders' prehensive Accumulated stockholders'
issued receivable income (loss) deficit equity
--------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ -- $ -- $ (345,313) $ (6,329,829) $ 706,636
Net loss
Unrealized gain on securities
Sale of stock for cash -- -- -- -- 1,300,000
Stock issuance costs -- -- -- -- (2,805,000)
Options issued to placement agent -- -- -- -- 2,800,000
Deferred compensation related to
grant of stock options -- -- -- -- --
Amortization of deferred compensation -- -- -- -- 2,927,083
------------- -------------- ------------ ------------- ------------
Balance, December 31, 1996 -- -- -- (14,386,747) (2,782,886)
Net loss
Unrealized loss on securities
Sale of stock and warrants for cash -- -- -- -- 4,306,944
Issuance of stock for noncash transactions -- -- -- -- 109,600
Stock issuance costs -- -- -- -- (1,785,888)
Options issued to Placement Agent -- -- -- -- 1,278,631
Deferred compensation related to
grant of stock options -- -- -- -- --
Cancellation of options -- -- -- -- --
Amortization of deferred compensation -- -- -- -- 1,252,657
Preferred dividends and beneficial
conversion feature -- -- -- (1,629,916) (249,916)
Repurchase of common stock -- -- -- -- (10)
Shareholders' receivable -- (200,000) -- -- (200,000)
Shares to be issued (including
additional paid-in capital) 389,583 -- -- -- 389,583
------------- -------------- ------------ ------------- ------------
Balance, December 31, 1997 389,583 (200,000) (31,200) (20,701,848) (2,397,670)
Net loss
Unrealized gain on securities
Sale of stock and warrants for cash -- -- -- -- 8,184,900
Issuance of stock for noncash transactions -- -- -- -- 846,273
Stock issuance costs -- -- -- -- (954,209)
Exercise of stock options -- -- -- -- 268,750
Exercise of warrants -- -- -- -- 858,000
Cancellation of stock in connection with
legal settlements -- -- -- -- 326,123
Conversion of preferred stock to common
stock -- -- -- -- --
Amortization of deferred compensation -- -- -- -- 19,648
Preferred dividends and beneficial
conversion feature -- -- -- (4,106,146) (448,146)
Common stock transferred to escrow (389,583) -- -- -- --
------------- -------------- ------------ ------------- ------------
Balance, December 31, 1998 -- (200,000) (20,638) (32,073,150) (550,925)
Net loss
Unrealized gain on securities
Sale of stock and warrants for cash -- -- -- -- 400,000
Issuance of stock for noncash transactions -- -- -- -- 299,542
Stock issuance costs -- -- -- (34,900)
Exercise of stock options -- -- -- -- 176,104
Exercise of warrants -- -- -- -- 258,000
Conversion of preferred stock to common
stock -- -- -- -- 15,662
Preferred dividends and beneficial
conversion feature -- -- -- (2,794,340) 38,020
------------- -------------- ------------ ------------- ------------
Balance, September 30, 1999 (unaudited) $ -- $ (200,000) $ -- $(40,351,980) $ (4,862,349)
=============== ============== ============== ============= ==============
</TABLE>
F-29
<PAGE>
U.S. Digital Communications, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1997 and 1998 and the nine months ended September
30, 1998 and 1999
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------------------------- --------------------------------
1996 1997 1998 1998 1999
--------------- --------------- --------------- --------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $(8,056,918) $(4,685,185) $(7,265,156) $(4,273,334) $(6,480,661)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 41,256 195,065 254,814 185,945 295,005
Goodwill write-off -- -- -- -- 665,895
Stock option compensation 2,927,083 1,252,657 528,690 369,479 --
Loss on investments and disposal of equipment 130,756 84,050 9,630 -- 12,313
Reserve for advances to target companies -- -- 615,536 -- --
Stock issued for services -- -- -- -- 33,542
Changes in assets and liabilities
Decrease (increase) in trade accounts
receivable -- (96,380) 21,850 80,410 (96,673)
Decrease in other receivables -- 20,000 -- -- --
(Increase) decrease in inventory -- 43,349 (687,150) 69,543 677,820
Decrease (increase) in prepaid expenses 69,522 13,042 (186,612) (88,444) 140,001
Increase in other noncurrent assets -- (3,079) (132,683) (32,014) (7,687)
(Decrease) increase in accounts payable
and accrued expenses 1,260,270 (520,463) (404,060) (181,494) 1,812,118
Decrease in deferred revenue -- (70,400) (94,652) (74,578) 79,194
Increase in accrued interest on
stockholder loans 25,659 109,603 113,257 87,756 60,003
Increase in minimum royalty obligation 450,000 -- -- -- --
Increase in due to former officers and
shareholders 300,000 324,905 -- -- --
----------- ----------- ----------- ---------- ----------
Net cash used in operating activities (2,852,372) (3,332,836) (7,226,536) (3,856,731) (2,809,130)
----------- ----------- ----------- ---------- ----------
Cash flows from investing activities
Purchase of investments -- (125,000) -- -- --
Proceeds from sale of investments -- -- -- -- 130,999
Capital expenditures (30,518) (62,444) (169,539) (49,658) (792,424)
Advances to Skysite prior to acquisition -- (231,039) -- -- --
Patents and other expenditures (13,838) -- -- -- --
Advances to stockholders (116,478) -- -- -- --
Advances to target companies -- (25,000) (690,536) (646,000) --
Collection of notes receivable -- -- -- -- 324,169
----------- ----------- ----------- ---------- ----------
Net cash used in investing activities (160,834) (443,483) (860,075) (695,658) (337,256)
----------- ----------- ----------- ---------- ----------
</TABLE>
F-30
<PAGE>
U.S. Digital Communications, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31, 1996, 1997 and 1998 and the nine months ended September
30, 1998 and 1999
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------------------------- ----------------------------------
1996 1997 1998 1998 1999
--------------- --------------- -------------- ----------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities
Borrowings from nonstockholders $ 100,000 $ 300,000 $ 600,000 $ -- $ --
Borrowings from stockholders 992,900 388,000 -- 1,110,150 890,000
Borrowings from TELCAM -- -- -- -- 520,000
Repayment of stockholder borrowings (100,000) (50,000) (250,000) (250,000) --
Principal payments under notes payable (5,970) (10,237) (16,240) (2,797) --
Proceeds to exercise future common
stock warrants -- -- 245,100 -- --
Proceeds from issuance of common
stock 1,300,000 -- -- 121,875 178,125
Proceeds from issuance of preferred
stock and warrants -- 4,306,944 8,184,900 8,763,900 237,900
Purchase of treasury stock -- (10) -- -- --
Payment of dividends on preferred stock -- (113,985) -- -- --
Payment of stock issuance costs, net (5,000) (507,257) (954,209) (1,120,390) (34,900)
Proceeds from exercise of common
stock options -- -- 268,750 -- --
Proceeds from exercise of common
stock warrants -- -- 858,000 -- --
------------- ---------- ------------- -------------- ------------
Net cash provided by financing activities 2,281,930 4,313,455 8,936,301 8,622,738 1,791,125
------------- ---------- ------------- -------------- ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (731,276) 537,136 849,690 4,070,349 (1,355,261)
Cash and cash equivalents, beginning 739,930 8,654 545,790 545,790 1,395,480
------------- ---------- ------------- -------------- ------------
Cash and cash equivalents, end $ 8,654 $ 545,790 $ 1,395,480 $ 4,616,139 $ 40,219
------------- ---------- ------------- -------------- ------------
</TABLE>
<PAGE>
U.S. Digital Communications, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31, 1996, 1997 and 1998 and the
six months ended September 30, 1998 and 1999
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
------------ --------------- ---------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash
transactions
Cash paid for interest $ 7,772 $ 70,619 $ 35,648 $ 36,148 $ 816
============ =============== ================ ============= =============
Supplemental disclosures of noncash
transactions
Beneficial conversion feature on
preferred stock $ - $ 1,380,000 $ 3,658,000 $ 1,317,438 $ 2,846,000
============ =============== ================ ============= =============
Acquisition of Skysite Communications
Corporation:
Fair value of assets acquired $ - $ 420,622 $ - $ - $ -
Liabilities assumed - 935,914 - - -
------------ --------------- ---------------- ------------- -------------
$ - $ 1,356,536 $ - $ - $ -
============ =============== ================ ============= =============
Satisfaction of note payable and accrued
interest with issuance of common
stock $ - $ 109,500 $ 663,484 $ 543,667 $ 245,100
============ =============== ================ ============= =============
Satisfaction of amounts due to
former officers with issuance of
common stock $ - $ - $ 474,811 $ - $ -
============ =============== ================ ============= =============
Satisfaction of accrued interest on
amounts due to former officers with
issuance of common stock $ - $ - $ 193,674 $ - $ 266,000
============ =============== ================ ============= =============
Common stock issued and transferred
to escrow $ - $ - $ 389,583 $ - $ -
============ =============== ================ ============= =============
Unpaid accrued dividends payable on
preferred stock $ - $ 135,931 $ 448,146 $ - $ 219,711
============ =============== ================ ============= =============
Satisfaction of amounts due to
shareholders with issuance of
common stock $ - $ - $ - $ 58,905 $ -
============ =============== ================ ============= =============
</TABLE>
F-32
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of september 30, 1998 and 1999 and for the
nine months then ended are unaudited)
NOTE A - ORGANIZATION
FORMATION
On November 28, 1995, Global Telephone and Communications, Inc. ("GTCI"), a
Nevada corporation, and Visual Information Service Corporation ("Viscorp"),
an Illinois corporation, entered into an agreement and plan of
reorganization under which every share of Viscorp stock was exchanged for
four shares of GTCI stock. This resulted in the stockholders of Viscorp
obtaining voting control over GTCI. To the Company's knowledge, GTCI did
not conduct any business prior to the reorganization. The reorganization
was consummated because the stock of GTCI traded on the NASDAQ Bulletin
Board and, therefore, provided the Company with a public presence. In
conjunction with the transaction, GTCI changed its name to Viscorp. On
October 24, 1997, Viscorp changed its name to U.S. Digital Communications,
Inc.
OPERATIONS
U.S. Digital Communications, Inc. (the "Company"), a Nevada corporation, is
a provider of satellite and wireless digital communications equipment and
services to corporate and other consumers. The Company, through a
wholly-owned subsidiary, markets satellite telephone products and services
to provide solutions for the communications needs of companies with global
operations or remote installations. Prior to its acquisition of this
subsidiary, the Company was a development stage enterprise founded to
develop various internet, modem, video data and telephone products and
devices. In 1997, the Company discontinued development of these products.
ACQUISITION OF SKYSITE
On June 20, 1997, the Company entered into an agreement and plan of
reorganization (the "Agreement") with Skysite. Under the Agreement, the
Company was to issue 750,000 shares of common stock to the shareholders of
Skysite, as well as options to purchase an additional 500,000 shares of
restricted common stock at an exercise price of $.40 per share.
F-33
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the
nine months then ended are unaudited)
NOTE A - OPERATIONS (Continued)
ACQUISITION OF SKYSITE (Continued)
The stock of Skysite was transferred to the Company on August 26, 1997.
Subsequent to the acquisition, a dispute arose between the Company and the
former President of Skysite related to the value of Skysite at the time of
the acquisition. As a result of this dispute, the Company withheld the
issuance of its shares. During 1998, the Company entered into an amended
agreement with the shareholders of Skysite, except for the former President
(who was originally allocated 240,000 shares). Under the terms of this
amended agreement, the other shareholders' shares and options were placed
in an escrow account in October 1998. The shareholders have all rights
attributable to the escrowed stock, however, they have agreed that at such
time when they elect to sell these shares, the first $200,000 of proceeds
will be placed in escrow and paid to the Company, and the remaining shares
and options will be released to the shareholders. The 240,000 shares due to
the former President remain unissued, and the Company does not intend to
issue such shares.
On or about January 19, 1999, the former President filed a complaint
against the Company alleging multiple claims, including breach of contract,
breach of fair dealing, fraud, negligent misrepresentation, specific
performance, conversion and trespass. On or about February 16, 1999, the
former President filed an Amended Complaint in the above-referenced matter
containing the same claims as those in the original Complaint. The claims
arise out of the August 26, 1997 acquisition by the Company of all of the
stock of Skysite, pursuant to the terms of the Agreement.
The Company alleged that numerous misrepresentations were made in the
Agreement. These defenses will be raised as a setoff to the former
President's claim for stock and any damages related thereto. Given the
early stages of the case, it is not possible to determine the likelihood of
an unfavorable outcome on this matter. Therefore, the Company has not
included an accrual for any possible loss in the accompanying financial
statements.
At the time of the acquisition, the Company also entered into an agreement
with the former President of Skysite to issue options to purchase 146,961
shares of the Company's common stock, at an exercise price of $.40 per
share, over the following 36 months in amounts to be determined by the
company. The number of options granted to the former President of Skysite
would be adjusted for any material breach of the agreement. In addition,
the options to be granted were also based upon employment services, which
were to be provided. No options have been granted to the former President
since the Company believes the former President did breach the agreement,
and no services were performed.
F-34
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the
nine months then ended are unaudited)
NOTE A - OPERATIONS (Continued)
ACQUISITION OF SKYSITE (Continued)
The Company recognized the Skysite acquisition as a purchase for accounting
purposes. The Company valued the acquisition at the fair value of the
consideration given plus the liabilities assumed. The consideration given
included the 510,000 shares and 500,000 options placed in escrow, less the
$200,000 to be received from escrow when these shares are sold. This
$200,000 receivable has been recognized by the Company as a reduction of
stockholders' equity. The shares and options have been recorded at
management's estimate of fair value which reflects a discount due to the
restricted nature of the shares. The following is the valuation at August
26, 1997, the closing date of the acquisition, of consideration given:
<TABLE>
<S> <C>
510,000 shares of Company common stock $ 214,583
500,000 options to purchase Company common stock 175,000
Due from Skysite shareholders (200,000)
Advances made from the Company to Skysite prior to acquisition 231,039
-----------------
420,622
Liabilities assumed 935,914
-----------------
Total purchase price $ 1,356,536
=================
</TABLE>
The Company allocated the purchase price based on the fair value of the
assets acquired as follows:
<TABLE>
<S> <C>
Current assets $ 289,440
Property and equipment 11,474
Other assets 4,200
Goodwill 1,051,422
-----------------
$ 1,356,536
=================
</TABLE>
F-35
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the
nine months then ended are unaudited)
NOTE A - OPERATIONS (Continued)
ACQUISITION OF SKYSITE (Continued)
The following unaudited proforma financial information presents the
consolidated results of operations of the Company and Skysite as if the
acquisition had occurred on January 1, 1996. The proforma financial
information does not necessarily reflect the results of operations that
would have occurred had the Company and Skysite constituted a single entity
during such periods.
<TABLE>
<CAPTION>
Year ended
December 31,
------------------------------
1996 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Proforma revenue $ 704,179 $ 1,243,961
Proforma net loss available to
common shareholders (8,898,614) (6,810,549)
Proforma net loss per share (0.41) (0.33)
</TABLE>
REORGANIZATION
In July 1998, the Company formed a new wholly-owned subsidiary,
International Satellite Group, Inc. ("Insat"), to oversee its satellite
communication operations, and transferred the common stock of Skysite
Communications Corporation ("Skysite") to Insat. Additionally, Insat formed
Project 77 Corp. ("Project 77") in 1998 as its other wholly-owned
subsidiary primarily to market Iridium satellite telephone equipment and
services.
REALIZATION OF ASSETS
For the three years ended December 31, 1998, the Company has experienced
significant losses due to its previous technology development activities
and the losses from Skysite's operations. The success of the Company is
dependent on its ability to generate adequate cash for operations and
capital needs. Its ability to generate adequate cash for such needs is in
F-36
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the
nine months then ended are unaudited)
NOTE A - OPERATIONS (Continued)
REALIZATION OF ASSETS (Continued)
part dependent on its success in increasing sales from Insat's products and
services and the sale of new products and services. The Company has
developed strategies to increase the sales of products and services,
however, due to market conditions and other factors beyond its control,
there can be no assurance the Company will be able to adequately increase
product sales. Therefore, the Company may have to generate additional
capital through the issuance of debt or equity securities. Although the
Company believes it has the ability to raise additional capital, such an
issuance may be dilutive to existing shareholders and there can be no
assurance that adequate funds will be available, if at all, on terms that
are reasonable or acceptable to the Company. Therefore, the Company has
developed a plan to implement certain cost control measures to mitigate its
liquidity risk, and is seeking new products and services that will increase
cash flow and reduce the reliance on Insat's products and services. If the
Company is unable to generate adequate cash, there could be a material
adverse effect on the business and financial condition of the Company.
Future operating results may be affected by a number of factors including
the timing of new product introductions in the market place, competitive
pricing pressures, and economic conditions. Because the market for the
Company's products is characterized by rapidly changing technology, the
development and introduction of competitive products may pose a threat to
the Company's business.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Insat, after eliminating intercompany
balances and transactions. The amounts included for Skysite for the year
ended December 31, 1997 represent all activity from August 26, 1997, the
date of acquisition, to December 31, 1997.
F-37
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the
nine months then ended are unaudited)
NOTE B - SUMMARY OF 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
the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Management has estimated the fair value of its unregistered restricted
stock and options given as consideration for the acquisition of Skysite,
compensation to placement agents, satisfaction of debts and other
obligations and compensation to nonemployee directors. Management's
estimate of fair value included marketability discounts that were estimated
based on arm's length transactions consummated with equity securities
(e.g., settlement of debt and stock sales). In addition, management has
made estimates in connection with the valuation allowance on the deferred
income taxes, valuation allowance on notes receivable and the evaluation of
potential impairment of goodwill.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. As of December
31, 1998 and September 30, 1999, substantially all funds are held at one
financial institution and balances exceed the federally insured limits. The
Company does not believe it is exposed to any significant credit risk on
cash equivalents.
INVENTORY
Inventory, which consists primarily of finished goods, is stated at the
lower of cost or market on a first-in, first-out basis. Cost is determined
using the weighted average cost method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are being depreciated over
the estimated useful lives of the assets ranging from three to seven years,
using accelerated methods. For property and equipment under capital lease,
the assets are depreciated over the shorter of the remaining life of the
lease or the useful life of the asset.
F-38
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the
nine months then ended are unaudited)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INTANGIBLE ASSETS
Intangible assets include the excess of purchase price over net assets
received resulting from the acquisition of Skysite, which is being
amortized over five years. As of December 31, 1997 and 1998, the
unamortized balance was $981,327 and $771,039, respectively (net of
accumulated amortization of $70,096 and $280,383, respectively). During the
nine months ended September 30, 1999, the amounts related to the
acquisition of Skysite were written-off, resulting in a charge to expense
of $665,895 for the nine months then ended.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company complies with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles held and used by an
entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. To determine recoverability of its long-lived assets, the
Company evaluates the probability that future undiscounted net cash flows
will be less than the carrying amounts of net assets. Impairment, if any,
is measured at fair value.
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share are computed by dividing net loss
available to common stockholders by the weighted-average number of common
shares outstanding. Diluted earnings (loss) per common share are computed
by dividing net loss by the weighted-average number of shares of common
stock outstanding plus other dilutive securities.
Since the Company had net losses from operations, no potential common
shares to be issued are included in the computation of the diluted per
share amount as they would be anti-dilutive. Accordingly, the following
common stock equivalents are not included in the weighted-average shares of
common stock outstanding.
F-39
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the
nine months then ended are unaudited)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EARNINGS (LOSS) PER COMMON SHARE (Continued)
<TABLE>
<CAPTION>
1996 1997 1998 1999
---------------- --------------- ---------------- -----------------
(Unaudited)
<S> <C> <C> <C> <C>
Common shares to be
granted under option
arrangements, less shares
assumed purchased
at average market price 2,312,122 1,580,562 340,888 549,575
Convertible preferred
securites and related
warrants - 935,800 4,428,498 2,061,075
---------------- --------------- ---------------- -----------------
2,312,122 2,516,362 4,769,386 2,610,650
================ =============== ================ =================
</TABLE>
FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, receivables and
stockholder loans are a reasonable estimate of their fair value given their
short-term nature. Investments in equity securities are carried at their
fair value.
STOCK-BASED COMPENSATION
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company has adopted the
disclosure-only provisions of SFAS No. 123 for employee stock options.
Accordingly, when the Company grants employee stock options with an
exercise price equal to the NASDAQ bulletin board price ("quoted price") of
the shares on the date of grant, no compensation expense is recorded. If
employee stock options are granted at an exercise price less than the
quoted price, compensation expense is recorded to the extent of the
intrinsic value.
F-40
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the
nine months then ended are unaudited)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION (Continued)
Transactions with nonemployees in which consideration is received for the
issuance of equity instruments are accounted for based on the fair value of
the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable.
RESEARCH AND DEVELOPMENT EXPENSE
The Company expenses research and development costs as they are incurred.
REVENUE RECOGNITION
The Company recognizes equipment sales revenue upon shipment. Airtime
services are recognized in the period in which communications services are
rendered. Deferred revenue consists of customer payments received in
advance of services provided under contractual arrangements.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of accounts receivable.
Risk with respect to accounts receivable is generally diversified among a
number of entities comprising the Company's customer base. The Company
performs ongoing credit evaluations of its customers' financial condition
and maintains allowances for potential credit losses. Actual losses and
allowances have been within management's expectations.
DEFERRED COMPENSATION
The Company records stock option compensation as the difference between the
exercise price of options granted and the fair value of the Company's
common stock on the date of grant over the vesting period. Deferred
compensation represents the unvested portion. The amount of deferred
compensation recorded in 1996, 1997 and 1998 was $6,640,625, $879,596 and
$-0-, respectively. Deferred compensation is amortized to expense during
the vesting period of the related options.
F-41
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the
nine months then ended are unaudited)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
display of comprehensive income (net income (loss) plus all other changes
in net assets from nonowner sources) and its components in the financial
statements.
INCOME TAXES
Deferred income taxes are recognized based on the estimated future tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amount used for income
tax purposes. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. Income tax
expense represents the current tax provision for the period and the change
during the period in deferred tax asset and liabilities.
RECLASSIFICATIONS
Certain balances from 1996 and 1997 have been reclassified to conform to
the December 31, 1998 presentation.
SEGMENT INFORMATION
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major
customers. The Company is in one business segment, satellite
communications, and follows the requirements of SFAS No. 131.
F-42
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE C - INVESTMENTS
In 1997, the Company loaned $50,000 to EDNET, an unrelated company. Under
the terms of a loan agreement, if EDNET did not repay the loan by June 15,
1997, the Company would, and did, receive 65,000 shares of EDNET, which
were restricted through June 15, 1998. The value of these shares on June
15, 1997 was $40,950. Due to the transaction, the Company has recognized a
loss of $9,050, which is included in loss on investments in the
accompanying financial statements. As of December 31, 1998, the fair value
of these shares was approximately $0.31 per share. The Company has
reflected the reduction in the fair value of this investment by recording a
$20,638 unrealized loss in stockholders' equity in the accompanying
consolidated balance sheet as of December 31, 1998. During the nine months
ended September 30, 1999, the fair value of the shares increased to $2.015
per share. The Company sold the shares for $130,099 and recognized a gain
of $90,049 during the nine months ended September 30, 1999.
NOTE D - PROPERTY AND EQUIPMENT
As of December 31, 1997 and 1998 and September 30, 1999, property and
equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------- September 30,
1997 1998 1999
--------- --------- ---------
(Unaudited)
<S> <C> <C> <C>
Office furniture and equipment $176,623 $256,875 $785,546
Computer and video equipment 18,040 67,069 169,822
Less accumulated depreciation (72,163) (86,061) (237,922)
--------- --------- ---------
$122,500 $237,883 $717,446
========= ========= =========
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1997 and 1998
and the nine months ended September 30, 1998 and 1999 amounted to $19,534,
$35,430, $54,156, $36,438, and $97,307 , respectively.
