SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
[ X ] Filed by the registrant
[ ] Filed by a party other than the registrant
Check the appropriate box:
[ X ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
Ethika Corporaton (formerly known as Dixie National Corporation)
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
<PAGE>
ETHIKA CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 29, 1998
May 6, 1998
To the Shareholders:
Notice is hereby given that the Annual Meeting of Shareholders of Ethika
Corporation will be held at The Sheraton Denver West Hotel, 360 Union Boulevard,
Lakewood, Colorado, 80228 on Friday, May 29, 1998 at 10:00 a.m. (Mountain) for
the following purposes:
I. To amend the Articles of Incorporation changing the par value of common
stock to zero, establishing a class of preferred stock, changing the
name of the corporation from Ethika Corporation to North American
Digicom Corporation and redomicile the corporation to Colorado.
II. To authorize a reverse split of the outstanding shares of Ethika common
stock, one new share for every twenty-two and one-half (22.5) currently
outstanding shares.
III. To approve the acquisition of North American Digicom Corporation.
IV. To fix the number of and to elect the Board of Directors for the
ensuing year or until their successors are duly elected.
V. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The close of business on February 20, 1998 is the Record Date for the
determination of Shareholders entitled to vote at the Annual Meeting and to
receive Notice thereof. The stock transfer books of the Corporation will not be
closed.
WE ARE NOT ASKING FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
BY ORDER OF THE BOARD OF DIRECTORS
/s/Davide E. Williams
- ---------------------
David E. Williams
Secretary
<PAGE>
ETHIKA CORPORATION
107 The Executive Center
Hilton Head Island, South Carolina 29928
INFORMATION STATEMENT
For the Annual Meeting of Shareholders
To be Held Friday, May 29, 1998
"We are not asking you for a Proxy and you are requested not to send us a Proxy"
The enclosed Information is being furnished by the Board of Directors of Ethika
Corporation ("Corporation") for use at the Annual Meeting of Shareholders of the
Corporation to be held at The Sheraton Denver West Hotel, 360 Union Boulevard,
Lakewood, Colorado, 80228 on Friday, May 29, 1998 at 10 a.m. (Mountain) and any
adjournment or postponement thereof. Shareholders may vote their shares by
attendance at the meeting and voting their shares in person. We are not asking
you for a proxy and you are requested not to send us a proxy. The term
"Corporation," as used herein, includes the Corporation and the Corporation's
subsidiaries as the context indicates. This Information Statement is being
mailed to Shareholders on or about May 6, 1998.
Shareholders attending the meeting will be asked to vote FOR amendment of the
Articles of Incorporation changing the par value of common stock to zero,
establishing a class of preferred stock, changing the name of the Corporation
from Ethika Corporation to North American Digicom Corporation and re-domicile
the Corporation to Colorado; FOR authorization of a 22.5 for 1 reverse stock
split; FOR the approval of the acquisition of North American Digicom
Corporation; and FOR the Board of Directors to consist of six members and the
election of the six nominees of the Board of Directors to serve as Directors of
the Corporation.
VOTING SECURITIES
Shareholders of record at the close of business on February 20, 1998 will be
entitled to Notice of and to vote at the Special Meeting. On February 20, 1998
there were 20,360,346 shares of common stock of the Corporation outstanding and
entitled to vote. Each outstanding share of common stock is entitled to one vote
per share on each matter submitted to a vote at the Annual Meeting except with
respect to the election of Directors, in which Shareholders have cumulative
voting rights. Cumulative voting means that each Shareholder will be entitled to
cast as many votes as he or she has shares of common stock multiplied by the
number of Directors to be elected, and all such votes may be cast for a single
nominee or may be distributed among the Directors to be voted for as he/she sees
fit. The presence in person of a majority of the outstanding shares shall
constitute a quorum for the transaction of business at the Annual Meeting.
Abstentions will be counted for purposes of determining the presence or absence
of a quorum. Abstentions are considered as a vote against any matter other than
the election of Directors as to which a Shareholder may vote for a nominee or
withhold authority to vote. "Broker non-votes" which occur when brokers are not
permitted to exercise discretionary voting authority for beneficial owners who
have not provided any voting instructions, are not counted for quorum purposes
or any vote. To the extent that voting instructions are provided to brokers as
to any proposal, the shares will be counted for purposes of determining a quorum
and the outcome of the vote. The Chairman of the Board of the Corporation will
appoint two inspectors of election. The inspectors will take charge of, and will
count the votes and ballots cast at the Annual Meeting and will make a written
report on their determination.
<PAGE>
OWNERSHIP OF VOTING SECURITIES BY CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth pertinent information as to the beneficial
ownership of the Corporation's common stock as of February 20, 1998 of persons
known by the Corporation to be holders of 5% or more of the outstanding common
stock. Information as to the number of shares beneficially owned has been
furnished by the persons named in the table and by reference to documents filed
with the Securities and Exchange Commission by holders of 5% or more of such
common stock.
Name and Address Shares Percent
Of Beneficial Owner Beneficially Owned of Class
------------------- ------------------ --------
Alfred Peeper 0 (1) 0%
Calle Hamburg 22
Benidorm, Spain ALC 03500
Argere Holdings, S.A. 420,000 (1) 1.9%
18 Boulevard Royal
L-2449 Luxembourg
Eur-Am B.V. 461,100 (1) 2.1%
Calle Hamburg 22
Benidorm, Spain ALC 03500
La Roche Holdings, S.A. 902,500 (1) 4.1%
18 Boulevard Royal
L-2449 Luxembourg
La Salle Investment, Ltd. 7,997,929 (1) 36.1%
35 Rue De Bains
Geneva, Switzerland 1205
Rial Equity Group, S.A. 600,000 (1) 2.7%
C/o SAGEM
35 Rue De Bains
Geneva, Switzerland 1205
Directors and Officers 19,000 *
As a Group
* Less than 1%.
(1) Alfred Peeper is an investment manager headquartered and operating in
Benidorm, Spain. Mr. Peeper holds a power of attorney for each Reporting Person
which gives him authority to purchase, sell, and exercise all voting rights
relating to each "Group Member." This Reporting Person represents 51% of the
total outstanding shares of Ethika common stock.
Security Ownership of Management
The following table sets forth information as to the beneficial ownership of the
Corporation's common stock as of February 20, 1998, by each Director, nominee;
Executive Officer named in the Summary Compensation Table and by all Directors
And Executive Officers as a group.
<PAGE>
<TABLE>
<CAPTION>
Name of Shares Percent
Beneficial Owner Beneficially Owned (1) of Class
---------------- ---------------------- --------
<S> <C> <C>
Russell C. Burk None 0%
Dennis Brovarone 7,500 *
Wayne Johnson None 0%
Philip F. Grey None 0%
Louis Scotti None 0%
Dennis P. Nielsen None 0%
Directors, nominees, and 19,000 (2) *
Executive Officers as a group (7
persons)
</TABLE>
(1) Current Board Members who have no outstanding shares of Ethika common
stock. See Item III for post acquisition share ownership.
(2) Includes shares issueable upon exercise of vested stock options. *
Represents less than 1%.
I. APPROVE AMENDMENTS TO ARTICLES OF INCORPORATION
The Board of Directors recommends that the Shareholders vote for amendments to
the Articles of Incorporation of the Corporation for the following:
a) Change the par value of all authorized shares of Ethika common stock to no
par value.
b) Establish a class of 10,000,000 shares of preferred stock, issuable in
series whose rights and preferences may be set by the Board of Directors
prior to issuance.
c) Change the name of the Corporation from Ethika Corporation to North
American Digicom Corporation.
d) Redomicile the Corporation to Colorado.
The principal purpose for the recommended amendments is to give the Corporation
greater flexibility in its financial affairs by eliminating the need to record a
discount on common stock when stock is issued or sold, and by making available a
different class of stock that may be used at such times as the Board of
Directors considers appropriate whether in public or private offerings or in
conjunction with merger and acquisitions or otherwise. The Corporation's
Shareholders may or may not be given the opportunity to vote on such a
transaction, depending on the nature of the transaction, applicable law, and the
rules and policies applicable to the Nasdaq National Stock Market.
Vote Required for Approval
A favorable vote of a majority of those shares voting in person is required to
approve the amendments to the Articles of Incorporation. The Board recommends
that you vote FOR the amendments to the Articles of Incorporation.
<PAGE>
II. AUTHORIZATION OF REVERSE SPLIT
Authorize a reverse split of the outstanding shares of Ethika common stock, one
new share for every twenty-two and one-half (22.5) currently outstanding shares,
with each fractional share rounded to the next whole share, and each
Shareholders' total share position rounded up to the next whole multiple of
fifty (50).
Vote Required for Approval
A favorable vote of a majority of those shares voting in person is required to
approve the Authorization of a Reverse Split. The Board recommends that you vote
FOR the Authorization of a Reverse Split.
III. APPROVAL OF ACQUISITION OF NORTH AMERICAN DIGICOM CORPORATION
On January 26, 1998 the Ethika Board of Directors unanimously approved the
acquisition through a reverse merger of 100% of the outstanding common stock of
North American Digicom Corporation (NADC) to be completed on or before March 6,
1998, and subsequently extended by mutual agreement the completion date to on or
before June 30, 1998.
