As filed with the Securities and Exchange Commission on June 15, 1998
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ending February 28, 1998 Commission File No. 000-28506
AMERICAN DIGITAL COMMUNICATIONS, INC.
(Exact name of registrant as specified in charter)
WYOMING 13-3411167
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
745 FIFTH AVENUE, SUITE 900 (212) 486-7424
NEW YORK, NY 10151 (Registrant's Telephone No. incl.
(Address of Principal Executive Offices) area code)
Securities registered pursuant to None
Section 12(b) of the Act:
Securities registered pursuant to None
Section 12(g) of the Act:
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes ( x) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation SB is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K ( ).
Based on the closing high bid price on June 2, 1998 as reported by the
National Association of Securities Dealer's Over The Counter electronic bulletin
board, the aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $4,260,150.
On June 2, 1998, the number of shares outstanding of the registrant's
Common Stock was 24,277,886.
Portions of the registrant's definitive proxy statement, which will be
filed within 120 days of February 28, 1998, are incorporated by reference into
Part III.
Transitional Small Business Disclosure Format (Check One): Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Certain matters discussed in this Annual Report may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act") and as such may involve risks
and uncertainties. These forward-looking statements relate to, among other
things, expectations of the business environment in which the Company operates,
projections of future performance, perceived opportunities in the market and
statements regarding the Company's goals. The Company's actual results,
performance, or achievements may differ from those expressed or implied in such
forward-looking statements. For discussion of the factors that might cause such
a difference, see Item 6 Management's Discussion and Analysis or Plan of
Operations.
INTRODUCTION
American Digital Communications, Inc. ("American Digital", "ADC" or the
"Company") is a corporation organized June 30, 1993 under the laws of the state
of Wyoming.
The Company's offices are located at 745 Fifth Avenue, New York, NY
10151 (telephone number 212-486-7424 and fax number 212-486-7352) and 580
Granite Court, Pickering, Ontario L1W 3Z4 (telephone number 905-837-9909 and fax
number 905-837-1139).
ADC is the successor to Mont Rouge Resources, Inc. ("Mont Rouge") a New
York corporation organized on March 19, 1987. Mont Rouge completed a small
public offering in 1987 and in March 1988 acquired American Fidelity Holding
Corporation, a Delaware corporation, in a stock -for-stock exchange. The
acquisition was rescinded in 1989 and Mont Rouge became dormant until early 1993
when it was redomiciled to the State of Wyoming.
220 MHZ OPERATIONS
In recent years ADC acquired a series of 220 Mhz licenses. The
acquisition strategy was to aggregate as many licenses as possible in order to
offer a low cost analog alternative to digital 800 and 900 Mhz spectrum.
Funding for this strategy was very difficult.
During the current year the Company reviewed its strategic direction
concerning the implementation of a 220 Mhz spectrum system. Based on certain
developments occurring in the industry, ADC determined that it would be unable
to operate effectively and profitably, at the requisite scale, an analog
dispatch system. As such, management decided to take advantage of an opportunity
to dispose of its tower sites and licenses to a large 220 Mhz aggregator, and
free up its investment in the 220 Mhz spectrum.
MIDLAND DISTRIBUTION RIGHTS
Between December 1995 and November 1996, ADC acquired Midland Land
Mobile Radio distribution rights. The rights included exclusive Midland 800 Mhz
rights in the United States, exclusive international (defined as Mexico, South
America, Pacific Rim, Australia, New Zealand, Thailand and Southeast Asia)
rights for all Midland radios and the rights to certain western Canadian
provinces.
During the year the Company decided to place for sale or sub-license
it's Midland distribution rights. The commercial success of these rights was
contingent upon the Company's ability to invest in product development and
generate sufficient working capital to ensure the uninterrupted supply of
competitive products. The delays encountered in disposing of the 220 Mhz systems
contributed to a shortfall in working capital. During the year the Company was
able to divest, by way of sale or sub-license, all of it's Midland distribution
rights except for the United States LTR rights.
The carrying value of the western Canadian distribution rights were
written down during the year by approximately $120,000 due to a decline in
projected royalties to be received from the sub-licensee.
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The United States LTR distribution rights, which have not been sold or
sub-licensed, have been written off in the interests of conservatism. The
Company was not able to make the necessary investment in product development and
did not possess the required working capital to ensure the commercial success of
these rights.
TRACKPOWER TECHNOLOGY ACQUISITION.
On January 28, 1998, the Company acquired certain development-stage
assets of Simmonds Capital Limited ("SCL"), including trademarks, information
and communications technology and contractual rights.
In consideration of the acquisition, the Company issued to SCL:
(i) 1,000,000 shares of convertible preferred stock of the Company, and
(ii) warrants to purchase 500,000 shares of common stock of the Company,
at an exercise price of $2.00 per share.
The preferred stock is convertible into ADC common shares at $1 per
share at any time, has a liquidation preference of $1.00 per share, has a
cumulative dividend rate of 6% for the first two years and 7% thereafter,
payable semi-annually in cash or shares of ADC, is redeemable by the Company at
anytime and is not redeemable by the holder.
The warrants are exercisable in whole or in part prior to January 31,
2001.
The Company also agreed to pay to SCL an amount equal to 10% of the
Company's earnings before interest, taxes, depreciation and amortization, up to
a maximum of $1.5 million, payable within 90 days of the end of the Company's
first fiscal year in which retained earnings position becomes positive.
In addition the Company agreed to assume $300,000 of accounts payable
and certain lease obligations of SCL.
Lastly, the Company agreed to pay SCL a monthly fee of $25,000 per
month for the services of those employees who became officers of ADC and office
space provided by SCL.
ONTARIO JOCKEY CLUB JOINT VENTURE
ADC entered into various agreements (collectively, the "OJC Agreement")
on February 28, 1998 with the Ontario Jockey Club ("OJC") to develop the
TrackPower business through a joint venture named TrackPower International Inc.
("TPI"). The OJC is one of the oldest and the Company believes, one of most
respected racing institutions in North America. In addition to providing more
live horse racing product than any other North American track, the Company
believes it holds a leading position in the industry for progress and
innovation, particularly with respect to exploiting new technologies. The OJC
Agreement provides that, under certain conditions, OJC will invest cash and
provide to TPI the following:
- carriage of the full complement of OJC live racing product
- use of its wagering systems and interfaces
- licensing to conduct wagering, and the ability to receive wagers from
around the world.
The joint venture was established to design and develop the new system
and receive the wagering income in connection therewith. Apart from the joint
venture, ADC will receive monthly subscription fees directly from subscribers
and will be responsible for the marketing of the service, subscriber management
and the distribution of set top boxes.
The initial funding of the joint venture will be $1.4 million ($0.7
million each from OJC and ADC), all further funding will be provided by ADC. ADC
is currently negotiating this funding. It is anticipated that the sale of the
Company's Intek stock during fiscal year ended February 28, 1999 will provide a
portion of the additional funding required. The Intek stock is currently pledged
as security (see note 11 to the
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financial statements), however excess coverage exists at this date. Under the
terms of the OJC Agreement, OJC is not required to contribute its portion of the
initial funding of TPI unless and until ADC contributes its portion. ADC is also
obligated to fund continuing operating losses for the first three years.
Under the terms of the OJC agreement, ADC will receive a portion of the
wagering revenue until TPI repays the ADC funding.
PLAN OF OPERATIONS
Upon full development, the assets acquired from SCL, are expected to
enable ADC to develop a new in-home wagering system featuring multiple channels
of real-time digital horse racing video and data.
The principal service intended to be provided by ADC, through the joint
venture, will be the capability to place wagers on live horse racing from a
subscriber's home. ADC will be paid a monthly subscription fee by the subscriber
directly (i.e. not through the joint venture). The intended market for this
service will be North America, initially, and globally through other joint
ventures or alliances.
The distribution method for this service is intended to be converted
from an existing Multi-point Microwave Distribution System ("MMDS") in Southern
Ontario to a satellite based system with a footprint of substantially all of
North America. Distribution of in-home hardware required for the service is the
responsibility of ADC, not the joint venture. The Company is in negotiations to
out-source this and other components of the business.
The implementation of the new service in North America is planned in
three stages, the first being the conversion from MMDS to a satellite service
throughout North America, the second adding more horse racing data to the signal
stream and a new television user interface and the last being the ability to
wager interactively on the television screen using a remote control, set top box
and telephone line.
Most wagering growth in the past several years in North America has
been through simulcasting and off-track wagering. Competitors have tried to join
the off-track trend through Telephone Account Betting ("TAB") and a combination
of TAB and limited local cable TV coverage. The Company believes the horse
racing industry is maturing and on track attendance is declining, increasing the
need for new methods of reaching customers. There are several competitors
nearing launch who will attempt to address the shortcomings of the existing TAB
business. A competitor recently announced the imminent launch of what is
believed to be a similar service to TrackPower. The Company is investigating the
competitive threat. At this stage, management believes that, based on the
competitive advantage gained through their MMDS experience in Southern Ontario,
the TrackPower offering will be a superior interactive service.
A principal supplier of the horse racing product is the OJC. The
company will also seek to negotiate other content agreements with major horse
racing tracks in North America. The suppliers of the necessary satellite
infrastructure hardware are being selected and contractual provisions are being
negotiated. The suppliers are expected to involve major industry participants.
The Company also intends to market the service to Horsemen (breeders,
owners, trainers, etc.). There are over 2.5 million direct participants in the
horse industry in North America.
As part of the SCL transaction, ADC acquired the use of the trademark
"TrackPower", which is a service employed using an MMDS system in Southern
Ontario. The Company believes that the TrackPower name has a base of recognition
and will serve as the key name for the service.
In terms of gaming regulations, the environment in the United States
can be divided between State Regulations and Federal Regulations. TAB and gaming
in general is regulated at the state level. TAB is legal in several states. The
majority of states permit pari-mutuel wagering and do not specifically address
TAB. Nine states expressly forbid TAB and TPI will avoid taking wagers from
these states. The recent trend however has been the liberalization of TAB
regulations.
The federal statutory regime that applies to pari-mutuel wagering is
known as the Federal Wire Act. The Federal Wire Act prohibits the
interstate/international transmission of bets or wagers, but does
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permit the interstate/international transmission of "information assisting in
the placing of bets or wagers" when betting on a particular event is legal at
the transmission's point of origin and terminus. The Company has taken the
position that so long as the account from which an individual places a wager is
located at the site where the wager is accepted, the telephone call that
initiates the wager merely transmits information assisting in the placement of
the wager; the telephone call does not constitute the wager itself. The Company
believes that this distinction places its proposed activity within the scope of
conduct that is permitted under the Federal Wire Act. The Department of Justice
has taken no formal position with regard to telephone betting on horse racing.
This has been broadly interpreted as approval by most racing organizations. The
TAB systems in operation are conducting business with the approval and sanction
of state racing commissions and their legal offices.
The Kyl Bill, recently tabled in Washington, is designed to control
illegal activity on the Internet. Its provisions are very broad and encompass
all forms of gaming and telecommunication. The Company believes that the bill
will pass but will likely contain exemptions for currently legal activity such
as horse race wagering, TAB and simulcasting. Passage of the Kyl Bill, in
whatever form, may have implications beyond the specific language of the Bill;
by, for example, prompting the Department of Justice to articulate a clear
interpretation of the Federal Wire Act and/or clarifying the legislative intent
of the Federal Wire Act through the legislative history that is expected to
accompany passage of the Kyl Bill.
In terms of satellite service regulations, the Company believes the
Federal Communications Commission ("FCC") regulations regime allows the Company
the opportunity to offer TrackPower to the North American market as a satellite
service from within the U.S. Use of a U.S. satellite could further subject the
business to the scope of the Federal Wire Act, subsection (d) of which requires
that common carriers terminate the services of any facility that may be
operating in violation of the Federal Wire Act upon written notice from a
federal, state or local law enforcement agency. Thus, distribution of, for
example, live horse racing coverage, with associated wagering, via a U.S.
satellite could be terminated upon demand by an appropriate law enforcement
agency. The Company is not aware that such demand has ever been made in similar
circumstances. The Company may also have the option of originating from Canada.
The Company has an offer to originate the satellite service from Canada, from a
Canadian satellite operator. The Company is deciding which satellite service
strategy to pursue.
There can be no assurance that new federal of state statutes of
regulations, or new interpretations under existing statutes or regulations,
including the Federal Wire Act, will not have a material adverse effect in the
business, operations or prospects of the Company.
TAB was legalized in Canada in 1982 under the Criminal Code and is
regulated by the Canadian Pari-Mutuel Association ("CPMA"). The CPMA has defined
"Home Market Areas" to protect local racing. In doing so they have assigned each
track a geographical region from which only they can receive wagers on horse
racing. The OJC joint venture agreement provides access to their home market
area.
The Company had in its employ as of February 28, 1998, seven full-time
salaried employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains a leased office at 745 Fifth Avenue, New York, NY
10151. Certain officers of the Company maintain offices at 580 Granite Court,
Pickering, Ontario, L1W 3Z4, Canada. Until May 15, 1998 the Company maintained
an office in Denver, Colorado. The Denver office was closed and the Company
entered into a sublease for the premises, co-terminus with the primary lease, in
an amount equal to the rent payable under the primary lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending litigation or any proceeding
contemplated by a governmental authority.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no
matter was submitted to a vote of the security holders of the Company.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades in the over-the-counter market (symbol
ADCM) on the OTC Electronic Bulletin Board operated by the National Association
of Securities Dealers, Inc. The table below sets forth the high and low bid
quotations for the common stock for the fiscal years ended February 28, 1998 and
1997.
FISCAL YEAR ENDED FISCAL YEAR ENDED
2/28/98 2/28/97
------- -------
HIGH LOW HIGH LOW
FIRST QUARTER 10/64 1/16 1 1/2
SECOND QUARTER 19/64 3/64 19/32 5/16
THIRD QUARTER 25/64 9/64 15/32 1/4
FOURTH QUARTER 26/64 2/16 19/64 9/64
These quotations reflect only inter-dealer prices, without retail
mark-up, mark-down or commissions and may not represent actual transactions.
SHAREHOLDERS
On June 2, 1998, the Company had 186 shareholders of record. The Company
believes it has approximately 336 shareholders including holders whose
securities are held in street name or nominee accounts.
DIVIDENDS
The Company has never paid a cash dividend on its common stock and does
not expect to pay one in the foreseeable future. Payment of dividends in the
future will depend on the Company's earnings and its cash requirements at that
time.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
During fiscal year 1998 the Company followed through on the strategic
decision to divest the existing operating assets and seek a new business focus.
All of the 220 Mhz systems and most of the Midland distribution rights were sold
during the year. The new business initiative, consummated through a transaction
with Simmonds Capital Limited on January 28, 1998, is the development of a
satellite based in-home electronic wagering system for horse racing content. The
new business, called TrackPower, will be operated in part through a new joint
venture with the Ontario Jockey Club (the "OJC"). The Company will not receive
any revenue from the new business until the launch of the service, currently
projected to be the fall of 1998. Revenues until that time will be from
royalties attributable to Midland distribution right sub-license agreements.
FINANCIAL CONDITION
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During the year ended February 28, 1998, total assets decreased from
$4,014,745 to $1,842,798 and shareholders equity decreased from $2,178,389 to
$1,269,524. The decrease in assets represents the sale of the 220 Mhz systems,
sale of certain of the Midland distribution rights and write-down of the other
distribution rights. The decrease in shareholders equity is a result of the loss
from operations. The Company had accumulated a deficit of $6,905,424 compared to
a year earlier of $5,665,041. Accumulated other comprehensive income was
$144,132 at February 28, 1998.
The Midland distribution rights to certain territories in western
Canadian provinces which have been sub-licensed to a third party were written
down by $119,542, to $201,672. The write down is a result of a decline in
projected royalties to be received from the sub-licensee.