F-43
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE E - NOTES PAYABLE AND STOCKHOLDER LOANS
As of December 31, 1997 and 1998 and September 30, 1999, notes payable and
stockholder loans consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------- September 30,
1997 1998 1999
---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Note payable to stockholder, interest rate 8%,
payable January 5, 1999 and February 28, 1999 $857,385 $500,000 $500,000
Note payable to stockholder, interest rate 8%,
payable on demand 105,000 -- --
Note payable, interest rate 10%, payable April 2, 2000 -- 100,000 100,000
Note payable, interest rate 10%, payable from
September 12, 1999 through May 5, 2000 300,000 800,000 800,000
Notes payable, interest rate 8%, payable February 15, -- -- 300,000
1999 and April 2, 1999
Note payable, interest rate 9%, payable June 30, 1999 -- -- 50,000
Note payable, interest rate 9%, payable June 30, 2000 -- -- 300,000
Note payable, interest rate 10%, payable April 12, 2000 -- -- 150,000
Note payable, interest rate 9%, payable July 30, 2000 -- -- 520,000
Note payable, interest rate 9%, payable on demand -- -- 90,000
Capital lease obligation, payable in monthly
installments of $846 through February 6, 1999,
including interest at an annual rate of 36.7% 9,521 8,521 8,521
Capital lease obligation, payable in monthly
installments of $211 through May 1, 2001,
including interest at an annual rate of 14.5% 6,817 6,314 6,314
Capital lease obligation, payable in monthly
installments of $431 through February 13, 2001,
including interest at an annual rate of 12.3% 14,737 -- --
---------- ---------- ----------
Total debt 1,293,460 1,414,835 2,824,835
Less current maturities 1,291,843 814,835 2,824,835
---------- ---------- ----------
$1,617 $600,000 $ --
========== ========== ==========
</TABLE>
F-44
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE E - NOTES PAYABLE AND STOCKHOLDER LOANS (Continued)
On April 15, 1997, the Company issued 160,000 shares of common stock in
full satisfaction of a $100,000 note payable June 30, 1997. On this date,
the outstanding balance on this note, including accrued interest was
$109,500. No gain or loss was recognized by the Company in the settlement
of the liability.
On August 24, 1998, the Company entered into a settlement related to an
amount owed to a shareholder of the Company. The balance owed to the
shareholder, including interest and unreimbursed expenses totaled
$1,033,951 as of December 31, 1997. Under the agreement, the Company issued
200,000 shares of its restricted common stock and made a $250,000 payment
to the shareholder on September 1, 1998. Pursuant to the settlement, the
Company was required to make two payments of $250,000 each on January 5,
1999 and February 28, 1999. The Company did not make these payments. No
gain or loss was recognized by the Company in the settlement of the
liability.
Future minimum payments of debt are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, September 30,
---------- ----------
(Unaudited)
<S> <C> <C>
1999 $ 814,835 $ --
2000 600,000 2,824,835
--------- ---------
$ 1,414,835 $ 2,824,835
========= =========
</TABLE>
NOTE F - STOCKHOLDERS' EQUITY
COMMON STOCK
In November 1994, the Company entered into an agreement with a placement
agent for a private offering. This private offering resulted in the sale of
2,000,000 units at a purchase price of $0.625 per unit for a total
consideration of $1,250,000. Each unit consisted of one share of common
stock, one Class A warrant and one Class B warrant (no Class A or Class B
warrants were exercised prior to their expiration date). The placement
agent received 200,000 shares of common stock and 48,000 expense units
valued at $155,000 as compensation for its services and costs. Each expense
unit was composed of one share of common stock, one Class A warrant and one
Class B warrant (no Class A or Class B warrants were exercised prior to
their expiration date). In addition, attorney and finder's fees totaling
$83,833, paid or to be paid in cash, were incurred and are included as
stock issuance
F-45
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE F - STOCKHOLDERS' EQUITY (Continued)
COMMON STOCK (Continued)
costs. Of the $83,833, $50,000 was payable at December 31, 1994 to one
consultant. In addition, the consultant was granted an option, exercisable
until March 8, 1998, for the purchase of 80,000 shares of common stock at
the exercise price of $0.625 per share.
During 1995, the Company and the consultant revised the fee structure noted
in the previous paragraph. In exchange for the cancellation of the $50,000
obligation and the option to purchase 80,000 shares, the consultant
received $25,000 in cash, 40,000 shares of common stock with a deemed value
of $25,000 and 120,000 options. The additional compensation was recorded as
general and administrative expense by the Company.
During 1995, the Company entered into an agreement with an investment
advisor to raise equity financing solely from offshore purchasers and
purchasers who may be deemed "accredited investors" as those terms are
generally defined under Regulation S and Regulation D, respectively,
promulgated by the U.S. Securities and Exchange Commission. A total of
4,400,000 shares of the Company's common stock were issued at a purchase
price of $0.625 per share for a total of $2,750,000. The placement agent
received a finder's fee totaling $330,000, which is included as stock
issuance costs and charged against additional paid-in capital.
Prior to signing the agreement with the investment advisor, the Company had
independently raised $285,000 through the issuance of 212,000 shares at a
purchase price of $1.25 per share and $20,000 through the issuance of
32,000 shares at a purchase price of $0.625 per share in separate
transactions.
An officer of the Company and outside consultants received 600,000 and
66,000 shares, respectively, during 1995 as payment for services rendered,
valued at the price of $0.625 per share. The value of the shares issued,
$375,000 and $41,250, were charged to research and development, and general
and administrative, respectively.
In February 1996, the Company raised $50,000 through the issuance of 20,000
shares of common stock. In addition, from March 1 through April 11, 1996,
the Company raised $1,000,000 through the issuance of 500,000 shares of
common stock and $250,000 through the exercise of 400,000 options at a
price of $0.625 per share which were convertible into 400,000 shares. The
options were issued to a placement agent for raising the $1,000,000 noted
in the previous sentence, and were valued at $2,800,000. This amount is
included as
F-46
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE F - STOCKHOLDERS' EQUITY (Continued)
COMMON STOCK (Continued)
stock issuance costs and charged to additional paid-in capital in the
statement of stockholders' equity.
In 1997, the Company issued 160,000 common shares to a third-party for full
settlement of a note payable (see note E) and 10,000 shares to a former
consultant. In addition, the Company reacquired 5,902,200 common shares
from a former director for total consideration of $10.
During 1998, the Company issued and cancelled 350,000 and 1,904,000 common
shares, respectively, to former directors for full settlement of amounts
owed (see note I). In addition, during 1998, the Company issued 505,000
common shares in exchange for options exercised, 286,000 common shares in
exchange for 464,000 common stock warrants exercised, converted 637,500
Series A preferred shares for 637,500 common shares (see note F) and issued
50,000 common shares in connection with sale of 3,000 Series B preferred
shares (see note I).
During the nine months ended September 30, 1999, the Company issued 490,000
common shares to former employees for full settlement of amounts owed (see
note I). In addition, during the nine months ended September 30, 1999, the
Company issued 260,578 common shares in exchange for options exercised,
2,423,000 common shares in exchange for 2,752,000 common stock warrants
exercised, converted 1,415,666 Series A preferred shares for 1,945,166
common shares, sold 666,668 common shares and issued 1,693,200 common
shares in connection with the redemption of 600 Series B preferred shares.
PREFERRED STOCK
SERIES A
In December 1996 and August 1997, the Company entered into an agreement
with a placement agent to raise equity financing solely from non-U.S.
persons as defined in Regulation S promulgated by the U.S. Securities and
Exchange Commission through a private offering of the Company's 8%
cumulative convertible preferred stock ("Series A"), $0.01 par value per
share. The Company offered a minimum of 2,000,000 and a maximum of
6,666,667 shares of the 8% preferred stock for consideration of between
$3,000,000 and $10,000,000. The Series A preferred stock is nonvoting.
F-47
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE F - STOCKHOLDERS' EQUITY (Continued)
PREFERRED STOCK (Continued)
SERIES A (Continued)
The first offering period was to expire on June 30, 1997; however, the
Company closed that offering in February 1997 after selling 2,031,832
shares of Series A Preferred Stock with 1,015,916 warrants for a total
consideration of $3,047,748. In August 1997, the Company again offered its
Series A Preferred Stock and warrants with the offering period to expire
March 31, 1998. The August 1997 memorandum was subsequently amended and the
offering period was extended to July 31, 1998. The Company raised
$3,460,500 through the issuance of 2,307,000 additional shares of Series A
preferred stock and 1,153,300 warrants. The Company raised a total of
$6,508,248 through the issuance of 4,338,832 total shares of Series A
preferred stock in the two offerings. Of this amount, $2,184,900 was raised
through the issuance of 1,456,600 shares during 1998.
For every two Series A preferred shares purchased, the stockholder received
one warrant (which expires three years after the date of execution of the
subscription agreement) to purchase one share of common stock at an
exercise price of $3.00 per share (the "preferred stock warrants"). The
preferred stock warrants shall become exercisable in the same increments
and on the same dates that the conversion rights with respect to the shares
to which they are attached become vested, as described below. As of
December 31, 1998, a total of 2,169,416 warrants had been issued and
286,000 warrants were exercised.
The Company allocated the equity raised between the preferred stock and the
warrants. Based on the valuation of each on the date of issuance, the
Company allocated approximately $2,868,000 to the preferred stock and
$3,640,000 to the warrants for the entire proceeds received under Series A
through closing at July 31, 1998. As of December 31, 1998, the allocation,
net of preferred shares converted and warrants exercised, amounted to
approximately $2,450,000 and $3,200,000 for the preferred stock and
warrants, respectively.
Series A preferred stockholders have the right to convert each share into
one share of common stock as follows: a) 25% of the shares 90 days
following the date the shares were issued (the initial conversion date) and
b) 25% of the shares at the end of each of the three consecutive 90-day
periods following the initial conversion date. No conversion of Series A
preferred stock to common stock was made in 1997. In 1998, the Company
converted 637,500 shares of Series A preferred stock to an equal number of
shares of common stock.
F-48
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE F - STOCKHOLDERS' EQUITY (Continued)
PREFERRED STOCK (Continued)
SERIES A (Continued)
Six months after the date of issuance of the Series A preferred shares, the
Company shall have the option to require the preferred stockholder to
convert each of such shares into one share of common stock. Upon such
conversion, all of the preferred stock warrants attached to such shares
shall become fully exercisable.
Each Series A preferred stockholder is entitled to receive quarterly
dividends on the last day of March, June, September and December in an
amount equal to 8% per annum of the stated value of the preferred stock.
During 1997, the Company recorded dividends totaling $249,916, of which
$113,985 was paid in 1997 and $135,931 was payable at December 31, 1997. No
dividends were paid in 1998. Additionally, the Company has recorded
dividends payable totaling $584,077 and $844,417 at December 31, 1998 and
June 30, 1999, respectively.
On the date of issuance of some of the Series A preferred stock, the
purchase price of the shares was less than the quoted market price of the
Company's common stock. Accordingly, the intrinsic value of this beneficial
conversion feature is being accreted to preferred stock over the conversion
rights period. Accretion of the beneficial conversion feature as of
December 31, 1998 and 1997 and September 30, 1999 totaled $3,658,000,
$1,380,000 and $6,192,000, respectively, and is reflected as an increase
in the carrying value of the preferred stock and a dividend charge against
accumulated deficit.
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the Company, the holders of the Series A preferred stock will be entitled
to be paid, before any distribution or payment is made in respect of any
common stock as to distribution on liquidation, dissolution or winding up,
an amount in cash equal to the aggregate stated value ($1.50 per share) of
all shares outstanding plus all accrued but unpaid dividends.
Under the terms of the placement agent agreement related to Series A, the
placement agent is entitled to (1) a placement fee based on a percentage of
capital raised, (2) options to purchase common stock of the Company and (3)
5% of the proceeds related to exercise of warrants issued with the Series A
preferred shares. The total fees earned and the value of the options
granted through the closing at July 31, 1998 amounted to $2,037,151. In
accordance with the
F-49
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE F - STOCKHOLDERS' EQUITY (Continued)
PREFERRED STOCK (Continued)
SERIES A (Continued)
placement agent agreement, on March 6, 1997, the placement agent was
granted 2,800,000 options to purchase common stock of the Company at
$0.3125 per share. On December 12, 1997, these options were canceled and
the Company granted the placement agent 2,800,000 new options, for which
the placement agent could exchange each option for .85 share of the
Company's stock upon registration. On December 12, 1997, the Company valued
the new options to be $1,278,631. The Company has recognized the value of
the new options and the percentage fee earned by the placement agent and
recorded this amount, which totaled $1,785,888 for the year ended December
31, 1997 as stock issuance cost, which is reflected as a reduction of
additional paid-in capital. In addition, if all warrants issued in the
Series A offering are exercised, the placement agent's 5% fee would
increase by approximately $325,000. For the year ended December 31, 1998,
the placement agent earned and was paid $251,264 and $42,900 for capital
raised and warrants exercised, respectively.
SERIES B
In April 1998, the Company created a Series B issue of preferred stock,
which it offered in a Regulation D Private Placement. The Company offered
3,000 shares of the 10,000,000 authorized shares of preferred stock at a
purchase price of $1,000 per share. Each share had a stated value of $1,000
and a par value of $0.01 per share. The Series B offer closed on May 28,
1998. The Company issued all 3,000 shares for $3,000,000, resulting in
$2,670,000 net cash proceeds to the Company. (See note I related to the
placement agent fee.) The Series B preferred stock does not pay dividends
and is nonvoting stock.
Each share of Series B preferred stock shall be convertible into shares of
the Company's common stock based upon a conversion formula, as defined in
the offering agreement.
In conjunction with the offering, 500,000 warrants were issued to the
Series B shareholders proportionate to each investor's number of shares
purchased to the total shares offered. Each warrant entitles the holder to
purchase shares of the Company's common stock at a price 110% of the
closing bid price as of the closing of the Series B offering. The exercise
price is $4.34. The exercise price and number of shares to be purchased may
be adjusted from time to time based on computations included in the warrant
agreement. Such warrants are exercisable for three years after closing of
the Series B offering.
F-50
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE F - STOCKHOLDERS' EQUITY (Continued)
PREFERRED STOCK (Continued)
SERIES B (Continued)
The Company has allocated the equity raised between the preferred stock and
the warrants. Based on the valuation of each on the date of issuance, the
Company allocated approximately $955,000 to the preferred stock and
$2,045,000 to the warrants.
Each holder of Series B preferred stock will have the right to convert
their shares as follows: a) 50% of the shares on the effective date of
registration ("conversion date") at the conversion price (lesser of (i) 25%
off the five-day average closing bid price for the Company's common stock
immediately before conversion or (ii) 100% of closing bid price for the
Company's common stock on the date of closing, but not less than $.50 per
share of the Company's common stock) and b) 50% of the shares on the 45th
day after the effective date of registration at the conversion price. The
holder shall be entitled to an additional discount privilege equal to 1%
per month, or fraction of a month, from the time of closing until the
conversion date for any conversion 30 days after the conversion date and
1/2% per month or fraction of a month for any conversions thereafter
("additionaL discount"). All shares outstanding on May 1, 2001 will be
automatically converted into common stock in accordance with the conversion
formula, at the conversion price.
The Company will have the right, in its sole discretion, to redeem in whole
or in part any shares of Series B preferred stock submitted for conversion.
The redemption price per share of common stock after conversion of the
Series B preferred stock shall be calculated as 133% of the face value plus
any accrued additional discount.
On the date of issuance of the Series B preferred stock, the conversion
price of certain of the Series B preferred stock was less than the quoted
market price of the Company's common stock. Accordingly, had the shares
been converted as of the issuance date, the intrinsic value of this
beneficial conversion feature would have been approximately $1,288,000. The
eventual accretion of the intrinsic value of the beneficial conversion
feature will be recorded as an increase in the carrying value of the
preferred stock and a dividend charge to accumulated deficit over the
conversion rights period.
F-51
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE F - STOCKHOLDERS' EQUITY (Continued)
PREFERRED STOCK (Continued)
SERIES B (Continued)
In the event of any liquidation, dissolution or winding-up of the Company,
either voluntary or involuntary (a "liquidation"), the holders of shares of
the Series B preferred stock then issued and outstanding shall be entitled
to be paid out of the assets of the Company available for distribution to
its shareholders, whether from capital, surplus or earnings, before any
payment shall be made to the holders of shares of the common stock or upon
any other series of preferred stock of the Company with a liquidation
preference subordinate to the liquidation preference of the Series A
preferred stock. The amount of the pay-out will be an amount per share
equal to the stated value.
The Series B preferred stock subscription agreements contain a "put"
provision for common stock which allows the Company to raise an additional
$3,000,000. The provision specifies that 75 days after the effective date
of the registration of additional common shares to be used under this
provision, the Company may sell common stock (the "put stock") to the
Series B subscribers. The price of the put stock is determined by taking
the lower of (1) 80% of the lowest closing bid price for the previous 20
trading days prior to funding or (2) 80% of the closing bid price on the
day of funding. The minimum draw is $250,000 and the maximum draw is
$750,000. If the price of the Company's common stock for the 20 trading
days prior to the funding is less than $1.25 and the average trading volume
is less than $300,000 per day for the previous 20 trading days, the Series
B shareholders have the option not to fund the requested draw. These
minimums increase as the amount of the funds requested by the Company
increase from $250,000 to $750,000.
On the date of issuance of the Series B preferred stock with the put
provision, the conversion price under the put provision was less than the
quoted market price of the Company's common stock. Accordingly, had the put
provision been exercised at the date of issuance of the Series B preferred
stock, the intrinsic value of the beneficial conversion feature would have
been approximately $483,000. The put provision was recorded as an
offsetting charge to shareholders' equity. The stock put rights will be
amortized over the period of the put provision with an offsetting charge to
accumulated deficit. The accretion of the intrinsic value of the beneficial
conversion feature will be recorded ratably over the term of the put
contract (two years from execution of the subscription agreement) based on
the earliest dates the Company may put its shares.
F-52
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE F - STOCKHOLDERS' EQUITY (Continued)
PREFERRED STOCK (Continued)
SERIES C
In August 1998, the Company created a Series C issue of preferred stock.
The Company offered 4,000 shares of the 10,000,000 authorized shares of
preferred stock at a purchase price of $1,000 and no par value. When the
offering ended September 1, 1998, the Company had issued 3,000 shares for
$3,000,000, resulting in $2,670,000 net cash proceeds to the Company (see
note I for discussion of placement agent fee). The Series C preferred stock
does not pay dividends and is nonvoting stock.
In conjunction with the offering, 495,000 warrants were issued to the
Series C shareholders proportionate to each investor's number of shares
purchased to the total shares offered. Each warrant entitles the holder to
purchase shares of the Company's common stock at a price of $4.34. The
exercise price and numbers of shares to be purchased may be adjusted from
time to time based on computations included in the warrant agreement. Such
warrants are exercisable for three years after closing of the Series C
offering.
The Company has allocated the equity raised between the preferred stock and
the related warrants. Based on the valuation of each on the date of
issuance, the Company allocated $1,802,000 to the preferred stock and
$1,198,000 to the warrants.
Fifty percent of each share of Series C preferred stock shall be
convertible on the earlier of the effective date of registration of the
Company's common ("conversion date") or 120 days from the closing of the
Series C preferred stock, the remaining 50% shall be convertible on the
earlier of the 45th day after the effective date of registration or 165
days from the closing of the Series C preferred stock. The conversion price
will be either the discounted price (25% off of the five-day average
closing bid price immediately before the conversion date) or $3.94,
whichever is less. However, in no event shall the conversion price be less
than $1.875 per share. In the event the stock trades below $1.875 for five
consecutive days prior to the conversion date, the floor price will be
adjusted to the lowest closing bid price for the Company's common stock
during such five-day period from which the holder shall be entitled to an
additional discount. The holder shall be entitled to an additional discount
privilege equal to 1% per month, or fraction of a month, from the time of
closing until the conversion date for any conversion 30 days after the
conversion date and 1/2% per month, or fraction of a month, for any
conversionS thereafter ("additional discount"). All shares outstanding on
June 1, 2001 will be automatically converted into common stock on such date
in accordance with the conversion formula and the conversion price then in
effect.
F-53
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE F - STOCKHOLDERS' EQUITY (Continued)
PREFERRED STOCK (Continued)
SERIES C (Continued)
The Company shall have the right in its sole discretion to redeem, prior to
receipt of the notice of conversion, in whole or in part any shares of
Series C preferred stock. The redemption price per share of common stock
after conversion of the Series C preferred stock shall be calculated as
133% of the face value plus any unpaid penalty should the Company not
effect the date of registration 150 days from closing. The Company shall
not have a redemption privilege if the common stock is trading above $3.50
per share unless the holder agrees in writing to allow the Company to
redeem such shares.
On the date of issuance of the Series C preferred stock, the conversion
price of certain of the Series C preferred stock was less than the quoted
market price of the Company's common stock. Accordingly, had the shares
been converted as of the issuance date, the intrinsic value of this
beneficial conversion feature would have been approximately $263,000. The
eventual accretion of the intrinsic value of the beneficial conversion
feature will be measured at the date of conversion and will be recorded as
an increase in the carrying value of the preferred stock and a dividend
charge to retained earnings over the conversion rights period.
In the event of any liquidation, dissolution or winding-up of the Company,
either voluntary or involuntary (a "liquidation"), the holders of shares of
the Series C preferred stock then issued and outstanding shall be entitled
to be paid out of the assets of the Company available for distribution to
its shareholders, whether from capital, surplus or earnings, before any
payment shall be made to the holders of shares of the common stock or upon
any other series of preferred stock of the Company with a liquidation
preference subordinate to the liquidation preferences of the Series A and B
preferred stock. The amount of the pay-out will be an amount per share
equal to the stated value.
F-54
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE G - INCOME TAXES
The components of the provision for income taxes for the years ended
December 31, 1996, 1997 and 1998 and the six months ended September 30, 1998 and
1999 are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
----------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Deferred taxes (benefit)
Federal $(2,732,891) $(1,588,986) $(2,258,112) $ 1,445,635 $ 2,197,298
State (482,609) (246,430) (422,802) 270,594 411,895
----------- ----------- ----------- ----------- -----------
Income tax benefit (3,215,500) (1,835,416) (2,680,914) (1,716,229) (2,609,193)
Increase in valuation allowance 3,215,500 1,835,416 2,680,914 1,716,229 2,609,193
----------- ----------- ----------- ----------- -----------
Income tax provision $ -- $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
</TABLE>
Components of the Company's deferred tax assets as of December 31, 1997 and 1998
and September 30, 1999 are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998 1999
----------- ----------- ---------------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets
Net operating loss carryforwards $5,057,005 $7,495,943 $ 10,077,849
Compensation related to stock options 1,670,109 1,857,509 1,857,509
Amortization of goodwill 18,627 73,203 100,491
----------- ----------- ---------------
Total deferred tax assets 6,745,741 9,426,655 12,035,849
Valuation allowance (6,745,741) (9,426,655) (12,035,849)
----------- ----------- ---------------
$ -- $ -- $ --
=========== =========== ===============
</TABLE>
Because of the uncertainty associated with future realization of the deferred
tax assets, the deferred tax assets have been offset in total by a valuation
allowance.
F-55
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE G - INCOME TAXES (Continued)
The Company has net operating loss ("NOL") carryforwards for federal tax
return purposes that may be offset against future taxable income. Prior to
1998, the Company did not file a consolidated federal income tax return
and, accordingly, net operating losses prior to 1998 of $11,811,000 may be
limited in future years. The use of the NOLs is subject to statutory and
regulatory limitations regarding changes in ownership. The August 26, 1997
Skysite acquisition resulted in a greater that 50% change in ownership for
Federal income tax purposes. Accordingly, the net operating loss
carryforward of Skysite at August 27, 1997 of approximately $337,000 will
be limited in future years. If not used, the carryforwards will expire as
follows.