At closing of this transaction, the Shareholders of NADC will exchange their
common stock for Ethika common stock at the rate of three (3) shares of Ethika
common stock for every four (4) shares of NADC stock. At the conclusion of this
transaction, current Shareholders of NADC will receive approximately 19.6
million post-split shares of Ethika representing approximately 95% of the
then-outstanding shares and will be in control of the Corporation. Three of the
nominees for the Board of Directors are full-time Officers of NADC. Upon
approval of the transaction, the name of Ethika Corporation will be changed to
North American Digicom Corporation. (See I Amendment of Articles of
Incorporation).
The following table sets forth information as to the beneficial ownership of the
Corporation's common stock as it will exist if the acquisition of NADC is
approved, for each Director, and nominee.
Name of Shares Percent
Beneficial Owner Beneficially Owned of Class
---------------- ------------------ --------
Russell C. Burk None 0%
Dennis Brovarone 7,500 *
Dennis Nielsen None 0%
Philip F. Grey 2,250,000 11.0%
Wayne Johnson 2,250,000 11.0%
Louis C. Scotti 1,875,000 9.1%
* Represents less than 1%.
<PAGE>
North American Digicom Corporation is a privately held corporation headquartered
in Lakewood, Colorado. It was incorporated as a Colorado corporation on December
27, 1995. The company was initially formed to explore potential opportunities
with, and arising from, the deregulation of the telecommunications industry.
Since inception, the Company has grown through internally generated sources as
well as acquisitions in the areas of Pre-paid calling cards, Stand-alone travel
cards, United Online internet provider, kidZtime TV violence-free television
programming, and kidZtime Challenge program.
<PAGE>
NADC Historical Development
NADC commenced actual operations through the activation of its P.C. based debit
card platform on December 23, 1996. In April of 1997, NADC commenced sales of
private line and other local services. On May 1, 1997, NADC loaded its first
switched one-plus customer. On June 7, 1997, the Company acquired in a stock for
stock exchange, United Online, Inc., a Colorado corporation engaged in the sales
of Internet services. United Online utilizes a network marketing model to
distribute its products. On October 20, 1997, NADC acquired in a stock for stock
exchange, KidZtime TV, Inc., a Colorado corporation specializing in providing
violence free children's programming on various cable systems.
NADC Operations
Management believes that the future of the telecommunications industry rests
with those companies who will control and process the orderly flow of time and
traffic on the vast telecommunications network including the rapidly expanding
information super highway, the world-wide web. In the telecommunications
industry, time is comprised of countless bits of data transmitted by voice,
cellular traffic, wireless media, modems, microwaves and the world -wide web.
While NADC is currently primarily a prepaid long distance company, management
believes that NADC is positioned to utilize this new technology to integrate the
multi-facets of telephony under one umbrella. NADC's focus is on pre-paid phone
cards, wholesale carrier sales, one plus long distance service, stand alone
travel cards, Internet applications and online dinning guide.
Pre-paid phone card sales have made inroads into the credit-impaired long
distance and the business traveler markets. This business continues to be the
cornerstone of NADC having contracts with companies such as Allstate Insurance,
Inten Corporations, IBM and others. The Company currently has contacts to
deliver pre- paid phone services in excess of $3,000,000 per month.
The Wholesale Carrier Service will be launched during 1998 to provide raw phone
time to other carriers. One-Plus long distance service continues to add new
customers to the NADC platform. Currently over one thousand One-Plus customers
are being served. During 1998, NADC plans to launch its stand-alone travel card
program. This program is tied to charity promotions with national presence
utilizing highly recognizable athletes as spoke persons. The acquisition of
United Online added unique dimension to NADC's Internet business. In addition to
providing dial-up connections, United Online sells through distributors, NADC's
long distance products and Pre-paid phone cards. The United Online Galleria
Online Mall offers a full array of products and services. NADC also offers
traditional Internet services such as individual dialup accounts, web housing
and dedicated high-speed business connections. KidZtime Online Service is
scheduled for release in 1998. NADC has developed a proprietary web browser that
will allow children access to the World Wide Web in a safe and limited access
way. The Restaurant Registry provides Web access to restaurants nationwide.
Sponsored by Nobel Sysco, one of the largest food wholesalers in world, this
service has been well accepted by consumers.
KidZtime TV is on the air in over 100 markets throughout the United States using
a broadcast format that utilizes the Network of Independent Broadcasters (NIB).
The current show is "Bananas in Pajamas", a children's friendly show with a
respectable Nielsen rating.
Proforma Financial Statements
Proforma consolidated financial statements (See exhibit I).
<PAGE>
NADC Audited Financial Statements
NADC's audited financial statements (see exhibit II) for the six months ended
December 31, 1997 show revenues of $2,467,540 of which $1,844, 609 represent
revenue recognized from long distance telephone service including prepaid
telephone calling cards (deferred revenue from prepaid cards at December 31,
1997 was $5,823,983 representing revenues to be recognized during 1998); $
610,688 represent earnings from television licensing and programming and $12,243
form Internet services. Operating losses for the six months ended December 31,
1997, were $789,091 for the long distance segment; $289,598 for the television
segment and $214,204 for the Internet segment. NADC's consolidated balance sheet
at December 31, 1997 had current assets of $9,251,635 and plant and equipment of
accumulated depreciation of $2,160,894. Liabilities excluding deferred revenue
(see above) were $7,191,516.
Vote Required for Approval
A favorable vote of a majority of those shares voting in person is required to
approve the transaction with North American Digicom Corporation. The Board
recommends that you vote FOR the completion of the transaction with North
American Digicom Corporation.
DISSENTERS' RIGHTS OF SHAREHOLDERS
General
The following is a summary of Article 13 of the Mississippi Business Corporation
Act ("Article 13" and "Act" respectively) and the procedures for shareholders
dissenting from the merger with North American Digicom Corporation. This summary
is qualified in its entirety by reference to Article 13, which is reprinted in
full as Exhibit III to this Information Statement. Exhibit III should be
reviewed carefully by any shareholder who wishes to assert statutory dissenters'
rights. FAILURE STRICTLY TO COMPLY WITH THE PROCEDURES SET FORTH IN ARTICLE 13
WILL RESULT IN THE LOSS OF DISSENTERS' RIGHTS.
Section 13.02 of Article 13 provides that a shareholder is entitled to dissent
from and obtain payment of the fair value of his shares of the Corporation in
the event of, among other things, the consummation of a plan of merger to which
the corporation is a party (i) if shareholder approval is required for the
merger by Section 79-4-11.03 or the articles of incorporation and the
shareholder is entitled to vote on the merger. The proposed merger by the
Corporation with North American Digicom requires such approval.
Accordingly, inasmuch as at lease one of the conditions enumerated in Section
13.02 of Article 13 of the Act is present, shareholders of the corporation have
the statutory right to dissent under Article 13.
As used in Article 13, the term "shareholder" includes both record shareholder
and beneficial shareholders.
A record shareholder may assert dissenters' rights as to fewer than all the
shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under subsection 13.03 are determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders.
<PAGE>
A beneficial shareholder may assert dissenters' rights as to shares held on his
behalf only if: (1) He submits to the corporation the record shareholder's
written consent to the dissent not later than the time the beneficial
shareholder asserts dissenters' rights; and (2) He does so with respect to all
shares of which he is the beneficial shareholder or over which he has power to
direct the vote.
Procedure for Exercise of Dissenters' Rights
Shareholders who wish to exercise dissenters' rights:
(i) must deliver to the Corporation, before the vote on Proposal No.
III is taken, written notice (the "Dissenters' Notice") of their intent
to demand payment for their shares if Proposal No. III is approved; and
(ii) must NOT vote their shares in favor of Proposal No. III.
SHAREHOLDERS WHO DO NOT SATISFY THESE REQUIREMENTS ARE NOT ENTITLED TO PAYMENT
FOR SHARES UNDER ARTICLE 13.
Shareholders electing to exercise dissenters' rights under Article 13 must NOT
VOTE FOR approval of Proposal No. III. Under Article 13, a vote against approval
of Proposal No. III is not required in order for a shareholder to exercise
dissenters' rights. HOWEVER, IF A SHAREHOLDER RETURNS A SIGNED PROXY BUT DOES
NOT SPECIFY A VOTE AGAINST APPROVAL OF PROPOSAL NO. III OR AN ELECTION TO
ABSTAIN, THE PROXY WILL BE VOTED FOR THE PROPOSAL WHICH WILL HAVE THE EFFECT OF
WAIVING THAT SHAREHOLDER'S DISSENTERS' RIGHTS.
If the North American Digicom merger is authorized, the Corporation must send
written dissenters notice (the "Company Notice") no later than 10 days after the
date of the action to all shareholders that have perfected their right to assert
dissenters' rights under Article 13.
Upon receipt of the Company Notice, dissenters must demand payment for their
shares by the date set forth in the Company Notice. A shareholder who elects to
exercise dissenters' rights must mail or deliver his or her written demand to :
Ethika Corporation, 107 The Executive Center, Hilton Head Island, SC 29928. The
written demand for payment must comply with the provisions of Article 13 and
must specify the shareholder's name and mailing address, the number of shares of
Corporation Common Stock owned, and state that the shareholder is demanding
payment of his or her shares. The shareholder must also certify that the
shareholder had beneficial ownership of the shares before the date set forth in
the Company Notice, which is January 8, 1998, the date of the first announcement
of the proposal merger to the news media. The shareholder must also deposit his
or her share certificates in accordance with the terms of the Company Notice.
