AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 2000
REGISTRATION NO. ____________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
TRACKPOWER, INC.
(Name of Small Business Issuer in Its Charter)
WYOMING 7999 13-3411167
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification
Incorporation or Classification Code Number)
Organization) Number)
67 WALL STREET, SUITE 2411
NEW YORK, NEW YORK 10005
(212) 804-5704
(Address and Telephone Number of Principal Executive Offices)
JOHN G. SIMMONDS
CHIEF EXECUTIVE OFFICER
TRACKPOWER, INC.
67 WALL STREET, SUITE 2411
NEW YORK, NEW YORK 10005
(212) 804-5704
(Name, Address and Telephone Number of Agent For Service)
COPIES TO:
SCOTT S. ROSENBLUM, ESQ.
KRAMER LEVIN NAFTALIS & FRANKEL LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022-3903
(212) 715-9100
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AT
SUCH TIME OR TIMES AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT AS
THE SELLING SHAREHOLDERS MAY DETERMINE.
<PAGE>
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------- ------------------- ---------------------- --------------------- ------------------
Title Of Each Number of Shares Proposed Proposed Maximum Amount
Class Of To Be Maximum Offering Aggregate Offering Of Registration
Securities Registered Price Per Unit Price (1) Fee
To Be Registered
- -------------------------------- ------------------- ---------------------- --------------------- ------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.0001
per share 6,067,032 $1.46 $8,857,867 $2,338.48
- -------------------------------- ------------------- ---------------------- --------------------- ------------------
</TABLE>
(1) The proposed maximum aggregate offering price has been estimated solely to
calculate the registration fee under Rule 457(c) of the Securities Act, based
upon the average of the highest and lowest price per share of common stock on
the Over The Counter Bulletin Board reported on February 2, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE DISTRIBUTION OF COMMON STOCK COVERED BY THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES, OR AN OFFER IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
- ---------------
TABLE OF CONTENTS
Page
Prospectus Summary ........................................................ 4
Risk Factors .............................................................. 6
Cautionary Statement
Concerning Forward-Looking Statements ...................................14
Selected Financial Information ............................................15
Capitalization ............................................................16
Market for our Common Equity and Related
Shareholder Matters .....................................................17
Management's Discussion and Analysis or
Plan of Operation .......................................................18
Business ..................................................................24
Legal Proceedings .........................................................27
Directors and Executive Officers ..........................................27
Executive Compensation ....................................................29
Security Ownership of Certain Beneficial
Owners and Management ...................................................31
Certain Relationships and Related Transactions ............................34
Use of Proceeds ...........................................................35
Selling Shareholders ......................................................35
Description of Securities .................................................37
Plan of Distribution ......................................................39
Legal Matters .............................................................40
Experts ...................................................................40
Indemnification ...........................................................40
Description of Property ...................................................41
Where You Can Find More Information .......................................41
UNTIL FEBRUARY ____, 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
=====================================
_______________ SHARES
TrackPower, Inc.
[LOGO]
COMMON STOCK
__________
PROSPECTUS
__________
FEBRUARY __, 2000
=====================================
<PAGE>
The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION DATED FEBRUARY 4, 2000
PROSPECTUS
TRACKPOWER, INC.
6,067,032 shares of common stock
o This prospectus relates to the public offering from time to time of up
to 6,067,032 shares of our common stock by the persons listed on pages
36 to 37 below.
o Our common stock is traded on the Over The Counter Bulletin Board under
the symbol TPWR. On January 20, 2000, the last sale price for our
common stock was $1.55.
o The shares of common stock offered by this prospectus are being sold by
the selling shareholders. Any selling shareholder may sell the common
stock on the Over The Counter Bulletin Board or in privately negotiated
transactions, whenever he decides and at the price he sets. The price
at which any of the shares of common stock are sold and the commissions
paid, if any, may vary from transaction to transaction.
o We will not receive any proceeds from the sale of these shares. We will
pay all expenses of registration incurred in connection with this
offering. The selling shareholders will pay all selling and other
expenses that they incur.
This investment involves a high degree of risk. You should carefully
consider the risk factors beginning on page 6 of this prospectus before you
decide to invest.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We have not authorized anyone to provide you with, and you should not
rely on, information other than that which is in this prospectus, any prospectus
supplement or which is incorporated in this prospectus by reference.
The date of this prospectus is February ___, 2000.
<PAGE>
TABLE OF CONTENTS
Page
----
Prospectus Summary..........................................................4
Risk Factors................................................................6
Cautionary Statement Concerning Forward-Looking Statements.................14
Selected Financial Information.............................................15
Capitalization.............................................................16
Market for our Common Equity and Related Shareholder Matters...............17
Management's Discussion and Analysis or Plan of Operation..................18
Business...................................................................24
Legal Proceedings..........................................................27
Directors and Executive Officers...........................................27
Executive Compensation.....................................................29
Security Ownership of Certain Beneficial Owners and Management.............31
Certain Relationships and Related Transactions.............................34
Use of Proceeds............................................................35
Selling Shareholders.......................................................35
Description of Securities..................................................37
Plan of Distribution.......................................................39
Legal Matters..............................................................40
Experts....................................................................40
Indemnification............................................................40
Description of Property....................................................41
Where You Can Find More Information........................................41
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements, including the Notes thereto,
appearing elsewhere in this Prospectus, including the information set forth
under "Risk Factors." Each prospective investor is urged to read this Prospectus
in its entirety
The Company
TrackPower was incorporated under the laws of the State of Wyoming on
June 30, 1993. TrackPower's present business strategy and direction is to
capitalize on the horseracing wagering industry by providing, via satellite,
live video coverage of horseraces directly to the homes and workplaces of those
who subscribe to our services in the United States. When fully implemented,
these services will enable our subscribers to place wagers on horseraces using
interactive television technology. TrackPower is also planning to expand the
availability of its services to computers in the near future.
TrackPower's live video services have been broadcast digitally since
July 1, 1999 through Echostar's Dish Network(TM) ("Echostar") to Echostar's
current subscribers. On July 9, 1999, an agreement was finalized between
TrackPower and Penn National under which Penn will provide wagering services to
TrackPower's subscribers. Agreements have also been entered into between
TrackPower and eBet to provide interactive wagering services.
TrackPower's current management team has experience in the industry of
broadcast communications, project management, marketing to the racing industry
and other industries, as well as many years of participation in the racing
industry through owning and breeding horses. TrackPower believes this team is
well-suited to continue the development and growth of the business.
Our principal offices are located in New York at 67 Wall Street, Suite
2411, New York, NY 10005, telephone number (212) 804-5704 and Canada at 590
Granite Court, Pickering, Ontario L1W 3Z4, telephone number (905) 836-1430.
The Offering
Common Stock Offered............................. Up to 6,067,032 shares.
Common Stock Outstanding Prior to
this Offering (1)
29,340,401 shares
Common Stock to be Outstanding After
Completion of this Offering (2)................... 31,027,043 shares
Use of Proceeds.................................... Selling shareholders are
selling all the common
stock covered by this
prospectus for their own
account. Therefore,
TrackPower will not
receive any proceeds from
the sale of this common
stock.
OTC Bulletin Board Symbol Common Stock............. TPWR
4
<PAGE>
(1) Based upon the number of outstanding shares at November 30, 1999. Does
not include (i) 1,850,000 shares issuable upon the exercise of
outstanding stock options, (ii) 7,572,813 shares issuable upon exercise
of outstanding warrants, (iii) 3,960,000 shares issuable upon
conversion of convertible debentures, and (iv) 3,960,000 shares
issuable upon the exercise of warrants that are issuable upon
conversion of convertible debentures.
(2) Includes 1,686,642 shares to be issued upon exercise of warrants held
by selling shareholders.
5
<PAGE>
RISK FACTORS
You should carefully consider each of the following risk factors in
addition to the other information contained in this prospectus before purchasing
shares of our common stock. Investing in our common stock involves a high degree
of risk. Any of the following risks could materially and adversely affect our
business, operating results, financial condition and the market price of our
common stock and could result in the complete loss of your investment.
We have a limited operating history with which to evaluate our business.
We are a development stage company. In 1998, we shifted our business
emphasis to focus on our live horseracing video service. As a result, we have
only a limited history with this service. There is little historical information
on which to evaluate our future business. Therefore, assumptions in our plan may
be inaccurate or flawed. This may prove to have a significant impact on our
future financial results.
An investor in our common stock must consider the risks, expenses and
difficulties frequently encountered by early-stage companies that are in the
midst of significant business changes and compete in new and rapidly-evolving
markets. Such risks for us include:
o our ability to achieve market acceptance of our service;
o our ability to manage growing and expanding operations;
o our ability to compete effectively against our competitors,
many of which have far greater resources;
o rapid evolution of technology in our market;
o the risk of business interruption arising from our dependence
on outside contractors; and
o our ability to attract and retain key personnel.
We may not be successful in implementing any of our strategies or in
addressing these risks. Even if we successfully address these risks, we may
never achieve or sustain profitability.
Our future revenues are unpredictable and our operating results may fluctuate
significantly.
Live horseracing video delivered to the home coupled with interactive
wagering from the home is a new, emerging market. Our revenue is driven by
numerous unpredictable factors, several of which we do not control.
Such factors include:
o our ability to retain existing subscribers and attract new
subscribers;
o price competition;
o the development, announcement or introduction of new services
or service enhancements by us or
by our competitors; and
o our ability to obtain and retain horseracing broadcast content.
We expect to base our expenditures on our plans and estimates of future
revenue. As many of our costs are fixed, if we are unable to reach a certain
number of subscribers, we will continue to incur losses.
We are uncertain of our future profitability.
We have been unprofitable to date and have incurred substantial
operating losses. In the last two fiscal years, we have incurred a cumulative
net loss of over $3 million. We have experienced significant quarterly
fluctuations in operating results and expect that these fluctuations in
revenues, expenses and losses will continue until a break-even level of
subscribers is attained. The amount of our wagering revenue is uncertain and
depends on many factors, including:
6
<PAGE>
o the personal wealth of our subscriber base;
o the personal preferences of subscribers;
o availability and presentation of horseracing data; and
o the relative attractiveness of our service in comparison to
other available wagering services.
Our independent auditors have included an explanatory paragraph in
their report to our financial statements on our Form 10-KSB for the fiscal year
ending February 28, 1999, which expresses doubt as to our ability to continue as
a going concern.
We currently depend on one service and face the risks of expanding into new
business areas.
We currently focus exclusively on our TrackPower service. As a result,
our near to medium-term future financial condition will depend heavily on the
success or failure of our TrackPower service. Our TrackPower service was
launched in July 1999 and it is difficult to predict demand and market
acceptance for this service in the new and rapidly evolving live horseracing
video market.
If the demand for our TrackPower service does not grow, whether because
of lack of market acceptance, competition, technological change or other
factors, we will need to expand our operations by promoting new or complementary
systems or services or by expanding the breadth and depth of our offerings. We
cannot assure you that we will be able to do so. Our experience in marketing our
TrackPower service may not be effective in marketing other systems or services.
We will rely heavily on certain third parties, including satellite service
providers and telecommunications companies.
Our operations depend on third parties for satellite service, billing
and customer service, various information technology functions and
telecommunications. From time to time, services such as ours have experienced
temporary interruptions in telecommunications access and other systems. Frequent
or prolonged interruptions of our service could result in significant losses of
revenues. We also depend on operating systems and data base and server software
produced by and licensed from third parties. From time to time, we expect to
discover errors and defects in such software and will rely on these third
parties to correct these errors and defects promptly. We have limited control
over these third parties and we cannot assure you that we will be able to
maintain satisfactory relationships with any of them on acceptable commercial
terms. We cannot assure you that the quality of services provided by these third
parties will be sufficient to enable us to conduct our business effectively.
Some of these third parties have experienced significant outages, delays and
other difficulties in the past and could experience future outages, delays and
other difficulties due to system failures unrelated to our on-line architecture.
These types of occurrences could cause our subscribers to believe that our
products as not functioning properly and to cease their use of our service.
We depend on Penn National Gaming, Inc. to produce horseracing content.
We depend on Penn National Gaming, Inc., or Penn, to provide us with
horseracing content. We have content agreements with Penn which generally have
one-year terms. We may not be able to renew these agreements on favorable terms
or at all, or these agreements may be cancelled prior to expiration of their
terms. If we are unable to renew any such agreements or if Penn cancels any of
these agreements, we cannot assure you that we will be able to obtain substitute
content, or that such substitute content will be comparable in quality or cost
to our existing horseracing content. Our competitors currently offer content
similar to ours. Our ability to compete successfully will depend on our ability
to continue to obtain desirable horseracing content.
7
<PAGE>
New regulatory and legal issues may restrict or eliminate our means of
conducting business.
New federal or state statutes or regulations, including the Federal
Wire Act, which is the statutory regime that applies to pari-mutuel wagering, or
new interpretations under existing statutes or regulations, may have a material
and adverse effect on our business, operating results and financial condition.
The Federal Wire Act prohibits interstate and international
transmission of wagers, but permits interstate and international transmission of
information assisting in placing wagers if betting on a particular event is
legal at both the transmission's point of origin and terminus. We have 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 rather than constituting the wager itself. We believe that this
distinction places our 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 the telephone wagering on horseracing.
The telephone account wagering systems conduct their business subject
to the approval and sanction of state racing commissions. Within the United
States, forty-two states permit some form of pari-mutuel wagering, eight
specifically have legalized pari-mutuel wagering, five of those permit
interstate wagering and six prohibit pari-mutual wagering.
The Kyl Bill, which is currently under consideration, is designed to
control wagering activity on the Internet. However, the Kyl Bill mainly targets
off-shore casinos accepting bets over the Internet and any Internet service
providers that facilitate this form of wagering. The Kyl Bill has specific
exemptions for horse-race wagering, allowing telephone account wagering and
simulcasting if conducted between states in which these activities are legal.
Use of a United States satellite could subject us to the scope of the
Federal Wire Act, 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, for
example, distribution via a United States satellite of live horseracing
coverage, with associated wagering, could potentially be terminated upon demand
by an appropriate law enforcement agency.
Government regulation and legal uncertainties relating to the Internet could
hurt our business.
We are currently subject to regulations applicable to businesses
generally, as well as laws and regulations specifically applicable to satellite
service and the Internet. Although currently our TrackPower service is available
only via satellite, we intend to deliver our service over the Internet in the
future. The laws of relating to satellite service and the Internet, however,
remain largely unsettled, even in areas where there has been some legislative
action. It may take years to determine whether and how existing laws such as
those governing intellectual property, privacy, libel and taxation apply to
satellite service and the Internet. In addition, due to the increasing
popularity and use of satellite service and the Internet, it is possible that a
number of laws and regulations may be adopted with respect to satellite service
and the Internet covering issues such as user privacy, security, pricing,
content, copyrights, distribution, taxation and characteristics and quality of
services.
Currently, there are few laws or regulations that specifically regulate
communications through satellite service and the Internet. For example, the
Telecommunications Act of 1996 sought to prohibit the transmission of certain
types of information and content over the Internet. In addition, several
telecommunications companies have petitioned the Federal Communications
Commission to regulate satellite service and Internet providers in a manner
similar to long distance telephone carriers and to impose access fees on such
providers. This could increase the cost of transmitting data via satellite or
over the Internet. Finally, state tax laws and regulations relating to the
provision of services via satellite or over the Internet are still developing.
If individual states impose taxes on services provided via satellite
8
<PAGE>
or over the Internet, our cost of providing our TrackPower service may increase
and we may not be able to increase the price we charge our subscribers to cover
these costs. Any new laws or regulations or new interpretations of existing laws
and regulations relating to satellite service or the Internet could have a
material and adverse effect on our business, operating results and financial
condition.
Our board of directors can issue preferred stock with rights adverse to the
holders of common stock.
After the offering, our board of directors will be authorized, without
further stockholder approval, to determine the provisions of and to issue an
unlimited number of shares of preferred stock. Issuance of preferred shares with
rights to dividends and other distributions, voting rights or other rights
superior to the common stock could be adverse to the holders of common stock.
Our articles of incorporation provide director and officer indemnification (and
indemnification of our employees and agents) if certain conditions are met.
We may have to spend significant resources indemnifying our officers,
directors, employees and agents or paying for attorneys' fees, damages or other
amounts to dispose of suits or proceedings caused by their conduct. Our articles
of incorporation also provide for the elimination in certain circumstances of
the personal liability of our directors for monetary damages for breach of their
fiduciary duty. Consequently, subject to applicable law and to certain
exceptions in our articles of incorporation, none of our directors will be
personally liable to us or to our stockholders for monetary damages for breach
of fiduciary duty as a director.
The Wyoming Business Corporation Act provides for broad indemnification
by corporations of their officers and directors, and our articles of
incorporation allow indemnification of our directors and officers, and also
eliminates the personal liability of directors for breach of their fiduciary
duty, to the fullest extent permitted under applicable law.
Our articles of incorporation, our bylaws and Wyoming law contain provisions
that could discourage a takeover.
There are provisions in our articles of incorporation, our bylaws and
Wyoming law that make it more difficult for a third party to obtain control of
TrackPower, even if doing so would be beneficial to our stockholders. For
example, TrackPower has the authority to issue an unlimited number of shares of
both common stock and preferred stock. The articles of incorporation provide
that each share of common stock will be of the same class without qualification,
limitation or restriction, each with one vote per share of stock on all matters
voted upon by the shareholders. However, the articles of incorporation also give
the Board of Directors the authority to create classes or series of common stock
and to determine whether the common stock will have full, limited, contingent,
or no voting power and to determine the designations, preferences and relative
rights, and the qualifications, limitations and restrictions, which will be
applicable to the common stock. The Board is also authorized to determine the
classes or series of preferred stock and their respective powers, preferences,
rights, limitations and restrictions. Additionally, the acquisition of
TrackPower may be made more difficult or expensive by the following: if the
shareholders of TrackPower wish to call a special shareholders' meeting, at
least twenty percent (20%) of the total voting power must make a written demand
on TrackPower to call such a meeting. Additionally, while the shares of each
class or series of common stock must be alike in every particular and be of
equal rank with the same power, preferences, rights, limitations and
restrictions, the Board has the authority to establish classes or series of
common stock, and to construct preferences, relative rights, limitations,
restrictions, and differences in voting powers as between the different classes
or series of shares of common stock.
9
<PAGE>
We face risks relating to systems development and rapid technological changes.
Our market is characterized by rapidly changing technologies and
customer demands. The life cycle of our TrackPower service is difficult to
estimate. If we cannot keep pace with these changes, our TrackPower service will
become obsolete and unmarketable and our business will suffer. The recent growth
of the Internet and of live horseracing video technology and the intense
competition in our industry exacerbate these characteristics. We need to enhance
and improve the customer service features, functions and responsiveness of our
TrackPower service and that keep pace with continuing changes in information
technology and customer requirements. We may not be successful in developing and
marketing enhancements to the TrackPower service or new systems or services that
respond to technological change or customer demands, and our business may suffer
as a result.
Software we use could contain defects.
Complex software such as the software developed for us by third parties
may contain errors or defects, especially when first implemented or when new
versions are released, that may be very costly to correct. Defects or errors
also could result in downtime and our business could suffer significantly from
any resulting adverse customer reaction, negative publicity and harm to our
reputation.
Satellite programming signals have been pirated, which could cause us to lose
subscribers and revenue.
The delivery of subscription programming requires the use of encryption
technology to protect against signal theft and piracy. If our satellite service
providers do not promptly correct a compromise in their encryption technology,
it would materially and adversely affect our business, operating results and
financial condition and our ability to contract for video and audio services
provided by programmers.
Complex broadcasting technology that we use could fail or become obsolete.
Technology in the satellite television industry is in a rapid and
continuing state of change as new technologies develop. We cannot assure you
that we and our suppliers will be able to keep pace with technological
developments. In addition, delays in the delivery of components or other
unforeseen problems in our partner's direct broadcast satellite system may occur
that could adversely affect performance or broadcast of our service and could
have an material and adverse effect on our business, operating results and
financial condition. Further, in the event that a competitive satellite receiver
technology becomes commonly accepted as the standard for satellite receivers in
the United States, we would be at a significant technological disadvantage.
We depend on the continued usage and development of the Internet infrastructure.
We believe that we will come to depend on the delivery of our service
over the Internet for revenue and, therefore, that the increased use of the
Internet for commerce is important for our business to grow. Accordingly, our
success depends in large part on the continued development of the infrastructure
for providing Internet access and services, which we do not control. The
Internet could lose its viability or its usage could decline due to many
factors, including:
o delays in the development of the Internet infrastructure;
o power outages;
o disruptions due to the inability of computer systems to
recognize the year 2000; o security and privacy concerns;
o lack of cost-effective, high-speed and consistent service;
o the adoption of new standards or protocols for the Internet;
and
10
<PAGE>
o changes in governmental regulations, including taxation,
intellectual property and liability regulations.
We cannot be certain that the infrastructure or complementary services
necessary to maintain the Internet as a useful and easy means of transferring
information and data will be developed or that, if they are developed, the
Internet will remain a viable channel for our TrackPower service. The Internet
infrastructure may not support the demands that growth may place on it and the
performance and reliability of the Internet may decline.
We may also incur substantial costs to keep up with changes surrounding
the Internet. Any costs we incur may have a material and adverse effect on our
business, operating results and financial condition.
We face substantial competition.
There are several competitors in operation that are attempting to
address the shortcomings of the existing wagering arrangements and secure
advantageous market positions in the live horseracing video market.
YouBet.com. The YouBet model is a personal computer service that
accepts wagers from subscribers' computers over a virtual private network
resembling a countrywide Intranet. All of the wagering will occur through the
Ladbrokes wagering hub based on a partnership with Ladbrokes in Pennsylvania.
YouBet earns a percentage of wagering for facilitating the transactions. YouBet
has developed a good customer interface and access to quality racing product.
YouBet has been in operation for over one year and, we believe, has several
thousand subscribers.
Television Games Network (TVG). TVG is developing a cable and satellite
television channel, The Television Games Network, which will utilize a set-top
box for wagering via interactive television technology. TVG is focused on
increasing awareness of horseracing and developing new horseracing fans and has
content agreements with many major tracks. TVG does not broadcast full cards in
an uninterrupted manner, but rather picks and chooses certain races.
The Racing Network (TRN). We believe that the TRN service will be
similar to our service but will not offer interactive wagering. TRN has launched
a four-channel network, which includes dog, thoroughbred and harness racing. We
believe that this system will utilize a studio show to switch between multiple
tracks on one channel. The system uses a host to comment on all of the carried
tracks.
Off-Shore Betting. While numerous offshore web sites exist, they are
focused on betting on sports other than horseracing and are also generally
unable to receive a video signal. In the United States it is illegal to wager
using these systems.
We may be unable to manage our growth and may face capacity constraints.
Our ability to implement our business plan successfully in a rapidly
evolving market requires effective planning and growth management. If we are
unable to manage our growth, we may not be able to implement our business plan,
and our business will suffer as a result. We expect that we will have to address
potential growth in the number of customers, to expand our system, service
offerings and existing operations, particularly those relating to marketing and
customer service and to pursue other market opportunities. We expect that we
will also need to continue to improve our financial systems, procedures and
controls, and will need to expand, train and manage our work force, particularly
our information technology staff. Furthermore, we expect that we will need to
continue to manage multiple relationships
11
<PAGE>
with various customers, Internet and satellite service providers and other third
parties to maintain control over our strategic direction as the live horseracing
video market evolves.
Our management and operating systems may be strained by these efforts
and we may be unable to complete in a timely manner necessary improvements to
our operating systems, procedures and controls to support our future operations.
If we cannot manage our anticipated growth effectively, our business, operating
results and financial condition will be materially and adversely affected.
We depend on the satisfactory performance, reliability and availability
of our content service providers, network infrastructure and subscriber support
system. These operating systems are critical to our reputation and our ability
to retain and attract subscribers and to maintain adequate subscriber service
levels. Any significant capacity restraints could have a material and adverse
effect on our business, operating results and financial condition.
International expansion could result in financial losses.
We intend to attempt to expand significantly our international
marketing and sales efforts. We have limited experience in marketing, selling
and distributing our TrackPower service internationally. International
operations are subject to a number of inherent risks, including the following:
o recessions in foreign economies;
o political and economic instability;
o fluctuations in currency exchange rates;
o potentially adverse tax consequences;
o the burdens of complying with a wide variety of
foreign laws and changing regulatory requirements; and
o uncertain or reduced protection for intellectual property
rights in some countries.
To the extent these or other factors inhibit our ability to market and
sell our TrackPower service outside the United States, our business, operating
results and financial condition could be materially and adversely affected.
We may have future capital needs.
We may need to raise funds if the marketing of our TrackPower service
is not as successful as anticipated and it takes a longer time to generate
significant revenues, if our expansion is otherwise delayed, if we attempt to
develop new or enhanced systems or services or to expand more rapidly or if
competitive pressures or technological changes are greater than anticipated. If
additional funds are raised through the issuance of common stock or securities
convertible into or exchangeable for common stock, the percentage ownership of
our stockholders at the time will decrease and they may experience additional
dilution. In addition, any convertible or exchangeable securities may have
rights, preferences and privileges more favorable than those of the common
stock. If additional financing is needed, we cannot assure you that it will be
available on reasonable terms or at all. If additional financing is needed and
is not available, we may not be able to fund necessary enhancements to our
technology, to develop new systems or services or otherwise expand our business,
and our business, operating results and financial condition will be materially
and adversely affected.
We are dependent on our intellectual property.
We believe that our success depends, in large part, on protecting our
intellectual property in the United States and in foreign countries. Other than
certain trademarks and patents, most of our intellectual property consists of
proprietary or confidential information that is not subject to patent or similar
12
<PAGE>
protection. Competitors may independently develop similar or superior services,
software or business models.
We cannot assure you that we will be able to protect our intellectual
property. There is no way to assure that third parties will not try to copy our
service or business model or use our confidential information to develop
competing services. Although we have applied for trademark protection for the
TrackPower name, this name is not currently a registered trademark in the United
States. We cannot assure you that we will be able to secure significant
protection for this trademark. It is possible that our competitors or others
will adopt product or service names similar to TrackPower, thereby impeding our
ability to build brand identity and possibly confusing customers. Legal
standards relating to the validity, enforceability and scope of protection of
certain proprietary rights in Internet and satellite-related businesses are
uncertain and still evolving. As a result, we cannot predict the future
viability or value of our proprietary rights. Policing unauthorized use of our
technology is difficult and expensive. The laws of other countries may not
adequately protect our intellectual property.
We also cannot assure you that our business activities and products
will not infringe upon the proprietary rights of others, or that other parties
will not assert infringement claims against us. Any such claims and any
resulting litigation, should it occur, could subject us to significant liability
for damages and could result in invalidation of our proprietary rights as well
as distracting management and requiring us to enter into costly and burdensome
royalty and licensing agreements. Such royalty and licensing agreements, if
required, may not be available on terms acceptable to us, or may not be
available at all. In the future, we may also need to file lawsuits to defend the
validity of our intellectual property rights and trade secrets, or to determine
the validity and scope of the proprietary rights of others. Such litigation,
whether successful or unsuccessful, could result in substantial costs and
diversion of resources.
We also rely on a variety of technologies that we license from third
parties. We cannot assure you that these third-party technology licenses will
continue to be available to us on commercially reasonable terms. If we lose any
such licenses, or if we are unable to maintain or obtain upgrades to any of
these licenses, it could delay completion of our proprietary software
enhancements until equivalent technology is identified, licensed or developed
and integrated.
We depend on our key personnel and we will need to attract and retain additional
personnel.
We are substantially dependent on the continued services and on the
performance of our executive officers and other key employees. We do not
maintain key person life insurance policies. Although many of our executive
officers and key employees have entered into employment agreements, none of
these agreements prevents any of them from leaving TrackPower. The loss of the
services of any of our executive officers or other key employees could
materially and adversely affect our business, operating results and financial
condition. If we do not succeed in retaining our personnel and in attracting the
required number of new employees, our business, operating results and financial
condition could be materially and adversely affected. In addition, we might not
be able to prevent key personnel, who may leave our employ in the future, from
disclosing or using our technical knowledge, practices or procedures.
Furthermore, we believe that our success will also depend upon our
ability to attract, train and retain highly skilled marketing, sales and
customer service personnel who have the required technical knowledge.
Competition for employees with their skills is intense, and we expect that it
will continue for the foreseeable future. We have from time to time experienced
difficulty in locating candidates with appropriate qualifications.
We may not be successful in attracting or retaining the required
personnel, which could have a material and adverse effect our business,
operating results and financial condition.
13
<PAGE>
Problems related to the year 2000 issue could require us to incur unanticipated
delays and expenses.
The year 2000 issue exists because many computer systems and
applications use two-digit fields to designate a year. Date-sensitive computer
systems and programs may fail to recognize or correctly process the year 2000 as
the century date change approaches or occurs. This inability properly to
recognize or address the year 2000 may cause systems errors or failures that
could seriously disrupt or prevent normal business operations. We rely on
computer programs and systems in connection with our internal and external
communication networks and systems, accounting and financial systems and other
business functions. Based on our design process and assessment to date, we
believe the current versions of our systems and services are year 2000
compliant. However, we cannot assure you that our programs designed to minimize
the impact of the transition to the year 2000 on our electronic date-sensitive
equipment, including the equipment at our outsourced function locations, will be
completely successful or that the costs of implementing them will not exceed our
current estimates. If they are not, the date change from 1999 to 2000 could have
a material and adverse effect on our business, operating results and financial
condition. The full extent of any adverse impact on our business is impossible
to determine.