<TABLE>
<CAPTION>
Operating losses
------------
<S> <C>
2009 $ 1,076,200
2010 2,249,000
2011 5,111,700
2012 3,374,100
2013 6,020,000
2014 2,214,000
------------
$ 20,045,000
============
</TABLE>
Reconciliation of the statutory federal rate to the effective rates were as
follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------- September 30,
1996 1997 1998 1999
------------- ------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
U.S. federal statutory income
tax rate 34.00 % 34.00 % 34.00 % 34.00 %
State income taxes, net of
federal tax benefit 4.71 5.38 5.57 5.95
Amortization of intangibles assets - 0.48 0.94 0.44
Valuation allowance (38.71) (39.86) (40.51) 40.39
------------- ------------- ------------- -------------
-- % -- % -- % -- %
============= ============= ============= =============
</TABLE>
F-56
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE H - LEASES
The Company has entered into several operating leases for office space and
equipment that are to expire at certain times through 2001. Additionally,
the Company has certain capital lease obligations for office equipment. As
of December 31, 1998 and September 30, 1999, the Company had the following
minimum lease payments:
<TABLE>
<CAPTION>
Year Ending 1998 1999
--------- ---------
(Unaudited)
<S> <C> <C>
1999 $ 172,538 $ 109,998
2000 47,458 26,933
2001 16,459 3,204
--------- ---------
Total minimum lease payments $ 236,455 $ 140,135
========= =========
</TABLE>
Total rent expense was $47,672, $62,844, $134,958, $79,257 and $76,926 for
the years ended December 31, 1996, 1997 and 1998 and the nine months ended
September 30, 1998 and 1999, respectively. The amount of related party rent
expense was $11,400, $0, $0, $0 and $0 for the years ended December 31,
1996, 1997 and 1998 and the six months ended June 30, 1998 and 1999,
respectively. Included in the above are lease payments that were made by the
Company on behalf of the former lessee in 1998. During 1998, management
completed the process of assuming this lease.
NOTE I - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENT
In December 1998, the Company entered into an employment agreement with the
President and Chief Executive Officer of the Company. The agreement expires
in June 2003. In addition to an annual salary and bonus, the agreement
provides for the granting of 200,000 options annually at a price of $2.00
per share and additional options upon the achievement of certain
performance measures. Pursuant to the agreement, the Company will advance
$150,000 to the President and Chief Executive Officer to be used to
exercise options to purchase common stock held by the President and Chief
Executive Officer at December 31, 1998.
F-57
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE I - COMMITMENTS AND CONTINGENCIES (Continued)
PLACEMENT AGENT FEE
SERIES B
Under the terms of the placement agent agreement related to the issuance of
Series B preferred stock, the placement agent was paid fees equal to 11% of
the funded amount of $3,000,000 or $330,000 for the placement of the 3,000
shares of Series B preferred stock, 50,000 shares of common stock of the
Company, valued at approximately $66,000 as of the closing date, for
establishing the put equity line of credit and warrants to purchase 250,000
shares of common stock at a price and under the conditions of the Series B
preferred stock investors' warrants, valued at approximately $269,000 as of
the closing date. In addition, as the Company, at its sole discretion,
utilizes the put equity line of credit, the placement agent will receive a
fee of 8% of the cash actually invested at each funding. If the entire line
of credit is used, the placement agent would earn an additional $240,000.
SERIES C
Under the terms of the placement agent agreement related to the issuance of
Series C preferred stock, the placement agent was paid fees equal to 11% of
the funded amount of $3,000,000 or $330,000 for the placement of the 3,000
shares of Series C preferred stock, and warrants to purchase 250,000 shares
of common stock at a price and under the conditions of the Series C
preferred stock investors' warrants, valued at approximately $228,000 as of
September 1, 1998, the closing date.
LITIGATION
In December 1994, a former officer and director filed suit against the
Company, claiming damages for breach of fiduciary duty, breach of oral
agreement, interference with contractual relations, conspiracy, restitution
and fraud. On April 4, 1995, the Company filed a counterclaim against the
plaintiff for fraud, breach of fiduciary duty, declaratory relief,
recession, intentional and negligent interference with prospective
advantage and money loaned. On December 17, 1996, the Court entered summary
judgment against the plaintiff on all claims against the Company. On
February 5, 1997, all claims were dismissed and final judgment was entered.
On February 11, 1997, the plaintiff filed a notice of appeal. On February
2, 1998, the Company and the plaintiff agreed to a settlement in which
plaintiff would receive a certain number of the Company's common shares.
The Company recognized a liability of $58,905 as of December 31, 1997,
related to the settlement. During 1998, the Company issued 150,000 common
shares to the former officer and director in full settlement of the
liability. No gain or loss was recognized by the Company in the settlement
of the liability.
F-58
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE I - COMMITMENTS AND CONTINGENCIES (Continued)
LITIGATION (Continued)
The Company filed a lawsuit against three individuals formerly associated
with the Company for misappropriation of trade secrets, conversion and
breach of fiduciary duty. The defendants filed counterclaims against the
Company alleging intentional interference with economic advantage,
intentional interference with contractual relations and unfair competition
arising out of the same set of occurrences. On July 26, 1996, the Company
filed a motion for a preliminary injunction. On December 4, 1996, the
District Court granted the Company's motion and issued a preliminary
injunction against the defendants. The injunction was conditioned upon the
Company's posting a bond in the amount of $1,000,000. The Company did not
post the bond and the injunction was dissolved. Prior to December 31, 1997,
the case was settled in conjunction with another related case. See the
following paragraph for a discussion of the settlement.
On December 20, 1996, a lawsuit was filed against the Company by one of the
individuals discussed above and another individual formerly associated with
the Company. The complaint alleged multiple claims including breach of
contract, fraud, negligent misrepresentation, breach of fiduciary duty,
wrongful termination and conversion, all arising out of the plaintiffs'
employment with the Company. On March 25, 1997, the Company filed a
counterclaim for misappropriation of trade secrets, conversion and breach
of fiduciary duty. On June 25, 1997, the Company and the plaintiffs agreed
to a settlement in which the Company would pay cash and provide options to
purchase shares of registered Company common stock. The Company was unable
to comply with the requirement because the Company does not have a
registration statement on file with the SEC. On February 3, 1999, a new
settlement agreement was reached.
Under the terms of the new Settlement Agreement and Release, which
supercedes the June 25, 1997 agreement, the U.S. District Court will order
the Company to issue to each of the individuals 245,000 shares of
unrestricted stock. These shares will be subject to a tradibility schedule
set forth in the new Settlement Agreement and Release, which has not yet
been executed by the parties. The agreement is expressly conditioned upon
the court's approval. The Company has recorded a liability of $266,000 as
of December 31, 1998, related to the original settlement. During the nine
months ended September 30, 1999, the Company issued 490,000 shares of
common stock in settlement of the litigation. No gain or loss was
recognized by the Company in the settlement of the liability.
F-59
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE I - COMMITMENTS AND CONTINGENCIES (Continued)
LITIGATION (Continued)
In June 1997, a former director and officer filed a complaint against the
Company, in which he requested the Court to declare that he could sell
220,000 shares of the Company's common stock standing in his name. The
Company also filed a complaint against the former officer and director in
which it asserted claims for breach of fiduciary duty, breach of a certain
employment agreement, accounting as to a certain severance agreement,
declaratory relief, fraud and conspiracy to defraud. In the declaratory
relief claim, the Company alleged that the former director and officer is
required, pursuant to a certain reverse stock split agreement, to return
all of his issued and outstanding shares of the Company so that new
certificates equal to one-half the shares presently standing in his name
can be issued to him, the remaining shares to be retained by the Company.
In September 1997, the former director and officer filed a counterclaim
against the Company asserting claims for partial recission of the severance
agreement, breach of the severance agreement, recission of a certain
lock-up agreement, or in the alternative, breach of the lock-up agreement,
and tortuous interference with economic advantage. An unfavorable outcome
against the Company would not require the former officer and director to
return his shares under the reverse stock split agreement. Additionally,
the Company would be required to pay a maximum of $300,000 under the
severance agreement among the former officer and director, and another
individual claiming existence of an employment and/or consulting
arrangement. The Company recognized a liability of $203,522 as of December
31, 1997, related to the settlement. During 1998, the former officer and
director returned 1,032,000 shares and retained 350,000 unrestricted common
shares, subject to a tradeability schedule, in full settlement of the
liability. No gain or loss was recognized by the Company in the settlement
of the liability.
In November 1997, the individual claiming the existence of an employment
and/or consulting agreement filed a complaint against the Company claiming
recission for breach of a severance agreement, or in the alternative,
breach of severance agreement. The settlement of this case would fall
within the severance settlement in the above case.
F-60
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE I - COMMITMENTS AND CONTINGENCIES (Continued)
LITIGATION (Continued)
On September 1, 1998, a settlement agreement for all outstanding claims and
obligations was reached between the Company and the former officer/director
and the individual claiming existence of an employment and/or consulting
agreement. Under the terms of the settlement agreement, 350,000 shares of
the Company's common stock, previously transferred by the former
officer/director to the individual claiming existence of an employment
and/or consulting agreement can remain with the individual. The former
officer/director returned his 1,032,000 remaining shares of the Company's
common stock and the Company reissued him 350,000 shares of its common
stock. The settlement also provides that the individual claiming existence
of an employment and/or consulting agreement has the option to purchase the
Company's former ED and UITI technologies for $50,000. This option was
exercised on November 1, 1998.
On June 28, 1998, the Company and CBS Corporation agreed to a settlement
for amounts past due, owed to CBS by Skysite. Under the settlement, the
Company was required to pay CBS $430,000. In 1998, the Company made payment
and CBS released all of its prior claims and security interests against the
Company.
On July 27, 1998, a former employee and consultant of the Company filed a
complaint against the Company for breach of an employment contract related
to his employment termination. The plaintiff has requested unpaid wages and
severance totaling $100,000, the value of 100,000 stock options, to which
the former employee believes he is entitled, punitive damages (to be proved
at the time of trial), and related interest. Management believes that the
plaintiff was terminated for just cause and fully compensated under his
employment agreement. Given the early stage of the case, it is not possible
to determine the likelihood of an unfavorable outcome on this matter.
Therefore, the Company has not included an accrual for any possible loss in
the accompanying financial statements.
On August 14, 1998, the Company received correspondence from the legal
counsel of Intelligent Decision Systems, Inc., alleging breach of certain
terms of a technology licensing agreement, between Intelligent Decision
Systems, Inc. and the Company. Intelligent Decision Systems, Inc. is
requesting return of the consideration previously paid as the initial
license fee of $968,750, plus interest from February 1995. Management
intends to vigorously defend the case. As no lawsuit or arbitration has
been filed, the likelihood of an unfavorable outcome cannot be determined
at this time; therefore, no accrual has been included in the accompanying
consolidated financial statements.
F-61
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE I - COMMITMENTS AND CONTINGENCIES (Continued)
SUPPLIER AGREEMENT
Skysite is subject to a "take-or-pay" provision pursuant to an agreement
with a supplier of private network satellite products and services. Under
this agreement, Skysite made payments totaling $418,593. Effective January
1, 1998, Skysite executed a new agreement with the supplier requiring
Skysite to make future minimum purchases from the supplier as follows
(assuming no cancellation of the agreement under termination provisions
described below).
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1999 $ 572,000
2000 892,000
2001 1,212,000
2002 1,532,000
2003 1,852,000
2004 2,172,000
2005 1,206,000
-----------
Total $ 9,438,000
===========
</TABLE>
Satisfaction of annual commitments are evaluated quarterly, beginning with
a minimum commitment of $33,000 in the first quarter of 1998 plus increases
in subsequent quarterly commitments of $20,000 each. Notwithstanding the
above provision, Skysite may terminate its agreement with the supplier upon
90 days written notice, in which case Skysite is required to pay a
termination fee equal to 30% of the remaining unpaid balance as of the date
of cancellation.
In August 1998, Project 77 entered into a take or pay minute of use
commitment for three million minutes with Iridium North America. The
minutes must be taken or paid within fifteen months following the
commercial launch of the Iridium System. The impact on the
F-62
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
consolidated financial statements cannot be determined due to potential
fluctuations in future rates.
F-63
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE J - STOCK OPTIONS
The following table summarizes stock option activity under the Company's
various stock option arrangements.
<TABLE>
<CAPTION>
Weighted
Options Exercise price average
outstanding per share exercise price
---------- ------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1995 2,167,600 $0.625 $0.6250
Granted 1,145,000 0.625 0.6250
Granted (immediately
exercisable) 75,000 10.5625-11 10.7100
Exercised (400,000) 0.625 0.6250
Cancelled/Expired -- -- --
---------- ------------- -------------
Balance, December 31, 1996 2,987,600 0.625-11 0.8780
Granted 2,860,000 0-0.88 0.1500
Granted (immediately
exercisable) 568,000 0.3125-2.6250 0.9146
Exercised -- -- --
Cancelled/Expired (400,000) -- 0.6250
---------- ------------- -------------
Balance, December 31, 1997 6,015,600 0-11 0.5100
Granted (immediately
exercisable) 1,266,000 0.3125-4.6875 1.6700
Exercised (505,000) 0.3125-0.625 0.5322
Cancelled/Expired (827,400) 0.625 0.6250
---------- ------------- -------------
Balance, December 31, 1998 5,949,200 0-11 0.7400
Granted (immediately
exercisable) 2,807,550 .33-3.50 0.6858
Exercised 2,684,603 0-0.5806 0.0664
Cancelled/Expired 1,374,125 0.50 -11 1.6929
---------- ------------- -------------
Balance, September 30,
1999 (Unaudited) 4,698,022 $.3125-3.50 $0.6892
========== ============= =============
</TABLE>
F-64
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE J - STOCK OPTIONS (Continued)
The following table summarizes the status of options outstanding as of
December 31, 1998 and September 30, 1999.
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999
-------------------------------------------- ----------------------------------------------
Weighted
Weighted average average
remaining Number remaining Number
Exercise price Number contractual life exercisable Number contractual life exercisable
-------------- ------- ----------------- ----------- ----------- ---------------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
$ 0.0000 2,380,000 1.2 -- -- --
0.3125-.3268 378,000 3.1 938,000 738,000 2.3 738,000
0.4000 300,000 1.7 300,000 300,000 1.2 300,000
.50-.5528 120,000 3.3 120,000 162,125 1.8 162,125
0.5806 -- -- -- 1,366,690 4.8 1,366,690
.60-0.6250 1,380,200 1.9 1,380,200 1,665,200 1.3 1,665,200
0.8739-0.8688 240,000 3.6 120,000 -- -- --
1.00-2.625 734,000 2.8 734,000 344,000 2.2 344,000
3.5000 22,000 2.9 22,000 122,000 2.3 122,000
4.0038-4.8872 320,000 4.6 320,000 -- -- --
10.563-11.0 75,000 2.3 75,000 -- -- --
------------- ---------- --- ---------- ---------- -- ---------
$ 0-11.0 5,949,200 2.1 3,449,200 4,698,015 4.8 4,698,015
============= ========== === ========== ========== === =========
</TABLE>
The Company has adopted three stock option plans under which it has granted
options to purchase shares of the Company's Common Stock. In addition, the
Company has granted additional options to purchase shares of Common Stock
outside of any stock option plan. As of December 31, 1998 and September 30,
1999, the shares underlying the stock options have not been registered with
the Securities and Exchange Commission, or under the securities laws of any
applicable state. The Company has granted the foregoing options and
permitted the issuance of shares of Common Stock upon the exercise of
certain stock options in reliance on the exemption from registration found
in Section 4(2) of the Act or Rules 505 or 506 promulgated thereunder and
similar state securities exemptions. Section 4(2) of the Act exempts from
the registration requirements of Section 5 of the Act those transactions by
an issuer not involving a public offering. If it is determined at a later
date that the grant of the aforementioned stock options or the issuance of
Common Stock pursuant to the exercise thereof involved a public offering for
which the Company cannot find an exemption, then the Company will have
committed a Section 5 violation, or a violation of similar state securities
laws, and may be subject to suit by shareholders pursuant to Section 12 of
the Act or such other similar state securities laws. A successful suit under
Section 5 or 12 of the Act or their state securities law counterparts could
have a material adverse effect on the Company's business, financial
condition or results of operations.
F-65
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE J - STOCK OPTIONS (Continued)
In September 1995, the Company adopted a stock option plan that reserved a
total of 2,400,000 shares of authorized, but unissued shares of common stock
(the "1995 plan"). Options under the 1995 plan may be granted to employees
and/or parties who render services to the Company. The final date on which
options could be granted was September 30, 1996. All options will expire on
June 30, 2001 if not previously exercised. During 1995, 725,200 options were
granted to employees and officers under the 1995 plan at an exercise price
of $0.625 per share. During 1998, 150,000 options under the 1995 plan have
been exercised. In addition, during September 1995, 440,000 stock options
were granted to parties under various agreements at an exercise price of
$0.625 per share. These options expire in September 2000. During 1998,
120,000 options have been exercised.
In January 1996, the Company granted options to purchase 170,000 shares of
common stock to various individuals at an exercise price of $0.625 per share
under the 1995 plan. All options expire October 1, 2000. No options have
been exercised.
In March 1996, the Company granted 400,000 options for services rendered in
connection with fund-raising activities to an investment advisor. These
options were exercised in 1996.
In May 1996 and September 1996, the Company, pursuant to employment
agreements, granted options to purchase 575,000 shares of common stock at an
exercise price of $0.625 per share. These options were issued to three
officers and an employee of the Company. Options to purchase 100,000 shares
of the common stock were immediately vested with the balance of the options
vesting over a two-year period. These options expire at various dates
through September 2001. At the May 1997 Board meeting, the Company elected
to cancel 350,000 of these options that had not vested as of December 31,
1996. These employees were incorporated into the new employee stock option
plan effective January 1, 1997.
Effective May 6, 1996, the Company established a nonemployee directors'
stock option plan (the "director plan") whereby each person who is elected a
director and constitutes an eligible participant shall be granted an option
to purchase 25,000 shares of common stock on the effective date of his/her
becoming an eligible participant. Each person who is subsequently re-elected
to a second and third term will be granted an option to purchase an
additional 25,000 and 50,000 shares, respectively. The exercise price per
share for all options granted under the director plan will be equal to the
market price of the common stock as of the date of grant. The term of each
option is for a period of five years from the date of grant. During 1996,
three directors were elected with each receiving 25,000 options. Effective
March 15, 1997, the Board of Directors amended the plan, entitling each
outside director to receive 40,000 options quarterly which will vest on the
following dates: March 15, 1997; June 15, 1997; September 15, 1997; December
15, 1997; and March 15, 1998. The exercise price of each option will be the
average bid price for the 90 days immediately preceding the vesting.
F-66
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE J - STOCK OPTIONS (Continued)
The difference between the exercisable price and the fair value of the
stock as of the date of issuance represents deferred compensation which the
Company will recognize on the date the options vest. If a director should
resign, options will be awarded according to the above schedule through the
closing date of the quarter in which he/she submits the resignation. The
Company reserved 300,000 shares of authorized but unissued shares of common
stock for this plan.
Effective March 14, 1997, the Board of Directors asked that two employees
of the Company vacate their employee agreements and continue to work for
the Company under the new employee stock option plan. Under the new plan,
any and all employees' in previous agreements will have their options
prorated through December 31, 1996. All full-time employees of record on
January 1, 1997 will be covered by the new employee stock option plan.
Every full-time employee on record will be granted 25,000 options on the
first trading day of each calendar quarter. Each option is vested as it is
granted and the exercise price of each option will be $.3125. As a result
of implementation of the new plan and the change in the options to be
given, the Company has canceled the unvested options by reducing deferred
compensation and additional paid-in capital, and valued the new options
based upon the current exercise price and market value.
During 1997, the Company granted 1,048,000 options to employees and
nonemployee directors. These options were issued under various arrangements
with different terms for the exercise price and vesting periods. During
1998, 150,000 options have been exercised.
In December 1997, in connection with the Series A issue of preferred stock,
the Company granted the placement agent 2,800,000 options for which the
placement agent could exchange each option for $.85 a share (see note F),
or 2,380,000 shares, of the Company's common stock upon registration.
On February 21, 1998, the Board adopted the 1998 stock option plan which
went into effect on January 1, 1998. The number of shares reserved for
stock options was increased to 6,000,000. Officers, other key employees,
directors and advisors of the Company who contribute to the growth of the
Company shall be eligible for the plan. Both the option term and price are
to be determined at the date of grant.
During 1998, the Company granted 1,266,000 options to employees and
nonemployee directors. The options were issued under various arrangements
with different terms and vesting periods. During 1998, 505,000 options were
exercised and 827,400 options were cancelled.
F-67
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE J - STOCK OPTIONS (Continued)
During the nine months ended September 30, 1999, the Company granted
2,807,550 options to employees and nonemployee directors. The options
were issued under various arrangements with different terms and vesting
periods. During the nine months ended September 30, 1999 2,684,603
options were exercised and 1,374,125 options were cancelled.
Proforma information regarding net income is required by SFAS No. 123
and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that statement. The
weighted-average fair value of options granted during the years ended
December 31, 1996, 1997 and 1998 and the nine months ended
September 30, 1998 and 1999 was $10.14, $1.26, $0.82, $ 0.69 and
$1.12, respectively. The fair value for options was estimated at the
date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------ -----------------
1996 1997 1998 1998 1999
----- ----- ----- ----- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Expected life (in years) 3 3 3 3 3
Risk-free interest rate 6.5% 6.1% 6.5% 6.5% 6.5%
Volatility factor 20.0% 150.0% 150.0% 150.0% 150.0%
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
characteristics, which are significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net loss and net loss per common share would have
been increased to the following proforma amounts:
F-68
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE J - STOCK OPTIONS (Continued)
<TABLE>
<CAPTION>
December 31, June 30,
-------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net loss available to
common stockholders
As reported $ (8,056,918) $ (6,315,101) $ (11,371,320) $ (3,649,887) $ (8,278,830)
------------ ------------ ------------- ------------ ------------
Proforma (8,236,918) (6,703,585) (11,649,998) (3,905,060) (10,517,566)
Net loss per common
share
As reported $ (0.37) $ (0.31) $ (0.69) $ (0.16) $ (0.42)
Proforma (0.38) (0.32) (0.70) (0.18) (0.53)
</TABLE>
NOTE K - LICENSE FEE INCOME
In January 1995, the Company entered into a license agreement with Digital
Sciences, Inc. to license its "ED" technology and services, and received an
initial license fee paid in the form of 250,000 shares of Digital Sciences,
Inc. common stock with a fair value of $629,688. The Company recognized
this stock receipt as income during 1995 as management believed that all of
the requirements of the Company under the agreement were completed during
the year. In addition, Digital Sciences, Inc. agreed to pay a license fee
based on a percentage of gross revenue derived from the use of the ED
technology and services. The Company did not receive any such license fees
in 1998, 1997 or 1996.
As a result of various mergers and acquisitions, the Company's shares in
Digital Sciences, Inc. were converted to shares in Intelligent Decision
Systems, Inc. ("IDSI"). In November 1996, the Company agreed to transfer
all of its shares of IDSI stock to a stockholder in exchange for the
cancellation of a loan of $500,000 made by such stockholder to the Company
in October 1996. The Company recognized a loss of $129,688 on this
transfer.
F-69
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE L - LICENSE FEE EXPENSE
In 1994, as part of an agreement with NTN Communications, Inc. (NTN), the
Company incurred and expensed a license fee of $250,000. Of this fee,
$200,000 was paid in 1994. The remaining $50,000 has not been paid and is
included in accounts payable and accrued expenses in the accompanying
consolidated balance sheets. The initial term of the agreement expires
December 13, 2001. Unless terminated, the agreement will be extended for a
period of seven years. The Company has a nonexclusive worldwide license to
promote, market and develop an online computer service, which was to be
provided by NTN, for use with the Company's now abandoned product. The
technology of the computer service provides two-way interactive
computerized games that are broadcast to multiple locations, can be played
by multiple participants at each location and allow the retrieval and
processing of data entered by the participants. The Company is required to
pay usage royalties as defined in the agreement. The Company has not used
the NTN online computer service and has not paid any royalties to NTN. The
Company has abandoned this product and does not intend to use the NTN
service in the future.