Failure to make a payment demand or to deposit the share certificates where
required, each by the dates for such action set forth in the Company notice,
shall forfeit the shareholder's right to receive payment for his or her shares.
Upon receipt of a payment demand, or as soon as the proposed corporate action is
taken, the Corporation shall pay shareholders who complied with Article 13 the
amount the Corporation estimates to be fair value of the shares submitted by
such shareholder plus accrued interest. Certain financial information concerning
the Corporation, its estimate of the value of the shares, an explanation of how
interest was calculated, and a statement of rights to demand payment along with
a copy of Article 13, must accompany such offer or payment.
<PAGE>
Shares Acquired After January 8, 1998
A corporation may elect to withhold payment required by Section 79-4-13.25 from
a dissenter unless he was the beneficial owner of the shares before the date set
forth in the dissenters' notice as the date of the first announcement to news
media or to shareholders of the terms of the proposed corporate action.
To the extent the corporation elects to withhold payment under subsection (a),
after taking the proposed corporate action, it shall estimate the fair value of
the shares, plus accrued interest and shall pay this amount to each dissenter
who agrees to accept it in full satisfaction of his demand. The corporation
shall send with its offer a statement of its estimate of the fair value of the
shares, an explanation of how the interest was calculated and a statement of the
dissenter's right to demand payment under Section 79-4-13.28.
Procedure if the Dissenters Are Dissatisfied with the Payment Offered
Dissenters may reject the Corporation's payment and demand in writing payment of
the fair value of their shares and interest due based on their own estimate of
the fair value of their shares and amount of interest due. To be entitled to
such rights, the dissenters must notify the Corporation of their demand in
writing within 30 days after the Corporation made or offered payment for the
shares.
If a dissenter has rejected the Corporation's payment and demanded payment of
the fair value of the shares and interest due and the demand for payment remains
unsettled, the Corporation shall commence a judicial proceeding within 60 days
after receiving the payment demand and petition an appropriate court, as
described in Article 13, to determine the fair value of the shares and accrued
interest. If the Corporation does not commence such action within the required
sixty-(60) day period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
The court in an appraisal proceeding shall determine the fair value of the
shares in question and determine all costs of the proceeding, including the
reasonable compensation and expenses of appraisers appointed by the court.
Additionally, the court may assess fees of legal counsel and of experts for the
respective parties. The court shall assess the costs against the Corporation,
except that the court may assess costs against all or some of the dissenters to
the extent the court finds the dissenters acted arbitrarily, vexatiously or not
in good faith in demanding payment under Article 13, or the court may assess
counsel fees against the dissenters who were benefited.
THE ABOVE IS MERELY A SUMMARY OF ARTICLE 13 OF THE MISSISSIPPI BUSINESS
CORPORATION ACT. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
ARTICLE 13, WHICH IS SET FORTH AS APPENDIX B TO THIS PROXY STATEMENT.
SHAREHOLDERS DESIRING TO EXERCISE DISSENTERS' RIGHTS SHOULD REFER TO THE FULL
TEXT OF ARTICLE 13 AND SHOULD CONSULT COUNSEL SINCE FAILURE TO COMPLY STRICTLY
WITH THE PROVISIONS OF ARTICLE 13 WILL DEFEAT THEIR DISSENTERS' RIGHTS.
IV. ELECTION OF DIRECTORS
In addition to establishing the minimum and maximum number of Directors, Article
III, Section 6 of the Bylaws of the Corporation also provides that the number of
Directors shall be fixed annually by the Shareholders at each Annual or Special
Meeting. The Board of Directors recommends that the Board of Directors of the
<PAGE>
Corporation for the ensuing year consist of six Directors and further recommends
the election of the nominees listed below. Each Director to hold office until
the next Annual or Special Meeting of Shareholders or until his/her successor
shall be duly elected and qualified. Shareholders may also nominate candidates
for Director at any Meeting of Shareholders at which Directors are to be
elected. Votes will not be recognized for more than eight nominees.
Three nominees are members of the present Board and were elected thereto by the
Board of Directors at Special Board of Directors' Meetings held on December 12,
1997 and January 27, 1998 to serve out the unexpired terms of resigning
Directors. Management has no reason to believe that any substitute nominee or
nominees will be required.
The following table indicates the age; year first elected a Director, and
principal occupation or employment for the past five years of each nominee. In
addition, the table also indicates any Committee of the Board of Directors of
the Corporation on which the nominee serves.
DENNIS BROVARONE Mr. Brovarone, 42, has been practicing
corporate and securities law since 1986
and as a sole practitioner since 1990.
He was elected to the Board in December
1997 and is Chairman of the
Corporation's Board of Directors. Mr.
Brovarone also serves as President
Pro-tem and Chairman of the Executive
Committee. Prior to 1990, Mr. Brovarone
served as in-house counsel to R.B.
Marich, Inc.; a Denver, Colorado based
brokerage firm. Mr. Brovarone also
served as President (Chairman) of the
Board of Directors of The Community
Involved Charter School, from January
1995 to March 1998, a four-year old K-12
independently chartered public school
located in Lakewood, Colorado. He also
serves as a Director of Innovative
Medical Services in San Diego,
California.
RUSSELL C. BURK Mr. Burk, 40, has been practicing
corporate securities law since 1990 and
as a sole practitioner since 1997. He
was elected to the Board in December
1997. From 1993 to 1997, Mr. Burk was
Vice President, General Counsel for RAF
Financial Corporation, Denver, Co.
<PAGE>
PHILIP F. GREY Mr. Grey, 45, has served as President,
Chief Executive Officer, and Director of
North American Digicom Corporation since
its inception in December 1995. He also
serves as Chairman of the Board of
United Online, a wholly owned subsidiary
of Digicom. Since 1994 Mr. Grey has
served as President and CEO of Premier
Financial Services, Inc., a Denver,
Colorado-based business-consulting firm.
Since 1991, Mr. Grey has served as
President and CEO of Phillips Energy
Corporation.
WAYNE JOHNSON Mr. Johnson, 40, is Chief Operating
Officer of technical/delivery systems
and a Director of North American Digicom
Corporation. He has served as Director
of Engineering for Key Communications
Group and was Director of Installation
at International Network Solutions. Mr.
Johnson has owned and operated
International Communications
Consultants, Inc.
DENNIS NIELSEN Mr. Nielsen, 55, has been a director
since March 1993, he has been self
employed as a business consultant
offering assistance to business on
restructuring, financing or assisting
with possible mergers or acquisitions.
Previously he was owner of P&N, Inc. and
Hufburn Sales, Inc., both automobile
dealerships.
LOUIS C. SCOTTI Mr. Scotti, 42, has been Chief Financial
Officer, Treasurer, and a Director of
North American Digicom Corporation since
1996. He also serves as President and
Chief Executive Officer of kidZtime TV,
Inc. Mr. Scotti served as President and
Managing Director of the Prometheus
Group. From 1992 to 1995 he served as
President of Carcharodon Acquisitions,
Inc.
During fiscal year 1997, the Board of Directors of the Corporation held 13
meetings. Each member of the previous Board of Directors attended at least 85%
of the meetings of the Board and appropriate Committee meetings.
<PAGE>
All Committees of the Board are appointed by the Chairman of the Board and
ratified by the Board of Directors. Committees of the Board of Directors consist
of the following:
(1) Audit and Compliance Committee - Reviews audit plans, controls, and the
Annual Report of the Corporation with independent auditors. Monitors
regulatory compliance activities of the Corporation. During fiscal year
1997, the Audit and Compliance Committee held two meetings.
(2) Executive Committee - Subject to statutory limitations, has concurrent
authority of the Board of Directors. During fiscal year 1997, the Executive
Committee of the Corporation held no meetings.
(3) Nominating and Stockholder Relations Committee - Serves as screening and
nominating committee for Board of Directors and monitors Shareholder
relations activities of the Corporation. A nominee for the Board of
Directors recommended by a Shareholder should be submitted to this
Committee. During fiscal year 1997, the Nominating and Stockholder
Committee held two meetings.
(4) Personnel and Compensation Committee - Reviews and approves compensation
for all Corporate Officers and employee benefit plans of the Corporation.
During fiscal year 1997, the Personnel and Compensation Committee held two
meetings.
(5) The Finance and Business Strategy Committee - Reviews and approves
financial reports of the Corporation and its operations. The Committee also
reviews Management recommendations related to business strategies and
acquisition proposals. During fiscal year 1997, the Finance and Business
Strategy Committee held two meetings.
Directors' Compensation
Directors who are not employees of the Corporation are paid a monthly base fee
of $400 and receive $250 per day per meeting attended. At the July 31, 1997
Board Meeting, the Directors approved the suspension of the monthly retainer fee
of $400 and its subsequent reinstatement on March 31, 1998.
As a group, the previous six non-employee Directors of the Corporation were paid
$27,550 during fiscal year 1997. The current Directors received no compensation
during fiscal year 1997.
The Corporation was the subject of an investigation by the Securities and
Exchange Commission ("SEC") which was resolved by means of a settlement.