Due to a significant decline in sales the United States, Midland 800 Mhz
distribution rights previously recorded in the records of the company at
$357,323, were written off as at February 28, 1998. The reason for this
write-down is that the Company was not able to make the necessary investment in
product development and did not possess the required working capital to ensure
commercial success. It is the intention of ADC to dispose of these rights,
however a prospective purchaser has not been identified.
The Intek and Ventel securities acquired in exchange for the sale of the
220 Mhz systems and are still held at year end were adjusted to market values.
The Intek securities (418,381 common shares) were valued at $1,117,077 and
1,344,446 Ventel common shares were valued at $92,767.
The TrackPower intangible assets acquired in the Simmonds Capital
Limited transaction have been valued at $398,412. The basis for this valuation
is cash equivalent of the liabilities assumed and the ADC common share
equivalent of the preferred stock discounted from trading levels on closing
date.
RESULTS OF OPERATIONS
As described in the overview, the operating results of the Company
during fiscal 1998 were affected by the disposal of many of the operating
assets.
Revenue from operations during the year was $2,758,689 compared to
$596,507 the prior year. Included in revenue for the current year was the sale
of 22 of the Company's 220 Mhz licenses at $2,638,219, representing a gain of
$479,326.
Included in the results for the current year was the sale of the
international Midland distribution rights for the territories of Mexico, South
America, Pacific Rim, Australia, New Zealand, Thailand and Southeast Asia, at a
loss of $324,375.
Total costs and expenses, excluding the cost of sale of the 220 Mhz
systems, increased less than 1% from $1,828,909 during fiscal 1997 to $1,840,179
in 1998. General and administrative expenses declined 29% from $923,795 to
$652,927.
The basic and diluted loss per common share in 1998 was $0.05 compared
to $0.07 in 1997.
As mentioned above, the Company is expected to experience material
pre-operating losses attributable to the implementation of the TrackPower
business.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity and capital resources of the Company were adversely
affected by the Company's operations during the fiscal year ended February 28,
1998.
The Company sold the international Midland distribution rights in
exchange for Intek stock and disposed of the shares in order to generate cash.
Unfortunately, at the time of disposition, the Intek shares were trading at
particularly low levels. The significant delay in closing the sale of the 220
Mhz licenses also strained liquidity.
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During the year the company issued 780,000 of its common shares to
employees for services, 436,193 shares for subscriptions, 300,000 common shares
to a consultant for services and 120,000 shares under options exercised.
In February the Company sold 1,322,221 Ventel shares in order to satisfy
some of the accounts payable assumed from SCL.
On April 17, 1998 the Company closed a private placement of 100 Units,
each Unit consisting of 5,000 shares of the Company's common stock, five-year
warrants to purchase 5,000 shares of the Company's common stock at an exercise
price of $0.30 per share, and debt securities in the principal amount of $5,000.
The debt is represented by a global promissory note, payable on demand and is
secured by the Company's shares of Intek and Ventel. The Company also entered
into a registration rights agreement with the investors, pursuant to which the
Company granted to the investors certain demand and piggyback registration
rights with respect to the common stock sold to such investors, as well as the
common stock underlying the warrants.
The Company is obligated to provide significant funding for the
development of TrackPower. Under the OJC joint venture agreement, the OJC and
ADC will provide initial funding of $1.4 million ($0.7 million each). The
Company will be responsible for any additional funding. Under the terms of the
OJC Agreement, the OJC is not required to contribute its portion of the initial
funding of TPI unless and until ADC contributes its portion. ADC is also
obligated to fund continuing operating losses for the first three years. It is
anticipated that the sale of the Company's investment in Intek will provide a
portion of the funding required. The Intek stock is currently pledged as
security (see note 11), however excess coverage exists at this date. Management
believes that the additional funding required will be provided by additional
equity or debt.
INFLATION
The effect of inflation on the Company has not been significant during
the last two fiscal years.
RECENT AUTHORITATIVE PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards ("SFAS") No.
131, "Disclosures about Segments of an Enterprise and Related Information" was
issued and is effective for years beginning after December 15, 1997. This
statement is not expected to have a material effect on the Company's financial
statements.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company as of February 28, 1998 and
1997, and for each of the years in the two-year period ended February 28, 1998
and 1997, are included as part of this report beginning on page F-1 hereof. An
index to the financial statements appears at page 14.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
a) Effective March 12, 1998, the Company engaged the firm of Stark,
Tinter & Associates, LLC ("STA") as its independent auditors, and dismissed its
former accountants, Causey Demgen & Moore ("CDM").
None of the reports of CDM on the financial statements of the Company
for either of the past two fiscal years contained an adverse opinion of a
disclaimer or opinion, or was modified as to uncertainty, audit scope or
accounting principles. During the Company's two most recent fiscal years and the
subsequent interim period preceding the termination of CDM, there were no
disagreements with CDM on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedures, which
disagreement(s), if not resolved to the satisfaction of CDM would have caused it
to make reference to the subject matter of the disagreement(s) in connection
with its report. None of the
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reportable events listed in Item 304(B) of the Company's two most recent fiscal
years and the subsequent interim period preceding the termination of CDM.
The Company's decision to engage the firm of STA was ratified by the
Board of Directors.
The Board of Directors and the Audit Committee subsequently determined
that, in light of recent management changes (see Item 9, below) it would be in
the best interests of the Company to maintain continuity by re-engaging CDM. See
Item 8(b) below.
b) The Company terminated the services of STA as independent auditors for
the Company on May 7, 1998.
None of the reports of STA on the financial statements of the Company
for either of the past two fiscal years contained an adverse opinion or a
disclaimer of opinion, or was modified as to uncertainty, audit scope or
accounting principles. During the Company's two most recent fiscal years and the
subsequent interim period preceding the termination of STA, there were no
disagreement(s) with STA on any matter of accounting principles or practices,
financial statement disclosure or auditing scope and procedures, which
disagreement(s), if not resolved to the satisfaction of STA would have caused it
to make reference to the subject matter of the disagreement(s) in connection
with its report. None of the reportable events listed in Item 304(B) of
Regulation S-B occurred with respect to the Company during the Company's two
most recent fiscal years and the subsequent interim period preceding the
termination of STA. STA was only engaged by the Company for a period of
approximately two months and accordingly did not perform an audit of the
financial statements of the Company or issue a report with respect thereto.
On May 7, 1998, the Company engaged Causey Demgen & Moore Inc. ("CDM")
as its independent auditors.
As noted above, CDM previously acted as independent accountants to audit
the financial statements of the Company. Subject to the foregoing, during the
Company's two most recent fiscal years and the subsequent interim period
preceding the engagement of CDM, neither the Company nor anyone on its behalf
consulted CDM regarding the application of accounting principles to a specific
completed or contemplated transaction, or the type of audit opinion that might
be rendered on the Company's financial statements, and no written or oral advice
concerning same was provided to the Company that was an important factor
considered by the Company in reaching a decision as to any accounting, auditing
or financial reporting issue.
The decision to terminate the services of STA and re-engage CDM was
recommended by the Audit Committee of the Board of Directors and was approved by
the Board of Directors on May 6, 1998.
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item will be set forth in either (I) the
Company's definitive proxy statement for the 1998 Annual Meeting of
Stockholders, or (ii) an amendment to this Report on Form 10-KSB/A, which in
either case will be filed with the Securities and Exchange Commission not later
than 120 days after February 28, 1998, and which information is incorporated
herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
Information required by this Item will be set forth in either (I) the
Company's definitive proxy statement for the 1998 Annual Meeting of
Stockholders, or (ii) an amendment to this Report on Form 10-KSB/A, which in
either case will be filed with the Securities and Exchange Commission not later
than 120 days after February 28, 1998, and which information is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item will be set forth in either (I) the
Company's definitive proxy statement for the 1998 Annual Meeting of
Stockholders, or (ii) an amendment to this Report on Form 10-KSB/A, which in
either case will be filed with the Securities and Exchange Commission not later
than 120 days after February 28, 1998, and which information is incorporated
herein by reference.
ITEM 12. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
Information required by this Item will be set forth in either (I) the
Company's definitive proxy statement for the 1998 Annual Meeting of
Stockholders, or (ii) an amendment to this Report on Form 10-KSB/A, which in
either case will be filed with the Securities and Exchange Commission not later
than 120 days after February 28, 1998, and which information is incorporated
herein by reference.
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PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT
PAGE
NO.
EXHIBIT
PAGE NO. DOCUMENT
- - -------- --------
1 UNDERWRITING AGREEMENT
1.1 Placement Agent Agreement, between Registrant and Pellinore Securities
Corporation ("Pellinore"), dated April 17, 1998 (incorporated by
reference to Exhibit 1 of the Registrant's Form 8-K dated May 7, 1998)
2 PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION
2.01 ARTICLES OF MERGER as filed with the New York Department of State on
February 11, 1994 (incorporated by reference to Exhibit 2.1 to report on
Form 8-K dated February 14, 1994)
2.02 ARTICLES OF MERGER as filed with the Wyoming Secretary of State on
February 14, 1994 (incorporated by reference to Exhibit 2.2 to report on
Form 8-K dated February 14, 1994)
2.03 AGREEMENT AND PLAN OF MERGER dated July 1, 1993 between the Company and
Mont Rouge Resources, Inc. (incorporated as Exhibit A to Exhibit 2.2
above)
3 ARTICLES OF INCORPORATION AND BYLAWS
3.01 ARTICLES OF INCORPORATION OF MONT ROUGE RESOURCES, INC. AS FILED WITH
THE NEW YORK DEPARTMENT OF STATE ON MARCH 19, 1987. (incorporated by
reference to Exhibit 3.1 to registration statement on Form S-1, File No.
33-6343)
3.02 ARTICLES OF INCORPORATION OF THE COMPANY, as filed with the Wyoming
Secretary of State on June 30, 1993 (incorporated by reference to
Exhibit 3.1 to report on Form 8-K dated July 14, 1993)
3.03 BYLAWS OF THE COMPANY (incorporated by reference to Exhibit 3.2 to
report on Form 8-K dated July 14, 1993)
4 INSTRUMENTS ESTABLISHING RIGHTS OF SECURITY HOLDERS
4.01 SPECIMEN STOCK CERTIFICATE OF THE COMPANY (incorporated by reference to
Exhibit 4.1 to report on Form 8-K dated July 14, 1993)
4.02 FORM OF WARRANT ISSUED BY REGISTRANT TO VARIOUS INVESTORS, DATED AS OF
APRIL 17, 1998 (incorporated by reference to Exhibit 4.1 to report on
Form 8-K, dated May 7, 1998)
10 MATERIAL CONTRACTS
10.01 1993 INCENTIVE STOCK OPTION PLAN OF THE COMPANY dated July 15, 1993
(incorporated by reference to Exhibit 10.1 to report on Form 8-K dated
July 14, 1993)
10.02 1993 NON-STATUTORY STOCK OPTION PLAN OF THE COMPANY dated July 15, 1993
(incorporated by reference to Exhibit 10.2 to report in Form 8-K dated
July 14, 1993)
10.03 1993 EMPLOYEE STOCK COMPENSATION PLAN OF THE COMPANY dated July 15, 1993
(incorporated by reference to Exhibit 10.3 to report on Form 8-K dated
July 14, 1993)
10.04 1993 EMPLOYEE STOCK COMPENSATION PLAN OF THE COMPANY dated November 5,
1993 (incorporated by reference to Exhibit 10.4 to report on Form 8-K
dated February 14, 1994)
10.05 ASSET PURCHASE AGREEMENT DATED NOVEMBER 8, 1996 FOR THE SALE OF CERTAIN
LICENSING RIGHTS, DISTRIBUTION RIGHTS, AND RIGHT TO ACQUIRE UP TO
$1,000,000 IN CERTAIN INVENTORY BY AND BETWEEN SIMMONDS CAPITAL LIMITED,
SCL DISTRIBUTORS (WESTERN) LTD., MIDLAND INTERNATIONAL CORPORATION, AND
AMERICAN DIGITAL COMMUNICATIONS, INC. (incorporated by reference to
Exhibit 10.41 of the Registrant's 10-KSB for the year ended February 28,
1997)
10.06 AGREEMENT, DATED JANUARY 15, 1998, BETWEEN SIMMONDS CAPITAL LIMITED AND
THE REGISTRANT (incorporated by reference to Exhibits 2 through 2.6 of
the Registrant's Form 8-K, dated May 7, 1998)
10.07 SECURED DEMAND PROMISSORY NOTE, DATED APRIL 17, 1998, IN THE PRINCIPAL
AMOUNT OF $500,000, ISSUED BY THE REGISTRANT IN FAVOUR OF PELLINORE, FOR
ITSELF AND AS AGENT FOR CERTAIN INVESTORS *
10.08 PLEDGE AGREEMENT, DATED APRIL 17, 1998, BETWEEN THE REGISTRANT AND
PELLINORE, FOR ITSELF AND AS AGENT FOR CERTAIN INVESTORS *
12
<PAGE>
EXHIBIT
PAGE DOCUMENT
NO.
- - ---
10.09 REGISTRATION RIGHTS AGREEMENT, DATED APRIL 17, BETWEEN THE REGISTRANT
AND PELLINORE, FOR ITSELF AND AS AGENT FOR CERTAIN INVESTORS *
16 LETTER ON CHANGE IN CERTIFYING ACCOUNTANTS
16.01 LETTER OF CAUSEY, DEMGEN & MOORE, DATED MARCH 24, 1998 (incorporated by
reference to Exhibit xxx to the Registrant's report on Form 8-K, dated
March 12, 1998)
16.02 LETTER OF STARK TINTER & ASSOCIATES, LLC, DATED MAY 13, 1998
(incorporated by reference to Exhibit 16 to the Registrant's report on
Form 8-K, dated May 7, 1998)
27 FINANCIAL DATA SCHEDULE *
(b) REPORTS ON FORM 8-K
1. Report on Form 8-K, dated March 12, 1998
2. Report on Form 8-K, dated May 7, 1998
* FILED HEREWITH.
(REMAINDER OF PAGE LEFT INTENTIONALLY BLANK)
13
<PAGE>
INDEX TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORTS F-2
FINANCIAL STATEMENTS:
BALANCE SHEET F-3
STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME F-5
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) F-6
STATEMENT OF CASH FLOWS F-8
NOTES TO FINANCIAL STATEMENTS F-10
14
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC
FINANCIAL STATEMENTS
FEBRUARY 28, 1998 AND 1997
WITH
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
F-1
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
FEBRUARY 28, 1998 AND 1997
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
American Digital Communications, Inc.
Denver, Colorado
We have audited the accompanying balance sheet of American Digital
Communications, Inc. as of February 28, 1998 and 1997, and the related
statements of operations and comprehensive income, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Digital
Communications, Inc. at February 28, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Denver, Colorado
May 15, 1998 CAUSEY DEMGEN & MOORE INC.