In January 1996, the Company finalized an agreement with a technology
company, for a nonexclusive, nontransferable license to its computer
operating system technology. The initial term of the agreement expired
December 26, 1998. Unless terminated, in accordance with the terms of the
agreement, the agreement is to be renewable for subsequent three-year
periods at the licensee's option. Since the agreement was not terminated,
it renewed for a three-year period. The Company is required to pay usage
royalties as defined in the agreement. In January 1996, the Company paid an
initial royalty deposit of $450,000 to the licensor, and recognized this
payment as research and development expense. The Company also recorded an
additional liability in the amount of $450,000 for the unpaid portion of
the minimum royalty. As of December 31, 1998 and September 30, 1999, the
Company has not utilized the license and, accordingly, no usage royalties
have been recorded by the Company.
NOTE M - SIGNIFICANT CUSTOMERS/SUPPLIERS
A significant portion of the Company's net revenue is derived from a
limited number of customers. During the year ended December 31, 1998,
approximately 17% of the Company's total net revenue was derived from one
customer. As of December 31, 1998, one customer accounted for approximately
11% of trade accounts receivable.
F-70
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE M - SIGNIFICANT CUSTOMERS/SUPPLIERS (Continued)
In addition, during the year ended December 31, 1998, the Company purchased
its supplies from four suppliers - CBS Corporation (formerly Westinghouse
Electric), American Mobile Satellite Corporation, Mitsubishi Electronics
America and Iridium North America, L.P.
NOTE N - RELATED-PARTY TRANSACTIONS
During 1996, the Company made advances to stockholders of $116,478. The
advances were forgiven during 1996 and accounted for as compensation
expense.
NOTE O - ADVANCES TO NON-AFFILIATES
In April and August 1998, the Company made loans totaling $510,000 to a
target company in a potential acquisition. The original notes bear interest
at 10% per annum and were due in December 1998. The notes were amended and
extended to March 31, 1999 and July 31, 1999. Management has recorded a
reserve at December 31, 1998 due to the target company's early state of
development.
In December 1997 and January 1998, the Company made advances totaling
$25,000 and $136,000, respectively, to another target company in a
potential acquisition. The advances bear interest at 12% per annum and are
secured by the common stock of the target company. The advances were due in
September 1998. In October 1998, the Company filed a lawsuit against the
target company to collect the outstanding amounts due to the Company. At
December 31, 1998, management has recorded a reserve against the amounts
due to the Company.
NOTE P - SUBSEQUENT EVENTS
SERIES C PREFERRED STOCK
In January 1999, the Company again offered its Series C preferred stock and
warrants. The offering period expired February 28, 1999. In connection with
the second offering, the Company issued 200 shares of Series C preferred
stock and 6,600 warrants and received net proceeds of $178,000. Based on
the valuation of each on the date of issuance of the second offering, the
Company will fully allocate $188,120 to the preferred stock and $11,880 to
the warrants. In addition, the Company will record a beneficial conversion
feature of approximately $61,000.
F-71
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE P - SUBSEQUENT EVENTS (Continued)
ASSET ACQUISITION
In January 1999, the Company entered into an agreement with an unrelated
company to purchase certain assets and technology for $350,000. The Company
paid $50,000 in January 1999 and signed a $300,000 promissory note at 8%
per annum payable in installments of $100,000 in February 1999 and the
remainder in April 1999.
EMPLOYMENT AGREEMENTS
In connection with the above asset acquisition, the Company entered into an
employment agreement with the founder of the unrelated company. The
agreement commenced on January 1, 1999 for a three year period ending
December 31, 2001 for an annual salary of $160,000 plus a discretionary
bonus. In addition, the Company will grant 100,000 options to the founder
at an exercise price of $3.50 per share, vesting immediately and
exercisable through December 31, 2001.
In addition, the Company entered into an employment agreement with an
employee commencing January 1, 1999 for an annual salary of $130,000 plus a
discretionary bonus. The employment agreement may be terminated with or
without cause by the Company or the employee and does not automatically
renew.
PROPOSED MERGER
In July 1999, the Company entered into a Memorandum of Understanding (the
"Memorandum") with TELCAM, Telecommunications Company of the Americas, Inc.
("Telcam"), a privately-held telecommunications company. Subject to the
approval of the Company's and Telcam's stockholders, the Company and Telcam
will enter into a combination in the form of a tax-free, reverse triangular
reorganization under Section 368(a)(1)(B) of the Internal Revenue Code
pursuant to which a newly-formed, wholly-owned subsidiary of the Company
would be merged into Telcam and the Telcam stockholders would exchange 100%
of the issued and outstanding common stock of Telcam for shares of the
Company. In connection with the Memorandum, in July 1999 and December the
Telecam made advances to the Company totaling $75,000 and $76,911,
respectively secured by the assets of the Company. On December 27, 1999,
the Board of Directors of the Company voted to recommend the merger to
the stockholders of the Company.
F-72
<PAGE>
U.S. Digital Communications, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998 and September 30, 1999
(Amounts and disclosures as of September 30, 1998 and 1999 and for the nine
months then ended are unaudited)
NOTE P - SUBSEQUENT EVENTS (Continued)
PROPOSED REVERSE STOCK SPLIT
In connection with the proposed merger, on December 27, 1999, the Board of
Directors voted to propose a 1 for 4 reverse stock split of the Company's
common stock. The reverse stock split is subject to the approval of the
stockholders and consummation of the merger with Telcam.
F-73
<PAGE>
APPENDIX A: AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER
BETWEEN
U.S. DIGITAL COMMUNICATIONS, INC.
AND
TELCAM, TELECOMMUNICATIONS COMPANY
OF THE AMERICAS, INC.
DATED AS OF DECEMBER 27, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I: THE MERGER.............................................................................................1
SECTION 1.1 The Merger..................................................................................1
SECTION 1.2 Closing.....................................................................................2
SECTION 1.3 Effective Time of the Merger................................................................2
SECTION 1.4 Effects of the Merger.......................................................................2
SECTION 1.5 Certificate of Incorporation; By-Laws.......................................................2
SECTION 1.6 Directors...................................................................................3
SECTION 1.7 Officers Following the Merger...............................................................3
SECTION 1.8 Directors and Officers of the Surviving Corporation.........................................3
ARTICLE II: EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES................................................................4
SECTION 2.1 Effect on Capital Stock.....................................................................4
SECTION 2.2 Exchange of Certificates....................................................................5
ARTICLE III: REPRESENTATIONS AND WARRANTIES.......................................................................6
SECTION 3.1 Representations and Warranties by the Parent................................................6
SECTION 3.2 Representations and Warranties of the Company..............................................18
ARTICLE IV: CONDUCT OF BUSINESSES PENDING THE MERGER.............................................................25
SECTION 4.1 Conduct of Business of the Parent .........................................................25
SECTION 4.2 Management of Subsidiaries' Operations.....................................................27
SECTION 4.3 Conduct of Business of Parent and Subsidiaries.............................................27
SECTION 4.4 Notification of Certain Matters............................................................27
SECTION 4.5 Assistance.................................................................................28
SECTION 4.6 Conduct of Business of the Company ........................................................28
ARTICLE V: ADDITIONAL AGREEMENTS................................................................................30
SECTION 5.1 Shareholder Approval; Preparation of Proxy Statement.......................................30
SECTION 5.2 Access to Information......................................................................31
SECTION 5.3 No Solicitation............................................................................32
SECTION 5.4 Reasonable Best Efforts....................................................................33
SECTION 5.5 Public Announcements.......................................................................34
SECTION 5.6 Conveyance Taxes...........................................................................34
ARTICLE VI: CONDITIONS OF MERGER................................................................................35
SECTION 6.1 Conditions to Obligation of Each Party to Effect the Merger................................35
SECTION 6.2 Conditions to Obligations of the Company...................................................35
SECTION 6.3 Conditions to Obligations of the Parent....................................................36
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE VII: TERMINATION, AMENDMENT AND WAIVER..................................................................37
SECTION 7.1 Termination................................................................................37
SECTION 7.2 Effect of Termination......................................................................38
SECTION 7.3 Fees and Expenses..........................................................................38
SECTION 7.4 Brokers....................................................................................39
SECTION 7.5 Subsidiaries' Operations...................................................................39
SECTION 7.6 Amendment..................................................................................39
SECTION 7.7 Waiver.....................................................................................40
ARTICLE VIII: GENERAL PROVISIONS................................................................................40
SECTION 8.1 Non-Survival of Representations, Warranties and Agreements.................................40
SECTION 8.2 Notices....................................................................................40
SECTION 8.3 Certain Definitions........................................................................41
SECTION 8.4 Severability...............................................................................42
SECTION 8.5 Entire Agreement; Assignment...............................................................43
SECTION 8.6 Parties in Interest........................................................................43
SECTION 8.7 Director and Officer Liability.............................................................43
SECTION 8.8 Enforcement of Agreement...................................................................43
SECTION 8.9 Governing Law..............................................................................43
SECTION 8.10 Headings..................................................................................44
SECTION 8.11 Counterparts..............................................................................44
</TABLE>
ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of December 27, 1999 (this
"Agreement"), by and between U.S. DIGITAL COMMUNICATIONS, INC., a Nevada
corporation (the "Parent"), and TELCAM, TELECOMMUNICATIONS COMPANY OF THE
AMERICAS, INC., a Texas corporation (the "Company").
WHEREAS, the respective Boards of Directors of Parent and the Company
have approved, and deem it advisable and in the best interests of Parent and the
Company and of their respective shareholders to consummate the business
combination transaction provided for herein in which USDI Acquisition, Inc., a
Texas corporation which is a wholly owned subsidiary of the Parent ("Sub"), will
merge with and into the Company (the "Merger");
WHEREAS, pursuant to the Merger, each outstanding share of the
Company's common stock, no par value (the "Company Common Stock"), shall be
converted into shares of Parent's common stock, $0.01 par value per share
("Parent's Common Stock"), upon the terms and subject to the conditions set
forth herein;
WHEREAS, for federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, Parent and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, mutual covenants and agreements herein contained,
and intending to be legally bound hereby, Parent and the Company hereby agree as
follows:
ARTICLE I: THE MERGER
SECTION 1.1 THE MERGER.
Upon the terms and subject to the conditions set forth in this
Agreement, and in accordance with the Texas Business Corporation Act (the
"TBCA"), at the Effective Time (as defined in Section 1.3), Sub shall be merged
with and into the Company. As a result of the Merger, the separate corporate
existence of Sub shall cease, and the Company shall continue as
1
<PAGE>
the surviving corporation of the Merger (the "Surviving Corporation") and shall
continue under the name TELCAM, Telecommunications Company of the Americas, Inc.
SECTION 1.2 CLOSING.
Unless this Agreement shall have been terminated and the transactions
herein contemplated shall have been abandoned pursuant to Section 7.1 and
subject to the satisfaction or waiver of the conditions set forth in Article VI,
the closing of the Merger (the "Closing") will take place as promptly as
practicable (and in any event within two business days) following satisfaction
or waiver of the conditions set forth in Article VI (the "Closing Date"), at the
offices of Campbell & Riggs, P.C., Houston, Texas, unless another date, time or
place is agreed to in writing by the parties hereto.
SECTION 1.3 EFFECTIVE TIME OF THE MERGER.
As soon as practicable on or after the Closing Date, the parties hereto
shall cause the Merger to be consummated by filing articles of merger with the
Secretary of State of the State of Texas ("Articles of Merger"), in such form as
required by, and executed in accordance with the relevant provisions of, the
TBCA (the date and time of the filing of the Articles of Merger with the
Secretary of State of the State of Texas, or such later time as is specified in
the Articles of Merger, being the "Effective Time").
SECTION 1.4 EFFECTS OF THE MERGER.
The Merger shall have the effects set forth in the TBCA. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time all the properties, rights, privileges, immunities, powers and franchises
of the Company and Sub shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
SECTION 1.5 CERTIFICATE OF INCORPORATION; BY-LAWS.
At the Effective Time:
(a) The certificate of incorporation of the Company, as in effect
immediately prior to the Effective Time, shall be the certificate of
incorporation of the Surviving Corporation following the Merger.
2
<PAGE>
(b) The by-laws of the Company, as in effect immediately prior to the
Effective Time, shall be the by-laws of the Surviving Corporation and thereafter
may be amended or repealed in accordance with their terms or the certificate of
incorporation of the Surviving Corporation or as provided by applicable law.
SECTION 1.6 DIRECTORS.
(a) Four directors of the Parent shall be nominated by the Company
to fill vacancies on the Board of Directors of the Parent at the Effective Time.
(b) The directors to be nominated by the Company shall be determined
within 21 days of the date hereof by the Board of Directors of the Company. If,
prior to the Effective Time of the Merger, any of the Company's designees to the
Board of Directors of the Parent as so selected shall decline or be unable to
serve as a director of the Parent, the Board of Directors of the Company shall
designate another person to serve in such person's stead.
(c) Subject to the fiduciary duties of the Board of Directors of the
Parent, and the willingness of such Persons to serve as directors of the Parent,
the Board of Directors of the Parent shall submit as nominees for election to
the Board of Directors of the Parent at the Annual Meeting of Stockholders of
the Parent to be held in 2000 the directors of the Parent as provided for
herein.
SECTION 1.7 OFFICERS FOLLOWING THE MERGER.
Robert J. Wussler shall be the Chairman of the Parent and Gregory Hahn
shall be a director and the President and Chief Executive Officer of the Parent.
The other officers of the Parent shall be the officers of the Company as of the
Effective Time of the Merger, together with such other persons as may be
selected by the Company to serve as officers of the Parent. All such officers
shall hold office in accordance with the Certificate of Incorporation and
By-laws of the Parent from the Effective Time of the Merger until the earlier of
their resignation or removal or until their respective successors are duly
elected and qualified, as the case may be.
SECTION 1.8 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION.
The directors of the Company immediately prior to the Effective Time shall be
the initial directors of the Surviving Corporation, each to hold office in
accordance with the articles of incorporation and by-laws of the Surviving
Corporation. Gregory Hahn shall be the Chief Executive Office and President and
the other officers of the Company immediately prior to the Effective Time shall
continue as officers of the Surviving Corporation, in each case until their
respective successors are duly elected or appointed, as the case may be, and
qualified.
3
<PAGE>
ARTICLE II: EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
SECTION 2.1 EFFECT ON CAPITAL STOCK.
At the Effective Time, by virtue of the Merger and without any action
on the part of the holders of any shares of Company Common Stock, or the Parent
as the holder of all shares of capital stock of Sub:
(a) COMMON STOCK OF SUB. Each share of common stock, par value $0.01
per share, of Sub issued and outstanding immediately prior to the Effective Time
shall be converted into 1,000 validly issued, fully paid and nonassessable share
of common stock, no par value, of the Surviving Corporation, which shall be all
of the issued and outstanding capital stock of the Surviving Corporation.
(b) CANCELLATION OF TREASURY STOCK. Each share of Company Common Stock
that is owned by the Company shall automatically be canceled and retired and
shall cease to exist and no consideration shall be delivered or deliverable in
exchange therefor.
(c) CONVERSION OF COMPANY COMMON STOCK AND ANTIDILUTION.
(i) It is the intent of the Parent and the Company that, upon
consummation of the Merger, the holders of the Company Common Stock will, in the
aggregate, own 51% of the Parent Common Stock which has been issued at the
Effective Time PLUS 51% of the Parent Common Stock of the Parent which may be
issued in conversion of, in exchange for or in settlement of, as applicable,
preferred stock of the Parent ("Parent Preferred Stock"), accrued but unpaid
dividends on any Parent Preferred Stock, options or warrants for Parent Common
Stock, debt of the Parent or any Subsidiary (including debt evidenced by the
Loan Agreements), claims made against the Parent or any Subsidiary by any
Person, or any other agreement or instrument which exists at the Effective Time
(each a "Convertible Security").
(ii) The consideration given to the holders of Company Common
Stock (the "Merger Consideration") shall be delivered as follows: (x) All issued
and outstanding shares of Company Common Stock at the Effective Time shall be
converted into the number of shares of Parent Common Stock which represents not
less than 51% of the Parent Common Stock issued at the Effective Time (including
the shares of Parent Common Stock issued pursuant to this Subsection
2.1(c)(ii)(x)); and (y) if, within 60 calendar months following the Effective
Time, the Parent issues, agrees to issue or is subject to any agreement (written
or oral), understanding
4
<PAGE>
(written or oral) or court order to issue Parent Common Stock for any
Convertible Security, then each holder of Company Common Stock shall be entitled
to receive and shall receive for each share of Company Common Stock held at the
Effective Time 1.041 shares of Parent Common Stock for each share of Parent
Common Stock which may be issued in conversion of, in exchange for or in
settlement of a Convertible Security which existed at the Effective Time.
(iii) The Merger Consideration deliverable under Subsection
2.1(c)(ii)(x) shall be payable to the holder thereof upon surrender of the
certificate formerly representing such share of Company Common Stock. All such
shares of Company Common Stock, when so converted under Subsection
2.1(c)(ii)(x), shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each certificate previously
representing any such shares shall cease to have any rights with respect
thereto, except the right to receive the Merger Consideration payable pursuant
to Subsection 2.1(c)(ii)(x) upon the surrender of such certificates and the
right to receive the Merger Consideration payable pursuant to Subsection
2.1(c)(ii)(y).
(d) NO FRACTIONAL PARENT SHARES. No fractional shares of Parent Common
Stock shall be issued in the Merger. A fractional share of Parent Common Stock
that a holder of Company Common Stock would otherwise be entitled to receive as
a result of the Merger shall be rounded up to the nearest whole share.
SECTION 2.2 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. Prior to the Effective Time of the Merger, Parent
shall engage Corporate Stock Transfer, Inc. or such other bank or trust company
reasonably acceptable to the Company, to act as exchange agent (the "Exchange
Agent") for the issuance of the Merger Consideration upon surrender of
Certificates.
(b) PAYMENT OF MERGER CONSIDERATION. Parent shall cause there to be
provided to the Exchange Agent on a timely basis, as and when needed after the
Effective Time of the Merger, certificates for the Parent Common Stock to be
issued upon the conversion of the Company Common Stock pursuant to Section 2.1.
(c) EXCHANGE PROCEDURE. As soon as practicable after the Effective Time
of the Merger, the Exchange Agent shall mail to each holder of record of a
certificate or certificates that immediately prior to the Effective Time of the
Merger represented outstanding Company Common Stock (the "Certificates"), (i) a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in a form and have such other
provisions as Parent may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for the certificates
representing the Parent Common Stock. Upon surrender of a Certificate for
cancellation to the Exchange Agent or to such other agent or agents
5
<PAGE>
as may be appointed by the Surviving Corporation, together with such letter of
transmittal, duly executed, and such other documents as may reasonably be
required by the Exchange Agent, the holder of such Certificate shall be entitled
to receive in exchange therefor a certificate or certificates representing the
number of whole shares of parent Common Stock into which the Company Shares
theretofore represented by such Certificate shall have been converted pursuant
to Section 2.1, and the Certificate so surrendered shall forthwith be canceled.
If the shares of Parent Common Stock are to be issued to a Person other than the
Person in whose name the Certificate so surrendered is registered, it shall be a
condition of exchange that such Certificate shall be properly endorsed or
otherwise in proper form for transfer and that the Person requesting such
exchange shall pay any transfer or other taxes required by reason of the
exchange to a Person other than the registered holder of such Certificate or
establish to the reasonable satisfaction of the Surviving Corporation that such
tax has been paid or is not applicable. Until surrendered as contemplated by
this Section 2.2, each Certificate shall be deemed at any time after the
Effective Time of the Merger to represent only the right to receive, upon
surrender of such Certificate, the number of shares of Parent Common Stock into
which the Company Shares theretofore represented by such Certificate shall have
been converted pursuant to Section 2.1. The Exchange Agent shall not be entitled
to vote or exercise any rights of ownership with respect to the Parent Common
Stock held by it from time to time hereunder, except that it shall receive and
hold all dividends or other distributions paid or distributed with respect
thereto for the account of Person entitled thereto.
(d) NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. All shares of
Parent Common Stock issued upon the surrender of Certificates in accordance with
the terms of this Article II, together with any dividends payable thereon to the
extent contemplated by this Section 2.2, shall be deemed to have been exchanged
and paid in full satisfaction of all rights pertaining to the Company Common
Stock theretofore represented by such Certificates and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the Company Common Stock that were outstanding immediately prior
to the Effective Time. If, after the Effective Time, Certificates are presented
to the Surviving Corporation for any reason, they shall be canceled and
exchanged as provided in this Article II.
ARTICLE III: REPRESENTATIONS AND WARRANTIES
SECTION 3.1 REPRESENTATIONS AND WARRANTIES BY THE PARENT.
The Parent represents and warrants to, and agrees with, the Company as
follows, subject to any exceptions specified in the Disclosure Letter of Parent
previously provided to the Company on the date hereof (the "Parent Disclosure
Letter") and except as expressly contemplated by this Agreement:
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(a) ORGANIZATION; STANDING AND POWER. The Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Nevada and has the requisite corporate power and authority to carry on its
business as now being conducted. The Parent is duly qualified to do business and
is in good standing in each jurisdiction in which the nature of its business or
the ownership or leasing of its properties makes such qualification necessary,
other than in such jurisdictions where the failure to be so qualified to do
business (individually or in the aggregate) would not have a Material Adverse
Effect on the Parent and the Subsidiaries, taken as a whole. The Parent has
provided the Company with complete and correct copies of the certificate of
incorporation and by-laws of the Parent currently in effect.
(b) SUBSIDIARIES. The Subsidiaries are corporations duly organized,
validly existing and in good standing under the laws of their respective
jurisdictions of incorporation and have the requisite corporate power and
authority to carry on their respective businesses as they are now being
conducted and to own, operate and lease the assets they now own, operate or hold
under lease, except where the failure to be so organized, existing or in good
standing would not have a Material Adverse Effect on the Parent and the
Subsidiaries, taken as a whole. At the Effective Time, the Subsidiaries will be
duly qualified to do business and are in good standing in each jurisdiction in
which the nature of their respective businesses or the ownership or leasing of
their respective properties makes such qualification necessary, other than in
jurisdictions where the failure to be so qualified or in good standing would not
have a Material Adverse Effect on the Parent and the Subsidiaries, taken as a
whole. All the outstanding shares of capital stock of the Subsidiaries are owned
of record and beneficially by the Parent and have been duly authorized and
validly issued and are fully paid and nonassessable and were not issued in
violation of any preemptive rights or other preferential rights of subscription
or purchase of any Person other than those than have been waived or otherwise
cured or satisfied, free and clear of all Liens. The Parent has provided the
Company with complete and correct copies of the certificate of incorporation and
by-laws of each Subsidiary as currently in effect.