Pursuant to the settlement on March 9, 1994, the United States District Court
for the District of Columbia entered final judgment of permanent injunction
against the Corporation. The judgment was entered on the basis of a complaint
filed by the SEC. The Corporation consented to the entry of final judgment of
permanent injunction without admitting or denying the allegations contained in
the SEC's complaint. The final judgment to which the Corporation consented
enjoin it from violating or aiding and abetting future violations of sections of
the Securities Act of 1933 and the Securities and Exchange Act of 1934 and
certain rules thereunder.
<PAGE>
Executive Officers
Executive Officer
Name Age Since
---- --- -----
Dennis Brovarone, Esq. 42 1997
Chairman, Chief Executive Officer,
and President Pro tem
David E. Williams 48 1996
Senior Vice President, Secretary,
Treasurer, Chief Financial Officer,
and Chief Operating Officer
Vote Required for Election
Fixing the number of Directors at six requires a favorable vote of a majority of
those shares voting in person. The six nominees receiving the highest number of
votes shall be elected to the Board.
The Board recommends that you vote FOR a Board consisting of six Directors and
FOR the election of each of the six nominees to be Directors of the Corporation.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
Summary Compensation Table
The following Summary Compensation Table sets forth for each of the last three
years ended December 31, 1997, information concerning the total compensation
paid or awarded to the Corporation's Chief Executive Officer for services
rendered in all capacities to the Corporation and its subsidiaries. The total
compensation of none of the Corporation's Officers exceeded $100,000 in 1997.
<TABLE>
<CAPTION>
Long-term
Compensation/
Number of
Annual Securities
Name and Compensation Underlying All Other
Principal Position Year Salary Bonus Options Compensation
------------------ ---- ------ ----- ------- ------------
<S> <C> <C> <C> <C> <C>
S.L. Reed, Jr. 1997 (2) $36,000 $0 50,000 $0
Chairman and CEO 1996 $36,000 $0 50,000 $0
1995 (1) $25,346 $0 50,000 $0
Dennis Brovarone 1997 (3) $ 0 $0 0 $0
Chairman and CEO
</TABLE>
- -----------
(1) Commenced employment January 1995
(2) Resigned as Chairman and Director in December 1997 and CEO in January 1998
(3) Joined the Board and elected Chairman in December 1997. Appointed CEO in
January 1998. Mr. Brovarone receives a fee of $5,000 per month starting
January 1998 as compensation for his services.
<PAGE>
Option Grants in 1997
The following table sets forth information concerning options to purchase shares
of common stock which were granted during 1997 to the individuals named in the
Summary Compensation Table.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for Option
Individual Grants Option Term 10 Years
----------------------------------------------------------------------------------------
Number of % of Total
Securities Options Granted
Underlying to Employees in
Options Fiscal Year Exercise Expiration
Name Granted Price Date 5% 10%
---- ------- ----- ---- -- ---
<S> <C>
S.L. Reed, Jr. 50,000 (1) 40% $0.42 05/05/05 $48,052 $76,515
</TABLE>
(1) These options would have begun vesting on May 30, 1998 at the rate of 20%
per year for five years, however, this option was accelerated in accordance
with the provisions of the Stock Option Plan since Mr. Reed's resignation
was requested in conjunction with the settlement of the "Peeper Group"
lawsuit. (See Certain Relationships and Related Transactions below for
additional information).
Fiscal Year End Option Value Table
The following table sets forth information as of December 31, 1997 concerning
the unexercised options held by Officers named in the Summary Compensation
Table, none of whom exercised options in 1997. Options are "in-the-money" when
the fair market of underlying common stock exceeds the exercise price of the
option. The closing price of common stock on December 31, 1997 was $0.19 per
share.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In-the-
Underlying Unexercised Money Options at
Name Options at December 31, 1997 December 31, 1997
---- ---------------------------- -----------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
S.L. Reed, Jr. 150,000 0 None None
</TABLE>
<PAGE>
Certain Relationships and Related Transactions
On June 10, 1997 the Corporation acquired Legislative Information Systems
Corporation (LIS) in a business combination accounted for as a pooling of
interests. LIS became a wholly owned subsidiary of the Corporation through the
exchange of 1,123,433 shares ($616,203) of the Corporation's common stock for
all of the outstanding stock of LIS. Mr. Don Withrow, who was a 55% owner of
LIS, received 617,888 shares of Ethika common stock. In addition, Mr. Withrow
entered into a one-year employment contract at an annual salary of $80,000 plus
bonus based upon performance. LIS is an electronic publishing company located in
Annandale, Virginia specializing in federal aviation regulations, banking
regulations, and custom service contracts.
Ethika Corporation, in conjunction with settlement of a lawsuit filed in the
United States District Court for the Southern District of Mississippi, Jackson
Division, styled EURAM, B.V., Peeper, et al. vs. Ethika by certain plaintiffs
against Ethika and its then-Chairman, S.L. Reed, Jr., entered into a
Subscription Agreement for the sale of 7,000,000 shares of its unregistered
common stock to LaSalle Investment, Ltd., a party to the lawsuit for $0.09 per
share. The Schedule 13-D filed with the SEC indicates that beneficial ownership
of the "Reporting Persons" increased to 51% as a result of this transaction
resulting in change of control of Ethika Corporation.
On January 8, 1998 the Corporation entered into a Letter of Intent to acquire in
a reverse merger 100% of the outstanding common stock of NADC. (See Item III for
additional information). On January 26, 1998 the parties executed a Definitive
Agreement to accomplish the acquisition on or before March 6, 1998. On March 4,
1998, the parties agreed to extend the closing date of this transaction to on or
before June 30, 1998.
At closing, the shareholders of NADC will exchange their common stock for Ethika
common stock at the rate of three (3) shares of Ethika common stock for every
four (4) shares of NADC stock. The NADC shareholders will receive approximately
19.6 million post-split shares of Ethika, which will represent approximately 95%
of the then-outstanding shares.
NADC is a mass communications company which integrates retail and wholesale
long-distance services including nationwide internet services, prepaid phone
cards through its wholly-owned subsidiary, United Online, violence-free
television programming distributed nationwide through its wholly-owned
subsidiary, kidZtime TV, Inc., and other telecommunications services under one
umbrella utilizing the most current technology in providing services to its
customers. (See Item III above).
SHAREHOLDER PROPOSALS
Any Shareholder desiring to have a proposal considered for inclusion in the
Proxy Statement to be distributed in connection with the Corporation's 1998
Annual Meeting is requested to submit such proposal in writing to the
Corporation, Attention: Corporate Secretary, no later than May 20, 1998.
<PAGE>
IV. OTHER MATTERS
The Management of the Corporation knows of no other matters, which may come
before the Meeting except for the approval of the Minutes of the last Annual
Meeting of Shareholders.
Copies of the Corporation's Form 10K for the year ended December 31, 1997
containing audited financial statements have been included in this mailing.
May 6, 1998
David E. Williams
Secretary
<PAGE>
EXHIBIT I
Ethika Corporation
Pro Forma Financial Statements
As of December 31, 1997
(Unaudited)
On January 8, 1998, Ethika Corporation ("Corporation") signed a letter of intent
with North American Digicom Corporation ("NADC"), a privately owned company
headquartered in Lakewood, Colorado, to acquire 100% of the outstanding common
stock of NADC. On January 26, 1998, the parties signed an Agreement and Plan of
Reorganization (the "Reorganization Agreement"), to complete the transaction.
The Reorganization Agreement requires that the Corporation's common stock be
reverse split on the basis of one (1) new share for every twenty-two and one
half (22.5) shares presently outstanding with all fractional shares being
rounded up to the next highest multiple of fifty (50) shares. Then the
shareholders of NADC will exchange their common stock for Ethika common stock at
the rate of three (3) shares of Ethika common stock for four (4) shares of NADC
stock. The NADC shareholders will receive approximately 19.6 million post-split
shares of Ethika, which will represent approximately 95% of the then outstanding
shares. The Reorganization Agreement also requires that the Corporation's
Articles of Incorporation be amended to eliminate the par value of the
Corporation's common stock, authorize a class of preferred stock whose rights
and preferences can be set by the Board of Directors and authorize a name change
of the Corporation to North American Digicom Corporation. The Reorganization
Agreement also calls for the Corporation's shareholders to approve a re-domicile
of the Corporation to Colorado. This transaction is a reverse acquisition,
whereby NADC will become the historical reporting company and is treated as the
acquirer for accounting purposes.
Basis of Presentation:
Ethika Corporation's fiscal year end is December 31, while NADC currently has a
fiscal year end of June 30. So that the proforma financial statements closely
reflect the combined operations as prepared from audited financial statements,
we have utilized the audited December 31, 1997 balance sheets of both Ethika and
NADC to prepare the combined proforma balance sheet. We have utilized Ethika's
audited Statement of Operations for the twelve months ended December 31, 1997
and the NADC Audited Statement of Operations for the six months ended December
31, 1997 to prepare the combined proforma Statement of Operations. Since during
the year ended June 30, 1997, NADC's operations were primarily start up in
nature, recasting of the December 31, 1997, NADC statement of operations to
include prior months was determined to be immaterial to the presentation. The
NADC audited statement of operations for the twelve months ended June 30, 1997
recorded sales of $134,309 and a net loss of $734,181.
