U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
UNITED DIGITAL NETWORK, INC.
(Name of Small Business Issuer in its charter)
Delaware 75-2613588
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18872 MacArthur Boulevard, Suite 300
Irvine, California 92612
(Address of principal executive offices and zip code)
(714) 833-8050
(Issuer's telephone number, including area code)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None
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Securities to be registered under Section 12(g) of the Act:
Common Stock
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(Title of Class)
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained under "Description of Business", "Management's
Discussion and Analysis of Financial Conditions and Results of Operations" and
elsewhere in this Registration Statement on Form 10-SB regarding matters that
are not historical facts are "forward-looking statements", as such term is
defined in the Private Securities Litigation Reform Act of 1995 (promulgated
under the Securities Act of 1933, as amended) and are subject to the safe-harbor
created by that act. Because such forward-looking statements include risks and
uncertainties, actual results may differ materially from those expressed in or
implied by such forward-looking statements. There are several important factors
that could cause actual results to differ materially from those anticipated by
the forward-looking statements contained in such discussions. The Company
undertakes no obligation to release publicly the result of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date of this Registration Statement on Form 10-SB or to
reflect the occurrence of unanticipated events.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
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United Digital Network, Inc., a Delaware corporation (the "Company" or
"United"), is a provider of voice and data long distance services, travelcard
services, international long distance, prepaid calling cards and various other
telecommunication services to residential, small to medium- sized commercial
customers, switchless resellers, agents and wholesale purchasers. The principal
market for its long distance services is the central and southwest United
States. The Company has customers in over 40 states. The Company operates
primarily through its wholly-owned subsidiaries, Answer-Net, Inc. ("ANI"),
Advanced Management Services, Inc. ("AMS"), Digital Network, Inc. ("DNI"), and
CTN-Custom Telecommunications Network of Arizona, Inc. ("CTN"). The Company
offers an array of services designed to afford its customers an integrated
telecommunications solution to their telecommunication needs.
The Company was incorporated in Canada under the British Columbia Company
Act on June 2, 1980 under the name Stag Explorations Ltd. On November 30, 1990,
the Company changed its name to Stag Holdings Ltd., and on February 8, 1993, the
Company changed its name to Unidex Communications Corp. On April 25, 1995, the
Company reincorporated in the United States by filing Articles of Continuance
with the Secretary of State of Wyoming, which allowed the Company to continue
its existence as a Wyoming corporation. Subsequently, the Company merged into
its wholly-owned subsidiary, a Delaware corporation, and continued its existence
as Unidex Communications Corp, a Delaware corporation.
Effective August 9, 1996, the Company changed its name from Unidex
Communications Corp. to United Digital Network, Inc., consolidated its share
capital on the basis of four old shares for one new share, and increased its
authorized capital to 100 million shares of common stock, par value, $0.01 per
share.
The Company's growth has resulted from a two-pronged growth strategy.
First, a direct sales force, complemented by a small but rapidly growing agent
network, has produced significant internal growth during the last two years.
Second, a plan of acquiring selected types of long distance companies has
produced four major acquisitions that have been successfully integrated into the
Company's operations.
Internal Growth
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From fiscal year ending April 30, 1995 through January 31, 1997, the
Company's customer base increased from approximately 2,000 customers to over
5,000 customers nationwide. As a part of the Company's two-pronged growth
strategy, besides acquisitions, the Company's internal growth contributed
significantly to this increase in customers and total revenue. During the eight
months
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from May 1996 to January 1997, internal growth contributed nearly $500,000 in
new monthly revenues. Approximately one-third of this growth came from the
Company's pre-paid calling card product line, with the remainder coming from
revenue increases in agent, affinity group and direct sales customers.
Acquisitions
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In March 1993, the Company acquired AnswerNet, Inc. ("ANI"), a Texas based
company. ANI was a small start-up long distance company in Texas that also
provided various "live-operator" functions such as answering services and third
party customer service to business customers.
In April 1995, for a purchase price of $827,665, the Company acquired
Digital Network, Inc. ("DNI"), a Dallas, Texas based company which provides
telecommunications services to small and medium sized commercial customers in
Texas and Oklahoma. DNI's operations were integrated into United's existing
Dallas base of business. This acquisition brought to the Company a more
sophisticated switching platform, a more efficient and flexible customer-billing
system and its own leased network facilities in the south central United States.
In March 1996, for a purchase price of $3,481,947, United acquired Advanced
Management Services, Inc. ("AMS"), a Phoenix, Arizona based long distance
switchless reseller which has in the past specialized in marketing long distance
services to the motor freight industry. The acquisition of AMS gave the Company
an expanded agent program, a nationwide retail customer base and a long distance
provider in the trucking industry market. AMS provides services to customers in
Arizona and over 40 other states. Prior to the AMS acquisition, most of United's
revenue came from Texas and Oklahoma.
In January 1997, the Company entered into a capital lease agreement with
RealSource, Inc. to lease, with the option to purchase for a nominal amount, the
WorldDial Prepaid Calling Platform, the WorldDial Point-of-Sale Activation
Platform and all equipment necessary for the operation thereof ("WorldDial
Platforms"). The WorldDial technologies, which include a proprietary card- swipe
technology, should give United a distinct competitive advantage in the point of
sale marketplace over many of its competitors in the prepaid card industry.
United has commenced providing services to a large prepaid card marketer which
is expected to produce over $3.5 million in revenues during the next twelve
months.
In January 1997, for a purchase price of $1,400,000, United acquired CTN
Custom Telecommunications Network of Arizona, Inc. ("CTN"), a switch based
reseller located in Phoenix, Arizona. CTN has a commercial customer base and a
complete originating and terminating network in Arizona and New Mexico. This
acquisition affords United the opportunity to integrate CTN's switch based
reseller business into its existing Arizona operations and utilize the acquired
network to lower its existing transmission costs. With the acquisition of CTN,
United's network will extend through Arizona, California, New Mexico, Oklahoma
and Texas.
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Product Offerings
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United provides long-distance voice and data services primarily in the
south central and southwestern United States. The Company offers a broad array
of services designed to afford small and medium-sized commercial clients and on
a limited basis residential customers integrated telecommunications solutions to
their telecommunication needs. From fiscal year ending April 30, 1995 through
January 31, 1997, the Company's customer base increased from approximately 2,000
to over 5,000 customers nationwide.
United operates in Texas, Oklahoma and California under the name Digital
Network, Inc. ("DNI"), in Arizona and in over 42 other states under the name AMS
Long Distance Services ("AMS"), and also in Arizona and New Mexico under the
name CTN-Custom Telecommunications Network of Arizona, Inc. ("CTN"). The
Company's direct sales force targets businesses with monthly telecommunication
expenses within a range of $250 to $10,000. The Company provides these clients
with basic inbound and outbound long distance service as well as travelcard and
international long distance services. The Company is adding prepaid calling
cards, voice mail and Internet services to its product offerings. To complement
these offerings and to be viewed by its clients as a provider of "bundled"
products, United also provides on a limited basis the following services:
Conference Calling, Fax Mail-Box, FAX Broadcast, FAX-on-Demand, Dedicated and
Switched Data Services, and Network Design and Implementation.
The Company's strategy is to provide a broad product line so that its
clients will view United as a one-stop provider of telecommunication services.
The more services a client obtains from the Company, the less susceptible a
client will be expected to switch to one of United's competitors. One of the
Company's strengths is its ability to customize products to fit a customer's
needs. The Company is currently studying various approaches to entering the
local service market and during 1997 is planning to offer local service on a
selective state-by-state basis.
Like many other resellers, United buys bulk long distance services from
various wholesale carriers. Unlike many resellers, however, United also
originates and terminates a majority of its traffic on its own network
throughout Texas, Oklahoma, Arizona and New Mexico. With significant volumes,
this constitutes a lower cost method of routing long distance traffic. With the
CTN acquisition, United obtained an Arizona and New Mexico network and a switch
sharing arrangement on a switch located in Phoenix, Arizona. United's network is
built around its DEX-400 switch located in Dallas. As United continues its
growth, additional switching and network capacity will be added in order to
maintain this low cost advantage. The Company recently entered into a switch-
sharing arrangement for the use of a switch in southern California. However,
substantial new traffic in this market is already making the Company evaluate
the purchase of a switch for the Los Angeles area. A statewide California
network is in the planning stage and should be implemented in the near future.
United's business plan contemplates continuing growth by marketing its
services through four separate channels:
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1. Direct Sales. The Company currently employs direct-sales representatives
in both the Dallas and Phoenix offices. These representatives each carry a
monthly quota for generating new business, and focus on selling to small and
medium-sized commercial accounts. They are supported by telemarketers that set
up appointments for the sales representatives with prospective clients.
2. Agent Sales. The Company uses a nationwide force of independent agents
to sell the Company's services to both residential and commercial accounts. The
independent agents are paid on the basis of a percentage of revenue that is
billed by the clients that they have brought to the Company. In addition to the
existing agent development group, a director of third party marketing was hired
in May 1996 who is focusing on developing agents primarily through affinity
marketing. He has extensive experience in this area and has brought several
groups to the Company including a large Christian affinity program in southern
California.
3. Wholesale Services - Switchless Resellers and Carrier Sales. A
switchless reseller is a non-facilities based long distance company towards whom
United acts as a wholesale provider of long distance services. The switchless
reseller's clients are connected directly to the Company's network. Call detail
records are sent to the reseller at the end of each month, which allows the
reseller to utilize his own billing system in order to bill his clients.
Alternatively, United may provide billing services to the switchless reseller
and, for a fee, will bill the switchless reseller's customers for him. "Carrier
sales" are those minutes other long distance carriers send to United to be
terminated by the Company on its own network which presently covers Texas,
Oklahoma, Arizona, New Mexico and portions of southern California. Although
carrier sales constitute lower margin revenue, the Company's strategy is to have
a base of wholesale clients for expanding its network geographically, which in
turn should provide additional markets for higher margin direct sales and may
ultimately increase margins in the agent base.
4. Prepaid Calling Cards. The agreement with RealSource, Inc. with respect
to the WorldDial Platforms has made prepaid calling cards a recent addition to
the Company's product line. Prepaid calling cards constitute a rapidly growing
market in which the Company now owns a proprietary call processing platform.
This platform should allow the Company to customize features for a wide variety
of calling card, voice-mail, international callback and multi-level marketing
applications.
In addition to continuing to expand the above channels to market, United
intends to focus on several other key areas to ensure the future growth of the
Company. First, the Company must retain its customer base. The replacement of
lost clients is a major expense to the Company and results in lost revenues. The
current industry average of lost clients is three percent per month in a
company's customer base. United is currently at or below that average and
intends to continue to focus on customer service and satisfaction in order to
reduce that number and to enroll new clients.
Second, the Company will continue to explore opportunities for expanding
its product line. Just as the acquisition of the WorldDial Platforms has
expanded the Company's product lines, the Company intends to continue to
acquire, develop and market products and services that meet the
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expanding needs of its clients. These products may include, among others, local
service, cellular service, paging and personal communications services.
Furthermore, the Company intends to continue to search for additional
strategic acquisitions. In addition to its current internal growth, the Company
will seek to accelerate revenue growth, expand its channels of distribution and
further product line extensions through external acquisitions. There can be no
assurance that the Company's expansion of its channels of distribution or its
product line extensions through external acquisitions will be sufficient to
accelerate revenue growth.
The Company currently serves over 5,000 customers nationwide, primarily
located in Texas, Oklahoma, Arizona and California. Current monthly long
distance revenue is approximately $2.5 million, which has grown as follows from
the Company's entrance into the market in 1992:
Long Distance Revenues
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Fiscal Year Ended April 30, 1993 $ 13,000
Fiscal year Ended April 30, 1994 $ 152,000
Fiscal Year Ended April 30, 1995 $1,378,000
Fiscal year Ended April 30, 1996 $8,027,000
For the Three Months Ended July 31, 1996 $5,150,000
For the Three Months Ended October 31, 1996 $5,765,000
For the Three Months Ended January 31, 1997 $5,878,000
Risk Factors
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In evaluating an investment in the Company and its business, potential
investors should carefully consider the following risk factors as well as other
information set forth elsewhere in this Registration Statement which pertain to
the Company.
Net Losses since Inception. Since its inception the Company has had a
history of losses and for the nine months ended January 31, 1997 the Company had
net losses of approximately $678,000. Although the Company will attempt to
attain profitability as its recent and proposed acquisitions are integrated more
fully into the Company's operations, there is no assurance that this will occur
or that the Company will achieve, or be able to sustain, profitable operations.
Need for Additional Capital. The Company needs to continue to enhance and
expand its operations in order to maintain its competitive position, expand its
service offerings and geographic markets and continue to meet the increasing
demands for providing quality service at
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competitive prices. The Company will need to raise additional capital from
public or private equity or debt sources in order to finance its anticipated
growth, including local service expansion and working capital needs. In
addition, the Company may need to raise additional funds in order to take
advantage of unanticipated opportunities, including more rapid expansion or
investments in, or strategic alliances with, companies that are complementary to
the Company's current operations, or to develop new services or otherwise
respond to unanticipated competitive pressures. If additional funds are raised
through the issuance of equity securities, the percentage ownership of the
Company's then current stockholders would be reduced. There can be no assurance
that the Company will be able to raise such capital on satisfactory terms or at
all. If the Company decides to raise additional funds through the incurrence of
debt, the Company would likely become subject to restrictive financial
covenants. In the event that the Company is unable to obtain such additional
capital or is unable to obtain such additional capital on acceptable terms, the
Company may be required to reduce the scope of its presently anticipated
expansion, which could materially and adversely affect the Company's business,
results of operations and financial condition and its ability to compete.
Competition. The long distance telecommunications industry is highly
competitive and affected by the introduction of new services by, and the market
activities of, major industry participants. Competition in the long distance
business is based upon pricing, customer service, billing services and perceived
quality. The Company competes against various national and regional long
distance carriers, the "top tier" carriers being AT&T, MCI and Sprint, among
others. There are numerous companies in the long distance telecommunications
market, many of which are offering essentially the same services as the Company.
Several of the Company's competitors are substantially larger and have longer
operating histories and greater financial, technical and marketing resources
than the Company. The ability of the Company to compete effectively in the
telecommunications industry will depend upon its continued ability to provide
high quality, value-added services at prices generally competitive with, or
lower than, those charged by its competitors.
The Company believes that in order to maintain its competition position,
its pricing must be equal to or less than its competitors. Through the effective
management of its network and through favorable purchasing arrangements with its
vendors, the Company believes that it has maintained competitive pricing and
adequate margins through a period of intense competitive pressures which have
caused significant decreases in pricing. While the Company believes it can
continue to effectively compete in its current markets, there is no assurance
that continued significant rate decreases in the market will not have a
materially adverse effect on the Company's business results of operations and
financial condition.
Various regulatory factors may also impact the Company's competitive
position. Legislation has recently been enacted by Congress which will open up
the long distance market to competition from the seven regional Bell operating
companies ("RBOCs"). While the Company is unable to predict at this time the
impact of this new legislation on the Company's business and prospects, the
entry of these well-capitalized and well-known entities into the long distance
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market could significantly alter the competitive environment in which the
Company operates because of the established relationship the RBOCs have with
their local service customers (and the likelihood that the RBOCs will take
advantage of those relationships), which may make it more difficult for other
providers, such as the Company, to compete to provide long distance services.
Maintenance of Customer Base. Customers are not obligated to purchase any
minimum usage amount and can discontinue service, without penalty, at any time.
There can be no assurance that customers will continue to buy their long
distance telephone service through the Company. In the event that a significant
portion of the Company's customers decide to purchase long distance service
directly from another long distance service provider, there can be no assurance
that the Company will be able to replace its customer base from other sources.
Loss of a significant portion of the Company's customers would have a material
adverse effect on its results of operations and financial condition.
A high level of customer attrition is inherent in the long distance
industry, and the Company's revenues are also affected by such attrition.
Attrition results from a variety of factors including termination of customers
by the Company for non-payment and the initiatives of existing and new
competitors as they engage in, among other things, national advertising
campaigns, telemarketing programs and the issuance of cash or other forms of
incentives. Although the Company is aware of the significance of attrition on
its business, telecommunications providers generally find it difficult to
measure customer attrition in a consistently meaningful manner due to, among
other factors, the wide range of revenues attributable to individual customers,
the fact that service to an individual customer may be provided by more than one
underlying carrier and the variety of reasons for changes in the volume of
service provided to an individual customer.
Dependence on Third Party Transmission Facilities. The Company does not own
all of the transmission facilities needed to complete long distance telephone
calls. Therefore, the Company's operator services, direct dial long distance,
"800" service, wholesale long distance service and international "call-back"
businesses are largely dependent upon the contractual arrangements with
facilities-based carriers for the transmission of calls on a cost-effective
basis. While the Company believes it has ample access to transmission facilities
at competitive rates and expects to continue to have such access in the
foreseeable future, due to the possibility of unforeseen changes in industry
conditions, the continued availability of transmission facilities at historical
rates cannot be assured.
In addition, the Company has entered into buying arrangements with other
carriers for the provision of originating and terminating long distance
services, primarily in those areas where the Company does not have its own
network facilities. Several of these contracts have monthly minimum usage
requirements for the term of the contract and contain penalties if these
minimums are not met. The Company is currently meeting the minimum usage
requirements in its contracts, however, there is no assurance that the Company
will be able to continue meeting these minimum
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usage requirements. If they are not met, the resulting penalties will severely
reduce the Company's gross margin and will negatively impact the Company's
results of operations.
Regulatory Risks. The Company's domestic telephone business is subject to
regulation at the federal level by the Federal Communications Commission ("FCC")
and at the state level by public utility commissions ("PUCs") of the various
states in which the Company operates.
The regulation of the telecommunications industry is changing rapidly, and
the regulatory environment varies substantially from state to state. FCC
regulatory actions have had, and are expected to continue to have, both positive
and negative effects upon the Company. Decisions by the FCC with respect to the
permissible business activities or pricing practices of the Company's dominant
competitors, such as AT&T Communications, Inc. ("AT&T"), may also have an
adverse impact on the Company's costs or otherwise have an adverse effect on the
Company's activities and on any future expansion efforts.
The FCC is currently considering action on various proposals that may have
an impact on the Company. Recent developments include consideration by Congress
of legislation that would modify the AT&T Divestiture Decree restrictions on the
provision of long distance service between Local Access and Transport Areas
("LATAs"), as defined in the AT&T Divestiture Decree, by the local exchange
carriers owned by the RBOCs, as discussed below; consideration by the Justice
Department and courts of related RBOC requests for waiver of the AT&T
Divestiture Decree to permit them to provide significant interLATA services
(such as service outside their respective regions, and in other circumstances)
or for the elimination of the AT&T Divestiture Decree altogether; action by the
FCC or PUCs changing access rates charged by local exchange carriers ("LECs")
and making other related changes to access and interconnection policies, certain
of which could have material adverse consequences for the Company; related FCC
and state regulatory proceedings considering additional deregulation of LEC
access pricing; a pending FCC rulemaking on "billed party preference" that could
adversely affect the Company's provision of operator services; and various
legislative and regulatory proceedings that could result in new local exchange
competition.
The Company will need to comply with the applicable laws and regulatory
requirements and obtain the approval of the regulatory authority of each state
and country in which it provides or proposes to provide telecommunications
services. The laws and regulatory requirements vary in these jurisdictions. Some
have substantially deregulated various communications services, while other
jurisdictions have maintained strict regulatory regimes. The application
procedure can be time-consuming and costly, and terms of licenses vary for
different jurisdictions.
Adverse Effect of Service Interruption. The Company's business requires
that transmission and switching facilities and other equipment be operational 24
hours per day, 365 days per year. Long distance telephone companies, including
the Company, have on occasion and may in the future experience temporary service
interruptions or equipment failures, in some cases resulting from causes beyond
their control. Any such event experienced by the Company would
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impair the Company's ability to service its customers and could have a material
adverse effect on the Company's business.
Potential Decline in Pricing of Long Distance Services. Although the basic
rates of the three largest long distance carriers -- AT&T, MCI and Sprint --
have consistently increased over the past three years and remained unchanged
through the third quarter of 1996. AT&T and other carriers have announced new
price plans aimed at residential customers with significantly simplified rate
structures, which may have the impact of lowering overall long distance prices.
There can be no assurance that AT&T or other carriers will not make similar
offerings available to small and medium sized businesses that the Company
serves. Accordingly, a reduction in long distance prices still may have a
material adverse impact on the Company's profitability.
Adverse Effect of Rapid Technological Change and Service. The
telecommunications industry has been characterized by rapid technological
change, frequent new service introductions and evolving industry standards. The
Company believes that its future success will depend on its ability to
anticipate such changes, and to offer on a timely basis services that meet these
evolving standards. There can be no assurance that the Company will have
sufficient resources to make necessary investments or to introduce new services
that would satisfy an expanded range of customer needs.
Conflicts of Interest. Certain directors and officers of the Company or its
subsidiaries may also be directors and/or officers of other companies whose
principal business is similar to that of the Company. It is possible, therefore,
that a conflict may arise between their duties as directors or officers of the
Company or its subsidiaries and their duties as directors or officers of such
other companies.
All conflicts will be disclosed by such directors and officers in
accordance with applicable law, and they will govern themselves in respect
thereof to the best of their abilities in accordance with the obligations
imposed upon them by law.
Acquisition Integration. A substantial portion of the Company's growth in
recent years has resulted from acquisitions, which involve operational and
financial risks. Operational risks include the possibility that an acquisition
does not ultimately provide the benefits originally anticipated by management of
the acquiror, while the acquiror continues to incur operating expenses to
provide the services formerly provided by the acquired company. Financial risks
involve the incurrence of indebtedness by the acquiror in order to effect the
acquisition and the consequent need to service the indebtedness. Although the
Company believes that it will be able to integrate successfully the business and
operations of recent acquisitions, there can be no assurance that the Company
will be able to accomplish such integration with the Company's operations
quickly, or that the efficiencies and growth opportunities anticipated as a
result of the combination of the Company and the acquired entities will
materialize.
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Expansion Policy. The Company is committed to an expansion policy of
acquiring other long distance and telecommunications companies for cash, debt
issued by the Company to the sellers of such companies and issuance of the
Company's common stock. The Company may be required to raise additional capital
and continue to issue common stock to facilitate its expansion policy. There can
be no assurance that funding will be available and as the Company issues its
common stock for cash or in connection with an acquisition, existing
shareholders will face dilution of their existing investment in the Company.
Risks of Growth and Expansion. There can be no assurance that the Company
will be able to add service or expand its markets at the rate presently planned
by the Company or that the existing regulatory barriers can be complied with or
will be reduced or eliminated. The Company's anticipated growth may place a
significant strain on the Company's administrative, operational and financial
resources and increase demands on its systems and controls. As the Company
increases its service offerings and expands its targeted markets, there will be
additional demands on the Company's customer support, sales and marketing and
administrative resources and network infrastructure. There can be no assurance
that the Company's operating and financial control systems and infrastructure
will be adequate to maintain and effectively monitor future growth. The failure
to continue to upgrade the administrative, operating and financial control
systems or the emergence of unexpected expansion difficulties could materially
adversely affect the Company.
Dependence on Effective Information Systems. To complete its billing, the
Company will have to record and process massive amounts of data quickly and
accurately. The Company is operating on the management information systems that
were being used by the companies which the Company acquired. The Company
believes that the successful implementation and integration of new information
systems is required for its growth, its ability to monitor costs, to bill
customers and to achieve operating efficiencies. There can be no assurance that
the Company will be able to finance the cost of these systems or will not
encounter delays or cost-overruns or suffer adverse consequences in implementing
and upgrading these systems. In addition, as the Company's suppliers revise and
upgrade their hardware, software and equipment technology, there can be no
assurance that the Company will not encounter difficulties in integrating the
new technology into the Company's business or that the new systems will be
appropriate for the Company's business.