F-2
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
BALANCE SHEET
February 28, 1998 and 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash $ 19,558 $ 31,701
Accounts receivable - 21,110
Notes receivable 8,548 8,548
Inventories - 469,415
Radio tower equipment and related licenses held for sale
(Note 2) - 2,126,636
Marketable securities (Note 2) 1,209,844 -
Other current assets - 3,888
-- -----
Total current assets 1,237,950 2,661,298
Property and equipment:
Office equipment 125,052 125,052
Furniture and fixtures 26,082 26,082
------- ------
151,134 151,134
Less accumulated depreciation 146,370 142,286
-------- -------
Net property and equipment 4,764 8,848
Other assets:
Distribution rights, net of amortization of $46,286 (1998)
and $52,901(1997) (Notes 6, 8 and 9) 201,672 1,344,599
TrackPower trademarks and other intellectual
property rights (Notes 3 and 6) 398,412 -
-------- -
Total other assets 600,084 1,344,599
-------- ---------
$1,842,798 $4,014,745
========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
BALANCE SHEET
February 28, 1998 and 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current liabilities:
Accounts payable $ 243,716 $ 149,531
Accounts payable - related parties (Note 6) 36,289 9,510
Accrued expenses 59,193 4,933
Accrued interest - related parties 40,294 248,471
Accrued warranty liability - 10,373
Notes payable - related parties (Note 4) 30,370 60,370
Current portion of capital lease obligations (Note 5) 5,075 6,195
Current portion of long-term notes payable -
related parties (Note 4) - 806,077
-------- -------
Total current liabilities 414,937 1,295,460
Long-term debt:
Capital lease obligations (Note 5) 876 5,597
Long term note payable - related parties (Note 4) 157,461 535,299
------- -------
Total long-term debt 158,337 540,896
Commitments and contingencies (Notes 1, 3, 5, 8, and 9)
Stockholders' equity (Notes 3, 8 and 9):
Convertible preferred stock, no par value, unlimited
shares authorized, 1,000,000 shares to be issued
(liquidation value $1,000,000) 1,000,000 -
Common stock, $.0001 par value; unlimited shares
authorized, issued and outstanding, 24,113,624
shares in 1998, 23,627,431 shares in 1997 2,412 2,363
Additional paid-in capital 6,986,409 7,747,767
Common stock subscribed, 214,262 shares (1998)
436,193 shares (1997) 41,995 93,300
Accumulated deficit (6,905,424) (5,665,041)
Accumulated other comprehensive income 144,132 -
-------- -
Total stockholders' equity 1,269,524 2,178,389
---------- ---------
Total liabilities and stockholders' equity $1,842,798 $4,014,745
=========== ==========
</TABLE>
See accompanying notes
F-4
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the Years Ended February 28, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues:
Two-way radio sales (Note 10) $ 76,480 $ 596,507
220 MHz radio tower equipment sales (Note 2) 2,638,219 -
Royalties received from distribution rights (Note 9) 43,990 -
------- -
Total revenues 2,758,689 596,507
Costs and expenses:
Cost of two-way radio sales 102,621 587,030
Write-down of two-way radio inventory 12,414 123,000
Cost of 220 MHz radio tower equipment sales 2,158,893 -
Loss on sale of distribution rights 324,375 -
Impairment losses on distribution rights (Note 9) 476,865 -
TrackPower expenses (Note 3) 87,509 -
Realized losses on marketable securities 130,197 -
General and administrative 652,927 923,795
Losses on 220 MHz and 800 MHz SMR systems
acquisitions (Note 9) - 105,654
Depreciation and amortization 53,271 89,430
------- ------
Total costs and expenses 3,999,072 1,828,909
---------- ---------
Net loss (1,240,383) (1,232,402)
Other comprehensive income:
Unrealized holding gains arising during the period
(Note 2) 144,132 -
-------- -
Comprehensive income (loss) $(1,096,251) $(1,232,402)
============ ============
Basic and diluted loss per share of common stock $ (0.05) $ (0.07)
======== ========
Weighted average number of common shares outstanding 24,199,000 18,047,000
=========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended February 28, 1998 and 1997
<TABLE>
<CAPTION>
Preferred stock Common stock Additional
Shares Amount Shares Amount paid-in capital
<S> <C> <C> <C> <C> <C>
Balance, February 29, 1996 - $ - 14,590,760 $ 1,459 $ 5,723,983
Issuance of common stock for cash
pursuant to Regulation D private
offering (Note 8) - - 308,186 31 125,126
Issuance of common stock and subsequent
exercise of warrants for cash (Note 8) - - 2,058,814 206 304,331
Exercise of stock options for cash - - 40,000 4 9,996
Issuance of common stock in payment for
one half the cost of radio tower
equipment (Note 8) - - 1,150,000 115 448,385
Issuance of common stock for cash
pursuant to private placement (Note 8) - - 208,705 21 47,979
Issuance of common stock in conjunction
with purchase of distribution agreement
(Notes 6 and 8) - - 3,000,000 300 629,700
Issuance of common stock in conjunction
with purchase of distribution agreement
(Note 8) - - 1,750,000 175 367,325
Issuance of common stock to acquire
licenses (Note 8) - - 270,966 27 55,967
Issuance of common stock for interest on
related party note payable (Note 6) - - 250,000 25 34,975
Stock subscriptions received for:
Cash (375,217 shares) - - - - -
Purchase of licenses (60,976 shares) - - - - -
Net loss for the year ended
February 28, 1997 - - - - -
-- -- -- -- --
Common stock Accumulated Other compre-
subscribed deficit hensive income
<S> <C> <C> <C>
Balance, February 29, 1996 $ - $ (4,432,639) $ -
Issuance of common stock for cash
pursuant to Regulation D private
offering (Note 8) - - -
Issuance of common stock and subsequent
exercise of warrants for cash (Note 8) - - -
Exercise of stock options for cash - - -
Issuance of common stock in payment for
one half the cost of radio tower
equipment (Note 8) - - -
Issuance of common stock for cash
pursuant to private placement (Note 8) - - -
Issuance of common stock in conjunction
with purchase of distribution agreement
(Notes 6 and 8) - - -
Issuance of common stock in conjunction
with purchase of distribution agreement
(Note 8) - - -
Issuance of common stock to acquire
licenses (Note 8) - - -
Issuance of common stock for interest on
related party note payable (Note 6) - - -
Stock subscriptions received for:
Cash (375,217 shares) 86,300 - -
Purchase of licenses (60,976 shares) 7,000 - -
Net loss for the year ended
February 28, 1997 - (1,232,402) -
-- ----------- -
See accompanying notes.
F-6
</TABLE>
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended February 28, 1998 and 1997
<TABLE>
<CAPTION>
Preferred stock Common stock Additional
Shares Amount Shares Amount paid-in capital
------ ------ ------ ------ ---------------
<S> <C> <C> <C> <C> <C>
Balance, February 28, 1997 - - 23,627,431 2,363 7,747,767
Issuance of common stock for subscriptions - - 436,193 44 93,256
Issuance of common stock to employees
for services (Note 8) - - 780,000 78 77,922
Exercise of stock options for cash - - 120,000 12 11,988
Return of the Company's common stock on
sale of radio tower equipment (Note 2) - - (1,150,000) (115) (87,932)
Issuance of common stock to consultants
for services (Note 8) - - 300,000 30 44,970
Stock subscriptions received for cash
(214,262 shares) (Note 8) - - - - -
Convertible preferred stock to be issued
for trademarks (Note 3) 1,000,000 1,000,000 - - (901,562)
Net income (loss) for the year ended
February 28, 1998 - - - - -
-- -- -- -- --
Balance, February 28, 1998 1,000,000 $1,000,000 24,113,624 $ 2,412 $ 6,986,409
========== =========== =========== ======== ============
Common stock Accumulated Other compre-
subscribed deficit hensive income
---------- ------- --------------
<S> <C> <C> <C>
Balance, February 28, 1997 93,300 (5,665,041) -
Issuance of common stock for subscriptions (93,300) - -
Issuance of common stock to employees
for services (Note 8) - - -
Exercise of stock options for cash - - -
Return of the Company's common stock on
sale of radio tower equipment (Note 2) - - -
Issuance of common stock to consultants
for services (Note 8) - - -
Stock subscriptions received for cash
(214,262 shares) (Note 8) 41,995 - -
Convertible preferred stock to be issued
for trademarks (Note 3) - - -
Net income (loss) for the year ended
February 28, 1998 - (1,240,383) 144,132
-- ----------- -------
Balance, February 28, 1998 $ 41,995 $ (6,905,424) $ 144,132
========= ============= =========
</TABLE>
See accompanying notes.
F-7
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
For the Years Ended February 28, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Operating activities:
Net loss $ (1,240,383) $ (1,232,402)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 53,271 89,430
Costs of licenses and distribution rights 801,240 105,654
Gain on sale of radio tower equipment (396,584) -
Realized losses on marketable securities 130,197 -
Issuance of stock for interest expense - 35,000
Issuance of common stock for services 123,000 -
Changes in:
Accounts receivable 21,110 21,910
Inventories 91,577 694,486
Other current assets 3,888 3,754
Accounts payable (179,010) 83,745
Accrued expenses 54,260 (4,660)
Other accrued liabilities 29,918 41,954
------- ------
Net cash used in operating activities (507,516) (161,129)
Investing activities:
Purchase of office and radio tower equipment - (380,000)
License expenditures - (114,316)
Note receivable - (8,548)
Proceeds from sale of marketable securities 292,500 -
Proceeds from sale of fixed assets 234,719 -
-------- -
Net cash provided by (used in) investing activities 527,219 (502,864)
Financing activities:
Proceeds from sale of common stock, net 12,000 487,694
Proceeds from stock subscriptions 41,995 86,300
Payment of capital lease obligations (5,841) (13,345)
Payments of long-term note payable (50,000) (2,756)
Borrowings from related party - 50,000
Payments of notes payable - related parties (30,000) 27,511
-------- ------
Net cash provided by (used in) financing activities (31,846) 580,382
-------- -------
Increase (decrease) in cash (12,143) (83,611)
Cash, beginning of period 31,701 115,312
------- -------
Cash, end of period $ 19,558 $ 31,701
========= ========
</TABLE>
See accompanying notes.
F-8
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
For the Years Ended February 28, 1998 and 1997
(Continued from previous page)
Supplemental disclosure of non-cash investing and financing activities:
During the year ended February 28, 1997, the Company financed the acquisition
of $12,251 of equipment through a capital lease and inventory of $535,299
through a note payable. During the year ended February 28, 1998, $377,838 of
inventory was returned for credit against the note payable. During the year
ended February 28, 1997, the Company financed the acquisition of $310,323 of
radio tower equipment through accounts payable and notes payable. During the
year ended February 28, 1997, the Company capitalized interest of $142,766 on
the radio tower equipment and licenses.
During the years ended February 28, 1998 and 1997, the Company issued common
stock for the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Services $ 123,000 $ -
Radio tower equipment - 448,500
Licenses - 62,994
Interest expense - 35,000
Distribution agreements - 997,500
-- -------
$ 123,000 $ 1,543,994
========== ===========
During the year ended February 28, 1998, the Company sold radio tower
equipment for:
1998 1997
---- ----
Marketable securities $ 1,211,156 $ -
Common stock of the Company 88,047 -
Settlement of a note payable 756,077 -
Settlement of accrued interest on a note payable 248,468 -
Cash 219,472 -
-------- -
$ 2,523,220 $ -
============ ===
During the year ended February 28, 1998, the Company purchased trademarks
for:
1998 1997
---- ----
Preferred stock to be issued $ 98,438 $ -
Assumption of accounts payable 299,974 -
-------- -
$ 398,412 $ -
========== ===
Supplemental disclosure of cash flow information:
1998 1997
---- ----
Cash paid for interest $ 1,564 $ 26,311
======== ========
</TABLE>
See accompanying notes.
F-9
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of significant accounting policies
Nature of business:
The Company was organized June 30, 1993 under the laws of Wyoming. The Company
is in the wireless telecommunications business and intended to provide two-way
communications in the 220 MHz band. The Company was the U.S. distributor for 800
MHz LTR Midland products but has suspended distribution of these products during
the year ended February 28, 1998. The Company also owns the rights to be a
distributor in Canada for certain Midland brand commercial land mobile radios
and radio parts. The distribution rights to the Midland brand products were
acquired in separate transactions described in Notes 6 and 8 herein. The Midland
brand products are currently produced by one supplier; any interruption of this
relationship would adversely affect the Company. On January 15, 1998, the
Company acquired the TrackPower trade name and other intellectual property
rights. The technology is in use in southern Ontario, Canada to market a service
whereby a subscriber watches live horse racing on television via Multi Point
Microwave Distribution System (MMDS) signals in the comfort of their own home
and places wagers with the Ontario Jockey Club using Telephone Account Betting.
The Company plans to change the MMDS delivery system to a satellite based system
and to ultimately provide interactive wagering through a set top box and
telephone line throughout North America. No revenues were generated by the
TrackPower division of the Company through February 28, 1998.
Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Accounts receivable:
No provision for doubtful accounts was deemed necessary at February 28, 1998 or
1997.
Inventories:
Inventories are carried at the lower of cost (first-in, first-out) or market.
Inventories consist primarily of two-way radios and radio parts and supplies and
are subject to technological obsolescence.
F-10
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of significant accounting policies (continued)
During the year ended February 28, 1997, sales of one product resulted in
approximately $123,000 of losses. The Company has discontinued the sale of this
product.
Marketable securities:
The Company's marketable securities consist of restricted and unrestricted
common stock of publicly traded companies. The securities are considered held
for sale and therefore are recorded at market value at the balance sheet date.
Depreciation:
Office equipment, furniture and fixtures, including assets under capital leases,
are stated at cost. Depreciation is computed over the estimated useful life of
three years using the straight-line method.
Amortization of distribution rights:
The cost of distribution rights are being amortized over the term of the
agreement (ten years) or 40 years if no legal term exists, the period estimated
by management to be benefited.
It is reasonably possible that revenues generated from the distribution of
products pursuant to the agreements will not be sufficient to recover these
capitalized costs.
Measurement of intangibles impairment:
The Company annually reviews the amount of recorded intangible assets for
impairment. If the sum of the expected cash flows from these assets is less than
the carrying amount of these assets, the Company will recognize an impairment
loss in such period.
Income taxes:
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 ("FASB No. 109"). Temporary differences are differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements that will result in taxable or deductible amounts in
future years. The Company's temporary differences consist primarily of tax
operating loss carryforwards and start-up costs capitalized for tax purposes.
F-11
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of significant accounting policies (continued)
Fair value of financial instruments:
Cash, accounts receivable, accounts payable and accrued liabilities are carried
in the financial statements in amounts which approximate fair value because of
the short-term maturity of these instruments. Long-term debt is carried in the
financial statements in amounts which approximate fair value because interest
rates have not changed significantly after the debt was incurred.
Advertising costs:
The Company expenses the costs of advertising as incurred.
Cash flows:
For purposes of the statement of cash flows, the Company considers cash and all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
Concentrations of credit risk:
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and trade receivables. The Company
places its cash with high quality financial institutions. At times during the
year, the balance at one financial institution may exceed FDIC limits.
The Company provides credit, in the normal course of business, to customers
throughout the United States. The Company performs ongoing credit evaluations of
its customers.
Net loss per share:
Basic loss per common share is based on the weighted average number of shares
outstanding during each period presented. Options to purchase stock are included
as common stock equivalents when dilutive.
F-12
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
2. Sale of radio tower equipment and related licenses and marketable securities
During the year ended February 28, 1998, the Company sold to Intek Global
Corporation (formerly Intek Diversified Corporation) (Intek), a company majority
owned by Securicor Radiocoms Ltd., most of the radio tower equipment and related
licenses held by the Company in exchange for cash of $75,000, payment of ADC's
note payable to Ventel, Inc. ($1,004,545 including accrued interest), return of
1,150,000 shares of ADC's common stock (valued at $88,047), 2,666,667 shares of
Ventel, Inc's. common stock (a Canadian public company, valued at $293,333),
418,381 shares of Intek's common stock (a U.S. public company, valued at
$917,823) and assumption of $144,472 of accounts payable for total consideration
of $2,523,220.
The marketable securities are considered available for sale and as such are
recorded at market value on the balance sheet at February 28, 1998 with the net
unrealized gain of $144,132 reflected as a separate component of stockholders'
equity. The gross unrealized gain on these securities amounts to $199,254 and
the gross unrealized loss amounts to $55,122 at February 28, 1998.