Purchase Price Consideration:
APB 16, paragraph 70 state in part "... that presumptive evidence of the
acquiring corporation combinations effected by an exchange of stock is obtained
by identifying the former common stockholder interests of a combining company
which ether retain or receive the larger portion of the voting rights in the
combined corporation. That corporation should be treated as the acquirer unless
other evidence clearly indicates that another corporation is the acquirer..."
(SEC 4220.52)
<PAGE>
SEC 4220.52 continues, "Consideration in a Reverse Acquisition is determined no
differently than in a normal acquisition, (i.e., fair value of stock issued or
the fair value of assets received and liabilities assumed, whichever is more
indicative of the accounting acquirer. However, in a Reverse Acquisition the
stock issued goes to the accounting acquirer (NADC). Accordingly, since the
accounting is the reverse of normal, it is the fair market value of issuer's net
assets depending on whether the stock is trading in excess (less than) book
value respectively."
Where the issuer is public, cost would normally be based on the aggregate fair
market value of the issuer's stock outstanding at date of acquisition. Such cost
would be allocated to the fair market value of net assets acquired and any
resultant goodwill would be recognized. Since the Corporation became delisted
from NASDAQ on February 13, 1998, and is currently being traded in the "pink
sheets", it is appropriate to use the net asset value $1,701,091 of Ethika at
December 31, 1997 as the purchase price for this transaction and in preparing
all of the proforma financial statements. At February 13, 1998, the total market
capitalization was $2.84 million and the market value of public float was $2.15
million.
Proforma earnings per share has been calculated as though the 22.5 reverse split
and the 4 for 3 exchange of NADC stock for Ethika stock occurred at January 1,
1997.
<PAGE>
<TABLE>
<CAPTION>
Ethika Corporation
Pro Forma worksheet
As of December 31, 1997
Unaudited
------------------------------- Combined
DESCRIPTION Audited Audited Adjustments Unaudited
Ethika NAD Dr. Cr. Pro Forma
------ --- --- --- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents 535,651 250,538 - 786,189
Marketable security 549,281 549,281
Accounts receivable, net 6,200,784 6,200,784
Receivables from related parties 1,761,037 1,761,037
Lease receivable 112,763 112,763
Prepaid and Other assets - 1,039,276 1,039,276
Net assets held for sale 739,545 739,545
----------- ----------- ---------- ----------- -----------
Total Current Assets 1,937,240 9,251,635 - - 11,188,875
Property, plant and equipment- net 45,097 2,160,894 2,205,991
Other Assets:
Software development costs 56,146 56,146
-
Deferred Income Tax -
Goodwill 6,604,796 6,604,796
Lease receivable, non-current 166,746 166,746
----------- ----------- ---------- ----------- -----------
Total Assets 2,149,083 18,073,471 - - 20,222,554
=========== =========== ========== =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses (367,992) (1,493,524) (1,861,516)
Accrued expenses (221,834) (221,834)
Payable to related parties - (3,802,674) (3,802,674)
Notes payable (LOC) - (49,900) (49,900)
Deferred revenue (5,823,983) (5,823,983)
Current portio of Long-term debt - (380,646) (380,646)
Accrued loss on discontinued operations (80,000) (80,000)
----------- ----------- ---------- ----------- -----------
Total current liabilities (447,992) (11,772,561) - - (12,220,553)
Notes payable (1,242,938) (1,242,938)
----------- ----------- ---------- ----------- -----------
Total liabilities (447,992) (13,015,499) - - (13,463,491)
----------- ----------- ---------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ethika Corporation
Pro Forma worksheet
As of December 31, 1997
Unaudited
(continued)
------------------------------- Combined
DESCRIPTION Audited Audited Adjustments Unaudited
Ethika NAD Dr. Cr. Pro Forma
------ --- --- --- ---------
<S> <C> <C> <C> <C> <C>
Shareholder's Equity:
Common Stock (20,361,458) (6,891,969) 20,361,458 (1,701,091) (8,593,060)
Preferred stock (435,000) (435,000)
Discount on Common Stock 8,123,528 (8,123,528) -
Treasury Stock 1,112 (1,112) -
Accumulated deficits 10,535,727 2,268,997 (10,535,727) 2,268,997
----------- ----------- ---------- ----------- -----------
(1,701,091) (5,057,972) 20,361,458 (20,361,458) (6,759,063)
----------- ----------- ---------- ----------- -----------
Total liabilities and equity (2,149,083) (18,073,471) 20,361,458 (20,361,458) (20,222,554)
=========== =========== ========== =========== ===========
</TABLE>
See accompaning notes to Pro Forma Financial Statements.
<PAGE>
EXHIBIT II
Financial Statements and Report
of
Independent Certified Public Accountants
North American
Digicom Corporation
December 31, 1997,
June 30, 1997 and 1996
<PAGE>
Board of Directors
North American Digicom Corporation
We have audited the accompanying consolidated balance sheets of North American
Digicom Corporation and subsidiaries as of December 31, 1997, June 30, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the periods ended December 31, 1997, June 30,
1997 and 1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits with generally accepted audited standards. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes, examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of North American
Digicom Corporation and subsidiaries as of December 31, 1997, June 30, 1997 and
1996, and the results of their operations and their cash flows for each of the
periods ended December 31, 1997, June 30, 1997 and 1996, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note K to the
consolidated financial statements, the Company has incurred a loss of $1,526,791
for the six months ended December 31, 1997, and has a working capital deficit of
approximately $2,500,000. As a result, sufficient equity and debt financing must
be obtained to fund obligations until successful operations are attained. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this certainty.
Englewood, Colorado
February 14, 1998
<PAGE>
<TABLE>
<CAPTION>
North American Digicom Corporation
Consolidated Balance Sheets
December 31, June 30,
------------- ------------------------------
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Assets
Current assets:
Cash $ 250,538 $ 45,650 $ 4,683
Accounts receivable, net of allowance for doubtful
Accounts of $30,000 at December 31, 1997 6,200,784 89,044 --
Receivables from related parties 1,761,037 -- --
Prepaid expenses 1,039,276 85,069 --
------------ ------------ ------------
Total Current Assets 9,251,635 219,763 4,683
------------ ------------ ------------
Property, Plant and Equipment, at cost:
Telephony equipment 1,723,293 1,306,789 --
Furniture and other equipment 691,284 81,880 47,292
------------ ------------ ------------
2,414,577 1,388,669 47,292
Accumulated depreciation 253,683 35,639 --
------------ ------------ ------------
2,160,894 1,353,030 47,292
------------ ------------ ------------
Other Assets:
Computer software under development 56,146 31,333 --
Excess of purchase price over net assets of businesses
Acquired, net of accumulated amortization of
$226,878 at December 31, 1997 6,604,796 753,552 --
------------ ------------ ------------
6,660,942 784,885 --
------------ ------------ ------------
Total Assets $ 18,073,471 $ 2,357,678 $ 51,975
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
North American Digicom Corporation
Consolidated Balance Sheets
(continued)
December 31, June 30,
------------- ------------------------------
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 1,493,524 $ 294,896 $ --
Payables to related parties 3,802,674 300,289 55,000
Note payable line of credit 49,900 49,900 --
Current maturities of long-term obligations 380,646 203,001 --
Deferred revenue 5,823,983 -- --
Accrued expenses 221,834 83,522 --
------------ ------------ ------------
Total Current Liabilities 11,772,561 931,608 55,000
------------ ------------ ------------
Long-term Obligations, less current maturities 1,242,938 994,806 --
------------ ------------ ------------
Stockholders' Equity
Preferred stock, $100 par value; authorized
10,000,000 shares 435,000 -- --
Common stock, no par value; authorized
50,000,000 shares 6,891,969 1,173,470 5,000
Accumulated deficit (2,268,997) (742,206) (8,025)
------------ ------------ ------------
Total Stockholders' Equity 5,057,972 431,264 (3,025)
Total Liabilities and Stockholders Equity $ 18,073,471 $ 2,357,678 $ 51,975
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
North American Digicom Corporation
Consolidated Statements of Operations
Six months Year Inception
period ended Ended (December 27,
1995)
December 31, June 30, through June 30,
1997 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Revenue $ 2,467,540 $ 134,309 $ --
----------- ---------- ----------
Costs and Expenses:
Cost of sales 1,652,394 185,380 --
Selling and development expenses 283,261 52,093 --
General and administrative expenses 1,824,778 537,281 8,025
---------- ---------- ----------
Total Costs and Expenses 3,760,433 774,754 8,025
---------- ---------- ----------
Operating loss (1,292,893) (640,445) (8,025)
---------- ---------- ----------
Other income (expense)
Interest expense (235,746) (98,880) --
Other income 1,848 5,144 --
---------- ---------- ----------
(233,898) (93,736) --
---------- ---------- ----------
Income taxes -- -- --
---------- ---------- ----------
Net Loss $(1,526,791) $ (734,181) $ (8,025)
=========== ========== ==========
</TABLE>
The Accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
North American Digicom Corporation
Consolidated Statements of Cash Flows
Six months Year Inception
period ended Ended (December 27,
1995)
December 31, June 30, through June 30,
1997 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(1,526,791) $ (734,181) $ (8,025)
Adjustments to reconcile net
cash provided (used) by
operating activities:
Depreciation and amortization 410,610 35,639 --
Common stock issued for services,
interest and other expenses 470,876 53,720 5,000
Payment of interest and other
expenses by increase in note payable -- 53,834 --
Changes in assets and liabilities:
Increase in accounts receivable (6,107,951) (88,829) --
Increase in receivables from
related parties (21,324)
Increase in prepaid expenses (317,067) (56,200) --
Increase in accounts payable 735,883 286,183 --
Increase in payables to related parties 664,639 -- --
Increase in deferred revenue 4,894,955 -- --
Increase in accrued expenses 114,988 83,522 --
----------- ----------- -----------
Net cash used by operating activities (681,182) (366,312) (3,025)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (221,363) (89,388) (47,292)
----------- ----------- -----------
Net cash used by investing activities (221,363) (89,388) (47,292)
----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
North American Digicom Corporation
Consolidated Statements of Cash Flows
(continued)
Six months Year Inception
period ended Ended (December 27,
1995)
December 31, June 30, through June 30,
1997 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Issuance of preferred stock 435,000 -- --
Issuance of common stock 105,500 242,250 --
Proceeds from line of credit -- 49,900 --
Loans from related parties 1,308,809 438,165 55,000
Repayments to related parties (669,234) (200,712) --
Payments on capital lease obligations (72,984) (51,738) --
Prepayment on capital lease obligation -- (26,845) --
Cash balance of business acquired by
issuance of common stock 342 45,647 --
----------- ----------- -----------
Net cash provided by financing activities 1,107,433 496,667 55,000
----------- ----------- -----------
Increase in cash 204,888 40,967 4,683
Cash
Beginning of period 45,650 4,683 --
----------- ----------- -----------
End of period $ 250,538 $ 45,650 $ 4,683
=========== =========== ===========
</TABLE>
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30 1997 and 1996
Note A----Organization and Summary of Significant Accounting
Policies
Nature of Operations
NAD develops, markets and sells nationwide long distance telephone services,
primarily to business customers and wholesalers. The Company's products include
long distance telephone service and prepaid calling cards. UOL develops, markets
and sells nationwide Internet services. The Company's products include Internet
dial-up connections and virtual marketplace shopping. KTV develops, markets and
sells nationwide television and Internet programming directed towards meeting
the needs of parents and children for nonviolent, safe, educational and
entertaining programming. KTV has sold licenses to companies (eighty markets
nationwide) to allow for the broadcasting of their programming.