Dependence On Key Personnel. The Company's success depends to a significant
degree upon the continued contributions of its management team and other key
technical, marketing and sales personnel. While the Company has entered into
employment agreements with John Snedegar, Walter Rusak and Dale Christensen, the
Company's employees may voluntarily terminate their employment with the Company
at any time. In addition, until the Company has implemented the new management
information systems and has trained its employees on such systems, the Company
will remain dependent on the technical personnel who developed the present
management information systems. Competition for qualified employees and
personnel in the telecommunications industry is intense and, from time to time,
there are a limited number of
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persons with knowledge of and experience in particular sectors of the
telecommunications industry.
The Company's success also depends on its ability to attract and retain
qualified management, marketing, technical and sales executives and personnel.
The process of locating such personnel with the combination of skills and
attributes required to carry out the Company's strategies is often lengthy. The
loss of the services of key personnel, including John Snedegar, Walter Rusak and
Dale Christensen, or the inability to attract additional qualified personnel,
could have a material adverse effect on the Company's results of operations,
development efforts and ability to expand. There can be no assurance that the
Company will be successful in attracting and retaining such executives and
personnel. Any such event could have a material adverse effect on the Company.
Potential Volatility Of Stock Price. The market price of the Common Stock
following this offering may be highly volatile. Factors such as variations in
the Company's revenue, earnings and cash flow, the difference between the
Company's actual results and the results expected by investors and analysts and
announcements of new service offerings, marketing plans or price reductions by
the Company or its competitors could cause the market price of the Common Stock
to fluctuate substantially. In addition, the stock markets recently have
experienced significant price and volume fluctuations that particularly have
affected telecommunications companies and resulted in changes in the market
prices of the stocks of many companies that have not been directly related to
the operating performance of those companies. Such market fluctuations may
materially adversely affect the market price of the Common Stock.
Release of Escrow Shares. Pursuant to an Escrow Agreement dated October 21,
1993, among Montreal Trust Company of Canada, the Company and the shareholders
party thereto (the "Escrow Agreement"), 187,500 shares of Common Stock were
placed in escrow in accordance with the Securities Act of British Columbia. The
shares are being held in escrow may be released from escrow if the Company
achieves certain cumulative cash flow levels, based on the Company's annual
financial statements. The release, and subsequent sale, of all or substantially
all of these shares may materially adversely affect the market price of the
Common Stock. The Escrow Agreement expires on December 13, 1998. If the terms
for the release of the shares are not achieved, the shares will be cancelled.
Limited Public Market For Common Stock. The Common Stock is traded on the
Vancouver Stock Exchange. The price on the Vancouver Stock Exchange has
fluctuated during April 1997 from CDN $2.00 to CDN $2.35. Trading has fluctuated
on a daily basis from a one day high of 55,470 shares to a low of 1,000 shares
with a daily average of approximately 2,000 to 4,000 shares.
Dividend Policy. The Company has never paid cash dividends on its Common
Stock. The Board of Directors does not anticipate paying cash dividends in the
foreseeable future as it intends to retain future earnings to finance the growth
of the business. The payment of future cash
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dividends will depend on such factors as earnings levels, anticipated capital
requirements, the operating and financial conditions of the Company and other
factors deemed relevant by the Board of Directors.
Concentration of Stock Ownership. As of January 31, 1997, the present
directors and executive officers of the Company beneficially own approximately
17.9% of the Company's Common Stock. The Company's President, John Snedegar,
possesses the right to vote approximately 12.8% of the Company's Common Stock as
of such date. As a result, these persons will be able to exercise significant
influence over all matters requiring stockholder approval, including the ability
to elect the Company's entire Board of Directors and to approve significant
corporate transactions. Such concentration of ownership may have the effect of
delaying or preventing a change in control of the Company.
Government Regulation
- - ---------------------
The terms and conditions under which the Company provides telecommunication
service are subject to government regulation. The Federal Communications
Commission ("FCC") administers the federal laws and regulations which apply to
interstate and international telecommunications, and public utility commissions
("PUCs") administer on the state level the laws which apply to intrastate
telecommunications.
Federal Regulations
The Company is classified by the FCC as a non-dominant carrier. Among
domestic carriers, only the local exchange carriers ("LECs") are classified as
dominant carriers. AT&T has recently been reclassified as a non-dominant
carrier. Therefore, certain pricing restrictions and regulatory oversight that
did apply to AT&T may be eliminated, which would make it easier for AT&T to more
aggressively compete directly with the Company for low volume long distance
customers. International carriers may also be classified as dominant if they are
affiliated with foreign carriers with substantial market share. The FCC has
generally not chosen to exercise its statutory power to regulate the charges,
practices, classifications or regulations of non-dominant carriers, although it
has the power to do so. The FCC retains the jurisdiction to act upon complaints
against any common carrier for failure to comply with its statutory obligations.
The FCC also has the authority to impose more stringent regulatory requirements
on the Company and change its regulatory classification.
The Company has, or is applying for, all necessary authority to provide
domestic interstate telecommunication services. The FCC generally presumes
compliance by resellers with many of the regulations imposed on common carriers
of interstate telecommunication services, including most reporting, accounting
and record keeping obligations.
Dominant and non-dominant carriers must maintain tariffs on file with the
FCC. Although the tariffs of non-dominant carriers, and the rates and charges
they specify, are subject to FCC
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<PAGE>
review, they are presumed to be lawful and are seldom contested. Until recently,
domestic non- dominant carriers were permitted by the FCC to file tariffs with a
"reasonable range of rates" instead of detailed schedules of individual charges
required of dominant carriers. In reliance on the FCC's past practice of
allowing relaxed tariff-filing requirements for non-dominant domestic carriers,
the Company and many of its competitors did not maintain detailed rate schedules
for domestic offerings in their tariffs. The Company could be held liable for
damages for its failure to do so, although it believes that such an outcome is
highly unlikely and would not have a material adverse effect on it. As a
domestic non-dominant carrier, the Company is permitted to make tariff filings
on a single day's notice and without cost support to justify specific rates.
Resale carriers are also subject to a variety of miscellaneous regulations that,
for instance, govern the documentation and verifications necessary to change a
consumer's long distance carrier, limit the use of "800" numbers for
pay-per-call services, require disclosure of operator services and restrict
interlocking directors and management.
To date, the FCC has exercised its regulatory authority to control rates
only with respect to the rates of dominant carriers, and it has increasingly
relaxed its control in this area. As an example, AT&T was recently reclassified
as non-dominant because the FCC believed that adequate competition existed.
Similarly, the FCC has required reduced total transport charges (i.e., the fee
for use of the LEC transmission facilities connecting the LEC's central office
and the interexchange carrier's access point). In addition, the LECs are being
afforded a degree of pricing flexibility in setting access charges where
adequate competition exists.
The regional Bell operating companies ("RBOCs") are currently prohibited
from providing interexchange telecommunication services between Local Access and
Transport Areas ("LATAs"). Several motions to remove or modify this restriction,
in whole or in part, are currently pending before the United States District
Court for the District of Columbia. Many industry observers believe that
legislation will be enacted which will authorize RBOCs to provide inter-LATA
interexchange telecommunication services, and separate bills to this effect have
been passed by the House of Representative and Senate in 1995. The separate
bills will be considered by a conference of the House of Representatives and
Senate. Such legislation, if passed, may include safeguards against
anti-competitive conduct. Anti-competitive conduct could result from an RBOC
taking advantage of its access to all customers on its existing network as well
as its potentially lower costs related to and control of the facilities used for
termination and origination of calls within its territory. The Company is unable
to predict whether any particular form of legislation will be enacted and, if
enacted, the impact that any such legislation would have on the Company's
business and prospects.
State Regulations
The Company's intrastate long distance telecommunications operations are
also subject to various state laws and regulations, including prior
certification, notification and registration requirements. Currently, the
Company is certified and tariffed, or is applying where required, to provide
intrastate service to customers throughout the United States except for five
states. The
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<PAGE>
Company is subject to varying levels of regulation in the states in which it
provides intrastate telecommunications. The vast majority of the states require
the Company to apply for certification to provide telecommunication services, or
at least register or be found exempt from regulation, before commencing
intrastate service. The vast majority of states also require the Company 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, assignments of carrier assets,
including customer bases, carrier stock offerings and incurrence by carriers of
significant debt obligations. Certificates of authority can generally be
conditioned, modified, cancelled, 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. In certain states,
prior regulatory approval may be required for acquisitions of telecommunications
operations.
The regulation of the telecommunications industry is changing rapidly and
the regulatory environment varies substantially from state to state. FCC
regulatory actions have had, and are expected to continue to have, both positive
and negative effects upon the Company. Decisions by dominant competitors, such
as AT&T, may also have an adverse impact on the Company's costs or otherwise
have an adverse effect on the Company's activities and on future expansion
efforts.
The FCC is currently considering action on various proposals that may have
an impact on the Company. Recent developments include consideration by Congress
of legislation that would modify the AT&T Divestiture Decree restrictions on the
provision of long distance service between Local Access and Transport Areas
("LATAs"), as defined in the AT&T Divestiture decree, by the local exchange
carriers owned by the RBOCs; consideration by the Justice Department and the
courts of related RBOC requests for waiver of the AT&T Divestiture Decree to
permit them to provide significant interLATA services (such as service outside
their respective regions, and in other circumstances) or for the elimination of
the AT&T Divestiture Decree altogether; action by the FCC or PUCs changing
access rates charged by local exchange carriers ("LECs") and making other
related changes to access and interconnection policies, certain of which could
have material adverse consequences for the Company; related FCC and state
regulatory proceedings considering additional deregulation of LEC access
pricing; a pending FCC rulemaking on "billed party preference" that could
adversely affect the Company's provision of operator services; and various
legislative proposals and regulatory proceedings that could result in new local
exchange competition.
The Company will have to comply with the applicable laws and regulatory
requirements and obtain the approval of the regulatory authority of each state
and country in which it provides or proposes to provide telecommunications
services. The laws and regulations in these jurisdictions vary, as some of them
have maintained strict regulatory regimes, while others have deregulated various
communications services. The application procedure can be time-consuming and
costly, and terms of licenses vary for different jurisdictions.
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<PAGE>
Industry Background
- - -------------------
According to FCC estimates, revenues of the U.S. long distance
telecommunications industry were approximately $72.8 billion U.S. in 1995 with
AT&T, MCI and Sprint being the dominant providers in this market. The industry
has grown at a rate of 5.3% annually over the last several years. However, the
second and third tier long distance companies, which includes the Company, have
grown in the aggregate at over five times the industry growth rate by offering
lower prices and better service to focused market niches. This is due in part to
the fact that while the quality of service tends to be consistent throughout the
industry, the smaller companies simply market more effectively because they stay
"closer to the customer".
The long distance telecommunications industry has been principally shaped
by a court decree between AT&T and the United States Department of Justice,
known as the Modification of Final Judgement (the "Consent Decree") that in 1984
required the divestiture by AT&T of its 22 Bell operating companies and divided
the country into some 200 LATAs. The 22 operating companies were combined into
seven RBOCs which were given the right to provide local telephone service, local
access service to long distance carriers and intra-LATA service (service within
LATAs), but were prohibited from providing inter-LATA service (service between
LATAs). The right to provide inter-LATA service was maintained by AT&T and other
carriers.
To encourage the development of competition in the long distance market,
the Consent Decree and the FCC require most local exchange carriers ("LECs") to
provide all carriers with access to local exchange services that is "equal in
type, quality and price" to that provided to AT&T and with the opportunity to be
selected by customers as their preferred long distance carrier. These so-called
"equal access" and related provisions are intended to prevent preferential
treatment of AT&T.
Regulatory, judicial and technological factors have helped to create the
foundation for smaller companies to emerge as competitive alternatives to AT&T,
MCI, Sprint and WorldCom for long distance telecommunication services. The FCC
requires that AT&T not restrict the resale of its services, and the Consent
Decree and regulatory proceedings have ensured that access to the LEC networks
is, in most cases, available to all long distance carriers. In recent years,
national and regional network providers have substantially upgraded the quality
and capacity of their long distance networks.
Long distance companies which have their own transmission facilities and
switches, such as AT&T, are referred to as facilities based carriers. Some
carriers are switched based "resellers" meaning that they have at least one
switch to direct their long distance traffic. Other companies, referred to as
"switchless resellers" have neither switches nor transmission facilities. Both
"switched" and "switchless" resellers may depend on facilities based carriers
for some or all of the services required to complete their customers calls.
- 16 -
<PAGE>
A typical inter-LATA long distance telephone call begins with a LEC
transmitting the call by means of its local transmission facilities and
switching equipment to the switch of a long distance company, whose switch
routes the call from that LATA over transmission facilities to the other LATA
where its switches then route the call to the LEC serving the area where the
recipient of the call is located. The LEC then completes the call over its local
facilities.
For each long distance call, the originating LEC receives an access fee
from the facilities based long distance carrier and the terminating LEC receives
an egress fee from the facilities based long distance carrier. The long distance
provider builds this fee into its cost structure and bills and collects from the
end user for the call.
Employees
- - ---------
The Company has 59 employees, of which 6 are full-time direct-sales
representatives.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- - ---------------------
Since its entry into the telecommunications business in 1992, United's long
distance revenues have grown from $13,000 in 1992 to anticipated revenue of
approximately $24 million for the current fiscal year ending April 30, 1997. The
Company's long distance revenue has shown an increase from $1.4 million in the
year ended April 30, 1995 to $8.0 million for the year ended April 30, 1996, an
approximate six-fold increase. Revenues for the nine months ended January 31,
1997 were $16.8 million as compared to $5.1 million for the nine months ended
January 31, 1996, an over three-fold increase. The current fiscal year projected
revenue is approximately $24 million, an approximate three-fold increase from
revenue of $8.0 million in the most recent fiscal year.
Despite the recent rapid growth in revenues, the Company has historically
reported losses. However, the Company's losses have been narrowing and for the
most recent fiscal year ended April 30, 1996, the Company had a net loss of
$1,662,000, which is an improvement from the loss of $2,073,000 for the year
ended April 30, 1995. For the nine months ended January 31, 1997, the Company's
results continued to show improvement with a loss of $678,000 as compared to a
loss of $1,369,000 for the nine months ended January 31, 1996. This 50%
improvement in net income was achieved through significant growth in the
Company's revenues, a corresponding growth in gross profit, and a reduction in
the Company's operating expenses as a percentage of revenue.
The Company's gross profit increased by 172% to $3,485,000 in the nine
months ended January 31, 1997, as compared to a gross profit of $1,283,000 for
the nine months ended January
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<PAGE>
31, 1996. Selling, general and administrative expenses ("SG&A expenses") were
$3,110,000 or 19% of revenue for the nine months ended January 31, 1997. This is
a significant improvement over the results for the nine months ended January 31,
1996 during which SG&A expenses were $2,108,000 or 41% of revenues. Even though
the Company plans to continue incurring significant selling costs, SG&A expenses
should continue to decrease as a percentage of total revenue.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
has also shown significant improvement. EBITDA was ($971,000) and ($1,714,000)
for the fiscal years ended April 30, 1996 and 1995, respectively. For the nine
months ended January 31, 1997 and 1996, EBITDA was $443,000 and ($825,000),
respectively.
Interest expenses have increased substantially, from $105,000 in the nine
months ended January 31, 1996 to $447,000 in the nine months ended January 31,
1997. Two factors have contributed to this increase. First, in July 1996, the
Company entered into an accounts receivable financing arrangement which has
incurred approximately $100,000 in interest expense during the seven months this
facility has been in place. Second, a majority of the purchase price for the
March 1996 AMS acquisition and the January 1997 CTN acquisition were financed
through the issuance of notes payable to the sellers. The interest expense
related to these two purchases is the primary contributor to the increased
interest expense during the nine months ended January 31, 1997.
Depreciation and amortization expenses increased from $439,000 to $674,000
during the nine months ended January 31, 1996 and 1997, respectively. This
increase results from the amortization of the goodwill and customer bases
associated with the AMS and CTN acquisitions.
Liquidity and Capital Resources
- - -------------------------------
At January 31, 1997, the Company had $263,000 cash on hand and a negative
working capital of $3,880,000, which is a decrease in working capital of
$2,018,000 when compared to negative working capital of $1,862,000 at January
31, 1996. This decrease in working capital results from negative working capital
assumed in the March 1996 AMS purchase and the addition of the current portion
of the notes issued in the AMS and CTN purchases.
The Company has historically operated with small cash balances and negative
working capital. Funds have been raised, as needed, through private placements
of the Company's common stock. In the years ended April 30, 1996 and 1995,
$3,237,000 and $2,133,000, respectively, was raised through the issuance of
common stock. At January 31, 1997, the Company had insufficient funds to meet
obligations coming due, however, in March 1997 the Company received gross
proceeds of $675,600 through the issuance of 422,250 shares in a private
placement. Also in March 1997, $264,389 was received from the issuance of
155,582 shares resulting from the exercise of warrants that were maturing. The
company's strategy has been to not dilute shareholder ownership through the
unnecessary issuance of excess shares. The
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<PAGE>
Company will continue to issue shares as required and believes that it will
continue to have access to the funds necessary to meet its obligations as they
become due. These funds will be raised through the issuance of additional
shares, through the expansion of the accounts receivable financing facility and
through the issuance of additional debt. Funds may be required to finance
additional acquisitions, expand the Company's existing sales effort, fund future
losses, meet working capital requirements, expand the Company's network, and
purchase additional switching systems, computer equipment and software systems.
On January 1, 1997, the Company acquired CTN for a total purchase price of
$1,400,000. The purchase was accomplished with the payment of $350,000 at
closing and the issuance of $1,050,000 in notes maturing over the next two
years. The Company plans to continue searching for acquisitions that can be done
on terms similar to the CTN acquisition. Only one month of CTN's Operations are
included in the operating results for the nine months ended January 31, 1997.
The achievement of a positive EBITDA of $443,000 for the nine months ended
January 31, 1997 marks a significant point in the Company's history. For the
first time the Company's operations were producing cash rather than consuming
cash. The Company's last three acquisitions have all been accounted for under
generally accepted accounting principles ("GAAP") as purchases, which has
significantly increased depreciation expense. Also, while the Company has
attempted to minimize the shares issued for these acquisitions, the significant
amount of owner financing has produced a large increase in interest expense.
Both the increase in amortization and the increase in interest expense, combined
with the ongoing aggressive sales effort will cause the Company to continue to
report net losses for a period of time. However, the Company anticipates that
these losses will continue to decrease and positive EBITDA will continue as the
Company continues the successful growth of its revenue base.
ITEM 3. DESCRIPTION OF PROPERTY
The Company and its subsidiaries lease each of their principal executive
offices. The Company does not own all of the transmission facilities needed to
complete long distance telephone calls. Other than the switching facility in
Dallas, the Company leases ports on switching facilities in Los Angeles and
Phoenix. Therefore, the Company's operator services, direct dial long distance,
"800" service, wholesale long distance service and international business are
largely dependent upon the contractual arrangement with facilities-based
carriers for the transmission of calls on a cost-effective basis. The Company
has contractual arrangements with a carrier for the use of its switch and
transmission facilities in Los Angeles and Phoenix. The term of the Los Angeles
contract is on a month-to-month basis and the Phoenix contract is one year,
expiring on December 31, 1997.
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<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the number of and percentage of outstanding
shares of Common Stock owned by officers, directors and principal shareholders
of the Company as of January 31, 1997. See "Description of Business - Risk
Factors."
<TABLE>
Name and Address Shares of Common Stock Percent of Class
---------------- ---------------------- ----------------
<S> <C> <C>
John R. Snedegar 674,0551 12.8%
18872 MacArthur Boulevard, Suite 300
Irvine, California 92612
Dale W. Christensen 139,3172 2.7%
1431 Greenway Drive, Suite 640
Irving, Texas 75038
Roger W. Wiese 125,000 2.4%
3926 Amy Avenue
Garland, Texas 75043
All Directors and Executive Officers 938,372 17.9%
as a Group
</TABLE>
- - ------------------------------
1 Includes 606,660 shares of Common Stock owned by a trust for the benefit of
Mr. Snedegar's family, under which Mr. Snedegar is a potential beneficiary
and the sole trustee. In addition, Mr. Snedegar is a potential beneficiary
and the sole trustee under the Snedegar Revocable Living Trust ("SRLT").
SRLT, in turn, owns 100% of the issued shares of Norexco Petroleum Corp.
("Norexco") which in turn owns 100% of the issued shares of Avalon
Management Corp. ("Avalon"). Avalon is the general partner of and owns 25%
of a limited partnership which owns 269,580 shares of the Company. As a
result, Mr. Snedegar has control and direction over these shares and
beneficially owns 25% of these shares which is reflected in the 674,055
shares shown in the above table. Does not include, however, share purchase
warrants to purchase 117,105 shares of Common Stock owned by Access
Financial LP ("Access"); warrants to purchase 82,000 shares, owned by SRLT;
and warrants to purchase 49,391 shares, owned by Norexco Petroleum Corp.
("Norexco"). SRLT owns 100% of Norexco and Access. Includes 250,000 shares
of Common Stock held pursuant to an Escrow Agreement dated October 21, 1993
among Montreal Trust Company of Canada, the Company and the shareholders
named therein.
2 Includes 37,500 shares of Common Stock held pursuant to an Escrow Agreement
dated October 21, 1993 among Montreal Trust Company of Canada, the Company
and the shareholders named therein.
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<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
Name Age Position
---- --- --------
John R. Snedegar 48 President and a Director of
the Company since 1990
Dale W. Christensen 44 Chief Operating Officer and
Chief Financial Officer of the
Company since January 26,
1996
Walter J. Rusak 48 Chief Technical Officer of
the Company since
December 1, 1996
Donald H. Sledge 56 Director and Chairman of
the Board of Directors of
the Company since January
26, 1996
Gordon Hutchins, Jr. 48 Director of the Company
since May 1995
Janine Thomas 42 Director and Secretary of
the Company since October
22, 1992
Ennis Rushton 39 Director of the Company
since March 1996
and President of AMS from
1991 through March 1996
Roger W. Wiese 47 Director of the Company
since 1995.
John R. Snedegar, President. Mr. Snedegar, 48, has been the President of
United since 1990. Prior to his involvement with United, Mr. Snedegar was the
President and CEO of AmeriTel Management, Inc., a California based provider of
long distance telecommunications and management services, whose stock was traded
on the Vancouver Stock Exchange. In May 1992, Mr. Snedegar led AmeriTel through
the acquisition of West Coast Telecommunications, Inc., forming WCT
Communications. AmeriTel was moved from the Vancouver Stock Exchange to
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<PAGE>
NASDAQ. Mr. Snedegar served on the Board of Directors of this $160 million
annual revenue carrier until its sale to Frontier Long Distance in early 1995.
In addition to his extensive experience in telecommunications, Mr. Snedegar
has been involved in the oil and gas business, land development and mineral
exploration since 1976. He was a member of the first Presidential Trade
Consortium to visit mainland China in 1972 and was among the first to implement
trade activities with China. Educated in the United States and Europe with an
emphasis on business, economics and journalism, Mr. Snedegar has wide experience
in both finance and acquisitions. In addition to his responsibilities with
United, he is also a director for StarBase Corporation, a California-based
software development company which trades on NASDAQ, and is also a director of
Star Telecommunications, Inc., a long distance carrier specializing in
international services. Mr. Snedegar also serves as President of Kendall Venture
Funding, Ltd., a reporting company in Alberta, Canada.
Dale W. Christensen, Chief Operating Officer and Chief Financial Officer.
Mr. Christensen, 44, co-founded ANI Communications in February 1992, and joined
United upon its acquisition of ANI later that same year. Mr. Christensen was the
Controller of International Telecharge, Inc. ("ITI"), a $200 million annual
revenue, American Stock Exchange listed telecommunications company that provided
alternative operator services primarily to the payphone and hospitality markets.
Prior to joining ITI, Mr. Christensen spent five years with Foreland
Corporation, a Utah based oil and gas exploration company that he helped found
and take public in 1984. Until 1983, Mr. Christensen was employed as the
Accounting Manager with Satelco, Inc., a long distance telephone company located
in San Antonio, Texas, which he helped to take public in 1983. Prior to that,
Mr. Christensen spent four years with GTE Corporation in various financial
positions. Mr. Christensen is a graduate of Brigham Young University and is a
Certified Public Accountant.