(c) CAPITAL STRUCTURE. The authorized capital stock of the Parent
consists of 50,000,000 shares of Parent Common Stock and 10,000,000 shares of
Parent Preferred Stock, $0.01 par value per share. At the close of business on
December 15, 1999, 36,237,858 shares of Parent Common Stock (excluding 5,902,200
shares of Parent Common Stock held in treasury), were issued and outstanding,
and 4,130 shares of Parent Preferred Stock were issued and outstanding. In
addition, at the close of business on December 15, 1999, (i) 7,000,000 shares of
Parent Common Stock were reserved for issuance pursuant to the provisions of
Series B and Series C preferred stock conversion rights, and (ii) 6,540,000
shares of Parent Common Stock were reserved for issuance pursuant to Parent's
employee and director benefit plans and arrangements, of which 6,540,000 shares
of Parent Common Stock were reserved for issuance upon the exercise of
outstanding options. Except as set forth above, no shares of capital stock or
other equity or voting securities of the Parent are reserved for issuance or
outstanding. All outstanding shares of capital stock of the Parent are, and all
such shares issuable upon the exercise of options will be, validly issued, fully
paid and nonassessable and not subject to
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preemptive rights. No capital stock has been issued by the Parent since December
15, 1999 to the date hereof, other than the Parent Common Stock issued pursuant
to options outstanding on or prior to such date in accordance with their terms
at such date and Parent Common Stock issued in conversion of Series B and Series
C preferred stock. Except as set forth in Section 3.1(c) of the Parent's
Disclosure Letter, there were no outstanding or authorized securities, options,
warrants, calls, rights, commitments, preemptive rights, agreements,
arrangements or undertakings of any kind to which the Parent or any of the
Subsidiaries is a party, or by which any of them is bound, obligating the Parent
or any of its Subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, any shares of capital stock or other equity or voting
securities of, or other ownership interests in, the Parent or any of its
Subsidiaries or obligating the Parent or any of its Subsidiaries to issue,
grant, extend or enter into any such security, option, warrant, call, right,
commitment, agreement, arrangement or undertaking. The shares of Parent Common
Stock to be issued pursuant to the terms of this Agreement will, when issued, be
validly issued, fully paid and nonassessable and not subject to preemptive
rights.
(d) AUTHORITY. The Parent has the requisite corporate power and
authority to enter into this Agreement and, subject to approval of the Merger
by the holders of a majority of the outstanding shares of Parent Common Stock
("Parent Stockholder Approval"), to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement by the Parent and the
consummation by the Parent of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part of the Parent,
subject to the Parent Stockholder Approval. This Agreement has been duly and
validly executed and delivered by the Parent and constitutes a valid and
binding obligation of the Parent, enforceable against the Parent in
accordance with its terms, except as may be limited by bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or other
similar laws affecting or relating to the enforcement of creditors' rights
generally and by general principles of equity.
(e) NONCONTRAVENTION; CONSENTS AND APPROVALS. The execution and
delivery of this Agreement by the Parent do not, and the consummation of the
transactions contemplated hereby and compliance with the provisions hereof will
not, conflict with, or result in any violation of, or default (with or without
notice or lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or the loss of a material benefit
under, or result in the creation of any Lien upon or right of first refusal with
respect to any of the properties or assets of the Parent or any of the
Subsidiaries, under any provision of (i) the certificate of incorporation or
by-laws of the Parent or any provision of any comparable organizational
documents of the Subsidiaries, (ii) any loan or credit agreement, note, bond,
mortgage, indenture, lease or other agreement, instrument, permit, concession,
franchise or license applicable to the Parent or any of the Subsidiaries or
their respective properties or assets or (iii) assuming all the consents, filing
and registrations referred to in the following sentence are obtained and made,
any judgment, order, decree, statute, law, ordinance, rule or regulation or
arbitration award applicable to the Parent or any of the Subsidiaries or their
respective properties or assets, other than, in the case of clause (ii), any
such conflicts, violations, defaults, rights or
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Liens that individually or in the aggregate would not have a Material Adverse
Effect on the Parent and the Subsidiaries, taken as a whole, and would not
materially impair the ability of the Parent to perform its obligations hereunder
or prevent the consummation of any of the transactions contemplated hereby. No
consent, approval, order or authorization of, or registration, declaration or
filing with, any Governmental Entity is required by or with respect to the
Parent or any of the Subsidiaries in connection with the execution and delivery
of this Agreement by the Parent or the consummation by the Parent of the
transactions contemplated hereby, except for (i) the filing with the SEC of (A)
the Proxy Statement with respect to Parent Stockholder Approval and (B) such
reports under Section 13(a) of the Exchange Act as may be required in connection
with this Agreement and the transactions contemplated hereby, (ii) the filing of
the Articles of Merger with the Secretary of State of the State of Texas as
provided in the TBCA and appropriate documents with the relevant authorities of
other states in which Sub is qualified to do business, and (iii) such other
consents, approvals, orders, authorizations, registrations, declarations and
filings as may be required under the "takeover" or "blue sky" laws of various
states and such other consents, approvals, orders, authorizations,
registrations, declarations and filings the failure of which to be obtained or
made would not have a Material Adverse Effect on the Parent and the
Subsidiaries, taken as a whole.
(f) LICENSES. To the knowledge of Parent, each of the Parent and the
Subsidiaries has all permits, licenses, waivers and authorizations, including
licenses, authorizations and certificates of and from applicable state and local
authorities, which are necessary for it to conduct its business in the manner in
which it is presently being conducted (collectively, "Licenses"), other than any
Licenses the failure of which to have would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect. To the
knowledge of Parent, each of the Parent and the Subsidiaries is in compliance
with the terms of all Licenses, except for such failures so to comply which
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect. To the knowledge of Parent, the Parent and the
Subsidiaries have duly performed their respective obligations under and are in
compliance with the terms of such Licenses, except for such nonperformance or
noncompliance as would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect. There is no pending or, to the
knowledge of the Parent, threatened application, petition, objection or other
pleading with any Governmental Entity which challenges or questions the validity
of, or any rights of the holder under, any License, except for such
applications, petitions, objections or other pleadings, that would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect or that are applicable to the telecommunications industry
generally.
(g) SEC DOCUMENTS AND OTHER REPORTS. The Parent has filed all required
documents with the SEC since August 6, 1999 (the "SEC Reports"). As of their
respective filing dates, the SEC Reports complied in all material respects with
the requirements of the Securities Act of 1933, as amended, and the rules and
regulations thereunder (the "Securities Act"), or the Exchange Act, as the case
may be, each as in effect on the date so filed, and at the time filed with
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SEC none of the SEC Reports contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of the Parent included in the SEC
Reports comply as of their respective dates as to form in all material respects
with the then applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with generally accepted accounting principles (except, in the case of the
unaudited statements, as permitted by Form 10-Q of the SEC) applied on a
consistent basis during the periods involved (except as may be indicated therein
or in the notes thereto) and fairly present the consolidated financial position
of the Parent and its consolidated Subsidiaries as at the dates thereof and the
consolidated results of their operations and their consolidated cash flows for
the periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments and to any other adjustments described therein).
(h) INFORMATION SUPPLIED. The Proxy Statement (or any amendment thereof
or supplement thereto) will, at the date of mailing to shareholders of the
Parent and at the time of the Shareholders' Meeting to be held in connection
with the Merger, not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, except that no representation is made by the Parent
with respect to statements made based on information supplied by the Company in
writing specifically for inclusion in the Proxy Statement. The Proxy Statement
will comply as to form in all material respects with the provisions of the
Exchange Act and the rules and regulations thereunder.
(i) ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1998,
except as contemplated by this Agreement, the Memorandum of Understanding, the
Loan Agreements, as set forth in Section 3.1(i) of the Parent's Disclosure
Letter, or disclosed in the SEC Reports filed since that date and up to the date
of this Agreement, there has not been (i) any material change by the Parent in
its accounting methods, principles or practices, (ii) any entry by the Parent or
the Subsidiaries into any commitment or transaction material to the Parent or
the Subsidiaries, (iii) any declaration, setting aside or payment of any
dividends or distributions in respect of the shares of Parent Common Stock or
any redemption, purchase or other acquisition of any of its securities, (iv) any
increase in or establishment of any bonus, insurance, severance, deferred
compensation, pension, retirement, profit sharing, stock option (including,
without limitation, the granting of stock options, stock appreciation rights,
performance awards, or restricted stock awards), stock purchase or other
employee benefit plan or agreement or arrangement, or any other increase in the
compensation payable or to become payable to any officers or key employees of
the Parent or any of its subsidiaries other than in the ordinary course of
business consistent with past practice or as was required under employment,
severance or termination agreements in effect as of December 31, 1998, (v) any
material bonus paid to the employees of the Parent or its Subsidiaries, (vi) any
sale or transfer of any material assets of the Parent or the Subsidiaries other
than in the ordinary course of business and consistent with past practice or
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(vii) any loan, advance or capital contribution to or investment in any person
by the Parent or any Subsidiary.
(j) LIABILITIES. Except for (a) liabilities incurred in the ordinary
course of business consistent with past practice, (b) transaction expenses
incurred in connection with this Agreement, the Memorandum, and the Loan
Agreements, (c) liabilities which individually or in the aggregate would not
reasonably be expected to have a Material Adverse Effect, (d) liabilities set
forth on any balance sheet (including the notes thereto) included in the
Parent's financial statements included in the SEC Reports filed prior to the
date hereof, or the Proxy, or (e) as disclosed in Section 3.1 (j) of the
Parent's Disclosure Letter since December 31, 1998 neither the Parent nor any of
the Subsidiaries has incurred any liabilities or obligations of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due, that would be required to be reflected or reserved against in a
consolidated balance sheet of the Parent and the Subsidiaries (including the
notes thereto) prepared in accordance with generally accepted accounting
principles as applied in preparing the consolidated balance sheet of the Parent
and the Subsidiaries as of December 31, 1998 contained in the Parent's Annual
Report on Form 10-K for the fiscal year ended and as contained in the Parent's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1999.
(k) ABSENCE OF LITIGATION. Except as disclosed in Section 3.1(k) of the
Parent's Disclosure Letter, in the Parent's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 and the Parent's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1999, there are no suits,
claims, actions, proceedings or investigations pending or, to the knowledge of
the Parent, threatened against the Parent or any Subsidiary, or any properties
or rights of the Parent or any Subsidiary, before any court, arbitrator or
administrative, governmental or regulatory authority or body, domestic or
foreign, that (i) individually or in the aggregate would reasonably be expected
to have a Material Adverse Effect, (ii) as of the date of this Agreement
question the validity of this Agreement or any action to be taken by the Parent
in connection with the consummation of the transactions contemplated hereby or
(iii) as of the date of this Agreement would prevent or result in a material
delay of the consummation of the transactions contemplated hereby. As of the
date hereof, neither the Parent nor any Subsidiary nor any of their respective
properties is or are subject to any order, writ, judgment, injunction, decree,
determination or award having, or which would reasonably be expected to have, a
Material Adverse Effect or which would prevent or result in a material delay of
the consummation of the transactions contemplated hereby.
(l) LABOR MATTERS. Except as set forth in the SEC Reports filed prior
to the date hereof, (i) neither the Parent nor any Subsidiary is a party to any
labor or collective bargaining agreement, and no employees of the Parent or any
Subsidiary are represented by any labor organization, (ii) to the knowledge of
the Parent there are no material representation or certification proceedings, or
petitions seeking a representation proceeding pending or threatened to be
brought or filed with the National Labor Relations Board or any other labor
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tribunal or authority and (iii) to the knowledge of the Parent there
are no material organizing activities involving the Parent or any Subsidiary
with respect to any group of employees of the Parent or the Subsidiaries.
(m) EMPLOYEE ARRANGEMENTS AND BENEFIT PLANS.
(i) Section 3.1(m) of the Parent Disclosure Letter sets forth
a complete and correct list of (i) all employee benefit plans within the meaning
of Section 3(3) of ERISA and all bonus or other incentive compensation, deferred
compensation, salary continuation, severance, disability, stock award, stock
option, stock purchase, tuition assistance, or vacation pay plans or programs
(collectively the "Plans") and (ii) all written employment, severance,
termination, change-in-control, or indemnification agreements (collectively, the
"Employment Arrangements"), in each case (i) or (ii) under which the Parent or
any Subsidiary has any obligation or liability (contingent or otherwise). Except
as set forth in the SEC Reports filed prior to the date of this Agreement and
except as would not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect: (A) each Plan has been administered and is in
compliance with the terms of such Plan and all applicable laws, rules and
regulations, (B) no "reportable event" (as such term is used in section 4043 of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"))
(other than those events for which the 30 day notice has been waived pursuant to
the regulations), "prohibited transaction" (as such term is used in section 406
of ERISA or section 4975 of the Code) or "accumulated funding deficiency" (as
such term is used in section 412 or 4971 of the Code) has heretofore occurred
with respect to any Plan and (C) each Plan intended to qualify under Section
401(a) of the Code has received a favorable determination from the IRS regarding
its qualified status and no notice has been received from the IRS with respect
to the revocation of such qualification.
(ii) Except as set forth in Section 3.1(m) of the Parent
Disclosure Letter, there is no litigation or administrative or other proceeding
involving any Plan or Employment Arrangement nor has the Parent received written
notice that any such proceeding is threatened, in each case where an adverse
determination would reasonably be expected to have a Material Adverse Effect.
The Parent has not contributed to any "multiemployer plan" (within the meaning
of section 3(37) of ERISA) and neither the Parent nor any Subsidiary has
incurred, nor, to the best of the Parent's knowledge, is reasonably likely to
incur any withdrawal liability which remains unsatisfied in an amount which
would reasonably be expected to have a Material Adverse Effect. The termination
of, or withdrawal from, any Plan or multiemployer plan to which the Parent
contributes, on or prior to the Closing Date, will not subject the Parent to any
liability under Title IV of ERISA that would reasonably be expected to have a
Material Adverse Effect.
(iii) With respect to each Plan and Employment Arrangement, a
complete and correct copy of each of the following documents (if applicable)
have been provided by the Parent: (i) the most recent Plan or Employment
Arrangement, and all amendments thereto and
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related trust documents; (ii) the most recent summary plan description, and all
related summaries of material modifications; (iii) the most recent Form 5500
(including schedules); (iv) the most recent IRS determination letter; (v) the
most recent actuarial reports (including for purposes of Financial Accounting
Standards Board report no. 87, 106 and 112) and (vi) the most recent estimate of
withdrawal liability from any Plan constituting a multiemployer plan if any.
(iv) Except as disclosed in the SEC Reports, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment becoming due to
any employee (current, former or retired) or consultant of the Parent or any
Subsidiary, (ii) increase any benefits under any Plan or Employment Arrangement
or (iii) result in the acceleration of the time of payment or vesting of any
rights under any Plan or Employment Arrangement.
(n) TAX MATTERS.
(i) To the best of Parent's knowledge, the Parent and each of
the Subsidiaries have timely filed with the appropriate taxing authorities all
material Tax Returns (as defined below) required to be filed through the date
hereof and will timely file any such material Tax Returns required to be filed
on or prior to the Closing Date (except those under valid extension) and all
such Tax Returns are and will be true and correct in all material respects, (B)
all Taxes (as defined below) of the Parent and each Subsidiary shown to be due
on the Tax Returns described in (A) above have been timely paid or adequately
reserved for in accordance with GAAP (except to the extent that such Taxes are
being contested in good faith, which contested Taxes are set forth in Section
3.1(n) of the Parent Disclosure Letter), (C) no material deficiencies for any
Taxes have been proposed, asserted or assessed against the Parent or any
Subsidiary that have not been fully paid or adequately provided for in the
appropriate financial statements of the Parent and the Subsidiaries, and no
power of attorney with respect to any Taxes has been executed or filed with any
taxing authority and no material issues relating to Taxes have been raised in
writing by any governmental authority during any presently pending audit or
examination, (D) the Parent and the Subsidiaries are not now subject to audit by
any taxing authority and no waivers of statutes of limitation with respect to
the Tax Returns have been given by or requested in writing from the Parent, (E)
there are no material liens for Taxes (other than for Taxes not yet due and
payable) on any assets of the Parent or any of the Subsidiaries, (F) neither the
Parent nor any of the Subsidiaries is a party to or bound by (nor will any of
them become a party to or bound by) any tax indemnity, tax sharing, tax
allocation agreement, or similar agreement, arrangement or practice with respect
to taxes, (G) neither the Parent nor any of the Subsidiaries has ever been a
member of an affiliated group of corporations within the meaning of Section 1504
of the Code, other than the affiliated group of which the Parent is the common
parent, (H) neither the Parent nor any of the Subsidiaries has filed a consent
pursuant to the collapsible corporation provisions of Section 341(f) of the Code
(or any corresponding provision of state or local law) or agreed to have Section
341(f)(2) of the Code (or any corresponding provisions of state or local law)
apply to any disposition of any asset owned by
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the Parent or any of the Subsidiaries, as the case may be, (I) neither the
Parent nor any of the Subsidiaries has agreed to make, nor is any required to
make any adjustment under Section 481(a) of the Code by reason of a change in
accounting method or otherwise, (J) the Parent and the Subsidiaries have
complied in all material respects with all applicable laws, rules and
regulations relating to withholding of Taxes and (K) no property owned by the
Parent or any of the Subsidiaries (i) is property required to be treated as
being owned by another person pursuant to the provisions of Section 168(f)(8) of
the Internal Revenue Code of 1954, as amended and in effect immediately prior to
the enactment of the Tax Reform Act of 1986; (ii) constitutes "tax exempt use
property" within the meaning of Section 168(h)(1) of the Code; or (iii) is tax
exempt bond financed property within the meaning of Section 168(g) of the Code.
(ii) As used in this Agreement, "Tax Return" shall mean any
return, report or statement required to be filed with any governmental authority
with respect to Taxes. As used in this Agreement, "Taxes" shall mean taxes of
any kind, including but not limited to those measured by or referred to as
income, gross receipts, sales, use, ad valorem, franchise, profits, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
value added, property or windfall profits taxes, customs, duties or similar
fees, assessments or charges of any kind whatsoever, together with any interest
and any penalties, additions to tax or additional amounts imposed by any
governmental authority, domestic or foreign.
(o) INTELLECTUAL PROPERTY. The Parent and the Subsidiaries do not
presently own any (i) registered trademarks, service marks, brand names and
other indications of origin, or (ii) patents. The Parent presently has the
applications for the patents which are set forth on Section 3.1(o)of the
Parent's Disclosure Letter pending before the U.S. Department of Commerce,
Patent and Trademark Office. The Parent makes no representation or warranties
concerning the patent applications.
(p) ENVIRONMENTAL MATTERS. To the best of Parent's knowledge and except
as disclosed in the SEC Reports filed prior to the date of this Agreement and
except as would not reasonably be expected to have a Material Adverse Effect,
(i) the operations of the Parent and the Subsidiaries have been and are in
compliance with all Environmental Laws and with all Licenses required by
Environmental Laws, (ii) there are no pending or, to the knowledge of the
Parent, threatened, actions, suits, claims, investigations or other proceedings
(collectively, "Actions") under or pursuant to Environmental Laws against the
Parent or the Subsidiaries or involving any real property currently or, to the
knowledge of the Parent, formerly owned, operated or leased by the Parent or the
Subsidiaries, (iii) the Parent and the Subsidiaries are not subject to any
Environmental Liabilities, and, to the knowledge of the Parent, no facts,
circumstances or conditions relating to, arising from, associated with or
attributable to any real property currently or, to the knowledge of the Parent,
formerly owned, operated or leased by the Parent or the Subsidiaries or
operations thereon that could reasonably be expected to result in Environmental
Liabilities, (iv) all real property owned and to the knowledge of the Parent all
real property operated or leased by the Parent or the Subsidiaries is free of
contamination from Hazardous
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Material and (v) there is not now, nor, to the knowledge of the Parent, has
there been in the past, on, in or under any real property owned, leased or
operated by the Parent or any of its predecessors (a) any underground storage
tanks, above-ground storage tanks, dikes or impoundments containing Hazardous
Materials, (b) any asbestos- containing materials, (c) any polychlorinated
biphenyls, or (d) any radioactive substances. As used in this Agreement,
"Environmental Laws" means any and all federal, state, local or municipal laws,
rules, orders, regulations, statutes, ordinances, codes, decisions, injunctions,
orders, decrees, requirements of any Governmental Entity, any and all common law
requirements, rules and bases of liability regulating, relating to or imposing
liability or standards of conduct concerning pollution, Hazardous Materials or
protection of human health or the environment, as currently in effect and
includes, but is not limited to, the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), 42 U.S.C. Section 9601 et seq., the
Hazardous Materials Transportation Act 49 U.S.C. Section 1801 et seq., the
Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. Section 6901 et seq.,
the Clean Water Act. 33 U.S.C. Section 1251 et seq., the Clean Air Act, 33
U.S.C. Section 2601 et seq., the Toxic Substances Control Act, 15 U.S.C. Section
2601 et seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C.,
Section 136 et seq., and the Oil Pollution Act of 1990, 33 U.S.C. Section 2701
et seq., as such laws have been amended or supplemented, and the regulations
promulgated pursuant thereto, and all analogous state or local statutes. As used
in this Agreement, "Environmental Liabilities" with respect to any person means
any and all liabilities of or relating to such person or any of its subsidiaries
(including any entity which is, in whole or in part, a predecessor of such
person or any of such subsidiaries), whether vested or unvested, contingent or
fixed, actual or potential, known or unknown, which (i) arise under or relate to
matters covered by Environmental Laws and (ii) relate to actions occurring or
conditions existing on or prior to the Closing Date. As used in this Agreement,
"Hazardous Materials" means any hazardous or toxic substances, materials or
wastes, defined, listed, classified or regulated as such in or under any
Environmental Laws which includes, but is not limited to, petroleum, petroleum
products, friable asbestos, urea formaldehyde and polychlorinated biphenyls.
(q) TRANSACTIONS WITH AFFILIATES. Except as set forth in the SEC
Reports filed prior to the date of this Agreement, there are no contracts,
agreements, arrangements or understandings of any kind between any affiliate of
the Parent, on the one hand, and the Parent or any Subsidiary, on the other
hand.
(r) BROKERS. No broker, finder, financial advisor or investment banker
is entitled to any brokerage, finder's or other fee, commission or expense
reimbursement in connection with the transactions contemplated by this Agreement
based upon arrangements made by and on behalf of the Parent.
(s) MATERIAL AGREEMENTS.
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(i) Except as disclosed in Section 3.1(s) of the Parent's
Disclosure Letter and any agreement entered into on behalf of the Subsidiaries
by the Company pursuant to the Memorandum, from and after December 31, 1998,
neither the Parent nor any of the Subsidiaries has entered into any contract,
agreement or other document or instrument (other than this Agreement) that is
required to be filed with the SEC that has not been so filed on or before the
date of this Agreement or any material amendment, modification or waiver under
any contract, agreement or other document or instrument that was previously so
filed.
(ii) The Parent makes no representations or warranty
concerning the validity or enforceability of the following (collectively, "USDI
Material Contracts"):
1. Employment Agreement between U.S. Digital Communications, Inc.
and Robert Wussler, effective June 1, 1998.
2. Employment Agreement between International Satellite Group, Inc.
and Philip Kernan dated December 31, 1998.
3. Employment Offer between Skysite and Charles Maynard dated July
16, 1997.
4. Employment Agreement between Skysite and Steve Mather April 22,
1998.
5. Employment Agreement between International Satellite Group, Inc.
and Steven Barket dated March 8, 1999.
6. Employment Agreement dated January 7, 1999 between International
Satellite Group, Inc. and Preston Riner.
7. Alleged Agreement between International Satellite Group, Inc. and
Tommy Williams.
8. Promissory Note dated June 25, 1999 in the original principal
amount of $50,000.00 payable to Balmore Funds, S.A. of Tortula,
British Virgin Island.
9. Promissory Note dated June 25, 1999 in the original principal
amount of $50,000.00 payable to Austost Ansalt Schaan, of Vaduz,
Liechtenstein.
10. Placement Agent Agreement dated December 6, 1996 by and between
Viscorp and Wincap, Ltd.
11. Private Placement Memorandum with SMS Capital Services dated
March 26, 1993.
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12. Non Disclosure Agreement between U.S. Digital Communications,
Inc. and Derek A. Sutherland, dated March 23, 1999.
13. Financing Procurement Agreement between U.S. Digital
Communications, Inc. and Derek Sutherland dated March 18, 1999,
and related documents.
14. Terms of Business between U.S. Digital Communications, Inc. and
Denholm, PLC, dated March 31, 1999.
15. Engagement Letter dated March 16, 1999, between U.S. Digital
Communications, Inc. and Chatsworth Securities, LLC.
16. Engagement Letter dated March 29, 1999, between U.S. Digital
Communication, Inc. and Chatsworth Securities, LLC.