3. Acquisition of TrackPower trademarks and other intellectual property rights
On January 15, 1998, the Company acquired the TrackPower trade name and other
intellectual property rights from Simmonds Capital Limited, a stockholder of the
Company. The Company (1) agreed to issue 1,000,000 shares of convertible
preferred stock which is convertible at the option of the holder into 1,000,000
shares of common stock (valued at $98,438) (2) assumed accounts payable of
$299,974 for total consideration of $398,412. In connection with the
transaction, the Company also agreed (1) to issue warrants to purchase an
additional 500,000 common shares of the Company exercisable at $2 per share
until January 31, 2001 and (2) to pay a royalty of 10% of the Company's annual
earnings before interest, taxes, depreciation and amortization (not to exceed
$1,500,000) commencing when the Company's retained earnings position becomes
positive. These items are considered contingent consideration. The preferred
stock is convertible into common stock of the Company at $1 per share at any
time, has a cumulative dividend rate of 6% for the first two years and 7%
thereafter, payable semi-annually in shares of the Company, is not redeemable by
the Company at anytime for $1,000,000 and is not redeemable by the holder.
The Company plans to convert the MMDS delivery system to a satellite based
system and to ultimately provide interactive wagering throughout North America
via a set top box and telephone line.
On February 28, 1998, the Company entered into a joint venture agreement with
the Ontario Jockey Club. The joint venture has been organized as a corporation
on April 1, 1998, with each entity acquiring a 50% interest for nominal cash and
an agreement for each entity to loan $1,000,000 (Canadian) on a non-interest
bearing basis to the joint venture.
F-13
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
4. Notes payable
Short-term notes payable:
The Company's short-term notes payable consist of the following loans from
shareholders at February 28, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
9% note payable - shareholder, due on demand,
unsecured, in default $ 10,370 $ 10,370
12% note payable - shareholder, due on demand,
unsecured, in default 20,000 50,000
- ------- ------
$ 30,370 $ 60,370
============= ============
Long-term notes payable consist of the following at February 28, 1998 and 1997:
1998 1997
---- ----
Note payable - Ventel, Inc., a related finance
company (Note 6), payable in monthly installments
of $24,199 in the aggregate including interest of 21%
per annum commencing September 30, 1997, certain of the
Company's radio tower equipment which was sold
was pledged as security for the Note (see Note 9)
$ - $ 806,077
Note payable - SCL, a related company (Note 6),
payable on November 1, 1999 including interest at 8% per
annum, unsecured 157,461 535,299
-------- -------
157,461 1,341,376
Less current portion - 806,077
-------- -------
Amount due after one year $157,461 $ 535,299
======== ===========
</TABLE>
During the year ended February 28, 1997, the Company capitalized interest of
$135,123 on the build out of the radio tower equipment.
Interest expense amounted to $46,454 and $89,156 for the years ended February
28, 1998 and 1997, respectively.
F-14
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
5. Lease commitments
Real estate lease commitments:
In November 1996, the Company entered into a building lease for office space in
Englewood, Colorado. Minimum monthly rent is between $4,909 and $5,189 for the
three-year lease term. The lease contains one three-year renewal option.
Rent expense for the years ended February 28, 1998 and 1997 amounted to $103,322
and $110,119, respectively.
Lease commitments:
The Company leases equipment under capital leases. The minimum annual
commitments under the real estate lease and capital leases are as follows:
<TABLE>
<CAPTION>
Year ended February 28, Capital leases Real estate leases Total
------------------------ -------------- ------------------ -----
<S> <C> <C> <C> <C>
1999 $ 5,383 $ 60,869 $66,252
2000 1,346 62,271 63,617
---------------- -------------------- ----------------
Total minimum lease
payments
6,729 $ 123,140 129,869
Amount representing ================== =================
interest
(778)
---------------
Present value of future
minimum payments
5,951
Current portion of
lease obligations
5,075
----------------
Obligations under capital
leases due after one year
$ 876
===============
</TABLE>
F-15
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
5. Lease commitments (continued)
Assets recorded under capital leases at February 28, 1998 are as follows:
Cost $ 46,105
Accumulated depreciation
41,922
------
$ 4,183
=========
6. Related party transactions
For the years ended February 28, 1998 and 1997, the Company incurred legal fees
of $5,779 and $28,148 to a law firm owned by a former director/officer of the
Company of which $11,289 and $9,510 remained unpaid at February 28, 1998 and
1997, respectively.
During the years ended February 28, 1997 and February 29, 1996, the Company
constructed and financed $241,823 and $806,077, respectively of 220 MHz radio
tower equipment through Ventel, Inc., affiliated with a major stockholder of the
Company. Upon the sale of certain of the radio tower sites, $241,823 of the
loans were assumed by the purchaser leaving a balance due of $806,077 at
February 28, 1997. In December 1996, the Company issued 250,000 shares of its
common stock valued at $35,000 ($.14 per share) to extend the commencement of
monthly payments due under the note agreement until September 30, 1997, which
amount has been recorded as interest expense. During April 1997, $50,000 in
principal was paid down on the note upon the sale of one radio tower site. In
November 1997, the Company closed on the sale of its remaining radio tower sites
and paid off the $756,077 principal balance on the note plus $248,468 in accrued
interest (see Note 2).
On November 1, 1996, the Company issued 3,000,000 shares of its common stock, in
exchange for certain Midland distribution rights, to Simmonds Capital Limited
("SCL") a significant shareholder of the Company and 100% owner of Midland
International Corporation. The agreement specified a purchase price of $900,000
or 3,000,000 restricted common shares of ADC which was the $.30 quoted market
price of the Company's stock on the day of the transaction. For accounting
purposes the restricted common stock was entered on the books at $630,000 ($.21
per share) which compared favorably to other similar transactions. The
distribution right grants the Company an exclusive license to market and sell
certain Midland brand commercial two-way radio products including modifications,
improvements and replacement products for an indefinite period of time
throughout the world excluding certain countries such as the United States,
Canada and certain portions of Europe and Asia. In addition, the Company
purchased inventory of $535,299 for a note payable to SCL (see Note 4).
F-16
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
6. Related party transactions (continued)
On January 15, 1998, the Company purchased the TrackPower trade name and other
intellectual rights from SCL as described in Note 3 and entered into a
management agreement which calls for the payment of $25,000 per month for
services to be performed by certain employees of SCL. During the year ended
February 28, 1998 $25,000 was accrued under this agreement.
7. Income taxes
The book to tax temporary differences resulting in deferred tax assets and
liabilities are primarily net operating loss carryforwards of $5,130,000 and
start-up costs capitalized for income tax purposes of $1,623,000 (net of
amortization).
As of February 28, 1998 and 1997, total deferred tax assets, liabilities and
valuation allowances are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets $ 605,000 $1,045,000
Deferred tax assets resulting from loss carryforward 1,914,000 1,063,000
Valuation allowance (2,519,000) (2,108,000)
----------- -- -----------
$ $
- -
== =
- - -----
The Company's net operating losses are restricted as to the amount which may be
utilized in any one year. The Company's net operating loss carryforwards expire
as follows:
2004 $ 798,000
2009 92,000
2010 726,000
2011 1,795,000
2012 1,719,000
---------
$5,130,000
==========
</TABLE>
8. Stockholders' equity
During the fiscal year ended February 28, 1997, the Company issued 308,186
shares of its common stock in exchange for cash of $125,157 ($.406 per share)
pursuant to a Regulation D offering.
F-17
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
8. Stockholders' equity (continued)
During August 1996, the Company sold 1,521,729 shares of its common stock in a
Regulation S offering for $350,000 in cash ($.23 per share) less offering costs
of $46,000. In connection with this transaction the Company granted warrants to
purchase 537,085 shares of the Company's stock for cash of $537 which were
exercised when certain conditions were met.
During September 1996, the Company issued 1,150,000 shares of its restricted
Rule 144 common stock in payment for one half of its obligation for the purchase
of radio tower equipment from Securicor Radiocoms Ltd. (an unrelated entity)
pursuant to a funding agreement. The common stock was valued at $448,500 ($.39
per share) which equaled the cash portion of the agreement.
During October 1996, the Company sold 208,705 shares of its common stock in a
private placement for cash of $48,000 ($.23 per share).
On November 1, 1996, the Company acquired distribution rights from a related
company in exchange for 3,000,000 shares of common stock (see Note 6).
On November 8, 1996, the Company issued 1,750,000 shares of its common stock, in
exchange for certain Midland distribution rights, to a company 20% owned by SCL.
The agreement specified a purchase price of $525,000 or 1,750,000 restricted
common shares of ADC which was the $.30 quoted market price of the Company's
stock on the day of the transaction. For accounting purposes the restricted
common stock was entered on the books at $367,500 ($.21 per share) which
compared favorably to other similar transactions. The distribution right grants
the Company an exclusive license to market and sell certain Midland brand
commercial two-way radio products including modifications, improvements and
replacement products for an indefinite period of time in three provinces and two
territories in Canada.
During February 1997 and March 1997, respectively, the Company issued 270,966
shares and 60,976 shares of its restricted Rule 144 common stock to exercise the
purchase option for 220 MHz licenses. These shares are valued at $55,994 ($.21
per share) and $7,000 ($.115 per share) for those shares issued and to be
issued, respectively, which amounts represent a 30% discount from the Company's
average quoted market price. The Company also issued in October 1997 and January
1998, 375,217 shares of its restricted Rule 144 common stock in exchange for
$86,300 of cash received for subscriptions during February 1997.
During March 1997, the Company issued 780,000 shares of its common stock to
employees for services valued at $78,000 ($.10 per share).
During February 1998, the Company issued 300,000 shares of its common stock to a
consultant for services pursuant to a consulting agreement valued at $45,000
($.15 per share).
F-18
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
8. Stockholders' equity (continued)
During February 1998, the Company received cash of $41,995 pursuant to a
subscription for 214,262 shares of common stock from SCL, a related company. The
shares were issued in April 1998.
Stock options:
1993 Compensatory Stock Option Plan ("CSO")
The Company has established the CSO plan for employees, directors and
consultants or other advisors. The Company has reserved a maximum of 4,000,000
common shares to be issued upon the exercise of options granted under the CSO
plan. The purchase price of each share of stock under the CSO will be determined
by the Board of Directors or the Compensation Committee. The CSO exercise term
will not exceed five years. The options expire beginning 1998 through 2004.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
Option price per Weighted average Number of shares
share exercised price
<S> <C> <C> <C>
Balance February 29, 1996 $.425 to $2.00 $0.82 1,985,000
Canceled $1.00 $1.00 (500,000)
Reissued $0.35 $0.35 500,000
Granted $.23 to $1.00 $0.34 1,440,000
Expired $.45 to $2.00 $1.24 (405,000)
Exercised $0.25 $0.25 (40,000)
------ ------ ------------------
Balance February 28, 1997 $.23 to $1.75 $0.44 2,980,000
Canceled $.25 to $1.00 $0.85 (620,000)
Reissued $.10 to $.35 $0.30 620,000
Granted $0.40 $0.40 1,100,000
Exercised $0.10 $0.10 (120,000)
------ ------ -------- ---------
Balance February 28, 1998 $.23 to $1.75 $0.44 3,960,000
======= =========
</TABLE>
F-19
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
8. Stockholders' equity (continued)
The following is additional information with respect to those options
outstanding at February 28, 1998:
<TABLE>
<CAPTION>
Option price per share Weighted average Weighted average Number of shares
contractual life exercise price
in years
<S> <C> <C> <C> <C>
$0.10 3 $0.10 500,000
$.23 to $.35 3.7 $0.33 1,070,000
$.40 to $.65 2.3 $0.42 2,115,000
$1.00 5 $1.00 175,000
$1.75 10 $1.75 100,000
-----------------
3,960,000
=================
</TABLE>
The weighted average grant date fair value per share of options granted during
the year ended February 28, 1998 are as follows where:
Exercise price exceeds market price $0.40
Exercise price equals market price $0.10
Exercise price is less than market price
-
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation costs for the Company's stock option plans been
determined based on the fair value at the grant date for awards during the
fiscal years ended February 28, 1998 and 1997 in accordance with the provisions
of SFAS No. 123, the Company's net loss and loss per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net loss - as reported $ (1,208,716) $ (1,232,402)
Net loss - pro forma (1,355,504) (1,549,537)
Loss per share - as reported
(0.05) (0.07)
Loss per share - pro forma
(0.06) (0.09)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997, dividend yield of 0%; expected
volatility of 225.35% and 64.28%; risk-free interest rate of 5.34% and 6.28%;
and expected lives of 3 years and 3.54 years, respectively.
F-20
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
8. Stockholders' equity (continued)
1993 Employee Stock Compensation Plan ("ESC")
The Company has reserved a maximum of 2,000,000 common shares to be issued upon
the grant of awards for employees, directors and consultants or advisors. No
shares have been awarded under this plan.
1993 Incentive Stock Option Plan ("ISO")
The Company has reserved a maximum of 2,000,000 common shares to be issued upon
the exercise of options granted under the ISO plan. Options will be granted
under the ISO plan at exercise prices at least equal to the fair market value of
the common stock on the date of grant. At February 28, 1998, no options remained
outstanding under the ISO plan.
1993 Non-Statutory Stock Option Plan ("NSO")
The Company has reserved a maximum of 2,000,000 common shares to be issued to
key employees upon the exercise of options granted under the NSO plan. Options
granted under the NSO plan will be at exercise prices to be determined by the
Board of Directors or other NSO plan administrator. At February 28, 1998, no
options have been granted under the NSO plan.
9. Commitments and contingencies
220 MHz agreements:
The Company signed 220 MHz Management and Option agreements with various
individuals. The Company made initial payments to license holders ranging from
$100 to $1,000. The Company agreed to construct and build out the licenses under
the Management and Option agreements. The Company had until August 15, 1996, the
FCC-mandated construction deadline, to construct the stations and place them in
operation, by which time 26 of the licenses had been constructed. During the
year ended February 28, 1997, the Company acquired 23 of the licenses for
$33,500 of cash and common stock valued at $62,994. Capitalized costs of
$105,654 relating to the licenses not built out have been expensed at February
28, 1997. All remaining obligations were assumed by the purchaser when the radio
tower equipment was sold (see Note 2).
F-21
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
9. Commitments and contingencies (continued)
Sublicense of portions of the distribution rights in Canada:
On April 7, 1997, the Company entered into a letter of intent with SCL
Distributors (Pacific) Ltd. ("SCL Pacific") to sublicense a portion of the
distribution rights in Canada owned by the Company. The letter of intent calls
for SCL Pacific to pay the Company approximately $36,000 on signing of a
definitive agreement and a royalty of 4% of the gross sales price of all
products pursuant to the agreement. The agreement also contains a purchase
option of approximately $288,000 less all previous payments.
During the year ended February 28, 1998, it was determined that royalties from
the Company's Canadian distribution rights had fallen below initial projections.
An impairment loss of $119,542 was calculated using the reduced estimate of
discounted cash flows estimated to be received from the distribution rights.
U.S. distribution rights:
The U.S. distribution rights with a book value of $357,323 were written off
during the year ended February 28, 1998. The Company was not able to make the
necessary investment in product development and did not possess the required
working capital to ensure the commercial success of these rights.
10. Major customers
Customers who accounted for over 10% of the Company's gross revenues for the
years ended February 28, 1998 and 1997 are as follows:
1998 1997
---- ----
Customer A - 44.5%
Customer B 82.7% -
11. Subsequent events
Private placement:
On April 17, 1998, the Company closed a private placement of $500,000 of 12%
secured demand notes, warrants and common shares in order to provide working
capital. Each debt holder is entitled to, on a pro-rata basis, 500,000 common
shares of the Company and 500,000 warrants to purchase common shares of the
Company at $.30 per share until April 17, 2003.
F-21
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
11. Subsequent events
The debt is represented by a global promissory note, payable on demand and is
secured by the Company's shares of Intek and Ventel.
Sublease agreement:
In May 1998, the Company subleased its Denver office for the remaining term of
the primary lease in an amount equal to the net payable under the primary lease.
F-22
<PAGE>
SIGNATURES
In accordance with sections 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereto duly authorized individual.
Date: June 15, 1998
AMERICAN DIGITAL COMMUNICATIONS, INC.