Walter J. Rusak, Chief Technical Officer. Mr. Rusak, 48, holds the degrees
of Bachelor of Science-Electrical Engineering (1970) and Master of Business
Administration (1975) from the State University of New York at Buffalo. He is a
Professional Engineer with over twenty years of engineering and operations
experience in telecommunications. He joined United as Chief Technical Officer on
December 1, 1996.
From 1970 to 1985, he held various engineering and other positions with New
York Telephone Company, American Telephone and Telegraph Company, Southwestern
Bell Telephone Company and LDX NET, Inc. From 1985 to 1989, he held the
positions of Director of Network Development and, subsequently, Vice
President-Engineering of Telecom*USA, Inc. of Atlanta, Georgia. His
responsibilities included network engineering and planning, network provisioning
and various special projects. From 1989 to 1991, he was Director of Domestic
Network Engineering at MCI Telecommunications, Corp., where he had complete
responsibility for switched network provisioning, switched network routing,
facilities provisioning and facilities management.
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<PAGE>
From 1991 to 1995, he was Senior Vice President Operations for U.S. Long
Distance Inc., where he had total responsibility for that company's 1+ and
operator services network. He was also responsible for network
engineering/operations, CPE installation maintenance, operator center management
and network planning/optimization. Under his direction, that company's network
expanded from the Southwest region into the Pacific Northwest and California
markets.
He was most recently Senior Vice President and General Manager for
California for ICG Telecom Group, Inc., where he had complete profit and loss
responsibility for ICG's Competitive Local Exchange Carrier Operations in
California.
Donald H. Sledge, Chairman of the Board of Directors. Mr. Sledge, 56, has
been involved in the development of telecommunication businesses both in the
United States and overseas. Most recently, Mr. Sledge served as President and
Chief Operating Officer of WCT Communications ("WCT"). Mr. Sledge successfully
guided WCT through a difficult period resulting in the sale of WCT to Frontier
Communications. At the time of the sale, WCT was a long distance carrier with
switches in seven cities and annual revenues of $160 million. Mr. Sledge is
currently Vice Chairman and CEO of TeleHub Communications Corp., a privately
held telecommunications company. Prior to joining WCT, Mr. Sledge worked in Hong
Kong as Head of Operations for New T&T, a wholly-owned subsidiary of Wharf
Holdings. From 1988 to 1992, Mr. Sledge was involved in the privatization of
Telecom New Zealand, first as Managing Director of Telecom Auckland and
ultimately as Chairman and Chief Executive Officer of Telecom New Zealand
International. Mr. Sledge served as a member of the Management Committee from
1988 to 1992. Mr. Sledge also served as Chairman, President and CEO of Megaphone
International, Inc., a NASDAQ listed company providing audio text services in
the U.S. and Great Britain. For 20 years, Mr. Sledge was employed in various
capacities by Pacific Telesis, serving as President and CEO for Pacific Telesis
International from 1983 to 1986.
Gordon Hutchins, Jr., Director. Mr. Hutchins, 48, is a nationally
recognized authority on the subject of competitive telecommunications services.
His McLean, Virginia, based management consulting firm, GH Associates, has
consulted to a wide variety of both domestic and international
telecommunications companies. Prior to founding GH Associates in early 1989, Mr.
Hutchins served as President and CEO of Institutional Communications Company
("ICC"), a Washington, D.C., based competitive access provider. Before joining
ICC, Mr. Hutchins was associated with LDX NET, an intercity fiber optic network
company headquartered in St. Louis, Missouri. A founder of LDX NET, he served as
Executive Vice President and Chief Operating Officer from 1984 to 1986 and Chief
Executive Officer from 1986 to 1987. In 1987, Mr. Hutchins helped orchestrate
the merger of LDX NET and WilTel and, following the merger, served as Senior
Vice President, Sales and Marketing, of the new company. Mr. Hutchins is a
former board member of the Telecommunications Resellers Association and a
founder and former Vice Chairman of its predecessor organization, the
Telecommunications Marketing Association. He has also served three terms as a
Director of the Competitive Telecommunications Association and two terms as a
Director of the Association for Local Telecommunications Service. Mr.
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<PAGE>
Hutchins holds a BSEE degree from the University of Massachusetts and a Master
of Business Administration from the University of Dallas.
Janine Thomas, Director. Ms. Thomas, 42, has been a director of the Company
since 1992. She holds an LL.B. (1977) from the University of Sydney, Australia.
Ms. Thomas is a lawyer who has practiced as a sole practitioner in British
Columbia since 1984. Prior to that, she was an associate at Davis and Company, a
Vancouver, British Columbia, law firm. Her primary focus is securities law with
an emphasis on venture capital. She also serves as a director of Kendall Venture
Funding Ltd., a reporting company in Alberta, Canada.
Ennis Rushton, Director. Mr. Rushton founded Advanced Management Services,
Inc., in 1992 and was its owner until its acquisition by United in March 1996.
Mr. Rushton has many years of experience in the trucking industry, a factor
which led to AMS specializing in providing telecommunications services to that
particular industry.
Roger W. Wiese, Director. Prior to its acquisition by United in early 1995,
Mr. Wiese, 47, was an owner and president of Digital Network, Inc. ("DNI"). Mr.
Wiese was one of the founders of DNI in 1982. As President of DNI, his primary
responsibilities were in the area of billing, network management and switching
technology. Mr. Wiese was also a founder of Texnet, Inc. ("Texnet"), in 1985.
Texnet was a Texas-based provider of long distance network services. He was also
a founder of Telesoft, Inc., which changed its name in 1989 to Highland Lakes
Software, Inc., a company which develops and sells billing, engineering and
administrative software.
All directors hold office until the next annual meeting of shareholders or
until their successors have been duly elected or qualified or until his earlier
death, resignation or removal. Executive officers of the Company are appointed
by and serve at the discretion of the Board of Directors.
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<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The following table shows the compensation paid to the Company's President
by the Company for the fiscal years noted.
Summary Compensation Table
Annual Compensation
-----------------------------------------
Name and Fiscal
Principal Position Year Salary Bonus
------------------ ---- ------ -----
John R. Snedegar 1997 $118,019.14 $25,000
1996 $ - 0 - $ - 0 -
1995 $ - 0 - $ - 0 -
Compensation of Directors
- - -------------------------
Standard Arrangements
The members of the Board of Directors are not compensated in such capacity.
However, the Board of Directors may, by resolution, reimburse directors for
out-of-pocket expenses incurred in their capacity as directors of the Company.
Other Arrangements
Donald Sledge is covered by the Company's health and dental insurance plan,
and the Company reimburses the annual costs of his life insurance policy.
On April 27, 1995, the Company issued two promissory notes to Roger Wiese
in connection with the acquisition of Digital Network, Inc. The promissory notes
are for the principal amounts of $106,912.33 and $35,380.82 with interest
accruing at six percent (6%) and twelve percent (12%) per annum, respectively.
The promissory notes mature on June 19, 1997.
Employment Contract and Termination of Employment, and Change-in-Control
Arrangements:
- - --------------------------------------------------------------------------------
The Company entered into an Employment Agreement, dated June 1, 1996, with
its President, John R. Snedegar, pursuant to which Mr. Snedegar is employed for
a four-year term from June 1, 1996, at a base salary of $125,000 per annum. The
agreement also provides for typical perquisites such as reimbursement of
expenses, paid vacation, automobile allowance and medical, disability and life
insurance. Mr. Snedegar can earn a bonus of up to$50,000 per fiscal year based
on revenue and profitability targets to be established by the Board of Directors
(the "Bonus").
In the event that Mr. Snedegar's employment is terminated without cause,
Mr. Snedegar will be entitled to a severance payment equal to his monthly base
salary times the number of
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months remaining in the term of the agreement up to a maximum of 24 months, in
addition to the following: (a) if termination occurs prior to April 30, 1997,
the amount of the Bonus which would have been earned in the fiscal year of
termination, multiplied by a fraction of which the numerator is the number of
days in that year prior to termination and the denominator is 365, or (b) if
termination occurs after April 30, 1997, two times the amount of the Bonus
earned during the fiscal year prior to termination.
In the event that there is a change in control of the Company, Mr. Snedegar
may elect to terminate the agreement. In that event, Mr. Snedegar will be
entitled to a severance payment equal to his monthly base salary times the
number of months remaining in the term of the contract, up to a maximum of 24
months, in addition to the following: (a) if termination occurs prior to April
30, 1997, two times the amount of the Bonus which would have been earned in the
fiscal year of termination, or (b) if termination occurs after April 30, 1997,
two times the amount of the Bonus earned during the fiscal year prior to
termination.
In the event that the agreement is otherwise terminated, Mr. Snedegar will
be entitled to receive an amount equivalent to the Bonus for the fiscal year in
which termination occurs multiplied by a fraction, the numerator of which is the
number of days in that year prior to termination and the denominator is 365.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Donald Sledge is covered by the Company's health and dental insurance plan,
and the Company reimburses the annual costs of his life insurance policy.
On April 27, 1995, the Company acquired all of the outstanding shares of
Digital Network, Inc. from Roger Wiese and William Wiese. The Company issued
four promissory notes related to the acquisition of DNI. Two of the promissory
notes are payable to Roger Wiese, who subsequently became a shareholder and a
director and the other two promissory notes are payable to William Wiese. Two of
the promissory notes are for a principal amount of $106,912.33 with interest
accruing at six percent (6%) per annum and the other two promissory notes are
for a principal amount of $35,380.82 with interest accruing at twelve percent
(12%) per annum. Each of the promissory notes mature on June 19, 1997.
ITEM 8. DESCRIPTION OF SECURITIES
Common Stock
- - ------------
The Company is authorized to issue 100,000,000 shares of Common Stock with
a par value of $0.01 per share (the "Common Stock"), of which 6,078,442 shares
are issued and outstanding as of April 10, 1997. If all of the outstanding
warrants are exercised, 1,655,557 additional shares will be issued and
outstanding. Effective August 9, 1996, the Company completed a four-for-one
reverse stock split. The number of issued and outstanding shares and
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<PAGE>
the number of shares issuable upon exercise of the warrants set forth in the
preceding sentences reflect the reverse stock split. All of the Company's shares
of Common Stock rank equally as to dividends, voting powers and participation in
assets upon dissolution. No shares have been issued subject to call or
assessment. Each outstanding share of Common Stock is entitled to one vote at
all stockholders' meetings, either in person or by proxy. Cumulative voting is
not allowed in the election of directors. Therefore, the holders of a majority
of the outstanding Common Stock can elect all directors.
Holders of Common Stock are entitled to share equally in such dividends as
may be declared by the Board of Directors, from time to time, out of funds
legally available therefor and, in the event of liquidation, to share equally in
any distribution of the Company's assets after payment of liabilities.
Holders of Common Stock do not have preemptive or preferential rights to
subscribe to additional shares if issued by the Company. There are no
conversion, redemption, sinking fund or similar provisions regarding the Common
Stock. All of the outstanding shares of Common Stock are fully paid and
non-assessable. See "Description of Business - Risk Factors."
Warrants
- - --------
The Company has 1,805,556 warrants outstanding. The terms and the number of
warrants outstanding are as follows:
Warrant Shares Date Issued Expiration Period Exercise Price
- - --------------------------------------------------------------------------------
150,000 11/10/95 2 years Yr. 1: $1.48
Yr. 2: $1.69
1,294,431 3/22/96 2 years Yr. 1: $2.12
Yr. 2: $2.84
211,125 4/4/97 2 years Yr. 1: $1.60
Yr. 2: $1.85
150,000 4/21/97 2 years Yr. 1: $1.60
Yr. 2: $1.85
Except as set forth in the table above, the terms and conditions of the warrants
are identical. No trading market currently exist for the warrants, and it is
unlikely one will ever develop. The following statements are subject to the
detailed provisions of the warrants, which are attached hereto as an exhibit.
The holder of a warrant will not possess any rights as a shareholder of the
Company until exercise of the warrant and full payment of the exercise price.
Shares of Common Stock issuable on exercise of the warrants will be
"restricted securities" as that term is defined under the Act, and consequently,
will be subject to the
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<PAGE>
restrictions on transfer set forth in the Act and, applicable regulations unless
an effective registration statement is in effect at the time of exercise of the
warrants. Further restrictions on transfer may be imposed by state securities
statutes. Therefore, the securities would have to be held indefinitely, unless
subsequently registered or qualified under applicable federal and state
securities laws or sold in a transaction exempt from such registration and
qualification requirements.
The warrants contain provisions that protect the holders thereof against
dilution by adjustment of the number of shares of Common Stock purchasable on
exercise of the warrants in certain events. In the event of a subdivision,
consolidation or reclassification of the Common Stock, the holder of the warrant
will be entitled to such number of shares and/or class of Common Stock had such
holder exercised the warrant before such subdivision, consolidation or
reclassification.
In certain of the warrants, the Company had agreed to use its best efforts
to register the Common Stock under the Act or under the British Columbia
Securities Commission by December 20, 1996. By failing to register the Common
Stock, each warrant entitled the holder to purchase twice the number of shares
purchasable under the warrant.
Convertible Debentures
- - ----------------------
On March 26, 1996, the Company issued four non-interest bearing Convertible
Debentures to the order of Ennis Rushton, Cindy Rushton and Corporate
Communications, Inc., a Nevada corporation. Each of Convertible Debenture One
and Convertible Debenture Two was issued for a principal amount of $1,000,000,
Convertible Debenture Three is for a principal amount of $250,000 and
Convertible Debenture Four is for the principal amount of $750,000. The
Convertible Debentures were issued as partial consideration in connection with
the Company's acquisition of Advanced Management Services, Inc. ("AMS").
Payments under Convertible Debentures One and Two were subject to reduction if
AMS did not meet certain performance guarantees made by the sellers.
Accordingly, payments under Convertible Debentures One and Two were slightly
reduced under the performance criteria formula set forth in the acquisition
agreement.
Convertible Debenture One was paid in full on June 1, 1996. With respect to
Convertible Debenture Two, the payee converted a part of the debenture into
250,000 shares of Common Stock, and the balance was paid in full in cash.
Convertible Debentures Three and Four are due and payable on December 1, 1997
and July 1, 1998, respectively. If the Company fails to pay principal on any
Convertible Debenture when due, interest shall accrue on such Convertible
Debenture at a rate of ten percent (10%) per annum. On or before the maturity
date of each Convertible Debenture, the payee may convert the debenture into
shares of Common Stock of the Company. Convertible Debenture Three is
convertible into 125,000 shares of Common Stock and Convertible Debenture Four
is convertible into 375,000 shares of Common Stock. To date,
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the payee has not converted any of Convertible Debenture Three or Four into
shares of Common Stock of the Company.
- 29 -
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND OTHER SHAREHOLDER MATTERS
The Company's Common Stock is presently traded on the Vancouver Stock
Exchange in British Columbia, Canada. The high and low sales prices of the
Common Stock on the Vancouver Stock Exchange for the last two fiscal years of
the Company are as follows (note that effective August 9, 1996, the Company
completed a four-for-one reverse stock split and the high and low sales prices
for the periods prior to August 1, 1996 reflect the reverse stock split):
Period High High Low Low
------ ---- ---- --- ---
(in CDN $$) in U.S.$$) (in CDN $$) (in U.S.$$)
from February 1, 1997
through April 30, 1997 $2.75 $2.03 $2.00 $1.43
from November 1, 1996
through January 31, 1997 $2.75 $2.05 $2.15 $1.57
from August 1, 1996
through October 31, 1996 $2.85 $2.00 $2.00 $1.46
from May 1, 1996
through July 31, 1996 $3.08 $1.84 $1.84 $1.36
from February 1, 1996
through April 30, 1996 $3.44 $2.08 $2.08 $1.52
from November 1, 1995
through January 31, 1996 $3.60 $1.96 $1.96 $1.44
from August 1, 1995
through October 31, 1995 $2.84 $1.80 $1.80 $1.36
from May 1, 1995
through July 31, 1995 $3.20 $2.20 $2.20 $1.60
As of January 31, 1997, there were 173 record holders of the Company's
Common Stock. The Company has not paid any dividends, and it is not anticipated
that any dividends will be paid in the near term.
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<PAGE>
ITEM 2. LEGAL PROCEEDINGS
The Company is not engaged in any material litigation, and the officers and
directors presently know of no threatened or pending litigation in which it is
contemplated that the Company will be made a party, except for proceedings
involving AMS with respect to AMS operating in certain states without
certification. The Company is indemnified by Ennis Rushton for up to $200,000
pursuant to the AMS purchase agreement in connection with such proceedings.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
In July 1996, the Company changed principal accountants from Weaver and
Tidwell, LLP to Price Waterhouse, LLP to audit its financial statements. Prior
thereto, Weaver and Tidwell, LLP had served as the Company's principal
accountants. The decision to change principal accountants was made with the
approval of the Company's Board of Directors as a result of the Company's
decision to register its stock under U.S. securities laws and apply to list its
shares on a U.S. exchange.
The Company believes, and has been advised by Weaver and Tidwell, LLP that
it concurs in such belief, that, during the fiscal years ended April 30, 1994
and 1995 and subsequent thereto, the Company and Weaver and Tidwell, LLP did not
have any disagreement on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Weaver and Tidwell, LLP,
would have caused it to make reference in connection with its report on the
Company's financial statements to the subject matter of the disagreement.
No report of Weaver and Tidwell, LLP on the Company's financial statements
for either of the past two fiscal years contained an adverse opinion, a
disclaimer of opinion, or qualification or modification as to audit scope or
accounting principles, except that the financial statements dated July 21, 1995
for the fiscal year ending April 30, 1995 did not include pro forma results
relating to a business acquisition of DNI by the Company on April 25, 1995. Note
that financial statements for each of DNI and AMS which were acquired by the
Company in April 1995 and March 1996, respectively, are included in Part F/S of
this registration statement.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The following table sets forth certain information concerning all
securities issued by the Company which have not been registered under the
Securities Act:
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<PAGE>
Note Reference Shares Issued Date Issued Consideration Received
- - --------------------------------------------------------------------------------
A 43,405 6/13/94 $ 167,113
B 155,625 9/22/94 $ 421,978
C 1,984 9/22/94 $ ---
D 450,000 11/25/94 $ 742,636
E 600,000 3/9/95 $ 851,108
F 250,000 4/25/95 $ 407,006
G 50,170 8/1/95 $ 72,245
H 86,684 9/21/95 $ 147,335
I 150,000 11/10/95 $ 218,000
J 48,500 1/8/96 $ 70,407
K 124,437 2/96 $ 222,056
L 141,100 3/96 $ 207,110
M 1,294,432 3/22/96 $ 2,471,037
N 100,000 2/97 $ 169,976
O 250,000 2/25/97 $ 500,000
P 55,852 3/97 $ 94,413
Q 422,250 4/4/97 $ 668,130
R 300,000 4/21/97 $ 480,000
A. In June 1994, the company issued 43,405 shares on the exercise of warrants
to one foreign investor.
B. In September 1994, the Company completed a private placement and issued
155,625 shares of its Common Stock with non-transferable warrants attached
to purchase up to 155,625. Four U.S. investors paid $332,669 for 122,688
shares and two foreign investors paid $89,309 for 32,937 shares.
C. 1,984 shares of Common Stock were issued to an unrelated party as a finders
fee in connection with the above private placement.
D. In November 1994, the Company completed a private placement and issued
450,000 shares of its Common Stock with non-transferable warrants attached
to purchase up to 450,000 shares of the Company. One U.S. investor paid
$494,528 for 300,000 shares and two foreign investors paid $248,108 for
150,000 shares.
E. In March 1995, the Company issued 600,000 shares of its Common Stock with
non- transferable warrants attached to purchase up to 600,000 shares of the
Company. Eight U.S. investors paid $437,484 for 301,500 shares of its
Common Stock and six foreign investors paid $413,624 for 298,500 shares of
its Common Stock. $36,496 was paid to an unrelated third party as a sales
commission.
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<PAGE>
F. Pursuant to that certain Stock Purchase and Exchange Agreement dated
November 2, 1994, the Company issued 125,000 shares of its Common Stock to
each of Roger W. Wiese and William M. Wiese in April 1995.
G. In August 1995, the Company issued 50,170 shares in the exercise of
warrants to one U.S. investor.
H. In September 1995, the Company issued 86,684 shares of its Common Stock in
the exercise of warrants. Two foreign investors paid $89,735 for 51,562
shares and one U.S. investor paid $57,600 for 35,122 shares.
I. In November 1995, the Company issued 150,000 shares of its Common Stock to
two U.S. investors for a total consideration of $218,000 with
non-transferable warrants attached to purchase up to 150,000 shares of the
Company.
J. In January 1996, the Company issued 48,500 shares of its Common Stock in
the exercise of warrants to one foreign investor.
K. In February 1996, the Company issued 124,437 shares in the exercise of
warrants. One U.S. investor paid $38,050 for 26,000 shares and one foreign
investor paid $186,006 for 98,438 shares.
L. In March 1996, the Company issued 141,100 shares in the exercise of
warrants. Two U.S. investors paid $60,764 for 41,100 shares and two foreign
investors paid $146,346 for 100,000 shares.
M. In March 1996, the Company completed the sale of 1,294,432 shares of its
Common Stock with non-transferable warrants attached to purchase up to
1,294,432 shares of the Company. Thirteen U.S. residents and thirty-three
foreign investors participated in this private placement. In connection
with this offering, the Company paid $50,401 as a sales commission for the
sale of 375,000 shares.
N. In February 1996, the Company issued 100,000 shares of the Common stock in
the exercise of warrants to two foreign investors.
O. Pursuant to that certain Revised Stock Purchase and Exchange Agreement
dated March 5, 1996, the Company issued 250,000 shares of its Common Stock
in February 1997.
P. In March 1997, the Company issued 55,852 shares of the Common Stock in the
exercise of warrants. One U.S. investor paid $10,000 for 5,852 shares and
one foreign investor paid $84,413 for 50,000 shares.
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<PAGE>
Q. On April 4, 1997, the Company issued 422,250 shares of its Common Stock
with one-half non-transferable warrant attached to purchase up to 211,125
shares of the Company. Seven U.S. residents paid $377,049 for 237,500
shares of its Common Stock and three foreign investors paid $291,081 for
184,750 shares of its Common Stock.
R. On April 21, 1997, the Company issued 300,000 shares of its Common Stock
with one- half non-transferable warrant attached to purchase up to 150,000
shares of the Company. One U.S. resident paid $160,000 for 100,000 shares
and two foreign investors paid $320,000 for 200,000 shares.
The issuance of shares described in notes A through R were exempt
transactions under Section 4(2) of the Act as transactions by an issuer not
involving a public offering. All of the shares of Common Stock referenced in
notes A through R were issued for investment purposes only and without a view to
distribution. All of the persons who acquired such shares were fully informed
and advised about matters concerning the Company, including its business,
financial affairs and other matters.
The Company was originally incorporated as a wholly-owned subsidiary of
Unidex Communications Corp., a British Columbia corporation ("Unidex"), for the
purpose of effecting a reincorporation of Unidex from British Columbia to
Delaware (the "Reincorporation"). To effect the Reincorporation, the shares of
the Company were issued in exchange for all of the shares of Unidex. In
connection with the Reincorporation, the Company requested and received a
fairness hearing before the California Commission of Corporations to permit the
offer and sale of securities under the laws of the State of California and to
satisfy the requirements of Section 3(a)(10) of the Act to qualify the Company's
shares as exempt securities. On March 22, 1995, the California Commission of
Corporations qualified the securities under California law and in satisfaction
of Section 3(a)(10) of the Act. Accordingly, each holder of Unidex shares
received an unlegended stock certificate issued by the Company in exchange of
the legended Unidex stock certificates.
The certificates evidencing the shares issued by the Company after the
fairness hearing in the transactions referenced in notes F through R bear
legends stating that they may not be offered, sold or transferred other than
pursuant to an effective registration statement under the Securities Act of
1933, or pursuant to an applicable exemption from registration. The shares of
Common Stock issued in the transactions referenced in notes F through R are
"restricted" shares as defined in Rule 144 under the Securities Act of 1933, as
amended. No underwriters were involved with the sale of the shares of Common
Stock.