Our business depends on the satisfactory performance and reliability of
the external communication and computer networks, systems and services integral
to satellite transmissions. These networks, systems and services are maintained
or provided by third parties and affect the ability of our customers to access
our services. We also rely on other systems and services that third parties
provide to our customers. We cannot assure you that the third parties upon which
our business depends will achieve year 2000 compliance. Any failure of
third-party networks, systems or services upon which our business depends could
have a material and adverse effect on our business, operating results and
financial condition.
As a result, the success of our plan to address year 2000 issues
depends in part on parallel efforts being undertaken by third parties. We have
begun to identify and initiate communications with third parties whose networks,
systems or services are critical to our business to determine the status of
their year 2000 compliance. We cannot assure you that all such parties will
provide accurate and complete information, or that all their networks, systems
or services will achieve full year 2000 compliance in a timely fashion. The most
reasonably likely worst-case scenario for us resulting from year 2000 issues is
that third-party noncompliance would disrupt, reduce or eliminate for a period
of time the ability of our subscribers to access our service. If these
occurrences are frequent or long in duration, they could have a material and
adverse effect on our business, operating results and financial condition. The
compliance of third-party global, national and local communications networks is
not within our control. Accordingly, a contingency plan for this worst-case
scenario does not exist, and we do not believe we will be able to develop one.
Our stock price may be extremely volatile.
The market price of our common stock is likely to fluctuate
substantially in the future. Fluctuations in the market price of our common
stock may affect our visibility and credibility in the market. Furthermore,
these fluctuations may be unrelated to the performance of our business.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This prospectus contains a number of forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as it may be amended
from time to time, and Section 21E of the Securities Exchange Act of 1934, as it
may be amended from time to time. Specifically, all statements other than
statements of historical facts included in this prospectus, or incorporated by
reference in this
14
<PAGE>
prospectus, regarding our financial position, business strategy and plans and
objectives of management for future operations are forward-looking statements.
These forward-looking statements are based on the beliefs of management, as well
as assumptions made by and information currently available to management. When
used in this prospectus, including the information incorporated by reference,
the words anticipate, believe, estimate, expect, may, will, continue and intend,
and words or phrases of similar import, as they relate to our financial
position, business strategy and plans, or objectives of management, are intended
to identify forward-looking statements. These cautionary statements reflect our
current view regarding future events and are subject to risks, uncertainties and
assumptions related to various factors which include but are not limited to
those listed under the heading Risk Factors starting on page 6 and other
cautionary statements in this prospectus and in the information incorporated in
this prospectus by reference.
Although we believe that our expectations are reasonable, we cannot
assure you that our expectations will prove to be correct. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described in this prospectus as anticipated, believed,
estimated, expected or intended. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by these cautionary statements.
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statements of Operations Data:
12 mos ended 12 mos ended 12 mos ended 12 mos ended 9 mos ended 9 mos ended
Feb 28 Feb 28 Feb 28 Feb 28 Nov 30 Nov 30
1996 1997 1998 1999 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Two way radio sales 74,644 596,507 76,480
220 Mhz equipment sales 331,500 2,638,219
Midland royalties 43,990 11,375 10,125 7,909
TrackPower subscriptions 30,152
TrackPower wagering commissions 9,312
Other 851 4,430
-------------------------------------------------------------------------------------------------------------
Total revenues: 406,164 596,507 2,758,689 12,226 10,125 51,803
Costs and expenses:
Cost of two way radio sales 53,126 587,030 102,621
Cost of 220 Mhz equipment sales 272,800 2,158,893
General & administrative 737,438 923,795 693,982 1,242,796 955,500 3,763,509
Depreciation and amortization 65,700 89,430 53,271 44,866 62,554 38,441
Interest and Financing Expense 46,454 332,139 287,170 829,634
Other 318,989 228,654 943,851 175,620 (6,849) (28,463)
-------------------------------------------------------------------------------------------------------------
Total costs and expenses: 1,448,053 1,828,909 3,999,072 1,795,421 1,298,375 4,603,121
Net loss: (1,041,889) (1,232,402) (1,240,383) (1,783,195) (1,288,250) (4,551,318)
Other comprehensive income:
Unrealized holdings gains
(losses) on marketable securities 144,132 (128,776) (390,159) 13,801
Comprehensive loss: (1,041,889) (1,232,402) (1,096,251) (1,911,971) (1,678,409) (4,537,517)
Net loss per share of common stock (.13) (.07) (.05) (.07) (.07) (.16)
</TABLE>
The Company was in the wireless telecommunications business and
intended to provide two-way radio communications in the 220 MHz band. The
Company was the U.S. distributor for 800 MHz LTR Midland products but suspended
the distribution of two-way radios and sold all remaining 220 MHz equipment and
licenses during the year ended February 28, 1998.
15
<PAGE>
In January 1998, the Company acquired certain development stage assets
from Simmonds Capital Limited, including the TrackPower trademark and other
information and communications technology and contractual and intellectual
property rights. The technology is in use in the United States to provide the
satellite distribution of live horse-racing to subscribers homes and for placing
wagers through a state licensed telephone account wagering entity.
On July 1, 1999, the Company launched the TrackPower service under the
EchoStar service.
<TABLE>
<CAPTION>
Balance Sheet Data:
Feb 28 Feb 28 Feb 28 Feb 28 Nov 30
1996 1997 1998 1999 1999
<S> <C> <C> <C> <C> <C>
Current assets 794,576 2,661,298 1,237,950 646,064 175,731
Property and equipment 604,046 8,848 4,764 20,618 39,392
Other assets 602,470 1,344,599 600,084 571,984 474,447
---------------------------------------------------------------------------------------------------
Total assets 2,001,092 4,014,745 1,842,798 1,238,666 689,570
Current liabilities 144,035 1,295,460 414,937 1,732,213 1,696,462
Long term debt 564,254 540,896 158,337 - 2,730,000
---------------------------------------------------------------------------------------------------
Total liabilities 708,289 1,836,356 573,274 1,732,213 4,426,462
Shareholders' equity 5,725,442 7,843,430 8,030,816 8,179,716 9,473,888
Accumulated deficit (4,432,639) (5,665,041) (6,905,424) (8,688,619) (13,239,937)
Accumulated other
comprehensive income 144,132 15,356 29,157
---------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) 1,292,803 2,178,389 1,269,524 (493,547) (3,736,892)
Total liabilities and
shareholders' equity 2,001,092 4,014,745 1,842,798 1,238,666 689,570
</TABLE>
The Balance Sheet Data table set forth above summarizes actual data on
an actual basis.
CAPITALIZATION
The following table sets forth our capitalization as of November 30, 1999.
This table excludes the following shares:
o 1,850,000 shares of common stock issuable upon the exercise of stock
options outstanding under our employee stock options plans;
o 7,572,813 shares of common stock issuable upon the exercise of
outstanding warrants;
o 3,960,000 shares of common stock issuable upon conversion of
convertible debentures; and
o 3,960,000 shares of common stock issuable upon the exercise of warrants
that are issuable upon conversion of convertible debentures.
16
<PAGE>
Nov 30
1999
Long-term obligations 2,730,000
Shareholders' deficit:
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, 29,340,4012,934
Additional paid in capital 7,813,954
Common stock subscribed 7,500
Warrants issued for guarantee 649,500
Accumulated deficit (13,239,937)
Accumulated other comprehensive income 29,157
--------------
Total shareholders' deficit (3,736,892)
--------------
Total capitalization (1,006,892)
--------------
MARKET FOR OUR COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
Our common stock trades under the symbol TPWR in the over-the-counter
market 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 our common stock for the fiscal years ended February 28, 1999 and
1998.
<TABLE>
<CAPTION>
---------------------- -------------------------------- ----------------------------------
Fiscal Year Ended 2/28/99 Fiscal Year Ended 2/28/98
---------------------- -------------- ----------------- ----------------- ----------------
High Low High Low
---------------------- -------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
First Quarter .375 .20 .156 .062
---------------------- -------------- ----------------- ----------------- ----------------
Second Quarter .28 .115 .297 .047
---------------------- -------------- ----------------- ----------------- ----------------
Third Quarter .175 .08 .391 .141
---------------------- -------------- ----------------- ----------------- ----------------
Fourth Quarter .36 .08 .406 .125
---------------------- -------------- ----------------- ----------------- ----------------
</TABLE>
These quotations reflect only inter-dealer prices, without retail
mark-up, mark-down or commissions and may not represent actual transactions.
Shareholders
On November 30, 1999, we had approximately 208 shareholders of record.
Dividends
We have never paid a cash dividend on our common stock and do not
expect to pay one in the foreseeable future. Payment of dividends in the future
will depend on our earnings and cash requirements at that time.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
Our business has changed from the sale and distribution of two Midland
radios and the operation of 220 MHz analog dispatch licenses in fiscal year 1998
to our new TrackPower business initiative, the development of our Track Power
service which, in conjunction with Penn, provides a satellite-based in-home
electronics wagering system for horseracing content. Subject to legal and
regulatory restrictions, we intend to add other sporting events later. Revenues
during fiscal year 1999 were nominal as a result of the launch of our TrackPower
service during fiscal year 2000.
During fiscal 1999, we focused primarily on financing the launch of our
TrackPower service and negotiating business relationships for the future.
Although our new TrackPower business initiative began in the first half of
fiscal year 2000, we anticipate continued operating losses until we reach a
break-even level of subscribers. However, we cannot assure you that we will
reach a break-even level of subscribers.
On July 1, 1999 we relaunched the TrackPower service on four channels
under the EchoStar DishNetwork service with a subscription fee of $19.99 per
month or $125 per annum. During the three month period ended August 31, 1999, we
also began earning wagering commissions under an agreement with Penn National
Gaming, Inc. ("Penn Gaming"). Subsequent to the end of the quarter ended
November 30, 1999 and effective January 10, 2000, reduced the number of channels
to two and no longer charged a fee for the service.
The decision to reduce the number of channels and eliminate the
subscription fee was a significant step forward for the Company in response to
changes in the marketplace. The reduction in channels has reduced the satellite
transporter costs from $400,000 to $200,000 per month. Despite the reduction in
the number of channels, we will effectively double the capacity of the
previously-used four channel service by adding new switching and production
equipment. We will now focus on marketing the wagering opportunity to
horseracing fans. The free channels allow access to a larger audience. We will
also focus more resources on marketing its interactive WebTV(TM) and computer
platforms expected to be available in February 2000.
Television Games Network ("TVG"), a service similar to TrackPower which
is also free of charge, was launched in the fall of 1999 on EchoStar's
DishNetwork. TVG accepts wagering from three U.S. States. The Racing Network
("TRN"), also similar service on EchoStar's DishNetwork, charges $24.999 and
does not offer any wagering services. TrackPower's free channels will allow
access to may of the TVG and TRN customers. TrackPower has launched an extensive
marketing campaign offering the wagering opportunity to this audience.
We believe that the TrackPower service is oriented toward the more
serious core wagerer and therefore we have made the decision to focus on
wagering by eliminating the subscription fee. We are attempting to attract more
core wagerers to subscribe to the TrackPower service and begin wagering through
Penn Gaming, thereby increasing the amount of wagering commissions earned by the
Company.
We have also hired key spokespeople, such as D. Wayne Lukas, a top
thoroughbred trainer, and John Campbell, a top harness racing driver, to promote
the service and gain credibility with the horseracing fans. We also hired a top
handicapper and well-recognized wagering consultant to assist in marketing the
product to active heavy wagerers.
The decision to reduce to two channels from four has reduced monthly
fixed transponder fees from $400,000 to $200,000. We are of the opinion that if
the Company succeeds in accelerating the sing up rate of wagering account
holders, a breakeven level of operations will occur sooner. In addition, due
18
<PAGE>
to the reduce costs the risk of being unable to raise sufficient financing to
fund interim operating losses has been reduced.
In November 1999, we changed the marketing campaign to refocus on
attracting bettors to the TrackPower service rather than attracting mass levels
of satellite subscribers. The marketing campaign has a specific focus on
attracting heavy wagerers. Initial plans include offering a loyalty program and
running a large handicapping tournament, the TrackPower National Handicapping
Challenge with a total purse of $200,000. We believe that the key statistics
that will measure the performance of the Company have shifted from number of
satellite subscribers to wagering revenue and the number of wagering accounts,
number of active account holders, and the amount wagered per active account.
Results of Operations
For the three month period ended November 30, 1999
Our revenues for the three month period ended November 30, 1999 were
$37,765, representing Midland royalty revenue of $3,393, TrackPower net
subscription revenue of $25,489, wagering commissions of $8,750 and
miscellaneous revenue of $133.
Our operating expenses totaled $1,996,100 during the three month period
ended November 30, 1999. Transponder fees were $1,200,000, advertising and
marketing costs were $300,421, general and administrative expenses were
$225,923, wages and consulting costs totaled $194,756 and management fees to
Simmonds Capital totaled $75,000. As described previously transponder fees have
been reduced to $200,000 per month effective January 10, 2000.
Other expenses totaled $47,004 during the three month period ended
November 30, 1999, including interest of $34,034, depreciation of capital assets
and amortization of Midland distribution rights and TrackPower technology rights
of $12,970.
We recorded an unrealized holding loss of marketable securities of
$3,773 during the three month period ended November 30, 1999. The loss is
attributable to the declined in the market value, after adjusting for a one for
five share consolidation, of Fifty Plus Network (formerly Ventel Inc.) shares
from $0.67 to $0.425 during the quarter. We held 15,400 Fifty Plus Network
common shares at November 30, 1999.
Our net loss during the three month period ended November 30, 1999
(prior to unrealized holding gains or losses on marketable securities) was
$2,005,339 and $2,009,112 after unrealized holding loss on marketable
securities.
For the three month period ended November 30, 1998
During the three month period ended November 30, 1998, we collected
$2,378 on Midland distribution rights.
We sold 87,400 Intek shares during the three month period ended
November 30, 1998 at an average price of $1.47 for total proceeds of $128,327
representing a gain of $5,421. we also sold 70,000 Fifty Plus Network Inc.
(formerly Ventel Inc.) shares at an average price of approximately $0.10 for
total proceeds of $7,250, representing a gain of $1,428.
Our operating expenses for the three month period ended November 30,
1998 were $235,563 consisting of $112,178 in wages and consulting costs, $75,000
in management fees to Simmonds Capital and $48,385 in general and administrative
costs.
19
<PAGE>
Our financing costs totaled $25,522 during the three month period ended
November 30, 1998, consisting primarily of interest.
The closing trading value of our investment in Intek common shares
increased from $1.56 at August 31, 1998 to $1.84 at November 30, 1998 and the
trading value of Fifty Plus Network, Inc. common shares closed at $0.52.
Accordingly, we recorded an unrealized holding gain on marketable securities of
$131,481 during the three month period ended November 30, 1998.
During the three month period ended November 30, 1998, our
comprehensive loss was $141,227 or $0.01 per share.
For the nine month period ended November 30, 1999
Our revenues for the nine month period ended November 30, 1999 were
$51,803, comprised of net TrackPower subscription revenues of $30,152, Midland
distribution right royalties of $7,909, TrackPower wagering commissions of
$9,312 and miscellaneous revenues of $4,430.
Our operating expenses for the nine month period ended November 30,
1999 were $3,763,509, comprised of $2,200,00 in EchoStar transponder fees,
general and administrative expenses of $526,004, advertising and marketing costs
of $450,425, wages and consulting costs of $362,080 and management fees paid to
Simmonds Capital of $225,000.
Other expenses for the nine month period ended November 30, 1999 were
$839,612, consisting of one time $649,500 non cash guarantee fee, $147,409 of
interest on notes payable and preferred shares, non-cash financing costs of
$32,725, a net gain on sales of marketable securities of $28,463 and
depreciation of capital assets and amortization of Midland distributions rights
and TrackPower technology rights of $38,441.
Our one time non-cash guarantee fee represents the estimated valued of
guarantee provided by Simmonds Capital on the Company's obligations under a
satellite distribution services agreement with EchoStar.
During the six month period ended August 31, 1999, we sold 256,800
Intek common shares for net proceeds of $635,903 and 270,000 Fifty Plus Network
(formerly Ventel, Inc.) shares for net proceeds of $16,696. The net gain of
sales of Intek shares was $29,587 and the loss on sales of Fifty Plus Network
shares was $1,124.
Our net loss for the nine month period ended November 30, 1999, prior
to unrealized holding gains or losses on marketable securities, was $4,551,318.
We recorded an unrealized holding gain on marketable securities of
$13,801 due to the appreciation in the market value of Fifty Plus Network shares
form $0.33 on February 28, 1999 to $0.425 on November 30, 1999.
Our comprehensive loss for the nine month period November 30, 1999 was
$4,537,517 or $0.16 per share.
For the nine month period ended November 30, 1998
Our revenues during the nine-month period ended November 30, 1998 were
$10,125, consisting of Midland royalty revenues.
20
<PAGE>
Our operating expenses, for the nine month period ended November 30,
1998 were $955,500 consisting of $397,664 in wages and consulting costs,
$225,000 in management fees to Simmonds Capital, $284,058 in general and
administrative costs and $48,778 of nonrecurring costs to close down the former
head office.
Other expenses totaled $342,875, during the nine month period ended
November 30, 1998, and consisted of $287,170 in non-cash financing costs (common
shares issued in connection with notes payable for the purpose of funding the
operations of the company), a gain of $6,849 on the sale of marketable
securities and depreciation of capital assets and amortization of Midland
distribution rights totaling $62,554.
During the nine month period ended November 30, 1998, we recorded an
unrealized holding loss on marketable securities of $390,159 due to the decline
in value of the Company's Intek and Fifty Plus Network shares.
Our comprehensive loss was $1,678,409, $0.07 per share, during the nine
month period ended November 30, 1998.
Fiscal year ended February 28, 1999
We had a comprehensive loss of $1,911,971 during the fiscal year ended
February 28, 1999 consisting of an unrealized holding loss on marketable
securities of $128,776 and a net loss from operations of $1,783,195. We paid
dividends of $67,500 to a related party on that party's shares of our
convertible preferred stock.
We recorded an unrealized holding loss on marketable securities of
$128,776 arising from holding shares of Intek Global Corporation and Ventel Inc.
common stock during the year. The price per share of Intek Global fell from
$2.67 on February 28, 1998 to $2.313 on February 28, 1999 and the price per
share of Ventel Inc. fell from $0.069 on February 28, 1998 to $0.066 on February
28, 1999.
Our net loss from operations during the current year included a loss of
$128,238 from the disposition of 161,581 shares of Intek Global Corporation
common stock and 997,446 shares of Ventel Inc. common stock.
We earned $11,375 in royalty revenue under a sub-license of Midland
distribution rights to certain territories in western Canada. As a result of low
royalty revenue during the fiscal year ended February 28, 1999 and the
expectation that royalties will remain at these lower levels, we wrote down the
Midland distribution rights by $47,382.
General and administrative expenses decreased 11% from $606,473 in the
fiscal year ended February 28, 1998 to $541,367 in the fiscal year ended
February 28, 1999. Our expenses relates to our Track Power service, which
consisted primarily of consulting costs attributable to the development of our
new business, amounted to $401,429.
We recorded amortization of $19,921 on our TrackPower trademark and
other intellectual property rights during the current year.
We financed our pre-operating losses by borrowing using our marketable
securities as security. We completed two financing of notes payable during the
current year for a total of $850,000. We incurred interest and other financing
related costs totaling $319,542 under these notes.
Our basic and diluted loss per share was $.07 during the current year.
21
<PAGE>
Fiscal year ended February 28, 1998
Revenue from operations during the fiscal year ended February 28, 1998
totaled $2,758,689, which included the sale of 22 of our 220 Mhz licenses for a
total of $2,638,219, which represented a gain of $479,326, and the sale of our
international Midland distribution rights for the territories of Mexico, South
America, Pacific Rim, Australia, New Zealand, Thailand and Southeast Asia for
$292,500, at a loss of $324,375.
Total costs and expenses, excluding the cost of sale of our 220 Mhz
systems, were $1,840,179 in 1998. General and administrative expenses were
$606,473. The basic and diluted loss per common share in the fiscal year ended
February 28, 1998 was $0.05.
We expect to experience material pre-operating losses attributable to
the implementation of our TrackPower service.
Financial Condition
Our total assets decreased from $744,786 on August 31, 1999 to $689,570
on November 30, 1999. The decrease is primarily the result of a $59,443 decrease
in cash offset by a $3,773 reduction in the value of our marketable securities.
Our decrease in cash during the three month period ended November 30,
1999 was caused by $1,258,251 of new funding being insufficient to offset the
$1,315,062 used in operations and $2,632 in capital asset acquisitions.
The value of our marketable securities, which consists of 15,400 Fifty
Plus Network common shares, decreased from $10,318 at August 31, 1999 to $6,545
at November 30, 1999. At November 30, 1999 our marketable securities consisted
of 15,400 shares of Fifty Plus Network valued at a market price of $0.425 per
share.
Our working capital deficit, after adjusting for related party amounts,
increased from $411,607 at August 31, 1999 to $1,177,982 at November 30, 1999.
The change resulted from a significant increase in accounts payable relating to
transponder fees.
Our shareholders equity deficit increased from $1,756,031 at August 31,
1999 to $3,736,892 at November 30, 1999. The increase in the deficit during the
current quarter is a result of $2.0 million comprehensive loss. We expect the
deficit to continue to rise until a break-even level of operations is achieved.
Options exercised to purchase common shares of the Company by
management during the three month period ended November 30, 1999 totaled 188,333
shares for an increase in stockholders capital of $28,251.
During the fiscal year ended February 28, 1999, total assets decreased
from $1,842,798 to $1,238,666. The decrease is directly proportional to the drop
in marketable securities during the year. As a result of unrealized holding
losses and sales of securities, marketable securities decreased from $1,209,844
to $616,880. We sold 161,581 shares of Intek common stock and 997,446 shares of
Ventel common stock during the year.
22
<PAGE>
Our working capital ratio declined from 2.98 at the beginning of the
fiscal year ended February 28, 1999 to 0.38 at the end of the fiscal year ended
February 28, 1999. However, we owe approximately $652,000 of our current
liabilities as at February 28, 1999 to related parties. In addition, subsequent
to the end of the fiscal year ended February 28, 1999, all $595,000 in notes
payable were either converted to our common equity or were repaid from the
proceeds of a new private placement.
Shareholders' equity decreased from $1,269,524 to a deficit of
$493,547. This decrease is attributable to common stock and paid in capital
increasing by $183,395 as a result of issuing common stock from treasury which
was more than offset by the accumulated deficit increasing by $1,783,195 and the
accumulated holding gain decreasing by $128,776.
Liquidity and Capital Resources
Our ability to continue to fund losses arising from costs and expenses
exceeding revenue is connected to its ability to raise additional financing
prior to achieving a break even level of operating results. We have and continue
to raise funds primarily by issuing new convertible debt.
At November 30, 1999 there were $2,730,000 outstanding in convertible
debentures. Debentures totaling $1,250,000 issued on June 10, 1999 which were
convertible into common shares of the Company at $1.25, were converted, on
December 17, 1999 by special resolution of the Board of Directors at $.50 per
share. At November 30, 1999 there was $1,480,000 face value in convertible
debentures outstanding with conversion privileges at $.60 per share, which were
also amended, by special resolution of the Board of Directors, to adjust the
conversion rate to $.50. Both special resolutions were approved to assist us in
raising sufficient financing to continue to fund the operating losses.
As of January 14, 2000 we have received commitments for the issuance of
$5,000,000 in new convertible debentures, of which $3,626,000 have been
received.
Simmonds Capital has provided two guarantees to the Company: a general
guarantee of all the obligations of the Company until March 1, 2000 and a
guarantee of our obligations under the Transponder Encryption Services
Corporation agreement. In exchange, during the quarter ended August 31, 1999,
Simmonds Capital received 1,000,000 warrants to purchase our common stock at
$2.50, valued at $649,500, and also received the option to convert the $1.5
million earnout, received in the January 1998 transaction, into 750,000 shares.
The earnout was based on 10% of annual EBITDA up to a maximum of $1,500,000,
after the Company's retained earnings become positive, Simmonds Capital has
funded and will continue to fund day-to-day operating case flow shortages.
We financed the development of our TrackPower service during the
current fiscal year by issuing notes payable totaling $850,000 in two
transactions of $500,000 and $350,000. Our marketable securities served as
security for the notes payable. Prior to the end of the fiscal year, we repaid
$255,000 of the notes from proceeds of the sale of securities.
In addition, Simmonds Capital Limited, an Ontario corporation ("SCL"),
a related party, funded a portion of our operations during the fiscal year ended
February 28, 1999. On June 10, 1999, SCL committed to provide us with additional
funding for one year, in the event that we are unable to fully support the
development of our TrackPower service. Furthermore, SCL has guaranteed our
obligations under a satellite distribution services agreement with EchoStar.
23
<PAGE>
We cannot assure you that we will generate sufficient revenues to fund
our operations.
Year 2000
We are developing our new TrackPower service to be year 2000 compliant.
We will, prior to consummating any new business contracts, require year 2000
compliance certification from the contracting party.
We do not know the incremental cost of year 2000 compliance at this
time, but we believe that due to our outsourcing of the majority of our
operating tasks, the cost will not be significant. If the systems of our
business partners are not year 2000 compliant at December 31, 1999, this may
have a material and adverse effect on our business, operating results and
financial condition. See "Problems related to the year 2000 issue could require
us to incur unanticipated delays and expenses" on page 14.
Inflation
Inflation has not had a significant impact on TrackPower during the
last two fiscal years.
BUSINESS
TrackPower, Inc.
Industry Background
During the last two decades, there has been an increase in off-track
wagering, which involves wagering without actually visiting a racetrack. We
believe that the basis for this trend is the desire for convenience. Most tracks
in the United States now import and export simulcast video of live horseracing
occurring within the United States. We believe that importing video of premier
tracks to a racetrack or an off-track wagering facility will attract significant
wagering. We plan to capitalize on this on-track to off-track trend by providing
the very same full card video signal available in an off-track facility directly
to our subscribers' home or place of work.
According to a report prepared for the American Horse Council
Foundation by Barents Group LLC in December 1996, referred to in this prospectus
as the Barents Report, over 7 million people participate in the horse industry
in the United States. It has been estimated that in 1997 horseracing wagering
exceeded $100 billion worldwide and $15 billion in the United States. We believe
that the horse industry contributes over $25 billion each year to the United
States Gross Domestic Product.
The majority of horseracing wagering is through either pari-mutuel
wagering, primarily in North America, or fixed-odds wagering, primarily in other
parts of the world such as the United Kingdom. In pari-mutuel wagering, the
entity accepting the wager, also known as the house, retains a percentage fee
from the total amount wagered in the pool. The house distributes the pool to tax
authorities, horsemen, through purses, and, normally, pays a fee to the
simulcast originator, and keeps the remainder as profit. Under pari-mutuel
wagering, the house bears no risk. Under fixed odds wagering, the house bears a
risk of possible loss. The house sets odds, collects all wagers and distributes
all amounts payable to winners. If the amount collected is less than the amount
paid out, the house must bear the resulting loss.
24
<PAGE>
We believe that a major portion of the wagering in the United States
is off-track. Off-track wagering includes telephone account wagering, off-track
wagering establishments and wagering on simulcasted races at other tracks.
Telephone account wagering involves establishing a wagering account with a
licensed account wagering entity, such as Penn National, depositing funds into
the account and then placing wagers, usually over a telephone.
Our TrackPower Service
We believe that our TrackPower service, when fully implemented, will
distribute live horseracing video to our subscribers' homes via satellite and a
number of other platforms and will enable our subscribers to place wagers using
interactive television technology. We intend to use our TrackPower service to
deliver the wages to a state license account wagering entity, but we will not
accept or place any wagering transactions.
Video Service
Since July 1, 1999, our TrackPower service has been broadcast by
Echostar's Dish NetworkTM, which has over 2.7 million current subscribers.
TrackPower's live video is currently broadcast digitally via the Dish NetworkTM
and, we believe, will provide an additional channel of streaming video via
broadband and 56K modems in the future. The Dish NetworkTM provides us with all
billing, customer service, technical infrastructure and other assistance, as
well as subsidized hardware which is available through EchoStar's 20,000 local
dealers. The Dish NetworkTM also broadcasts over 230 other channels, which are
available to TrackPower subscribers for additional monthly fees. In order to
receive our TrackPower service, a subscriber must purchase an 18-inch Dish
NetworkTM satellite dish and a Dish NetworkTM set-top box. The base model begins
at $149.00, while the top model, the DISHPlayerTM, is available at $199.00. The
DISHPlayerTM set-top box is a WebTV receiver in addition to a satellite
receiver. It has a hard drive and will be used to interact with our service.
Content
Currently our TrackPower service carries over thirty tracks, including
some of the most prestigious thoroughbred and standard bred tracks in the United
States.
Wagering Services
On July 9, 1999, we finalized an agreement with Penn, pursuant to which
Penn provides wagering services to our subscribers. Penn's wholly-owned
subsidiary, Penn National Race Course, a licensed pari-mutuel wagering facility
in the state of Pennsylvania, will accept the wagers through its existing phone
wagering system. Penn has agreed to pay us a fee of up to 4.75% of the gross
wagering through Penn National Race Course from our TrackPower subscribers in
exchange for using our video system and marketing their services to our
TrackPower subscribers.