By: /s/ John G. Simmonds
--------------------
JOHN G. SIMMONDS,
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ John G. Simmonds
- - --------------------------------------
JOHN G. SIMMONDS Chairman/ President/CEO/Director June 15, 1998
(principal executive officer)
/s/ Gary N. Hokkanen
- - --------------------------------------
GARY N. HOKKANEN Chief Financial Officer June 15, 1998
(principal financial officer)
/s/ Charles Cernansky
- - --------------------------------------
CHARLES J. CERNANSKY Director June 15, 1998
/s/ Ian MacDonald
- - --------------------------------------
IAN MACDONALD Director June 15, 1998
/s/ Harry Dunstan
- - --------------------------------------
J. HARRY DUNSTAN Director June 15, 1998
</TABLE>
<PAGE>
Exhibit 10.07
SECURED DEMAND NOTE
$500,000 New York, New York
April 17, 1998
FOR VALUE RECEIVED, the undersigned, AMERICAN DIGITAL
COMMUNICATIONS, INC., a Wyoming corporation having an address at 580 Granite
Court, Pickering Ontario L1W 3Z4 (together with any permitted successors, the
"Borrower"), hereby unconditionally promises to pay on demand to the order of
Pellinore Securities Corporation, for itself and as agent for the Lenders listed
on Exhibit A hereto (together with any successor, the "Agent"), with offices
located at 745 Fifth Avenue, New York, New York 10151, in lawful money of the
United States of America and in immediately available funds, and at the office
of the Lender set forth above, an aggregate amount equal to FIVE HUNDRED
THOUSAND DOLLARS ($500,000), with interest at the rate of 12% per annum.
This Secured Demand Note is the Note referred to in the Pledge
Agreement, of even date herewith, between the Borrower and the Agent, and is
secured and entitled to such benefits as provided in said Pledge Agreement.
The Borrower promises to make on demand by the Agent any and
all payments required by this Secured Demand Note.
The Borrower hereby waives diligence, presentment, protest and
notice of any kind, forbearance or other indulgence, and release, surrender or
substitution of security and agrees to pay all costs of collection when
incurred, including reasonable attorney's fees, and to perform and comply with
each of the covenants, conditions, provisions and agreements contained in every
instrument now evidencing or securing said indebtedness. No extension of the
time for the payment of this Note made by agreement with any person now or
hereafter liable for the payment of this Note shall operate to release,
discharge, modify, change or affect the original liability under this Note,
either in whole or in part, of the undersigned unless the holder of this Note
and the undersigned shall be parties to such agreement.
This Secured Demand Note may not be changed, modified or
terminated orally, but only by an agreement in writing signed by the party to be
charged.
THIS SECURED DEMAND NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES
OF CONFLICT OF LAWS AND SHALL BE BINDING UPON THE SUCCESSORS AND ASSIGNS OF THE
BORROWER AND INURE TO THE BENEFIT OF THE LENDER AND ITS SUCCESSORS AND ASSIGNS.
<PAGE>
If any item or provision of this Secured Demand Note shall be
held invalid, illegal or unenforceable, the validity of all other terms and
provisions herein shall in no way be affected thereby.
IN WITNESS WHEREOF, the Borrower has executed and delivered
this Secured Demand Note on the date first above written.
AMERICAN DIGITAL COMMUNICATIONS, INC.
By:/s/ John G Simmonds
-------------------
John G. Simmonds
President
<PAGE>
Exhibit 10.08
PLEDGE AGREEMENT
PLEDGE AGREEMENT (this "Agreement") is made as of April 3,
1998, between American Digital Communications, Inc., a Wyoming corporation (the
"Pledgor"), and Pellinore Securities Corporation (for itself and as agent, the
"Pledgee Agent").
WHEREAS, simultaneously with the execution of this Pledge
Agreement, the Pledgor is issuing to the Pledgee Agent, for itself and as agent
for the other investors listed on Exhibit A hereto (collectively, including the
Pledgee Agent, the "Investors") one or more Secured Demand Notes in the
aggregate amount of $ (the loan evidenced by such Secured Demand Notes, together
with all other amounts loaned by the Investors up to a maximum of $500,000, is
hereinafter collectively referred to as the "Loan"; such Secured Demand Notes,
together with all other notes evidencing the Debt, is hereinafter referred
collectively referred to as the "Note"), and
WHEREAS, as inducement for the Loan, the Pledgor has agreed to
pledge certain stock as security for the repayment of the Loan.
NOW THEREFORE, it is agreed as follows:
1. Pledge. In consideration of the Loan, the Pledgor hereby
grants a security interest to the Pledgee Agent in instruments of the following
description: (a) 418,000 common
2
<PAGE>
shares of Intek Global Corporation, a Delaware corporation (the "Intek Issuer"),
represented by certificates Nos. 12529 (50,000 shs.); 12530 (50,000 shs.); 12531
(50,000 shs.); 12532 (50,000 shs.); 12533 (50,000 shs.); 12534 (50,000 shs.);
12535 (50,000 shs.); 12536 (50,000 shs.); 12537 (18,387 shs.); and (b) subject
to Section 9 hereof, 1,344,446 shares of Common Stock of Ventel Inc, a
corporation organized under the laws of Canada (the "Ventel Issuer" and,
together with the Intek Issuer, the "Issuers"). (The shares described in
paragraphs (a) and (b) above, together with any additional securities of the
Issuer subsequently pledged pursuant to paragraph 7 or 8 hereof, are hereinafter
collectively referred to as the "Pledged Shares"). The Pledgee Agent shall hold
the Pledged Shares as security for the repayment of the Loan, and shall not
encumber or dispose of the shares except as provided in paragraph 10 herein.
2. Delivery of Instruments. The Pledgor shall promptly deliver
to the Pledgee Agent, or cause the Issuers to deliver directly to the Pledgee
Agent, all certificates, instruments or other property representing or
3
<PAGE>
constituting any Pledged Shares; provided, however, that the Pledgor shall use
its best efforts to cause the Pledged Shares issued by the Ventel Issuer (the
"Ventel Pledged Shares") to be delivered as soon as possible following the date
hereof. Any certificates or other instruments so delivered shall be duly
endorsed and subscribed by the Pledgor or accompanied by appropriate instruments
of transfer or assignment duly executed in blank by the Pledgor. Any such
certificates, instruments or other property representing or constituting any
Pledged Shares received by the Pledgor after the date of this Pledge Agreement
shall be held by the Pledgor in trust for the Pledgee Agent and shall forthwith
be delivered by the Pledgor to the Pledgee Agent as aforesaid. If at any time
the Pledgee Agent notifies the Pledgor that additional endorsements or other
instruments of transfer or assignment with respect to any of the Pledged Shares
held by the Pledgee Agent are required, the Pledgor shall promptly execute the
same in blank and deliver such endorsements or other instruments of transfer or
assignment as the Pledgee Agent may request.
3. Power of Attorney. The Pledgor hereby constitutes and
irrevocably appoints the Pledgee Agent, with full power of substitution and
revocation by the Pledgee Agent, as the Pledgor's true and lawful
attorney-in-fact, for the purpose from time to time of carrying out the
provisions of this Agreement and taking any reasonable action and executing any
instrument that the Pledgee Agent reasonably deems necessary or advisable to
accomplish the purposes of this Agreement, including, without limitation, to
affix to certificates representing any Pledged Shares the endorsements or other
instruments of transfer or assignment delivered with respect thereto and to
transfer or cause the transfer of the Pledged Shares, or any part thereof, on
the books of the Issuers. The power of attorney granted pursuant to this
Agreement and all authority hereby conferred are granted and conferred solely to
protect the Pledgee Agent's interest in the Pledged Shares and shall not impose
any duty upon the Pledgee Agent to exercise any power. This power of attorney
shall be irrevocable as one coupled with an interest.
3
<PAGE>
4. Dividends. During the term of this Pledge Agreement, and so
long as the Pledgor is not in default in the performance of any term of the
Pledge Agreement or in the payment of the principal or interest of the Loan (a
"Default"), the Pledgor shall be entitled to receive all dividends and other
amounts paid in respect of the Pledged Shares and any other property of any kind
received, receivable, distributed or distributable on or by reason of the
Pledged Shares pledged hereunder, whether in the form of or by way of cash
distributions, warrants, subscription rights, partial liquidation, conversion,
prepayments or redemptions (in whole or in part), liquidation, or otherwise that
may be made subsequent to the date hereof.
5. Voting rights. During the term of this Pledge Agreement,
and so long as no Default has occurred and is continuing, the Pledgor may vote
the Pledged Shares on all corporate questions, and the Pledgee Agent shall
execute due and timely proxies in favor of the Pledgor to this end.
6. Representations of Pledgor. The Pledgor represents and
warrants to the Pledgee Agent that:
(a) the Pledgor is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, has all requisite power and
4
<PAGE>
authority to own, lease and operate its properties, to carry on its business as
currently being conducted, to enter into this Agreement and to perform its
obligations hereunder and thereunder.
(b) the Pledgor has the corporate power and authority and
the legal right to execute, deliver and perform this Agreement and to grant the
lien on the Pledged Shares contemplated hereby in favor of the Pledgee Agent,
and all parties whose consent to the pledge made herein is required have given
written consent to such pledge.
(c) The execution, delivery and performance of this
Agreement by the Pledgor and the granting of the lien on the Pledged Shares
contemplated hereby have been duly authorized by all necessary corporate action
and do not and will not (i) violate any applicable law, rule or regulation or
any provision of the corporate charter or the by-laws of the Pledgor , (ii)
conflict with, result in a breach of, or constitute a default under any
provision of any indenture, mortgage or other material agreement or instrument
to which the Pledgor is a party or by which it or its respective properties or
assets is bound or subject or of any license, judgment, order or decree of any
governmental authority having jurisdiction over the Pledgor or any of its
activities, properties or assets or (iii) result in or require the creation or
imposition of any lien, security interest, charge or other claims or
encumbrances upon or with respect to any properties or assets now or hereafter
owned by the Pledgor (other than the liens created hereunder).
5
<PAGE>
(d) This Agreement has been duly executed and delivered by
the Pledgor and constitutes a legal, valid and binding obligation of the Pledgor
enforceable against the Pledgor in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles.
(e) No consent or authorization of, filing with, or other
act by or in respect of, any arbitrator or governmental authority and no consent
of any other persons is required (i) for the execution, delivery and performance
of this Agreement by the Pledgor, (ii) for the pledge by the Pledgor of the
Pledged Shares to the Pledgee Agent pursuant to this Agreement or (iii) for the
exercise by the Pledgee Agent of the rights provided for in this Agreement or
the remedies in respect of the Pledged Shares pursuant to this Agreement, except
such as have been obtained, made or taken and are in full force and effect or
may be required under federal or state securities laws in connection with any
sale of the Pledged Shares.
(f) The Pledgor is the sole legal and beneficial owner of,
and has valid and transferrable title to, the Pledged Shares, free and clear of
all liens, security increases, charges or other claims or encumbrances, other
than the lien in favor of the Pledgee Agent created by this Agreement.
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(g) There are, as of the date hereof, a total of (i)
42,254,930 shares of common stock of the Intek Issuer outstanding (computed
assuming that all outstanding options and warrants and securities convertible
into shares of common stock of the Intek Issuer have been exercised or
converted, as the case may be), and (ii) 28,648,635 shares of common stock of
the Ventel Issuer outstanding (computed assuming that all outstanding options
and warrants and securities convertible into shares of common stock of the
Ventel Issuer have been exercised or converted, as the case may be), in each
case including the Pledged Shares. No other shares of capital stock of the
Issuers are outstanding as of the date hereof.
(h) The Pledged Shares are not subject to any restrictions
governing their issuance, transfer, ownership or control except as set forth in
the organizational documents of the Issuers, true, correct and complete copies
of which have been provided to the Pledgee Agent, or on the face of the
certificates themselves and the Pledgor has the right to transfer the Pledged
Shares free of any encumbrances and without obtaining the consents of the other
shareholders of the Issuers.
(i) Each Issuer was duly formed and is validly existing as a
corporation under the laws of the jurisdiction of its incorporation.
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(j) All actions required to create and perfect the lien of
the Pledgee Agent in the Pledged Shares have been taken and the liens on the
Pledged Shares in favor of the Pledgee Agent are superior in right to any rights
or claims of any other person.
7. Adjustments. If, during the term of this Agreement any
share dividend, reclassification, readjustment, or other change is declared or
made in the capital structure of the Issuers, all new, substituted, and
additional shares, or other securities, issued by reason of any such change
shall be held by the Pledgee Agent under the terms of this Pledge Agreement in
the same manner as the originally pledged Pledged Shares.
8. Warrants and rights. If, during the term of this Agreement
subscription warrants or any other rights or options are issued in connection
with the Pledged Shares, the Pledgee Agent shall immediately assign the pledged
warrants, rights, or options to the Pledgor. All new shares or other securities
so acquired by the Pledgor shall be immediately assigned to the Pledgee Agent to
be held under the terms of this Pledge Agreement in the same manner as the
originally pledged Pledged Shares.
9. Payment of loan; Release of Collateral. Upon payment of all
principal and interest owed by the Pledgor pursuant to the Loan, the Pledged
Shares shall automatically and without further action on the part of any party
hereto be released from the pledge hereunder and Pledgee Agent shall promptly
transfer to the Pledgor all the Pledged Shares and all
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rights received by the Pledgee Agent as a result of the Pledgee Agent's record
ownership thereof. Notwithstanding the foregoing, effective the date upon which
the principal amount of the Loan outstanding is less than $400,000, the Ventel
Pledged Shares shall automatically and without further action on the part of any
party hereto be released from the pledge hereunder and the Pledgee Agent shall
promptly transfer to the Pledgor all such Ventel Pledged Shares and all rights
received by the Pledgee Agent as a result of the Pledgee Agent's record
ownership thereof.
10. Default. If the Pledgor defaults in the performance of any
terms of this Agreement, or in the payment on demand of the principal or
interest of the Loan, the Pledgee Agent shall have the rights and remedies
provided in the Uniform Commercial Code in force in the State of New York at the
date of this Agreement. In addition to and in conjunction with such rights and
remedies, the Pledgee Agent may, by giving five Business Days' notice to the
Pledgor by registered mail, and without liability for any diminution in price
that may have occurred, sell all the Pledged Shares in any manner that accords
with applicable law. At any bona fide public sale the Pledgee Agent may purchase
all or any part of the Pledged Shares. The Pledgee Agent may retain out of the
proceeds of any sale an amount equal to the principal and interest then due on
the loan, plus the expenses of the sale, and shall pay any balance of the
proceeds to the Pledgor. If the sale proceeds are insufficient to cover the
principal and interest of the Loan and the sale expenses, the Pledgor shall
remain liable to the Pledgee Agent
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for the resulting deficiency. As used herein, the term "Business Day" shall mean
a day other than Saturday, Sunday or any other day on which banks located in the
State of New York are authorized or obligated to close
11. Obligations of Pledgor. The Pledgor covenants to the
Pledgee Agent that:
(a) The Pledgor will not sell, transfer or convey any
interest in, or suffer or permit any lien, security interest, charge or other
claim or encumbrance to exist on or with respect to, any of the Pledged Shares
except the lien created under this Agreement; and
(b) The Pledgor will defend the Pledgee Agent's right, title
and interest in, to and under the Pledged Shares against the claims and demands
of all persons wheresoever.
12. Agent Pledgee as Agent. The Pledgee Agent is acting
hereunder as agent for and on behalf of the Investors. No action may be taken by
the Agent Pledgee hereunder unless authorized by Investors holding not less than
51% of the debt represented by the Note outstanding from time to time.
13. General Provisions.
(a) No failure on the part of the Pledgee Agent to exercise,
and no delay in exercising, any right, power or remedy hereunder shall operate
as a waiver thereof, nor shall any single
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or partial exercise by the Pledgee Agent of any right, power or remedy hereunder
preclude any other or future exercise thereof, or the exercise of any other
right, power or remedy. The representations, covenants and agreements of the
Pledgor herein contained shall survive the date hereof.