17. Settlement and Release Agreements between U.S. Digital
Communication, Inc. and Marvin Lerch dated March 19, 1999.
18. Settlement and Release Agreements between U.S. Digital
Communication, Inc. and David Serlin dated March 19, 1999.
19. Fee Agreement and Non-Circumvention Agreement between U.S.
Digital Communication, Inc. and The Geneva Group, Inc. dated
March 29, 1999.
20. Engagement Letter between G.M. Astor & Associates and Visual
Information Services Corporation dated September 8, 1997.
21. Asset Purchase Agreement between International Satellite Group,
Inc. and Steven Barket dated March 8, 1999.
22. Asset Purchase Agreement between International Satellite Group,
Inc. and Enhanced Personal Communications, Inc.
23. Promissory Note dated January 7, 1999 in the original principal
amount of $300,000.00 in favor of Enhance Personal
Communications, Inc.
24. Service Provider Agreement dated February 6, 1999 between TMI
Communications Company, Limited Partnership and International
Satellite Group, Inc., as amended by letter agreement dated
February 6, 1999.
25. Retainer agreement between U.S. Digital Communications, Inc. and
Rothwell, Figg, Ernst & Kustz, PC dated January 26, 1999.
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26. Non Negotiable Promissory Note dated September 12, 1997 in the
original principal amount of $100,000.00 payable to Anker Bank.
27. Non Negotiable Promissory Note dated December 10, 1997 in the
original principal amount of $150,000.00 payable to Anker Bank.
28. Non Negotiable Promissory Note dated April 2, 1998 in the
original principal amount of $100,000.00 payable to DG Bank.
29. Non Negotiable Promissory Note dated May 5, 1998 in the original
principal amount of $350,000.00 payable to Finter Bank.
30. Non Negotiable Promissory Note dated April 27, 1998 in the
original principal amount of $150,000.00 payable to Finter Bank.
31. Service provider agreement between Skysite Communications
Corporation and American Mobile Satellite Corporation, as
amended.
32. Iridium Product Sales Agreement and service provider agreements,
as amended, between Iridium North America, L.P. and Project 77,
Inc. and/or International Satellite Group, Inc.
(iii) Parent acknowledges that it or its Subsidiaries may be
in default under the agreements with Iridium North America, L.P. and American
Mobile Satellite Corporation included in USDI Material Contracts in (ii) above.
Pursuant to the Memorandum, the Company is in negotiations with the applicable
service providers regarding these agreements. Neither the Parent nor any of the
Subsidiaries is in breach of any material agreement other than any USDI Material
Contract, except for breaches which would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
(iv) The Parent has delivered true and complete copies to the
Company of every USDI Material Contract, including all amendments or
modifications thereto.
(t) COMPLIANCE WITH APPLICABLE LAW. Except as disclosed by the Parent
in the SEC Reports filed prior to the date hereof or disclosed in Section 3.1(t)
of the Parent's Disclosure Letter, the Parent and the Subsidiaries are not in
violation of any law, ordinance or regulation of any Governmental Entity. Except
as disclosed by the Parent in the SEC Reports filed prior to the date hereof or
disclosed in Section 3.1(t) of the Parent's Disclosure Letter, to the knowledge
of the Parent no investigation or review by any Governmental Entity with respect
to the Parent or its Subsidiaries is pending or threatened, nor, to the
knowledge of the Parent, has any Governmental Entity indicated an intention to
conduct the same.
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(u) TANGIBLE PROPERTY. All of the personal property of the Parent is in
good operating condition, reasonable wear and tear excepted, and usable in the
ordinary course of business, except where the failure to be in such condition or
so usable would not individually or in the aggregate reasonably be expected to
have a Material Adverse Effect. The Company has possession of all personal
property of the Subsidiaries and is solely relying on its inspection of the
same.
SECTION 3.2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to, and agrees with, the
Parent as follows, subject to any exceptions specified in the Disclosure Letter
of the Company previously provided to the Parent on the date hereof (the
"Company Disclosure Letter") and except as expressly contemplated by this
Agreement:
(a) ORGANIZATION; STANDING AND POWER. The Company is a corporation
validly existing and in good standing under the laws of the State of Texas and
has the requisite corporate power and authority to carry on its business as it
is now being conducted. The Company is duly qualified to do business and is in
good standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification necessary, other
than in such jurisdictions where the failure to be so qualified to do business
(individually or in the aggregate) would not have a Material Adverse Effect. The
Company has provided the Parent with complete and correct copies of the articles
of incorporation and by-laws of the Company as currently in effect.
(b) CAPITAL STRUCTURE. The authorized capital stock of the Company
consists of 1,000,000 shares of Company Common Stock, no par value. At the close
of business on December 21, 1999, 335,173 shares of Company Common Stock were
issued and outstanding (excluding 157,327 shares of Company Common Stock held in
treasury). No shares of capital stock or other equity or voting securities of
the Company are reserved for issuance or outstanding. All outstanding shares of
capital stock of the Parent are, and all such shares issuable upon the exercise
of options will be, validly issued, fully paid and nonassessable and not subject
to preemptive rights. As of December 21, 1999, except as set forth in Section
3.2(b) of the Company Disclosure Letter, there were no outstanding or authorized
securities, options, warrants, calls, rights, commitments, preemptive rights,
agreements, arrangements or undertakings of any kind to which the Company is a
party, or by which it is bound, obligating the Company to issue, deliver or
sell, or cause to be issued, delivered or sold, any shares of capital stock or
other equity or voting securities of, or other ownership interests in, the
Company or obligating the Company to issue, grant, extend or enter into any such
security, option, warrant, call, right, commitment, agreement, arrangement or
undertaking.
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(c) AUTHORITY. The Company has the requisite corporate power and
authority to enter into this Agreement and, subject to the approval of the
Merger by the holders of the outstanding shares of Company Common Stock
("Company Stockholder Approval"), to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate action on the part of the
Company, subject to Company Stockholder Approval. This Agreement has been duly
executed and delivered by the Company and, assuming due authorization, execution
and delivery by the Parent, constitutes a legal, valid and binding obligation of
the Company enforceable against in accordance with its terms, except as may be
limited by bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or other similar laws affecting or relating to the enforcement of
creditors' rights generally and by general principles of equity.
(d) NONCONTRAVENTION; CONSENTS AND APPROVALS. The execution and
delivery by the Company of this Agreement do not, and the consummation by the
Company of the transactions contemplated hereby and compliance by the Company
with the provisions hereof will not, conflict with, or result in any violation
of, or default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, cancellation or acceleration of any obligation
or the loss of a benefit under, or result in the creation of any Lien upon or
right of first refusal with respect to any of the properties or assets of the
Company under, (i) any provision of the certificate of incorporation or by-laws
of the Company, (ii) any loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, obligation, instrument, permit, concession,
franchise or license applicable to the Company, or (iii) assuming all the
consents, filings and registrations referred to in the following sentence are
obtained and made, any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company or any of its properties or assets, other
than, in the case of clause (ii) or (iii), any such violations, defaults,
rights, losses or liens, that, individually or in the aggregate, would not have
a Material Adverse Effect on the Company. No filing or registration with, or
authorization, consent or approval of, any Governmental Entity is required by or
with respect to the Company in connection with the execution and delivery of
this Agreement by the Company or is necessary for the consummation of the Merger
and the other transactions contemplated by this Agreement, except (i) the filing
of the Articles of Merger with the Secretary of State of the State of Texas, and
(ii) such other consents, approvals, orders, authorizations, registrations,
declarations and filings the failure of which to be obtained or made would not,
individually or in the aggregate, reasonably be expected to prevent or result in
a material delay of the consummation of the transactions contemplated hereby.
(e) LICENSES. To the knowledge of the Company, the Company has all
permits, licenses, waivers and authorizations, including licenses,
authorizations and certificates of and from applicable state and local
authorities which are necessary for it to conduct its business in the manner in
which it is presently being conducted (collectively, "Licenses"), other than any
Licenses the failure of which to have would not, individually or in the
aggregate, reasonably be
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expected to have a Material Adverse Effect. To the knowledge of the Company, the
Company is in compliance with the terms of all Licenses, except for such
failures so to comply which would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect, and the Company has
duly performed its obligations under and is in compliance with the terms of such
Licenses, except for such nonperformance or noncompliance as would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect. There is no pending or, to the knowledge of the Company,
threatened application, petition, objection or other pleading with any
Governmental Entity which challenges or questions the validity of, or any rights
of the Company under, any License, except for such applications, petitions,
objections or other pleadings, that would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect or that are applicable
to the telecommunications industry generally.
(f) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference in the Proxy
Statement will, at the date of mailing to shareholders of the Parent and at the
time of the Shareholders' Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(g) ABSENCE OF CERTAIN CHANGES OR EVENTS. Since May 13, 1999, except as
contemplated by this Agreement, the Memorandum of Understanding and the Loan
Agreements or disclosed in Section 3.1(g) of the Company Disclosure Letter, the
Company has conducted its business only in the ordinary course and, since such
date, there has not been (i) any condition, event or occurrence which,
individually or in the aggregate, has had, or would reasonably be expected to
have, a Material Adverse Effect, (ii) any termination or cancellation of, or any
modification to, any agreement, arrangement or understanding which has had or
would reasonably be expected to have a Material Adverse Effect, (iii) any
material change by the Company in its accounting methods, principles or
practices, (iv) any revaluation by the Company of any of its material assets
other than in the ordinary course of business, consistent with past practice,
(v) any entry by the Company into any commitment or transactions material to the
Company, (vi) any declaration, setting aside or payment of any dividends or
distributions in respect of the shares of Company Common Stock or any
redemption, purchase or other acquisition of any of its securities, (vii) any
increase in or establishment of any bonus, insurance, severance, deferred
compensation, pension, retirement, profit sharing, stock option (including,
without limitation, the granting of stock options, stock appreciation rights,
performance awards, or restricted stock awards), stock purchase or other
employee benefit plan or agreement or arrangement, or any other increase in the
compensation payable or to become payable to any officers or key employees of
the Company or any of its subsidiaries other than in the ordinary course of
business consistent with past practice or as was required under employment,
severance or termination agreements in effect as of May 13, 1999; (viii) any
bonus paid to the employees of the Company, (ix) any sale or transfer of any
material assets of the Company other than in the
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<PAGE>
ordinary course of business and consistent with past practice or (x) any loan,
advance or capital contribution to or investment in any person by the Company.
(h) LIABILITIES. Except for (a) liabilities incurred in the ordinary
course of business consistent with past practice, (b) transaction expenses
incurred in connection with this Agreement, the Memorandum and the Loan
Agreements, (c) liabilities incurred in connection with the Memorandum and the
Loan Agreements, (d) liabilities which individually or in the aggregate would
not reasonably be expected to have a Material Adverse Effect, or (e) liabilities
set forth on any balance sheet (including the notes thereto) included in the
Company's financial statements as of December 31, 1998 and as of September 30,
1999, the Company has not incurred any liabilities or obligations of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due, that would be required to be reflected or reserved against in a balance
sheet of the Company as of December 31, 1998 and as of September 30, 1999
(including the notes thereto).
(i) ABSENCE OF LITIGATION. There are no suits, claims, actions,
proceedings or investigations pending or, to the knowledge of the Company,
threatened against the Company, or any properties or rights of the Company,
before any court, arbitrator or administrative, governmental or regulatory
authority or body, domestic or foreign, that (i) individually or in the
aggregate, would reasonably be expected to have a Material Adverse Effect, (ii)
as of the date of this Agreement question the validity of this Agreement or any
action to be taken by the Company in connection with the consummation of the
transactions contemplated hereby or (iii) as of the date of this Agreement would
prevent or result in a material delay of the consummation of the transactions
contemplated hereby. As of the date hereof, neither the Company nor any of its
properties is or are subject to any order, writ, judgment, injunction, decree,
determination or award having, or which would reasonably be expected to have, a
Material Adverse Effect or which would prevent or result in a material delay of
the consummation of the transactions contemplated hereby.
(j) LABOR MATTERS. The Company is not a party to any labor or
collective bargaining agreement, and no employees of the Company are represented
by any labor organization. To the knowledge of the Company there are no material
representation or certification proceedings, or petitions seeking a
representation proceeding pending or threatened to be brought or filed with the
National Labor Relations Board or any other labor relations tribunal or
authority and to the knowledge of the Company there are no material organizing
activities involving the Company with respect to any group of employees of the
Company.
(k) EMPLOYEE ARRANGEMENTS AND BENEFIT PLANS.
(i) Section 3.2(m) of the Company Disclosure Letter sets forth
a complete and correct list of (i) all employee benefit plans within the meaning
of Section 3(3) of ERISA and all bonus or other incentive compensation, deferred
compensation, salary continuation,
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severance, disability, stock award, stock option, stock purchase, tuition
assistance, or vacation pay plans or programs (collectively the "Plans") and
(ii) all written employment, severance, termination, change-in-control, or
indemnification agreements (collectively, the "Employment Arrangements"), in
each case (i) or (ii) under which the Company has any obligation or liability
(contingent or otherwise). To the knowledge of the Company, except as would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect: (A) each Plan has been administered and is in compliance with
the terms of such Plan and all applicable laws, rules and regulations, (B) no
"reportable event" (as such term is used in section 4043 of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) (other than those
events for which the 30 day notice has been waived pursuant to the regulations),
"prohibited transaction" (as such term is used in section 406 of ERISA or
section 4975 of the Code) or "accumulated funding deficiency" (as such term is
used in section 412 or 4971 of the Code) has heretofore occurred with respect to
any Plan and (C) each Plan intended to qualify under Section 401(a) of the Code
has received a favorable determination from the IRS regarding its qualified
status and no notice has been received from the IRS with respect to the
revocation of such qualification.
(ii) There is no litigation or administrative or other
proceeding involving any Plan or Employment Arrangement nor has the Company
received written notice that any such proceeding is threatened, in each case
where an adverse determination would reasonably be expected to have a Material
Adverse Effect. The Company has not contributed to any "multiemployer plan"
(within the meaning of section 3(37) of ERISA) and the Company has not incurred,
nor, to the best of the Company's knowledge, is reasonably likely to incur any
withdrawal liability which remains unsatisfied in an amount which would
reasonably be expected to have a Material Adverse Effect. The termination of, or
withdrawal from, any Plan or multiemployer plan to which the Company
contributes, on or prior to the Closing Date, will not subject the Company to
any liability under Title IV of ERISA that would reasonably be expected to have
a Material Adverse Effect.
(iii) With respect to each Plan and Employment Arrangement, a
complete and correct copy of each of the following documents (if applicable)
have been provided by the Company: (i) the most recent Plan or Employment
Arrangement, and all amendments thereto and related trust documents; (ii) the
most recent summary plan description, and all related summaries of material
modifications; (iii) the most recent Form 5500 (including schedules); (iv) the
most recent IRS determination letter; (v) the most recent actuarial reports
(including for purposes of Financial Accounting Standards Board report no. 87,
106 and 112) and (vi) the most recent estimate of withdrawal liability from any
Plan constituting a multiemployer plan if any.
(iv) Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will (i) result in any
payment becoming due to any employee (current, former or retired) or consultant
of the Company, (ii) increase any benefits under any Plan or Employment
Arrangement or (iii) result in the acceleration of the time of payment or
vesting of any rights under any Plan or Employment Arrangement.
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(l) TAX MATTERS.
(i) To the knowledge of the Company, the Company has timely filed with the
appropriate taxing authorities all material Tax Returns (as defined below)
required to be filed through the date hereof and will timely file any such
material Tax Returns required to be filed on or prior to the Closing Date
(except those under valid extension) and all such Tax Returns are and will be
true and correct in all material respects, (B) all Taxes (as defined below) of
the Company shown to be due on the Tax Returns described in (A) above have been
timely paid or adequately reserved for (except to the extent that such Taxes are
being contested in good faith, which contested Taxes are set forth in Section
3.1(n) of the Company Disclosure Letter), (C) no material deficiencies for any
Taxes have been proposed, asserted or assessed against the Company that have not
been fully paid or adequately provided for in the appropriate financial
statements of the Company, and no power of attorney with respect to any Taxes
has been executed or filed with any taxing authority and no material issues
relating to Taxes have been raised in writing by any governmental authority
during any presently pending audit or examination, (D) the Company is not now
subject to audit by any taxing authority and no waivers of statutes of
limitation with respect to the Tax Returns have been given by or requested in
writing from the Company, (E) there are no material liens for Taxes (other than
for Taxes not yet due and payable) on any assets of the Company, (F) the Company
is not a party to or bound by (nor will it become a party to or bound by) any
tax indemnity, tax sharing, tax allocation agreement, or similar agreement,
arrangement or practice with respect to taxes, (G) the Company has not ever been
a member of an affiliated group of corporations within the meaning of Section
1504 of the Code, (H) the Company has not filed a consent pursuant to the
collapsible corporation provisions of Section 341(f) of the Code (or any
corresponding provision of state or local law) or agreed to have Section
341(f)(2) of the Code (or any corresponding provisions of state or local law)
apply to any disposition of any asset owned by the Company, (I) the Company has
not agreed to make, nor is any required to make any adjustment under Section
481(a) of the Code by reason of a change in accounting method or otherwise, (J)
the Company has complied in all material respects with all applicable laws,
rules and regulations relating to withholding of Taxes and (K) no property owned
by the Company (i) is property required to be treated as being owned by another
person pursuant to the provisions of Section 168(f)(8) of the Internal Revenue
Code of 1954, as amended and in effect immediately prior to the enactment of the
Tax Reform Act of 1986; (ii) constitutes "tax exempt use property" within the
meaning of Section 168(h)(1) of the Code; or (iii) is tax exempt bond financed
property within the meaning of Section 168(g) of the Code.
(m) INTELLECTUAL PROPERTY. The Company does not presently own any (i)
registered trademarks, service marks, brand names and other indications of
origin, or (ii) patents.
(n) ENVIRONMENTAL MATTERS. Except as would not reasonably be expected
to have a Material Adverse Effect, to the knowledge of the Company, (i) the
operations of the Company
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have been and are in compliance with all Environmental Laws and with all
Licenses required by Environmental Laws, (ii) there are no pending or, to the
knowledge of the Company, threatened, actions, suits, claims, investigations or
other proceedings (collectively, "Actions") under or pursuant to Environmental
Laws against the Company or the Subsidiaries or involving any real property
currently or, to the knowledge of the Company, formerly owned, operated or
leased by the Company, (iii) the Company is not subject to any Environmental
Liabilities, and no facts, circumstances or conditions relating to, arising
from, associated with or attributable to any real property currently or, to the
knowledge of the Company, formerly owned, operated or leased by the Company or
operations thereon that could reasonably be expected to result in Environmental
Liabilities, (iv) all real property owned and to the knowledge of the Company
all real property operated or leased by the Company is free of contamination
from Hazardous Material and (v) there is not now nor has there been in the past,
on, in or under any real property owned, leased or operated by the Company or
any of its predecessors (a) any underground storage tanks, above-ground storage
tanks, dikes or impoundments containing Hazardous Materials, (b) any asbestos-
containing materials, (c) any polychlorinated biphenyls, or (d) any radioactive
substances.
(o) TRANSACTIONS WITH AFFILIATES. Except as disclosed in Section 3.1(g)
of the Company Disclosure Letter, there are no contracts, agreements,
arrangements or understandings of any kind between any affiliate of the Company,
on the one hand, and the Company, on the other hand.
(p) BROKERS. No broker, finder, financial advisor or investment banker
is entitled to any brokerage, finder's or other fee, commission or expense
reimbursement in connection with the transactions contemplated by this Agreement
based upon arrangements made by and on behalf of the Company.
(q) MATERIAL AGREEMENTS.
(i) Except as disclosed in Section 3.1(q) of the Company
Disclosure Letter, the Company is not a party to and has not entered into or, as
of the date hereof, made any material amendment or modification to or granted
any material waiver under the following (collectively, "Company Material
Contracts"): Employment Agreement between Seth Straayer and the Company
effective June 20, 1999; Agreement between Qwest Communications Corporation and
the Company dated August 5, 1999; Lease Agreement between 1322 Space Park, L.P.
as Landlord and the Company as Tenant dated as of July 1, 1999; Agreement for
Billing and Related Services between the Company and Telone Telecommunications,
Inc. dated as of June 7, 1999; Marketing Agreement between Midwest TELCAM, Inc.
and the Company dated August 6, 1999; Marketing Agreement between Canam
Communications and the Company dated August 6, 1999; the Memorandum; and the
Loan Agreements.
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(ii) Except as disclosed in Section 3.1(q) of the Company
Disclosure Letter, each of the Company Material Contracts is valid and
enforceable against the Company in accordance with its terms and there is no
default under any Company Material Contract either by the Company or, to the
knowledge of the Company, by any other party thereto, and no event has occurred
that with the lapse of time or the giving of notice or both would constitute a
default hereunder by the Company or, to the knowledge of the Company, any other
party thereto, in any such case in which such default or event would reasonably
be expected to have a Material Adverse Effect. The Company has not received any
written notice (or to the knowledge of the Company any other notice) of default
or termination of any Company Material Contract, and to the knowledge of Company
there exists no basis for any assertion of a right of default or termination
under any Company Material Contract.
(iii) The Company has delivered true and complete copies to
the Parent of every Company Material Contract, including all amendments or
modifications thereto.
(r) COMPLIANCE WITH APPLICABLE LAW. To the knowledge of the Company,
the Company is not in violation of any law, ordinance or regulation of any
Governmental Entity, except that no representation or warranty is made in this
Section 3.2 (r) with respect to Environmental Laws, and except for violations or
possible violations which would not reasonably be expected to have a Material
Adverse Effect. To the knowledge of the Company no investigation or review by
any Governmental Entity with respect to the Company is pending or threatened,
nor, to the knowledge of the Company, has any Governmental Entity indicated an
intention to conduct the same.
(s) TANGIBLE PROPERTY. All of the assets of the Company are in good
operating condition, reasonable wear and tear excepted, and usable in the
ordinary course of business, except where the failure to be in such condition or
so usable would not individually or in the aggregate reasonably be expected to
have a Material Adverse Effect.
ARTICLE IV: CONDUCT OF BUSINESSES PENDING THE MERGER
SECTION 4.1 CONDUCT OF BUSINESS OF THE PARENT.