Technology
Our TrackPower interactive wagering service will operate on a
highly-secure, closed-loop subscriber-based network. We have outsourced most of
the technology development required for our TrackPower service and will likely
continue to do so in the future. EchoStar is currently responsible for providing
all required technology and hardware for the continued operation and development
of the video aspect of our TrackPower service.
We recently finalized an agreement with eBet Ltd., or eBet, which
currently operates a wagering system in Australia and New Zealand, to provide
the interactive components of our TrackPower service,
25
<PAGE>
including the interactive wagering interface for both the computer and
interactive television platforms. This allows us to eliminate the capital
expenditures and technical risk of developing our own interactive interface.
TrackPower.com Features
Our TrackPower service is currently available on television through the
Dish NetworkTM service and will later, we believe, be available via computer.
Wagering is available via telephone account wagering today and, we believe, will
be available in the future via computer or via a television closed-loop
subscription network. We believe that our TrackPower service will be able to
provide real-time odds, past performances and statistical information in the
future via television and computer.
Marketing
There are three core audiences that we intend to focus on during the
first phase of our marketing strategy. The primary target market is large
handicappers/bettors, industry participants and current Dish NetworkTM
subscribers. We believe that there are currently over 7 million industry
participants and approximately 2.7 million Dish NetworkTM subscribers.
We intend to contact prospects in this market via different types of
media. The most significant will be direct mail campaigns, through handicapping
services, publications and industry organizations, using magazine and radio
advertising to reinforce name recognition of TrackPower.com.
We are currently building relationships with trade publications and
developing an alliance with companies such as the Daily Racing Form, or DRF. We
believe that we can increase industry leaders' and participants' awareness of
TrackPower.com through advertisements and editorials in these publications.
We are also conducting joint marketing programs with both the Dish
NetworkTM and Penn. We intend to contact Dish NetworkTM subscribers through bill
inserts, commercials, newsletters and entertainment magazines and Penn Telebet
account holders through direct mail, newsletters and live demonstrations.
We also intend to use telemarketing and a VIP program that will
encourage interactive wagering through Penn National and to conduct marketing
initiatives such as a guaranteed $10,000 Pick 6 with the DRF on Breeders Cup day
and a $200,000 National Handicapping Challenge contest during February 2000.
Revenue Sources
We believe that the revenues from our TrackPower service in its initial
horseracing form will stem from wagering commissions.
Wagering Revenue. Under pari-mutuel wagering, a state licensed wagering
entity, such as Penn National, retains a percentage fee from each accepted
wager. The wagering entity pays all statutory taxes and returns a portion of the
wagering revenue to horsemen in the form of purses. After these payments, the
wagering entity normally pays a fee to the simulcast signal originator and keeps
the remainder. Under the terms of our agreement with Penn, we receive a
percentage of up to 4.75% of the gross wager revenue from subscribers as payment
for providing video services.
26
<PAGE>
Expansion
Although our TrackPower service was launched as a horseracing service,
we also intend to expand our service offerings to include other sports involving
wagering, such as jai alai and dog racing, both of which are established
pari-mutuel sporting ventures that are popular in certain regions of the United
States.
In addition, subject to changes in the legal and regulatory frameworks,
we intend to eventually simulcast and process wagering on other live sports
events, such as football, baseball and basketball. Wagering on these sports is
currently only legal in the State of Nevada.
We believe that Canada may represent a significant horseracing market
for our TrackPower service. However, we believe that landing the TrackPower
video signal is not legal under current Canadian legislation. We are
investigating alternative signal delivery options.
We believe that substantial growth in revenue may be achieved by
entering certain markets such as Puerto Rico and Mexico. Puerto Rico currently
has a base of EchoStar subscribers who already possess the set-top box and
satellite dish required to receive our TrackPower service and who can become
TrackPower subscribers simply by calling EchoStar and ordering our service.
Management
Members of our management team have industry experience in broadcast
communications, project management, marketing to the racing industry and other
industries, as well as many years of participation in the racing industry
through owning and breeding horses. We believe that our current management team
is well suited to continue to develop and grow our business.
Hardware Sales
We plan to out-source as many functional tasks as possible. The
hardware required for our TrackPower service is available direct from EchoStar
or through the EchoStar network of approximately 20,000 dealers. Subscribers can
install the system themselves or contract the dealer to install it.
Corporate Information and Description of Property
We were incorporated on June 30, 1993 in Wyoming. The addresses and
telephone numbers of our principal executive offices are 67 Wall Street, Suite
2411, New York, NY 10005, (212) 804-5704 and 580 Granite Court, Pickering,
Ontario L1W 3Z4, (905) 839-1430.
LEGAL PROCEEDINGS
We are not presently party to any pending litigation the outcome of
which could reasonably be expected to have a material adverse effect on our
financial condition or results of operations.
DIRECTORS AND EXECUTIVE OFFICERS
Directors
John G. Simmonds, 49, was appointed chairman of the board of directors
and chief executive officer of TrackPower effective January 29, 1998. Mr.
Simmonds is the founder of Simmonds Capital
27
<PAGE>
Limited, or SCL, formerly Simmonds Communications Ltd., a company listed on the
Toronto Stock Exchange. Since 1991, Mr. Simmonds has served as chairman,
president and chief executive officer of SCL. SCL is involved in the wireless
communications business as a systems integrator and in the electronics business
as a manufacturer and distributor of electronic components and related products.
From 1994 to 1996, Mr. Simmonds served as chief executive officer of Intek
Global Corporation, formerly Intek Diversified Corp., a company listed on the
Nasdaq SmallCap Market. Intek is involved in the specialized mobile radio market
in the United States and owns and manages SMR licenses in the 200 MHz frequency.
Between September 1995 and November 1997, Mr. Simmonds served as the chairman of
Ventel Inc., a company listed on the Vancouver Stock Exchange. Ventel provides
secured loans to developing companies in the specialized radio market in the
United States. Mr. Simmonds was a member of the board of directors of Intek from
1994 until his resignation during 1998 and has resigned from the board of
directors of Ventel.
Kenneth J. Adelberg, 46, has been a director of TrackPower since April
1, 1996. Mr. Adelberg, who holds Bachelor of Science degrees in biophysics and
psychology from Pennsylvania State University, is the president and chief
executive officer of HiFi House Group of Companies, a founder and a director of
Republic First Bancorp and a founder and former director of U.S. Watts. Since
1995, Mr. Adelberg has been a director of Global Sports Inc., a company listed
on the Nasdaq SmallCap Market.
Lawrence P. Aziz, 52, has been a director of TrackPower since August
25, 1999. Mr. Aziz has occupied several senior management positions in the
office furniture manufacturing industry, including vice president of sales for
Biltrite Manufacturing for four years. In 1988, Mr. Aziz founded PBI Office
Interiors, a leading office furniture dealership offering interior design and
supplying products and services to major corporations and financial institutions
throughout the United States and Canada. Mr. Aziz continues to own and operate
PBI. Mr. Aziz is also a private pilot and maintains an active role with the
Canadian Cancer Society.
Charles Cernansky, 45, has been a director of TrackPower since August
1997. Mr. Cernansky has a securities principal registration with Pellinore
Securities Corp., a New York City-based broker-dealer, and, since 1992, has been
a principal of WestCap Partners, Inc., a Manhattan-based financial investment
and merchant banking consulting and advisory services firm. Mr. Cernansky is
experienced in business development and consults on overall corporate financial
functions, tax planning, corporate finance strategy and venture capital
activities and provides merger-acquisition assistance. Mr. Cernansky holds a
Bachelor of Science degree from SUNY College at Brockport, an M.B.A. from
Rensselaer Polytechnic Institute and a J.D. from Albany Law School of Union
University. Mr. Cernansky is an attorney and C.P.A. in the State of New York.
Ian Macdonald, 44, has been a director of TrackPower since June 1996.
Mr. Macdonald, who holds a Bachelor of Science degree in economics, an M.B.A. in
marketing and is a C.A., is the chairman and chief executive officer of The
Versatech Group Inc., an auto parts manufacturer listed on the Toronto Stock
Exchange. Mr. Macdonald has been managing director of Tri-Capital Management
Limited, a Toronto-based private merchant bank, since 1989.
Arnold K. Smolen, 57, has been a director of TrackPower since August
25, 1999. Mr. Smolen graduated from the Philadelphia College of Pharmacy and
Science with a Bachelor of Science degree in 1965. From 1974 to 1994, Mr. Smolen
owned and operated a chain of pharmaceutical stores. He is presently a
consultant of Northwest Tennis, Inc. and is executive vice president and
principal of Percival Financial Partners. Mr. Smolen has been actively involved
as a breeder of thoroughbred racehorses in the Mid-Atlantic area for over
twenty-five years and is a licensed owner in Maryland, West Virginia, Delaware,
New Jersey, Pennsylvania and New York.
28
<PAGE>
Executive Officers and Significant Employees
Gary N. Hokkanen, 43, was appointed chief financial officer of
TrackPower in February 1998. Mr. Hokkanen's principal occupation is an
accountant and he holds a Certified Management Accountant, or CMA, designation
from Society of Management Accountants of Ontario. Mr. Hokkanen has also been
vice president, finance/chief financial officer of SCL since July 1997. From
April 1996 to July 1997, Mr. Hokkanen was treasurer of SCL. From June 1994 to
April 1996 he was manager, finance & treasury of SCL. From May 1986 to June
1994, Mr. Hokkanen was manager, financial planning & analysis, with CUC
Broadcasting Limited, which was a privately-owned Canadian cable TV multiple
system operator prior to being acquired by Shaw Communications Inc.
Carrie J. Weiler, 40, joined the Simmonds group of companies in 1979.
Ms. Weiler has been secretary of TrackPower since February 1998 and was promoted
to vice president of corporate development for SCL and its divisions in 1994.
Ms. Weiler continues to serve in this capacity and is a key liaison between the
compensation and audit committees and the board of directors of SCL.
The Company's directors will serve until the next annual meeting of
shareholders and until their respective successors are duly elected and shall
have qualified. The By-laws of the Company provide that the number of directors
of the Company shall be fixed by the shareholders or the Board of Directors and
shall be not less than three or more than fifteen. The number has been fixed by
the Board of Directors at seven. The Company's Articles of Incorporation
provides that directors may be removed by the shareholders, with or without
cause, upon the affirmative vote of the holders of a majority of the votes cast
and at a meeting called for the purpose of such removal.
There are no family relationships among any of the directors or
executive officers of the Company.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the compensation
for services in all capacities for the fiscal years ended February 28, 1999,
February 28, 1998 and February 28, 1997 of those persons who were, during all or
part of the fiscal year ended February 28, 1998, the chief executive officer.
None of our other executive officers received compensation in excess of $100,000
in fiscal year ended February 28, 1999.
<TABLE>
<CAPTION>
- ------------------------------------------------------------- -------------------------------------------------------
Long Term Compensation
Annual Compensation
- ------------------------------------------------------------- -------------------------------------------------------
Awards Payouts
- ------------------------------------------------------------- ---------------- --------------------------------------
Restricted
Name and Principal Position Year Salary Bonus Other Annual Stock Awards Options/ LTIP
Compensation SARS(#) Payouts
- ------------------------------ -------- ---------- ---------- ---------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
John G. Simmonds 1999 (1) (1) (1) None 250,000 None
Chairman of the Board,
Chief Executive Officer and
President
- ------------------------------ -------- ---------- ---------- ---------------- ------------- ------------ -----------
1998 (1) (1) (1) N/A 250,000 N/A
- ------------------------------ -------- ---------- ---------- ---------------- ------------- ------------ -----------
1997 N/A N/A N/A N/A N/A N/A
- ------------------------------ -------- ---------- ---------- ---------------- ------------- ------------ -----------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------ -------- ---------- ---------- ---------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Gary N. Hokkanen 1999 (1) (1) (1) None 100,000 None
Chief Financial Officer
- ------------------------------ -------- ---------- ---------- ---------------- ------------- ------------ -----------
1998 (1) (1) (1) N/A 100,000 N/A
- ------------------------------ -------- ---------- ---------- ---------------- ------------- ------------ -----------
1997 N/A N/A N/A N/A N/A N/A
- ------------------------------ -------- ---------- ---------- ---------------- ------------- ------------ -----------
Carrie J. Weiler 1999 (1) (1) (1) None 200,000 None
Vice President and
Corporate Secretary
- ------------------------------ -------- ---------- ---------- ---------------- ------------- ------------ -----------
1998 (1) (1) (1) N/A 100,000 N/A
- ------------------------------ -------- ---------- ---------- ---------------- ------------- ------------ -----------
1997 N/A N/A N/A N/A N/A N/A
- ------------------------------ -------- ---------- ---------- ---------------- ------------- ------------ -----------
</TABLE>
(1) In connection with the acquisition of certain assets of SCL in January
1998, we agreed to pay to SCL an aggregate of $25,000 per month,
commencing February 1998 and terminating at the end of July 1999, for
the services of Mr. Simmonds, Mr. Dunstan, Ms. Weiler and Mr. Hokkanen.
We have no long-term incentive plan.
Option Grants Table for Fiscal 1999
We did not grant any stock options or stock appreciation rights under
any of our stock option plans during the fiscal year ended February 28, 1999.
We adopted our 1993 Compensatory Stock Option Plan, or Stock Option
Plan, for our officers, key employees, potential key employees, non-employee
directors and advisors. We reserved a maximum of 4,000,000 shares of our common
stock to be issued upon the exercise of options granted under the Stock Option
Plan. The Stock Option Plan does not qualify as an incentive stock option plan
under Section 422A of the Internal Revenue Code of 1986, as amended. Options are
granted under the Stock Option Plan at exercise prices to be determined by our
board of directors or stock option committee. With respect to options granted
pursuant to the Stock Option Plan, optionees will not recognize taxable income
upon the grant of options, but will realize income or capital loss at the time
the options are exercised to purchase common stock. The amount of income will be
equal to the difference between the exercise price and the fair market value of
the common stock on the date of exercise. We will be entitled to a compensating
deduction in an amount equal to the taxable income realized by an optionee as a
result of exercising the option. The Stock Option Plan is currently administered
by our board of directors. We maintain three other stock option plans but have
not granted any options under these plans.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth information regarding the exercise of
stock options during the last fiscal year by the executives named in the Summary
Compensation Table on page 25 and the fiscal year-end value of unexercised
options.
<TABLE>
<CAPTION>
- ------------------------ ---------------------- ----------------------- --------------------- ----------------------
Name Shares Acquired on Value Realized Number of Value of Unexercised
Exercise Unexercised Options In-the-Money Options
at February 28, 1999 at February 28, 1999
exercisable/
unexercisable (1)
- ------------------------ ---------------------- ----------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
John G. Simmonds None N/A 500,000 $17,500
- ------------------------ ---------------------- ----------------------- --------------------- ----------------------
Gary N. Hokkanen None N/A 200,000 $7,000
- ------------------------ ---------------------- ----------------------- --------------------- ----------------------
Carrie J. Weiler None N/A 300,000 $14,000
- ------------------------ ---------------------- ----------------------- --------------------- ----------------------
</TABLE>
(1) Represents the difference between the fair market value of the
securities underlying the options and the exercise price of the options
at fiscal year end.
30
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth certain information as of November 30, 1999
regarding the beneficial ownership, as defined in regulations of the Securities
and Exchange Commission, of common stock of (i) each person who is known to
TrackPower to be the beneficial owner of more than 5% of the outstanding shares
of our common stock, (ii) each director and nominee for director of TrackPower
and each executive officer of TrackPower named in the summary compensation table
below and (iii) all directors and executive officers as a group. Unless
otherwise specified, the named beneficial owner has sole voting and investment
power. The information in the table below was furnished by the persons listed in
the table.
Security Ownership of Certain Beneficial Owners
- -------------------------------- ----------------------------- -----------------
Name and address of Amount and nature of Percent of
beneficial owner beneficial ownership Common Stock
- -------------------------------- ----------------------------- -----------------
Simmonds Capital Limited
580 Granite Court 7,377,558 (1) 22.4%
Pickering, Ontario
Canada L1W 3Z4
- -------------------------------- ----------------------------- -----------------
John G. Simmonds
580 Granite Court 1,965,422 (3) 6.6% (2)
Pickering, Ontario
Canada L1W 3Z4
- -------------------------------- ----------------------------- -----------------
(1) SCL owns an aggregate of 3,727,558 shares of our common stock,
representing 12.70% of the aggregate shares of our outstanding common
stock. See footnote 3 under Security Ownership of Management on page
27. In addition, SCL owns (i) 1,000,000 shares of our preferred stock,
which are convertible into an aggregate of 1,000,000 shares of our
common stock; (ii) warrants to purchase 1,250,000 shares of our common
stock at an exercise price of $2.00 and 1,200,000 shares of our common
stock at an exercise price of $2.50; and (iii) $250,000 of debentures
convertible into 200,000 shares of our common stock; assuming the
conversion of this preferred stock and these debentures and the
exercise of these warrants, SCL owns 22.4% of our outstanding common
stock. This does not include any securities of TrackPower owned by
certain directors and/or officers of SCL who are also directors and/or
officers of TrackPower.
(2) Based on 29,340,401 shares outstanding at November 30, 1999.
(3) Includes 800,000 options to purchase our common stock from SCL, which
is also included in the amount of common stock held by SCL listed in
footnote 1 above.
Security Ownership of Management
The following table sets forth the beneficial ownership of our common
stock as of December 1, 1999, by each director, each executive officer named in
the Summary Compensation Table on pages 25 and 26, and by all directors and
executive officers of TrackPower as a group:
31
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------- --------------------------- -------------------------
Name and address of Amount and nature of Percent of
beneficial owner beneficial ownership (1) Common Stock (2)
- ------------------------------------- --------------------------- -------------------------
<S> <C> <C>
John G. Simmonds (3)(12)
580 Granite Court
Pickering, Ontario
Canada L1W 3Z4 1,965,422 6.6%
- ------------------------------------- --------------------------- -------------------------
Kenneth J. Adelberg (4)
1001 Sussex Blvd.
Broomall, Pennsylvania 29008 691,237 2.3%
- ------------------------------------- --------------------------- -------------------------
Lawrence P. Aziz (5)
PBI Office Interiors
1305 Morningside Ave., Unit 15
Scarborough, Ontario
Canada M1B 3Z5 237,258 0.8%
- ------------------------------------- --------------------------- -------------------------
Charles Cernansky (6)
WestCap Partners, Inc.
745 Fifth Avenue
New York, New York 10151 394,625 1.3%
- ------------------------------------- --------------------------- -------------------------
J. Harry Dunstan (7)(12)
6 Damascus Drive
Caledon East, Ontario
Canada L0N 1E0 1,076,936 3.7%
- ------------------------------------- --------------------------- -------------------------
Gary Hokkanen (8)
580 Granite Court
Pickering, Ontario
Canada L1W 3Z4 400,000 1.4%
- ------------------------------------- --------------------------- -------------------------
Ian Macdonald (9)
The Versatech Group
4307 Village Centre Court
Mississauga, Ontario
Canada L4Z 1S2 858,750 2.9%
- ------------------------------------- --------------------------- -------------------------
Arnold K. Smolen (10)
2515 Boston St., Unit 1103
Baltimore, Maryland 21224 124,200 0.4%
- ------------------------------------- --------------------------- -------------------------
Carrie Weiler (11)
580 Granite Court
Pickering, Ontario
Canada L1W 3Z4 700,000 2.4%
- ------------------------------------- --------------------------- -------------------------
All executive officers and directors
as a group, including those named
above (9 persons) (12) 6,448,428 21.4%
- ------------------------------------------- --------------------------- -------------------------
</TABLE>
(1) Except as otherwise indicated below, each person or entity in this
table has voting and investment power with respect to the securities he
or it owns.
(2) Based on 29,340,401 shares outstanding at November 30, 1999.
(3) Represents (a) 418,164 shares of our common stock; (b) 250,000 options
to acquire our common stock granted under the Stock Option Plan
effective September 8, 1997, at an exercise price of $.40 per share,
all of which are fully exercisable; (c) 400,000 options granted by SCL
to acquire shares of our common stock held by SCL on January 12, 1998,
at an exercise price of $.01 per
32
<PAGE>
share, all of which are fully exercisable, subject to certain
conditions regarding the minimum trading price of our common stock for
a specified period; (d) 400,000 options granted by SCL on January 28,
1998 to acquire our common stock held by SCL, at an exercise price of
$.25 per share, all of which are fully exercisable, subject to certain
conditions regarding the minimum trading price of our common stock for
a specified period; (e) $125,000 of our convertible debenture which is
convertible into 100,000 shares of our common stock issued on June
10,1999; (f) 100,000 warrants to purchase our common stock at an
exercise price of $2.50 issued upon conversion of our convertible
debenture described in (e); (g) 147,258 shares of our common stock
owned by Mr. Simmonds' wife Deborah Simmonds; (h) $31,250 of our
convertible debenture convertible into 25,000 shares of our common
stock issued on June 10, 1999 owned by Mr. Simmonds' wife Deborah
Simmonds; (i) 25,000 warrants to purchase our common stock at an
exercise price of $2.50 issued upon conversion of our convertible
debenture described in (h), owned by Mr. Simmonds' wife Deborah
Simmonds; (j) 50,000 shares of our common stock held in trust by Mr.
Simmonds' wife Deborah Simmonds for Mr. Simmonds' son Jack Simmonds;
(k) $31,250 of our convertible debenture which is convertible into
25,000 shares of our common stock issued on June 10, 1999 held in trust
by Mr. Simmonds' wife Deborah Simmonds for Mr. Simmonds' son Jack
Simmonds; and (l) 25,000 warrants to purchase our common stock at an
exercise price of $2.50 issued upon conversion of our convertible
debenture described in (k) held in trust by Mr. Simmonds' wife Deborah
Simmonds for Mr. Simmonds' son Jack Simmonds.
(4) Represents (a) 341,237 shares of our common stock; (b) options to
acquire 250,000 shares of our common stock granted under our Stock
Option Plan on March 18, 1999 at an exercise price of $.15 per share,
all of which are fully exercisable; (c) $62,500 of our convertible
debenture convertible into 50,000 shares of our common stock issued on
June 10, 1999; and (d) 50,000 warrants to purchase our common stock at
an exercise price of $2.50 issued upon conversion of our convertible
debenture described in (c).
(5) Represents (a) 197,258 shares of our common stock; (b) $25,000 of our
convertible debenture issued on June 10, 1999 which is convertible into
20,000 shares of our common stock; and (c) 20,000 warrants to purchase
our common stock at an exercise price of $2.50 issued upon conversion
of our convertible debenture described in (b).
(6) Represents (a) 17,625 shares of our common stock owned by an affiliate;
(b) 15,000 warrants owned by an affiliate to purchase our common stock
at an exercise price of $.30 per share issued on April 17, 1998, all of
which are fully exercisable; (c) 350,000 shares of our common stock;
(d) $7,500 of our convertible debenture, owned by an affiliate,
convertible into 6,000 shares of our common stock issued on June 10,
1999; and (e) 6,000 warrants to purchase our common stock at an
exercise price of $2.50 issued upon conversion of our convertible
debenture described in (d).
(7) Represents (a) 200,000 options to acquire our common stock granted
under the Stock Option Plan effective September 8, 1997, at an exercise
price of $.40 per share, all of which are fully exercisable; (b)
250,000 options to acquire our common stock granted under the Stock
Option Plan effective March 18, 1999, at an exercise price of $.15 per
share, all of which are fully exercisable; (c) 200,000 options to
acquire our common stock granted by SCL on January 12, 1998 at an
exercise price of $.01 per share, all of which are fully exercisable,
subject to certain conditions regarding the minimum trading price of
our common stock for a specified period; (d) 200,000 options to acquire
our common stock granted by SCL on January 28, 1998 at an exercise
price of $.25 per share, all of which are fully exercisable, subject to
certain conditions regarding the minimum trading price of our common
stock for a specified period; (e) 17,500 warrants to purchase our
common stock at an exercise price of $.30 per share issued on April 17,
1998, all of which are fully exercisable; (f) 114,999 shares of our
common stock; and (g) 94,437 warrants to purchase our common stock at
an exercise price of $.15 per share issued on March 31, 1999, all
33
<PAGE>
of which are fully exercisable. Mr. Dunstan resigned as a member of our
Board of Directors on December 13, 1999.
(8) Represents (a) 100,000 options to acquire the Company's common stock
granted under the Stock Option Plan effective September 8, 1997, at an
exercise price of $.40 per share, all of which are fully exercisable;
(b) 100,000 options to acquire the Company's common stock granted under
the Stock Option Plan effective March 18, 1999, at an exercise price of
$.15 per share, all of which are fully exercisable; (c) 100,000 options
to acquire the Company's common stock granted by SCL on January 12,
1998 at an exercise price of $.01 per share, all of which are currently
exercisable subject to certain conditions regarding the minimum trading
price of the Company's stock for a specified period.
(9) Represents (a) options to acquire 250,000 shares of our common stock
granted under our Stock Option Plan on March 18, 1999 at an exercise
price of $.15 per share, all of which are fully exercisable; (b)
300,000 shares of our common stock; (c) 100,750 shares of our common
stock owned by an affiliate; (d) $125,000 of our convertible debenture
convertible into 100,000 shares of our common stock issued on June 10,
1999; and (e) 100,000 warrants to purchase our common stock at an
exercise price of $2.50 issued upon conversion of our convertible
debenture described in (d).
(10) Represents (a) 24,200 shares of our common stock; (b) $62,500 of our
convertible debenture issued on June 10, 1999 which is convertible into
50,000 shares of our common stock; (c) 50,000 warrants to purchase our
common stock at an exercise price of $2.50 issued upon conversion of
our convertible debenture described in (b).
(11) Represents (a) 100,000 options to acquire the Company's common stock
granted under the Stock Option Plan effective September 8, 1997, at an
exercise price of $.40 per share, all of which are fully exercisable;
(b) 200,000 options to acquire the Company's common stock granted under
the Stock Option Plan effective March 18, 1999, at an exercise price of
$.15 per share, all of which are fully exercisable; (c) 100,000 options
to acquire the Company's common stock granted by SCL on January 12,
1998 at an exercise price of $.01 per share, all of which are currently
exercisable, subject to certain conditions regarding the minimum
trading price of the Company's stock for a specified period; (d)
100,000 options to acquire the Company's common stock granted by SCL on
January 28, 1998 at an exercise price of $.25 per share, all of which
are currently exercisable, subject to certain conditions regarding the
minimum trading price of the Company's stock for a specified period;
(e) 62,500 of the Company's convertible debenture convertible into
50,000 shares of the Company's common stock issued on June 10, 1999;
(f) 50,000 warrants to purchase the Company's common stock at an
exercise price of $2.50 issued upon conversion of the Company's
convertible debenture described in (e).
(12) Does not include securities owned by SCL other than with respect to
options granted by SCL to purchase our stock held by SCL, as described
above. The relationship of John G. Simmonds is described below under
Certain Relationships and Related Transactions on pages 30 to 31 of
this prospectus.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SCL, either directly or through its wholly-owned subsidiary, Midland
International Corporation, or MIC, owns, as of October 4, 1999, an aggregate of
3,727,558 shares of our common stock, representing 12.7% of the aggregate
29,340,401 shares of our common stock outstanding. In addition, SCL owns (i)
1,000,000 shares of our preferred stock, which are convertible into an aggregate
of 1,000,000 shares of our common stock; (ii) warrants to purchase 1,250,000
shares of our common stock
34
<PAGE>
at an exercise price of $2.00 per share and 1,200,000 shares of our common stock
at $2.50 per share; and (iii) a $250,000 debenture convertible into 200,000
shares of our common stock. Assuming conversion of the debenture and the
preferred stock and the exercise of the warrants, SCL owns 22.4% of our
outstanding common stock. The above figures do not include any of our securities
owned by officers and/or directors of SCL who are also officers and/or directors
of TrackPower.
Mr. John G. Simmonds, either directly or through various affiliates,
owns approximately 5% of the stock of SCL. SCL acquired certain shares of our
stock in December 1995, in connection with the grant to TrackPower of certain
exclusive license rights and the sale of assets. SCL acquired additional shares
of TrackPower in November 1996, in connection with an exclusive distribution
license granted to TrackPower. In addition, in January 1998, SCL completed the
sale to TrackPower of certain intellectual property and other assets. As
consideration for these assets, SCL received 1,000,000 shares of our convertible
preferred stock, which are convertible at the option of the holder into
1,000,000 shares of our common stock and a warrant exercisable until January 31,
2001 to purchase 500,000 shares of our common stock at a purchase price of $2.00
per share. In connection with these transactions, we agreed to pay to SCL an
aggregate of $25,000 per month pursuant to a written management fee agreement
commencing February 1998 and terminating at the end of July 1999, for the
services of Mr. Simmonds, Mr. Dunstan, Ms. Weiler and Mr. Hokkanen. We continue
to pay SCL $25,000 a month for these services.
On October 16, 1998, SCL transferred ownership of 4,230,906 shares of
our common stock, owned by MIC, to Mees Pierson ICS Limited, or Mees, pursuant
to a debt settlement agreement between SCL, MIC and Mees. On May 4, 1999, Mr.