(b) This Agreement and any provisions hereof, may not be
modified, amended, waived, extended, changed, discharged or terminated orally or
by any act on the part of the Pledgor or the Lender, but only by an agreement in
writing, signed by the Pledgee Agent.
(c) Any notice, demand, statement, request or consent made
hereunder shall be in writing and delivered personally or sent to the party to
whom the notice, demand or request is being made by Federal Express or other
nationally recognized overnight delivery service, as follows, and shall be
deemed given when delivered personally or one business day after being deposited
with Federal Express or such other nationally recognized delivery service:
If to the Investors or the Pledgee Agent:
To: Pellinore Securities Corporation
745 Fifth Avenue
New York, NY 10151
Attn: J. Richard Messina
with a copy to:
Duquette & Tipton LLP
405 Lexington Avenue, Ste. 4500
New York, NY 10174
Attn: David J. Duquette, Jr.
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If to the Pledgor:
To: American Digital Communications, Inc.
580 Granita Court
Pickering Ontario L1W 3Z4
CANADA
with a copy to:
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, NY 10022
Attn: Scott S. Rosenblum, Esq.
provided that any notice, request or demand to or upon the Pledgee Agent shall
not be effective until actually received. Any notices, requests or demands
received on a day which is not a business day shall be deemed to have been
received on the next following business day.
(d) THIS AGREEMENT SHALL BE GOVERNED BY, AND INTERPRETED AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. EACH OF THE
PARTIES HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT IT MAY
HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY
ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT.
(e) The Pledgor hereby consents to the non-exclusive
jurisdiction of the Supreme Court of the State of New York County and the United
States District Court for the Southern District of New York with respect to any
suit, claim, action or proceeding arising out of or related to this Agreement or
the transaction contemplated hereby and hereby waives any objection which it may
have now or hereafter to the venue of any suit, claim, action or proceeding
arising out of or related to this Agreement or the transactions contemplated
hereby and brought in the courts specified above and also hereby waives any
claims that any such suit, claim, action or proceeding has been brought in an
inconvenient forum.
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(f) Notwithstanding anything to the contrary in this
Agreement, the Pledgee Agent's recourse for amounts payable by the Pledgor under
this Agreement shall be limited to the Pledge and any other collateral
hereinafter specifically designated by the Pledgor or any other Person as
security for the payment of such amounts; provided, however, that the foregoing
shall not in any manner preclude or limit Pledgee Agent from (i) proceeding
against the Pledgor by appropriate action to prevent or seek redress for any
breach by the Pledgor of its obligations under this Agreement of for any fraud
or intentional misrepresentation by the Pledgor or (ii) exercising any of its
rights or remedies with respect to the Pledged Shares or any other collateral or
security for the Note or from otherwise seeking enforcement of the Note.
(g) If any provision of this Agreement is determined by a
court of competent jurisdiction to be unenforceable, such provision shall be
automatically reformed and construed so as to be valid, operative and
enforceable to the maximum extent permitted by the law while most nearly
preserving its original intent. The invalidity of any part of this Agreement
shall not render invalid the remainder of the Agreement.
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(h) This Agreement may be executed in counterparts, each of
which when so executed and delivered shall be deemed an original, but all such
counterparts taken together shall constitute one and the same instrument.
(i) The section headings in this Agreement are for convenience
of reference only and shall not affect the interpretation hereof.
IN WITNESS WHEREOF, the parties have executed this agreement.
AMERICAN DIGITAL COMMUNICATIONS, INC.
By:/s/ John G. Simmonds
--------------------
John G. Simmonds
President
PELLINORE SECURITIES CORP. FOR ITSELF
AND AS AGENT FOR THE INVESTORS LISTED
ON EXHIBIT A HERETO
By:/s/ J. Richard Messina
----------------------
J. Richard Messina
President
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EXHIBIT A
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Exhibit 10.09
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is dated as of
April 3, 1998 between AMERICAN DIGITAL COMMUNICATIONS, INC., a Wyoming
corporation (the "Company") and Pellinore Securities Corporation as agent for
the individuals and entities listed on Annex I hereto (each, an "Investor" and
collectively the "Investors"). Capitalized terms not otherwise defined herein
have the meanings set forth in Section 9.
WHEREAS, the Investors have acquired certain shares of common stock of
the Company (collectively, the "Investor Common Stock"), and certain warrants to
purchase common stock of the Company (collectively, the "Warrants"), as more
fully set forth on Exhibit A hereto;
WHEREAS, the Company has agreed to provide the Investors with certain
registration rights with respect to the Investor Common Stock and the common
stock (the "Investor Warrant Stock") underlying the Warrants;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
1. Requested Registrations.
(a) Registration Requests. At any time after the date 180 days
subsequent to the date hereof, but only for such period of time as the Company
is obligated to any Investor pursuant to any Secured Notes, upon the written
request of the holders of not less than 50% of the Registrable Securities
requesting that the Company effect the registration under the Securities Act of
all or part of the Registrable Securities owned by the such holders and
specifying the number of Registrable Securities to be registered and the
intended method of disposition thereof, the Company will thereupon will use its
best efforts to effect the registration under the Securities Act of the
Registrable Securities which the Company has been so requested to register by
the such holders, all to the extent requisite to permit the disposition (in
accordance with the intended methods thereof) of the Registrable Securities so
to be registered; provided that the number of Registrable Securities requested
to be so registered is not less than 25% of the Registrable Securities held by
such requesting Holders. Notwithstanding the foregoing, the Company may postpone
taking action with respect to a Requested Registration for a reasonable period
of time after receipt of the original request (not exceeding ninety (90) days)
if, in the good faith opinion of the Company's Board of Directors, effecting the
registration would adversely affect a material financing, acquisition,
disposition of assets or stock, merger or other comparable transaction or would
require the Company to make public disclosure of information the public
disclosure of which would have a material adverse effect upon the Company.
(b) Limitations on Requested Registrations. Notwithstanding anything
herein to the contrary, the Company shall not be required to honor a request for
a Requested Registration if:
(i) the Company has effected one Effective Registration pursuant
to Section 1(a); or
(ii) such request is received by the Company less than ninety
(90) days following the effective date of any previous registration statement
filed in connection with a Requested Registration or a Piggyback Registration,
regardless of whether any Investor has exercised its rights under this Agreement
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(c) Registration Statement Form. Requested Registrations shall be on
such appropriate registration form promulgated by the Commission as shall be
selected by the Company, and shall be reasonably acceptable to the requesting
holders of Registrable Securities, and shall permit the disposition of such
Registrable Securities in accordance with the intended method or methods
specified in the request for such registration.
(d) Registration Expenses. The Company will pay all Registration
Expenses incurred in connection with any Requested Registration.
(e) Priority in Cutback Registrations. If a Requested Registration
becomes a Cutback Registration, the Company will include in any such
registration to the extent of the number which the Managing Underwriter advises
the Company can be sold in such offering (i) first, Registrable Securities
requested to be included in such registration by the requesting holders and (ii)
second, only to the extent all of such Registrable Securities have been included
in such registration statement, securities of other stockholders of the Company
in accordance with the advice of the Managing Underwriter specified above; and
any securities so excluded shall be withdrawn from and shall not be included in
such Requested Registration.
(f) Preemption of Requested Registration. Notwithstanding anything
to the contrary contained herein, at any time within thirty (30) days after
receiving a written request for a Requested Registration, the Company may elect
to effect an underwritten primary registration in lieu of the Requested
Registration if the Company's Board of Directors believes that such primary
registration would be in the best interests of the Company or if the Managing
Underwriter for the Requested Registration advises the Company in writing that
in its opinion, in order to sell the Registrable Securities to be sold, the
Company should include its own securities. If the Company so elects to effect a
primary registration, the Company shall give prompt written notice to all
holders of Registrable Securities of its intention to effect such a registration
and shall afford the holders of the Registrable Securities rights contained in
Section 2 with respect to Piggyback Registrations. In the event that the Company
so elects to effect a primary registration after receiving a request for a
Requested Registration, the requests for a Requested Registration shall be
deemed to have been withdrawn and such primary registration shall not be deemed
to be an Effective Registration.
2. Piggyback Registrations. (a) Right to Include Registrable
Securities. Notwithstanding any limitation contained in Section 1, if the
Company at any time proposes after the date hereof to effect a Piggyback
Registration, including in accordance with Section 1(f), it will each such time
give prompt written notice (a "Notice of Piggyback Registration") at least 30
days prior to the anticipated filing date, to all holders of Registrable
Securities of its intention to do so and of such holders' rights under this
Section 2, which Notice of Piggyback Registration shall include a description of
the intended method of disposition of such securities. Upon the written request
of any such holder made within 15 days prior to the anticipated filing date
specified in the Notice of Piggyback Registration (which request shall specify
the Registrable Securities intended to be disposed of by such holder), the
Company will use its best efforts to include in the registration statement
relating to such Piggyback Registration all Registrable Securities which the
Company has been so requested to register. Notwithstanding the foregoing, if, at
any time after giving a Notice of Piggyback Registration and prior to the
effective date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to register or to
delay registration of such securities, the Company may, at its election, give
written notice of such determination to each holder of Registrable Securities
and, thereupon, (i) in the case of a determination not to register, shall be
relieved of
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its obligation to register any Registrable Securities in connection with such
registration (but not from its obligation to pay the Registration Expenses in
connection therewith) without prejudice, however, to the rights of Requesting
Holders to request that such registration be effected as a Requested
Registration under Section 1, and (ii) in the case of a determination to delay
registering, shall be permitted to delay registering any Registrable Securities
for the same period as the delay in registering such other securities. No
registration effected under this Section 2 shall relieve the Company of its
obligations to effect a Requested Registration under Section 1.
(b) Registration Expenses. The Company will pay all Registration
Expenses incurred in connection with each Piggyback Registration.
(c) Priority in Cutback Registrations. If a Piggyback Registration
becomes a Cutback Registration, the Company will include in such registration to
the extent of the amount of the securities which the Managing Underwriter
advises the Company can be sold in such offering:
(i) if such registration was initially proposed by the Company as
a primary registration of its securities, (x) first, the securities
proposed by the Company to be sold for its own account, and (y)
second, any Registrable Securities requested to be included in such
registration by Requesting Holders and any securities of other
stockholders of the Company, pro rata on the basis of the number of
Registrable Securities and other securities requested to be included
in such registration;
(ii) if such registration was in whole or part requested by the
Requesting Holders and thereafter became a Piggyback Registration
under the circumstances described in Section 1(f), or if such
registration was in whole or part requested by other stockholders of
the Company and not the Requesting Holders and the Company exercises
rights to preempt such requested registration, (x) first, the
securities proposed by the Company to be sold for its own account, (y)
second, any Registrable Securities requested to be included in such
registration or any securities of other initiating stockholders of the
Company requested by such stockholders to be included in such
registration and (x) third, any securities of other stockholders of
the Company; and
(iii) if such registration was requested in whole or part by
other stockholders of the Company and not by the Requesting Holders
and the Company does not exercise any right to preempt such requested
registration, (x) first, the securities of the initiating holders
requested to be included in the registration, and (y) second, any
Registrable Securities requested to be included in such registration
by Requesting Holders and any securities of other stockholders of the
Company, pro rata on the basis of the number of Registrable Securities
and other securities requested to be included in such registration;
and any securities so excluded shall be withdrawn from and shall not be included
in such Piggyback Registration.
3. Registration Procedures. If and whenever the Company is required to
use its best efforts to effect the registration of any Registrable Securities
under the Securities Act pursuant to Section 1 or Section 2, the Company will
use its best efforts to effect the registration and sale of such Registrable
Securities in accordance with the intended methods of disposition thereof.
Without limiting the foregoing, the Company in each such case will, as
expeditiously as possible:
(a) prepare and file with the Commission the
requisite registration statement to effect such registration and use
its best efforts to cause such registration statement to become
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effective, provided that as far in advance as practical before filing
such registration statement or any amendment thereto, the Company will
furnish to Pellinore and Requesting Holders copies of reasonably
complete drafts of all such documents proposed to be filed (including
exhibits), and any such holder shall have the opportunity to object to
any information pertaining solely to such holder that is contained
therein and the Company will make the corrections reasonably requested
by such holder with respect to such information prior to filing any
such registration statement or amendment;
(b) prepare and file with the Commission such
amendments and supplements to such registration statement and any
prospectus used in connection therewith as may be necessary to maintain
the effectiveness of such registration statement and to comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities covered by such registration statement, in
accordance with the intended methods of disposition thereof, until the
earlier of (i) such time as all of such securities have been disposed
of in accordance with the intended methods of disposition by the seller
or sellers thereof set forth in such registration statement and (ii)
180 days after such registration statement becomes effective;
(c) promptly notify each Investor and each Requesting
Holder and the underwriter or underwriters, if any:
(i) when such registration statement or any
prospectus used in connection therewith, or any amendment or
supplement thereto, has been filed and, with respect to such
registration statement or any post effective amendment
thereto, when the same has become effective;
(ii) of any written request by the Commission for
amendments or supplements to such registration statement or
prospectus;
(iii) of the notification to the Company by the
Commission of its initiation of any proceeding with respect
to the issuance by the Commission of, or of the issuance by
the Commission of, any stop order suspending the
effectiveness of such registration statement; and
(iv) of the receipt by the Company of any
notification with respect to the suspension of the
qualification of any Registrable Securities for sale under
the applicable securities or blue sky laws of any
jurisdiction;
(d) furnish to each seller of Registrable Securities
covered by such registration statement such number of conformed copies
of such registration statement and of each amendment and supplement
thereto (in each case including all exhibits and documents incorporated
by reference) such number of copies of the prospectus contained in such
registration statement (including each preliminary prospectus and any
summary prospectus) and any other prospectus filed under Rule 424
promulgated under the Securities Act relating to such holder's
Registrable Securities, and such other documents, as such seller may
reasonably request to facilitate the disposition of its Registrable
Securities;
(e) use its best efforts to register or qualify all
Registrable Securities covered by such registration statement under
such other securities or blue sky laws of such jurisdictions as each
holder thereof shall reasonably request, to keep such registration or
qualification in effect for so long as such registration statement
remains in effect, and take any other action which may be reasonably
necessary or advisable to enable such holder to consummate the
disposition in such jurisdictions of the Registrable Securities owned
by such holder, except that the Company shall not
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for any such purpose be required (i) to qualify generally to do
business as a foreign corporation in any jurisdiction wherein it would
not but for the requirements of this paragraph (e) be obligated to be
so qualified, (ii) to subject itself to taxation in any such
jurisdiction or (iii) to consent to general service of process in any
jurisdiction;
(f) use its best efforts to cause all Registrable
Securities covered by such registration statement to be registered with
or approved by such other governmental agencies or authorities as may
be necessary to enable each holder thereof to consummate the
disposition of such Registrable Securities;
(g) furnish to each Investor and each Requesting
Holder a signed counterpart, addressed to such holder (and the
underwriters, if any), of
(i) an opinion of counsel for the Company, dated
the effective date of such registration statement (or,
if such registration includes an underwritten Public
Offering, dated the date of any closing under the
underwriting agreement), reasonably satisfactory in form
and substance to such holder, and
(ii) a "comfort" letter, dated the effective
date of such registration statement (and, if such
registration includes an underwritten Public Offering,
dated the date of any closing under the underwriting
agreement), signed by the independent public accountants
who have certified the Company's financial statements
included in such registration statement,
in each case covering substantially the same matters with respect to
such registration statement (and the prospectus included therein) and,
in the case of the accountants' letter, with respect to events
subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' letters
delivered to the underwriters in underwritten Public Offerings of
securities and, in the case of the accountants' letter, such other
financial matters, as such holder (or the underwriters, if any) may
reasonably request;
(h) notify each holder of Registrable Securities
covered by such registration statement, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act,
of the happening of any event as a result of which any prospectus
included in such registration statement, as then in effect, includes an
untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, and at the request of any such holder promptly prepare
and furnish to such holder a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so
that, as thereafter delivered to the purchasers of such securities,
such prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(i) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available
to its security holders, as soon as reasonably practicable, an earnings
statement covering the period of at least twelve (12) months, but not
more than eighteen (18) months, beginning with the first full calendar
month after the effective date of such registration statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 promulgated thereunder;
(j) make available for inspection by each Investor
and any Requesting
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Holder, any underwriter participating in any disposition pursuant to
such registration statement and any attorney, accountant or other agent
retained by any such seller or underwriter (collectively, the
"Inspectors"), all financial and other records, pertinent corporate
documents and properties of the Company (collectively, the "Records")
as shall be reasonably necessary to enable them to exercise their due
diligence responsibility, and cause the Company's officers, directors
and employees to supply all information reasonably requested by any
such Inspector in connection with such registration statement. Records
which the Company determines, in good faith, to be confidential and
which it notifies the Inspectors are confidential shall not be
disclosed by the Inspectors unless (i) the disclosure of such Records
is necessary to avoid or correct a misstatement or omission in the
registration statement, (ii) the release of such Records is ordered
pursuant to a subpoena or other order from a court of competent
jurisdiction or (iii) the information in such Records has been made
generally available to the public. The seller of Registrable Securities
agrees by acquisition of such Registrable Securities that it will, upon
learning that disclosure of such Records is sought in a court of
competent jurisdiction, give notice to the Company and allow the
Company, at the Company's expense, to undertake appropriate action to
prevent disclosure of the Records deemed confidential;
(k) provide a transfer agent and registrar for all
Registrable Securities covered by such registration statement not later
than the effective date of such registration statement; and
(l) use its best efforts to cause all Registrable
Securities covered by such registration statement to be listed, upon
official notice of issuance, on any securities exchange on which any of
the securities of the same class as the Registrable Securities are then
listed.