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<PAGE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"DECL") provides, in general, that a corporation incorporated under the laws of
the State of Delaware, such as the Company, may indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (other than a derivative action by or in
the right of the corporation) by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another enterprise, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding if such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful. In the case of a derivative action, a Delaware corporation
may indemnify any such person against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
court determines such person is fairly and reasonably entitled to indemnity for
such expenses.
In addition, Article 6 of the Company's Articles of Incorporation provides
that no director of the Company will be personally liable to the Company or to
its stockholders for monetary damages for breach of fiduciary duty as a
director, provided this provision shall not eliminate or limit the liability of
a director to the Company or to its stockholders for monetary damages for: (i)
any breach of the director's duty of loyalty to the Company or to its
stockholders; (ii) acts or omissions of the director not in good faith or which
involve intentional misconduct or a knowing violation of the law; (iii) acts by
such director under Section 174 of the DECL.; or (iv) any transaction from which
such director derived an improper personal benefit.
Article VI, Section 1, of the Company's By-Laws provides that the Company
will indemnify, in the manner and to the fullest extent permitted by the DECL.,
and by the Certificate of Incorporation, any person (or the estate of any
person) who is or was a party, or is threatened to be made a party to, any
threatened, pending or completed action, suit, or proceeding, whether or not by
or in the right of the Corporation, and whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is or was a
director or officer of the Company, or is or was serving at the request of the
Company as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise. The indemnification provided in Article VI,
Section 1, of the By-Laws shall not be deemed to limit the right of the Company
to indemnify any other person to the fullest extent permitted by the DECL., nor
shall it be deemed exclusive of any other rights to which any person seeking
indemnification from the
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<PAGE>
Company may be entitled under any agreement, vote of the stockholders or
disinterested directors, or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office. The Company may enter into indemnification agreements with any one or
more of its directors, officers, employees and agents upon resolution duly
adopted by the Board of Directors. Such agreements may indemnify such persons to
the fullest extent permitted under law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, or persons controlling the
Company pursuant to the foregoing provisions, the Company understands that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
- 36 -
<PAGE>
PART F/S
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants for the year ended April 30, 1996 38
Report of Independent Accountants for the year ended April 30, 1995 39
Consolidated Financial Statements of United Digital Network, Inc. for the 40
years ended as of April 30, 1996 and 1995
Consolidated Financial Statements of United Digital Network, Inc. for the 62
nine months ended January 31, 1997
Consolidated Financial Statements of Advanced Management Services, Inc. 72
for the period from May 1, 1995 to March 26, 1996
Consolidated Financial Statements of Advanced Management Services, Inc. 82
for the year ended April 30, 1995
Consolidated Financial Statements for Digital Network, Inc. for the year 86
ended January 31, 1995
- 37 -
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
August 30, 1996
To the Board of Directors and Shareholders
of United Digital Network, Inc. and subsidiaries
(formerly Unidex Communications Corp.)
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of United
Digital Network, Inc. and its subsidiaries (formerly Unidex Communications
Corp.) at April 30, 1996 and the results of their operations and their cash
flows for the year then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these financial
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
-38-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
UNIDEX COMMUNICATIONS CORP.
We have audited the consolidated balance sheet of Unidex Communications Corp.
And Subsidiaries as of April 30, 1995, and the consolidated statements of
operations, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentations.
We believe that our audit provides a reasonable basis for our opinion.
In our previously issued report dated July 21, 1995, we expressed an opinion
that the 1995 consolidated financial statements presented fairly the financial
position of Unidex Communications Corp. and Subsidiaries as of April 30, 1995,
and the results of operation and cash flows for the year then ended in
conformity with generally accepted accounting principles, except for the
omission of the disclosure of proforma results of operations relating to a
business acquisition on April 27, 1996. The Company has included the omitted
proforma information in Note 6. Accordingly, our present opinion on the 1995
financial statements is different from that presented in our previous report.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Unidex
Communications Corp. and Subsidiaries as of April 30, 1995 and the results of
its operations and its cash flows for the year then ended in accordance with
generally accepted accounting principles.
WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
July 21,1995, except for the proforma information
relating to the business acquisition, as to which
date is May 20, 1997.
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<PAGE>
UNITED DIGITAL NETWORK,INC.
AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
ACCOUNTANTS
APRIL 30, 1996 AND 1995
-40-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants for the year ended April 30, 1996
Report of Independent Accountants for the year ended April 30, 1995
Consolidated Financial Statements:
Consolidated Balance Sheets as of April 30, 1996 and 1995
Consolidated Statements of Operations for the years ended
April 30, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the years ended
April 30, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
April 30, 1996 and 1995
Notes to Consolidated Financial Statements
-41-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
August 30, 1996
To the Board of Directors and Shareholders
of United Digital Network, Inc. and subsidiaries
(formerly Unidex Communications Corp.)
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of United
Digital Network, Inc. and its subsidiaries (formerly Unidex Communications
Corp.) at April 30, 1996 and the results of their operations and their cash
flows for the year then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these financial
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
-42-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
UNIDEX COMMUNICATIONS CORP.
We have audited the consolidated balance sheet of Unidex Communications Corp.
And Subsidiaries as of April 30, 1995, and the consolidated statements of
operations, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentations.
We believe that our audit provides a reasonable basis for our opinion.
In our previously issued report dated July 21, 1995, we expressed an opinion
that the 1995 consolidated financial statements presented fairly the financial
position of Unidex Communications Corp. and Subsidiaries as of April 30, 1995,
and the results of operation and cash flows for the year then ended in
conformity with generally accepted accounting principles, except for the
omission of the disclosure of proforma results of operations relating to a
business acquisition on April 27, 1996. The Company has included the omitted
proforma information in Note 6. Accordingly, our present opinion on the 1995
financial statements is different from that presented in our previous report.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Unidex
Communications Corp. and Subsidiaries as of April 30, 1995 and the results of
its operations and its cash flows for the year then ended in accordance with
generally accepted accounting principles.
WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
July 21,1995, except for the proforma information
relating to the business acquisition, as to which
date is May 20, 1997.
-43-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
CONSOLIDATED BALANCE SHEETS
- - -------------------------------------------------------------------------------
<TABLE>
As of April 30,
---------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,073,649 $ 121,077
Accounts and notes receivable, net (Note 5) 2,452,336 1,017,731
Receivable from employee 12,010 11,000
Prepaid expenses and other 140,991 115,542
------------ ------------
Total current assets 3,678,986 1,265,350
------------ ------------
Property and equipment, net (Note 6) 1,369,576 1,678,834
Intangible assets, net (Note 7) 5,367,809 1,160,852
Other assets 170,791 416,921
------------ ------------
Total assets $ 10,587,162 $ 4,521,957
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 3,407,351 $ 1,094,259
Other accrued liabilities 220,834 553,738
Notes and accounts payable to shareholders 386,289 474,084
Current maturities of long-term obligations,
net (Note 8) 1,316,957 570,532
Accrued taxes, other than income taxes 388,881 60,015
------------ ------------
Total current liabilities 5,720,312 2,752,628
------------ ------------
Long-term obligations, net (Note 8) 2,061,286 653,114
Commitments and contingencies (Note 13)
Shareholders' equity:
Common stock, $.01 par value (no par value
1995) 100,000,000 shares authorized;
5,250,340 and 3,355,016 issued at April 30, 1996
and 1995, respectively (Notes 2 and 9) 52,503 -
Additional paid-in capital 9,913,694 6,614,546
Retained deficit (7,160,633) (5,498,331)
------------ ------------
Total shareholders' equity 2,805,564 1,116,215
------------ ------------
Total liabilities and shareholders' equity $ 10,587,162 $ 4,521,957
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
-44-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
- - -------------------------------------------------------------------------------
For the years
ended April 30,
---------------
1996 1995
---- ----
Telecommunications revenues $ 8,026,587 $ 2,338,467
Cost of revenues 6,029,796 1,917,734
------------- -------------
Gross profit 1,996,791 420,733
------------- -------------
Operating expenses:
General and administrative 2,904,092 2,016,286
Depreciation and amortization 583,530 273,053
------------- -------------
Total operating expenses 3,487,622 2,289,339
------------- -------------
Loss from continuing operations before
other expenses (1,490,831) (1,868,606)
Other expenses:
Interest expense, net (107,474) (85,431)
Loss on sale of assets - (118,680)
Loss on impairment of assets (63,997) -
------------- -------------
Total other expenses (171,471) (204,111)
------------- -------------
Net loss $ (1,662,302) $ (2,072,717)
============= =============
Loss per weighted average common
shares outstanding $ (.45) $ (.92)
============= =============
Weighted average number of
common shares outstanding 3,706,993 2,252,953
============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
-45-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- - -------------------------------------------------------------------------------
<TABLE>
For the years ended April 30, 1996 and 1995
-------------------------------------------
Common Stock Additional
------------ paid-in Retained
Shares Amount capital deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1994 1,854,002 $ - $4,074,620 $(3,425,614) $ 649,006
Net loss (2,072,717) (2,072,717)
Issuance of common stock for:
Private placements 1,205,625 - 2,015,722 - 2,015,722
Exercise of warrants 43,405 - 167,113 - 167,113
Acquisition of DNI 250,000 - 407,006 - 407,006
Consideration for finder's fees 1,984 - -
Issuance costs - - (49,915) - (49,915)
---------- ---------- ---------- ---------- ----------
Balance at April 30, 1995 3,355,016 - 6,614,546 (5,498,331) 1,116,215
---------- --------- ---------- ---------- ----------
Net loss (1,662,302) (1,662,302)
Increase in par value to $.01/share 33,550 (33,550) - -
Issuance of common stock for:
Private placements 1,444,432 14,444 2,674,593 - 2,689,037
Exercise of warrants 450,892 4,509 714,644 - 719,153
Compensation expense - - 47,000 - 47,000
Issuance costs - - (103,539) - (103,539)
---------- ---------- ---------- ---------- ----------
Balance at April 30, 1996 5,250,340 $ 52,503 $9,913,694 $(7,160,633) $2,805,564
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-46-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------
<TABLE>
For the years
ended April 30,
---------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,662,302) $ (2,072,717)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 583,530 276,026
Loss on disposal of assets - 118,680
Loss on impairment 63,997 -
Compensation recognized for stock options 47,000 -
Other (3,494) (14,914)
(Increase) decrease, net of effect of acquisition:
Accounts and notes receivable 179,016 (203,307)
Prepaid expenses and other assets 152,385 47,751
Increase (decrease), net of effect of acquisition:
Accounts and notes payable and accrued expense (705,416) 29,143
------------- -------------
Net cash used in operating activities (1,345,284) (1,819,338)
------------- -------------
Cash flows from investing activities:
Additions to property and equipment (186,439) (193,745)
Purchase of AMS, net of cash acquired (542,980) -
Purchase of DNI, net of cash acquired - (200,000)
Sale of assets - 150,000
Receipts on notes 71,375 5,128
------------- -------------
Net cash used in investing activities (658,044) (238,617)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 3,236,725 2,132,920
Principal payments on obligations (280,825) (303,080)
Advances from shareholders - 233,329
------------- -------------
Net cash provided by financing activities 2,955,900 2,063,169
------------- -------------
Increase in cash 952,572 5,214
Cash at beginning of year 121,077 115,863
------------- -------------
Cash at end of year $ 1,073,649 $ 121,077
============= =============
Supplemental disclosure of cash flow information:
Interest paid $ 113,815 $ 93,105
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-47-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
United Digital Network, Inc. (the "Company"), formerly Unidex
Communications Corp. was incorporated in 1980 under the British Columbia
Company Act in British Columbia, Canada, and its shares are publicly traded
on the Vancouver Stock Exchange. In April 1995, the Company's continuance
was authorized to the jurisdiction of Wyoming under the Wyoming Business
Corporation Act from the Registrar of Companies for the Province of British
Colombia. The Company then merged with a wholly-owned subsidiary domiciled
in the state of Delaware, thereafter becoming a Delaware Corporation. The
Company operates through its principal subsidiaries, Answer-Net, Inc.
(ANI), Digital Network, Inc. (DNI) and Advanced Management Services, Inc.
(AMS). The Company's principal business activity is providing basic long
distance services, travelcard service, international long distance, and
various other telecommunication services to residential and small to medium
sized commercial customers. The principal markets for its long distance
services are the central and southwest United States as well as customers
located nationwide in the motor freight industry.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries ANI, DNI and AMS. The financial
statements and related footnotes are presented in U.S. dollars, unless
otherwise indicated, and all significant intercompany accounts and
transactions are eliminated in consolidation. Certain previously reported
amounts have been reclassified to conform to the current year presentation.
Financial instruments
The fair market value of financial instruments is determined by reference
to various market data and other valuation techniques as appropriate. The
Company believes that the fair values of financial instruments approximate
their recorded values.
Business and credit concentrations
In the normal course of business, the Company extends unsecured credit to
its customers. Management has provided an allowance for doubtful accounts
to provide for amounts which may eventually become uncollectible and to
provide for any disputed charges.
Property and equipment
Property and equipment are stated at cost. Depreciation for financial
statement purposes, which includes amortization of assets under capital
leases, is provided utilizing the straight-line method over the estimated
useful lives of the depreciable assets or the lease terms.
-48-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
Expenditures for major renewals and betterments, which significantly extend
the useful lives of existing property and equipment, are capitalized and
depreciated. Upon retirement or disposition of property and equipment, the
cost and related accumulated depreciation are removed from the accounts and
any resulting gain or loss is recognized in income. Expenditures for repair
and maintenance are charged to expense as incurred.
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"), which requires that an
entity review long-lived assets for impairment, and any impairment loss for
assets to be held and used shall be reported as a component of income from
continuing operations before income taxes. The impairment loss recognized
shall be measured as the amount by which the carrying amount of the asset
exceeds the fair value of the asset.
In November 1995, the Company adopted SFAS 121. The application of SFAS 121
resulted in a charge to income for the 1996 fiscal year and a decrease in
the value of two long-lived assets.
Foreign currency transactions
Foreign currency transaction gains and losses are included in determining
net income and are not significant.
Intangible assets
Intangible assets consist of the acquired cost of goodwill and customer
lists. These intangibles are amortized utilizing the straight-line method
over their estimated useful lives. The realizability of goodwill and
customer lists is evaluated periodically as events or circumstances
indicate a possible inability to recover their carrying amount. Such
evaluation is based on various analyses, including cash flow and
profitability projections that incorporate, as applicable, the impact on
existing company businesses. The analyses necessarily involve significant
management judgment to evaluate the capacity of an acquired business to
perform within projections. Historically, the Company has generated
sufficient returns from acquired businesses to recover the cost of their
intangible assets.
Accounting for stock-based compensation
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-based Compensation" ("SFAS 123").
SFAS 123 requires the fair value of stock options and other stock-based
compensation issued to employees to either be included as compensation
expense in the income statement, or the pro forma effect on net income and
earnings per share of such compensation expense to be disclosed in the
footnotes to the financial statements. This statement is effective for the
Company's 1997 fiscal year. The Company expects to adopt SFAS 123 on a
disclosure basis only. As such, implementation of SFAS 123 is not expected
to impact the Company's consolidated balance sheet or statement of
operations.
-49-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Shareholder's equity
Loss per share is computed by dividing the net loss by the weighted average
number of shares of common stock outstanding during the periods. The effect
of outstanding options and warrants on the computation of net loss per
share is antidilutive and, therefore, is not included in the computation
for the years ended April 30, 1996 and 1995.
On June 5, 1996, the Company's board of directors declared a four-for-one
reverse common stock split. As a result, effective August 9, 1996, all of
the Company's 50,000,000 shares of common stock, both issued and unissued,
were consolidated into 12,500,000 shares. The Company's par value of $.01
per share remained unchanged. All share and per share amounts appearing in
the consolidated financial statements and notes thereto have been
retroactively adjusted for the stock split.
On June 5, 1996, the Company's board of directors also approved an increase
in the authorized shares of the Company from 12,500,000 to 100,000,000
shares effective August 9, 1996. Concurrent with this change, the Company's
name was changed to United Digital Network, Inc.
Federal income taxes
During fiscal 1994, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Deferred
income taxes are calculated utilizing an asset and liability approach,
whereby deferred taxes are provided for tax effects of basis differences
for assets and liabilities arising from differing treatments for financial
and income tax reporting purposes. Valuation allowances against deferred
tax assets are provided where appropriate. There was no impact on the
consolidated financial statements upon adoption of SFAS 109.
3. ACQUISITIONS
Advanced Management Services, Inc.
Effective March 26, 1996, the Company acquired all of the outstanding
common stock of AMS, a long distance carrier based in Phoenix, Arizona. The
acquisition was accomplished through the payment of $1,100,000 in cash and
the issuance of a series of convertible debentures and a note
-50-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
payable totaling $2,381,947, net of discount. The Company has recorded
adjustments to the purchase price and reductions to the notes and
debentures payable to the sellers based on management's best estimate of
allowable adjustments defined in the stock purchase agreement.
The present value of the notes and debentures was imputed using an interest
rate of 11%. Future payments are contingent upon, and may be reduced, if
various revenue and equity targets through March 1998 as outlined in the
purchase agreement are not met.
The acquisition was accounted for using the purchase method of accounting,
and accordingly, the purchase price was allocated to the assets purchased
and the liabilities assumed based upon fair values at the date of
acquisition. The excess of the purchase price over the fair values of the
net liabilities acquired was $3,541,050 and was reflected as goodwill. A
summary of the AMS excess of cost over net liabilities acquired is as
follows:
Assets, including identified intangible assets of $820,000 $ 2,994,730
Property and equipment 24,295
Liabilities (3,078,128)
-------------
Net liabilities acquired $ (59,103)
Goodwill 3,541,050
-------------
Purchase price $ 3,481,947
=============
The Company's consolidated statement of operations includes the results of
operations of AMS since March 26, 1996. The Company will also include AMS
in its 1996 consolidated federal income tax return for the period it was
owned in 1996.
Digital Network, Inc.
Effective April 27, 1995, the Company acquired all of the outstanding
shares of Digital Network, Inc. (DNI). DNI provides telecommunication
services to customers in Texas and southern Oklahoma.
The acquisition was accounted for using the purchase method of accounting,
and accordingly, the purchase price was allocated to the assets purchased
and the liabilities assumed based upon fair values at the date of
acquisition. The excess of the purchase price over the fair values of the
net assets acquired was $679,241, and reflected as goodwill.
-51-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
A summary of the DNI excess of cost over the net assets acquired is as
follows:
Assets, including identified intangible assets of $360,000 $ 1,331,363
Property and equipment 1,261,674
Current liabilities (1,906,894)
Long-term debt, net (537,719)
------------
Net assets acquired 148,424
Goodwill 679,241
------------
Purchase price $ 827,665
============
The following unaudited pro forma combined results of operations for the
Company assume that the acquisition of AMS was completed at May 1, 1994 and
the acquisition of AMS and DNI was completed at May 1, 1993. These pro
forma amounts represent the historical operating results of DNI combined
with those of the Company with appropriate adjustments which give effect to
interest expense and amortization. These pro forma amounts are not
necessarily indicative of consolidated operating results which would have
occurred had AMS and DNI been included in the operations of the Company
during the periods presented, or which may result in the future, because
these amounts do not reflect full transmission and switched service cost
optimization, and the synergistic effect on operating, selling, and general
and administrative expenses.
For the years ended
April 30,
---------
1996 1995
---- ----
Revenues $ 17,503,992 $ 17,429,712
Net loss (2,557,287) (3,190,433)
Net loss per share outstanding (.69) (1.42)
4. NONCASH INVESTING AND FINANCING ACTIVITIES
During the year ended April 30, 1996 the Company purchased all of the
capital stock of AMS for $1,100,000 in cash and the issuance of a series of
convertible debentures and a note payable totaling $2,381,947. During the
year ended April 30, 1995, the Company purchased all of the capital stock
of DNI for $200,000 in cash and the issuance of a $200,000 note payable and
the issuance of 1,000,000 shares of common stock at $.407 a share.
Additionally, during fiscal 1995, the Company sold net assets with a
carrying value of $578,876 in exchange for $150,000 cash and a $295,000
note receivable.
The Company recorded capital lease obligations of $19,949 and $87,465
during the years ended April 30, 1996 and 1995, respectively. During the
year ended April 30, 1996, accounts payable to shareholders of $17,926 and
notes payable of $50,000 were relieved through the exercise of warrants.
-52-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
5. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
April 30,
1996 1995
---- ----
Trade receivables:
Billed $ 1,262,617 $ 549,769
Unbilled 1,337,640 454,375
Other 74,790 110,513
------------- -------------
2,675,047 1,114,657
Allowance for doubtful accounts:
Trade 222,711 76,926
Other - 20,000
------------- -------------
Total accounts and notes receivable, net $ 2,452,336 $ 1,017,731
============= =============
The Company's monthly billing cycle is such that certain services performed
in the last month of one fiscal year will not be billed until the first
month of the subsequent fiscal year. These services are recognized as
revenue and recorded as unbilled receivables when earned.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
April 30,
---------
1996 1995 Life
---- ---- ----
<S> <C> <C> <C>
Communications equipment $ 3,281,643 $ 3,327,128 2-8 years
Office equipment 321,250 194,189 5 years
Leasehold improvements 20,053 11,720 5 years
------------ ------------
3,622,946 3,533,037
Accumulated depreciation (2,253,370) (1,854,203)
------------ ------------
Total property and equipment, net $ 1,369,576 $ 1,678,834
============ ============
</TABLE>
Total depreciation expense, including amortization of equipment under
capital leases, charged to operations for the years ended April 30, 1996
and 1995 was $436,688 and $245,768 respectively.
-53-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
7. INTANGIBLE ASSETS
Intangible assets consist of:
April 30,
---------
1996 1995 Life
---- ---- ----
Goodwill $ 4,193,143 $ 679,241 25 years
Customer lists 1,316,832 500,820 7 years
------------ ------------ ------------
5,509,975 1,180,061
Accumulated amortization (142,166) (19,209)
------------ ------------
$ 5,367,809 $ 1,160,852
============= ============
Additions to goodwill and customer lists were recorded during fiscal years'
1996 and 1995 as a result of the Company's acquisitions (Notes 3 and 4).
8. LONG-TERM OBLIGATIONS
<TABLE>
Long-term obligations consist of: April 30,
--------------------------------- ---------
1996 1995
---- ----
<S> <C> <C> <C>
Convertible debenture with interest imputed
at 11% per annum: (Amounts contingent criteria
on certain factors discussed in Note 3)
Due February 1997 $ 838,056 $ -
Due December 1997 250,000 -
Due July 1998 750,000 -
Notes payable
Repayable in four quarterly installments of
$250,000 from June 1997 to June 1998, with
interest imputed at 11%. (Amount contingent
on certain factors discussed in Note 3) 1,000,000 -
Repayable in monthly installments of $2,042
including interest at the Wall Street Journal prime
rate plus 2% per annum, due December 1996.
This note is currently in default. 50,117 50,117
Repayable to a bank in monthly installments amounts
of $3,678 plus interest at 8%, final payment due
June 1995. This note is currently in default. 41,098 41,098
Repayable to a bank in monthly installments of $1,825
including interest at the Wall Street Journal prime
rate plus 2% per annum, due January 1998. This
note is currently in default. 63,743 63,743
-54-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
Repayable in monthly installments of $4,894 including
interest at 8%, due December 1996. 36,800 90,241
Repayable in monthly installments of $1,500 including
interest at 8.11% per annum, fully retired. - 14,451
Repayable in monthly installments of $2,661 including
interest at 10% per annum, fully retired. - 15,861
Capital lease obligations 804,538 948,135
------------- -------------
3,834,352 1,223,646
Less: Discount on convertible debentures and note
payable imputed at 11% (456,109) -
------------- -------------
Total long-term obligations 3,378,243 1,223,646
Less current maturities:
Long-term debt, net of discount on convertible
debenture imputed at 11% of $80,695 949,119 185,777
Capital lease obligations 367,838 384,755
------------- -------------
Long-term portion $ 2,061,286 $ 653,114
============= =============
</TABLE>
Principal repayments of long-term debt are due approximately as follows:
Years ending
April 30
--------
1997 $ 1,312,817
1998 1,002,866
1999 947,496
2000 115,064
2001 -
-------------
Total long-term debt $ 3,378,243
=============
9. STOCK OPTIONS, WARRANTS, AND OTHER
The Company granted stock options entitling the holders to purchase 386,250
and 50,000 common shares during the fiscal years ended April 30, 1996 and
1995, respectively. Outstanding stock options to certain directors,
officers, employees, and others entitle the holders to purchase a total of
411,250 and 143,250 common shares at prices ranging from $2.40 to $6.40 and
$2.64 to $6.40 (Canadian) per share as of April 30, 1996 and 1995,
respectively. These options are exercisable subject to vesting schedules,
and in the case of options granted to others, the achievement of certain
performance targets. The options expire on various dates between May 1997
and March 2001.