Simmonds and a group of close business associates and investors familiar with
TrackPower acquired the block of 4,230,906 shares from Mees. Mr. Simmonds and
his immediate family acquired 170,906 of the shares. Effective June 4, 1999, we
issued to SCL 1,000,000 warrants to purchase our common stock at any time during
the next four years at an exercise price of $2.50 per share and 750,000 warrants
to purchase our common stock at any time during the next four years at an
exercise price of $2.00 per share, in consideration for guaranteeing our
obligations under a contract with a subsidiary of EchoStar Satellite
Communications Inc. and a general guarantee of all of our obligations until
March 1, 2000. As part of this transaction, SCL has been given the option to be
paid with 750,000 shares of our common stock.
Mr. Simmonds, our chairman of the board, president and chief executive
officer, serves SCL in the same capacities. In addition, Mr. Hokkanen, our chief
financial officer, is chief financial officer of SCL. Mr. Dunstan and Mr.
Macdonald, who are directors of TrackPower, are also directors of SCL.
USE OF PROCEEDS
The selling shareholders are selling all the common stock covered by
this prospectus for their own account. We will not therefore receive any
proceeds from the sale of this common stock.
SELLING SHAREHOLDERS
We issued 2,800,000 shares to SCL in 1996 in exchange for certain
Midland two way radio distribution rights pursuant to a General Security
Agreement and a License Agreement both between the Company and SCL SCL
subsequently sold 50,000 of these shares to each Shelwick Investments and
Blakeian Investments, both on May 25, 1999.
In April 1998, we issued 100 units pursuant to subscription agreements
with certain of the selling shareholders. Each unit is convertible into 5,000
35
<PAGE>
shares of our common stock, warrants to purchase 5,000 shares of our common
stock and debt securities in the principal amount of $5,000. The debt securities
are evidenced by secured demand notes. In July 1998, we issued 70 substantially
similar units pursuant to subscription agreements with certain other selling
shareholders.
On March 31, 1999, we offered shares of common stock to the holders of
the units as incentive to convert the secured demand notes underlying their
units into warrants and shares of common stock. Pursuant to conversion
agreements all dated as of March 31, 1999, the holders of the units converted
their secured demand notes into warrants and shares of common stock.
In the table below is information, as of November 30, 1999, regarding
the beneficial ownership of the shares by the selling shareholders. The number
of shares shown as beneficially owned by the selling shareholders represents all
of the shares of common stock currently issued and to be issued upon conversion
in full of all of the convertible securities described above. The information
regarding the selling shareholders' beneficial ownership after this offering
assumes that all shares of common stock offered by the selling shareholders
through this prospectus are actually sold. The presentation is based on
29,340,401 shares of our common stock outstanding as of November 30, 1999.
<TABLE>
<CAPTION>
- --------------------------------------------- ----------------------- --------------------- -------------------------
Number of Shares Number of Common Stock
of Common Stock Shares of Beneficially Owned
Beneficially Owned Common Stock After Offering
- --------------------------------------------- ----------------------- --------------------- ------------- -----------
Selling Shareholders Prior to Offering Offered Number Percent
- --------------------------------------------- ----------------------- --------------------- ------------- -----------
<S> <C> <C> <C> <C>
Kenneth J. Adelberg * 324,195 * *
Adoribel Holdings Ltd. * 219,596 * *
Lawrence Aziz * 97,258 * *
William Scott Benoit * 43,500 * *
Helmut Biemann * 65,250 * *
Blakein Investments * 50,000 * *
Pamela Brocious * 65,250 * *
Louis J. DeRicco Jr. * 21,750 * *
Harry Dunstan * 226,936 * *
First Premier Corp. * 43,500 * *
Gary and Linda Fischoff JT * 125,206 * *
Rabbia and Khawasa Ali Hassan * 183,695 * *
Anthony Matrone * 219,596 * *
Richard Messina * 223,250 * *
Relevant Investments Ltd. * 626,034 * *
Reina S. Robbins IRA * 54,375 * *
Saul Robbins IRA * 54,375 * *
Steven A. Sanders & Partners * 65,250 * *
Shelwick Investments Limited * 50,000 * *
Simmonds Capital Limited * 2,700,000 * *
Deborah Simmonds * 97,258 * *
John G. Simmonds * 97,258 * *
Sphere Management Corporation * 87,000 * *
Summit Capital Associates, Inc. * 76,375 * *
Tricapital Management Limited * 108,750 * *
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------- ----------------------- --------------------- -------------------------
Number of Shares Number of Common Stock
of Common Stock Shares of Beneficially Owned
Beneficially Owned Common Stock After Offering
- --------------------------------------------- ----------------------- --------------------- ------------- -----------
Selling Shareholders Prior to Offering Offered Number Percent
- --------------------------------------------- ----------------------- --------------------- ------------- -----------
<S> <C> <C> <C> <C>
Lee Vosburgh * 54,375 * *
Wallis G. Young * 54,375 * *
WestCap Capital * 32,625 * *
- ----------------------------------------------------------
</TABLE>
Certain selling shareholders are known or believed to have had material
relationships with TrackPower or its affiliates within the last three years.
Messrs. Adelberg, Aziz, Dunstan and Simmonds are currently directors of
TrackPower. Mr. Simmonds is also Chairman, President and CEO of SCL which is the
largest shareholder of TrackPower. Deborah Simmonds is the spouse of Mr.
Simmonds who is currently a director of TrackPower. Ian MacDonald, a current
director of TrackPower, is a partner in Tricapital Management Limited and
Blakeian Investments is a trust for Mr. MacDonald's children. Charles Cernansky,
a current director of TrackPower, is a partner of WestCap Partners, Inc. Mr.
Cernansky also holds a security principal registration in Pellinore Securities,
Inc. which acted as agent for April and July 1998 noteholders. Richard Messina
is President of Pellinore Securities, Inc. and Summit Capital Associates, Inc. A
partner of Mr. MacDonald in Tricapital Management Limited is also the owner of
Shelwick Investments Limited. Helmut Biemann was the Chief Operating Officer of
TrackPower for the period from February 1998 to December 1998. Sphere Management
Corporation performs technical consulting services for TrackPower.
DESCRIPTION OF SECURITIES
Pursuant to our articles of incorporation, TrackPower has the authority
to issue an unlimited number of shares of common stock, par value $.0001 per
share ("Common Stock") and an unlimited number of shares of preferred stock, no
par value ("Preferred Stock"). As of November 30, 1999, there were 29,340,401
shares of Common Stock issued and outstanding and 1,000,000 shares of Preferred
Stock issued and outstanding. In addition, TrackPower has reserved 1,850,000
shares of Common Stock for issuance upon the exercise of stock options.
The following is a description of the Common Stock and Preferred Stock.
Common Stock
Issuance. All shares of Common Stock are alike in every particular, are
of equal rank, have the same power, preferences and rights and are subject to
the same qualifications, limitations and restrictions. As of January 20, 2000,
there are no classes or series of Common Stock which have been authorized. The
Board of Directors is authorized to create classes or series of Common Stock and
to issue additional shares of Common Stock, with all shares of each class or
series of Common Stock alike and, of equal rank with the same power, preferences
and rights and otherwise within the limits authorized by TrackPower's articles
of incorporation.
Voting Powers. Each share of Common Stock presently has one vote in
respect of all matters voted upon by the shareholders, although the articles of
incorporation allow the Board of Directors to
37
<PAGE>
determine the voting powers of the Common Stock. Cumulative voting is not
allowed in the election of directors or as to any other matter presented for
shareholder approval.
Dividends. After the holders of Preferred Stock are paid any declared
dividends and after TrackPower has complied with any provisions in effect
related to the setting aside of sums in a sinking fund for the purchase or
redemption of shares of any class or series of Preferred Stock, the holders of
Common Stock are entitled to receive, to the extent permitted by law, dividends
as declared by the Board of Directors.
Dissolution or Liquidation. Upon the voluntary or involuntary
liquidation, dissolution, distribution of assets or winding-up of TrackPower,
and after distributions have been made in full to the holders of Preferred Stock
as authorized by the articles of incorporation, the holders of Common Stock are
entitled to receive all the remaining assets of TrackPower of whatever kind
available for distribution to shareholders ratably in proportion to the number
of shares of Common Stock respectively held by them.
Convertibility. The Board of Directors may adopt resolutions allowing
for the Common Stock to be convertible into or exchangeable for (at the option
of TrackPower or the shareholder or upon the occurrence of a specified event)
shares of any other class or any other series of the same or any other class of
shares of TrackPower, at a price or at a rate of exchange and with adjustments
as adopted by the Board of Directors.
Redemption. The Board of Directors may authorize redeemable Common
Stock which may be made redeemable at the option of TrackPower, of the holder
thereof, of another person or upon the occurrence of a designated event, if and
to the extent now or subsequently allowed by the Wyoming Business Corporation
Act, as amended, and the terms and conditions of redemption which may be
imposed, fixed and established by the Board of Directors.
Preferred Stock
The Articles of Incorporation of TrackPower expressly grant to the
Board of Directors the right to issue any class or series of Preferred Stock and
to determine the respective designation, powers, preferences, rights,
qualifications, limitations and restrictions of the class or series, including
but not limited to the rights of holders of Preferred Stock with respect to the
payment of dividends, conversion of shares, redemption of shares, and rights
upon liquidation or dissolution of TrackPower.
Dividends. The holders of Preferred Stock shall be entitled to receive
dividends declared by the Board of Directors in preference to the holders of
Common Stock, at the rate determined by the Board of Directors.
Dissolution or Liquidation. Upon the voluntary or involuntary
liquidation, dissolution or winding-up of TrackPower, the holders of the
Preferred Stock shall have the right to receive the amount per share fixed by
the Board of Directors before any distribution or payment is made to the holders
of the Common Stock.
Voting. The Preferred Stock has no voting power with respect to any
matter, although the Board of Directors has the authority to determine whether
the shares of any class or series of Preferred Stock which might be authorized
by the Board of Directors would have limited, contingent, full or no voting
rights and what the terms of any such voting rights would be.
38
<PAGE>
PLAN OF DISTRIBUTION
We anticipate that the selling shareholders may sell all or a portion
of the shares offered by this prospectus from time to time on the Over The
Counter Bulletin Board, on securities exchanges or in private transactions, at
fixed prices, at market prices prevailing at the time of sale or at prices
reasonably related to the market price, at negotiated prices, or by a
combination of these methods of sale through:
o ordinary brokerage transactions and transactions in which the broker
solicits purchases;
o sales to one or more brokers or dealers as principal, and the resale by
those brokers or dealers for their account, including resales to other
brokers and dealers;
o block trades in which a broker or dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction; or
o privately negotiated transactions with purchasers.
We are not aware as of the date of this prospectus of any agreements
between the selling shareholders and any broker-dealers regarding the sale of
the shares offered by this prospectus, although we have made no inquiry in that
regard. In connection with distributions of the shares or otherwise, the selling
shareholders may enter into hedging transactions with broker-dealers. In
connection with these transactions:
o broker-dealers may engage in short sales of the shares covered by this
Prospectus in the course of hedging the positions they assume with
selling shareholders;
o the selling shareholders may sell shares of our common stock short and
deliver the shares to close out their short positions;
o the selling shareholders may enter into option or other transactions
with broker-dealers that require the delivery to the broker-dealer of
the shares covered by this prospectus, which the broker-dealer may
resell according to this prospectus; and
o the selling shareholders may pledge the shares covered by this
prospectus to a broker or dealer and upon a default, the broker or
dealer may effect sales of the pledged shares according to this
prospectus.
The selling shareholders and any broker, dealer or other agent
executing sell orders on behalf of the selling shareholders may be considered to
be underwriters within the meaning of the Securities Act, in which case
commissions received by any of these brokers, dealers or agents and profit on
any resale of the shares may be considered to be underwriting commissions under
the Securities Act. These commissions received by a broker, dealer or agent may
be in excess of customary compensation.
All costs, fees and expenses of registration incurred in connection
with the offering will be borne by us. All selling and other expenses incurred
by the selling shareholders will be borne by the selling shareholders.
The selling shareholders also may resell all or a portion of the shares
offered by this prospectus in reliance upon Rule 144 under the Securities Act of
1933, provided that they meet the criteria and conform to the requirements of
that Rule.
39
<PAGE>
We have notified the selling shareholders that they will be subject to
applicable provisions of the Exchange Act and its rules and regulations,
including without limitation, Rule 102 under Regulation M. These provisions may
limit the timing of purchases and sales of any of the common stock by the
selling shareholders. Rule 102 under Regulation M provides, with some
exceptions, that it is unlawful for the selling shareholders or their affiliated
purchasers to, directly or indirectly, bid for or purchase, or attempt to induce
any person to bid for or purchase, an account in which the selling shareholders
or affiliated purchasers have a beneficial interest in any securities that are
the subject of the distribution during the applicable restricted period under
Regulation M. All of the above may affect the marketability of the common stock.
To the extent required by law, we may require the selling shareholders, and
their brokers if applicable, to provide a letter that acknowledges compliance
with Regulation M under the Exchange Act before authorizing the transfer of the
selling shareholders' shares.
LEGAL MATTERS
Holland & Hart of Cheyenne, Wyoming, will opine as to the offered
shares being validly authorized and issued by TrackPower and fully-paid and
nonassessable.
EXPERTS
Causey Demgen & Moore Inc., independent auditors, have audited our
financial statements as of February 28, 1999 and for the previous year ending
February 28, 1998, as set forth in their report, included in our annual report
on Form 10-KSB for the year ended February 28, 1999 which is incorporated in
this prospectus by reference. Such report contained an explanatory paragraph
which indicated that substantial doubt existed with respect to our ability to
continue as a going concern. Our consolidated financial statements are
incorporated by reference in reliance on Causey Demgen & Moore Inc.'s report,
given on their authority as experts in accounting and auditing.
INDEMNIFICATION
The Wyoming Business Corporation Act, or WBCA, provides for mandatory
indemnification of directors and officers of a corporation in connection with an
action, suit or proceeding brought by reason of their position as a director or
officer if they are wholly successful, on the merits or otherwise, in defense of
the proceeding. The WBCA also allows a corporation to indemnify directors or
officers in such proceedings if the director or officer acted in good faith, in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, in the case of a criminal proceeding, he had no reasonable
cause to believe that his conduct was unlawful.
Our articles of incorporation provide that directors and officers may
be indemnified for reasonable expenses or liability incurred in connection with
any proceeding to which they are made a party by reason of their status as a
director or officer provided that they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of TrackPower
or that, with respect to any criminal proceeding, they had reasonable cause to
believe that their conduct was unlawful. These indemnification provisions do not
apply, subject to certain exceptions, if the director or officer initiates the
claim for which he seeks indemnification, if he acts in bad faith, if the claim
against him has been paid by his insurance, or if the claim arises from his
purchase or sale of securities in violation of Section 16(b) of the Exchange Act
or any similar statute.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling TrackPower
pursuant to the foregoing provisions, we have been
40
<PAGE>
informed that, in the opinion of the SEC, that indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
DESCRIPTION OF PROPERTY
The principal office of TrackPower is located at 67 Wall Street, Suite
2411, New York, NY 10005. Certain TrackPower officers and executives have
offices located at 580 Granite Court, Pickering, Ontario, L1W 3Z4, Canada.
WHERE YOU CAN FIND MORE INFORMATION
o Government Filings. We file annual, quarterly and special reports,
proxy statements and other information with the SEC. Our SEC filings are
available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the SEC's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the SEC's public reference room in
Washington, D.C. by calling the SEC at 1-800-SEC-0330.
We have filed with the SEC a registration statement on Form SB-2 to
register the shares of common stock to be offered. This prospectus is part of
that registration statement and, as permitted by the SEC's rules, does not
contain all the information included in the registration statement. For further
information about us and our common stock, you should refer to that registration
statement and to the exhibits and schedules filed as part of that registration
statement. You can review and copy the registration statement, its exhibits and
schedules at the public reference facilities maintained by the SEC as described
above. The registration statement, including its exhibits and schedules, are
also available on the SEC's web site, given above.
o Stock Market. Shares of our common stock are traded on the Over the
Counter Bulletin Board. Materials that are filed can be inspected at the offices
of the National Association of Securities Dealers, Inc., Reports Section, 1735 K
Street, N.W., Washington, D.C. 20006.
We are not making an offer of these securities in any state where the
offer is not permitted. You should not assume that the information in this
prospectus or any prospectus supplement is accurate as of any date other than
the date on the front of those documents.
41
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors, Officers, Employees and Agents.
Sections 17-16-852 and 17-16-856 of the Wyoming Business Corporation
Act, or WBCA, provide for mandatory indemnification by a corporation of
reasonable expenses incurred by a director or officer in connection with any
proceeding brought by reason of his position as a director or officer, so long
as he was wholly successful, on the merits or otherwise, in defense of the
proceeding.
In addition, under Section 17-16-851 of the WBCA, a corporation may
indemnify a director who is party to a proceeding because of his status as a
director if "(i) He conducted himself in good faith; and (ii) He reasonably
believed that his conduct was in or at least not opposed to the corporation's
best interests; and (iii) in the case of any criminal proceeding he had no
reasonable cause to believe his conduct was unlawful; or (iv) He engaged in
conduct for which broader indemnification has been made permissible or
obligatory under a provision of the articles of incorporation."
Under Section 17-16-853 of the WBCA, TrackPower may, before the final
disposition of a proceeding, advance funds to pay for or reimburse the
reasonable expenses incurred by a director if he provides to TrackPower a
written affirmation of his good faith belief that he has met the standard of
conduct required for indemnification under the WBCA and his written undertaking
to repay any funds advanced if he is not entitled to mandatory indemnification
under the WBCA and it is ultimately determined that he has not met the standard
of conduct required for indemnification under the WBCA. Section 17-16-854 of the
WBCA provides for the manner and the circumstances under which a court may order
indemnification and provide for an advance of expenses.
Under Section 17-16-856 of the WBCA, an officer may be indemnified to
the same extent as a director. If an officer is not also a director, the
corporation may further indemnify him as may be provided in the articles of
incorporation, the by-laws, the resolutions of the Board of Directors, or
contract, except for (i) liability in actions brought by or in the right of the
corporation, other than for reasonable expenses incurred therein, or (ii)
liability arising out of conduct that constitutes receipt of a financial benefit
to which he is not entitled, intentional infliction of harm on the corporation
or the shareholders, or intentional violation of criminal law. If an officer
also is a director but the proceeding was brought solely on the basis of his
status as an officer, he also may be indemnified and receive advanced expenses
as may be provided in the articles of incorporation, the by-laws, resolutions of
the Board of Directors, or contract.
Our articles of incorporation provide, among other indemnity
provisions, that directors, officers, employees and agents may be indemnified
for expenses (including attorneys' fees), judgments, fines, settlements or other
liabilities reasonably incurred in connection with any proceeding to which they
are made a party by reason of their status as a director, officer, employee or
agent provided that they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of TrackPower or that,
with respect to any criminal proceeding, they had no reasonable cause to believe
that their conduct was unlawful. These indemnification provisions do not apply,
subject to certain exceptions, if the director, officer, employee or agent
initiates the claim (other than to enforce a right of indemnification) for which
he seeks indemnification, if he institutes a proceeding and a court determines
that each of the material assertions made by him in the proceeding was not made
in good faith or was frivolous, if the claim against him has been paid directly
by an insurance carrier under a policy of officers' and directors' liability
insurance maintained by TrackPower, or if the claim arises from his purchase or
sale of securities in violation of Section 16(b) of the Exchange Act or any
similar or successor statute.
<PAGE>
The provisions of Section 17-18-101 and the subsequent sections of the
WBCA, which sections are referred to as the "Wyoming Management Stability Act",
could have the effect of delaying, deferring or preventing a change in control
of TrackPower or the removal of existing management, and as a result could
prevent our shareholders from being paid a premium for their shares of common
stock.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses payable in
connection with the distribution of the securities covered by this Registration
Statement. All the amounts shown are estimates except the Securities and
Exchange Commission Registration Fee and the OTC Market Listing Fee. All of the
expenses will be borne by the Company except as otherwise indicated.
SEC Registration Fee.........................................$2,586.74
Printing and Engraving Fees and Expenses..........................$ *
Legal Fees and Expenses...........................................$ *
Accounting Fees and Expenses......................................$ *
Miscellaneous.....................................................$ *
Total.............................................................$ *
* To be completed by amendment
Item 26. Recent Sales of Unregistered Securities.
None except as described in the section entitled "Selling Stockholders"
of this Form SB-2.
Item 27. Exhibits.
The following documents are filed as exhibits to this registration
statement, including those exhibits incorporated in this registration statement
by reference to a prior filing of TrackPower under the Securities Act or the
Exchange Act as indicated in parenthesis:
Exhibit
Number Description
1.1 Placement Agent Agreement dated April 17, 1998 between TrackPower and
Pellinore Securities Corporation (1)
2.1 Articles of Merger as filed with the New York Department of State on
February 11, 1994 (2)
2.2 Articles of Merger as filed with the Wyoming Secretary of State on
February 14, 1994 (3)
2.3 Agreement and Plan of Merger dated July 1, 1993 between TrackPower and
Mont Rouge Resources, Inc. (4)
3.1 Certificate of Incorporation of TrackPower (5)
3.2 By-Laws of TrackPower (6)
2
<PAGE>
4.1 Specimen Stock Certificate of TrackPower (7)
4.2 Form of Warrant issued by TrackPower to various investors, dated as of
April 17, 1998 (8)
5.1 Opinion by Holland & Hart regarding legality of the shares of common
stock being registered pursuant to this registration statement
10.1 Agreement, dated July 9, 1999, between Penn National Gaming, Inc. and
the Registrant, as amended by letter agreements dated July 20, 1999 and
October 1, 1999 (9)
10.2 Satellite Capacity Lease, dated as of June 4, 1999, between the
Registrant and Transponder Encryption Services Corporation (10) 10.2
10.3 License Agreement, dated as of November 8, 1996, between the Registrant
and Simmonds Capital Limited
23.1 Consent of Causey, Demgen & Moore
- -------------------------------------------
(1) Incorporated by reference to Exhibit 1 to our Form 8-K dated
May 7, 1998.
(2) Incorporated by reference to Exhibit 2.1 to our Form 8-K dated
February 14, 1994.
(3) Incorporated by reference to Exhibit 2.2 to our Form 8-K dated
February 14, 1994.
(4) Incorporated by reference to Exhibit A to our Articles of
Merger (which are filed as Exhibit 2.2 above).
(5) Incorporated by reference to Exhibit 3.1 to our Form 8-K dated
July 14, 1993.
(6) Incorporated by reference to Exhibit 3.2 to our Form 8-K dated
July 14, 1993.
(7) Incorporated by reference to Exhibit 4.1 to our Form 8-K dated
July 14, 1993.
(8) Incorporated by reference to Exhibit 4.1 to our Form 8-K dated
May 7, 1998.
(9)(10) A portion of this exhibit has been omitted and separately
filed with the Securities and Exchange Commission pursuant to
Rule 406 promulgated under the Securities Act of 1933, as
amended.
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act;
3
<PAGE>
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;
and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report pursuant
to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Registration
Statement or amendment thereto to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on the
3rd day of February, 2000.
TRACKPOWER, INC.
By: /s/ John G. Simmonds
-----------------------------
John G. Simmonds
Chief Executive Officer
<PAGE>
Pursuant to the requirements of the Securities Act, this Registration
Statement or amendment thereto has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ John G. Simmonds President and Chief February 3, 2000
- ------------------------ Executive Officer
John G. Simmonds (principal executive officer)
(Director)
/s/ Gary N. Hokkanen Chief Financial Officer February 3, 2000
- ------------------------ (principal financial officer)
Gary N. Hokkanen
/s/ Ken Adelberg Director February 3, 2000
- ------------------------
Ken Adelberg
/s/ Lawrence Aziz Director February 3, 2000
- ------------------------
Lawrence Aziz
/s/ Charles J. Cernansky Director February 3, 2000
- ------------------------
Charles J. Cernansky
Director February _, 2000
- ------------------------
Ian MacDonald
/s/ Arnold Smolen Director February 3, 2000
- ------------------------
Arnold Smolen
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
American Digital Communications, Inc.
New York, New York
We have audited the accompanying balance sheet of American Digital
Communications, Inc. (a development stage company) as of February 28, 1999
and 1998, 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, 1999 and 1998, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is a development stage company and has
suffered recurring losses and at February 28, 1999, the Company has a working
capital deficit of $1,086,149 and a stockholders' deficit of $493,547.
These conditions raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Denver, Colorado
May 27, 1999, except for
Note 11 as to which the
date is June 10, 1999 CAUSEY DEMGEN & MOORE INC.
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
BALANCE SHEET
February 28, 1999 and 1998
ASSETS
1999 1998
---- ----
Current assets:
Cash $ 18,089 $ 19,558
Notes receivable 10,764 8,548
Marketable securities (Notes 2 and 4) 616,880 1,209,844
Other current assets 331 -
--------- ----------
Total current assets 646,064 1,237,950
Property and equipment, at cost:
Office equipment 141,055 125,052
Furniture and fixtures 26,082 26,082
--------- ----------
167,137 151,134
Less accumulated depreciation 146,519 146,370
--------- ----------
Net property and equipment 20,618 4,764
Other assets:
Distribution rights, net of accumulated amortization
of $118,465 (1999) and $46,286 (1998) (Note 9) 129,493 201,672
Deposits on satelite uplink services 64,000 -
TrackPower trademarks and other intellectual property
rights, net of accumulated amortization of $19,921
(1999) (Notes 3 and 6) 378,491 398,412
---------- ----------
Total other assets 571,984 600,084
---------- ----------
$1,238,666 $1,842,798
========== ==========
See accompanying notes.
F-2
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
BALANCE SHEET
February 28, 1999 and 1998
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1999 1998
---- ----
Current liabilities:
Accounts payable $ 339,106 $ 243,716
Accounts payable - related parties (Note 6) 407,319 36,289
Accrued expenses 71,063 59,193
Accrued interest 75,242 -
Accrued interest - related parties 56,652 40,294
Notes payable - related parties (Note 4) 30,370 30,370
Current portion of long-term note payable - related
party (Note 4) 157,461 -
Notes payable - individuals (Notes 4 and 11) 595,000 -
Current portion of capital lease obligations - 5,075
--------- ----------
Total current liabilities 1,732,213 414,937
Long-term debt:
Capital lease obligations - 876
Long-term note payable - related parties (Note 4) - 157,461
--------- ----------
Total long-term debt - 158,337
Commitments and contingencies (Notes 1, 3, 5, and 9)
Stockholders' equity (deficit)(Notes 3, 8 and 11):
Convertible preferred stock, no par value, unlimited
shares authorized, 1,000,000 shares to be issued
(liquidation value $1,000,000) 1,000,000 1,000,000
Common stock, $.0001 par value; unlimited shares
authorized, issued and outstanding, 25,162,886
shares (1999), 24,113,624 shares (1998) 2,516 2,412
Additional paid-in capital 7,169,700 6,986,409
Common stock subscribed, 50,000 shares (1999),
214,262 shares (1998) 7,500 41,995
Accumulated deficit (including $1,783,195 accumulated
during the development stage) (8,688,619)(6,905,424)
Accumulated other comprehensive income 15,356 144,132
---------- ----------
Total stockholders' equity (deficit) (493,547) 1,269,524
---------- ----------
Total liabilities and stockholders' equity
(deficit $1,238,666 $1,842,798
========== ==========
See accompanying notes.
F-3
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the Years Ended February 28, 1999 and 1998
1999 1998
---- ----
Revenues:
Two-way radio sales (Note 10) $ - $ 76,480
220 MHz radio tower equipment sales (Note 2) - 2,638,219
Royalties received from distribution rights (Note 9) 11,375 43,990
Other revenue 851 -
---------- -----------
Total revenues 12,226 2,758,689
Costs and expenses:
Cost of two-way radio sales - 102,621
Write-down of two-way radio inventory - 12,414
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) 47,382 476,865
TrackPower expenses (Note 3) 401,429 62,509
TrackPower expenses - related party (Note 6) 300,000 25,000
Realized losses on marketable securities 128,238 130,197
General and administrative 541,367 606,473
Depreciation and amortization 44,866 53,271
Interest expense 288,943 5,901
Interest expense - related parties 43,196 40,553
----------- -----------
Total costs and expenses 1,795,421 3,999,072
----------- -----------
Net loss (1,783,195) (1,240,383)
Preferred dividends (Note 3) (67,500) -
----------- -----------
Net loss applicable to common shareholders $(1,850,695) $(1,240,383)
=========== ===========
Basic and diluted net loss per share of common
stock $ (0.07) $ (0.05)
=========== ===========
Weighted average number of common shares outstanding 24,486,000 24,199,000
========== ==========
COMPREHENSIVE INCOME
Net loss $(1,783,195) $(1,240,383)
Other comprehensive income:
Unrealized holding gains (losses) Note 2) (128,776) 144,132
----------- -----------
Comprehensive income (loss) $(1,911,971) $(1,096,251)
=========== ===========
See accompanying notes.