Principles of Consolidation
The consolidated financial statements of North American Digicom Corporation and
subsidiaries ("the Company") include the accounts of its two wholly-owned
subsidiaries United Online, Inc.("UOL") and Kidztime TV, Inc. ("KTV"). All
significant intercompany accounts and transactions have been eliminated. As
described in Note B, UOL was acquired on June 30, 1997 and KTV was acquired on
October 20, 1997.
Revenue Recognition
Revenues are recognized when earned. For telephone operations, deferred revenue
represents amounts billed to customers for prepaid calling cards which have not
yet been used. Revenue is recognized based on usage by customers. A portion of
television license revenue is deferred to properly match programming costs with
revenue. For other products and services, revenue is recognized when products
are delivered or services are rendered to customers.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method. Estimated useful lives
are five years for telephony equipment, and seven years for furniture and other
equipment.
Other Assets
Excess of purchase price over net assets of businesses acquired ("goodwill") is
amortized on the straight-line method over the estimated periods of future
demand for the products acquired. Goodwill related to the acquisition of UOL is
being amortized over three years and goodwill related to the acquisition of KTV
is being amortized over ten years.
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note A----Organization and Summary of Significant Accounting
Policies, continued
The Company capitalizes certain software development and production costs once
technological feasibility has been achieved pursuant to Statement of Financial
Accounting Standards No. 86, Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed. Software costs were capitalized in the
amount of $31,333 during the year ended June 30, 1997 and in the amount of
$24,861 during the six month period ended December 31, 1997. The software is
expected to be placed in service during the first quarter of 1998 and will be
amortized based upon the straight-line method over an estimated life of three
years.
Income Taxes
Income taxes include provisions for temporary differences between earnings for
financial reporting purposes and earnings for income tax purposes under the
guidelines of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires the use of certain estimates. Actual results may
differ from those estimates.
Advertising
The Company expenses advertising costs as they are incurred. Advertising
expenses were $91,517, $127,472 and $7,470 for the periods ending December 31,
1997, June 30, 1997 and June 30, 1996, respectively.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Note B----Business Acquisitions
Both acquisitions recognized in these financial statements have been accounted
for under the purchase method. The results of operations of the acquired
businesses are included in the consolidated financial statements from the dates
of acquisition. These acquisitions have been structured to qualify as tax-free
reorganizations.
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note B----Business Acquisitions, continued
On June 30, 1997, the Company acquired 100% of the outstanding stock of UOL by
issuance of 1,675,000 shares of common stock. The purchase price of $837,500
plus the liabilities assumed exceeded the fair value of the tangible assets and
identifiable intangible assets by $753,552 which is being amortized over a
period of three years.
On October 20, 1997, the Company acquired 100% of the outstanding capital stock
of KTV by issuance of 5,142,123 share of common stock. The purchase price of
$5,142,123 plus the liabilities assumed exceeded the fair value of the tangible
assets and identifiable intangible assets by $6,078,122 which is being amortized
over a period of ten years.
The following unaudited pro forma consolidated results of operations are
presented as if the acquisition of UOL had occurred on July 1, 1995 and the
acquisition of KTV on July 1, 1996. The unaudited pro forma information is not
necessarily indicative of either the results of operations that would have been
made during the periods presented or the future results of the combined
operations.
<TABLE>
<CAPTION>
Six month period ended
ended December 31, Year ended June 30,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $4,525,172 $6,093,255 $ 42,071
Net loss 1,732,468 2,203,718 333,452
</TABLE>
Note C----Line of Credit
The Company has a line of credit for $50,000 with a local bank. The outstanding
balance at December 31, 1997, and June 30, 1997 was $49,900 and interest at 1.5%
over prime rate (10.5% effective rate at December 31, 1997 and June 30, 1997) is
paid monthly. The line of credit expires on January 8, 1998, and the Company has
applied for renewal. The line of credit is collateralized by assets of one of
the officer/shareholders.
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note D---Long Term Obligations
The following is an analysis of the leased equipment under capital leases by
major classes.
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997 1996
----------- ----------- -------
<S> <C> <C> <C>
Telephone equipment $1,695,748 $1,249,545 $ --
Less: Accumulated depreciation 182,785 31,841 --
----------- ----------- -------
$1,512,963 $1,217,704 $ --
========== ========== =======
</TABLE>
Amortization of leased equipment is included in general and administrative
expense.
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum lease
payments:
<TABLE>
<CAPTION>
December 31, June 30,
Due Within 1997 1997 1996
---------- ----------- ------------ ------
<S> <C> <C> <C>
1 year $ 579,650 $ 335,441 $ --
2 years 508,007 334,129 --
3 years 440,263 332,162 --
4 years 420,714 326,257 --
5 years 121,982 244,693 --
---------- ------------ -----
Total minimum lease payments 2,070,616 1,572,682 --
Less: Amounts representing interest 451,590 374,875 --
---------- ------------ -----
Present value of net minimum
lease payments $1,619,026 $ 1,197,807 $ --
========== ============ =====
</TABLE>
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note D---Long Term Obligations, continued
(A) Imputed interest rates of 12% were used to calculate the present value of
the leases. (B) Reflected in the balance sheet as:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Current maturities of long-term $ 380,646 $ 203,001 $ --
obligations
Long-term obligations, net of
current portion 1,238,380 994,806 --
---------- ---------- --------
Total $1,619,026 $1,197,807 $ --
========== ========== ========
</TABLE>
Note E----Related Party Transactions
The Company has loans from shareholders, directors and officers who have
assisted the company in meeting its financial commitments, as follows:
<TABLE>
<CAPTION>
December 31, June 30,
Loans 1997 1997 1996
----- ---- ---- ----
<S> <C> <C> <C>
Loans $1,290,809 $ 391,350 $55,000
Repayments 595,214 148,763 --
Payables to related parties 641,385 297,587 55,000
Interest expense:
Paid in cash 36,388 3,163 --
Stock issued in lieu 18,546 23,475 --
</TABLE>
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note E----Related Party Transactions, continued
The Company has had transactions with other companies related through common
ownership as follows:
<TABLE>
<CAPTION>
December 31,
1997
-------------
<S> <C>
Capital Funding and Financing Group, Inc.:
Purchase of furniture and equipment $ 215,376
Loans 637,500
Repayments 249,772
Balance with KTV at date of acquisition 1,836,966
Receivables from related parties at December 31, 1997 $ 1,233,882
Kidztime TV Management Group, Inc.:
Sale of furniture and equipment $ 88,150
Due for development of promotional program 250,000
Loans 5,000
Repayments 97,500
Balance with KTV at date of acquisition (2,080,000)
Payables to related parties at December 31, 1997 $ (2,323,650)
</TABLE>
The receivable from Capital Funding has been collateralized by former
shareholders of Kidztime TV, Inc., with their stock in the Company.