-55-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
During the year ended April 30, 1996, the Company recorded compensation
expense and an increase in additional paid-in-capital in the amount of
$47,000 for options granted to outsiders.
Additional information regarding options granted and outstanding is
summarized below:
Number of Exercise
Options Price (Canadian)
------- ----------------
Outstanding at April 30, 1993 94,500 $ 2.64-4.00
Granted 58,750 $ 6.40
Outstanding at April 30, 1994 153,250
Granted 50,000 $ 2.80
Canceled/Expired (60,000) $ 2.40-6.40
Outstanding at April 30, 1995 143,250
Granted 386,250 $ 2.40-2.92
Canceled/Expired (118,250) $ 2.40-6.40
Outstanding at April 30, 1996 411,250
Warrants
The Company issued warrants attached to certain shares issued for cash
entitling the holders to purchase an additional 797,216 and 1,205,625
common shares during the years ended April 30, 1996 and 1995, respectively.
Total outstanding warrants entitle the holders to purchase up to 1,551,949
and 1,475,792 shares as of April 30, 1996 and 1995, respectively, at prices
ranging from $2.00 to $4.40 and $2.00 to $6.00 (Canadian) per share for
1996 and 1995, respectively, exercisable at any time and expiring on
various dates through January 1998.
Pursuant to an agreement, the Company will issue additional warrants to
certain warrant holders entitling them to purchase an additional 647,216
common shares in the event the Company does not make a filing with various
securities regulatory authorities as defined in the agreement by December
22, 1996.
Escrow shares
The Company issued 187,500 common shares to certain shareholders subject to
an escrow agreement dated May 19, 1988 and amended October 21, 1993.
Concurrent with its initial public offering on the Vancouver Stock
Exchange.
Under the terms of the escrow agreement, shares are to be released from
escrow on the basis of one share for each $1.52 (Canadian) of cumulative
cash flow, as defined by the agreement. No shares had been released as of
April 30, 1996. The escrow agreement expires 10 years from the date of
issue of the shares, at which time any shares not released from escrow will
be canceled.
-56-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
Conversion privileges
The note payable that was granted by the Company as partial consideration
for a 1992 acquisition gives the holder the right to convert at any time
the outstanding principal amount of the note payable into common shares of
the Company as follows:
1996 $6.60 (Canadian) per share
1997 $7.60 (Canadian) per share
1998 $8.60 (Canadian) per share
10. FEDERAL INCOME TAXES
The components of the net deferred tax asset were as follows:
<TABLE>
April 30,
---------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 76,000 $ 26,000
Depreciation 23,000 -
Net operating loss carryforwards 1,669,000 1,262,000
------------- -------------
Gross deferred tax asset 1,768,000 1,288,000
Deferred tax liabilities:
Depreciation - 51,000
Basis difference arising from purchase accounting 279,000 -
------------- -------------
Gross deferred tax liabilities 279,000 51,000
------------- -------------
Valuation allowance (1,489,000) (1,237,000)
------------- -------------
Net deferred tax asset $ - $ -
============= =============
</TABLE>
The following is a reconciliation of the provision for income taxes at the
U.S. federal income tax rate to the income taxes reflected in the
consolidated statements of operations:
<TABLE>
For the years ended April 30,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
Income tax benefit at federal statutory rate $ (565,000) $ (705,000)
Operating losses not benefited 407,000 750,000
Nondeductible amortization arising
from purchase accounting 57,000 -
Change in valuation reserve and other 101,000 (45,000)
------------ ------------
Income tax benefit provided $ - $ -
============ ============
</TABLE>
-57-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
At April 30, 1996, the Company had a net operating loss carryforward
aggregating approximately $4,900,000 which expires in years beginning in
2010. If certain changes in the Company's ownership should occur as defined
by Internal Revenue Code Section 382, there would be an annual limitation
on the amount of tax carryforwards which can be utilized.
11. LEASES
The Company leases certain office facilities and equipment under capital
leases and noncancellable operating leases expiring through December 2000.
At the end of the capital lease terms, the Company has the option to
purchase the leased equipment. Minimum annual rentals under these leases
are as follows:
Years ending Capital Operating
April 30, Leases Leases
--------- ------ ------
1997 $ 476,268 $ 227,392
1998 204,834 195,452
1999 190,924 183,816
2000 120,271 164,752
2001 - 60,447
----------- -----------
Total minimum lease payments 992,297 $ 831,859
----------- ===========
Amounts representing interest (187,759)
-----------
Present value of net minimum lease payments 804,538
Current portion (367,838)
-----------
Long-term capitalized lease obligations $ 436,700
===========
Assets recorded under capital leases are included in property and equipment
as follows:
April 30,
---------
1996 1995
---- ----
Communications equipment $ 948,733 $ 2,392,977
Office equipment 64,106 43,023
------------ ------------
1,012,839 2,436,000
Accumulated amortization (202,852) (1,414,000)
------------ ------------
$ 809,987 $ 1,022,000
============ ============
The total rent expense incurred during the years ended April 30, 1996 and
1995 was $186,470 and $126,660, respectively.
-58-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
The Company is in default on certain lease obligations totaling $211,110 at
April 30, 1996 due to nonpayment. The Company is currently renegotiating
the lease agreement and expects the terms of the agreement will be modified
without incurring significant additional costs to the Company.
12. RELATED PARTY TRANSACTIONS
The Company is provided executive office space by another company of which
a Company executive is a director.
Interest of $1,587 was paid to a director of the Company for the year ended
April 30, 1996. No interest was paid to related parties during 1995.
13. COMMITMENTS AND CONTINGENCIES
The Company has entered into various long-term commitments for the purchase
of network usage. Total payments under these agreements were $1,613,863 for
the year ended April 30, 1996. The aggregate amount of minimum purchases of
network usage under these various agreements are $9,550,000, $9,450,000,
$100,000, for 1997, 1998 and 1999, respectively.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. Management believes it is unlikely that the
final outcome of any of the claims or proceedings to which the Company is a
party would have a materially adverse effect on the Company's financial
position or results of operations.
On February 8, 1996, the federal government signed legislation that will,
without limitation, permit the Regional Bell Operating Companies ("RBOC")
to provide domestic and international long distance services upon a finding
by the FCC that the petitioning RBOC has satisfied certain criteria for
opening up its local exchange network to competition and that its provision
of long distance services would further the public interest; removes
existing barriers to entry into local service markets; significantly
changes the manner in which carrier-to-carrier arrangements are regulated
at the federal and state level; establishes procedures to revise universal
service standards; and, establishes penalties for unauthorized switching of
customers. The Company cannot predict the effect such legislation will have
on the Company or the industry. However, the Company believes that it is
positioned to take advantage of business opportunities in the rapidly
changing telecommunications market.
-59-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
14. FINANCING OF OPERATIONS
At April 30, 1996, the Company's current liabilities exceeded its current
assets by $2,041,326 and the Company was experiencing losses from
operations. The financial stability of the Company depends on its ability
to raise additional capital until operations reach a profitable level. The
Company's plans are to continue funding the growth of the Company through
additional private placements, as it has done in the past, and by
discounting receivables.
15. SUBSEQUENT EVENTS
Effective July 1, 1996, the Company entered into a receivables purchase
facility with Receivables Funding Corporation (RFC). Under this facility,
the Company will transfer receivables with recourse to RFC subject to the
conditions of the facility. The transfers will be recorded in the period in
which they occur. DNI and AMS began transferring approximately 90% of
eligible receivables to RFC beginning in July and September, respectively.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfer and Servicing of Financial Assets and
Extinguishment of Liabilities." SFAS 125 requires that a transfer of
financial assets be accounted for as either a sale of these assets or as a
secured borrowing with a pledge of collateral. There are certain criteria
which must be met to classify the transfer as a sale. This statement is
effective for the Company's 1997 fiscal year. Under the provisions of SFAS
125, the Company's transfers of receivables to RFC meet the criteria for
classification as sales.
-60-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
For the quarters ended
----------------------
July 31, October 31,
-------- -----------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 1,702,209 $ 504,775 $ 1,764,900 $ 587,935
------------ ------------ ------------ ------------
Cost of revenues $ (2,041,669) $ (1,138,643) $ (2,162,607) $ (1,060,481)
------------ ------------ ------------ ------------
Net loss $ (339,460) $ (633,868) $ (397,707) $ (472,546)
============ ============ ============ ============
Loss per share $ (.10) $ (.32) $ (.12) $ (.24)
============ ============ ============ ============
For the quarters ended
----------------------
January 31, April 30,
----------- ---------
1996 1995 1996 1995
---- ---- ---- ----
Revenues $ 1,664,245 $ 651,193 $ 2,895,248 $ 594,564
------------ ------------ ------------ ------------
Cost of revenues $ (2,296,514) $ (1,091,699) $ (3,128,045) $ (1,120,361)
------------ ------------ ------------ ------------
Net loss $ (632,269) $ (440,506) $ (232,797) $ (525,797)
============ ============ ============ ============
Loss per share $ (.17) $ (.20) $ (.05) $ (.16)
============ ============ ============ ============
The net loss for the three months ended January 31, 1996 includes losses on
impairment of two long-lived assets.
</TABLE>
-61-
<PAGE>
UNITED DIGITAL NETWORK, INC.
AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended
January 31,1997
-62-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements:
Consolidated Balance Sheets as of January 31, 1997 and April 30, 1996
Consolidated Statements of Operations for the nine months ended
January 31, 1997 and January 31, 1996
Consolidated Statements of Shareholders' Equity as of
January 31, 1997 and April 30, 1996
Consolidated Statements of Cash Flows for the nine months ended
January 31, 1997 and January 31, 1996
Notes to Consolidated Financial Statements
-63-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
CONSOLIDATED BALANCE SHEETS
- - --------------------------------------------------------------------------------
<TABLE>
January 31, April 30,
1997 1996
(Unaudited)
---------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 263,178 1,073,649
Accounts and notes receivable, net of allowance of
$275,406 and $222,711 respectively 3,684,353 2,452,336
Receivable from employee 12,010 12,010
Prepaid expenses and other 487,176 140,991
------------ ------------
Total current assets 4,446,717 3,678,986
------------ ------------
Property and equipment, net of accumulated
depreciation of $2,705,910 and $2,253,370
respectively 1,974,026 1,369,576
Intangible assets, net of accumulated amortization of
$429,945 and $142,166 respectively 6,484,063 5,367,809
Other assets 132,201 170,791
------------ ------------
Total assets $ 13,037,007 $ 10,587,162
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 5,054,441 $ 3,407,351
Other accrued liabilities 345,724 220,834
Notes and accounts payable to shareholders 167,430 386,289
Current maturities of long-term obligations, net 2,117,980 1,316,957
Accrued taxes, other than income taxes 640,926 388,881
------------ ------------
Total current liabilities 8,326,501 5,720,312
------------ ------------
Long-term obligations, net 2,537,506 2,061,286
Commitments and contingencies (Note 6)
Shareholders' equity:
Common stock, $.01 par value, 100,000,000 shares
and authorized; 5,250,340 issued at January 31,
1997 April 30, 1996 52,503 52,503
Additional paid-in capital 9,958,694 9,913,694
Retained deficit (7,838,197) (7,160,633)
------------ ------------
Total shareholders' equity 2,173,000 2,805,564
------------ ------------
Total liabilities and shareholders' equity $ 13,037,007 $ 10,587,162
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-64-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
CONSOLIDATED STATEMENT OF OPERATIONS
- - --------------------------------------------------------------------------------
<TABLE>
For the nine months ended January 31,
1997 1996
(Unaudited)
-------------------------------------------------------
<S> <C> <C>
Telecommunications revenues $ 16,793,911 $ 5,131,354
Cost of revenues 13,308,590 3,848,331
------------ ------------
Gross profit 3,485,321 1,283,023
------------ ------------
Operating expenses:
General and administrative 3,110,491 2,044,498
Depreciation and amortization 674,023 439,220
------------ ------------
Total operating expenses 3,784,514 2,483,718
------------ ------------
Loss from operations
before other expenses (299,193) (1,200,695)
Other expenses:
Interest expense, net 446,629 104,744
Loss on impairment of assets 63,997
Gain on debt restructure (68,258) -
------------ ------------
Total other expenses 378,371 168,741
------------ ------------
Net loss $ (677,564) $ (1,369,436)
============ ============
Loss per weighted average common shares outstanding:
Net loss per share $ (.129) $ (.394)
============ ============
Weighted average number of 5,250,340 3,475,995
============ ============
common shares outstanding
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-65-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
- - --------------------------------------------------------------------------------
<TABLE>
(Unaudited)
-------------------------------------------------------------------------
Additional
Common Stock paid-in Retained
Shares Amount capital deficit Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1996 5,250,340 $52,503 $9,913,694 $(7,160,633) 2,805,564
Net loss (677,564)
Compensation expense 45,000
-------------------------------------------------------------------------
Balance at January 31, 1997 5,250,340 $52,503 $9,958,694 $(7,838,197) $2,173,000
=========================================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
-66-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------
<TABLE>
For the nine months ended January 31,
1997 1996
(Unaudited)
----------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (677,564) $ (1,369,436)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 674,023 445,432
Gain on debt restructure (68,258) -
Loss on impairment - 63,997
Compensation recognized for stock options 45,000 -
Other (6,005) 2,487
(Increase) decrease, net of effect of acquisition:
Accounts and notes receivable (147,915) 84,763
Prepaid expenses and other assets (435,622) 229,112
Increase (decrease), net of effect of acquisition:
Accounts and notes payable and accrued expenses 1,181,076 86,478
----------- -----------
Net cash provided by (used in) operating activities 564,735 (457,167)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (495,140) (95,869)
Purchase of CTN (350,000) -
Receipts on notes 52,419 53,011
----------- -----------
Net cash (used in) investing activities (792,721) (42,858)
Cash flows from financing activities:
Proceeds from issuance of common stock 490,816
Private placement advances 62,407
Principal payments on obligations (582,485) (202,534)
----------- -----------
Net cash (used in) provided by financing activities (582,485) 350,689
----------- -----------
Decrease in cash (810,471) (149,336)
Cash at beginning of period 1,073,649 121,077
Cash at end of period $ 263,178 $ (28,259)
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-67-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
United Digital Network (the "Company"), formerly Unidex Communications
Corp. operates through its principal subsidiaries, Answer-Net, Inc. (ANI),
Digital Network, Inc. (DNI), Advanced Management Services, Inc. (AMS) and
Custom Telecom Network (CTN). The Company's principal business activity is
providing basic long distance services, travelcard service, international
long distance, and various other telecommunication services to residential
and small to medium sized commercial customers. The principal markets for
its long distance services are the central and southwest United States as
well as customers located nationwide in the motor freight industry.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries ANI, DNI, AMS and CTN. The financial
statements and related footnotes are presented in U.S. dollars, unless
otherwise indicated, and all significant intercompany accounts and
transactions are eliminated in consolidation. The interim financial data as
of January 31, 1997 and for the nine months ended January 31, 1997 and
January 31, 1996 is unaudited; however, in the opinion of the company, the
interim data includes all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position, results of
operations and cash flows for the interim periods. The interim consolidated
financial statements and the notes thereto should be read in conjunction
with the consolidated financial statements and notes included in the
Company's annual report for the year ended April 30, 1996.
Shareholder's equity
Loss per share is computed by dividing the net loss by the weighted average
number of shares of common stock outstanding during the periods. The effect
of outstanding options and warrants on the computation of net loss per
share is antidilutive and, therefore, is not included in the computation
for the year ended April 30, 1996 and for the nine and three months ended
January 31, 1997.
On June 5, 1996, the Company's board of directors declared a four-for-one
reverse common stock split. As a result, effective August 9, 1996, all of
the Company's 50,000,000 shares of common stock, both issued and unissued,
were consolidated into 12,500,000 shares. The Company's par value of $.01
per share remained unchanged. All share and per share amounts appearing in
the consolidated financial statements and notes thereto have been
retroactively adjusted for the stock split.
On June 5, 1996, the Company's board of directors also approved an increase
in the authorized shares of the Company from 12,500,000 to 100,000,000
shares effective August 9, 1996. Concurrent with this change, the Company's
name was changed to United Digital Network, Inc.
-68-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
3. ACQUISITION OF CTN
Effective December 31, 1996, the Company acquired all of the outstanding
shares of Custom Telecom Network (CTN). The purchase price of $1,400,000
included cash, a promissory note and a debenture due 24 months after
closing entitling the holder to convert the principal into 150,000 shares
of the Company during the term of the debenture. One month of CTN
operations is included in the interim financial statements. CTN is a
facility-based reseller of long distance services located in Phoenix,
Arizona.
The acquisition was accounted for using the purchase method of accounting,
and accordingly, the purchase price was allocated to the assets purchased
and the liabilities assumed based upon fair values at the date of
acquisition.
4. ACCOUNTS RECEIVABLE
Effective July 1, 1996, the Company entered into a receivables purchase
facility with Receivables Funding Corporation (RFC). Under this facility,
the Company will transfer receivables with recourse to RFC subject to the
conditions of the facility. The transfers will be recorded in the period in
which they occur.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"). SFAS requires that a transfer
of financial assets be accounted for as either a sale of these assets or as
a secured borrowing with a pledge of collateral. There are certain
criteria, which must be met to classify the transfer as a sale. This
statement is effective for the Company's 1997 fiscal year.
The company sells approximately 90% of its gross trade receivables to RFC
with a maximum purchase commitment amount of $9,000,000. The initial term
of the facility terminates after two years with options to extend for one
or two additional 12 months terms subject to RFC's approval. The Company
can also terminate the agreement early with proper notice and payment of
termination fees. The interest rate on the facility is prime rate plus 2.6%
annually.
5. LONG-TERM OBLIGATIONS
At April 30, 1996 the Company was in default on certain notes and leases
totaling approximately $366,000. Subsequently, the Company has favorably
negotiated settlements on notes and leases totaling approximately $325,000
that were in default.
6. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. Management believes it is unlikely that the
final outcome of any of the claims or proceedings to which the Company is a
party would have a materially adverse effect on the Company's financial
position or results of operations.
-69-
<PAGE>
UNITED DIGITAL NETWORK, INC. AND SUBSIDIARIES
(formerly UNIDEX COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
7. WARRANTS
The terms of a January 1996 private placement allowed for an increase in
the number of shares the warrant-holder could purchase when exercising the
warrant if the Company did not effect a registration statement prior to
December 22, 1996. The Company did not complete the filings in Canada and
U.S. registrations before December 22, 1996. The warrant holders therefore
were granted the right to purchase one share of the Company instead of one
half-share. The warrants expire March 1998.
8. SUBSEQUENT EVENTS
On February 10, 1997 the Company announced a private placement to raise a
total of $675,000 by issuing a total of 422,250 units of the Company at the
price of $1.60 per unit. Each unit consists of one common share and
one-half non-transferable share purchase warrant. The shares were issued
April 4, 1997.
On March 7, 1997 the Company announced a private placement to raise a total
of $640,000 by issuing a total of 400,000 units of the Company at the price
of $1.60 per unit. The placement was subsequently amended to raise a total
of $480,000 by issuing a total of 300,000 units of the Company. Each unit
consists of one common share and one-half non-transferable share purchase
warrant. The shares were issued April 21, 1997.
Per the stock purchase agreement related to the AMS acquisition, a $838,056
debenture was due in February 1997. The company issued 250,000 shares and
paid an actual amount of $225,036. The debenture amount was reduced as a
result of certain contingencies as specified in the stock purchase
agreement. Management has recorded adjustments to the purchase price and
reductions to the notes and debentures payable to the sellers based on
management's best estimate of allowable adjustments defined in the stock
purchase agreement.
-70-
<PAGE>
UNITED DIGITAL NETWORK, INC.
CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
Year Ended April 30, 1996
(Unaudited)
(in thousands, except per share amounts)
On March 26, 1996, the Company acquired all the outstanding capital stock of
Advanced Management Services, Inc. (AMS). The pro forma consolidated statement
of operations for the year ended April 30, 1996 is presented as if the Company
had acquired AMS on May 1, 1995, and gives effect to the related financing. The
pro forma consolidated statement of operations should be read in conjunction
with the financial statements of the Company and AMS, including the related
footnotes thereto, appearing elsewhere in this Prospectus. The pro forma
information is not necessarily indicative of the results that would have been
reported had such events actually occurred on May 1, 1995, or is it indicative
of the Company's future results. The pro forma information also does not reflect
either the issuance of shares in connection with this Offering and the
contemplated use of proceeds therefrom, or the conversion or exercise of any of
the Company's outstanding convertible preferred stock or warrants.
<TABLE>
Pro Forma
UDN AMS Adjustments Consolidated
--- --- ----------- ------------
<S> <C> <C> <C>
Sales $ 7,080 10,424 ----- $ 17,504
Cost of Sales 5,135 9,604 ----- 14,739
---------- ---------- ---------- ----------
Gross Margin 1,945 820 ----- 2,765
Operating Expenses 3,420 1,328 259(A) 5,007
---------- ---------- ---------- ----------
Income (loss) from Operations (1,475) (508) (259) (2,242)
Other Income (Expense) (171) ----- (144)(B) (315)
---------- ---------- ---------- ----------
Net Loss $ (1,646) (508) (403) (2,557)
========== ========== ========== ==========
Weighted Average Shares Outstanding 3,707 3,707
Net Loss Per Share (.44) (.69)
---------- ----------
</TABLE>
NOTES TO CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
The following describes the assumptions used in determining the pro forma
adjustments necessary to give on a pro forma basis to the transaction described
above:
(A) Adjustment to amortization for goodwill and a customer base arising from
the AMS acquisition based on useful lives of 25 years and 7 years,
respectively.
(B) Interest related to $2.4 million of obligation incurred in connection with
the acquisition with interest rate of 11%.
-71-
<PAGE>
ADVANCED MANAGEMENT
SERVICES, INC.
FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT ACCOUNTANTS
MARCH 26, 1996
-72-
<PAGE>
ADVANCED MANAGEMENT SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants for the period from May 1, 1995
to March 26, 1996
Financial Statements:
Balance Sheet as of March 26, 1996
Statement of Operations for the period from
May 1, 1995 to March 26, 1996
Statement of Shareholders' Equity (Deficit) for the period from
May 1, 1995 to March 26, 1996
Statement of Cash Flows for the period from
May 1, 1995 to March 26, 1996
Notes to Financial Statements
-73-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
April 28, 1997
To the Board of Directors and Shareholders
of United Digital Network, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, shareholders' equity (deficit) and cash flows present fairly, in all
material respects, the financial position of Advanced Management Services, Inc.
at March 26, 1996, and the results of their operations and their cash flows for
the period from May 1, 1995 to March 26, 1996 (date of acquisition of the
Company by United Digital Network, Inc.), in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which requires 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
-74-
<PAGE>
ADVANCED MANAGEMENT SERVICES, INC.