F-4
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended February 28, 1999 and 1998
Preferred stock Common stock
Shares Amount Shares Amount
------ ------ ------ ------
Balance, February 28, 1997 - $ - 23,627,431 $ 2,363
Issuance of common stock for
subscriptions (Note 8) - - 436,193 44
Issuance of common stock to
employees for services (Note 8) - - 780,000 78
Exercise of stock options for cash - - 120,000 12
Return of the Company's common
stock on sale of radio tower
equipment (Note 2) - - (1,150,000) (115)
Issuance of common stock to
consultants for services (Note 8) - - 300,000 30
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 - -
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
Issuance of common stock for
subscriptions - - 164,262 16
Issuance of common stock in
conjunction with debt issuance
($.19 per share)(Note 4) - - 500,000 50
Issuance of common stock in
conjunction with debt issuance
($.14 per share)(Note 4) - - 385,000 38
Net loss for the year ended
February 28, 1999 - - - -
--------- --------- ---------- ------
Balance, February 28, 1999 1,000,000 $1,000,00 25,162,886 $2,516
========= ========= ========== ======
(Continued on following page)
See accompanying notes.
F-5
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the years Ended February 28, 1999 and 1999
(Continued from preceding page)
Additional Common Other
paid-in stock Accumulated comprehensive
capital subscribed deficit income
--------- ---------- ----------- -------------
Balance, February 28, 1997 $ 7,747,767 93,300 $(5,665,041) $ -
Issuance of common stock for
subscriptions (Note 8) 93,256 (93,300) - -
Issuance of common stock to
emloyees for services (Note 8) 77,922 - - -
Exercise of stock options for
cash 11,988 - - -
Return of the Company's common
stock on sale of radio tower
equipment (Note 8) (87,932) - - -
Issuance of common stock to
consultants for services
(Note 8) 44,970 - - -
Stock subscriptions received for
cash (214,262 shares) (Note 8) - 41,995 - -
Convertible preferred stock to be
issued for trademarks (Note 3) (901,562) - - -
Net income (loss) for the year
ended February 28, 1998 - - (1,240,383) 144,132
---------- ------- ----------- --------
Balance, February 28, 1998 6,986,409 41,995 (6,905,424) 144,132
Issuance of common stock for
subscription 34,479 (34,495) - -
Issuance of common stock in
conjunction with debt issuance
($.19 per share) (Note 4) 94,950 - - -
Issuance of common stock in
conjunction with debt issuance
($.14 per share)(Note 4) 53,862 - - -
Net loss for the year ended
February 28, 1999 - - (1,783,195) (128,776)
---------- ------ ----------- --------
Balance, February 28, 1999 $7,169,700 $7,500 $(8,688,619) $15,356
========== ====== =========== =======
See accompanying notes.
F-6
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
For the Years Ended February 28, 1999 and 1998
1999 1998
---- ----
Operating activities:
Net loss $(1,783,195) $(1,240,383)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 44,866 53,271
Impairment losses on distribution rights 47,382 476,865
Costs of licenses and distribution rights - 324,375
Gain on sale of radio tower equipment - (396,584)
Realized losses on marketable securities 128,238 130,197
Issuance of stock for interest expense 148,900 -
Issuance of common stock for debt issuance
costs - 123,000
Changes in:
Accounts receivable - 21,110
Inventories - 91,577
Other current assets (331) 3,888
Accounts payable 466,420 (179,010)
Accrued expenses 11,870 54,260
Accrued interest 91,600 29,918
---------- ---------
Net cash used in operating activities (844,250) (507,516)
Investing activities:
Purchase of office and equipment (16,002) -
Increase in deposits (64,000) -
Note receivable (2,216) -
Proceeds from sale of marketable securities 335,950 292,500
Proceeds from sale of fixed assets - 234,719
--------- --------
Net cash provided by investing activities 253,732 527,219
Financing activities:
Proceeds from sale of common stock, net - 12,000
Proceeds from stock subscriptions - 41,995
Payment of capital lease obligations (5,951) (5,841)
Payments of notes payable (255,000) (50,000)
Borrowings under notes payable 850,000 -
Borrowings from related parties - (30,000)
---------- --------
Net cash provided by (used in) financing
activities 589,049 (31,846)
---------- --------
Decrease in cash (1,469) (12,143)
Cash, beginning of period 19,558 31,701
---------- --------
Cash, end of period $ 18,089 $ 19,558
========== ========
(Continued on following page)
See accompanying notes.
F-7
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
For the Years Ended February 28, 1999 and 1998
(Continued from preceding page)
Supplemental disclosure of non-cash investing and financing activities:
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, 1999, the Company issued common stock for
debt issuance costs of $148,900. During the year ended February 28, 1998, the
Company issued common stock for services valued at $123,000.
During the year ended February 28, 1998, the Company sold radio tower
equipment for:
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:
Preferred stock to be issued $ 98,438
Assumption of accounts payable 299,974
---------
$ 398,412
=========
Supplemental disclosure of cash flow information:
1999 1998
---- ----
Cash paid for interest $ 91,639 $ 1,564
======== =======
See accompanying notes.
F-8
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
1. Summary of significant accounting policies
Nature of business:
The Company was organized June 30, 1993 under the laws of Wyoming. The
Company was 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 certain territories of Canada for
certain Midland brand commercial land mobile radios and radio parts. On
January 15, 1998, the Company acquired the TrackPower trade name and other
intellectual property rights. The technology is in use in the United States
to market a service whereby subscribers are able to watch live horseracing on
television via satellite distribution and place wagers through a state
licensed telephone account wagering entity. The Company plans to add
horseracing statistics and data to the service in later stages. The Company
is party to a hub wagering letter of intent under which a portion of the
wagering revenue will accrue to the Company. The Company is also planning, in
a later stage, to provide interactive wagering through the television to
subscribers. The Company will not accept or place any wagering transactions,
but will deliver the wager to a state licensed account wagering entity. The
TrackPower service was launched on April 1, 1999. Therefore no revenues,
from the TrackPower business, accrued to the Company during year ended
February 28, 1999. Effective March 1, 1998, the Company is considered to be
in the development stage as more fully defined in the Financial
Accounting Standards Board Statement No. 7.
Basis of presentation:
The financial statements have been prepared on a going concern basis which
contemplates the realization of assets and liquidation of liabilities in the
ordinary course of business. As shown in the accompanying financial
statements, the Company has incurred significant losses and at February 28,
1999, the Company has a working capital deficit of $1,086,149 and a
stockholders' deficit of $493,547. As a result, substantial doubt exists
about the Company's ability to continue to fund future operations using its
existing resources.
The Company plans to begin executing the TrackPower business plan during
fiscal year ended February 29, 2000. Many business agreements and strategic
relationships have been put in place and others are in various stages of
completion. A significant agreement was executed with Transponder Encryption
Services Corporation (a subsidiary of Echo Star Communications Inc.) on June
4, 1999. Pursuant to which the TrackPower Service will be broadcast effective
July 1, 1999, under EchoStar's main Dish Network service which has
approximately 2.5 million subscribers. The Company anticipates that the
subscriber take up rate will accelerate as a result of this agreement.
F-9
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
1. Summary of significant accounting policies (continued)
Subsequent to year end the outstanding notes payable - individuals were
either converted to common stock of the Company or repaid from the proceeds
of a private placement of new convertible notes. The marketable
securities previously held as security for the notes payable were freed up
for sale to generate cash to support operations. Net proceeds, from the
new private placement, after repaying the notes payable will also provide
additional cash for operations.
The Company has entered into letters of intent with companies to provide a
satellite uplink facility, a subscriber billing system and a wagering hub
operator. The Company launched the service on April 1, 1999 and expects to
generate revenues from operations sufficient to fund operations. Although
the Company is expects these revenue generating strategies to be
successful, there is no assurance that sufficient cash flows will be
generated to fund current operations.
The Company is also planning additional financing activities as and when cash
will be required. The Company is confident, based on past experience, that it
will be able to fund any additional working capital shortfalls as and when
required although there can be no assurances that this can be achieved. The
financial statements present the Company on a going concern basis and
do not include any adjustments that might be necessary should the Company
be unable to continue as a going concern.
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.
Marketable securities:
The Company's marketable securities consist of 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 and furniture and fixtures, are stated at cost. Depreciation
is computed over the estimated useful life of three years using the
straight-line method.
F-10
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
1. Summary of significant accounting policies (continued)
Amortization of distribution rights:
The cost of distribution rights are being amortized over 10 years, the period
estimated by management to be benefited. However, due to uncertainty
surrounding future revenues from the distribution rights, the Company uses
the cost recovery method if that method produces a greater amount of
amortization.
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.
Fair value of financial instruments:
Cash, accounts payable, accrued liabilities and notes payable are carried
in the financial statements in amounts which approximate fair value because
of the short-term maturity of these instruments. Notes payable are 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.
F-11
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
1. Summary of significant accounting policies (continued)
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. The Company places its cash with
high quality financial institutions. At times during the year, the balance at
one financial institution exceeded insured limits.
Net loss per share:
Basic net 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.
Reclassifications:
Certain reclassifications have been made to the 1998 financial statements to
conform to the 1999 presentation.
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 the Company's note payable to Ventel, Inc. ($1,004,545 including
accrued interest), return of 1,150,000 shares of the Company'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.
F-12
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
2. Sale of radio tower equipment and related licenses and marketable
securities (continued)
The marketable securities are considered available for sale and as such are
recorded at market value on the balance sheet at February 28, 1999 and 1998
with the net unrealized gain of $15,356 and $144,132, respectively, reflected
as a separate component of stockholders' equity. The gross unrealized gain on
these securities amounts to $30,623 and $199,254 and the gross unrealized
loss amounts to $15,267 and $55,122 at February 28, 1999 and 1998,
respectively.
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
redeemable by the Company at anytime for $1,000,000 and is not redeemable by
the holder. At February 28, 1999, undeclared cumulative dividends owed on the
preferred stock amounted to $67,500 which is payable in shares of the
Company's common stock (429,963 shares).
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. On July 15, 1998, the
joint venture was terminated and the Company acquired the remaining 50%
interest in the joint venture for nominal consideration.
The TrackPower trademark and intellectual property rights are in use in the
United States and the Company plans to add horseracing data and the ability
to interactively wager through a television in later stages of the business.
F-13
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
4. Notes payable
Short-term notes payable:
The Company's short-term notes payable consist of the following loans from
shareholders at February 28, 1999 and 1998:
9% note payable - shareholder, due on demand,
unsecured, in default $ 10,370
12% note payable - shareholder, due on demand,
unsecured, in default 20,000
--------
$ 30,370
========
During April and July 1998, the Company raised gross proceeds of $500,000 and
$350,000, respectively, in debt offerings. The notes are due on demand, bear
interest at 12% per annum and the marketable securities are pledged as
collateral. As part of the offering, the Company issued 850,000 shares of its
common stock to the note holders and warrants to purchase 850,000 shares of
its common stock exercisable at $.30 per share for a five-year period.
Offering expenses amounted to $66,425 in cash plus 35,000 shares of the
Company's common stock valued at $4,900. During the year ended February 28,
1999, the Company repaid $255,000 of the principal of the notes.
Of the total debt offering, $95,000 was issued to related parties and the
balance owed to related parties at February 28, 1999 was $66,500.
Long-term note payable consist of the following at February 28, 1999 and
1998:
1999 1998
---- ----
Note payable - SCL, a related company (Note 6),
payable on November 1, 1999 including interest
at 8% per annum, unsecure $157,461 $157,461
Less current portion 157,461 -
-------- ---------
Amount due after one year $ - $157,461
======== ========
F-14
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
5. 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. During 1998, the space was subleased for
substantially the same amount. The remaining commitment amounted to $62,271
at February 28, 1999.
On April 1, 1998, the Company entered into an agreement to lease office space
in New York, New York. The agreement is for one year and also included
certain corporate, investor relations, financial and administrative advisory
services. This agreement stipulates a fee of $8,000 per month and the Company
has estimated that rent represents $2,000 of this amount.
Rent expense for the years ended February 28, 1999 and 1998 amounted to
$24,000 and $103,322, respectively.
6. Related party transactions
For the years ended February 28, 1999 and 1998, the Company incurred legal
fees of $0 and $5,779 to a law firm owned by a former director/officer of the
Company of which $11,289 remained unpaid at February 28, 1998, which amount
was paid during the year ended February 28, 1999.
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. 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 January 15, 1998, the Company purchased the TrackPower trade name and
other intellectual rights from Simmonds Capital Limited ("SCL" - a
significant shareholder of the Company) 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, 1999 and 1998, $300,000 and $25,000, respectively, was
accrued under this agreement. During the year ending February 28, 1999,
$356,164 was received from and $408,390 was paid to affiliates of SCL,
$267,619 of expenses was paid by affiliates of SCL on behalf of the Company,
and $133,074 was advanced by the Company on behalf of affiliates of SCL,
leaving $407,319 balance due to related parties at February 28, 1999.
F-15
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
7. Income taxes
The book to tax temporary differences resulting in deferred tax assets and
liabilities are primarily net operating loss carryforwards of $7,496,000 and
start-up costs capitalized for income tax purposes of $1,623,000 (net of
amortization).
As of February 28, 1999 and 1998, total deferred tax assets, liabilities and
valuation allowances are as follows:
1999 1998
---- ----
Deferred tax assets $ 385,000 $ 605,000
Deferred tax assets resulting from loss
carryforward 2,797,000 1,914,000
Valuation allowanc (3,182,000)(2,519,000)
---------- ----------
$ - $ -
========== ==========
A 100% valuation allowance has been established against the deferred tax
assets, as utilization of the loss carryforwards and realization of other
deferred tax assets cannot be reasonable assured.
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
2013 2,366,000
----------
$7,496,000
==========
8. Stockholders' equity
During the year ended February 28, 1998, the Company issued 436,193 shares of
its common stock in exchange for cash of $93,300 received for subscriptions
during February 1997.
F-16
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
8. Stockholders' equity (continued)
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).
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,
164,262 of 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:
Weight
average
Option price exercised Number of
per share price shares
------------ --------- ---------
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 $0.10 (120,000)
----- ----- ---------
Balance February 28, 1998 and 1999$.23 to $1.75 $0.44 3,960,000
=========
F-17
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
8. Stockholders' equity (continued)
The following is additional information with respect to those options
outstanding at February 28, 1999:
Weighted Weighted
average average
contractual exercise Number of
Option price per share in years price shares
---------------------- ----------- -------- ---------
$0.10 2 $0.10 500,000
$.23 to $.35 2.7 $0.33 1,070,000
$.40 to $.65 1.3 $0.42 2,115,000
$1.00 4 $1.00 175,000
$1.75 9 $1.75 100,000
---------
3,960,000
=========
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, 1999 and 1998 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:
1999 1998
---- ----
Net loss - as reported $ (1,701,507) $ (1,240,383)
Net loss - pro forma (1,701,507) (1,387,171)
Loss per share - as reported (0.07) (0.05)
Loss per share - pro forma (0.07) (0.06)
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, dividend yield of 0%; expected
volatility of 225.35%, risk-free interest rate of 5.34%; and expected life of
3 years.
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.
F-18
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
8. Stockholders' equity (continued)
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, 1999,
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, 1999, no options have been granted under the NSO plan.
Warrants:
Warrants outstanding at February 28, 1999 consist of the following:
Exercisable Exercise Number
until price of shares
----------- -------- ---------
January 31, 2001 $2.00 500,000
April 17, 2003 $0.30 500,000
July 26, 2003 $0.30 350,000
July 26, 2003 $0.30 35,000
---------
1,385,000
=========
9. Commitments and contingencies
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.
F-19
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
9. Commitments and contingencies (continued)
During the years ended February 28, 1998 and 1999, it was determined that
royalties from the Company's Canadian distribution rights had fallen below
initial projections. Impairment losses of $119,542 and $47,382, respectively,
were 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, 1999 and 1998 are as follows:
1999 1998
---- ----
Customer A - 82.7%
Customer B 93.0% -
11.Subsequent events
Stock options:
On March 18, 1999, options to purchase 2,335,000 shares of common stock at
prices ranging from $.23 to $1.75 per share were canceled. On the same date,
options for 2,350,000 shares of common stock were issued to different
individuals at a price of $.15 per share. Of those newly issued options,
50,000 shares expire January 31, 2000 with the remaining 2,300,000 shares
expiring November 30, 2003.
On March 26, 1999, options to purchase 250,000 shares at $.10 per share and
500,000 shares at $.15 per share were exercised. On March 31, 1999, options
to purchase 250,000 shares at $.10 per share were exercised. These exercises
of options resulted in net proceeds to the Company of $125,000 and was used
to help launch the TrackPower service on April 1, 1999.
F-20
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
11.Subsequent events (continued)
Conversion of notes payable to common stock:
An offer was made on March 31, 1999 to noteholders for their consent to allow
the sale of additional common stock and to change the form of the promissory
notes to make them convertible into shares of common stock at the holders
option. The offer was in the form of one share of common stock for every $4
of principal outstanding for a total of 148,746 shares of common stock.
On March 31, 1999, a portion of the note holders chose to convert their notes
to shares of common stock and additional warrants. Principal and interest
amounting to $125,497 was converted to common stock and warrants to purchase
an equal number of shares at $.15 per share expiring in one year were also
issued. A total of 836,644 shares of common stock and warrants to purchase
836,644 common share were issued to convert the debt.
Launch of TrackPower service:
On April 1, 1999, the Company launched the TrackPower service on the Sky
Vista service. Sky Vista is satellite service of Sky Direct which is a joint
venture between EchoStar Satellite Communications Inc. and Loral Skynet (a
subsidiary of Loral SpaceCom Corporation).
On June 4, 1999, the Company signed an agreement with Transponder Encryption
Services Corporation (a subsidiary of EchoStar communications Inc.) to move
the TrackPower service from the Sky Vista service to the Dish Network Service
which has substantially more existing subscribers. The Company plans to
relaunch the TrackPower service under the Dish Network Service on July
1, 1999. This agreement provides for a base monthly rent of $433,000 per
month plus a portion of revenues to be paid to EchoStar for the four-year
term of the agreement. Simmonds Capital Limited has guaranteed the Company's
obligation under this agreement.
Penn National Gaming letter of intent:
On April 29, 1999, the Company entered into a binding letter of intent with
Penn National Gaming Inc. under which Penn National will serve as the
Company's exclusive wagering hub operator for a five-year period. Penn
National will process all wagers arising from TrackPower subscribers. The
Company will receive a fee of up to 4.75% of all wagers delivered to Penn
National.
In Connection with the Penn National agreement, the Company issued warrants
to purchase 5,000,000 common shares of the Company. The warrants are
exercisable one million shares each year at (1) $1.58, (2) $1.82, (3) $2.05,
(4) $2.29, and (5) $2.53 and are exercisable for a five-year period. The
agreement contains one five-year renewal option.
F-21
<PAGE>
AMERICAN DIGITAL COMMUNICATIONS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 and 1998
11.Subsequent events (continued)
Private placements:
On March 12, 1999, the Company completed a private placement of 333,333
common stock with Simmonds Capital Limited at $.15 per share. Proceeds of the
private placement were used to help launch to TrackPower service.
On June 10, 1999, the Company completed a $1,250,000 private placement of
convertible notes. Proceeds of the private placement were used to repay the
remaining notes payable, after certain note holders converted to common stock
and for general corporate purposes. Interest on the notes at the rate of 8%
per annum is payable annually each June commencing in the year 2000 with the
principal due June 2004. The notes are convertible, at the option of the note
holder, into an aggregate of 1,000,000 shares of common stock of the Company
and 1,000,000 warrants to purchase common stock of the Company at $2.50, per
share for a period of three years from the date of conversion.
At the maturity date, the outstanding amount of the notes plus any accrued
interest is automatically converted into an equal number of shares of common
stock and warrants computed by dividing the total principal and interest
outstanding by $1.25.
F-22
<PAGE>
Unaudited Financial Information
TrackPower, Inc.
Balance Sheet
(UNAUDITED)
ASSETS November 30, February 28,
1999 1999
------- --------
Current Assets:
Cash 41,690 18,089
Accounts receivable 40,081 --
Notes receivable 10,764 10,764
Inventory 70,928 --
Marketable securities 6,545 616,880
Other current assets 5,723 331
- -------------------------------------------------------------------------------
Total current assets 175,731 646,064
- -------------------------------------------------------------------------------
Property and equipment:
Property and equipment 190,815 167,137
Less: Accumulated depreciation (151,423) (146,519)
- -------------------------------------------------------------------------------
Net property and equipment 39,392 20,618
Other assets:
Distribution rights, net of accumulated
amortization 110,897 129,493
Deposit on satellite uplink services -- 64,000
TrackPower trademarks and other intellectual
property rights 363,550 378,491
- -------------------------------------------------------------------------------
474,447 571,984
- -------------------------------------------------------------------------------
TOTAL ASSETS 689,570 1,238,666
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-1A
<PAGE>
TrackPower, Inc.
Balance Sheet
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY November 30, February 28,
1999 1999
---- ----
<S> <C> <C>
Current Liabilities:
Accounts payable 1,222,582 339,106
Accrued expenses 72,870 71,063
Accrued interest 58,261 75,242
Note payable -- 595,000
- --------------------------------------------------------------------------------------------------------------------
Total non-related party current liabilities 1,353,713 1,080,411
Accounts payable - related parties 332,379 407,319
Accrued interest - related parties -- 56,652
Notes payable - related parties 10,370 30,370
Current portion note payable - related party -- 157,461
- --------------------------------------------------------------------------------------------------------------------
Total related party current liabilities 342,749 651,802
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,696,462 1,732,213
Long term debt:
8% senior subordinated convertible debenture due June 10, 2004 1,250,000
8% senior subordinated convertible debenture due October 31, 2004 1,480,000 -
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 4,426,462 1,732,213
Shareholders' equity:
Convertible preferred stock, no par value, unlimited shares authorized, 1,000,000 1,000,000
(liquidation value $1,000,000)
Common stock, $.0001 par value; unlimited shares authorized, 2,934 2,516
29,340,401 shares, issued and outstanding on November 30, 1999 and 25,162,886
shares, issued and outstanding on February 28, 1999.
Additional paid in capital 7,813,954 7,169,700
Common stock subscribed 7,500 7,500
Warrants issued for guarantee 649,500 --
Accumulated deficit (13,239,937) (8,688,619)
Accumulated other comprehensive income 29,157 15,356
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity (3,736,892) (493,547)
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 689,570 1,238,666
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-2A
<PAGE>
TrackPower, Inc.
Statements of Operations and Comprehensive Income
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Royalties from distribution rights 3,393 2,378 7,909 10,125
Net subscription revenue 25,489 -- 30,152 --
Wagering commissions 8,750 -- 9,312 --
Other revenue 133 -- 4,430 --
- ---------------------------------------------------------------------------------------------------------------
Total revenue 37,765 2,378 51,803 10,125
Operating expenses:
TrackPower - wages and consulting fees 194,756 112,178 362,080 397,664
TrackPower - mgmt fees related party 75,000 75,000 225,000 225,000
TrackPower - transponder fees 1,200,000 -- 2,200,000 --
Non-recurring Denver office costs -- -- -- 48,778
Advertising & marketing costs 300,421 -- 450,425 --
General & administrative 225,923 48,385 526,004 284,058
- ---------------------------------------------------------------------------------------------------------------
Total operating expenses 1,996,100 235,563 3,763,509 955,500
Loss from operations: (1,958,335) (233,185) (3,711,706) (945,375)
Other expenses:
Interest on preferred shares -- -- 67,500 --
Interest 34,034 25,522 79,909 --
Non-cash financing expense -- -- 682,225 287,170
Realized gains on marketable securities -- (6,849) (28,463) (6,849)
Depreciation and amortization 12,970 20,850 38,441 62,554
- ---------------------------------------------------------------------------------------------------------------
Total other expenses 47,004 39,523 839,612 342,875
Net loss (2,005,339) (272,708) (4,551,318) (1,288,250)
Other comprehensive income:
Unrealized holding (loss) gain on marketable (3,773) 131,481 13,801 (390,159)
securities
- ---------------------------------------------------------------------------------------------------------------
Comprehensive loss (2,009,112) (141,227) (4,537,517) (1,678,409)
- ---------------------------------------------------------------------------------------------------------------
Net loss per share of common stock (0.07) (0.01) (0.16) (0.07)
- ---------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 29,199,151 25,127,886 28,133,203 24,897,330
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-3A
<PAGE>
TrackPower, Inc.
Statements of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
Increase (Decrease) in Cash
1999 1998 1999 1998
---- ---- ---- ----
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash used in operations
Net loss (2,005,339) (272,708) (4,551,318) (1,288,250)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 12,970 20,850 38,441 62,554
Gain on sale of marketable securities -- (6,849) (28,463) (6,849)
Changes in:
Accounts receivable (19,464) -- (40,081) --
Due to related parties (25,852) (1,012) (466,513) (23,713)
Inventory (597) -- (70,928) --
Other current assets 1,723 300 (5,392) --
Accounts payable 686,466 195,713 883,476 183,525
Accrued expenses 1,255 706 1,807 (57,891)
Accrued interest 33,776 -- (16,981) --
Other accrued liabilities -- 25,500 -- 51,233
- -----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,315,062) (37,500) (4,255,952) (1,079,391)
- -----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of marketable securities -- 135,576 652,598 193,843
Deposits - recovery -- -- 64,000 --
Sale/(purchase) of fixed assets (2,632) -- (23,678) (4,387)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 639,021 135,576 692,920 189,456
- -----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from options exercised 28,251 -- 263,751 --
Proceeds from sale of common stock, net -- -- 348,196 --
Warrants issued as guarantee fee -- -- 649,500 --
Non-cash financing expense -- -- 32,725 144,001
Proceeds/(repayment) of notes payable -- -- (437,539) 850,000
Proceeds on issuance of convertible debentures 1,230,000 -- 2,730,000 --
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities: 1,258,251 -- 3,586,633 994,001
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (59,443) 98,076 23,601 104,066
- -----------------------------------------------------------------------------------------------------------
Cash, beginning of period 101,133 25,548 18,089 19,558
- -----------------------------------------------------------------------------------------------------------
Cash, end of period 41,690 123,624 41,690 123,624
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-4A
<PAGE>
TrackPower, Inc.
Notes to Financial Statements
November 30, 1999
Summary of significant accounting policies
Basis of presentation
The accompanying financial statements have been prepared by the Company
without audit. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of the financial position
of the Company as of November 30, 1999 and February 28, 1999 and the results of
operations and cash flows for the periods ended November 30, 1999 and November
30, 1998.
Nature of business
The Company was organized on June 30, 1993 under the laws of Wyoming.
Prior to August 26, 1999, the Company operated under the name American Digital
Communications, Inc. The Company had intended to provide wireless two-way
communications in the 220 mHz. band, and the Company held distribution rights
for various Midland brand commercial land mobile radios and radio parts acquired
in separate transactions during 1995 and 1996. During fiscal year 1998, the
Company sold, sub-licensed or wrote off all remaining distribution rights. On
January 15, 1998, the Company acquired the TrackPower trade name and other
intellectual property rights from Simmonds Capital Limited ("Simmonds Capital").
The TrackPower service, when fully implemented, will distribute live horse
racing video to subscribers' homes via satellite and such subscribers will be
able to place wagers interactively through the World Wide Web and television.
The Company will not accept or place any wagering transactions but will deliver
the wager to a state-licensed account wagering entity.
Certain matters discussed in this Quarterly Report may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 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
expressed or implied in such forward-looking statements may differ. For
discussion of the factors that might cause such a difference, see "Management's
Discussion and Analysis or Plan of Operation" in this Quarterly Report.
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.
F-5A
<PAGE>
Marketable securities
The Company's marketable securities consist of unrestricted common
stock of publicly traded companies. The securities are considered held for sale
and therefore are recorded at the market value of the securities 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.
Advertising costs
The Company expenses advertising as incurred. Advertising expense
totaled approximately $450,425 in the nine month period ended November 30, 1999.
Amortization of intangibles
The cost of the remaining Midland distribution rights, which have been
sub-licensed to a third party, are being amortized over 10 years. However, due
to uncertainty surrounding future revenues from the distribution rights, the
Company uses the cost recovery method if that method produces a greater amount
of amortization.
The TrackPower trademark and other intellectual property rights are
being amortized over 20 years, which is the period estimated by management to be
the useful life of such rights.
Measurement of intangibles impairment:
The Company annually reviews the amount of the recorded intangible
assets for impairment. If the sum of 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.
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-6A
Exhibit 10.1
[A portion of this exhibit has been omitted and separately filed with Securities
and Exchange Commission pursuant to Rule 406 promulgated under the Securities
Act of 1933, as amended]
AGREEMENT
This Agreement made and entered into this 9th day of July, 1999, by
and between Penn National Gaming, Inc., a Pennsylvania corporation ("Penn") and
American Digital Communications, Inc., a Wyoming corporation ("TrackPower").
BACKGROUND
The parties have entered into a binding Letter of Intent dated April
29, 1999 pertaining to the subject matter hereof. The parties intend to more
fully set forth herein the rights and obligations of the parties under the
binding Letter of Intent.
Penn, through its subsidiaries, Mountainview Thoroughbred Racing
Association and Pennsylvania National Turf Club, Inc. (the "Racing
Associations") owns and operates Penn National Race Course ("Penn National"), a
thoroughbred racetrack located in Grantville, Pennsylvania. In connection with
the racing activities at Penn National, the Racing Associations import and
export simulcast signals of races conducted at Penn National as well as races
conducted at other racetracks throughout the United States and its territories,
possessions and commonwealths (the "Territory"). In addition, Penn, through the
Racing Associations, conducts a telephone account wagering system pursuant to
Section 218 of the Pennsylvania Race Horse Industry Reform Act, and the rules
and regulations thereunder (the "Pennsylvania Racing Law") pursuant to which
patrons place wagers on Penn National races and simulcast races from throughout
North America.