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note E----Related Party Transactions, continued
KTV has eighty affiliates (formed as LLC's) nationwide who are licensed to air
KTV's programming on local cable channels. These affiliates were organized
through efforts of Capital Funding and Financing Group, Inc. and participate in
promotional programs such as the Kidztime Challenge. The license agreement
provides that programming is provided free to the affiliates, but they must pay
for their own local access costs and satellite transmission. KTV contracts for
these services on behalf of these affiliates. As a result, funds are advanced
for the affiliates and advances to KTV occur, as follows:
December 31,
1997
------------
Kidztime Affiliate LLC's
Billings for renewal license fees $440,000
Payments to affiliates 114,914
Charges for satellite transmission 89,160
Amounts received from related parties 559,071
Balances with KTV at December 31, 1997
Receivables from related parties $527,155
Payables to related parties 837,639
Note F----Income Taxes
The Company files a consolidated federal and state income tax returns as
required by the applicable income tax laws.
Net deferred tax assets from continuing operations consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets
Amortization of goodwill $ 33,571 $ -- $ --
Allowance for bad debts 7,500 -- --
Net operating loss carryforwards 515,345 186,345 2,006
--------- --------- ---------
556,416 186,345 2,006
Valuation allowance (556,416) (186,345) (2,006)
--------- --------- ---------
Net deferred tax asset $ -- $ -- $ --
========= ========= =========
</TABLE>
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note F----Income Taxes, continued
The Company recorded a valuation allowance due to the uncertainty of the
Company's ability to realize future benefits of net operating loss carryforwards
or other future tax deductions.
The benefit from income taxes is summarized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current $ -- $ -- $ --
Deferred -- -- --
------ ------ ------
$ -- $ -- $ --
====== ====== ======
</TABLE>
The Company has net operating loss carryforwards of approximately $2,063,000
which expire in 2011 through 2013. Acquired subsidiaries have another $352,000
available to apply to their separate taxable earnings through 2011.
Note G----Stockholders' Equity
The Series A Preferred Stock accrues dividends of $9.25 per share per annum.
Dividends are cumulative and payable semi-annually on January 1 and July 1. At
any time on or before January 1, 2000, each share of Preferred Stock is
convertible into 25 shares of common stock. The liquidation preference of
Preferred Stock is the par value of $100 per share plus any unpaid dividends
whether or not declared.
The Company has issued common stock to officers, key employees and consultants
as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Number of shares granted 450,830 12,201,660 5,000,000
Estimated weighted average fair
market value at date of grant $ .782 $ .003 $ .001
Compensation cost recognized $ 352,330 $ 35,245 $ 5,000
</TABLE>
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note G----Stockholders' Equity, continued
In addition, common stock has been issued to notes payable holders as incentive
to loan funds to the Company, and to other persons and entities who have acted
as finders in identifying equity investors.
These transactions have been recognized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
---- ----
<S> <C> <C>
Number of shares issued to notes
payable holders 190,000 313,000
Interest expense recognized $ 18,546 $ 23,475
Number of shares issued to finders 815,100 158,000
Stock issuance costs recognized $252,650 $ 15,800
</TABLE>
Note H----Backlog
Backlog represents the amount of revenue the Company expects to realize from
executed long-term contracts for future sales of prepaid calling cards. At
December 31, 1997, the Company had a backlog of $24,500,000 through February
2001, as follows:
Year
1 $19,300,000
2 2,400,000
3 2,400,000
4 400,000
-----------
$24,500,000
===========
Note I----Commitments and Contingencies
Purchase Contracts
The Company has contracts with companies who provide various services. These
contracts provide for minimum purchases over the term of the contract. Internet
services are contracted for at a minimum of $5,845 monthly through September
1999. Long distance services are contracted for at $250,000 minimum monthly
through March 2000.
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note I----Commitments and Contingencies, continued
Regulatory Agency Administrative Proceedings
Certain state regulatory agencies have requested administrative hearings against
Capital Funding and Financial Group, Inc. (Capital Funding) and the Company's
subsidiary, Kidztime TV, Inc. (KTV) involving the solicitation and sale of
partnership interests in Kidztime TV territorial affiliates, Regulators have
asserted that the partnership interests were offered and sold as unregistered
securities.
In addition, in late 1997 the Securities and Exchange Commission (SEC) commenced
a formal investigation on the same matter.
The Company and KTV believe that there will not be any material financial impact
on these financial statements as a result of the following:
o KTV sold its licenses to Capital Funding who assigned the licenses to
each Kidztime TV territorial affiliate at the time of formation.
o KTV took no part in the sale of partnership interests.
o The license agreement between KTV and Capital Funding includes an
indemnification provision requiring Capital Funding to defend any
actions and absorb all losses, claims, damages, liabilities and
expenses.
Concentrations of Risk
For the six months ended December 31, 1997, the company had sales of prepaid
cards to one customer representing 58% of prepaid card revenues ($1,584,364).
The Company maintains cash deposits in several banks, and deposits at each bank
are insured by the Federal Deposit Insurance Corporation up to $100,000. At
December 31, 1997, the uninsured portion of the balance at one bank was
approximately $130,000.
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note J----Business Segments Information
The Company's operations have been classified into three business segments:
Long-distance telephone services including prepaid calling cards, licensing and
television programming and Internet services.
Summarized financial information by business segment is as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales
Long distance $ 1,844,609 $ 134,309 $ --
Television 610,688 -- --
Internet 12,243 -- --
------------ ------------ ------------
2,467,540 134,309 --
------------ ------------ ------------
Operating income (loss)
Long distance (789,091) (640,445) (8,025)
Television (289,598) -- --
Internet (214,204) -- --
------------ ------------ ------------
(1,292,893) (640,445) (8,025)
------------ ------------ ------------
Total Assets
Long distance 7,967,713 1,522,462 51,975
Television 9,414,338 -- --
Internet 691,420 -- --
------------ ------------ ------------
18,073,471 2,357,678 51,975
------------ ------------ ------------
Depreciation and amortization
Long distance 179,144 34,592 --
Television 106,114 -- --
Internet 126,114 -- --
------------ ------------ ------------
411,285 34,592 --
------------ ------------ ------------
Capital expenditures
Long distance 938,497 1,341,377 47,292
Television 1,000 -- --
Internet 5,436 -- --
------------ ------------ ------------
$ 944,933 $ 1,341,377 $ 7,292
------------ ------------ ------------
</TABLE>
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, and June 30, 1997 and 1996
Note K----Financial Developments
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. For the six months ended December
31, 1997, the Company incurred a loss of $1,526,791, and used cash in operations
of $681,182. In addition, the Company at December 31, 1997 had a working capital
deficit of approximately $2,500,000. Significant liquidity demands exist in the
short term including approximately $550,000 to fund anticipated equipment
additions for capacity requirements.
The Company believes through its preferred stock private offering and related
party sources, it can raise sufficient funds to fund operations until they begin
generating cash and successful operations can be attained.
Note L----Subsequent Events
Subsequent to December 31, 1997, proceeds have been received aggregating
$559,000 from the sale of an additional 5,590 shares of Series A preferred
stock.
During January 1998, the Company issued 250,000 shares of common stock pursuant
to an asset purchase agreement. The assets acquired had an estimated fair market
value of $500,000.
On January 26, 1998, the Company agreed to exchange all of its outstanding
shares for a 95% interest in the stock of Ethika Corporation. Upon approval of
the merger by Ethika's shareholders, but no later than March 31, 1998, the
closing will occur. Ethika will then change its name to North American Digicom
Corporation. The merger is intended to be a reverse acquisition.
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, and June 30, 1997 and 1996
Note M----Supplemental Cash flow Information
<TABLE>
<CAPTION>
Six months Year Inception
period ended Ended (December 27, 1995)
December 31, June 30, through June 30,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Supplemental Cash Flow Information:
Cash payments for interest $ 16,957 $ 28,973 $ --
Cash refunds for income taxes 90,000 -- --
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Equipment financed by capital
lease obligations $ 446,203 $1,249,545 $ --
Common stock issued for note
payable conversion -- 35,000 --
Common stock issued for common
stock of business acquired 5,141,781 791,853 --
Repayment of short-term borrowings
by issuance of note -- 88,928 --
</TABLE>
<PAGE>
EXHIBIT III
ARTICLE 13 OF MISSISSIPPI
BUSINESS CORPORATION ACT
Section 79-4-13.01. Definitions
In this article:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring
corporation by merger or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under Section 79-4-13.02 and who exercises that
right when and in the manner required by Sections 79-04-13.20
through 79-4-13.28.
(3) "Fair Value", with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the
corporate action to which the dissenter objects, excluding any
appreciation or depreciation in anticipation of the corporate
action unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently
paid by the corporation on its principal bank loans, or if none,
at a rate that is fair and equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner
of shares to the extent of the rights granted by a nominee
certificate on file with a corporation.
(6) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the
record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
Section 79-4-13.02 Right to dissent.