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The Parent covenants and agrees that, during the period from the date
hereof to the Effective Time, unless the Company shall otherwise agree in
writing, the businesses of the Parent and its Subsidiaries shall be conducted
only in, and the Parent shall not take any action and its Subsidiaries shall not
take any action except in, the ordinary course of business; and the Parent shall
use its best efforts to preserve intact the business organization of the Parent
and the Subsidiaries, to keep available the services of the present officers,
employees and consultants of the Parent and the Subsidiaries and to preserve the
present relationships of the Parent and the Subsidiaries with customers,
suppliers and other persons with which the Parent or any of the Subsidiaries has
significant business relationships. Notwithstanding the other provisions of this
Section 4.1, the parties acknowledge that the Company is operating the business
of the Subsidiaries pursuant to the terms of the Memorandum and Section 4.2
below, and the provisions and restrictions of this Section 4.1 shall not apply
to any action taken by the Company with regard to the Subsidiaries. Without
limiting the generality of the foregoing, except as expressly provided in this
Agreement (including Section 4.3), neither the Parent nor any of the
Subsidiaries shall, between the date of this Agreement and the Effective Time,
directly or indirectly do, or propose or commit to do, any of the following
without the prior written consent of Company:
(a) (i) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock (except dividends and
distributions by a wholly owned subsidiary of the Parent or of a Subsidiary to
its parent), (ii) split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock or (iii) purchase, redeem or
otherwise acquire any shares of capital stock of the Parent or any of the
Subsidiaries or any other securities thereof or any rights, warrants or options
to acquire any such shares or other securities (other than in connection with
its employee stock purchase plan consistent with past practice);
(b) authorize for issuance, issue, deliver, sell or agree or commit to
issue, sell or deliver (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise), pledge
or otherwise encumber any shares of its capital stock or the capital stock of
any of its Subsidiaries, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities or any other securities or
equity equivalents (including without limitation stock appreciation rights);
(c) (i) increase the compensation or fringe benefits of any of its
directors, officers or employees, or (ii) grant any severance or termination
pay, or (iii) enter into any Employment Arrangement or similar agreement or
arrangement with any present or former director level or other equivalent or
more senior officer or employee, or any other employee of the Parent and Sub or
any of the Subsidiaries, or (iv) establish, adopt, enter into or amend in any
material respect or terminate any Plan or Employment Arrangement or other plan,
agreement, trust, fund, policy or arrangement for the benefit of any directors,
officers or employees;
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(d) except as set forth in the Proxy Statement, amend its certificate
of incorporation, by-laws or other comparable charter or organizational
documents;
(e) acquire or agree to acquire (i) by merging or consolidating with,
or by purchasing a substantial portion of the stock or assets of, or by any
other manner, any business or any corporation, partnership, joint venture,
association or other business organization or division thereof or (ii) any
assets that are material, individually or in the aggregate, to the Parent and
its Subsidiaries taken as a whole;
(f) sell, lease, dispose of, license, mortgage or otherwise encumber or
subject to any Lien or otherwise dispose of any of its properties or assets,
except in the ordinary course of business;
(g) (i) incur or assume any indebtedness for borrowed money or
guarantee any such indebtedness of another person, issue or sell any debt
securities or warrants or other rights to acquire any debt securities of the
Parent or any of the Subsidiaries, guarantee any debt securities of another
person, enter into any "keep well" or other agreement to maintain any financial
statement condition of another person or enter into any arrangement having the
economic effect of any of the foregoing, except for borrowings incurred in the
ordinary course of business under the Loan Agreement, or (ii) make any loans,
advances or capital contributions to, or investments in, any other person;
(h) authorize or expend any funds for capital expenditures;
(i) enter into, amend in any respect, terminate, rescind, waive in any
respect or release any of the terms or provisions of any (i) USDI Material
Contract or (ii) any other agreement which is material to the business of the
Parent and Sub and the Subsidiaries taken as a whole, including, but not limited
to the Creditors' Agreements;
(j) knowingly violate or fail to perform any material obligation or
duty imposed upon it by any applicable material federal, state or local law,
rule, regulation, guideline or ordinance;
(k) adopt a plan of complete or partial liquidation or resolutions
providing for or authorizing such a liquidation or a dissolution, merger,
consolidation, restructuring, recapitalization or reorganization;
(l) recognize any labor union (unless legally required to do so) or
enter into or materially amend any collective bargaining agreement;
(m) except as may be required as a result of a change in law or in
generally accepted accounting principles, make any material change in its method
of accounting;
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(n) revalue in any material respect any of its material assets,
including, without limitation, writing down the value of inventory or
writing-off notes or accounts receivable other than in the ordinary course of
business or as required by generally accepted accounting principles;
(o) except to the extent required by law, make or revoke any Tax
election or settle or compromise any Tax liability that is, in the case of any
of the foregoing, material to the business, financial condition or results of
operations of the Parent and its Subsidiaries taken as a whole or change (or
make a request to any taxing authority to change) any material aspect of its
method of accounting for tax purposes;
(p) except for claims covered by insurance, settle or compromise any
litigation in which the Parent or any Subsidiary is a defendant (whether or not
commenced prior to the date of this Agreement) or settle, pay or compromise any
claims not required to be paid, or settle or compromise any pending or
threatened suit, action or claim;
(q) pay any liabilities or obligations (absolute, accrued, asserted,
contingent or otherwise);
(r) take, propose to take, or agree in writing or otherwise to take,
any of the foregoing actions.
SECTION 4.2 MANAGEMENT OF SUBSIDIARIES' OPERATIONS.
Prior to the Effective Time, unless this Agreement is terminated
pursuant to Article VII, management of the Subsidiaries' business operations
shall remain with the Company pursuant to terms and conditions of the
Memorandum.
SECTION 4.3 CONDUCT OF BUSINESS OF PARENT AND SUBSIDIARIES.
During the period from the date of this Agreement to the Effective
Time, neither Parent nor any Subsidiary shall engage in any activities of any
nature except as provided in, or in connection with the transactions
contemplated by, this Agreement.
SECTION 4.4 NOTIFICATION OF CERTAIN MATTERS.
If Parent or any Subsidiary or the Company receives an administrative
or other order or notification relating to any violation or claimed violation of
any Governmental Entity that could affect Parent's, any Subsidiary's or the
Company's ability to consummate the transactions contemplated hereby, Parent,
Subsidiary or the Company as the case may be, shall promptly notify the other
parties thereof and shall use all reasonable efforts to take such steps as may
be
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necessary to remove any such impediment to the transactions contemplated by this
Agreement. In addition, Parent or the Company, as the case may be, shall give to
the other party prompt written notice of (a) the occurrence, or failure to
occur, of any event of which it becomes aware that has caused or that would be
likely to cause any representation or warranty of Parent or the Company, as the
case may be, contained in this Agreement to be untrue or inaccurate at any time
from the date hereof to the Closing Date, and (b) the failure of Parent or the
Company, as the case may be, or any officer, director, employee or agent
thereof, to comply with or satisfy in any material respect any covenant,
condition or agreement to be complied with or satisfied by it hereunder. No such
notification shall affect the representations or warranties of the parties or
the conditions to their respective obligations hereunder.
SECTION 4.5 ASSISTANCE.
If the Company requests, the Parent will cooperate, and will cause
Reznick Fedder & Silverman to cooperate, in all reasonable respects with the
efforts of the Company to finance the transactions contemplated by this
Agreement, including without limitation, providing assistance in the preparation
of one or more offering documents relating to financing to be obtained by the
Company, all at the sole expense of the Company ("Offering Documents"). The
Parent (a) shall furnish to Reznick Fedder & Silverman, as independent
accountants to the Parent, such customary management representation letters as
Reznick Fedder & Silverman may require of the Parent in connection with the
delivery of any customary "comfort" letters requested by the Company's financing
sources and (b) shall furnish to the Company all financial statements (audited
and unaudited) and other information in the possession of the Parent or its
representatives or agents as the Company shall reasonably determine is necessary
or appropriate for the preparation of such Offering Documents.
SECTION 4.6 CONDUCT OF BUSINESS OF THE COMPANY .
The Company covenants and agrees that, during the period from the date
hereof to the Effective Time, unless the Parent shall otherwise agree in
writing, the business of the Company shall be conducted only in, and the Company
shall not take any action except in, the ordinary course of business; and the
Company shall use its best efforts to preserve intact the business organization
of the Company, to keep available the services of the present officers,
employees and consultants of the Company and to preserve the present
relationships of the Company with customers, suppliers and other persons with
which the Company has significant business relationships. Without limiting the
generality of the foregoing, except as expressly provided in this Agreement, the
Company, between the date of this Agreement and the Effective Time, directly or
indirectly does, or proposes or commits to do, any of the following without the
prior written consent of Parent:
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(a) (i) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock, (ii) split, combine or
reclassify any of its capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for shares of its
capital stock or (iii) purchase, redeem or otherwise acquire any shares of
capital stock of the Company or any other securities thereof or any rights,
warrants or options to acquire any such shares or other securities (other than
in connection with its employee stock purchase plan consistent with past
practice);
(b) authorize for issuance, issue, deliver, sell or agree or commit to
issue, sell or deliver (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise), pledge
or otherwise encumber any shares of its capital stock, any other voting
securities or any securities convertible into, or any rights, warrants or
options to acquire, any such shares, voting securities or convertible securities
or any other securities or equity equivalents (including without limitation
stock appreciation rights);
(c) (i) increase the compensation or fringe benefits of any of its
directors, officers or employees, or (ii) grant any severance or termination
pay, or (iii) enter into any Employment Arrangement or similar agreement or
arrangement with any present or former director level or other equivalent or
more senior officer or employee, or any other employee of the Company, or (iv)
establish, adopt, enter into or amend in any material respect or terminate any
Plan or Employment Arrangement or other plan, agreement, trust, fund, policy or
arrangement for the benefit of any directors, officers or employees;
(d) amend its certificate of incorporation, by-laws or other comparable
charter or organizational documents;
(e) acquire or agree to acquire (i) by merging or consolidating with,
or by purchasing a substantial portion of the stock or assets of, or by any
other manner, any business or any corporation, partnership, joint venture,
association or other business organization or division thereof or (ii) any
assets that are material, individually or in the aggregate, to the Company taken
as a whole;
(f) sell, lease, dispose of, license, mortgage or otherwise encumber or
subject to any Lien or otherwise dispose of any of its properties or assets,
except in the ordinary course of business;
(g) except as contemplated by the Memorandum and the Loan Agreements,
(i) incur or assume any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or warrants or
other rights to acquire any debt securities of the Company, guarantee any debt
securities of another person, enter into any "keep well" or other agreement to
maintain any financial statement condition of another person or enter into any
arrangement having the economic effect of any of the foregoing, except for
borrowings
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incurred in the ordinary course of business under the Loan Agreement, or (ii)
make any loans, advances or capital contributions to, or investments in, any
other person;
(h) authorize or expend any funds for capital expenditures;
(i) enter into, amend in any respect, terminate, rescind, waive in any
respect or release any of the terms or provisions of any (i) Company Material
Contract or (ii) any other agreement which is material to the business of the
Company taken as a whole;
(j) knowingly violate or fail to perform any material obligation or
duty imposed upon it by any applicable material federal, state or local law,
rule, regulation, guideline or ordinance;
(k) adopt a plan of complete or partial liquidation or resolutions
providing for or authorizing such a liquidation or a dissolution, merger,
consolidation, restructuring, recapitalization or reorganization;
(l) recognize any labor union (unless legally required to do so) or
enter into or materially amend any collective bargaining agreement;
(m) except as may be required as a result of a change in law or in
generally accepted accounting principles, make any material change in its method
of accounting;
(n) revalue in any material respect any of its material assets,
including, without limitation, writing down the value of inventory or
writing-off notes or accounts receivable other than in the ordinary course of
business or as required by generally accepted accounting principles;
(o) except to the extent required by law, make or revoke any Tax
election or settle or compromise any Tax liability that is, in the case of any
of the foregoing, material to the business, financial condition or results of
operations of the Company taken as a whole or change (or make a request to any
taxing authority to change) any material aspect of its method of accounting for
tax purposes;
(p) except for claims covered by insurance, settle or compromise any
litigation in which the Company is a defendant (whether or not commenced prior
to the date of this Agreement) or settle, pay or compromise any claims not
required to be paid, or settle or compromise any pending or threatened suit,
action or claim;
(q) pay any liabilities or obligations (absolute, accrued, asserted,
contingent or otherwise);
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(r) take, propose to take, or agree in writing or otherwise to take,
any of the foregoing actions.
ARTICLE V: ADDITIONAL AGREEMENTS
SECTION 5.1 SHAREHOLDER APPROVAL; PREPARATION OF PROXY STATEMENT.
(a) On or prior to February 7, 2000, the Parent shall duly call, give
notice of, convene and hold a meeting of holders of the Parent Common Stock (the
"Shareholders Meeting") for the purpose of obtaining the Company Stockholder
Approval. Without limiting the generality of the foregoing but subject to
Section 5.3(b), the Parent agrees that its obligations pursuant to the first
sentence of this Section 5.1(a) shall not be affected by (i) the commencement,
public proposal, public disclosure or communication to the Parent of any
Transaction Proposal or (ii) the withdrawal or modification by the Board of
Directors of the Parent of its approval or recommendation of this Agreement or
the Merger. The Parent shall, through its Board of Directors (but subject to the
right of the Board of Directors to withdraw or modify its approval or
recommendation of the Merger and this Agreement as set forth in Section 5.3(b)),
recommend to its shareholders that the Company Stockholder Approval be given.
(b) The Parent shall prepare and file a preliminary Proxy Statement
with the SEC and shall use its reasonable best efforts to respond to any
comments of the SEC or its staff, and, to the extent permitted by law, to cause
the Proxy Statement to be mailed to the Parent's shareholders as promptly as
practicable after responding to all such comments to the satisfaction of the
staff and in any event at least ten (10) days prior to the Shareholders Meeting.
The Parent shall notify the Company promptly of the receipt of any comments from
the SEC or its staff and of any request by the SEC or its staff for amendments
or supplements to the Proxy Statement or for additional information and will
supply the Company with copies of all correspondence between the Parent or any
of its representatives, on the one hand, and the SEC or its staff, on the other
hand, with respect to the Proxy Statement or the Merger. If at any time prior to
the Shareholders Meeting there shall occur any event that should be set forth in
an amendment or supplement to the Proxy Statement, the Parent shall promptly
prepare and mail to its shareholders such an amendment or supplement. The Parent
shall not mail any Proxy Statement, or any amendment or supplement thereto, to
which the Company reasonably objects. The Company shall cooperate with and
provide such information as is reasonably requested by the Parent in the
preparation of the Proxy Statement or any amendment or supplement thereto.
(c) Parent, in its capacity as the sole shareholder of Sub, by its
execution hereof, approves and adopts this Agreement and the transactions
contemplated hereby.
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SECTION 5.2 ACCESS TO INFORMATION.
The Parent shall, and shall cause each of the Subsidiaries to, upon
reasonable notice, afford to the Company and to the officers, employees,
accountants, counsel, actuaries, financial advisors and other representatives of
the Company and the Company's financing sources with respect to the transactions
contemplated by this Agreement, reasonable access to, and permit them to make
such inspections as they may reasonably require of, during normal business hours
during the period from the date of this Agreement through the Effective Time,
all their respective properties, books, contracts, commitments, documents and
records and, during such period, the Parent shall, and shall cause each of Sub
and the Subsidiaries to, furnish promptly to the Company (i) a copy of each
report, schedule, registration statement and other document filed by it during
such period pursuant to the requirements of federal or state securities laws and
(ii) all other information concerning its business, properties and personnel as
the Company may reasonably request. The Parent shall use reasonable best efforts
to cause its senior management to cooperate with any reasonable request by the
Company relating to the Company obtaining the financing described in the
Offering Documents.
SECTION 5.3 NO SOLICITATION.
(a) The Parent shall, and the Parent shall direct and use its best
efforts to cause the officers, directors, employees, representatives, agents and
affiliates of the Parent and the Subsidiaries to, immediately cease any
discussions or negotiations with any parties that may be ongoing with respect to
any Transaction Proposal (as hereinafter defined). The Parent shall not, nor
shall it permit any of the Subsidiaries to, nor shall it authorize or permit any
of its officers, directors or employees or any investment banker, financial
advisor, attorney, accountant or other representative retained by it or any of
the Subsidiaries to, directly or indirectly, (i) solicit, initiate or knowingly
encourage (including by way of furnishing information or assistance) any
inquiries or the making of any proposal which constitutes, or may reasonably be
expected to lead to, any Transaction Proposal or (ii) enter into or participate
in any discussions or negotiations regarding any Transaction Proposal;
(b) Except as set forth in this Section 5.3, or for other good cause as
required by the Board of Directors' fiduciary duties and obligations, the Board
of Directors of the Parent shall not (i) withdraw or modify, or propose publicly
to withdraw or modify, in a manner adverse to the Company, the approval or
recommendation by such Board of Directors of the Merger or this Agreement, (ii)
approve or recommend, or propose publicly to approve or recommend, any
Transaction Proposal or (iii) cause the Parent or the Sub to enter into any
letter of intent, agreement in principle, acquisition agreement or other similar
agreement related to any Transaction Proposal. Notwithstanding the foregoing, if
the Board of Directors of the Parent determines in good faith that it has
received a Superior Proposal, the Board of Directors of the
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Parent may, prior to the receipt of the Parent Stockholder Approval, withdraw or
modify its approval or recommendation of the Merger and this Agreement, approve
or recommend a Superior Proposal (as defined below) or terminate this Agreement,
but in each case, only at a time that is at least ten business days after the
Company's receipt of written notice advising the Company that the Board of
Directors of the Parent has received a Transaction Proposal that may constitute
a Superior Proposal, specifying the material terms and conditions of such
Superior Proposal and the names of the person or persons making such Superior
Proposal.
(c) Nothing contained in this Section 5.3 shall prohibit the Parent
from taking and disclosing to its shareholders a position contemplated by Rules
14d-9 and 14e-2 promulgated under the Exchange Act or from making any disclosure
to the Parent's shareholders if, in the good faith judgment of the Board of
Directors of the Parent, after consultation with outside counsel, such
disclosure is necessary in order to comply with its fiduciary duties to the
Parent's shareholders under applicable law or is otherwise required under
applicable law.
(d) (i) For purposes of this Agreement, "Transaction Proposal"
means any bona fide inquiry, proposal or offer from any person relating to any
direct or indirect acquisition or purchase of more than 50% of the assets of the
Parent, the Sub or the Subsidiaries or more than 50% of the voting power of the
shares of the Parent's Common Stock then outstanding or any merger,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar transaction involving the Parent, the Sub or the Subsidiaries, other
than the transactions contemplated by this Agreement.
(ii) For purposes of this Agreement, a "Superior Proposal"
means any proposal determined by the Board of Directors of the Parent in good
faith, after consultation with outside counsel, to be a bona fide proposal and
made by a third party to acquire, directly or indirectly, for consideration
consisting of cash, property and/or securities, more than 50% of the voting
power of the shares the Parent's Common Stock then outstanding or more than 50%
of the assets of the Parent, the Sub or the Subsidiaries and otherwise on terms
which the Board of Directors of the Parent determines in its good faith
judgment, after consultation with outside counsel and with a financial advisor
of nationally recognized reputation (such as the financial advisor(s) identified
in Section 3.1(r)), to be more favorable to the Parent's shareholders (taking
into account all factors relating to such proposal deemed relevant by the Board
of Directors of the Parent, including, without limitation, the financing of such
proposal, any regulatory issues related thereto and all other conditions to
closing) than the Merger.
SECTION 5.4 REASONABLE BEST EFFORTS.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use its reasonable best efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, and to
assist and cooperate with the other parties in doing, all things
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reasonably necessary, proper or advisable to consummate and make effective, in
the most expeditious manner practicable, the Merger and the other transactions
contemplated by this Agreement, including (i) the obtaining of all necessary
actions, waivers, consents, licenses and approvals from Governmental Entities
and the making of all necessary registrations and filings (including filings
with Governmental Entities) and the taking of all reasonable steps as may be
necessary to obtain an approval, waiver or license from, or to avoid an action
or proceeding by, any Governmental Entity, (ii) the obtaining of all necessary
consents, approvals or waivers from third parties (and in furtherance thereof
the Parent, with the prior written consent of the Company, may make and commit
to make payments to third parties and enter into or modify agreements), (iii)
the defending of any lawsuits or other legal proceedings, whether judicial or
administrative, challenging this Agreement, or the consummation of the
transactions contemplated by this Agreement, including seeking to have any stay
or temporary restraining order entered by any court or other Governmental Entity
vacated or reversed and (iv) the execution and delivery of any additional
instruments necessary to consummate the transactions contemplated by, and to
carry out fully the purposes of, this Agreement.
(b) In connection with, but without limiting, the foregoing, the Parent
and its Board of Directors shall (i) use reasonable best efforts to ensure that
no state takeover statute or similar statute or regulation is or becomes
applicable to this Agreement, the Merger or any of the other transactions
contemplated by this Agreement and (ii) if any state takeover statute or similar
statute or regulation becomes applicable to this Agreement, the Merger or any of
the transactions contemplated by this Agreement, use reasonable best efforts to
ensure that the Merger and the other transactions contemplated by this Agreement
may be consummated as promptly as practicable on the terms contemplated by this
Agreement and otherwise to minimize the effect of such statute or regulation on
the Merger and the other transactions contemplated by this Agreement.
(c) Each of the parties hereto shall promptly provide the others with a
copy of any inquiry or request for information (including any oral request for
information), pleading, order or other document either party receives from any
Governmental Entities with respect to the matters referred to in Section 5.4.
(d) The Company shall give prompt notice to Parent, and Parent shall
give prompt notice to the Company, of (i) any notice of, or other communication
relating to, a default or event which, with notice or lapse of time or both,
would become a default, if received by it or any of the Subsidiaries subsequent
to the date of this Agreement and prior to the Effective Time, under any USDI
Material Contract or Company Material Contract, or (ii) any written notice or
other communication from any third party alleging that the consent of such third
party is or may be required in connection with the transactions contemplated by
this Agreement; provided, however, that the delivery of any notice pursuant to
this Section 5.4 shall not cure such breach or
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noncompliance or limit or otherwise affect the remedies available hereunder to
the party receiving such notice.
SECTION 5.5 PUBLIC ANNOUNCEMENTS.
Each of the parties hereto shall consult with each other before issuing
any press release or otherwise making any public statements with respect to the
Merger and shall not issue any such press release or make any such public
statement prior to such consultation, except as may be required by law,
fiduciary duties or any listing agreement with any national securities exchange
or quotation system.
SECTION 5.6 CONVEYANCE TAXES.
Each of the parties hereto shall cooperate in the preparation,
execution and filing of all returns, questionnaires, applications, or other
documents regarding any real property transfer gains, sales, use, transfer,
value added, stock transfer and stamp taxes, any transfer, recording,
registration and other fees, and any similar taxes that become payable in
connection with the transactions contemplated hereby that are required or
permitted to be filed on or before the Effective Time.
ARTICLE VI: CONDITIONS OF MERGER
SECTION 6.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER.
The respective obligations of each party to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) SHAREHOLDER APPROVAL. The Company Stockholder Approval and the
Parent Stockholder approval shall have been obtained, including the Parent
Stockholder Approval of (i) an amendment to the Parent's articles of
incorporation increasing the number of authorized shares of Parent Common
Stock to 325,000,000, providing that the provisions of Nevada Revised
Statutes 78.378 to 78.3793 do (ii) if and under the terms requested by the
Company, a reverse stock split of the Parent's issued and outstanding common
stock.
(b) Parent's bylaws shall have been amended to provide that the
provisions of Nevada Statutes 78.378 to 78.3793 do not apply to Parent.
(c) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in
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effect, nor shall any proceeding by any Governmental Entity seeking any of the
foregoing be pending. There shall not be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which makes the consummation of the Merger illegal.
SECTION 6.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY.
The obligations of the Company to effect the Merger are subject to the
satisfaction of the following additional conditions unless waived in writing by
the Company:
(a) REPRESENTATIONS AND WARRANTIES OF THE PARENT. The representations
and warranties of the Parent set forth in this Agreement shall be true and
correct in all respects (provided that any representation or warranty of the
Parent contained herein that is subject to a materiality, Material Adverse
Effect or similar qualification shall not be so qualified for purposes of
determining the existence of any breach thereof on the part of the Parent) as of
the date of this Agreement and (except to the extent such representations and
warranties speak as of an earlier date) as of the Closing Date as though made on
and as of the Closing Date, except for such breaches that would not,
individually or in the aggregate with any other breaches on the part of the
Parent, reasonably be expected to have a Material Adverse Effect on the Parent,
and the Company shall have received a certificate signed on behalf of the Parent
by the Chief Executive Officer of the Parent to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF THE PARENT AND SUB. The Parent and
Sub shall have performed in all material respects all obligations required to be
performed by them under this Agreement and the Loan Agreements at or prior to
the Closing Date, and the Company shall have received certificates signed on
behalf of the Parent and Sub by the Chief Executive Officer of each the Parent
and Sub to such effect.
(c) RESIGNATIONS. The Parent shall have obtained the resignations of A.
Frans Heideman and Lawrence Siegel from the Parent's Board of Directors
effective at the Effective Time.
(d) CONSENTS. The Parent shall have obtained the consent or approval of
each person (including any Governmental Entity) whose consent or approval shall
be required in connection with the transactions contemplated hereby under any
USDI Material Contract.