TrackPower has entered into an agreement with Loral SpaceCom
Corporation dated January 26, 1999 (the "Skynet Agreement") pursuant to which
TrackPower may distribute programming on up to 4 channels on Loral's Echostar
Satellite. TrackPower has determined not to distribute its programming under the
Skynet Agreement.
TrackPower has entered into an agreement with Transponder Encryption
Service Corporation dated June 4, 1999 (the "TESC Agreement" and together with
the Skynet Agreement, the "Satellite Agreements") pursuant to which TrackPower
may distribute encrypted programs on four video channels and one data channel on
certain designated satellites.
Penn National desires to engage TrackPower as the non-exclusive
distributor of races conducted at Penn National or simulcast through Penn
National pursuant to the terms and provisions hereof.
<PAGE>
TrackPower desires to engage Penn National as its exclusive hub through
which all betting on racing programs conducted by or through TrackPower to any
venue in the Territory including direct television broadcast, cable television,
Internet or other forms of distribution of such programming (the "TrackPower
Network"), will be conducted by or through the Penn National telephone account
wagering system conducted by Penn National pursuant to the applicable laws.
TrackPower has also agreed to grant Penn National a right of first refusal to
serve as the hub for the TrackPower Network outside the Territory.
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Distribution
1.1 TrackPower represents and warrants to Penn that attached hereto as
(i) Exhibit A and made a part hereof is a true and correct copy of the TESC
Agreement. TrackPower will promptly forward to Penn any amendments or
modifications to the TESC Agreement. TrackPower agrees to pay and perform all of
its obligations under the TESC Agreement as and when the same become due and
will promptly notify Penn of any defaults that exist or, upon the giving of
notice or the running of time would exist by any party, under either the TESC
Agreement.
1.2 During the term hereof, TrackPower shall maintain all technology
and equipment required or necessary to produce a television program of each race
conducted at Penn National and to distribute the same on the TrackPower Network
as well as to receive simulcasting from other racetracks and distribute the same
on the TrackPower Network. The hardware and software required in connection with
the operation of the TrackPower Network is described on Schedule 1.2, attached
hereto and made a part hereof. In that regard, TrackPower will maintain all such
software and hardware in a condition meeting prevailing industry norms so that
the programming on the TrackPower Network will be competitive with programming
produced by other racing networks and racetracks.
1.3 TrackPower shall, at its cost, maintain and operate the TrackPower
Network and all equipment and software relating thereto, twenty fours hours per
day, three hundred sixty five days per year on at least four channels on the
designated Satellite (subject to acts of God, labor disputes and other events
beyond the control of TrackPower).
1.4 TrackPower agrees that the TrackPower network signal shall be
encoded or otherwise broadcast in a manner consistent with applicable laws, the
Interstate Horse Racing Act of 1967, and the requirements of Penn and other
originating racetracks.
1.5 TrackPower shall furnish, at its cost, decoders to each recipient
of the encoded TrackPower Racing Network signal from or through Penn National.
2
<PAGE>
1.6 TrackPower agrees that Penn National will be the exclusive hub
operator for the TrackPower Racing Network and all races disseminated or
distributed by TrackPower to any venue (open TV, cable television, Internet or
other form of telecommunication) in the Territory and that all betting on such
races distributed by TrackPower shall be conducted through the Penn telephone
account wagering network. In addition, should TrackPower determine to distribute
the TrackPower Network outside the Territory, Penn National shall have a right
of first refusal, exercisable for 20 business days after notice from TrackPower,
to serve as the hub for the area beyond the Territory. Notwithstanding the
foregoing, in the event Penn cannot or decides not to offer any wagering product
proposed by TrackPower in any jurisdiction, TrackPower may, if such declination
continues for seven business days after written notice from TrackPower to Penn,
within the following 20 business days, agree with another hub operator to offer
such wagering product in the jurisdiction specifically rejected by Penn.
1.7 TrackPower shall be entitled to receive all subscriber fees paid by
subscribers enrolling in the TrackPower Racing Network. TrackPower agrees to use
its best efforts to maximize the number of subscribers by advertising, marketing
and promotions campaigns. TrackPower and Penn agree to use their best efforts to
develop a marketing/advertising/promotions campaign plan by not later than 90
days after the date hereof.
1.8 TrackPower agrees to pay Autotote, as and when due, any fees that
are incurred as a result of the interface between the TrackPower Network system
and the Autotote system utilized at Penn National. In the event Penn terminates
Autotote, TrackPower shall make such payments to Autotote's successor or to Penn
if such services are provided directly by Penn. TrackPower agrees to use its
best efforts to continue to develop software to be used in the TrackPower Racing
Network, which shall meet prevailing industry norms, all of which costs shall be
the responsibility of TrackPower. TrackPower and Penn shall, from time to time,
set minimum standards and goals for such software developments.
2. Obligations of Penn
2.1 Penn shall, at its cost, and in consultation with TrackPower,
negotiate simulcast agreements with thoroughbred and harness racetracks
throughout North America to be distributed on the TrackPower Racing Network.
Penn shall also be responsible for submitting such simulcast agreements to the
Pennsylvania State Horse Racing Commission for approval in accordance with the
Pennsylvania Racing Law, if required to do so, or for complying with any other
applicable laws.
2.2 Penn shall take all action necessary to seek all regulatory
approvals from the Pennsylvania State Horse Racing Commission and any other
government regulatory body having jurisdiction over the distribution of the
TrackPower Racing Network.
2.3 Penn shall assist TrackPower in formatting and scheduling the
content of the TrackPower Racing Network programming.
3
<PAGE>
2.4 Penn shall use its best efforts to cause the customers registered
on its telephone account wagering network to become subscribers on the
TrackPower Racing Network and, in that regard, to actively solicit and market
such transition.
2.5 Penn shall make available to the TrackPower Racing Network the new
Penn Players Choice player tracking system and, at its cost and expense, upgrade
and expand such system to accommodate the needs of the TrackPower Racing
Network. Penn shall make available to TrackPower all available wagering data
pertaining to wagering on the races distributed on the TrackPower Racing
Network.
2.6 Penn shall, at its cost, secure handheld automated devices (Tiny
Tim's) distributed through Autotote to be leased, without cost, to premium
players identified by Penn and TrackPower.
3. Fees to TrackPower
Penn shall pay or cause to be paid to TrackPower for the signal and
data sent to the TrackPower Network subscribers the following payments:
3.1 While the TrackPower Racing Network operates on an operator
assisted (telephone) basis, the following fees shall be payable:
SITUATION FEE PAYABLE AS A % OF
AMOUNT WAGERED
Existing Penn Telephone Account Customers [ ]*
New Customers - supplemental simulcast fee payable [ ]*
New Customers - no supplemental simulcast fee payable [ ]*
3.2 When the TrackPower Racing Network operates on an automated basis
(no operator), the following fees shall be payable:
SITUATION FEE PAYABLE AS A % OF
AMOUNT WAGERED
Existing Penn Telephone Account Customers [ ]*
New Customers - supplemental simulcast fee payable [ ]*
New Customers - no supplemental simulcast fee payable [ ]*
* Confidential percentage omitted.
4
<PAGE>
3.3 The fee shall be payable monthly, by the tenth day of the following
month. At the time the fee is paid, Penn shall furnish to TrackPower an
accounting and reconciliation for all customer accounts.
4. Warrants. TrackPower shall grant to Penn a warrant (the "Warrant") in the
form attached hereto as Exhibit "C" pertaining to the purchase of an aggregate
of 5,000,000 shares of TrackPower's common stock, par value $0.001 per share
(the "Common Stock"), upon the terms and conditions more fully set forth in the
Warrant. The Warrant shall vest, and shall be exercisable at the exercise
prices, as set forth in the following table:
From and after: Number of Shares Exercisable Exercise Price
--------------- ---------------------------- --------------
April 29, 1999 1,000,000 $1.58/share
April 29, 2000 1,000,000 $1.82/share
April 29, 2001 1,000,000 $2.05/share
April 29, 2002 1,000,000 $2.29/share
April 29, 2003 1,000,000 $2.53/share
The Warrant shall expire on April 30, 2004.
5. Representations and Warranties
5.1 TrackPower represents and warrants to Penn as follows:
5.1.1 Organization. TrackPower is a corporation duly organized
and existing under the laws of Wyoming and is qualified and in good standing
under the laws of each other jurisdiction in which such qualification is
necessary.
5.1.2 Authority. TrackPower has the requisite power and
authority to own its properties and assets and carry on its business as
presently conducted and to execute and deliver and perform this Agreement. All
requisite corporate action has been taken by TrackPower to authorize the
execution, delivery and performance of this Agreement.
5.1.3 No Contravention. TrackPower is not prevented by any
law, rule, regulation, order or decree from entering into this Agreement or
performing its obligation hereunder. No consent, approval or authorization of
(or declaration or filing with) any governmental agency on the part of
TrackPower is required in connection with the execution and delivery of this
Agreement, the consummation of the transactions contemplated hereby and the
performance of its obligations hereunder.
5.1.4 Licenses. TrackPower holds and will maintain all
licenses required by any governmental body having jurisdiction over TrackPower
and the TrackPower Network with respect to the operation of the TrackPower
Network and the exercise by TrackPower of its duties and obligations hereunder.
5
<PAGE>
5.1.5 Legal Compliance. During the term hereof, TrackPower
shall at all times abide by all applicable federal, state and local laws,
regulations, rules and orders pertaining to the operation of the TrackPower
Network and the performance of its obligations hereunder.
5.1.6 Litigation. TrackPower is not a party to nor threatened
by any civil or criminal litigation which could have a material adverse effect
on the financial or business condition of TrackPower or limit, in any material
way, the ability of TrackPower to perform its obligations hereunder.
5.1.7 Satellite Agreements. The TESC Agreement is in full
force and effect and none of the parties thereto is in default thereof. No party
to the TESC Agreement has given any formal or informal notice that another party
is in default or that any party intends to default under or terminate the TESC
Agreement.
5.1.8 No Proceedings. None of the officers or directors of
TrackPower are or within the past five years have been, the subject of any
government or court proceedings which could impact the ability of TrackPower or
such officers and directors to operate the TrackPower Network and perform their
obligations hereunder without being in violation of any applicable law, rule or
regulation of any governmental body or any ruling of any court.
5.1.9 Warrants. TrackPower has taken all corporate action
necessary to authorize the grant of the Warrants to Penn pursuant to paragraph 4
hereof and, during the term hereof, will reserve such number of shares of its
Common Stock for issuance under the Warrants as are necessary or appropriate,
from time to time.
5.1.10 SEC Compliance. TrackPower has complied, and during the
term hereof will continue to be in compliance, with the Securities Exchange Act
of 1934, as amended, and the rules and regulations thereunder, including, but
not limited to, filing all reports and other documents required to be filed
thereunder.
5.1.11 Continuing Representations. TrackPower agrees that the
foregoing representations and warranties shall be deemed to be continuing
representations and warranties and shall remain in full force and effect and
shall pertain to the facts and circumstances existing during the entire term
hereof. TrackPower shall promptly notify Penn of any facts or circumstances
which arise after the date hereof which would constitute a violation or breach
of any such continuing representations and warranties.
5.2 Penn represents and warrants to TrackPower as follows:
5.2.1 Organization. Penn is a corporation duly organized and
existing under the laws of Pennsylvania and is qualified and in good standing
under the laws of each other jurisdiction in which such qualification is
necessary.
6
<PAGE>
5.2.2 Authority. Penn has the requisite power and authority to
own its properties and assets and carry on its business as presently conducted
and to execute and deliver and perform this Agreement. All requisite corporate
action has been taken by Penn to authorize the execution, delivery and
performance of this Agreement.
5.2.3 No Contravention. Penn is not prevented by any law,
rule, regulation, order or decree from entering into this Agreement or
performing its obligation hereunder. No consent, approval or authorization of
(or declaration or filing with) any governmental agency on the part of Penn is
required in connection with the execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby and the performance of its
obligations hereunder, except as provided in Section 8.5 below.
5.2.4 Licenses. Penn holds and will maintain all licenses
required by any governmental body having jurisdiction over Penn and the exercise
by Penn of its duties and obligations hereunder.
5.2.5 Legal Compliance. During the term hereof, Penn shall at
all times abide by all applicable federal, state and local laws, regulations,
rules and orders pertaining to the operation of the TrackPower Network and the
performance of its obligations hereunder.
5.2.6 Litigation. Penn is not a party to nor threatened by any
civil or criminal litigation which could have a material adverse effect on the
financial or business condition of Penn or limit, in any material way, the
ability of Penn to perform its obligations hereunder.
5.2.7 No Proceedings. None of the officers or directors of
Penn are or within the past five years have been, the subject of any government
or court proceedings which could impact the ability of Penn or such officers and
directors to perform their obligations hereunder without being in violation of
any applicable law, rule or regulation of any governmental body or any ruling of
any court.
5.2.8 Continuing Representations. Penn agrees that the
foregoing representations and warranties shall be deemed to be continuing
representations and warranties and shall remain in full force and effect and
shall pertain to the facts and circumstances existing during the entire term
hereof. Penn shall promptly notify TrackPower of any facts or circumstances
which arise after the date hereof which would constitute a violation or breach
of any such continuing representations and warranties.
6. Term and Termination
6.1 Term. The term of this Agreement shall be for five years ending
April 30, 2004. Penn shall, at its sole discretion, have the option to extend
the Term hereof for an additional five years commencing May 1, 2004.
Notwithstanding anything herein to the contrary, the term hereof shall end upon
the termination of the TESC Agreement due to no fault of TrackPower.
7
<PAGE>
6.2 Termination by Penn National. Penn National may terminate this
Agreement for any of the following reasons:
6.2.1 TrackPower shall be in default in any material respect
in the performance of any of its obligations hereunder or otherwise commits any
material breach of this Agreement and such default continues uncured for a
period of thirty days after notice thereof from Penn to TrackPower.
6.2.2 TrackPower shall fail to maintain the TESC Agreement in
full force and effect or shall commit any breach thereunder which would permit
any other party thereto to terminate such Agreement.
6.2.3 Immediately upon the occurrence of the filing by
TrackPower of a petition in bankruptcy, filing a petition seeking any
reorganization, arrangement, composition or similar relief under any federal or
state law regarding insolvency or relief for debtors or making an assignment for
the benefit of creditors or the appointment of a receiver, manager, trustee or
similar officer for the business or property of TrackPower, or, if any
involuntary petition or proceeding in bankruptcy or insolvency is instituted
against TrackPower and not stayed or enjoined or discharged within sixty days
thereafter.
6.2.4 Immediately upon the occurrence or filing of an action,
whether administrative, regulatory or otherwise, seeking the suspension or
termination of any racing or gaming license in any jurisdiction in which
TrackPower requires a license in order to maintain the TrackPower Racing Network
and to perform its duties and obligations hereunder.
6.3 Termination by TrackPower. TrackPower may terminate this Agreement
for any of the following reasons:
6.3.1 Penn shall be in default in any material respect in the
performance of any of its obligations hereunder or otherwise commits any
material breach of this Agreement and such default continues uncured for a
period of thirty days after notice thereof from TrackPower to Penn.
6.3.2 Immediately upon the occurrence of the filing by Penn of
a petition in bankruptcy, filing a petition seeking any reorganization,
arrangement, composition or similar relief under any federal or state law
regarding insolvency or relief for debtors or making an assignment for the
benefit of creditors or the appointment of a receiver, manager, trustee or
similar officer for the business or property of Penn, or, if any involuntary
petition or proceeding in bankruptcy or insolvency is instituted against Penn
and not stayed or enjoined or discharged thereafter.
6.3.3 Immediately upon the occurrence or filing of an action,
whether administrative, regulatory or otherwise, seeking the suspension or
termination of any racing or gaming license in any jurisdiction in which Penn
requires a license in order to maintain and to perform its duties and
obligations hereunder.
8
<PAGE>
7. Intellectual Property Rights
7.1 All intellectual property rights, including but not limited to
rights in and to patents, copyrights, mask work rights, trademarks, and trade
secret rights, related to the equipment, hardware, software, tradenames or
trademarks directly or indirectly provided by either party under or in
connection with this Agreement at any time during the term (including extensions
thereof), belong and shall continue to belong exclusively to the party providing
the same.
7.2 Each party shall immediately notify the other if it ever becomes
aware of any impairment or infringement, or imminent threat of impairment or
infringement, of the other's rights. Neither party shall take any steps against
any alleged infringer unless and until requested to do so in writing by the
provider of the rights; provided, however, that if the owner of the rights fails
to take action as to any infringement that has or is likely to have a material
adverse effect on the operation of the TrackPower Network, the other may, after
the giving of at least fourteen days prior written notice to the owner, take
reasonable action to stop or abate the infringement at the owner's expense and
the owner will cooperate in any such action.
7.3 This Section 7 shall survive the termination or expiration of this
Agreement without time limitation.
7.4 License of Intellectual Property.
7.4.1 Each party hereby grants to the other the non-exclusive
right, license and authority to use each such party's respective trademarks,
service marks, trade names, logotypes and variances thereof (collectively,
"Marks") in connection with the advertising and promotion of the TrackPower
Network.
7.4.2 Penn and TrackPower have each granted the other the
non-exclusive right, license and authority to use each such party's Marks and
acknowledge and agree that it is essential to the proper marketing of the
products and services offered by each of them and to the preservation and
promotion of the excellent reputation and acceptance by the public at large of
the goods and services offered by each of them, and the goodwill and integrity
of each party's respective Marks that high uniform standards of quality and
service be maintained, and that uniform display of each party's respective Marks
be used in the distribution of such products and services to the public at
large. Accordingly, Penn and TrackPower each covenant and agree, as part of the
consideration for the execution of this Agreement, as follows:
9
<PAGE>
7.4.2.1 The right to use the Marks of the other party granted
under Section 7.4.1 above are personal to such party and cannot be sold,
assigned, transferred, hypothecated, pledged, liened, charged or encumbered, in
whole or in part, except in accordance with the terms of this Agreement;
7.4.2.2 Each party has the sole and exclusive right to use its
Marks (except for certain rights granted under existing and future license
agreements and for the rights granted hereunder) and neither party shall, during
the term of this Agreement nor after the expiration or termination hereof,
directly or indirectly impugn, contest, or aid or permit any act impugning or
contesting the validity of the other party's Marks or take any action whatsoever
in derogation of the other party's Marks nor shall either party assert any claim
to the goodwill, reputation or ownership thereof by virtue of the license
granted hereunder.
7.4.2.3 Each of Penn and TrackPower will advertise, promote
and display the Marks of the other only in the manner specified or approved in
writing by such other party. Each party shall advertise the Marks of the other
only in a professional and responsible manner and no advertising or other use of
such other party's Marks shall contain any statement or material which may, in
the sole subjective judgment of such other party, be misleading, in bad taste or
inconsistent with such other party's marketing strategy or public image.
7.4.2.4 Each of Penn and TrackPower acknowledge and agree that
nothing contained in this Agreement shall give either of them any right, title
or interest in or to the Marks of the other, except the right to use such Marks
in strict accordance with the terms of this Agreement. Each party further agrees
that any and all goodwill associated with the Marks, including any goodwill
which may be deemed to arise from the use by a party of the Marks of the other
party, inures directly and exclusively to such other party and no monetary
amount shall be assigned or attributed to any goodwill associated with a party's
use of the Marks of the other party.
7.4.2.5 Each party will promptly notify the other, in writing,
of any infringement or potential infringement of such other party's Marks of
which it has become aware. Neither party shall have any right to bring any
action or proceeding relating to such infringement or potential infringement of
the other party's Marks or which involves, directly or indirectly, any issue the
litigation of which may affect the interest of such other party in its Marks,
without the express prior written consent of such other party; and
7.4.2.6 On the termination of this Agreement, each party shall
immediately and completely discontinue all use of the other party's Marks and
shall not thereafter operate or do business under any trademark, service mark or
trade name or in any manner or style that may tend to give the general public
the impression that it is, either directly or indirectly, associated,
affiliated, licensed by or related to the other party.
10
<PAGE>
8. Miscellaneous
8.1 Entire Agreement. This Agreement contains the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior or contemporaneous agreements with respect to
such subject matter.
8.2 Binding Nature. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and permitted
assigns. Neither party shall assign any of its obligations hereunder, without
the express written permission of the other party, except to an affiliate of
such party.
8.3 Amendments. This Agreement may not be modified or amended except in
writing signed by each of the parties hereto.
8.4 Dispute Resolution. Any dispute arising hereunder shall be resolved
by arbitration in Philadelphia, Pennsylvania before a single arbitrator in
accordance with the rules of civil arbitration of the American Arbitration
Association. The decision or award of the arbitrator shall be final, binding and
conclusive on the Parties hereto and may be entered for enforcement in any court
having jurisdiction.
8.5 Racing Commission Approval. This Agreement shall not be binding
upon either party unless and until the same shall have been filed with the
Pennsylvania State Horse Racing Commission and, if necessary, approved by such
Commission.
8.6 Notices. All notices, demands and requests of any kind which either
party may be required or may desire to serve upon the other party hereto in
connection with this Agreement shall be delivered only by courier or other means
of personal service, which provides written verification of receipt or by
registered or certified mail return receipt requested (the "Notice"). Any such
Notice or demand so delivered by registered or certified mail or courier shall
be deposited in the United States mail, or in the case of courier, deposited
with the courier, with postage thereon fully prepaid. All Notices shall be
addressed to the parties to be served as follows:
(a) If to Penn: Copy to:
Joseph A. Lashinger, Jr., Esquire Robert P. Krauss, Esquire
Penn National Gaming, Inc. Mesirov Gelman Jaffe Cramer & Jamieson,
825 Berkshire Boulevard LLP
Suite 200 1735 Market Street
Wyomissing, PA 19610 Philadelphia, PA 19103
Fax No.: (610) 373-4966 Fax No.: (215) 994-1111
11
<PAGE>
(b) If to TrackPower: Copy to:
_______________________________ _______________________________
_______________________________ _______________________________
_______________________________ _______________________________
_______________________________ _______________________________
Either of the parties hereto may at any time and from time to
time change the address to which notice shall be sent hereunder by notice to the
other party given under this Section. All such notices, requests, demands, and
other communications shall be effective when received at the respective address
set forth above or as then in effect pursuant to any such change.
8.7 Governing Law. This Agreement shall be construed in accordance with
and governed by the internal laws of the Commonwealth of Pennsylvania with
respect to contracts made and performed in the Commonwealth.
8.8 Relationship of the Parties. This Agreement does not constitute
TrackPower and Penn as partners, joint venturers or make TrackPower or Penn an
agent of the other.
8.9 Public Announcements. No public announcement relating to the
existence of this Agreement or the matters contemplated by this Agreement will
be made without the prior approval of the other party, which approval shall not
be unreasonably withheld. Notwithstanding the foregoing, either party may make
such public announcements, after notifying the other, as are required by the
securities laws pertaining to the trading of the Common Stock of either party.
8.10 Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed will be deemed an original and all
of which when taken together shall be one in the same instrument. One or more
counterparts of this Agreement may be delivered by facsimile transmission with
the intention that it or they will have the same effect as the delivery of an
original counterpart hereof.
8.11 Force Majeure. Neither TrackPower nor Penn will be liable to the
other for any failure or delay in performance hereunder if and to the extent
such failure or delay was due to a cause beyond the reasonable control of
TrackPower or Penn, as the case may be, including, without limitation, acts or
failure to act of governmental authorities or others whose actions are required
by law, strikes, lockouts and other labor disturbances, riot, insurrection or,
electrical or cable failure, and/or acts of God (force majeure). The party whose
performance is prevented or delayed by an event of force majeure will promptly
give notice to the other of the occurrence of such an event and will use
commercially reasonable efforts to remove such event as soon as possible and
thereafter resume performance in accordance with the terms and provisions
hereof.
12
<PAGE>
8.12 Severability. In the event any term or provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
invalid or unenforceable, such provision shall be deleted and this Agreement
shall continue in full force and effect without such provision; provided that no
such deletion will be effective if it materially changes the economic benefit of
this Agreement to either party hereto.
8.13 Further Assurances. The parties acknowledge that the subject
matter hereof pertains to a new and developing technology. Accordingly, each
party agrees to cooperate with the other, in good faith, to resolve any disputes
between themselves or with third parties arising out of or in connection with
the performance of any duty or obligation hereunder.
8.14 Audit. TrackPower shall permit Penn or any governmental agency
having jurisdiction over the conduct of the TrackPower Network to review, audit
and copy any records of TrackPower pertaining to TrackPower subscribers and the
betting activity of such subscribers upon reasonable notice to TrackPower.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above written.
PENN NATIONAL GAMING, INC.
BY:___________________________
AMERICAN DIGITAL COMMUNICATIONS, INC.
BY:___________________________
13
<PAGE>
Sent Via Fax and First Class Mail
- ---------------------------------
July 20, 1999
Mr. John Simmonds - Chairman/CEO
Mr. Graham Simmonds - Director/Bus. Development
American Digital Communications
580 Granite Court
Pickering, Ontario
Canada LIW3Z4
Dear John and Graham:
This Letter Agreement is designed to act as a binding amendatory
agreement between Penn National Gaming, Inc. and American Digital Communications
(t/a TrackPower, Inc.). This agreement is designed to coordinate with terms of
an earlier agreement entered into by the same parties on July 9, 1999. The
agreement of July 9th is commonly referred to as the "hubbing agreement". This
agreement shall be known as Addendum #1.
Whereas, the hubbing agreement dealt with product controlled by Penn
National, this agreement deals with product that grows out of an arrangement
originated by TrackPower. This agreement relates solely to the Irish Racing
Product along with the Racing Channel and Channel 4 racing product being
broadcast from the United Kingdom and/or the Republic of Ireland. Therefore, the
only material changes shall be to those economic terms of the original hubbing
agreement.
In consideration of TrackPower obtaining the exclusive rights to the
in-home distribution of the aforementioned British and Irish racing product into
the United States; and in consideration of Penn's agreement to act as the hub
operator for this product in the
<PAGE>
United States, the parties have mutually agreed to the following economic terms
for this product only:
1. The first __%* of takeout will be applied to the
United Kingdom tote fee.
2. The next payment from takeout will be for pari-mutuel
taxes in the state licensing jurisdiction (estimated
at __%*).
3. TrackPower shall remain responsible for any fees
payable for the exclusive in-home rights that they
have obtained.
4. Following the payment of the UK tote fee and those
pari-mutuel taxes levied by the state licensing
jurisdiction in the United States, there shall be a
__%/__%* split of the balance amount between Penn
National Gaming, Inc. and American Digital
Communications.
5. Penn shall have non-exclusive rights to use this
product throughout their racing system, such to
include, but not be limited to, its racetracks,
off-track network and any Internet service, which it
may own and operate.
Parties hereto agree that this is the entire agreement and there are no
additional terms or agreements.
It is agreed that the parties executing this agreement shall have the
authority to execute this agreement.
This agreement may not be modified or amended except in writing signed
by each of the parties hereto.
All material non-financial covenants, representations and warranties
contained in the hubbing agreement are incorporated herein by reference.
* Confidential Percentage Omitted.
<PAGE>
All notices, demands and requests of any kind which either party may be
required or may desire to serve upon the other party hereto in connection with
this Agreement shall be delivered only by courier or other means of personal
service, which provides written verification of receipt or by registered or
certified mail return receipt requested (the "Notice"). Any such notice or
demand so delivered by registered or certified mail or courier shall be
deposited in the United States mail, or in the case of courier, deposited with
the courier, with postage thereon fully prepaid. All notices shall be addressed
to the parties to be served as follows:
(a) If to Penn: Copy to:
Joseph A. Lashinger, Jr., Esq. Robert P. Krauss, Esq.
Penn National Gaming, Inc. Mesirov, Gelman, Jaffe,
825 Berkshire Blvd., Suite 200 Cramer & Jamieson, LLP
Wyomissing, PA 19610 1735 Market Street
Fax No.: (610) 373-4966 Philadelphia, PA 19103
Fax No.: (215) 994-1111
(b) If to TrackPower Copy to:
Graham Simmonds John Simmonds
TrackPower, Inc. TrackPower, Inc.
580 Granite Court 580 Granite Court
Pickering, Ontario Pickering, Ontario
Canada LIW3Z4 Canada LIW3Z4
This agreement shall not be binding upon either party until the same
shall be submitted to the appropriate licensing jurisdiction commission and, if
necessary, approved by such commission.
<PAGE>
The execution of this document by the responsible corporate officers
shall be binding upon the parties, their successors and assigns.
Very truly yours,
PENN NATIONAL GAMING, INC.
By: ___________________________
Name:
Title:
AMERICAN DIGITAL COMMUNICATIONS
_______________________ By: ___________________________
Witness Name: John Simmonds
Title: Chairman/CEO
<PAGE>
October 1, 1999
Mr. John Simmonds - Chairman/CEO
Mr. Graham Simmonds - Director/Bus. Development
TrackPower, Inc.
580 Granite Court
Pickering, Ontario
Canada LIW3Z4
Dear John and Graham:
This is an Addendum Agreement identified as Addendum #2 to the original
Hubbing Agreement of July 9, 1999 between Penn National Gaming, Inc.