The Company may require each holder of Registrable Securities
as to which any registration is being effected to, and each such holder, as a
condition to including Registrable Securities in such registration, shall,
furnish the Company with such information and affidavits regarding such holder
and the distribution of such securities as the Company may from time to time
reasonably request in writing in connection with such registration.
Each holder of Registrable Securities agrees by acquisition of
such Registrable Securities that upon receipt of any notice from the Company of
the happening of any event of the kind described in paragraph (h), such holder
will forthwith discontinue such holder's disposition of Registrable Securities
pursuant to the registration statement relating to such Registrable Securities
until such holder's receipt of the copies of the supplemented or amended
prospectus contemplated by paragraph (h) and, if so directed by the Company,
will deliver to the Company (at the Company's expense) all copies, other than
permanent file copies, then in such holder's possession of the prospectus
relating to such Registrable Securities current at the time of receipt of such
notice. In the event the Company shall give any such notice, the period referred
to in paragraph (b) shall be extended by a number of days equal to the number of
days during the period from and including the giving of notice pursuant to
paragraph (h) and to and including the date when each holder of any Registrable
Securities covered by such registration statement shall receive the copies of
the supplemented or amended prospectus contemplated by paragraph (h).
4. Underwritten Offerings.
(a) Underwritten Requested Offerings. In the case of any
underwritten Public Offering being effected pursuant to a Requested
Registration, the Managing Underwriter and any other underwriter or underwriters
with respect to such offering shall be selected, after consultation with the
holders of the Registrable Securities to be included in such underwritten
offering, by the Company with the consent of the holders of a majority of the
Registrable Securities to be included in such underwritten offering, which
consent shall not be unreasonably withheld. The Company shall enter into an
underwriting agreement in customary form with such underwriter or underwriters,
which shall include, among other provisions, indemnities to the effect and to
the extent provided in Section 6. The holders of Registrable
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Securities to be distributed by such underwriters shall be parties to such
underwriting agreement and may, at their option, require that any or all of the
representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters also be made to and for
their benefit and that any or all of the conditions precedent to the obligations
of such underwriters under such underwriting agreement also be conditions
precedent to their obligations. No holder of Registrable Securities shall be
required to make any representations or warranties to or agreements with the
Company or the underwriters other than representations, warranties or agreements
regarding such holder and its ownership of the securities being registered on
its behalf and such holder's intended method of distribution and any other
representation required by law. No holder of Registrable Securities may
participate in such underwritten offering unless such holder agrees to sell its
Registrable Securities on the basis provided in such underwriting agreement and
completes and executes all questionnaires, powers of attorney, indemnities and
other documents reasonably required under the terms of such underwriting
agreement. If any holder of Registrable Securities disapproves of the terms of
an underwriting, such holder may elect to withdraw therefrom and from such
registration by notice to the Company and the Managing Underwriter, and each of
the remaining holders shall be entitled to increase the number of Registrable
Securities being registered to the extent of the Registrable Securities so
withdrawn in the proportion which the number of Registrable Securities being
registered by such remaining holder bears to the total number of Registrable
Securities being registered by all such remaining holders.
(b) Underwritten Piggyback Offerings. If the Company at any
time proposes to register any of its securities in a Piggyback Registration and
such securities are to be distributed by or through one or more underwriters,
the Company will, subject to the provisions of Section 2(c), use its best
efforts, if requested by any holder of Registrable Securities, to arrange for
such underwriters to include the Registrable Securities to be offered and sold
by such holder among the securities to be distributed by such underwriters, and
such holders shall be obligated to sell their Registrable Securities in such
Piggyback Registration through such underwriters on the same terms and
conditions as apply to the other Company securities to be sold by such
underwriters in connection with such Piggyback Registration. The holders of
Registrable Securities to be distributed by such underwriters shall be parties
to the underwriting agreement between the Company and such underwriter or
underwriters and may, at their option, require that any or all of the
representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters also be made to and for
their benefit and that any or all of the conditions precedent to the obligations
of such underwriters under such underwriting agreement also be conditions
precedent to their obligations. No holder of Registrable Securities shall be
required to make any representations or warranties to or agreements with the
Company or the underwriters other than representations, warranties or agreements
regarding such holder and its ownership of the securities being registered on
its behalf and such holder's intended method of distribution and any other
representation required by law. No Requesting Holder may participate in such
underwritten offering unless such holder agrees to sell its Registrable
Securities on the basis provided in such underwriting agreement and completes
and executes all questionnaires, powers of attorney, indemnities and other
documents reasonably required under the terms of such underwriting agreement. If
any Requesting Holder disapproves of the terms of an underwriting, such holder
may elect to withdraw therefrom and from such registration by notice to the
Company and the Managing Underwriter, and each of the remaining Requesting
Holders shall be entitled to increase the number of Registrable Securities being
registered to the extent of the Registrable Securities so withdrawn in the
proportion which the number of Registrable Securities being registered by such
remaining Requesting Holder bears to the total number of Registrable Securities
being registered by all such remaining Requesting Holders.
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5. Holdback Agreements.
(a) By the Holders of Registrable Securities. Unless the
Managing Underwriter (or, in the case of a non-underwritten Public Offering, the
Company) otherwise agrees, each holder of Registrable Securities, by acquisition
of such Registrable Securities, agrees, to the extent permitted by law, not to
effect any public sale or distribution (including a sale under Rule 144) of such
securities, or any securities convertible into or exchangeable or exercisable
for such securities, during the 10 days prior to and the 90 days after the
effective date of any registration statement filed by the Company in connection
with a Public Offering (or for such shorter period of time as is sufficient and
appropriate, in the opinion of the Managing Underwriter (or, in the case of a
non-underwritten Public Offering, the Company), in order to complete the sale
and distribution of the securities included in such registration), except as
part of such registration statement, whether or not such holder participates in
such registration.
(b) By the Company and Other Securityholders. Unless the
Managing Underwriter otherwise agrees, the Company agrees (x) not to effect any
public sale or distribution of its equity securities, or any securities
convertible into or exchangeable or exercisable for such securities, during the
14 days prior to and the 90 days after the effective date of the registration
statement filed in connection with an underwritten offering made pursuant to a
Requested Registration or a Piggyback Registration (or for such shorter period
of time as is sufficient and appropriate, in the opinion of the Managing
Underwriter, in order to complete the sale and distribution of the securities
included in such registration), except as part of such underwritten registration
and except pursuant to registrations on Form S-4 or Form S-8 promulgated by the
Commission or any successor or similar forms thereto, and (y) to cause each
holder of its equity securities, or of any securities convertible into or
exchangeable or exercisable for such securities, in each case purchased from the
Company at any time after the date of this Agreement (other than in a Public
Offering), to agree, to the extent permitted by law, not to effect any such
public sale or distribution of such securities (including a sale under Rule
144), during such period, except as part of such underwritten registration.
6. Indemnification. (a) Indemnification by the Company. The Company
shall, to the full extent permitted by law, indemnify and hold harmless each
seller of Registrable Securities included in any registration statement filed in
connection with a Requested Registration or a Piggyback Registration, its
directors and officers, and each other Person, if any, who controls any such
seller within the meaning of the Securities Act, against any losses, claims,
damages, expenses or liabilities, joint or several (together, "Losses"), to
which such seller or any such director or officer or controlling Person may
become subject under the Securities Act or otherwise, insofar as such Losses (or
actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any such registration statement, any
preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein (in the case of a prospectus, in the
light of the circumstances under which they were made) not misleading, and the
Company will reimburse such seller and each such director, officer and
controlling Person for any legal or any other expenses reasonably incurred by
them in connection with investigating or defending any such Loss (or action or
proceeding in respect thereof); provided that the Company shall not be liable in
any such case to the extent that any such Loss (or action or proceeding in
respect thereof) arises out of or is based upon (x) an untrue statement or
alleged untrue statement or omission or alleged omission made in any such
registration statement, preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement in reliance upon and in conformity with
information furnished to the Company by such seller or (y) such seller's failure
to send or give a copy of the
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final prospectus to the Persons asserting an untrue statement or alleged untrue
statement or omission or alleged omission at or prior to the written
confirmation of the sale of Registrable Securities to such Person if such
statement or omission was corrected in such final prospectus. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such seller or any such director, officer or controlling Person,
and shall survive the transfer of such securities by such seller. The Company
shall also indemnify each other Person who participates (including as an
underwriter) in the offering or sale of Registrable Securities, their officers
and directors and each other Person, if any, who controls any such participating
Person within the meaning of the Securities Act to the same extent as provided
above with respect to holders of Registrable Securities.
(b) Indemnification by the Sellers. Each holder of Registrable
Securities which are included or are to be included in any registration
statement filed in connection with a Requested Registration or a Piggyback
Registration, as a condition to including Registrable Securities in such
registration statement, shall, to the full extent permitted by law, indemnify
and hold harmless the Company, its directors and officers, and each other
Person, if any, who controls the Company within the meaning of the Securities
Act, against any Losses to which the Company or any such director or officer or
controlling Person may become subject under the Securities Act or otherwise,
insofar as such Losses (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any such
registration statement, any preliminary prospectus, final prospectus or summary
prospectus contained therein, or any amendment or supplement thereto, or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein (in the case of a
prospectus, in the light of the circumstances under which they were made) not
misleading, if such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company through an instrument duly executed by such
seller specifically stating that it is for use in the preparation of such
registration statement, preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement and the aggregate amount which may be
recovered from any holder of Registrable Securities pursuant to the
indemnification provided for in this Section 6(b) in connection with any
registration and sale of Registrable Securities shall be limited to the total
proceeds received by such holder from the sale of such Registrable Securities.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Company or any such director, officer
or participating or controlling Person and shall survive the transfer of such
securities by such seller. Such holders shall also indemnify each other Person
who participates (including as an underwriter) in the offering or sale of
Registrable Securities, their officers and directors and each other Person, if
any, who controls any such participating Person within the meaning of the
Securities Act to the same extent as provided above with respect to the Company.
(c) Notices of Claims, etc. Promptly after receipt by an
Indemnified Party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding paragraph (a) or (b) of this
Section 6, such Indemnified Party will, if a claim in respect thereof is to be
made against an Indemnifying Party pursuant to such paragraphs, give written
notice to the latter of the commencement of such action, provided that the
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under the preceding paragraphs
of this Section 6, except to the extent that the Indemnifying Party is actually
prejudiced by such failure to give notice. In case any such action is brought
against an Indemnified Party, the Indemnifying Party shall be entitled to
participate in and to assume the defense thereof, jointly with any other
Indemnifying Party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such Indemnified Party, and after notice from
the Indemnifying Party to such Indemnified Party of its election so to assume
the defense thereof, the Indemnifying Party shall not be liable to such
Indemnified Party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof other than reasonable costs of
investigation; provided that the Indemnified Party may participate in such
defense at the Indemnified Party's expense; and provided, further that the
Indemnified Party or Indemnified Parties shall have the right to
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<PAGE>
employ one counsel to represent it or them if, in the reasonable judgment of the
Indemnified Party or Indemnified Parties, it is advisable for it or them to be
represented by separate counsel by reason of having legal defenses which are
different from or in addition to those available to the Indemnifying Party, and
in that event the reasonable fees and expenses of such one counsel shall be paid
by the Indemnifying Party. If the Indemnifying Party is not entitled to, or
elects not to, assume the defense of a claim, it will not be obligated to pay
the fees and expenses of more than one counsel for the Indemnified Parties with
respect to such claim, unless in the reasonable judgment of any Indemnified
Party a conflict of interest may exist between such Indemnified Party and any
other Indemnified Parties with respect to such claim, in which event the
Indemnifying Party shall be obligated to pay the fees and expenses of such
additional counsel for the Indemnified Parties. No Indemnifying Party shall
consent to entry of any judgment or enter into any settlement without the
consent of the Indemnified Party which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation. No
Indemnifying Party shall be subject to any liability for any settlement made
without its consent, which consent shall not be unreasonably withheld.
(d) Contribution. If the indemnity and reimbursement
obligation provided for in any paragraph of this Section 6 is unavailable or
insufficient to hold harmless an Indemnified Party in respect of any Losses (or
actions or proceedings in respect thereof) referred to therein, then (unless,
and except to the extent that, such unavailability or insufficiency results from
defenses or limitations provided by this Section 6) the Indemnifying Party shall
contribute to the amount paid or payable by the Indemnified Party as a result of
such Losses (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative fault of the Indemnifying Party on the
one hand and the Indemnified Party on the other hand in connection with
statements or omissions which resulted in such Losses, as well as any other
relevant equitable considerations. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Indemnifying Party or the Indemnified
Party and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission. The parties
hereto agree that it would not be just and equitable if contributions pursuant
to this paragraph were to be determined by pro rata allocation or by any other
method of allocation which does not take account of the equitable considerations
referred to in the first sentence of this paragraph. The amount paid by an
Indemnified Party as a result of the Losses referred to in the first sentence of
this paragraph shall be deemed to include any legal and other expenses
reasonably incurred by such Indemnified Party in connection with investigating
or defending any Loss which is the subject of this paragraph.
(e) Fraudulent Misrepresentation. No Indemnified Party guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to indemnification or contribution from the
Indemnifying Party if the Indemnifying Party was not guilty of such fraudulent
misrepresentation.
(f) Other Indemnification. Indemnification similar to that
specified in the preceding paragraphs of this Section 6 (with appropriate
modifications) shall be given by the Company and each seller of Registrable
Securities with respect to any required registration or other qualification of
securities under any federal or state law or regulation of any governmental
authority other than the Securities Act. The provisions of this Section 6 shall
be in addition to any other rights to indemnification or contribution which an
Indemnified Party may have pursuant to law, equity, contract or otherwise.
(g) Indemnification Payments. The indemnification required by
this Section 6 shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, as and when bills are received or
Losses are incurred.