(e) PREFERRED STOCK, OPTIONS AND CONVERTIBLE SECURITIES. Each share of
Parent Preferred Stock shall have been or will be as of the Effective Time
converted into and/ or redeemed for shares of Parent Common Stock. All Stock
Incentive Plans shall have been or will be as of the Effective Time duly
canceled by the Parent and each Option and all securities convertible into or
exchangeable, redeemable or exercisable for shares of capital stock or voting
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securities of the Parent shall be or will be as of the Effective Time canceled,
exercised or expired, with the effect that, upon consummation of the Merger, the
shareholders of the Company will own 51% of the capital stock and voting
securities of the Parent on a fully diluted basis.
(f) CREDITORS' AGREEMENT. As of the Effective Time, all creditors of
and claimants against the Parent and the Subsidiaries shall have entered into
Creditors' Agreements which are satisfactory to the Company.
(g) COMPLETION OF DUE DILIGENCE. The Company shall have completed due
diligence investigations of the Parent and the Subsidiaries to its satisfaction
and in its sole discretion.
SECTION 6.3 CONDITIONS TO OBLIGATIONS OF THE PARENT.
The obligations of the Parent to effect the Merger are subject to the
satisfaction of the following additional conditions unless waived by the Parent:
(a) REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The representations
and warranties of the Company set forth in this Agreement shall be true and
correct in all respects (provided that any representation or warranty of the
Company contained herein that is subject to a materiality, Material Adverse
Effect or similar qualification shall not be so qualified for purposes of
determining the existence of any breach thereof on the part of the Company) as
of the date of this Agreement and (except to the extent such representations and
warranties speak as of an earlier date) as of the Closing Date as though made on
and as of the Closing Date, except for such breaches that would not,
individually or in the aggregate with other breaches on the part of the Company,
materially adversely affect the ability of the Company to consummate the
transactions contemplated hereby, and the Parent shall have received a
certificate signed on behalf of the Company by the President of the Company to
such effect.
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement and the Loan Agreements at or prior to the Closing Date,
and the Parent shall have received a certificate signed on behalf of the Company
by the President of the Company to such effect.
(c) COMPLETION OF DUE DILIGENCE. Parent shall have completed due
diligence investigations of Company to its satisfaction and in its sole
discretion.
ARTICLE VII: TERMINATION, AMENDMENT AND WAIVER
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SECTION 7.1 TERMINATION.
This Agreement may be terminated and the Merger contemplated hereby may
be abandoned at any time prior to the Effective Time, notwithstanding Parent
Stockholder Approval or Company Stockholder Approval:
(a) by mutual written consent of Parent and the Company; or
(b) by Parent, so long as the Parent is not then in material breach of
its obligations hereunder, upon a breach of any material representation,
warranty, covenant or agreement on the part of the Company set forth in this
Agreement, or if any such representation or warranty of the Company shall have
been or become untrue, in each case such that the conditions set forth in
Section 6.3 would not be satisfied and such breach or untruth (i) cannot be
cured by the Closing Date or (ii) has not been cured within ten days of the date
on which the Company receives written notice thereof from Parent;
(c) by the Company, so long as the Company is not then in material
breach of its obligations hereunder, upon a breach of any material
representation, warranty, covenant or agreement on the part of Parent set forth
in this Agreement, or if any such representation or warranty of Parent shall
have been or become untrue, in each case such that the conditions set forth in
Section 6.2 would not be satisfied and such breach or untruth (i) cannot be
cured by the Closing Date or (ii) has not been cured within ten days of the date
on which Parent receives written notice thereof from the Company;
(d) by either Parent or the Company if any permanent injunction or
other order, decree, ruling or action by any Governmental Entity preventing the
consummation of the Merger shall have become final and nonappealable; provided
that such right of termination shall not be available to any party if such party
shall have failed to make reasonable efforts to prevent or contest the
imposition of such injunction or other order, decree, ruling or action and such
failure materially contributed to such imposition;
(e) by either Parent or the Company if (other than due to the willful
failure of the party seeking to terminate this Agreement to perform its
obligations hereunder required to be performed at or prior to the Effective
Time) the Merger shall not have been consummated on or prior to March 1, 2000
(the "Termination Date");
(f) by either Parent or the Company, if the Parent Stockholder Approval
of this Agreement and the Merger required for the consummation of the Merger
shall not have been obtained by reason of the failure to obtain the Parent
Stockholder Approval at a duly held meeting of shareholders or at any
adjournment thereof; or
40
<PAGE>
(g) by the Company, if (i) the Board of Directors of the Parent (A)
shall have withdrawn, modified or changed its approval or recommendation of this
Agreement or the Merger in any manner which is adverse to the Company, (B) shall
have approved or have recommended to the shareholders of the Parent a
Transaction Proposal or (C) shall have resolved to do the foregoing; or (ii) the
Parent shall have wilfully failed to hold the Shareholders Meeting on or prior
to February 7, 2000 (the "Delayed Date"); provided that the Delayed Date shall
be automatically extended for each day with respect to which the failure to hold
the Shareholders Meeting (x) is attributable to a lack of reasonable cooperation
and assistance by the Company or its affiliates or (y) is the result of any
injunction or similar action or any action of the SEC, in each case preventing
or delaying the holding of such meeting.
SECTION 7.2 EFFECT OF TERMINATION.
In the event of the termination of this Agreement pursuant to Section
7.1, this Agreement shall forthwith become void and there shall be no liability
on the part of any party hereto except as set forth in Section 7.3, Section 7.5
and Section 8.1; provided, however, that nothing herein shall relieve any party
from liability for any breach hereof.
SECTION 7.3 FEES AND EXPENSES.
(a) Except as provided below in this Section 7.3, all fees and expenses
incurred in connection with the Merger, this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such fees or expenses,
whether or not the Merger is consummated.
(b) The Parent shall pay, or cause to be paid, in same day funds to the
Company the amounts set forth below (which amounts shall constitute full
satisfaction of all of the Parents's obligations and liabilities to the Company
under this Agreement) under the circumstances and at the times specified: If the
Company terminates this Agreement under Section 7.1(c) as a result of a willful
breach of a material representation, warranty or covenant by the Parent, and
within 320 days thereafter, (A) the Parent or Sub enters into a merger
agreement, acquisition agreement or similar agreement (including, without
limitation, a letter of intent) with respect to a Transaction Proposal, or a
Transaction Proposal is consummated, or (B) the Parent or Sub enters into a
merger agreement, acquisition agreement or similar agreement (including, without
limitation, a letter of intent) with respect to a Superior Proposal, or a
Superior Proposal is consummated, which in the case of either (A) or (B) above
will result in shareholders of the Parent becoming entitled to receive upon
consummation of such Transaction Proposal or Superior Proposal consideration
with a value (determined in good faith by the Board of Directors of the Parent)
per share of Parent Common Stock greater than the value afforded the
shareholders of the Parent in the event the Merger were consummated then, in the
case of either (A) or (B) above, the Parent shall pay to the Company upon the
consummation of such Transaction
41
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Proposal or Superior Proposal (i) a fee of $20,000 per month for the Company's
management of the operations of the Subsidiaries from July 5, 1999 through the
date of termination of this Agreement, (ii) reimbursement of the expenses of the
Company incurred in connection with the transactions contemplated by this
Agreement (the "Termination Fee") upon demand, and (ii) all amounts payable
under the terms of the Loan Agreements upon demand.
SECTION 7.4 BROKERS.
Except as otherwise provided in Section 7.3, the Company agrees to
indemnify and hold harmless the Parent, and the Parent agrees to indemnify and
hold harmless the Company, from and against any and all liability to which the
Parent, on the one hand, or the Company, on the other hand, may be subjected by
reason of any brokers, finders or similar fees or expenses with respect to the
transactions contemplated by this Agreement to the extent such similar fees and
expenses are attributable to any action undertaken by or on behalf of the
Company or Parent, as the case may be.
SECTION 7.5 SUBSIDIARIES' OPERATIONS.
Upon termination of this Agreement by the Company or by the Parent
pursuant to Section 7.1, the Company shall transfer to the Parent the management
of all operations of the Subsidiaries, subject to the prior performance by the
Parent of its obligations under the Loan Agreements. All costs and expenses
incurred in connection with the transfer of the management and the assets of the
Subsidiaries to the control of the Parent shall be paid by the Parent. The
Company and the Parent shall cooperate and assist each other in the transfer of
operations and assets contemplated by this Section 7.5.
SECTION 7.6 AMENDMENT.
This Agreement may be amended by the parties hereto by action taken by
the respective Boards of Directors of Parent and the Company at any time prior
to the Effective Time; provided, however, that, after approval of the Merger by
the shareholders of the Parent, no amendment may be made which would reduce the
amount or change the type of consideration into which each share of Parent Stock
shall be converted upon consummation of the Merger. This Agreement may not be
amended except by an instrument in writing signed by the parties hereto.
SECTION 7.7 WAIVER.
42
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At any time prior to the Effective Time, any party hereto, to the
extent lawful, may (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto and (c) waive compliance with any of the
agreements or conditions contained herein. Any such extension or waiver shall be
valid if set forth in an instrument in writing signed by the party or parties to
be bound thereby.
ARTICLE VIII: GENERAL PROVISIONS
SECTION 8.1 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
The representations, warranties and agreements in this Agreement shall
terminate at the Effective Time or upon the termination of this Agreement
pursuant to Section 7.1, except that (i) those agreements set forth in Section
2.1, Section 2.2, Section 5.2, Section 5.4, Section 5.5, Section 7.2, Section
7.3, Section 7.4 and Article VIII shall survive the Effective Time and (ii)
those agreements set forth in Section 5.2, Section 7.2, Section 7.3, Section
7.4, Section 7.5 and Article VIII shall survive termination (in each of (i) and
(ii) in accordance with the terms of such provisions).
SECTION 8.2 NOTICES.
All notices, requests, claims, demands and other communications
hereunder shall be in writing and shall be given (and shall be deemed to have
been duly given upon receipt) by delivery in person or by registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
if to Parent or Sub: U.S. Digital Communications, Inc.
Two Wisconsin Circle, Suite 700
Chevy Chase, Maryland 20815-7003
Attention: Robert J. Wussler
with a copy to: Caplan, Buckner, Rohrbaugh & Kostecka
Three Bethesda Metro Center, Suite 430
Bethesda, Maryland 20814
Attention: Robert Kostecka, Esq.
43
<PAGE>
if to the Company: TELCAM, Telecommunications Company of the
Americas, Inc.
1322 Space Park Drive, Suite 101
Houston, Texas 77058
Attention: Gregory Hahn
with a copy to: Campbell & Riggs, P.C.
1980 Post Oak Blvd., Suite 2300
Houston, Texas 77056
Attention: Carole R. Riggs, Esq.
SECTION 8.3 CERTAIN DEFINITIONS.
For purposes of this Agreement, the term:
(a) "affiliate" of a person means a person that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, the first mentioned person;
(b) "beneficial owner" with respect to any shares of Company Common
Stock means a person who shall be deemed to be the beneficial owner of such
shares of Company Common Stock (i) which such person or any of its affiliates or
associates beneficially owns, directly or indirectly, (ii) which such person or
any of its affiliates or associates (as such term is defined in Rule 12b-2 of
the Exchange Act) has, directly or indirectly, (A) the right to acquire (whether
such right is exercisable immediately or subject only to the passage of time),
pursuant to any agreement, arrangement or understanding or upon the exercise of
consideration rights, exchange rights, warrants or options, or otherwise, or (B)
the right to vote pursuant to any agreement, arrangement or understanding or
(iii) which are beneficially owned, directly or indirectly, by any other persons
with whom such person or any of its affiliates or person with whom such person
or any of its affiliates or associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of any
shares;
(c) "control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee or
executor, of the power to direct or cause the direction of the management
policies of a person, whether through the ownership of stock, as trustee or
executor, by contract or credit arrangement or otherwise;
(d) "Creditors' Agreements" means any and all agreements between the
Parent or any Subsidiary and a creditor or creditors of the Parent or any
Subsidiary which compromise or settle indebtedness of the Parent or any
Subsidiary.
44
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(e) "generally accepted accounting principles" shall mean the generally
accepted accounting principles set forth in the opinions and pronouncements of
the Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession in the United
States, in each case applied on a basis consistent with the manner in which the
audited financial statements for the fiscal year of the Parent ended December
31, 1998 were prepared;
(f) "knowledge" means, with respect to any entity, knowledge of any
officer of an entity after reasonable inquiry (except as otherwise set forth
herein);
(g) "Lien" means, with respect to any asset (including, without
imitation, any security) any mortgage, lien, pledge, collateral assignment,
hypothecation, charge, security interest or encumbrance of any kind in respect
of such asset;
(h) "Loan Agreements" means the working capital credit agreement and
promissory note dated as of July 5, 1999 between the Parent and the Company and
the working capital credit agreement and promissory note dated August 6, 1999
between the Parent and Texas Interim Funding, Ltd., a Texas limited partnership.
(i) "Memorandum" means the memorandum of understanding dated July 5,
1999 between the Company and the Parent, as modified or supplemented from time
to time.
(j) "person" means an individual, corporation, partnership,
association, trust, unincorporated organization, other entity or group (as
defined in Section 13(d)(3) of the Exchange Act);
(k) "Subsidiary" or "Subsidiaries" means any corporation, partnership,
joint venture or other legal entity of which the Parent or the Sub, as the case
may be (either alone or through or together with any other subsidiary), owns,
directly or indirectly, 50% or more of the stock or other equity interests the
holder of which is generally entitled to vote for the election of the board of
directors or other governing body of such corporation or other legal entity.
SECTION 8.4 SEVERABILITY.
If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner adverse to any party. Upon
such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as
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<PAGE>
to effect the original intent of the parties as closely as possible in an
acceptable manner to the end that the transactions contemplated hereby are
fulfilled to the fullest extent possible.
SECTION 8.5 ENTIRE AGREEMENT; ASSIGNMENT.
Except for the Memorandum of Understanding, this Agreement constitutes
the entire agreement among the parties with respect to the subject matter hereof
and supersedes all prior agreements and undertakings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof.
Neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned by any of the parties hereto (whether by operation of law or
otherwise) without the prior written consent of the other parties. This
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
SECTION 8.6 PARTIES IN INTEREST.
This Agreement shall be binding upon and inure solely to the benefit of
each party hereto, and nothing in this Agreement, express or implied, is
intended to or shall confer upon any other person any rights, benefits or
remedies of any nature whatsoever under or by reason of this Agreement.
SECTION 8.7 DIRECTOR AND OFFICER LIABILITY.
The directors, officers, stockholders and other controlling persons of
each of the parties and their affiliates acting in such capacity shall not in
such capacity have any personal liability or obligation arising under this
Agreement (including any claims that the other parties may assert) other than as
an assignee of this Agreement.
SECTION 8.8 ENFORCEMENT OF AGREEMENT.
The parties hereto agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, such remedy being in addition to any other remedy to which
any party is entitled at law or in equity.
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<PAGE>
SECTION 8.9 GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Texas, regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws thereof.
SECTION 8.10 HEADINGS.
The descriptive headings contained in this Agreement are included for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 8.11 COUNTERPARTS.
This Agreement may be executed in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
shall be deemed to be an original but all of which taken together shall
constitute one and the same agreement.
47
<PAGE>
IN WITNESS WHEREOF, Parent and the Company have caused this Agreement
to be executed as of the date first written above by their respective officers
thereunto duly authorized.
U.S. DIGITAL COMMUNICATIONS, INC.
By:
------------------------------
Name:
Title:
TELCAM, TELECOMMUNICATIONS
COMPANY OF THE AMERICAS, INC.
By:
--------------------------------
Name:
Title:
48
<PAGE>
APPENDIX B
CERTIFICATE OF AMENDMENT
OF THE
ARTICLES OF INCORPORATION
OF
U.S. DIGITAL COMMUNICATIONS, INC.
-------------------------------------
Pursuant to the provisions of NRS Section 78.390, the undersigned
President and Secretary of U.S. Digital Communications, Inc., a Nevada
corporation (the "Corporation"), do hereby certify as follows:
1. The Board of Directors of the Corporation, by unanimous consent at a
duly constituted meeting of the Board of Directors, pursuant to NRS Section
78.315(3), held on December 27, 1999, adopted resolutions in accordance with NRS
Section 78.390(l)(a) directing that the Articles of Incorporation, as amended
and restated, be amended as follows:
CHANGE IN AUTHORIZED CAPITAL STOCK: Article VI, Section 1. of the
Articles of Incorporation, as amended and restated, is amended so as to increase
the number of shares of the capital common stock which the Corporation shall
have the authority to issue to Three Hundred Twenty-Five Million (325,000,000)
shares of Common Stock, par value $0.01 per share. Such change shall not alter
or change the issued and outstanding shares of Common Stock of the Corporation.
Such change shall not alter or change the number of authorized shares of
Preferred Stock or the number of issued and outstanding shares of Preferred
Stock. Article VI, Section 1 of the Articles of Incorporation, as previously
restated on October 24, 1997, is hereby deleted and the following is inserted in
its place:
"1. The Corporation shall be authorized to issue Three Hundred
Twenty Five Million Shares of Common Stock, par value $0.01 per share."
2. The number of shares of Common Stock of the Corporation issued and
outstanding and entitled to vote on the amendment to the Articles of
Incorporation is ____________ shares of Common Stock, and the foregoing
amendment has been consented to and approved by the affirmative vote of
___________ shares of the Common Stock thereby constituting a majority of the
voting power of each class of stock outstanding and entitled to vote thereon.
Dated this ______ date of __________, 2000.
-------------------------------------
Robert J. Wussler, President
-------------------------------------
Edward J. Kopf, Secretary
2
<PAGE>
STATE OF ________________ )
) ss.
COUNTY OF _______________ )
On this ____ day of ___________, 2000, before me, the undersigned
Notary Public, personally appeared Robert J. Wussler and Edward J. Kopf, known
to me or satisfactorily proven to be the persons whose name are subscribed to
the foregoing instrument, and acknowledged that they executed the same in the
capacities and for the purposes therein contained.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal on
the day and year first above written.
-------------------------------------
Notary Public
My Commission expires: _______________
3
<PAGE>
APPENDIX C
CERTIFICATE TO DECREASE NUMBER OF AUTHORIZED SHARES
PURSUANT TO NRS SECTION 78.207
OF
U.S. DIGITAL COMMUNICATIONS, INC.
-------------------------------------------------------
Pursuant to the provisions of NRS Sections 78.207(1) and 78.209, the
undersigned President and Secretary of U.S. Digital Communications, Inc., a
Nevada corporation (the "Corporation"), do hereby certify as follows:
1. The Name of the Corporation is U.S. DIGITAL COMMUNICATIONS, INC.
2. The Board of Directors of the Corporation, by unanimous consent at a
duly constituted meeting of the Board of Directors, pursuant to NRS Section
78.315(3), held on December 27, 1999, adopted resolutions in accordance with NRS
Section 78.207(1) to decrease the number of issued shares of the Common Stock of
the Corporation and correspondingly decrease the number of issued shares held by
each stockholder of record at the Effective Date (defined below).
3. The following is provided as required by NRS Section 78-209(1):
(a) THE CURRENT NUMBER OF AUTHORIZED SHARES AND THE PAR
VALUE, IF ANY, OF EACH CLASS AND SERIES, IF ANY, OF
SHARES BEFORE THE CHANGE. The current number of
authorized shares of Common Stock is 325,000,000
shares. The par value of the Common Stock before the
change is $0.01 per share. The current number of
authorized shares of Class A Preferred Stock is
6,666,666 shares, at a par value of $0.01 per share.
The current number of authorized shares of Class B
Preferred Stock is 3,000 shares, at a par value of
$0.01 per share. The current number of authorized
shares of Class C Preferred Stock is 4,000 shares, at
a par value of $0.01 per share.
(b) THE NUMBER OF AUTHORIZED SHARES AND THE PAR VALUE, IF
ANY, OF EACH CLASS AND SERIES, IF ANY, OF SHARES
AFTER THE CHANGE. The number authorized shares of
Common Stock after the change shall be 81,250,000
shares, at a par value of $0.01 per share. The number
of authorized shares of Class A Preferred Stock after
the change is unchanged and remains at 6,666,666
shares, at a par value of $0.01 per share. The number
of authorized shares of Class B Preferred Stock after
the change is unchanged and remains at 3,000 shares,
at a par value of $0.01 per share. The number of
authorized shares of Class C Preferred Stock after
the change is unchanged and remains at 4,000 shares,
at a par value of $0.01 per share.
(c) THE NUMBER OF SHARES OF EACH AFFECTED CLASS AND
SERIES, IF ANY, TO BE ISSUED AFTER THE CHANGE IN
EXCHANGE FOR EACH ISSUED SHARE OF THE SAME CLASS OR
SERIES: The only affected class is Common Stock. At
the Effective Date
<PAGE>
(defined below), each share of Common Stock shall be
reduced and converted into and shall become
twenty-five hundredths of a share (.25 shares) of
Common Stock, par value $0.01 per share, and that
number of shares of Common Stock held by each
stockholder after the Effective Date shall equal the
number of shares of Common Stock held by them
immediately prior to the Effective Date divided by
four (4).
(d) THE PROVISIONS, IF ANY, FOR THE ISSUANCE OF
FRACTIONAL SHARES, OR FOR THE PAYMENT OF MONEY OR THE
ISSUANCE OF SCRIP TO STOCKHOLDERS OTHERWISE ENTITLED
TO A FRACTION OF A SHARE AND THE PERCENTAGE OF
OUTSTANDING SHARES AFFECTED THEREBY. To the extent
required in connection with the holding and
conversion of any stockholder, the Corporation shall
issue fractional shares. No money or scrip will be
issued to any stockholder, and therefore the
percentage of stockholders otherwise entitled to a
fraction of a share who will receive money or scrip
shall be zero percent (0%).
(e) SHAREHOLDER APPROVAL REQUIREMENTS. Shareholder
approval is not required pursuant to NRS Sections
78.207(1), nevertheless, this Certificate has been
approved by a majority of the voting power of each
class of stock outstanding and entitled to vote
thereon.
(f) WHETHER THE CHANGE IS EFFECTIVE ON FILING THE
CERTIFICATE OR, IF NOT, THE DATE AND TIME AT WHICH
THE CHANGE WILL BE EFFECTIVE, WHICH MUST NOT BE MORE
THAN 90 DAYS AFTER THE CERTIFICATE IS FILED. The
change described in this Certificate shall be come
effective at 5:00 p.m. Pacific Daylight Time, on the
date of filing of this Certificate in the office of
the Secretary of State of Nevada (the AEffective
Date@).
Dated this ______ date of __________, 2000.
--------------------------------------
Robert J. Wussler, President
--------------------------------------
Edward Kopf, Secretary
2
<PAGE>
STATE OF ________________ )
) ss.
COUNTY OF _______________ )
On this ____ day of ____________, 2000, before me, the undersigned
Notary Public, personally appeared Robert J. Wussler and Edward Kopf, known to
me or satisfactorily proven to be the persons whose name are subscribed to the
foregoing instrument, and acknowledged that they executed the same in the
capacities and for the purposes therein contained.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal on
the day and year first above written.
--------------------------------------
Notary Public
My Commission expires: _________________
3
<PAGE>
BILL SPENCER
CERTIFIED PUBLIC ACCOUNTANT
=============================
822 WEST PASADENA BOULEVARD
DEER PARK, TEXAS 77536-5749
PHONE: 281/479-7798 FAX:281/479-5980
TELCAM, Telecommunications Company of the Americas, Inc.
We hereby consent to the use in the Proxy Statement Pursuant to
Section 14(a) of the Securities Exchange Act of 1934 of our report dated
February 27, 1998, except for note 6, which is dated July 27, 1999, related
to the financial statements of TELCAM, Telecommunications Company of the
Americas, Inc. as of December 31, 1997 and for the two years in the period
then ended.
/s/ Bill Spencer
Bill Spencer
December 27, 1999