(hereinafter referred to as "Penn") and TrackPower, Inc. (hereinafter referred
to as "TrackPower") (collectively the "Parties"). It is the intention of the
parties hereto to define the rights, duties and responsibilities between Penn
and TrackPower as a result of a separate agreement entered into between eBet
Limited (Australia) and Penn National Gaming, Inc. (hereinafter referred to as
"eBet Agreement").
The eBet Agreement will provide interactive wagering technology to
Penn. It is Penn's desire to have TrackPower benefit as a participant under the
eBet Agreement.
Penn has formed a wholly-owned subsidiary known as eBetUSA, Inc. The
operating license created under the eBet Agreement for the interactive wagering
technology will reside with eBetUSA; and, whereas
TrackPower plans to maintain a separate and distinct wagering site on a
closed-loop subscriber based service across the Internet and agrees to offer
such in compliance with all applicable laws, rules and regulations as directed
by Penn and will complete such at its own cost; and
Penn has agreed to allow TrackPower to participate as permitted under
the terms of the eBet agreement (attached hereto); and
<PAGE>
The Parties hereto agree that TrackPower will hereinafter have two (2)
types of subscribers; the first being identified as a EchoStar Interactive
subscriber, and the second being identified as a PC subscriber; and
The Parties hereto agree that both subscribers will eventually employ
the interactive wagering technology for sending, receiving and wagering-related
data; and
WHEREFORE, the Parties hereto agree that the applicable terms of the
eBet Limited/Penn National Gaming, Inc. agreement shall be incorporated herein.
The eBet Participation Agreement has a ___ percent (__%)* based licensing fee
payable by eBetUSA, Inc. to eBet Limited for use of the interactive wagering
technology. It is agreed that this licensing fee is no longer required under the
terms of an equity conversion by eBet Limited in eBetUSA, Inc. and when and if
that occurs, the TrackPower liability hereunder shall also terminate; and
THEREFORE, Penn and TrackPower hereby agree that for the period that
eBetUSA, Inc., Penn or any of its other subsidiaries, is obligated to pay the
base licensing fee to eBet Limited, TrackPower will pay, within fifteen (15)
days following the close of each month, to eBetUSA, Inc. the following
EchoStar Interactive
PC Subscriber Subscriber
------------- ----------
Existing Telebet Account ___%* ___%*
Customer
New Telebet Account ___%* ___%*
Customer, Supplemental
Simulcast Fee Payable
New Telebet Account ___%* ___%*
Customer, Supplemental
Simulcast Fee Not Payable
The Parties further agree that the percentages defined in the above
table shall apply to all gross wagering revenue placed interactively using eBet
Limited's interactive wagering technology. In the case of any wagering revenue
placed by TrackPower
* Confidential percentage omitted.
<PAGE>
subscribers over the telephone to Telebet phone operators, no license fee will
be payable but this shall not alter the existing agreement between Parties as to
these customers.
The Parties additionally agree that this Addendum is conditioned upon
the approval of all relevant regulatory authorities.
The Parties agree that the terms of the original Hubbing Agreement and
Addendum #1 are incorporated with the terms of this Addendum Agreement.
The Parties agree that the person executing this agreement is the
responsible and fully authorized party to enforce this transaction; and
It is agreed that this agreement shall be binding upon the parties,
their heirs, successors and assigns (where permitted).
It is agreed hereto this ____ day of October, 1999.
Very truly yours,
PENN NATIONAL GAMING, INC.
By: ___________________________
Name:
Title:
TRACKPOWER, INC.
________________________ BY: ___________________________
Witness Name:
Title:
EXHIBIT 10.2
[A portion of this exhibit has been omitted and separately filed with the
Securities and Exchange Commission pursuant to Rule 406 promulgated under the
Securities Act of 1933, as amended]
SATELLITE CAPACITY LEASE
This Satellite Capacity Lease (the "Lease" or "Agreement"), is made
and effective as of this Fourth (4th) day of June, 1999, by and between American
Digital Communications, Inc., a Wyoming corporation ("Network"), having a
principal place of business at 745 Fifth avenue, suite 900, New York, New York
10151, and Transponder Encryption Services Corporation ("TESC"), having a
principal place of business at 90 Inverness Circle East, Englewood, Colorado
80112.
RECITALS
A. Network is in the business of producing and/or distributing a
certain video programming service ("Video Programming Service") and a certain
data programming service ("Data Programming Service") (the Video Programming
Service and the Data Programming Service are sometimes collectively referred to
herein as the "Programming Service", as more particularly described in Section
1.3.1 below) for viewing by end-users located in the Territory (as defined in
Section 1.4 below).
B. TESC is in the business of distributing programming services in a
digitally-compressed and encrypted format via satellites using Ku-Band and/or
Ka-Band frequencies (the "DTH System").
C. Network desires to lease four video channels and one data channel of
capacity on the DTH System for the purpose of transmitting the Programming
Service in a digitally encrypted format for receipt on a subscription basis by
end-users in the Territory via one or more Ku-Band and/or KaBand satellite(s) to
be selected by TESC from time to time in its sole judgment (any of which shall
be hereinafter referred to as the "Satellite"), which are directly or indirectly
owned and/or operated in whole or in part by TESC and are located at the 61.5
degrees west longitude orbital position.
D. Subject to the terms and conditions set forth below, TESC agrees to
allow Network to lease such capacity on the Satellite for the purpose of
transmitting the Programming Service in a digitally encrypted format for receipt
on a subscription basis by end-users in the Territory.
<PAGE>
NOW, THEREFORE, in consideration of the mutual promises and the
covenants hereinafter set forth, and for other good and valuable consideration,
the receipt of which is hereby acknowledged, Network and TESC agree as follows:
1. LEASE
1.1 Service Subscribers. A "Service Subscriber" is hereinafter defined
to mean any customer in the Territory which receives any portion or all of the
Programming Service from the Satellite in an encrypted format. A Service
Subscriber may include, but shall not be limited to, hotel and motel guest
rooms, private offices, and patient rooms in hospitals. For residential or
commercial Service Subscribers, each single residential dwelling unit or
commercial establishment regardless of the number of televisions or integrated
receiver-decoders ("IRDs") within the unit or establishment that are authorized
to receive the Programming Service shall be deemed to be a single Service
Subscriber. For hotel/motel rooms, hospital patient rooms and private business
offices, each television authorized to receive the Programming Service shall be
deemed to be a single Service Subscriber. For bulk-billed Service Subscribers,
the number of Service Subscribers per account shall be determined on an
equivalent billing unit basis, assuming one hundred percent (100%) penetration
Notwithstanding the foregoing, the following subscribers to the Programming
Service shall not be considered "Service Subscribers": (a) TESC's and/or any of
its Affiliates' test sites; (b) TESC's and/or any of its Affiliates, retailer
showrooms; and (c) employees of TESC and/or any of its Affiliates. For purposes
of this Lease, "Affiliate" shall mean, with respect to a person or entity, any
other person or entity directly or indirectly controlling, controlled by or
under common control with such person or entity.
1.2 Grant of Rights
1.2.1.1 By TESC. Subject to the terms and conditions of this
Lease, TESC hereby agrees to lease four (4) video channels, at approximately
three (3) megabits per second each, of capacity on the Satellite to Network for
the sole purpose of transmitting the Video Programming Service in a digitally
compressed and encrypted format (or any other transmission method determined by
TESC in its sole discretion) on a twenty-four (24) hour per day, 7 days per week
subscription (as opposed to a transaction, demand purchase, pay-per-view or
pay-per-block) basis to end-users in the Territory without any transport or
"bulk" rights granted or permitted.
1.2.1.2 Subject to the terms and conditions of this Lease,
TESC hereby agrees to lease one (1) data channel, at up to one (1) megabit per
second, of capacity on the Satellite to Network for the sole purpose of
transmitting the Data Programming Service in a digitally compressed and
encrypted format (or any other transmission method determined by TESC in its
sole discretion) on a multiple-hour per day format 7 days per week subscription
(as opposed to a transaction, demand purchase, pay-per-view or pay-per-block)
basis to end-users in the Territory without any transport or "bulk" rights
granted or permitted.
<PAGE>
1.2.2 By Network. Subject to the terms and conditions of this
Lease, Network grants TESC the rights to: (i) offer and sell subscriptions to
any or all portions of the Programming Service to residential, commercial
(public and private), SMATV, hotel/motel and other bulk-billed subscribers; (ii)
authorize and deauthorize IRDs to receive any or all portions of the Programming
Service for residential, commercial (public and private), SMATV, hotel/motel and
other bulk-billed subscribers; and (iii) to transport any or all portions of the
Programming Service to residential complexes, apartment buildings and other
multi-unit residential and business office complexes; hotels, motels and other
places of public lodging; hospitals, nursing homes and other health and medical
care facilities; prisons, reform schools and other correctional facilities, in
each case previously set forth in this subsection (iii) served by a centralized
receiving antenna or "SMATV" system. Network represents and warrants that it has
all rights necessary to grant TESC the rights contracted for by TESC under this
Lease, including but not limited to transmitting and transporting any or all
portions of the Programming Service and activating and deactivating
subscriptions to any or all portions of the Programming Service.
1.3 Programming Service
1.3.1 The Programming Service is comprised of the programming
elements set forth on the Programming Schedule attached hereto as Exhibit A,
which is incorporated herein by this reference. Network acknowledges and agrees
that the Programming Service will not directly or indirectly advertise, market
promote or otherwise reference any distributor of programming services which is
not owned and/or operated by TESC and/or its Affiliates.
1.3.2 If there is a material change in the programming content
set forth in Exhibit A hereto, as determined in TESC's reasonable judgment,
Network must notify TESC in writing at least thirty (30) days in advance of such
programming content change. In addition, Network must provide TESC with
sufficient proof as determined in TESC's reasonable judgment, of Networks
license rights to the new content upon request. In the event that the new
programming lineup does not contain substantially similar content as the initial
programming lineup set forth in Exhibit A hereto, TESC shall have the option,
exercisable in its sole discretion, to cease transmission of the Programming
Service effective thirty (30) days after delivery of written notice to Network.
In the event that Network does not provide TESC with sufficient proof of
Networks license rights to the new content upon request TESC shall have the
option, exercisable in its sole discretion to cease transmission of the
Programming Service effective immediately upon delivery of written notice to
Network. In the event that TESC ceases transmission of the Programming Service
pursuant to this Section 1.3.2, this Lease shall automatically terminate. Any
such termination shall be Without prejudice to any other rights or remedies that
TESC might have under this Lease, at law, in equity or otherwise.
1.3.3 Telecast Scheduling. TESC shall have the absolute right
but not the obligation to transmit any content it deems appropriate, on any
channel or channels during any time period in which no content has been provided
by Network for transmission during such time, or if the content supplied is not
transmitted by TESC because of poor transmission quality, technical problems,
non-payment, a refusal by TESC to transmit the content provided
<PAGE>
by Network for any of the reasons set forth in Section 10.2, or for any other
reason. TESC shall have the absolute right but not the obligation, in its sole
discretion, to blackout or to refrain from blacking out any programming in any
market at any time.
1.4 Territory. The "Territory" shall mean the geographic
boundaries of the United States and its territories, possessions, and
commonwealths. TESC is hereby authorized to distribute, exhibit or authorize any
third party to distribute or exhibit the Programming Service, in whole or in
part, to any location in the Territory, subject to all applicable laws, rules
and regulations, including without limitation the laws, rules and regulations of
the U.S. Government, the government of any foreign country, and their respective
agencies.
2. TERM This Lease shall commence on the date first written above and shall
continue for four (4) years thereafter, unless terminated sooner as provided
herein (the "Term"). TESC will use reasonable commercial efforts to commence
transmitting the Video Programming Service via the Satellite for revenue
generating purposes by July 1, 1999 (the "Commencement Date"). TESC will use
reasonable commercial efforts to commence transmitting the Data Programming
Service via the Satellite for revenue generating purposes within a reasonable
period of time following Network's delivery of the data signal to TESC's
Affiliate's Uplink Facility. Network agrees that upon the expiration or earlier
termination of this Lease, if TESC has already sold subscriptions to the
Programming Service, then, at Tesac's option, Network shall continue to provide
TESC the Programming Service under the terms and conditions outlined herein for
a period of time ("Programming Service Extension") that is the shorter of twelve
(12) months or that number of months necessary for TESC to provide the
Programming Service to Service Subscribers who bought a multi-month subscription
to the Programming Service prior to the receipt by TESC of notice of termination
of the Lease. Network's obligation to pay Base Rent under Section 3.2 below will
not apply during a Programming Service Extension.
3. RENT AND RESIDUAL REVENUES, RESIDUAL THIRD PARTY DATA REVENUES; RETAIL
PRICE OF PROGRAMMING; PAYMENTS AND DUE DATES
3.1 Rent and Residual Revenues.
3.1.1 Subject to the right hereby granted to TESC and its
Affiliates to offset any amounts due to Network hereunder against any amounts
due to TESC and/or any of its Affiliates from Network or any Affiliate thereof
(including without limitation the payment of Base Rent under Section 3.2 below),
TESC shall be entitled to retain [ ](1) percent of Video Programming Service
Revenues (as defined in Section 3.1.2 below) from each Reporting Period (as
defined in Section 3.3.1 below) as rent ("Video Rent") and the remaining [ ](2)
percent shall be payable to Network (the "Residual Video Revenues"). For
example, if [ ]: (3).
- -----------------
(1) Confidential number omitted
(2) Confidential number omitted
(3) Confidential paragraph omitted
<PAGE>
3.1.2 "Video Programming Service Revenues" for a particular
Reporting Period shall be calculated by multiplying the then current retail
price per month for a single-family subscription to the Video Programming
Service by the average of the sum of (a) the number of Service Subscribers to
the Video Programming Service as of the last day of the Reporting Period in
question; and (b) the number of Service Subscribers as of the last day of the
immediately preceding Reporting Period. For example, if. (i) there are 30,000
Service Subscribers as of the last day of the Reporting Period in question; (ii)
20,000 Service Subscribers as of the last day of the immediately preceding
Reporting Period; and (iii) the retail price per month for a single-family
subscription to the Video Programming Service is $24.99, then there would be
$624,750 in Video Programming Service Revenues for the Reporting Period in
question, which is equal to $24.99 (the then current retail price per month for
a single-family subscription to the Video Programming Service) times 25,000 (the
average of the sum of number of Service Subscribers as of the last day of the
current Reporting Period and the number of Service Subscribers as of the last
day of the immediately preceding Reporting Period or (30,000 + 20,000) divided
by 2).
3.2.1 Subject to the right hereby granted to TESC and its
Affiliates to offset any amounts due to Network hereunder against any amounts
due to TESC and/or any of its Affiliates from Network or any Affiliate thereof
(including without limitation the payment of Base Rent under Section 3.4 below),
TESC shall be entitled to retain [ ](4) percent of Data Service Revenues (as
defined in Section 3.2.2 below) from each Reporting Period (as defined in
Section 3.3.1 below) as rent ("Data Rent") and the remaining [ ](5) percent
shall be payable to Network (the "Residual Data Revenues"). For example, if; [
](6).
3.2.2 "Data Service Revenues" for a particular Reporting
Period shall include all revenues generated by Network on or from the Network
Data Programming on the Service including, but not limited to, advertising and
sponsorship, electronic or other commerce, and/or products and services for
which a Service Subscriber pays (including subscriptions, if any) Network a fee.
Notwithstanding anything to the contrary contained herein, Data Service Revenues
shall not include revenues derived from data related to gambling or wagering
activities.
3.3-1 "Reporting Period" for all Programming Service Revenues
means the period between the 22nd day of one calendar month and the 21st day of
the following calendar, as such Reporting Period may change from time to time in
TESC's sole discretion. The Video Programming Service Revenues and the Data
Programming Service Revenues are sometimes collectively referred to herein as
the Programming Service Revenues.
- ---------------
(4) Confidential number omitted
(5) Confidential number omitted
(6) Confidential paragraph omitted
<PAGE>
3.3.2 Notwithstanding Sections 3.1.2 and 3.2.2, TESC shall be
entitled to adjust Programming Service Revenues for any given Reporting Period
to account for: (i) differences between Programming Service Revenues previously
calculated and Programming Service revenues actually collected by TESC; (ii)
Programming Service refunds and credits that have previously been issued by
TESC; and/or (iii) sales tax assessed on Programming Service that has
previously been remitted by TESC. Network acknowledges and agrees that revenues
actually collected by TESC from a particular Service Subscriber will first be
applied towards the payment of outstanding balances due for any DISH Network
programming services purchased by that Service Subscriber and then will be
applied towards the payment of any outstanding balance due from that Service
Subscriber for the Programming Service.
3.4 Base Rent
3.4. Base Video Rent. In addition to any other amounts
specified herein, Network agrees to pay TESC US$[ ](7) per calendar month for
transmission of the Video Programming Service (the "Base Video Rent"). The Base
Video Rent payment for each calendar month during the Term shall be due and
payable in advance on the last business day of the immediately preceding
calendar month. Network's obligation to pay the Base Video Rent shall be
absolute, and shall not be contingent in any way on commercial viability or
success of the Video Programming Service, or on amounts actually being collected
from Service Subscribers.
3.4.2 Base Data Rent. In addition to any other amounts
specified herein, Network agrees to pay TESC US$[ ](8) per calendar month for
transmission of the Data Programming Service (the "Base Data Rent"). The Base
Data Rent payment for each calendar month during the Term commencing upon launch
of the data channel shall be due and payable in advance on the last business day
of the immediately preceding calendar month. Network's obligation to pay the
Base Data Rent shall be absolute, and shall not be contingent in any way on
commercial viability or success of the Data Programming Service, or on amounts
actually being collected from Service Subscribers. The Base Video Rent and the
Base Data Rent are sometimes collectively referred to herein as the "Base Rent."
3.5 Residual Third Party Video Revenues. In the event that
TESC transmits any third party audio or video content on the programming
channels during any residual time between transmissions of Network's Video
Programming, i.e., at times during which Network's Video Programming is not
being transmitted, for reasons other than those set forth in Section 10.2 or due
to termination or suspension by TESC of such transmissions pursuant to any other
term or condition of this Agreement, then TESC shall be entitled to retain [
](9) percent of Third Party Video Programming Service Revenues (as defined in
Section 3.5.1 below) as rent ("Third
- ----------------
(7) Confidential number omitted
(8) Confidential number omitted
(9) Confidential number omitted
<PAGE>
Party Video Rent") and the remaining [ ](10) percent shall be payable to Network
(the "Residual Third Party Video Revenues").
3.5.1 "Third Party Video Programming Service Revenues" for a
Particular period shall be defined as the net receipts to TESC from third
parties resulting from the lease of the video channels which are the subject
matter of this Agreement, to third parties during the period in which the video
channels are actively in use by Network as contemplated hereunder but the Video
Programming Service is not being transmitted at such time. Notwithstanding the
foregoing, Third Party Video Programming Service Revenues shall not include, and
in no event shall Network be entitled to , any portion of revenues generated
from the sale of times on the video channel during which Network's Video
Programming is not being transmitted due to the reasons set forth in Section
10.2 or due to termination or suspension by TESC of such transmissions pursuant
to any other, term or condition of this agreement.
3.6 Retail Price of Programming Service. The retail price for a
single-family subscription to the Video Programming Service will initially be
set at US$19.95 per month and US$150 per year per Service Subscriber. The retail
price for a single-family subscription to the Data Programming Service will be
mutually agreed by the Parties. Any subsequent changes to these rates shall be
mutually agreed upon by Network and TESC. The retail price for the Programming
Service for hotel and motel rooms shall be mutually agreed upon by the parties.
The retail price for the Programming Service for private offices, patient rooms
in hospitals, public and private commercial establishments and bulk-billed
consumers shall be determined by TESC in its sole judgment.
3.7 Payments and Due Dates
3.7.1 Residual Revenues for a given Reporting Period shall be
paid by TESC no later than forty-five (45) days after the end of the calendar
month in which the Reporting Period ends.
3.7.2 Any payment not made by Network to TESC within thirty
(30) days after it is due shall accrue interest at the rate of one percent (1%)
per month, compounded monthly from the date such amount is due until it is paid.
3.7.3 Any payment not made by TESC to Network within thirty
(30) days after it is due shall accrue interest at the rate of one percent (1%)
per month, compounded monthly from the date such amount is due until it is paid.
4. REPORTS; BOOKS AND RECORDS; AUDIT RIGHTS
4.1 Reports. Within forty-five (45) days after the end of the calendar
month in which the relevant Reporting Period ends, TESC shall supply to Network
the total number of
- ---------------
(10) Confidential number omitted
<PAGE>
Service Subscribers as of the last day of the relevant Reporting Period and the
immediately preceding Reporting Period. Subject to technical feasibility, TESC
will use reasonable commercial efforts to supply Network with reports
delineating Subscriber Information and indicating the number of new Service
Subscribers activated during mutually agreed upon intervals. Network
acknowledges and agrees that all information provided by TESC to Network under
this Section 4.1 is deemed proprietary to TESC, and Network represents and
agrees that it will treat all such information confidential in the same manner
as all Subscriber Information (as hereinafter defined in Section 11.11.2 below)
under Section 11.11.2 of this Lease.
4.2 Books and Records. TESC shall maintain for a period of at least two
(2) years, during the Term and for one (1) year thereafter, complete and
accurate records pertaining to distribution of the Programming Service pursuant
to this Lease.
4.3 Audit Rights. No more than once every twelve (12) months
during the term and on a one-time basis only for one (1) year thereafter, and
upon at least thirty (30) business days advance written notice, Network shall
have the right through a nationally recognized independent accounting firm, to
perform an audit at TESC's offices, during normal business hours, of the books
and records of TESC with respect to the Programming Service only for the sole
purpose of verifying Residual Revenue payments. Such audit shall be conducted at
Network's sole cost, and Network shall promptly provide TESC with a copy of any
such audit. If during the course of an audit Network uncovers that TESC has
failed to make any Residual Revenue payment or made any underpayments of greater
than ten percent (10%) with respect to any Residual Revenue payment made, TESC
shall pay to Network, in addition to the unpaid or underpaid Residual Revenue
payment, the reasonable costs and expenses incurred by Network in connection
with such audit. Network shall, and hereby agrees to obtain the written
agreement of any representative or agent conducting such audit on its behalf
(including, without limitations accountants and attorneys) to, maintain the
confidential treatment of all audited information of TESC in accordance with the
provisions of Section 11.11. Performance and acceptance of an audit by Network
of TESC's books and records shall be conclusively deemed as acceptance by
Network of full and final payment by TESC with respect to all accounts covered
by such audit; provided that any unpaid or underpaid Residual Revenues revealed
by such audit and any audit expenses required to be paid by TESC under this
Section 4.3 are actually paid in full by TESC.
5. MARKETING AND SALES
5.1 Marketing and Press Releases by Network
5.1.1 Marketing by Network. Network will use its best efforts
to market and promote the Programming Service to prospective Service Subscribers
throughout the Territory. In no event will Network or any of its Affiliates
directly or indirectly use any TESC Identifying
<PAGE>
Information in connection with the marketing and promotion of the Programming
Service without TESC's prior written approval which approval TESC may withhold
in its sole discretion. For purposes of this Lease, "TESC Identifying
Information" shall mean any logos, trademarks, service marks, trade names or
other information in any form now or hereafter used by TESC and/or any of its
Affiliates to identify itself or themselves or any of its or their products
and/or services. Network shall provide to TESC, at least thirty (30) days prior
to first use, an example of any advertising or promotional materials to be used
by Network and/or any of its Affiliates that directly or indirectly use any TESC
Identifying Information in connection with the marketing and promotion of the
Programming Service, which use has not, within the past twelve months, been
approved by TESC in exactly the form intended for use. TESC may reject and
prohibit Network and its Affiliates from using such materials, for any reason or
no reason in its sole and absolute discretion. In the event that TESC does not
grant written approval of marketing materials within five (5) business days
after receiving them from Network, the marketing materials submitted shall be
deemed rejected and Network and its Affiliates shall be prohibited from using
such materials. In the event that Network or any of its Affiliates: (i) directly
or indirectly uses any TESC Identifying Information in connection with the
marketing and promotion of the Programming Service without TESC's prior written
approval; or (ii) is required to, but fails to provide TESC with proposed
advertising or promotional materials at least thirty (30) days prior to first
use, TESC shall be entitled to terminate this Lease effective immediately upon
delivery of written notice to Network. Any such termination shall be without
prejudice to any other rights or remedies that TESC might have under this Lease,
at law, in equity or otherwise. Notwithstanding the foregoing, Network may
market and promote the Programming Service as being available on a "high-powered
DBS service" (or words of substantially the same import). All advertising,
marketing and promotional materials utilized by Network in connection with the
Programming Service: (a) will not directly or indirectly advertise, market,
promote or otherwise refer to any distributor of programming services which is
not owned and/or operated by TESC and/or it Affiliates; and (b) in the event
that TESC exercises the Option set forth in Exhibit A hereto, will direct
prospective Service Subscribers solely to the toll-free telephone number
established by Network under Section 5.4.5 below.
5.1.2 Press Releases by Network. In no event will Network or
any of its Affiliates directly or indirectly use any TESC Identifying
Information in any press release issued by Network and/or its Affiliates without
TESC's prior written approval, which approval TESC may withhold in its sole
discretion. Network shall provide to TESC, at least thirty (30) days prior to
release and in exactly the form intended to be publicly released by Network
and/or any of its Affiliates, any and all press releases which directly or
indirectly use any TESC Identifying Information (as defined in Section 5.1.1
above). TESC may reject and prohibit Network and its Affiliates from publicly
releasing such press releases, for any reason or no reason in its sole and
absolute discretion. In the event that TESC does not grant written approval of a
press release within five (5) business days after receiving it from Network, the
press release submitted shall be deemed rejected and Network and its Affiliates
shall be prohibited from publicly releasing it. In the event that Network and/or
any of its Affiliates: (i) directly or indirectly uses any TESC Identifying
Information in any press release issued by Network and/or its Affiliates without
TESC's prior written approval, or (ii) is required to, but
<PAGE>
fails to provide TESC with a proposed press release at least thirty (30) days
prior to release, TESC shall be entitled to immediately terminate this Lease by
providing written notice to Network to that effect. Any such termination shall
be without prejudice to any other rights or remedies that TESC might have under
this Lease, at law, in equity or otherwise.
5.2 Marketing by TESC. TESC shall have the right, but not the
obligation, to market and promote the all or any portion of the Programming
Service in a substantially similar manner as it markets and promotes other
programming services transmitted in a digitally compressed and encrypted format
via the then current satellite used by TESC to transmit the Programming Service.
TESC shall also have the right but not the obligation to direct prospective
Service Subscribers who contact TESC or any of its Affiliates with inquiries
about the Programming Service to the toll-free telephone number established by
Network under Section 5.4.5 below. Network agrees to permit TESC to use Networks
trademarks to market the Programming Service to customers.
5.3 Electronic Programming Guide. Network acknowledges and agrees that
the Programming Service will not be included in the electronic programming guide
("EPG") generally available to DISH Network customers, and that the Programming
Service will only be included in the EPG of individuals who subscribe to the
Programming Service. Subject to technical feasibility, TESC will use reasonable
commercial efforts to include all or portions of the Programming Service in the
EPG of individuals who subscribe to other adult-oriented programming services
offered on DISH Network. Notwithstanding the foregoing, TESC reserves the right
to alter, substitute, delete or otherwise modify the display of individual
program titles on the EPG, as TESC determines its sole and absolute discretion.
5.4 Sales.
5.4.1 Until such time, if ever, that TESC in its sole
discretion decides otherwise, TESC shall be responsible for receiving and
processing orders for the Programming Service. At all times during the Term,
TESC shall be responsible for billing and collecting payment from Service
Subscribers, and the authorization and deauthorization of IRDs to receive the
Programming Service; provided, however, that TESC shall have absolutely no
obligation to authorize, and hereby expressly retains the right to deauthorize
any IRD which TESC determines in its sole judgment is: (i) located outside the
Territory, or (ii) which is within the control of any person who may not legally
purchase the programming service or to whom the Programming Service may not
legally be sold; provided, further, that TESC shall have absolutely no
obligation to authorize an IRD to receive the Programming Service unless Network
provides TESC with a street mailing address (i.e.. not a post office box) for
the prospective Service Subscriber.
5.4.2 Network acknowledges and agrees that under no
circumstances shall Network collect any payment for Programming Service
subscriptions directly from any Service Subscriber, and that all payments for
Programming Service subscriptions will be made directly to TESC. In the event
that, notwithstanding Network's best efforts to comply with this requirement,
any Service Subscriber forwards any payment to Network rather than to TESC
<PAGE>
directly, Network shall immediately forward the payment, together with any
applicable sales or similar taxes, to TESC without deduction or offset of any
kind, and shall instruct the Service Subscriber that all future payments for the
Programming Service must be made to TESC directly.
5.4.3 Network will use its best efforts to market and sell to
Service Subscribers one of TESC's programming packages that includes at least
ten (10) basic programming services. TESC may, as a condition of furnishing
certain programming services to Service Subscribers, including without
limitation, the Programming Service, pay-per-view and a la carte programming,
impose additional access fees if a Service Subscriber does not maintain a
minimum level of programming services as determined by TESC, as such additional
access fee may change from time to time in TESC's sole discretion
5.4.4 Network further acknowledges and agrees that the
distribution of the Programming Service to Service Subscribers by TESC via the
DTH System is subject to the terms and conditions of the Residential Customer
Agreement attached hereto as Exhibit B, as such agreement may change from time
to time in TESC's sole discretion
5.5 TESC's Announcements. If Network delivers the Programming service
in a format which provides for the insertion and integration of announcements by
TESC, then TESC shall be entitled to the same amount of time per each hour of
delivery of the Programming Service as Network allots for any other operator
distributing the Programming Service, but in no event less than a reasonable
amount of time in accordance with industry standards. In addition to and without
limitation of the foregoing, Network will schedule at least one (1) thirty (30)
second video spot for announcements by TESC per four hours of delivery of the
Programming Service. Such spots will be distributed roughly evenly throughout
the hours of delivery of the Programming Service, unless the parties mutually
agree otherwise.