BALANCE SHEET
- - --------------------------------------------------------------------------------
As of March 26,
1996
----
ASSETS
Current assets:
Cash $ 557,020
Accounts receivable, net (Note 3) 1,614,825
Accounts and note receivable from officer 418,077
Prepaid expenses and other 2,884
------------
Total current assets 2,592,806
------------
Property and equipment, net (Note 4) 24,295
------------
Total assets $ 2,617,101
============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable $ 2,655,992
Sales tax payable 406,056
Accrued liabilities 2,423
Current portion of capital lease obligation 4,836
------------
Total current liabilities 3,069,307
------------
Capital lease obligation 8,820
Commitments and contingencies (Note 6)
Shareholders' equity (deficit):
Common stock, $1 par value
50,000 shares authorized;
10,753 issued 10,753
Retained deficit (471,779)
------------
Total shareholders' equity (deficit) (461,026)
------------
Total liabilities and shareholders' equity (deficit) $ 2,617,101
============
The accompanying notes are an integral
part of these financial statements.
-75-
<PAGE>
ADVANCED MANAGEMENT SERVICES, INC.
STATEMENT OF OPERATIONS
- - -------------------------------------------------------------------------------
For the period
from May 1, 1995
to March 26, 1996
-----------------
Telecommunications revenues $ 9,969,398
Cost of revenues 9,206,800
------------
Gross profit 762,598
------------
Operating expenses:
General and administrative 1,406,739
Depreciation and amortization 9,251
------------
Total operating expenses 1,415,990
------------
Operating loss (653,392)
Interest income, net 3,042
------------
Net loss $ (650,350)
============
The accompanying notes are an integral
part of these financial statements.
-76-
<PAGE>
ADVANCED MANAGEMENT SERVICES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
- - --------------------------------------------------------------------------------
For the period from
May 1, 1995 to March 26, 1996
-----------------------------
Common Stock Retained Total
------------ earnings equity
Shares Amount (deficit) (deficit)
------ ------ --------- ---------
Balance at April 30, 1995 10,000 $ 10,000 $ 178,571 $ 188,571
Net loss (650,350) (650,350)
Issuance of common stock 753 753 753
---------- ---------- ---------- ----------
Balance at March 26, 1996 10,753 10,753 $ (471,779) $ (461,026)
========== ========== ========== ==========
The accompanying notes are an integral
part of these financial statements.
-77-
<PAGE>
ADVANCED MANAGEMENT SERVICES, INC.
STATEMENT OF CASH FLOWS
- - --------------------------------------------------------------------------------
For the period
from May 1, 1995
to March 26, 1996
-----------------
Cash flows from operating activities:
Net income $ (650,350)
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization 9,251
Decrease in accounts and notes receivable 354,217
Increase in prepaid expenses and other assets (875)
Increase in accounts payable and accrued liabilities 840,131
-----------
Net cash provided by operating activities 552,374
-----------
Cash flows from investing activities:
Additions to property and equipment (9,292)
-----------
Net cash used in investing activities (9,292)
-----------
Cash flows from financing activities:
Principal payments on obligations (4,250)
Proceeds from issuance of common stock 753
-----------
Net cash used in financing activities (3,497)
-----------
Increase in cash 539,585
Cash at beginning of period 17,435
-----------
Cash at end of period $ 557,020
===========
The accompanying notes are an integral
part of these financial statements.
-78-
<PAGE>
ADVANCED MANAGEMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
- - --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND ACQUISITION
Advanced Management Services, Inc. (the "Company") was incorporated as an S
corporation in 1991. The Company's principal business activity is providing
long-distance services, travelcard service, and various other
telecommunication services to customers located nationwide, primarily in
the motor freight industry.
Effective March 26, 1996, all of the outstanding stock of the Company was
acquired by United Digital Network, Inc. (formerly Unidex Communications
Corp.) The financial statements of the Company presented herein do not
reflect any adjustments arising from the United Digital Network, Inc.
acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
For purposes of this presentation, the Company's fiscal year ends on April
30.
Financial instruments
The fair market value of financial instruments is determined by reference
to various market data and other valuation techniques as appropriate. The
Company believes that the fair values of financial instruments approximate
their recorded values.
Business and credit concentrations
In the normal course of business, the Company extends unsecured credit to
its customers. Management has provided an allowance for doubtful accounts
to provide for amounts which may eventually become uncollectible and to
provide for any disputed charges.
Sales to one customer for the period ended March 26, 1996 represented
approximately 26% of telecommunications revenues.
Property and equipment
Property and equipment are stated at cost. Depreciation for financial
statement purposes, which includes amortization of assets under capital
leases, is provided utilizing the straight-line method over the estimated
useful lives of the depreciable assets or the lease terms.
Expenditures for major renewals and betterments, which significantly extend
the useful lives of existing property and equipment, are capitalized and
depreciated. Upon retirement or disposition of property and equipment, the
cost and related accumulated depreciation are removed from the accounts and
any resulting gain or loss is recognized in income. Expenditures for repair
and maintenance are charged to expense as incurred.
-79-
<PAGE>
ADVANCED MANAGEMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
- - --------------------------------------------------------------------------------
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Federal income taxes
The Company elected to be treated as an S corporation under Subchapter S of
the Internal Revenue Code. Therefore, no income tax amounts have been
reflected in the financial statements as all income tax consequences of the
Company's activities are passed through to the Company shareholders.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
March 26,
1996
----
Trade receivables:
Billed $ 864,092
Unbilled 884,293
-----------
1,748,385
Allowance for doubtful accounts:
Trade (133,560)
-----------
Total accounts receivable, net $ 1,614,825
===========
The Company's monthly billing cycle is such that certain services performed
in the last month of one fiscal year will not be billed until the first
month of the subsequent fiscal year. These services are recognized as
earned revenue and recorded as unbilled receivables when provided.
-80-
<PAGE>
ADVANCED MANAGEMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
- - --------------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT
Property and equipment consist of:
March 26,
1996 Life
---- ----
Computer equipment $ 20,100 5 years
Office furniture 97,191 7 years
-----------
117,291
Accumulated depreciation (92,996)
-----------
Total property and equipment, net $ 24,295
-----------
Total depreciation expense, including amortization of equipment under
capital leases, charged to operations for the period from May 1, 1995 to
March 26, 1996 was $9,251.
5. EMPLOYEE SAVINGS PLAN
The Company has an employee savings 401(k) plan which covers certain
eligible full-time employees. It is the Company's policy to fund the Plan
with discretionary contributions. During fiscal 1996, the Plan was
terminated. For the period from May 1, 1995 to March 26, 1996,
approximately $38,543 was expensed by the Company related to the Plan.
6. COMMITMENTS AND CONTINGENCIES
The Company has entered into various long-term commitments for the purchase
of network usage. The aggregate amount of required payments under these
various agreements is $650,000 for fiscal 1997.
The Company is involved in various claims and legal actions arising from
the ordinary course of business. Management believes that it is unlikely
that the final outcome of any of the claims or precedings to which the
Company is a party would have a materially adverse effect on the Company's
financial position or results of operations.
-81-
<PAGE>
ADVANCED MANAGEMENT
SERVICES, INC.
STATEMENT OF TELECOMMUNICATION
SERVICES REVENUES AND DIRECT
EXPENSES AND REPORT OF INDEPENDENT
ACCOUNTANTS
YEAR ENDED APRIL 30, 1995
-82-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
April 25, 1997
To the Board of Directors and Shareholders
of Advanced Management Services, Inc.
We have audited the accompanying statement of telecommunication services
revenues and direct expenses of Advanced Management Services, Inc., acquired by
United Digital Network, Inc. (formerly Unidex Communication Corp.), for the year
ended April 30, 1995. This statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this statement based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of telecommunication services revenues and
direct expenses is free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in this
statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of this statement. We believe that our audit provides a reasonable
basis for our opinion.
The accompanying statement of telecommunication services and direct expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in a registration statement on
Form 10-SB of United Digital Network, Inc.) as described in Note 3 and is not
intended to be a complete presentation of Advanced Management Services Inc.'s
revenues and expenses.
In our opinion, the statement referred to above presents fairly, in all material
respects, the telecommunication services revenues and direct expenses acquired,
as described in Note 2, for the year ended April 30, 1995, in conformity with
generally accepted accounting principles.
/s/ Price Waterhouse LLP
-83-
<PAGE>
ADVANCED MANAGEMENT SERVICES, INC.
STATEMENT OF TELECOMMUNICATION SERVICES REVENUES AND DIRECT EXPENSES
- - -------------------------------------------------------------------------------
For the
year ended
April 30,
1995
----
Telecommunication services revenues $ 10,671,000
Direct expenses (primarily line costs) 9,042,000
-------------
Gross Profit $ 1,629,000
=============
The accompanying notes are an integral
part of this financial statement.
-84-
<PAGE>
ADVANCED MANAGEMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENT OF TELECOMMUNICATION
SERVICES REVENUES AND DIRECT EXPENSES
- - --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
Advanced Management Services, Inc. ("AMS") was incorporated as an S
corporation in 1991. The Company's principal business activity is providing
long-distance services, travelcard service, and various other
telecommunication services to customers located nationwide in the motor
freight industry.
2. ACQUISITION
Effective March 26, 1996, all of the outstanding common stock of AMS was
acquired by United Digital Network ("United Digital") (formerly Unidex
Communications Corp.) in a transaction accounted for as a purchase by the
United Digital.
3. BASIS OF PRESENTATION
The accompanying statement of telecommunication services revenues and
direct expenses was prepared for the purpose of complying with the rules
and regulations of the Securities and Exchange Commission ("SEC") for the
inclusion in the registration statement on Form 10-SB of United Digital.
For purposes of this presentation, AMS's fiscal year ends on April 30.
The acquisition of AMS constituted a significant acquisition to United
Digital pursuant to SEC Regulation S-B. AMS did not maintain complete
accounting records and, accordingly, complete financial statements of the
acquired AMS are not presented.
Telecommunication services revenues primarily represent amounts billed to
customers for long distance and travelcard services and direct expenses,
primarily representing line costs. The accompanying statement is not
intended to be a complete presentation of the Company's revenues and
expenses.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
AMS recognizes revenue from telecommunication services in the period in
which the services are provided. Direct expenses are recorded when the
related revenue is recognized.
-85-
<PAGE>
DIGITAL NETWORK, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
ACCOUNTANTS
JANUARY 31, 1995
-86-
<PAGE>
DIGITAL NETWORK, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants for the year ended January 31, 1995 2
Consolidated Financial Statements:
Consolidated Balance Sheet as of January 31, 1995 3
Consolidated Statement of Operations for the year ended
January 31, 1995 4
Consolidated Statement of Shareholders' Equity (Deficit)
for the year ended January 31, 1995 5
Consolidated Statement of Cash Flows for the year ended
January 31, 1995 6
Notes to Consolidated Financial Statements 7
-87-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
April 28, 1997
To the Board of Directors and Shareholders
of Digital Network, Inc. and subsidiaries
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of
Digital Network, Inc. and its subsidiaries at January 31, 1995, and the results
of their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
-88-
<PAGE>
DIGITAL NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- - --------------------------------------------------------------------------------
As of
January 31,
1995
----
ASSETS
Current assets:
Cash $ 69,258
Accounts and notes receivable, net (Note 3) 460,397
Trade credits 225,297
Deposits 169,800
------------
Total current assets 924,752
------------
Property and equipment, net (Note 4) 1,014,189
Customer list, less accumulated amortization of $2,277 107,030
------------
Total assets $ 2,045,971
============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable $ 1,825,056
Notes and accounts payable to shareholders 23,695
Accrued taxes 250,879
Current maturities of long-term obligations, net (Note 6) 277,064
Advances from United Digital Network, Inc. (Note 10) 135,000
Accrued liabilities and other 72,588
------------
Total current liabilities 2,584,282
------------
Notes payable to shareholder 25,946
Long-term obligations, net (Note 6) 632,536
Commitments and contingencies (Note 8)
Shareholders' equity (deficit):
Common stock, $1 par value
50,000,000 shares authorized;
1,000 issued 1,000
Additional paid-in-capital 206,746
Retained deficit (1,404,539)
------------
Total shareholders' equity (deficit) (1,196,793)
------------
Total liabilities and shareholders' equity (deficit) $ 2,045,971
============
The accompanying notes are an integral part
of these consolidated financial statements.
-89-
<PAGE>
DIGITAL NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
- - --------------------------------------------------------------------------------
For the
year ended
January 31,
1995
Telecommunications revenues $ 3,823,226
Cost of revenues (2,760,776)
-------------
Gross profit 1,062,450
-------------
Operating expenses:
General and administrative 1,374,689
Depreciation and amortization 280,665
-------------
Total operating expenses 1,655,354
-------------
Operating loss (592,904)
Interest expense, net (83,192)
Other expense, net (Note 9) (20,429)
-------------
Net loss $ (696,525)
=============
The accompanying notes are an integral part
of these consolidated financial statements.
-90-
<PAGE>
DIGITAL NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
- - --------------------------------------------------------------------------------
<TABLE>
For the year ended
January 31, 1995
----------------
Common Stock Additional Total
------------ paid-in Retained equity
Shares Amount capital deficit (deficit)
------ ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1994 1,000 $ 1,000 $ 206,746 $ (708,014) $ (500,268)
Net loss (696,525) (696,525)
------------- ------------- ------------- ------------- -------------
Balance at January 31, 1995 1,000 $ 1,000 $ 206,746 $ (1,404,539) $ (1,196,793)
============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-91-
<PAGE>
DIGITAL NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- - --------------------------------------------------------------------------------
For the year
ended
January 31,
1995
----
Cash flows from operating activities:
Net loss $ (696,525)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 280,665
Increase in accounts and notes receivable (31,035)
Increase in prepaid expenses and other assets (97,727)
Increase in accounts payable and accrued expenses 843,027
------------
Net cash provided by operating activities 298,405
------------
Cash flows from investing activities:
Additions to property and equipment (460,999)
------------
Net cash used in investing activities (460,999)
------------
Cash flows from financing activities:
Additions to long term obligations 423,604
Principal payments on obligations (213,058)
------------
Net cash provided by financing activities 210,546
------------
Increase in cash 47,952
Cash at beginning of year 21,306
------------
Cash at end of year $ 69,258
============
Supplemental disclosure of cash flow information:
Interest paid $ 88,876
============
The accompanying notes are an integral part
of these consolidated financial statements.
-92-
<PAGE>
DIGITAL NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
Digital Network, Inc. and subsidiaries ("DNI" or the "Company") was
incorporated in 1982. The Company's principal business activity is
providing basic long distance services, travelcard service, international
long distance, and various other telecommunication services to residential
and small to medium sized commercial customers. The principal markets for
its long distance services are the central and southwest United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its wholly and majority owned subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation.
Financial instruments
The fair market value of financial instruments is determined by reference
to various market data and other valuation techniques as appropriate. The
Company believes that the fair values of financial instruments approximate
their recorded values.
Business and credit concentrations
In the normal course of business, the Company extends unsecured credit to
its customers. Management has provided an allowance for doubtful accounts
to provide for amounts which may eventually become uncollectible and to
provide for any disputed charges.
Property and equipment
Property and equipment are stated at cost. Depreciation for financial
statement purposes, which includes amortization of assets under capital
leases, is provided utilizing the straight-line method over the estimated
useful lives of the depreciable assets or the lease terms.
Expenditures for major renewals and betterments, which significantly extend
the useful lives of existing property and equipment, are capitalized and
depreciated. Upon retirement or disposition of property and equipment, the
cost and related accumulated depreciation are removed from the accounts and
any resulting gain or loss is recognized in income. Expenditures for repair
and maintenance are charged to expense as incurred.
Customer list
Customer list represents the value assigned to purchased customer
relationships and is amortized utilizing the straight-line method over an
estimated useful life of 7 years.
-93-
<PAGE>
DIGITAL NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Federal income taxes
The Company has elected to be treated as an S corporation under Subchapter
S of the Internal Revenue Code. Therefore, no income tax amounts have been
reflected in the financial statements as all income tax consequences of the
Company's activities are passed through to the Company shareholders.
If the Company had elected to be treated as a C corporation, any net
deferred tax asset arising as a result of the application of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes",
would have been fully reserved.
3. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
January 31,
1995
----
Trade receivables:
Billed $ 291,980
Unbilled 289,407
------------
581,387
Allowance for doubtful accounts:
Trade (120,990)
------------
Total accounts and notes receivable, net $ 460,397
============
The Company's monthly billing cycle is such that certain services performed
in the last month of one fiscal year will not be billed until the first
month of the subsequent fiscal year. These services are recognized as
earned revenue and recorded as unbilled receivables when the services are
provided.
-94-
<PAGE>
DIGITAL NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT
Property and equipment consist of:
January 31,
1995 Life
---- ----
Communications equipment $ 2,876,823 5 years
Office furniture 82,253 7 years
------------
2,959,076
Accumulated depreciation (1,944,887)
------------
Total property and equipment, net $ 1,014,189
============
Total depreciation expense, including amortization of equipment under
capital leases, charged to operations for the year ended January 31, 1995
was $278,388.
5. LEASES
The Company leases certain office facilities and equipment under capital
leases and noncancellable operating leases expiring through January 2000.
At the end of the capital lease terms, the Company has the option to
purchase the leased equipment. During fiscal 1995, the Company modified the
terms of one capital lease agreement resulting in an increase in long-term
obligations of $48,466. Minimum annual rentals under these leases are as
follows:
Years ending Capital Operating
January 31, Leases Leases
----------- ------ ------
1996 $ 178,132 $ 34,070
1997 178,132 55,920
1998 178,132 55,920
1999 178,132 51,120
2000 163,287 51,120
Thereafter - 46,860
------------ ------------
Total minimum lease payments 875,815 $ 295,010
============
Amounts representing interest (168,193)
------------
Present value of net minimum lease payments 707,622
Current portion (121,090)
------------
Long-term capitalized lease obligations $ 586,532
============
-95-
<PAGE>
DIGITAL NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
6. LONG-TERM OBLIGATIONS
Long-term obligations consist of: January 31,
1995
----
Note repayable to a bank in monthly installment
amounts of $3,678 plus interest at 8%, final payment
due June 1995. This note is currently in default $ 41,098
Note repayable in monthly installments of $4,894,
including interest at 8%, due December 1996 102,947
Note repayable in weekly installments of $2,661
including interest of 10%, due June 1995 49,604
Capital lease obligations 707,622
Other 8,329
----------
Total long-term obligations 909,600
Less current maturities:
Long-term debt 155,974
Capital lease obligations 121,090
----------
Long-term portion $ 632,536
==========
Principal repayments of long-term debt are due approximately as follows:
Years ending
January 31,
1996 $ 277,064
1997 177,813
1998 143,640
1999 156,713
2000 154,370
----------
Total long-term debt $ 909,600
==========
-96-
<PAGE>
DIGITAL NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
Assets recorded under capital leases are included in property and equipment
as follows:
January 31,
1995
----
Communications equipment $ 674,000
Accumulated amortization (7,021)
----------
$ 666,979
==========
The total rent expense incurred during the year ended January 31, 1995 was
$166,490.
7. RELATED PARTY TRANSACTIONS
The Company made payments to creditors totaling $47,314 on behalf of an
associated company. These payments were expensed by the Company.
Additionally, the Company processed long-distance traffic through the use
of a carrier identification code ("CIC") owned by another associated
company. The Company remits payment of the access code charges directly to
the service providers.
Associated companies represent companies in which certain officers of DNI
have ownership interests.
Interest paid to shareholders of the Company was $1,873 for the year ended
January 31, 1995.
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. Management believes it is unlikely that the
final outcome of any of the claims or proceedings to which the Company is a
party would have a materially adverse effect on the Company's financial
position or results of operations.
9. OTHER EXPENSE
Other expense consists of the following:
Fees and penalties $ (101,669)
Gain on dispute settlement 50,863
Other income 30,377
----------
$ (20,429)
==========
Fees and penalties consist of late fees paid to service providers and tax
penalties paid to regulatory agencies. The gain resulted from the
settlement of a dispute regarding line charge discounts with a service
provider.
-97-
<PAGE>
DIGITAL NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
10. SUBSEQUENT EVENTS
During fiscal 1995, the Company received $135,000 in cash advances from
United Digital Network, Inc. ("UDN"), formerly Unidex Communications Corp.,
for the funding of operations.
Effective April 27, 1995, UDN acquired all of the outstanding shares of the
Company. Subsequent to the acquisition, the cash advances were treated as
intercompany payables and eliminated in consolidation. The financial
statements of the Company presented herein do not reflect any adjustments
arising from the UDN acquisition.
-98-
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
- - ------ -----------------------
2 Charter and Bylaws.*
3 Instruments Defining the Rights of Security Holders.(See Exhibit No. 2).*
- - ------------------
* Filed herewith.
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this amendment to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE: May 30, 1997 UNITED DIGITAL NETWORK, INC.
By: /s/ John R. Snedegar
--------------------
John R. Snedegar, President
By: /s/ Dale W. Christensen
-----------------------
Dale W. Christensen,
Vice President of Finance
and Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
- - ------ -----------------------
2 Charter and Bylaws*
3 Instruments Defining the Rights of Security Holders.
(See Exhibit No. 2)*
- - ------------------
* Filed herewith.
<PAGE>
INDEX TO EXHIBITS
Exhibit No. SEC Reference No. Title of Document
- - ----------- ----------------- -----------------
1 2 Articles of Incorporation of the Company
and related Amendments
2 2 Bylaws of the Company
3 3 Form of Warrant
4 3 Form of Warrant
EXHIBIT 1
---------
CERTIFICATE OF INCORPORATION
OF
UNITECH COMMUNICATIONS CORP.
A Delaware Corporation
ARTICLE 1 - NAME
The name of this Corporation is UniTech communications Corp.
ARTICLE 2 - REGISTERED OFFICE AND AGENT
The address of the registered office of the Corporation in the State of
Delaware is 32 Loockerman Square, Suite L-100, Dover, Delaware. The name of the
Corporation's registered agent at that address is The Prentice-Hall Corporation
System, Inc. County of Kent.
ARTICLE 3 - PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware, as amended from time to time.
ARTICLE 4 - AUTHORIZED CAPITAL
The Corporation is authorized to issue one class of shares designated
"Common Stock". The number of shares of Common Stock Authorized to be issued is
15,000,000, with a par value of $01 per share
ARTICLE 5 - ELECTION OF DIRECTORS
(a) The number of directors of the Corporation shall be fixed from time to
time by the Board of Directors either by a resolution or Bylaw adopted by the
Board of Directors.
(b) Elections of directors need not be by written ballot unless otherwise
provided in the Bylaws.
ARTICLE 6 - LIMITATION OF DIRECTORS' LIABILITY
(a) A director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that this provision shall not eliminate or limit
the liability of a director (i) for any breach of his duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law, (iii)
under Section 174 of the
<PAGE>
General Corporation Law of the State of Delaware, or (iv) for any transaction
from which the director derives an improper personal benefit.
(b) If the General Corporation Law of the State Of Delaware is hereafter
amended to authorize corporate action further limiting or eliminating the
personal liability of directors, then the liability of a director to the
Corporation shall be limited or eliminated to the fullest extent permitted by
the General Corporation Law of the State of Delaware, as so amended from time to
time. Any repeal or modification of this Article 6 by the stockholders of the
Corporation shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Corporation existing
at the time of such repeal or modification.
ARTICLE 7 - AMENDMENT OF BYLAWS
The Board of Directors of the Corporation shall have concurrent power with
the stockholders to make, alter, amend, change, add to or repeal the Bylaws of
the Corporation.
ARTICLE 8 - AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation or to adopt new
provisions, in the manner now or hereafter prescribed by the General Corporation
Law of the State of Delaware, as amended from time to time, and all rights conf
erred on stockholders and directors herein are granted subject to this reserved
power.
ARTICLE 9 - INCORPORATOR
The name and address of the Incorporator of the Corporation are as follows:
Lisa K. Montalvo
c/o Higham, McConnell & Dunning
28202 Cabot Road, Suite 450
Laguna Niguel, California 92677-1250
-2-
<PAGE>
I, THE UNDERSIGNED, being the Incorporator, for the purpose of forming a
corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation, do certify that the facts herein stated are
true, and accordingly, have hereunto set my hand this _____ of __________ 1992.