(a) A shareholder is entitled to dissent from, and obtain payment of the
fair value of his shares in the event, of any of the following
corporate actions:
(1) Consummation of a plan of merger to which the corporation is a
party (i) if shareholder approval is required for the merger by
Section 79-4-11.03 or the articles of incorporation and the
shareholder is entitled to vote on the merger, or (ii) if the
corporation is a subsidiary that is merged with its parent under
Section 79-4-11.04;
<PAGE>
(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if
the shareholder is entitled to vote on the plan;
(3) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than in the usual and
regular course of business, if the shareholder is entitled to vote
on the sale or exchange, including a sale in dissolution, but not
including a sale pursuant to court order or a sale for cash
pursuant to a plan by which all or substantially all of the net
proceeds of the sale will be distributed to the shareholders
within one (1) year after the date of sale;
(4) An amendment of the articles of incorporation that materially and
adversely affects right in respect of a dissenter's shares because
it:
(i) Alters or abolishes a preferential right of the shares;
(ii) Creates, alters or abolishes a right in respect of
redemption, including a provision respecting a sinking
fund for the redemption or repurchase, of the shares;
(iii) Alters or abolishes a preemptive right of the holder of
the shares to acquire shares or other securities;
(iv) Excludes or limits the rights of the shares to vote on
any matter, or to cumulate votes, other than a limitation
by dilution through issuance of shares or other
securities with similar voting rights; or
(v) Reduces the number of shares owned by the shareholder to
a fraction of a share if the fraction share so created is
to be acquired for cash under Section 79-4-6.04;or
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws or a resolution of
the board of directors provides that voting or nonvoting
shareholders are entitled to dissent and obtain payment for their
shares.
(b) Nothing in subsection (a) (4) shall entitle a shareholder of a
corporation to dissent and obtain payment of his shares as a result of
an amendment of the articles of incorporation exclusively for the
purpose of either (i) making such corporation subject to application of
the Mississippi Control Share Act, or (ii) making such act inapplicable
to a control share acquisition of such corporation.
(c) A shareholder entitled to dissent and obtain payment for his shares
under this article may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to
the shareholder of the corporation.
Section 79-4-13.03. Dissent by nominees and beneficial owners.
(a) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his name only if he dissents with respect to
all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose
behalf he asserts dissenters' rights. The rights of a partial dissenter
under this subsection are determined as if the shares as to which he
dissents and his other shares were registered in the names of different
shareholders.
<PAGE>
(b) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
(1) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial
shareholder asserts dissenters' rights; and
(2) He does so with respect to all shares of which he is the
beneficial shareholder or over which he has power to direct
the vote.
Section 79-4-13.20. Notice of dissenters' rights.
(a) If proposed corporate action creating dissenters' rights under Section
79-4-13.02 is submitted to a vote at a shareholders' meeting, the
meeting notice must state that shareholders are or may be entitled to
assert dissenters' rights under this article and be accompanied by a
copy of this article.
(b) If corporate action creating dissenters' rights under Section
79-4-13.02 is taken without a vote or shareholders, the corporation
shall notify in writing all shareholders entitled to assert dissenters'
rights that the action was taken and send them the dissenters' notice
described in Section 79-4-13.22.
Section 79-4-13.21. Notice of intent to demand payment.
(a) If proposed corporate action creating dissenters' rights under Section
79-4-13.02 is submitted to a vote at a shareholders' meeting, a
shareholder who wishes to assert dissenters' rights (1) must deliver to
the cooperation before the vote is taken written notice of his intent
to demand payment for his shares if the proposed action is effectuated,
and (2) must not vote his share in favor of the proposed action.
(b) A shareholder who does not satisfy the requirement of subsection (a) is
not entitled to payment for his shares under this article.
Section 79-4-13.22. Dissenters' notice.
(a) If proposed corporate action creating dissenters' rights under Section
79-4-13.02 is a authorized at a shareholders' meeting, the corporation
shall deliver a written dissenters' notice to all shareholders who
satisfied the requirements of Section 79-4-13.21.
(b) The dissenters' notice must be sent no later than ten (10) days after
the corporate action was taken, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment
demand is received;
(3) Supply a form for demanding payment that includes the date of
the first announcement to news media or to shareholders of the
terms of the proposed corporate action and requires that the
person asserting dissenters' right certify whether or not he
acquired beneficial ownership of the shares before that date;
<PAGE>
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty (30) nor more
than sixty (60) days after the date the subsection (a) notice
is delivered; and
(5) Be accompanied by a copy of this article.
Section 79-4-13.23. Duty to demand payment.
(a) A shareholder sent a dissenters' notice described in Section 79-4-13.22
must demand payment, certify whether he acquired beneficial ownership
of the shares before the date required to be set forth in the
dissenters' notice pursuant to Section 79-4-13.22(b)(3), and deposit
his certificates in accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits his shares under
subsection (a) retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate
action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment of his shares under this article.
Section 79-4-13.24. Share restrictions.
(a) The Corporation may restrict the transfer of uncertificated shares the
date the demand for their payment is received until the proposed
corporate action is taken or the restrictions released under Section
79-4-13.26.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until
these rights are canceled or modified by the taking of the proposed
corporate action.
Section 79-4-13.25. Payment.
(a) Except as provided in Section 79-4-13.27, as soon as the proposed
corporate action is taken, or upon receipt of a payment demand, the
corporation shall pay each dissenter who complied with Section
79-4-13.23 the amount the corporation estimates to be the fair value of
his shares, plus accrued interest.
(b) The payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen (16) months before the date of
payment, an income statement for that year, a statement of
changes in shareholders' equity for that year, and the latest
available interim financial statements, if any;
(2) A statement of the corporation's estimates of the fair value
of the shares;
(3) An explanation of how the interest was calculated;
<PAGE>
(4) A statement of the dissenters' right to demand payment under
Section 79-4-13.28; and
(5) A copy of this article.
Section 79-4-13.26. Failure to take action.
(a) If the corporation does not take the proposed action within sixty (60)
days after the date set for demanding payment and depositing share
certificates, the corporation shall return the deposited certificates
and release the transfer restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a
new dissenters' notice under Section 79-4-13.22 and repeat the payment
demand procedure.
Section 79-4-13.27. After-acquired shares.
(a) A corporation may elect to withhold payment required by Section
79-4-13.25 from a dissenter unless he was the beneficial owner of the
shares before the date set forth in the dissenters' notice as the date
of the first announcement to news media or to shareholders of the terms
of the proposed corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a), after taking the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interest and shall
pay this amount to each dissenter who agrees to accept it in full
satisfaction of his demand. The corporation shall send with its offer a
statement of its estimate of the fair value of the shares, an
explanation of how the interest was calculated and a statement of the
dissenter's right to demand payment under Section 79-4-13.28.
Section 79-4-13.28. Procedure if a shareholder dissatisfied with payment or
offer.
(a) A dissenter may notify the corporation in writing of his own estimate
of the fair value of his shares and amount of interest due, and demand
payment of his estimate (less any payment under Section 79-4-13.25), or
reject the corporation's offer under Section 79-4-13.27 and demand
payment of the fair value of his shares and interest due, if:
(1) The dissenter believes that the amount paid under Section
79-4-13.25 or offered under Section 79-4-13.27 is less than
the fair value of his shares or that the interest due is
incorrectly calculated;
(2) The corporation fails to make payment under Section 79-4-13.25
within sixty (60) days after the date set for demanding
payment; or
(3) The corporation, having failed to take the proposed action,
does not return the deposited certificates or release the
transfer restrictions imposed on uncertificated shares within
sixty (60) days after the date set for demanding payment.
<PAGE>
(b) A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing under
subsection (a) within thirty (30) days after the corporation made or
offered payment for his shares.
Section 79-4-13.30. Court action.
(a) If a demand for payment under Section 79-4-13.28 remains unsettled, the
corporation shall commence a proceeding within sixty (60) days after
receiving the payment demand and petition the court to determine the
fair value of the shares and accrued interest. If the corporation does
not commence the proceeding within the sixty-(60) day period, it shall
pay each dissenter whose demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in the chancery court of
the county where a corporation's principal office (of, if none in this
state, its registered office) is located. If the corporation is a
foreign corporation without a registered office in this state, it shall
commence the proceeding in the county in this state where the
registered office of the domestic corporation merged with or whose
shares were acquired by the foreign corporation was located.
(c) The corporation shall make all dissenters (whether or not residents of
this state) whose demands remain unsettled parties to the proceeding as
in an action against their shares and all parties must be served with a
copy of the petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers
described in the order appointing them, or in any amendment to it. The
dissenters are entitled to the same discovery rights as parties in
other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgement
(1) for the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the corporation,
or (2) for the fair value, plus accrued interest, of his after-acquired
shares for which the corporation elected to withhold payment under
Section 79-4-13.27.
Section 79-4-13.31. Court costs and counsel fees.
(a) The court in an appraisal proceeding commenced under Section 79-4-13.30
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The
court shall assess the costs against the corporation, except that the
court may assess costs against all or some of the dissenters, in the
amounts the court finds equitable, to the extent the court finds the
dissenters acted arbitrarily, vexatiously or not in good faith in
demanding payment under Section 79-4-13.28.
<PAGE>
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the courts finds equitable:
(1) Against the corporation and in favor of any or all dissenters
if the court finds the corporation did not substantially
comply with the requirements of Section 79-4-13.20 through
79-4-13.28;or
(2) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom
the fees and expenses are assessed acted arbitrarily,
vexatiously or not in good faith with respect to the rights
provided by this article.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that
the fees for those services should not be assessed against the
corporation, the court may award to these counsel reasonable fees to be
paid out of the amounts awarded the dissenters who were benefited.