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7. Covenants Relating to Rule 144. If at any time the Company is
required to file reports in compliance with either Section 13 or Section 15(d)
of the Exchange Act, the Company will file reports in compliance with the
Exchange Act, and will, at its expense, forthwith upon the request of any holder
of Registrable Securities, deliver to such holder a certificate, signed by the
Company's principal financial officer, stating (a) the Company's name, address
and telephone number (including area code), (b) the Company' s Internal Revenue
Service identification number, (c) the Company's Commission file number, (d) the
number of shares of each class of Stock outstanding as shown by the most recent
report or statement published by the Company, and (e) whether the Company has
filed the reports required to be filed under the Exchange Act for a period of at
least ninety (90) days prior to the date of such certificate and in addition has
filed the most recent annual report required to be filed thereunder.
8. Other Registration Rights.
(a) No Existing Agreements. Except as provided on Schedule
8(a) hereto, the Company represents and warrants to Pellinore that there is not
in effect on the date hereof any agreement by the Company pursuant to which any
holders of securities of the Company have a right to cause the Company to
register or qualify such securities under the Securities Act or any securities
or blue sky laws of any jurisdiction that would conflict or be inconsistent with
any provision of this Agreement.
(b) Future Agreements. The Company shall not hereafter agree
with the holders of any securities issued or to be issued by the Company to
register or qualify such securities under the Securities Act or any securities
or blue sky laws of any jurisdiction unless such agreement specifically provides
that (i) such holder of such securities may not participate in any Requested
Registration under this Agreement except as provided in Section 1; (ii) the
holder of such securities may not participate in any Piggyback Registration
except as contemplated in Section 2(c); and (iii) such securities may not be
publicly offered or sold for the period specified in Section 5(a) under the
circumstances described in such Section.
9. Termination. Notwithstanding anything in this Agreement to the
contrary, this Agreement and the obligations of the Company hereunder shall
terminate and be of no further force or effect on the first date upon which the
Registrable Securities may be sold without limitation under Rule 144 under the
Securities Act of 1933 , as amended (as such Rule may be amended from time to
time), as determined by an option of counsel to the Company.
10. Definitions.
(a) Except as otherwise specifically indicated, the following
terms will have the following meanings for all purposes of this Agreement:
"Affiliate" of any Person means any Person, directly or
indirectly, controlling, controlled by or under common control with such Person.
"Agreement" means this Registration Rights Agreement, as the
same shall be amended from time to
time.
"Business Day" means a day other than Saturday, Sunday or any
other day on which banks located in the State of New York are authorized or
obligated to close.
"Commission" means the United States Securities and Exchange
Commission, or any successor governmental agency or authority.
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"Company" has the meaning specified in the preamble hereto.
"Cutback Registration" means any Requested Registration or
Piggyback Registration to be effected as an underwritten Public Offering in
which the Managing Underwriter with respect thereto advises the Company, the
Requesting Holders and any other stockholders of the Company who have requested
that shares be included in such registration in writing that, in its opinion,
the number of securities requested to be included in such registration
(including securities which are not Registrable Securities) exceed the number
which can be sold in such offering without a material reduction in the selling
price anticipated to be received for the securities to be sold in such public
offering.
"Effective Registration" means, subject to the last sentence
of Section 1(f), a Requested Registration which (a) has been declared or ordered
effective in accordance with the rules of the Commission and (b) has been kept
effective for the period of time contemplated by Section 3(b); provided that a
Cutback Registration in which the number of Registrable Securities actually
included in such registration is not at least eighty-five percent (85%) of the
number of Registrable Securities requested to be included in such registration
shall not be an Effective Registration for purposes of this Agreement;
Notwithstanding the foregoing, a registration that does not become effective
after it has been filed with the Commission solely by reason of Pellinore's
refusal to proceed shall be deemed to be an Effective Registration for purposes
of this Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Indemnified Party" means a party entitled to indemnity in
accordance with Section 6.
"Indemnifying Party" means a party obligated to provide
indemnity in accordance with Section 6.
"Inspectors" has the meaning ascribed to it in Section 3(j).
"Investor Common Stock" has the meaning set forth in the
preamble hereof.
"Investor Warrant Stock" has the meaning set forth in the
preamble hereof.
"Investors" has the meaning set forth in the preamble hereof.
"Losses" has the meaning ascribed to it in Section 6(a).
"Managing Underwriter" means, with respect to any Public
Offering, the underwriter or underwriters managing such Public Offering.
"NASD" means the National Association of Securities Dealers,
Inc.
"Notice of Piggyback Registration" has the meaning ascribed to
it in Section 2(a).
"Person" means any natural person, corporation, general
partnership, limited partnership, proprietorship, other business organization,
trust, union or association.
"Piggyback Registration" means any registration of securities
of the Company of the same class as the Registrable Securities under the
Securities Act (other than a registration in respect of a dividend reinvestment
or similar plan for stockholders of the Company or on Form S-4 or Form S-8
promulgated by the Commission, or any successor or similar forms thereto),
whether for sale for the account of the
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Company or for the account of any holder of securities of the Company (other
than Registrable Securities), including a registration by the Company under the
circumstances described in Section 1(f).
"Preferred Stock" has the meaning specified in the preamble
hereto, and any stock into which such Preferred Stock shall have been changed or
any stock resulting from any reclassification of such Preferred Stock.
"Public Offering" means any offering of common stock of the
Company ("Common Stock"), Preferred Stock or warrants to purchase Common Stock
or Preferred Stock to the public, either on behalf of the Company or any of its
securityholders, pursuant to an effective registration statement under the
Securities Act.
"Records" has the meaning ascribed to it in Section 3(j).
"Registrable Securities" means (i) the Investor Common Stock
and the Investor Warrant Stock, (ii) any additional shares of Common Stock
issued or distributed to the Investors by way of a dividend, stock split or
other distribution in respect of the Investor Common Stock and the Investor
Warrant Stock, (iii) any additional shares of Common Stock acquired by the
Investors by way of any rights offering or similar offering made in respect of
the Investor Common Stock and the Investor Warrant Stock and (iv) any additional
shares of Common Stock issued or issuable to the Investors upon conversion,
exercise or exchange of any capital stock, right, option, warrant, evidence of
indebtedness or other security of any type whatsoever that shall have been
issued pursuant to or with respect to the Investor Common Stock and the Investor
Warrant Stock. As to any particular Registrable Securities, once issued such
securities shall cease to be Registrable Securities when (i) a registration
statement with respect to the sale of such securities shall have become
effective under the Securities Act and such securities shall have been disposed
of in accordance with such registration statement, (ii) they shall have been
distributed to the public pursuant to Rule 144, or (iii) they shall have ceased
to be outstanding.
"Registration Expenses" means all expenses incident to the
Company's performance of or compliance with its obligations under this Agreement
to effect the registration of Registrable Securities in a Requested Registration
or a Piggyback Registration, including, without limitation, all registration,
filing, securities exchange listing and NASD fees, all registration, filing,
qualification and other fees and expenses of complying with securities or blue
sky laws, all word processing, duplicating and printing expenses, messenger and
delivery expenses, the fees and disbursements of counsel for the Company and of
its independent public accountants, including the expenses of any special audits
or "cold comfort" letters required by or incident to such performance and
compliance, the reasonable fees and disbursements of a single counsel retained
by the holders of a majority of the Registrable Securities being registered,
premiums and other costs of policies of insurance against liabilities arising
out of the Public Offering of the Registrable Securities being registered and
any fees and disbursements of underwriters customarily paid by issuers or
sellers of securities, but excluding underwriting discounts and commissions and
transfer taxes, if any, in respect of Registrable Securities, which shall be
payable by each holder thereof, pro rata on the basis of the number of
Registrable Securities of each such holder that are included in a registration
under this Agreement.
"Requesting Holders" means, with respect to any Piggyback
Registration, the holders of Registrable Securities requesting to have
Registrable Securities included in such registration in accordance with this
Agreement.
"Requested Registration" means any registration of Registrable
Securities under the Securities Act effected in accordance with Section 1.
"Rule 144" means Rule 144 promulgated by the Commission under
the Securities Act, and any successor provision thereto.
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"Securities Notes" means, collectively, the secured promissory
notes issued by the Company to Pellinore Securities Corporation, on behalf of
and as agent for the several Investors, dated the date hereof.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Senior Executive Officer" means, as to the Company, its
Chairman, President, Chief Financial Officer, Treasurer or Controller or any
person performing any of such functions, whether or not holding such title.
(b) Unless the context of this Agreement otherwise requires,
(i) words of any gender include each other gender; (ii) words using the singular
or plural number also include the plural or singular number, respectively; (iii)
the terms "hereof," "herein," "hereby" and derivative or similar words refer to
this entire Agreement; and (iv) the term "Section" refers to the specified
Section of this Agreement. Whenever this Agreement refers to a number of days,
such number shall refer to calendar days unless Business Days are specified.
11. Miscellaneous.
(a) Notices. All written communications provided for hereunder
shall be sent by registered or certified mail or nationwide overnight delivery
service (with charges prepaid) or delivered by hand to the following addresses
or such other address as the appropriate party may specify to each other party
hereto in writing:
If to Investor,
to: Pellinore Securities Corporation, as agent
745 Fifth Avenue
New York, NY 10151
Attn: J. Richard Messina
with a copy to:
Duquette & Tipton LLP
405 Lexington Avenue, Ste. 4500
New York, NY 10174
Attn: David J. Duquette, Jr.
If to the Company,
to: American Digital Communications, Inc.
580 Granite Court
Pickering Ontario L1W 3Z4
CANADA
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with a copy to:
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, NY 10022
Attn: Scott Rosenblum, Esq.
provided, however, that any such communication to the Company shall be in
writing and may also, at the option of Pellinore, be delivered by any other
means to the Company at the address specified above in this Section or to any
Senior Executive Officer of the Company. Any notice or other communication given
under this Section will be deemed effective two days after deposit in the United
States Mail if mailed as aforesaid and otherwise upon receipt. With respect to
any other holder of Registrable Securities, such notices, requests and other
communications shall be sent to the addresses set forth in the stock transfer
records regularly maintained by the Company.
(b) Entire Agreement. This Agreement supersedes all prior
discussions and agreements between the parties with respect to the subject
matter hereof, and contains the sole and entire agreement between the parties
hereto with respect to the subject matter hereof.
(c) Amendment. This Agreement may be amended, supplemented or
modified only by a written instrument (which may be executed in any number of
counterparts) duly executed by or on behalf of each of the Company and Persons
owning sixty-six and two-thirds percent (66-2/3%) or more of the Registrable
Securities.
(d) Waiver. Subject to paragraph (e) of this Section, any term
or condition of this Agreement may be waived at any time by the party that is
entitled to the benefit thereof, but no such waiver shall be effective unless
set forth in a written instrument duly executed by or on behalf of the party
waiving such term or condition. No waiver by any party of any term or condition
of this Agreement, in any one or more instances, shall be deemed to be or
construed as a waiver of the same term or condition of this Agreement on any
future occasion.
(e) Consents and Waivers by Holders of Registrable Securities.
Any consent of the holders of Registrable Securities pursuant to this Agreement,
and any waiver by such holders of any provision of this Agreement, shall be in
writing (which may be executed in any number of counterparts) and may be given
or taken by Persons owning sixty-six and two-thirds percent (66-2/3%) or more of
the Registrable Securities, and any such consent or waiver so given or taken
will be binding on all the holders of Registrable Securities.
(f) No Third Party Beneficiary. The terms and provisions of
this Agreement are intended solely for the benefit of each party hereto, their
respective successors or permitted assigns and any other holder of Registrable
Securities, and it is not the intention of the parties to confer third-party
beneficiary rights upon any other Person other than any Person entitled to
indemnity under Section 6.
(g) Successors and Assigns. This Agreement is binding upon,
inures to the benefit of and is enforceable by the parties hereto and their
respective successors and assigns. The registration rights of Pellinore as set
forth herein are assignable, in whole or in part, by any Investor to one or more
transferees of Registrable Securities, provided that written notice of such
assignment is furnished to the Company; provided, however, that no Investor may
assign any rights under this Agreement to any Person that competes directly or
indirectly with the Company without the prior written consent of the Company.
(h) Headings. The headings used in this Agreement have been
inserted for convenience of reference only and do not define or limit the
provisions hereof.
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(i) Invalid Provisions. If any provision of this Agreement is
held to be illegal, invalid or unenforceable under any present or future law,
and if the rights or obligations of any party hereto under this Agreement will
not be materially and adversely affected thereby, (i) such provision will be
fully severable, (ii) this Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof,
(iii) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom and (iv) in lieu of such illegal, invalid
or unenforceable provision, there will be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible.
(j) Remedies. Except as otherwise expressly provided for
herein, no remedy conferred by any of the specific provisions of this Agreement
is intended to be exclusive of any other remedy, and each and every remedy shall
be cumulative and shall be in addition to every other remedy given hereunder or
now or hereafter existing at law or in equity or by statute or otherwise. The
election of any one or more remedies by any party hereto shall not constitute a
waiver by any such party of the right to pursue any other available remedies.
Damages in the event of breach of this Agreement by a party hereto or any other
holder of Registrable Securities would be difficult, if not impossible, to
ascertain, and it is therefore agreed that each such Person, in addition to and
without limiting any other remedy or right it may have, will have the right to
an injunction or other equitable relief in any court of competent jurisdiction,
enjoining any such breach, and enforcing specifically the terms and provisions
hereof and the Company and each holder of Registrable Securities, by its
acquisition of such Registrable Securities, hereby waives any and all defenses
it may have on the ground of lack of jurisdiction or competence of the court to
grant such an injunction or other equitable relief. The existence of this right
will not preclude any such Person from pursuing any other rights and remedies at
law or in equity which such Person may have.
(k) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to a
contract executed and performed in such State, without giving effect to the
conflict of laws principles thereof.
(l) Counterparts. This Agreement may be executed in any number
of counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
16
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officer of each party hereto as of the date
first above written.
AMERICAN DIGITAL COMMUNICATIONS, INC.
By:
Name:
Title:
PELLINORE SECURITIES CORPORATION,
as agent for the Investors listed on
Exhibit A hereto
By: /s/ J. Richard Messina
----------------------
Name: J. Richard Messina
Title: President
17
<PAGE>
EXHIBIT A
18
<PAGE>
Schedule 8(a)
19
<PAGE>
SIGNATURES
In accordance with sections 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereto duly authorized individual.
Date: June 15, 1998
AMERICAN DIGITAL COMMUNICATIONS, INC.
By: /s/ John G. Simmonds
--------------------
JOHN G. SIMMONDS,
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ John G. Simmonds
- - --------------------------------------
JOHN G. SIMMONDS Chairman/ President/CEO/Director June 15, 1998
(principal executive officer)
/s/ Gary N. Hokkanen
- - --------------------------------------
GARY N. HOKKANEN Chief Financial Officer June 15, 1998
(principal financial officer)
/s/ Charles Cernansky
- - --------------------------------------
CHARLES J. CERNANSKY Director June 15, 1998
/s/ Ian MacDonald
- - --------------------------------------
IAN MACDONALD Director June 15, 1998
/s/ Harry Dunstan
- - --------------------------------------
J. HARRY DUNSTAN Director June 15, 1998
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 19,558
<SECURITIES> 1,209,844
<RECEIVABLES> 8,558
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,237,950
<PP&E> 151,134
<DEPRECIATION> 146,370
<TOTAL-ASSETS> 1,842,798
<CURRENT-LIABILITIES> 414,937
<BONDS> 158,337
0
1,000,000
<COMMON> 2,412
<OTHER-SE> 267,112
<TOTAL-LIABILITY-AND-EQUITY> 1,842,798
<SALES> 2,714,699
<TOTAL-REVENUES> 2,758,689
<CGS> 2,261,514
<TOTAL-COSTS> 3,067,635
<OTHER-EXPENSES> 931,437
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,096,251)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,096,251)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