---------------------------------
Lisa K. Montalvo
-3-
<PAGE>
CERTIFICATE OF AMENDMENT
or
CERTIFICATE OF INCORPORATION
or
UNITECH COMMUNICATIONS CORP.,
a Delaware corporation
(Pursuant to Sections 228 and 242 of the
General Corporation Law of the State of Delaware)
UNITECH COMMUNICATIONS CORP., a corporation organized and existing under
the General Corporation law of the State of Delaware (the "Company"), does by
its President and its Secretary and under its corporate seal hereby certify as
follows:
FIRST: That the Certificate of Incorporation of the Company was filed in
the office of the Secretary of State of the State of Delaware on November 23,
1992 (the "Certificate of Incorporation").
SECOND: That the Board of Directors of the Company has duly adopted
resolutions setting forth proposed amendments to the Certificate of
Incorporation, declaring said amendments to be advisable and directing said
amendments to be submitted to the stockholders of the Company entitled to vote
thereon for adoption by written consent. The resolutions setting forth the
proposed amendments are as follows:
"RESOLVED, that Article 1 of the Certificate of Incorporation of the
Corporation be amended to read, in its entirety, as follows:
ARTICLE I - NAME
The name of this Corporation is Digital Network, Inc.
RESOLVED FURTHER, that Article 4 of the Certificate of Incorporation
of the Corporation be amended to read, in its entirety, as follows:
ARTICLE 4 - AUTHORIZED CAPITAL
The Corporation is authorized to issue one class of shares designated
"Common Stock". The number of shares of Common Stock authorized to be
issued is Fifty Million (50,000,000), with a par value of One Cent ($0.01)
per share."
THIRD: That such resolutions of the Board of Directors of the Company were
duly adopted in accordance with the provisions of Section 151 of the General
Corporation Law of the State of Delaware on October 28, 1994.
<PAGE>
FOURTH: The foregoing amendments to the Certificate of Incorporation were
duly adopted by the stockholders of the Company by written consent given in
accordance with the applicable provisions of Sections 228 and 242 of the General
Corporation Law of the State of Delaware. Written notice of such action has been
given as provided in Section 228 of the General Corporation Law of the State of
Delaware.
FIFTH: The foregoing amendment to the Certificate of Incorporation shall be
effective on and as of the date of filing of this Certificate of Amendment in
the office of 'the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Certificate of Amendment to
be executed by John Snedegar, its President, and attested to by Judy Coultas,
its Secretary, this ____ day of October, 1994.
UNITECH COMMUNICATIONS CORP.
By:_______________________________
John Snedegar,
President
[SEAL]
ATTEST:
By:________________________
Judy Coultas,
Secretary
-2-
<PAGE>
CERTIFICATE OF MERGER
OF
UNIDEX COMMUNICATIONS CORPORATION,
a Wyoming corporation
AND
DIGITAL NETWORK, INC.,
a Delaware corporation
Pursuant to the provisions of Section 252 of the Delaware General
Corporation Law, the undersigned corporations adopt the following Certificate of
Merger for the purpose of merging Unidex Communications Corporation, a Wyoming
corporation into Digital Network, Inc., a Delaware corporation (hereinafter
sometimes referred to as the "Surviving Corporation").
1. The Name and State of incorporation of each of the constituent
corporations is:
NAME: STATE:
----- ------
Unidex Communications Corp. Wyoming
Digital Network, Inc. Delaware
2. An Agreement and Plan of Merger has been approved, adopted, certified,
executed and acknowledged by each of the constituent corporations in accordance
with Subsection 252(c) of the Delaware General Corporation Law.
3. The name of the Surviving Corporation, Digital Network, Inc., following
the name change referred to in Section 4 below, shall be Unidex Communications
Corp.
4. The Certificate of Incorporation of Digital Network, Inc., a Delaware
corporation shall be the Certificate of Incorporation of the surviving
corporation, provided however that ARTICLE 1 of such Certificate of
Incorporation shall be amended to provide that "The name of the Corporation is
Unidex Communications Corp."
5. The executed Agreement and Plan of Merger by and between the constituent
corporations is on file in the principal place of business of the Surviving
Corporation at 1431 Greenway, Suite 640, Irving, Texas 75038.
6. A copy of the Agreement and Plan of Merger by and between the
constituent corporations will be furnished by the Surviving Corporation on
request and without cost, to any stockholder of any constituent corporation.
<PAGE>
7. The authorized capital of Unidex Communications Corp., a Wyoming
corporation, the constituent corporation that will not survive the merger, is
One Hundred Million (100,000,000) shares of no par value Common Stock.
Dated this 25th day of April, 1995.
UNIDEX COMMUNICATIONS CORPORATION
ATTEST: By: _________________________
John Snedegar, President
_________________________
Janine Thomas, Secretary
DIGITAL NETWORK, INC.
ATTEST: By: _________________________
John Snedegar, President
_________________________
Judy Coultas, Secretary
-2-
<PAGE>
CERTIFICATE
FOR RENEWAL AND REVIVAL OF CHARTER
OF
UNIDEX COMMUNICATIONS CORP.
UNIDEX COMMUNICATIONS CORP., a corporation organized under the laws of the
State of Delaware, the Certificate of Incorporation of which was filed in the
Office of the Secretary of State on the twenty-third day of November A.D. 1992,
the charter of which was voided for nonpayment of taxes now desires to procure a
restoration, renewal and revival of its charter, and hereby certifies as
follows:
1. The name of this corporation is:
UNIDEX COMMUNICATIONS CORP.
2. Its registered office in the State of Delaware is located at 1013 Centre
Road, in the City of Wilmington. THE PRENTICE-HALL CORPORATION SYSTEM, INC.
3. The date when the restoration, renewal, and revival of the charter of
this company is to commence is the twenty-ninth day of February, A.D. 1996, same
being prior to the date of the expiration of the charter. This renewal and
revival of the charter of this corporation is to be perpetual.
4. This corporation was duly organized and carried on the business
authorized by its charter until the first day of March, A.D. 1996, at which time
its charter became inoperative and void for non-payment of taxes and this
certificate for renewal and revival is filed by authority of the duly elected
directors of the corporation in accordance with the laws of the State of
Delaware.
IN TESTIMONY WHEREOF, and in compliance with the provisions of Section 312
of the General Corporation Law of the State of Delaware, as amended, UNIDEX
COMMUNICATION CORP. has caused this Certificate to be signed by this ________
day of March, A.D. 1996.
--------------------------
Authorized Officer
CERTIFICATE FOR RENEWAL AND REVIVAL
OF CHARTER OF UNIDEX COMMUNICATIONS CORP.
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
UNIDEX COMMUNICATIONS CORP.,
a Delaware corporation
(Pursuant to Section 242 of the
General Corporation Law of the State of Delaware)
UNIDEX COMMUNICATIONS CORP., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Company"), does by its
President and its Secretary and under its corporate seal hereby certify as
follows:
FIRST: That the Certificate of Incorporation of the Company was filed in
the office of the Secretary of State of the State of Delaware on November 23,
1992 (the "Certificate of Incorporation").
SECOND: That the Board of Directors of the Company has duly adopted
resolutions setting forth proposed amendments to the Certificate of
Incorporation, declaring said amendments to be advisable and directing said
amendments to be submitted to the stockholders of the Company entitled to vote
thereon for adoption at a special meeting of the stockholders of the Company.
The resolutions setting forth the proposed amendments are as follows:
"RESOLVED FURTHER, that the authorized capital of the Company be
altered by consolidated all of the 50,000,000 shares of common stock
with a par value of $0.01, both issued and unissued, into 12,500,000
shares of common stock with a par value of $0.01, every 4 shares of
common stock with a par value of $0.01 being consolidated into 1 share
of common stock with a par value of $0.01; and that Article 4 of the
Certificate of Incorporation be amended to read as follows:
ARTICLE 4 - AUTHORIZED CAPITAL
The Corporation is authorized to issue one class of
shares designated "Common Stock". The number of shares of
Common Stock authorized to be issued is Twelve Million Five
Hundred Thousand (12,500,000), with a par value of One Cent
($0.01) per share."
<PAGE>
THIRD: That such resolutions of the Board of Directors of the Company were
duly adopted in accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware on June 17, 1996.
FOURTH: The foregoing amendments to the Certificate of Incorporation were
duly adopted by the stockholders of the Company at a special meeting of the
stockholders held in accordance with the applicable provisions of Section 242 of
the General Corporation Law of the State of Delaware. Written notice of such
action has been given as provided in Section 222 of the General Corporation Law
of the State of Delaware.
FIFTH: The foregoing amendment to the Certificate of Incorporation shall be
effective on and as of the date of filing of this Certificate of Amendment in
the office of the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Certificate of Amendment to
be executed by John Snedegar, its President, and attested to by Janine L.
Thomas, its Secretary, this 1st day of August, 1996.
UNIDEX COMMUNICATIONS CORP.
By: ______________________________
John Snedegar, President
(SEAL)
ATTEST:
By: _______________________
Janine L. Thomas, Secretary
-2-
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
UNIDEX COMMUNICATIONS CORP.,
a Delaware corporation
(Pursuant to Section 242 of the
General Corporation Law of the State of Delaware)
UNIDEX COMMUNICATIONS CORP., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Company"), does by its
President and its Secretary and under its corporate seal hereby certify as
follows:
FIRST: That the Certificate of Incorporation of the Company was filed in
the office of the Secretary of State of Delaware on November 23, 1992 (the
"Certificate of Incorporation").
SECOND: That the Board of Directors of the Company has duly adopted
resolutions setting forth proposed amendments to the Certificate of
Incorporation, declaring said amendments to be advisable and directing said
amendments to be submitted to the stockholders of the Company entitled to vote
thereon for adoption at a special meeting of the stockholders of the Company.
The resolutions setting forth the proposed amendments are as follows:
"RESOLVED, that the name of the Company be changed to "United
Digital Network, Inc., and that Article 1 of the Company's Certificate
of Incorporation be amended to read as follows:
ARTICLE 1 - NAME
The name of this Corporation is United Digital Network, Inc.
* * *
RESOLVED FURTHER, that the authorized capital of the Company,
which presently consists of 12,500,000 shares of common stock with a
par value of $0.01 U.S. be increased to 100,000,000 shares of common
stock with a par value of $0.01 U.S., all shares issued and unissued
raking pari passu, and that Article 4 of the Certificate of
Incorporation of the Corporation be amended to read as follows:
<PAGE>
ARTICLE 4 - AUTHORIZED CAPITAL
The Corporation is authorized to issue one class of
shares designated "Common Stock". The number of shares of
Common Stock authorized to be issued is One Hundred Million
(100,000,000), with a par value of One Cent ($0.01) per
share."
THIRD: That such resolutions of the Board of Directors of the Company were
duly adopted in accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware on June 17, 1996.
FOURTH: The foregoing amendments to the Certificate of Incorporation were
duly adopted by the stockholders of the Company at a special meeting of the
stockholders held in accordance with the applicable provisions of Section 242 of
the General Corporation Law of the State of Delaware. Written notice of such
action has been given as provided in Section 222 of the General Corporation Law
of the State of Delaware.
FIFTH: The foregoing amendment to the Certificate of Incorporation shall be
effective on and as of the date of filing of this Certificate of Amendment in
the office of the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Certificate of Amendment to
be executed by John Snedegar, its President, and attested to by Janice L.
Thomas, its Secretary, this 1st day of August, 1996.
UNIDEX COMMUNICATIONS CORP.
By: ______________________________
John Snedegar, President
(SEAL)
ATTEST:
By: _______________________
Janine L. Thomas, Secretary
-2-
EXHIBIT 2
---------
BYLAWS
OF
UNITECH COMMUNICATIONS CORP.
A Delaware Corporation
<PAGE>
TABLE OF CONTENTS
ARTICLE I
OFFICES.....................................................................1
Section 1. Registered Office........................................1
Section 2. Other Offices............................................1
Section 3. Books....................................................1
ARTICLE II..................................................................1
MEETINGS OF STOCKHOLDERS....................................................1
Section 1. Place of Meetings........................................1
Section 2. Annual Meetings..........................................1
Section 3. Special Meetings.........................................1
Section 4. Notification of Business to be Transacted at Meeting.....1
Section 5. Notice; Waiver of Notice.................................2
Section 6. Quorum; Adjournment......................................2
Section 7. Voting...................................................2
Section 8. Stockholder Action by Written Consent Without a Meeting..3
Section 9. List of Stockholders Entitled to Vote....................3
Section 10. Stock Ledger.............................................3
Section 11. Inspectors of Election...................................3
Section 12. Organization.............................................4
Section 13. Order of Business........................................4
ARTICLE III.................................................................4
DIRECTORS...................................................................4
Section 1. Powers...................................................4
Section 2. Number and Election of Directors.........................4
Section 3. Vacancies................................................4
Section 4. Time and Place of Meetings...............................4
Section 5. Annual Meeting...........................................5
Section 6. Regular Meetings.........................................5
Section 7. Special Meetings.........................................5
Section 8. Quorum; Vote Required for Action: Adjournment............5
Section 9. Action by Written Consent................................6
Section 10. Telephone Meetings.......................................6
Section 11. Committees...............................................6
Section 12. Compensation.............................................6
Section 13. Interested Directors.....................................6
-i-
<PAGE>
ARTICLE IV..................................................................7
OFFICERS....................................................................7
Section 1. Officers.................................................7
Section 2. Appointment of Officers..................................7
Section 3. Subordinate Officers.....................................7
Section 4. Removal and Resignation of Officers......................7
Section 5. Vacancies in Offices.....................................8
Section 6. Chairman of the Board....................................8
Section 7. Vice Chairman of the Board...............................8
Section 8. Chief Executive Officer..................................8
Section 9. President................................................8
Section 10. Vice President...........................................8
Section 11. Secretary................................................9
Section 12. Chief Financial Officer..................................9
ARTICLE V...................................................................9
STOCK.......................................................................9
Section 1. Form of Certificates.....................................9
Section 2. Signatures..............................................10
Section 3. Lost Certificates.......................................10
Section 4. Transfers...............................................10
Section 5. Registered Owners.......................................10
ARTICLE VI.................................................................10
INDEMNIFICATION............................................................10
Section 1. Scope of Indemnification................................10
Section 2. Insurance...............................................11
ARTICLE VII................................................................11
GENERAL PROVISIONS.........................................................11
Section 1. Dividends...............................................11
Section 2. Disbursements...........................................11
Section 3. Fiscal Year.............................................11
Section 4. Corporate Seal..........................................11
Section 5. Record Date.............................................11
Section 6. Voting of Stock Owned by the Corporation................12
Section 7. Construction and Definitions............................12
Section 8. Amendments..............................................12
-ii-
<PAGE>
BYLAWS
OF
UniTech Communications Corp.
A Delaware Corporation
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the Corporation in
the State of Delaware shall be in the City of Dover.
Section 2. Other Offices. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
Section 3. Books. The books of the Corporation may be kept within or
without the State of Delaware as the Board of Directors may from time to time
determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. All meetings of the stockholders shall be
held at such place either within or without the State of Delaware and on such
date and at such time as may be designated from time to time by the Board of
Directors, the Chairman of the Board of Directors or the Chief Executive
Officer.
Section 2. Annual Meetings. Annual meetings of stockholders shall be held
at a time and date designated by the Board of Directors for the purpose of
electing directors and transacting such other business as may properly be
brought before the meeting.
Section 3. Special Meetings. Special meetings of stockholders, for any
purpose or purposes, may be called by the Board of Directors, the Chairman of
the Board of Directors, or the holder or holders of shares entitled to cast not
less than ton percent (10%) of the votes at the meeting. Special meetings may
not be called by any other person.
Section 4. Notification of Business to be Transacted at Meeting. To be
properly brought before a meeting, business must be (a) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the Board
of Directors, (b) otherwise properly
<PAGE>
brought before the meeting by or at the direction of the Board of Directors, or
(c) otherwise properly brought before the meeting by a stockholder entitled to
vote at the meeting.
Section 5. Notice; Waiver of Notice. Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting shall
be given which shall state the place, date and hour of the meeting, and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called. Unless otherwise required by law, such notice shall be given not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the mail, postage prepaid,
directed to the stockholder at his address as it appears on the records of the
Corporation. A written waiver of any such notice signed by the person entitled
thereto, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
Section 6. Quorum; Adjournment. Except as otherwise required by law, or
provided by the Certificate of Incorporation or these Bylaws, the holders of a
majority of the capital stock issued and outstanding and entitled to vote
thereat, present in person or represented by proxy, shall constitute a quorum
for the transaction of business at all meetings of the stockholders. A meeting
at which a quorum is initially present may continue to transact business,
notwithstanding the withdrawal of enough votes to leave less than a quorum, if
any action taken is approved by at least a majority of the required quorum to
conduct that meeting. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting of the time and place of the adjourned meeting, until a quorum shall
be present or represented. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally noticed. If the adjournment is for more
than thirty (30) days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder entitled to vote at the meeting.
Section 7. Voting. Except as otherwise required by law, or provided by the
Certificate of Incorporation or these Bylaws, any question brought before any
meeting of stockholders at which a quorum is present shall be decided by the
vote of the holders of a majority of the stock represented and entitled to vote
thereat. Unless otherwise provided in the Certificate of Incorporation, each
stockholder represented at a meeting of stockholders shall be entitled to cast
one vote for each share of the capital stock entitled to vote thereat held by
such stockholder. Such votes may be cast in person or by proxy, but no proxy
shall be voted on or after three (3) years from its date, unless such proxy
provides for a longer period. Elections of directors need not be by ballot
unless the Chairman of the meeting so directs.
-2-
<PAGE>
Section 8. Stockholder Action by Written Consent Without a Meeting. Except
as otherwise provided in the Certificate of Incorporation, any action which may
be taken at any annual or special meeting of stockholders may be taken without a
meeting and without prior notice, if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding shares having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted. All such consents shall be filed with the Secretary of the
Corporation and shall be maintained in the corporate records. Any stockholder
giving a written consent, or the stockholder's proxy holders, or a transferee of
the shares or a personal representative of the stockholder or their respective
proxy holders, may revoke the consent by a writing received by the Secretary of
the Corporation before written consents of the number of shares required to
authorize the proposed action have been filed with the Secretary.
Section 9. List of Stockholders Entitled to Vote. The officer who has
charge of the stock ledger of the Corporation shall prepare and make, at least
ten (10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten (10) days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder of the Corporation who is present.
Section 10. Stock Ledger. The stock ledger of the Corporation shall be the
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 9 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
Section 11. Inspectors of Election. In advance of any meeting of
stockholders, the Board of Directors may appoint one or more persons (who shall
not be candidates for office) as inspectors of election to act at the meeting or
any adjournment thereof. If inspectors are not so appointed, or if an appointed
inspector fails to appear or fails or refuses to act at a meeting, the Chairman
of any meeting of stockholders may, and on the request of any stockholder or his
proxy shall, appoint inspectors of election at the meeting. The duties of such
inspectors shall include: determining the number of shares outstanding and the
voting power of each; the shares represented at the meeting; the existence of a
quorum; the authenticity, validity and effect of proxies; receiving votes,
ballots or consents; hearing and determining all challenges and questions in any
way arising in connection with the right to vote; counting and tabulating all
votes or consents; determining the result; and such acts as may be proper to
conduct the election or vote with fairness to all stockholders. In the event of
any dispute between or among the inspectors, the determination of the majority
of the inspectors shall be binding.
-3-
<PAGE>
Section 12. Organization. At each meeting of stockholders the Chairman of
the Board of Directors, if one shall have been elected, (or in his absence or if
one shall not have been elected, the President) shall act as Chairman of the
meeting. The Secretary (or in his absence or inability to act, the person whom
the Chairman of the meeting shall appoint secretary of the meeting) shall act as
secretary of the meeting and keep the minutes thereof.
Section 13. Order of Business. The order and manner of transacting business
at all meetings of stockholders shall be determined by the Chairman of the
meeting.
ARTICLE III
DIRECTORS
Section 1. Powers. Except as otherwise required by law or provided by the
Certificate of Incorporation, the business and affairs of the Corporation shall
be managed by or under the direction of the Board of Directors.
Section 2. Number and Election of Directors. The authorized number of
directors of the Corporation shall be five (5) until this Section 2 is amended
by a resolution duly adopted by the Board of Directors or the stockholders of
the Corporation. Directors shall be elected at each annual meeting of
stockholders, and each director so elected shall hold office until his successor
is duly elected and qualified, or until his earlier death, resignation or
removal. Any director may resign at any time effective upon giving written
notice to the Board of Directors, unless the notice specifies a later time for
such resignation to become effective. Unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective. If
the resignation of a director is effective at a future time, the Board of
Directors may elect a successor prior to such effective time to take office when
such resignation becomes effective. Directors need not be stockholders.
Section 3. Vacancies. Vacancies in the Board of Directors resulting from
death, resignation, removal or otherwise and newly created directorships
resulting from any increase in the authorized number of directors may be filled
by a majority of the directors then in office, although less than a quorum, or
by a sole remaining director. Each director so selected shall hold office for
the remainder of the full term of office of the former director which such
director replaces and until his successor is duly elected and qualified, or
until his earlier death, resignation or removal. No decrease in the authorized
number of directors constituting the Board of Directors shall shorten the term
of any incumbent directors.
Section 4. Time and Place of Meetings. The Board of Director shall hold its
meetings at such place, either within or without the State of Delaware, and at
such time as may be determined from time to time by the Board of Directors.
-4-
<PAGE>
Section 5. Annual Meeting. The Board of Directors shall meet for the
purpose of organization, the election of officers and the transaction of other
business, as soon as practicable after each annual meeting of stockholders, on
the same day and at the same place where such annual meeting shall be held.
Notice of such meeting need not be given. In the event such annual meeting is
not so held, the annual meeting of the Board of Directors may be held at such
place, either within or without the State of Delaware, on such date and at such
time as shall be specified in a notice thereof given as hereinafter provided in
Section 8 of this Article III or in a waiver of notice thereof.
Section 6. Regular Meetings. Regular meetings of the Board of Directors may
be held at such places within or without the State of Delaware at such date and
time as the Board of Directors may from time to time determine and, if so
determined by the Board of Directors, notices thereof need not be given.
Section 7. Special Meetings. Special meetings of the Board of Directors may
be called by the Chairman of the Board, the President, the Secretary or by any
two directors. Notice of the date, time and place of special meetings shall be
delivered personally or by telephone to each director or sent by first-class
mail or telegram, charges prepaid, addressed to each director at the director's
address as it is shown on the records of the Corporation. In case the notice is
mailed, it shall be deposited in the United States mail at least five (5) days
before the time of the holding of the meeting. In case the notice is delivered
personally or by telephone or telegram, it shall be delivered personally or by
telephone or to the telegraph company at least forty-eight (48) hours before the
time of the holding of the meeting. The notice need not specify the purpose of
the meeting. A written waiver of any such notice signed by the person entitled
thereto, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
Section 8. Quorum; Vote Required for Action: Adjournment. Except as
otherwise required by law, or provided in the Certificate of Incorporation or
these Bylaws, a majority of the directors shall constitute a quorum for the
transaction of business at all meetings of the Board of Directors and the
affirmative vote of not less than a majority of the directors present at any
meeting at which there is a quorum shall be the act of the Board of Directors.
If a quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting, from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
A meeting at which a quorum is initially present may continue to transact
business, notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum to conduct that meeting.
When a meeting is adjourned to another time or place (whether or not a quorum is
present), notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting, the Board of Directors may transact any business which
might have been transacted at the original meeting.
-5-
<PAGE>
Section 9. Action by Written Consent. Unless otherwise restricted by the
Certificate of Incorporation, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting if all the members of the Board of Directors or committee, as
the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board of Directors or committee.
Section 10. Telephone Meetings. Unless otherwise restricted by the
Certificate of Incorporation, members of the Board of Directors of the
Corporation, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors or such committee, as the
case may be, by conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other.
Participation in a meeting pursuant to this Section 10 shall constitute presence
in person at such meeting.
Section 11. Committees. The Board of Directors may, by resolution passed by
a majority of the entire Board, designate one or more committees, each committee
to consist of one or more of the directors of the Corporation. The Board of
Directors may designate one or more directors as alternate members of any such
committee, who may replace any absent or disqualified member at any meeting of
the committee. In the event of absence or disqualification of a member of a
committee, and in the absence of a designation by the Board of Directors of an
alternate member to replace the absent or disqualified member, the committee
member or members present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of the
absent or disqualified member. Any committee, to the extent allowed by law and
as provided 'in the resolution establishing such committee, shall have and may
exercise all the power and authority of the Board of Directors in the management
of the business and affairs of the Corporation, but no such committee shall have
the power or authority in reference to amending the Certificate of
Incorporation, adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
Bylaws of the Corporation; and, unless the resolution or the Certificate of
Incorporation expressly so provides, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock. Each
committee shall keep regular minutes of its meetings and report to the Board of
Directors when required.
Section 12. Compensation. The directors may be paid such compensation for
their services as the Board of Directors shall from time to time determine.
Section 13. Interested Directors. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
-6-
<PAGE>
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or the committee thereof
which authorizes the contract or transaction, or solely because his of their
votes art counted for such purpose if: (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of Directors
or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
his or their relationship or interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof, or the stockholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting of
the Board of Directors or of a committee which authorizes the contract or
transaction.
ARTICLE IV
OFFICERS
Section 1. Officers. The officers of the Corporation shall be a President,
a Secretary and a Chief Financial officer. The Corporation may also have, at the
discretion of the Board of Directors, a Chairman of the Board, a Vice Chairman
of the Board, a Chief Executive Officer, one or more Vice Presidents, one or
more Assistant Financial Officers and Treasurers, one or more Assistant
Secretaries and such other officers as may be appointed in accordance with the
provisions of Section 3 of this Article IV.
Section 2. Appointment of Officers. The officers of the Corporation, except
such officers as may be appointed in accordance with the provisions of Section 3
or Section 5 of this Article IV, shall be appointed by the Board of Directors,
and each shall serve at the pleasure of the Board, subject to the rights, if
any, of an officer under any contract of employment.
Section 3. Subordinate Officers. The Board of Directors may appoint, and
may empower the Chief Executive Officer or President to appoint, such other
officers as the business of the Corporation may require, each of whom shall hold
office for such period, have such authority and perform such duties as are
provided in the Bylaws or as the Board of Directors may from time to time
determine.
Section 4. Removal and Resignation of Officers. Subject to the rights of an
officer under any contract, any officer may be removed at any time, with or
without cause, by the Board of Directors or, except in case of an officer chosen
by the Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors.
-7-
<PAGE>
Any officer may resign at any time by giving written notice to the
Corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation shall be without prejudice to
the rights of the Corporation under any contract to which the officer is a
party.
Section 5. Vacancies in Offices. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these Bylaws for regular appointments to that office.
Section 6. Chairman of the Board. The Chairman of the Board, if such an
officer is elected, shall, if present, preside at meetings of the stockholders
and of the Board of Directors. He shall, in addition, perform such other
functions (if any) as may be prescribed by the Bylaws and Board of Directors.
Section 7. Vice Chairman of the Board. The Vice Chairman of the Board, if
such an officer is elected, shall, in the absence or disability of the Chairman
of the Board, perform all duties of the Chairman of the Board and when so acting
shall have all the powers of and be subject to all of the restrictions upon the
Chairman of the Board. The Vice Chairman of the Board shall have such other
powers and duties as may be prescribed by the Board of Directors or the Bylaws.
Section 8. Chief Executive Officer. The Chief Executive Officer of the
Corporation, if such an officer is elected, shall, subject to the control of the
Board of Directors, have general supervision, direction and control of the
business and the officers of the Corporation. He shall exercise the duties
usually vested in the chief executive officer of a corporation and perform such
other powers and duties as may be assigned to him from time to time by the Board
of Directors or prescribed by the Bylaws. In the absence of the Chairman of the
Board and any Vice Chairman of the Board, the Chief Executive Officer shall
preside at all meetings of the stockholders and of the Board of Directors.
Section 9. President. The President of the Corporation shall, subject to
the control of the Board of Directors and the Chief Executive Officer of the
Corporation, if there be such an officer, have general powers and duties of
management usually vested in the office of president of a corporation and shall
have such other powers and duties as may be prescribed by the Board of Directors
or the Bylaws or the Chief Executive Officer of the Corporation. In the absence
of the Chairman of the Board, Vice Chairman of the Board and Chief Executive
Officer, the President shall preside at all meetings of the Board of Directors
and stockholders.
Section 10. Vice President. In the absence or disability of the President,
the Vice Presidents, if any, in order of their rank as fixed by the Board of
Directors or, if not ranked, a Vice President designated by the Board of
Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of, and subject to all the restrictions upon, the
-8-
<PAGE>
President. The Vice Presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors or the Bylaws, and the President, or the Chairman of the
Board.
Section 11. Secretary. The Secretary shall keep or cause to be kept, at the
principal executive office or such other place as the Board of Directors may
direct, a book of minutes of all meetings and actions of Directors, committees
of Directors, and stockholders, with the time and place of holding, whether
regular or special, and, if special, how authorized, the notice given, the names
of those present at Directors' meetings or committee meetings, the number of
shares present or represented at stockholders' meetings, and a summary of the
proceedings.
The Secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the Corporation's transfer agent or registrar, as
determined by resolution of the Board of Directors, a share register, or a
duplicate share register, showing the names of all stockholders and their
addresses, the number and classes of shares held by each, the number and date of
certificates issued for the same, and the number and date of cancellation of
every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the Board of Directors required by the Bylaws or by law
to be given, and he shall keep or cause to be kept the seal of the Corporation
if one be adopted, in safe custody, and shall have such powers and perform such
other duties as may be prescribed by the Board of Directors or by the Bylaws.
Section 12. Chief Financial Officer. The Chief Financial Officer &hall keep
and maintain, or cause to be kept and maintained, adequate and correct books and
records of accounts of the properties and business transactions of the
Corporation. The Chief Financial Officer shall deposit all moneys and other
valuables in the name and to the credit of the Corporation with such
depositories as may be designated by the Board of Directors. He shall make such
disbursements of the funds of the Corporation as are authorized and shall render
from time to time an account of all of his transactions as Chief Financial
Officer and of the financial condition of the Corporation. The Chief Financial
Officer shall also have such other powers and perform such other duties as may
be prescribed by the Board of Directors or the Bylaws.
ARTICLE V
STOCK
Section 1. Form of Certificates. Every holder of stock in the Corporation
shall be entitled to have a certificate signed by, or in the name of the
Corporation (i) by the Chairman or Vice Chairman of the Board of Directors, or
the President or a Vice President and (ii) by the Chief Financial Officer or the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant
-9-
<PAGE>
Secretary of the Corporation, certifying the number of shares owned by such
stockholder in the Corporation.
Section 2. Signatures. Any or all of the signatures on the certificate may
be a facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the Corporation with the same effect as if he
were such officer, transfer agent or registrar at the date of issue.
Section 3. Lost Certificates. The Corporation may issue a new certificate
to be issued in place of any certificate theretofore issued by the Corporation,
alleged to have been lost, stolen or destroyed, upon the making of an affidavit
of that fact by the person claiming the certificate to be lost, stolen or
destroyed. The Corporation may, in the discretion of the Board of Directors and
as a condition precedent to the issuance of such new certificate, require the
owner of such lost, stolen, or destroyed certificate, or his legal
representative, to give the Corporation a bond (or other security) sufficient to
indemnify it against any claim that may be made against the Corporation
(including any expense or liability) on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate.
Section 4. Transfers. Stock of the Corporation shall be transferable in the
manner prescribed by law and in these Bylaws or in any agreement with the
stockholder making the transfer. Transfers of stock shall be made on the books
of the Corporation only by the person named in the certificate or by his
attorney lawfully constituted in writing and upon the surrender of the
certificate therefor, which shall be canceled before a new certificate shall be
issued.
Section 5. Registered Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise required by
law.
ARTICLE VI
INDEMNIFICATION
Section 1. Scope of Indemnification. The Corporation shall indemnify, in
the manner and to the fullest extent permitted by the Delaware General
Corporation Law, as the same exists or may hereinafter be amended (the "Delaware
Law"), and by the Certificate of Incorporation, any person (or the estate of any
person) who is or was a party, or is threatened to be made a party to, any
threatened, pending or completed action, suit or proceeding, whether or not by
or in the right of the Corporation, and whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is or was a
director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director or officer of another corporation,
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<PAGE>
partnership, joint venture, trust or other enterprise. The indemnification
provided herein shall not be deemed to limit the right of the Corporation to
indemnify any other person to the fullest extent permitted by the Delaware Law,
nor shall it be deemed exclusive of any other rights to which any person seeking
indemnification from the Corporation may be entitled under any agreement, vote
of stockholders or disinterested directors, or otherwise, both as to action in
such person's official capacity and as to action in another capacity while
holding such office. The Corporation may enter into indemnification agreements
with any one or more of its directors, officers, employees and agents upon
resolution duly adopted by the Board of Directors. Such agreements may indemnify
such persons to the fullest extent permissible under law.
Section 2. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware Law.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Subject to limitations contained in the General
Corporation Law of the State of Delaware and the Certificate of Incorporation,
the Board of Directors may declare and pay dividends upon the shares of capital
stock of the Corporation, which dividends may be paid either in cash, securities
of the Corporation or other property.
Section 2. Disbursements. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.
Section 4. Corporate Seal. The Corporation shall have a corporate seal in
such form as shall be prescribed by the Board of Directors.
Section 5. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a record
date, which shall not be more than sixty (60) days nor less than ten (10) days
before the date of such meeting, nor more than sixty (60) days prior to any
other action. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new
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<PAGE>
record date for the adjourned meeting. Stockholders on the record date are
entitled to notice and to vote or to receive the dividend, distribution or
allotment of rights or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares on the books of the Corporation after
the record date, except as otherwise provided by agreement or by applicable law.
Section 6. Voting of Stock Owned by the Corporation. The Chairman of the
Board, the Chief Executive officer, the President and any other officer of the
Corporation authorized by the Board of Directors shall have power, on behalf of
the Corporation, to attend, vote and grant proxies to be used at any meeting of
stockholders of any corporation (except this Corporation) in which the
Corporation may hold stock.
Section 7. Construction and Definitions. Unless the context requires
otherwise, the general provisions, rules of construction and definitions in the
General Corporation Law of the State of Delaware shall govern the construction
of these Bylaws.
Section 8. Amendments. Subject to the General Corporation Law of the State
of Delaware, the Certificate of Incorporation and these Bylaws, the Board of
Directors may amend or repeal these Bylaws, or adopt other Bylaws as in its
judgment may be advisable for the regulation of the conduct of the affairs of
the Corporation. Unless otherwise restricted by the Certificate of
Incorporation, these Bylaws may be altered, amended or repealed, and new Bylaws
may be adopted, at any annual meeting of the stockholders (or at any special
meeting thereof duly called for that purpose) by a majority of the combined
voting power of the then outstanding shares of capital stock of all classes and
series of the Corporation entitled to vote generally in the election of
directors, voting as a single class, provided that, in the notice of any such
special meeting, notice of such purpose shall be given.
-12-
EXHIBIT 3
---------
[FORM OF WARRANT]
This Warrant will be void and of no value
unless exercised on or before 4:00 o'clock in
the afternoon (Vancouver Time) on March 23, 1998
THIS WARRANT IS NON-TRANSFERABLE
WARRANT FOR THE PURCHASE OF COMMON SHARES OF
UNIDEX COMMUNICATIONS CORP.
---------------------------
(a Delaware corporation)
Warrant Number:
RIGHT TO PURCHASE ______ COMMON SHARES (subject to increase as set forth
herein)
THIS IS TO CERTIFY THAT, for value received, __________________________________
_____________________________________________ (the "Holder"), is entitled to
subscribe for and purchase the number of fully paid and non-assessable Common
Shares without par value in the capital stock (as constituted on March 22, 1996)
of Unidex Communications Corp. (the "Company") as calculated in accordance with
the provisions of the following paragraph. The number of shares so calculated is
purchasable at the price of $0.75 per share at any time prior to 4:00 o'clock in
the afternoon (Vancouver Time) on March 21, 1997, and thereafter at a price of
$1.00 per share at any time prior to 4:00 o'clock in the afternoon (Vancouver
Time) on March 23, 1998.
As stated in the offering documents (the "Offering Documents") delivered to the
Holder in connection with the offering of Units (the "Units") pursuant to which
this warrant is issued (the "Offering"), subject to the directors of the Company
determining that it would not be in the best interests of the Company or its
shareholders, the Company has agreed to use its best efforts to file a
Registration Statement under the U.S. Securities Act of 1933, as amended, and an
Exchange Offering Prospectus with the Vancouver Stock Exchange and the B.C.
Securities Commission (the "Filing"), to enable purchasers of Units under the
Offering to freely sell their shares acquired thereunder, including any shares
purchasable by the exercise of Warrants, during the effective period of Filing.
If the Company makes the Filing within such a time frame as to permit the said
shares to be freely tradeable on or before December 20, 1996, then this Warrant
entitles the Holder to purchase _____ common shares of the Company. However, if
the Filing is not made so as to permit the said shares to be freely tradeable on
or
<PAGE>
before December 20, 1996, then this Warrant entitles the Holder to purchase
_____ common shares of the Company.
The rights represented by this Warrant may be exercised by the Holder, in whole
or in part (but not as to a fractional share), by completing the subscription
form attached hereto and surrendering this Warrant at the office of Montreal
Trust Company of Canada, 4th Floor, 510 Burrard Street, Vancouver, British
Columbia, V6C 3B9, together with a certified cheque, money order or bank draft
payable to or to the order of the Company in payment of the purchase price of
the number of Common Shares subscribed for.
In the event of an exercise of the rights represented by this Warrant,
certificates for the Common Shares so purchased shall be delivered to the Holder
within a reasonable time, not exceeding ten (10) days after the rights
represented by this Warrant shall have been exercised and, unless this Warrant
has expired, a new Warrant representing the number of Common Shares, if any,
with respect to which this Warrant shall not then have been exercised shall also
be issued to the Holder within such time.
The Company covenants and agrees that all Common Shares which may be issued upon
the exercise of the rights represented by this Warrant will, upon issuance, be
fully paid and non-assessable. The Company further covenants and agrees that
during the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized and reserved a
sufficient number of Common Shares to provide for the exercise of the rights
represented by this Warrant.
This Warrant is issued on the following terms and conditions:
1. In the event of any subdivision of the Common Shares of the Company as such
shares are constituted on the date hereof, at any time while this Warrant
is outstanding, into a greater number of Common Shares, the Company will
thereafter deliver at the time or times of purchase of shares hereunder, in
addition to the number of shares in respect of which the right to purchase
is then being exercised, such additional number of shares as result from
such subdivision without any additional payment or other consideration
therefor.
2. In the event of any consolidation of the Common Shares of the Company as
such shares are constituted on the date hereof, at any time while this
Warrant is outstanding, into a lesser number of Common Shares, the number
of shares represented by this Warrant shall thereafter be deemed to be
consolidated in like manner and any subscription by the Holder for shares
hereunder shall be deemed to be a subscription for shares of the Company as
consolidated.
3. In the event of any reclassification of the Common Shares of the Company at
any time while this Warrant is outstanding, the Company shall thereafter
deliver at the time of
<PAGE>
the purchase of shares hereunder the number of shares of the appropriate
class resulting from the reclassification as the Holder would have been
entitled to receive in respect of the number of shares so purchased had the
right to purchase been exercised before such reclassification.
4. As used herein, the term "Common Shares" shall mean and include the
Company's presently authorized common shares and shall also include any
capital stock of any class of the Company hereafter authorized which shall
not be limited to a fixed sum or percentage in respect of the rights of the
holder thereof to participate in dividends and in the distribution of
assets upon the voluntary or involuntary liquidation, dissolution or
winding up of the Company.
5. This Warrant shall not entitle the Holder to any rights as a member of the
Company, including without limitation, voting rights.
6. The Holder, by acceptance of this Warrant, agrees that this Warrant and all
rights hereunder are non-transferable and further agrees that
a. any shares acquired by the Holder pursuant to this Warrant may not be
traded in British Columbia for a period of twelve (12) months from the
22nd day of March, 1996, except as permitted by the Securities Act
(British Columbia) or regulations made under the Act; and
b. the certificates representing shares acquired by the Holder pursuant
to this Warrant will bear the restrictive legends set out in the
Subscription Agreement between the Holder and the Company dated
January 29, 1996.
7. Nothing contained herein shall confer any right upon the Holder or any
other person to subscribe for or purchase any shares of the Company at any
time subsequent to 4:00 o'clock in the afternoon (Vancouver Time) on March
23, 1998, and from and after such time this Warrant and all rights
hereunder shall be void and of no value.
8. Time shall be of the essence hereof.
9. This Warrant shall not be valid until it has been countersigned by or on
behalf of Montreal Trust Company of Canada.
IN WITNESS WHEREOF Unidex Communications Corp. has caused its common seal to be
affixed and this Warrant to be signed as of the 22nd day of March, 1996.
COUNTERSIGNED BY:
UNIDEX COMMUNICATIONS CORP. MONTREAL TRUST COMPANY
OF CANADA
Per:_______________________________ Per:____________________________
___________________________________ ________________________________
Authorized Signatory Authorized Signatory
<PAGE>
SUBSCRIPTION FORM
To: Montreal Trust Company of Canada
4th Floor, 510 Beerwort Street
Vancouver, B.C.
V6C 3B9
The hlder of the within Share Purchase Warrant,_________________________________
________________________________________________, hereby subscribes for ______
Common Shares referred to therein according to the terms and conditions thereof,
and herewith makes payment of the purchase price in full for the said number of
shares at the rate of $0.75 per share until March 21, 1997 and thereafter at the
rate of $ 1.00 per share until March 23, 1998. A certified cheque/bank draft for
such amount is enclosed herewith.
DATED this ____day of __________, 19___.
___________________________
Signature of Warrant Holder
EXHIBIT 4
---------
[FORM OF WARRANT]
This Warrant will be void and of no value
unless exercised on or before 4:00 o'clock in
the afternoon (Vancouver Time) on March 7, 1999
THIS WARRANT IS NON-TRANSFERRABLE
WARRANT FOR THE PURCHASE OF COMMON SHARES OF
UNITED DIGITAL NETWORK, INC.
----------------------------
(a Delaware corporation)
Warrant Number:
RIGHT TO PURCHASE _______ COMMON SHARES
THIS IS TO CERTIFY THAT, for value received, ___________________________________
______________________________________________(the "Holder"), is entitled to
subscribe for and purchase _____ fully paid and non-accessible Common Shares
without par value in the capital stock of United Digital Network, Inc. (the
"Company") at the price of US$1.60 per share at any time prior to 4:00 o'clock
in the afternoon (Vancouver Time) on March 7, 1998, and thereafter at a price of
US$1.85 per share at any time prior to 4:00 o'clock in the afternoon (Vancouver
Time) on March 7, 1999.
The rights represented by this Warrant may be exercised by the Holder, in whole
or in part (but not as to a fractional share), by completing the subscription
form attached hereto and surrendering this Warrant at the office of Montreal
Trust Company of Canada, 4th Floor, 510 Burrard Street, Vancouver, British
Columbia, V6C 3B9, together with a certified cheque, money order or bank draft
payable to the order of the Company in payment of the purchase price of the
number of Common Shares subscribed for.
<PAGE>
In the event of an exercise of the rights represented by this Warrant,
certificates for the Common Shares so purchased shall be delivered to the Holder
within a reasonable time, not exceeding ten (10) days after the rights
represented by this Warrant shall have been exercised and, unless this Warrant
has expired, a new Warrant representing the number of Common Shares, if any,
with respect to which this Warrant shall not then have been exercised shall also
be issued to the Holder within such time.
The Company covenants and agrees that all Common Shares which may be issued upon
the exercise of the rights represented by this Warrant will, upon issuance, be
fully paid and non-assessable. The Company further covenants and agrees that
during the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized and reserved a
sufficient number of Common Shares to provide for the exercise of the rights
represented by this Warrant.
This Warrant is issued on the following terms and conditions:
1. In the event of any subdivision of the Common Shares of the Company as such
shares are constituted on the date hereof, at any time while this Warrant
is outstanding, into a greater number of Common Shares, the Company will
thereafter deliver at the time or times of purchase of shares hereunder, in
addition to the number of shares in respect of which the right to purchase
is then being exercised, such additional number of shares as a result from
such subdivision without any additional payment or other consideration
therefor.
2. In the event of any consolidation of the Common Shares of the Company as
such shares are constituted on the date hereof, at any time while this
Warrant is outstanding, into a lesser number of Common Shares, the number
of shares represented by this Warrant shall thereafter be deemed to be
consolidated in like manner and any subscription by the Holder for shares
hereunder shall be deemed to be a subscription for shares of the Company as
consolidated.
3. In the event of any reclassification of the Common Shares of the Company at
any time while this Warrant is outstanding, the Company shall thereafter
deliver at the time of the purchase of shares hereunder the number of
shares of the appropriate class resulting from the reclassification as the
Holder would have been entitled to receive in respect of the number of
shares so purchased had the right to purchase been exercised before such
reclassification.
4. As used herein, the term "Common Shares" shall mean and include the
Company's presently authorized common shares and shall also include any
capital stock of any class of the Company hereafter authorized which shall
not be limited to a fixed sum or percentage in respect of the rights of the
holder thereof to participate in dividends and in the distribution of
assets upon the voluntary or involuntary liquidation, dissolution or
winding up of the Company.
<PAGE>
5. This Warrant shall not entitle the Holder to any rights as a member of the
Company, including without limitation, voting rights.
The Holder, by acceptance of this Warrant, agrees that this Warrant and all
rights hereunder are non-transferrable and further agrees that the
certificates representing shares acquired by the Holder pursuant to this
Warrant will bear the following restrictive legends:
(a) The shares represented by this certificate are subject to a hold
period and may not be traded in British Columbia until after March 7,
1998 except as permitted by the Securities Act (British Columbia) and
the regulations made thereunder;
these securities have not been registered under the United States
Securities Act of 1933, as amended (the "Act"). They may not be sold
or offered for sale within the United States or to, or for the benefit
of, U.S. persons (i) as part of their distribution at any time or (ii)
otherwise until April 21, 1998, except in either case in accordance
with Regulations S under the Act. Terms used in this legend have the
meaning given to them in Regulation S; and
any other legends that may be applicable under relevant laws at the
time of issue of the share certificates.
6. Nothing contained herein shall confer any right upon the Holder or any
other person to subscribe for or purchase any shares of the Company at any
time subsequent to 4:00 o'clock in the afternoon (Vancouver Time) on March
7, 1999, and from and after such time this Warrant and all rights hereunder
shall be void and of no value.
7. Time shall be of the essence hereof.
8. This Warrant shall not be valid until it has been countersigned by or on
behalf of Montreal Trust Company of Canada.
IN WITNESS WHEREOF United Digital Network, Inc. has caused its common seal to be
affixed and this Warrant to be signed as of the 21st day of April, 1997.
COUNTERSIGNED BY:
UNITED DIGITAL NETWORK, INC. MONTREAL TRUST
COMPANY OF CANADA
Per: ______________________________ Per: ________________________________
Authorized Signature Authorized Signature
<PAGE>
SUBSCRIPTION FORM
To: Montreal Trust Company of Canada
4th Floor, 510 Beerwort Street
Vancouver, B.C.
V6C 3B9
The holder of the within Share Purchase Warrant, _______________________________
hereby subscribes for ______ Common Shares referred to therein according to the
terms and conditions thereof, and herewith makes payment of the purchase price
in full for the said number of shares at the rate of US$1.60 per share until
March 7, 1998 and thereafter at the rate of US$1.85 per share until March 7,
1999. A certified cheque/bank draft for such amount is enclosed herewith.
DATED this ___ day of _____________, 19___.
____________________________
Signature of Warrant Holder