5.6 Packaging Requirements.
5.6.1 TESC may offer a la carte subscriptions to the
Programming Service or bundle the sale of the Programming Service with any of
TESC's new or existing programming packages or services.
5.6.2 In the event that TESC elects to bundle the Programming
Service with any other programming package(s) or service(s) (collectively, the
"Bundled Service"), the number of Service Subscribers attributable to the
Bundled Service as of the last day of any given Reporting Period shall be equal
to the quotient of the amount of Bundled Service Revenues attributable to the
Programming Service under Section 5.6.3 below during that particular Reporting
Period divided by the then current retail price per month for a single-family
subscription to the Programming Service. For example, if $100,000.00 in Bundled
Service Revenues are attributable to the Programming Service under Section 5.6.3
below during a given reporting month and the then current retail price per month
for a single-family subscription to the Programming Service is $24.99, there
would be 4,002 Service Subscribers attributable to the Bundled Service as of the
last day of that reporting month.
<PAGE>
5.6.3 "Bundled Service Revenues" for a particular Reporting
Period shall be calculated in the same manner as Programming Service Revenues
under Sections 3 above. The percentage of Bundled Service Revenues attributable
to each particular programming package or service comprising the Bundled Service
shall be equal to the quotient of the then current retail price per month for a
single-family subscription to the relevant programming package or service
divided by the sum of the then current retail prices per month for
single-family subscriptions to each of the individual programming packages or
services constituting the Bundled Service. For example, if TESC bundles the
Video Programming Service ($24.99 per month for a single-family subscription)
with "Channel X" ($15.99 per month for a single-family subscription) and
"Channel Y" ($9.99 per month for a single-family subscription), then the
percentage of Bundled Service Revenues attributable to the Video Programming
Service is equal to the quotient of then current retail price per month for a
single-family subscription to the Programming Service ($24.99) divided by the
sum of the then current retail prices per month for single-family subscriptions
to the Video Programming Service, Channel X and Channel Y ($50.97), or forty
nine percent (49%).
6 RECEPTION AND DISTRIBUTION OF THE PROGRAMMING SERVICE
6.1 Signal Delivery by Network. Network shall be solely responsible
for all costs of production programming and delivery of the Programming Service
to TESC's, uplink facility in Cheyenne, Wyoming (the "Uplink Facility"),
including the acquisition, delivery and installation of any equipment, including
non-standard broadcast equipment, necessary to receive the Programming Services
at the Uplink Facility. Network will initially deliver the Programming Service's
signal to the Uplink Facility via a domestic communications satellite(s) or
backhaul mutually agreed to in advance in writing. Network will transmit to TESC
a high-quality signal for the Programming Service from a satellite and shall
keep TESC apprised of both the satellite and transponder it is using for such
transmission. The signal which carries the Programming Service to the Uplink
Facility may be encrypted at the sole option and expense of Network; provided
that Network provides TESC with a primary and secondary IRD capable of decoding
the signal at least twenty-one (21) days prior to commencement of the delivery
of encrypted signals. TESC acknowledges that Network has provided TESC with a
primary and secondary IRD which are capable of decoding Network's current signal
within a sufficient period of time prior to commencement of delivery of
Network's current signal. Network agrees that, if it intends to deliver the
Programming Service's signal to the Uplink Facility in a digital format, it will
provide TESC, twenty-one (21) days prior to the Commencement Date, with a
primary and secondary IRD in order that TESC may receive the Programming
Service's digital signal from the Network's satellite. In the event that TESC or
any of its Affiliates are required under any applicable federal state or local
law or regulation to provide the Programming Service in a close-captioned
format, Network agrees, at Network's sole cost and expense (including without
limitation the payment of any additional production costs associated therewith),
to deliver the Programming Service to the Uplink Facility in a close captioned
format.
<PAGE>
6.1.1 Network represents that up to the time of execution hereof two of
the video channels which are the subject matter of this Agreement, have been
delivered via satellites and services owned and operated by Loral SkyNet, Inc.
("Loral"). Network warrants and represents that prior to execution hereof it has
obtained all necessary written consents, approvals and waivers from Loral in
order to transfer the said channels from Loral's satellite, to TESC's satellite
hereunder and to fully perform under this Agreement without claim of any kind by
Loral and/or any of its affiliates, against Network and/or its Affiliates or
TESC and/or its Affiliates. Network and its Affiliates hereby agree to
indemnify, defend (through counsel of the relevant TESC Indemnitees choice) and
hold harmless the TESC Indemnitees from, against and with respect to any and all
direct and indirect claims damages, liabilities, costs and expenses (including
the payment of reasonable attorney fees in advance) incurred in connection with
any civil, criminal administrative and other claim against any of the TESC
Indemnities arising out of or relating in any way to Network's relationship with
Loral and the transfer of the two channels as described above.
6.2 Signal Transmission by TESC.
6.2.1 Network is responsible for providing to TESC, at
Networks sole cost and expense, all equipment necessary for TESC to receive the
Programming Service. Except as otherwise set forth in the immediately preceding
sentence, TESC shall be responsible for the costs of compression encryption and
transmission of the Programming Service from the Uplink Facility to the DTH
System and to Service Subscribers; provided however, that if Network desires to
change the technology used to deliver or encode the signal after the date first
set forth above, Network agrees to give TESC written notice of the technology
that will be used to deliver and/or encode the signal at least sixty (60) days
prior to the date upon which Network intends to commence delivery and/or
encoding of the Programming Service using that technology. Network agrees to pay
all reasonable additional costs to be incurred by TESC in order to receive,
decode, compress, digitize, transmit or any other manipulation of the signal due
to such change in technology within fifteen (15) days after delivery of such
notice. In the event that Network fails to pay such costs in a timely manner,
then TESC may at its option by notice to Network cease transmission of the
Programming Service from the DTH System and terminate this Lease. Any such
termination shall be without prejudice to any other fights or remedies that TESC
might have under this Lease, at law, in equity or otherwise.
6.2.2 In the event that Network desires to change the
satellite transmitting the Programming Service to the Uplink Facility, Network
agrees to give TESC written notice of the satellite and transponder location by
which the Programming Service will be delivered to the Uplink Facility at least
sixty (60) days prior to the date upon which Network intends to commence
delivery of the Programming Service via satellite or to switch the satellite
used to deliver the Programming Service to the Uplink Facility. In the event
that the satellite indicated by Network in any such notice cannot be received by
TESC using exisiting antennas at the Uplink Facility, Network agrees to pay all
reasonable costs associated with the purchase of appropriate downlink antenna
equipment for, and the installation and integration of such
<PAGE>
equipment at, the Uplink Facility within fifteen (15) days after delivery of
such notice. In the event that Network fails to pay such costs in a timely
manner, then TESC may, at its option, by notice to Network delete carriage of
the Programming Service from the DTH System and terminate this Lease. Any such
termination shall be without prejudice to any other rights or remedies that TESC
might have under this Lease, at law, in equity or otherwise.
6.2.3 Network will ensure that all satellite transmissions to
TESC have a high-quality signal for the Programming Service and shall keep TESC
apprised of both the satellite and transponder it is using for such
transmissions. Satellite signals carrying the Programming Service to the Uplink
Facility may be encrypted at the sole option and expense of Network provided
that Network provides TESC with a primary and secondary IRD capable of decoding
the signal at least twenty-one (21) days prior to commencement of the delivery
of encrypted signals. TESC acknowledges that Network has provided TESC with a
primary and secondary IRD which are capable of decoding Network's current signal
within a sufficient period of time prior to commencement of delivery of Networks
current signal. Network agrees that, if it intends to deliver the Programming
Service's signal to the Uplink Facility in a digital format, it will provide
TESC, twenty (21) days prior to the Commencement Date, with a primary and
secondary IRD in order that TESC may receive the Programming Service's digital
signal from the Network's satellite. Notwithstanding anything to the contrary
set forth herein, Network acknowledges and agrees that TESC has no obligation to
distribute the Programming Service via the DTH System in any manner which is
now, or at any time hereafter may be, prohibited under applicable local, state
or federal laws and regulations, including without limitation statutes, laws,
rules, regulations and orders enforced, administered, promulgated or pronounced
by the Federal Communications Commission or any successor agency thereto, as
amended from time to time.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS
7.1 General Representations, Warranties and Covenants. Network
represents, warrants and covenants to TESC that: (i) it has and will continue to
have full and sole authority, ability and right to enter into and fully perform
this Lease; (ii) it has not and will not during the Term enter into an agreement
or arrangement which limits the full performance of its obligations hereunder;
(iii) it is and will remain in full compliance with all applicable local, state
and federal laws and regulations, including without limitation such statutes,
laws, rules, regulations and orders enforced, administered, promulgated or
pronounced by the Federal Communications Commission or any successor agency
thereto, as amended from time to time; (iv) it is under no obligation and will
not become subject to any obligation that might interfere with its performance
of this Lease; (v) it has all rights necessary to grant TESC the right to
distribute the Progranuning Services and to use Network's trademarks, service
marks, logos and related trade usages as permitted hereunder; (vi) no civil,
criminal, administrative or other claims have ever been filed against Network
its Affiliates or any predecessor entity of either alleging a violation of any
federal, state, local or other gambling, wagering, obscenity, indecency and/or
similar laws; and (vii) it will comply with all of its representations,
<PAGE>
warranties, obligations, covenants and responsibilities herein contained. All
representations, warranties and covenants made under this Section 7 shall
survive the termination or earlier expiration of this Lease for a period of
three (3) years following expiration or earlier termination. In the event that
Network's representation and warranty under subsection (vi) above ultimately
proves untrue, TESC shall be entitled to terminate this Lease effective
immediately upon delivery of written notice to Network. Any such termination
shall be without prejudice to any other rights or remedies that TESC might have
under this Lease, at law, in equity or otherwise.
7.2 Representations, Warranties and Covenants as to Content. Network
represents, warrants and covenants that all programming included as part of the
Programming Service (whether or not set forth on Exhibit A hereto) will not be
obscene, libelous, slanderous, or defamatory, or in violation of any gambling or
wagering laws, or any other federal state, local or other laws, nor will it
contain any material which violates or infringes any copyright, right of privacy
or literary or dramatic right of any person or entity. Network is responsible
for making (and hereby represents and warrants that it will pay as and when due)
all copyright, royalty or other performance rights payments through to the
viewer, including, without limitation payments to ASCAP, BMI, SESAC and any
other applicable music performance society or other applicable entity
(collectively referred to as the "Performance Right Fees") with respect to all
programming included as part of the Programming Services (whether or not set
forth on Exhibit A hereto). In the event that Network breaches any of its
representations and warranties under this Section 7.2, TESC shall be entitled to
terminate this Lease effective immediately upon delivery of written notice to
Network. Any such termination shall be without prejudice to any other rights or
remedies that TESC might have under this Lease, at law, in equity or otherwise.
8. INDEMNIFICATION
8.1 Indemnification by Network and its Affiliates. Network and its
Affiliates hereby agree to indemnify, defend (through counsel of the relevant
TESC Indemnitees choice) and hold harmless TESC, its Affiliates, and the
directors, officers, employees and agents of TESC and/or any of TESC's
Affiliates (collectively, the "TESC Indemnities") from, against and with respect
to any and all claims, damages, liabilities, costs and expenses (including the
payment of reasonable attorney fees in advance) incurred in connection with any
civil criminal, administrative and other claim against any of the TESC
Indemnities arising out of or relating in any way to: (i) Network's breach of
any material provision of this Lease; (ii) the breach of any of Networks
representations or warranties herein; (iii) material or programming supplied by
Network and/or any of its Affiliates (whether or not set forth in Exhibit A
hereto), including without limitation any claims alleging that the transmission
of any programming provided by Network and/or any of its Affiliates (whether or
not set forth in Exhibit A hereto) is obscene, libelous, slanderous or
defamatory, violates any gambling or wagering laws, or violates or infringes any
copyright, right of privacy or literary or dramatic right of any person or
entity; (iv) Networks and/or any of its Affiliates' advertising and marketing;
(v) the transmission of
<PAGE>
any programming as part of the Programming Service (whether or nor set forth on
Exhibit A hereto) which violates or requires payment of any Performance Rights
Fees; (vi) any other materials, including advertising or promotional copy,
supplied and/or approved by Network, (vii) the use of any logos, trademarks,
service marks, trade names or other TESC Identifying Information inconsistent
with TESC's written instructions or this Lease; and/or (vii) TESC ceasing to
transmit the Programming Service for any reason permitted hereunder;.
8.2 Indemnification by TESC. TESC shall indemnify and hold harmless
each of Network, its Affiliates, directors, officers, employees and agents of
Network, (collectively, the "Network Indemnities") from, against and with
respect to any and all claims, damages, liabilities, costs and expenses
(including reasonable attorneys' fees) incurred in connection with any claim
against the Network Indemnities arising out of (i) TESC's breach of any material
provision of this Lease; and/or (ii) TESC's advertising and marketing of the
Programming Service (unless materials are provided or approved by Network).
8.3 Notice of Indemnification Claim. Should either party wish to
assert a claim for indemnification, such party shall do so by promptly notifying
the other party in writing of such claim. The indemnifying party shall undertake
the defense of any such claim or action and permit the indemnified party to
participate therein at the indemnified party's expense. The settlement of any
such claim or action by an indemnified party, without the indemnifying parties
prior written consent, shall release the indemnifying parry from its obligations
hereunder with respect to such claim or action so settled. The indemnities
contained in this Article 8 shall continue throughout the Term and shall survive
the termination of this Lease.
9. LIMITATION OF LIABILITY IN NO EVENT SHALL TESC OR ANY AFFILIATE OF TESC BE
LIABLE FOR ANY EXEMPLARY, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES TO
NETWORK (INCLUDING WITHOUT LIMITATION, ANY PAYMENT FOR LOST BUSINESS, FUTURE
PROFITS, LOSS OF GOODWILL, REIMBURSEMENT FOR EXPENDITURES OR INVESTMENTS MADE OR
COMMITMENTS ENTERED INTO, CREATION OF CLIENTELE, ADVERTISING COSTS, TERMINATION
OF EMPLOYEES OR EMPLOYEES SALARIES, OVERHEAD OR FACILITIES INCURRED OR ACQUIRED
BASED UPON THE BUSINESS DERIVED OR ANTICIPATED UNDER THIS LEASE), WHETHER
FORESEEABLE OR NOT, CLAIMS UNDER DEALER TERMINATION, PROTECTION, NON-RENEWAL OR
SIMILAR LAWS, FOR ANY CAUSE WHATSOEVER WHETHER OR NOT CAUSED BY TESC'S
NEGLIGENCE, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. IN NO EVENT SHALL ANY
PROJECTIONS OR FORECASTS BY TESC BE BINDING AS COMMITMENTS OR PROMISES BY TESC.
<PAGE>
10. TERMINATION
10.1 Termination by Either Party
10.1.1 Termination. Subject to Section 10.1.2 below, upon
thirty (30) days prior written notice (or ten (10) days in the case of a payment
default), either party may terminate this Lease in the event: (i) the other
party has made any material misrepresentation; (ii) the other party has breached
any of the material warranties, covenants or material obligations; or (iii) the
other party becomes insolvent or seeks relief under any insolvency statute, is
placed in receivership or liquidation, or makes any assignment for the benefit
of creditors. The right of a party to terminate this Lease in any such instances
shall be in addition to any other rights or remedies it may have under this
Lease, at law, in equity or otherwise.
10.1.2 Opportunity to Cure. Upon receiving written notice of
termination due to breach or default as specified in Section 10.1.1 above, the
notified party shall use its reasonable efforts to immediately commence to cure
such breach or default; provided however, that the notified party shall have:
(i) up to a maximum of thirty (30) days (or ten (10) days in the case of a
payment default), if needed, from the receipt of such notice to cure the breach
or default: or (ii), except in the case of a payment default, if such cure is
capable of cure but cannot be reasonably completed in such period, and the
notified party has commenced and is diligently pursuing such cure, then for such
longer period necessary to complete such cure, but in no event to exceed ninety
(90) days in total. If such breach or default is timely cured, the notice of
termination shall be null and void.
10.2 Termination by TESC.
10.2.1 If TESC determines, in its sole judgment, that the
activities contemplated under this Lease or any other circumstances, including
without limitation an increase in obscenity prosecutions or prospective or
current customer or citizen protests against gambling, wagering, or
adult-oriented products or services, may: (i) adversely impact the business,
reputation, interests, or goodwill of TESC and/or any of its Affiliates, or (ii)
result in the institution of civil, criminal, administrative or other
proceedings against TESC and/or any of its Affiliates, TESC may take such
actions as it deems necessary in its sole judgment to protect the business,
reputation, interests, and goodwill of TESC and/or any of its Affiliates and to
prevent the institution of any such proceedings against TESC and/or any of its
Affiliates, including without limitation termination of the Lease and suspension
and/or restriction of the transmission of the Programming Services in the
Territory or any portion of the Territory, or to certain Service Subscribers.
TESC shall have no liability or obligations to Network as a result of such
actions, and in the event that TESC elects to terminate the Lease, TESC shall
have no further obligations to Network whatsoever, except that TESC shall not be
relieved of its obligations to pay moneys due or which become due to Network as
of or subsequent to such termination. Any such termination shall be without
prejudice to any other rights or remedies that TESC might have under this Lease,
at law, in equity or otherwise.
10.2.2 This Lease shall terminate automatically should any of
the following occur, unless TESC notifies Network to the contrary in writing:
(i) Network becomes insolvent, or voluntary or involuntary bankruptcy,
insolvency or similar proceedings are instituted against
<PAGE>
Network; (ii) Network, for more than twenty (20) consecutive days, fails to
maintain operations as a going business; (iii) Network, for more than twenty
(20) consecutive days, ceases to actively market and promote the Programming
Service; (iv) Network, or any officer, director, substantial shareholder or
principal of the Network is convicted in a court of competent jurisdiction of
any offenses substantially related to the business conducted by the Network in
connection with this Lease; (v) Network fails to comply with any applicable
local, state and federal laws and regulations, including without limitation such
statutes, laws, rules, regulations and orders enforced, administered,
promulgated or pronounced by the Federal Communications Commission or any
successor agency thereto, as amended from time to time; (vi) Network falsifies
any documents, records or reports required hereunder; (vi) Network fails to
renew, or loses, due to suspension, cancellation or revocation, for a period of
fifteen (15) days or more, any license, permit or similar document or authority
required by law or governmental authority having jurisdiction, that is necessary
in carrying out the provisions of this Lease and to maintain its corporate or
other business status, as in effect as of the effective date of this Lease;
(viii) Network makes any representation or promise on behalf of TESC
inconsistent with the representations or promises that TESC has specifically
authorized Network to make on behalf of TESC in this Lease; or (ix) any actual
or alleged fraud, misrepresentation, or illegal action of any sort by Network in
connection with this Lease. Any such termination under this Section 10.2.2 shall
be without prejudice to any other rights or remedies that TESC might have under
this Lease, at law, in equity or otherwise.
11. MISCELLANEOUS
11.1 Network's Ownership of Programming Service. All rights, title and
interest in and to the Programming Service, and all advertising and promotional
materials produced by Network, ideas, formats and concepts contained therein or
used in connection therewith (including all copyrights) shall, as between the
parties, at all times be the sole property of Network, and TESC shall not make
any claim to the contrary.
11.2 Counterparts. This Lease may be executed in one or more identical
counterparts, each of which shall be deemed an original, but all of which shall
together constitute one and the same instrument.
11.3 Assignment. Network shall not assign this Lease without the
prior written consent of TESC, which consent may be withheld in TESC's sole and
absolute discretion, except to an Affiliate of Network; provided, however, that,
such Affiliate is: (i) at least as creditworthy as Network at the time it
originally executed this Lease; (ii) is not a direct or indirect provider of
direct to home programming; and (iii) Network unconditionally guarantees the
full and timely payment and performance of the Affiliate's obligations under
this Lease. In furtherance and without limitation of the foregoing, any merger,
reorganization or consolidation of Network shall be deemed an assignment
requiring TESC's consent hereunder. In furtherance and without limitation of the
foregoing, in the event that any person or entity
<PAGE>
who, as of the date first written above, did not possess, directly or
indirectly, the power to direct or cause the direction of management or policies
of Network, whether by virtue of the ownership of voting stock, by contract or
otherwise, later comes into possession of such power, that will be considered an
assignment requiring TESC's consent hereunder. TESC may assign this Lease in
whole or in part at any time without Network's consent. In the event that
Network assigns or attempts to assign this Lease in violation of this Section
11.3, TESC shall be entitled to terminate this Lease effective immediately upon
delivery of written notice to Network. Any such termination shall be without
prejudice to any other rights or remedies that TESC might have under this Lease,
at law, in equity or otherwise.
11.4 Relationship of the Parties. The relationship of the parties
hereto is that of independent contractors. Nothing contained herein shall be
deemed to create, and the parties hereto do not intend to create, any
relationship of employee/employer, partnership, joint venture or agency, nor
shall any similar relationship be deemed to exist between them. Network hereby
represents that it is not dependent upon TESC for a major part of its business.
11.5 Force Majeure. Notwithstanding anything to the contrary in this
Lease, neither party shall be liable to the other for failure to fulfill its
obligations hereunder if such failure is caused by or arises out of an act of
force majeure including acts of God, war, strike, riot labor dispute, natural
disaster, technical failure (including the failure of all or part of the
Network's domestic communications satellite or TESC's Satellite, or transponders
on which the Programming Service is delivered by Network to TESC or by TESC to
Service Subscribers, or of the related uplinking or other equipment),
governmental order or regulation or any other reason beyond the reasonable
control of the party whose performance is prevented during the period of such
occurrence. The Term of this Lease shall be suspended during the period when a
party is unable to fulfill its obligations hereunder by reason of such
occurrence. In addition, the shared revenue payable by TESC shall be reduced on
a prorated basis if by reason of force majeure, a Service Subscriber receives
the Programming Service for less than a full month and the Programming Service
charge to such Service Subscriber is reduced accordingly. If a Force Majeure
event is reasonably expected to continue for more than three (3) months, either
party may terminate this Agreement by providing thirty (30) days prior written
notice to the other party. TESC shall have the right to preempt the Programming
Service if there is a total or substantial in-orbit failure of a satellite that
prevents TESC and/or its Affiliates from continuing a significant portion of the
DISH Network without such preemption
11.6 Waiver. The failure of either party at arty time to enforce any
right or remedy available to it under this Lease or otherwise with respect to
any breach or failure by the other party shall not be construed to be a waiver
of such right or remedy with respect to any other breach or failure by the other
party.
11.7 Notices. Except as otherwise expressly set forth herein, any
notices to be given pursuant to this Lease ("Notice") shall be in writing,
signed by the party issuing them, and sent by: (i) facsimile transmission; (ii)
first class certified mail postage prepaid; or (iii) overnight courier service,
charges prepaid, to the party to be notified, addressed to such party at the
following address, or sent by facsimile to the following fax number, or such
other
<PAGE>
address or fax number as such party may have substituted by notice given to the
others in accordance with this Section. The sending of such notice with
confirmation or receipt thereof (in the case of facsimile transmission) or
receipt of such notice (in the case of delivery by certified mail or by
overnight courier service) shall constitute the giving thereof.
If to Network: American Digital Communications, Inc.
745 Fifth Avenue, Suite 900
New York New York 10151
Attention: John G. Simmonds
Fax No.:
If to TESC: Transponder Encryption Services Corporation
90 Inverness Circle East
Englewood, Colorado 80112
Attn: Mark Jackson, President
Fax No.: (303) 723-1999
with a copy to: Transponder Encryption Services Corporation
90 Inverness Circle East
Englewood, Colorado 80112
Attn: R- Stanton Dodge, Corporate Counsel
Fax No.: (303) 723-1699
11.8 Governing Law and Exclusive Jurisdiction, This Lease shall be
construed by and governed in accordance with the laws of the State of Colorado,
without regard to its choice of law provisions. The federal and state courts
located in the State of Colorado shall have exclusive jurisdiction to hear and
determine any claims, disputes, actions or suits which may arise under or out of
this Lease. The parties voluntarily consent to the personal jurisdiction of, and
waive any objection as to venue in, such courts for such purposes.
11.9 Severability. The parties agree that each provision of this
Lease shall be construed as separable and divisible from every other provision
and that the enforceability of any one provision shall not limit the
enforceability, in whole or in part, of any other provision hereof. The
invalidation or unenforceability of any of the provision contained in this Lease
shall in no way affect any of the other provisions hereof or the application
thereof and the same shall remain in full force and effect. In the event that a
court of competent jurisdiction determines that any term or provision herein, or
the application thereof to any person, entity, or circumstance, shall to any
extent be invalid or unenforceable, it shall be construed by limiting and
reducing it so as to be enforceable under then applicable law.
11.10 Entire Agreement, Exhibits, Amendments, Captions and Construction
<PAGE>
11.10.1 This Lease (including any Exhibits hereto)
contains the entire understanding of the parties with respect to the subject
matter hereof and supersedes any and all prior or contemporaneous agreements,
representations or undertakings between the parties with respect to the subject
matter hereof. The captions used herein are for reference purposes only and
shall not be used in the interpretation of this Lease. In the case of a conflict
between the provisions of this Lease and any Exhibit this Lease shall prevail.
11.10.2 This Lease has been fully reviewed and
negotiated by the parties hereto and their respective counsel. Accordingly, in
interpreting this Lease, no weight shall be placed upon which party hereto or
its counsel drafted the provision being interpreted.
11.10.3 No waiver, modification or amendment of any
of the terms or conditions of this Lease shall be effective unless memorialized
in a writing that has been signed by both parties hereto.
11.11 Confidentiality.
11.11.1 Each party agrees, and it is of the essence
under this Lease, that they and their employees, representatives and agents have
maintained and will maintain in confidence, the terms and provisions and
existence of this Lease, as well as all data, summaries, reports or information
of all kinds, whether oral or written acquired or devised or developed in any
manner from the disclosing party personnel or files, and that they have not and
will not reveal the same to any persons not employed by the disclosing party
except: (i) at the written direction of such party; (ii) to the extent necessary
to comply with the law, the valid order of a court of competent jurisdiction, or
a requirement of the Securities and Exchange Commission or any successor agency
thereto, in which event the disclosing party shall so notify the other party as
promptly as practicable (and, if possible prior to making any disclosure) and
shall seek confidential treatment of such information; (iii) in connection with
any arbitration proceeding; (iv) as part of its normal reporting or review
procedure to its partners, parent company, its auditors, its attorneys and its
investment bankers, and such parent company, auditors, attorneys and investment
bankers agree to be bound by the provisions of this Section 11.11; and (v) in
order to enforce any of its rights pursuant to this Lease.
11.11.2 Network acknowledges and agrees that all
subscribers who subscribe to the Programming Service shall be deemed customers
of TESC for a purposes relating to programming services (including but not
limited to video, audio and data) and the hardware necessary to receive such
services. Network acknowledges and agrees that the names, addresses, profiles
and other identifying information of such subscribers ("Subscriber Information")
are as between Network and TESC, the sole and exclusive property of TESC. During
the term of this Lease and at all times thereafter, Network agrees that it will
treat all Subscriber Information strictly confidential, and will not directly or
indirectly disclose any
<PAGE>
Subscriber Information or directly or indirectly use, or permit any others to
use, any Subscriber Information for any purpose. By example, but not by way of
limitation, Network shall not directly or indirectly use any Subscriber
Information for the purpose of soliciting, or to permit any others to solicit,
subscribers to subscribe to the Programming Service or any other programming
services.
11.11.3 Each party agrees that a breach of these obligations
of confidentiality will result in the substantial likelihood of irreparable harm
and injury to the other party, for which monetary damages alone would be an
inadequate remedy, and which damages are difficult to accurately measure.
Accordingly, each party agrees that the other party shall have the right, in
addition to any other remedies available, to obtain immediate injunctive relief
as well as other equitable relief allowed by the federal and state courts. The
foregoing remedy of injunctive relief is agreed to without prejudice to the
other party's to exercise any other rights and remedies it may have, including
without limitation, the right to terminate this Lease and seek damages or other
contractual, legal or equitable relief The foregoing confidentiality obligations
will survive termination of this Lease.
11.11.4 In the event that Network derives an economic benefit,
in any form, from a violation of its obligations under Section 11.11.2, it is
hereby agreed that such economic benefit is the property of TESC and that
Network shall deliver the cash value of the economic benefit to TESC immediately
upon receipt of the economic benefit. It is further agreed that Network shall
hold such economic benefit in trust for the benefit of TESC until such time as
its cash value is delivered to TESC. The foregoing is agreed to without
prejudice to TESC to exercise any other rights and remedies it may have,
including without limitations the right to terminate this Lease and seek damages
or other contractual, legal or equitable relief The confidentiality obligations
set forth in this Section 11.11 will survive termination of this Lease
indefinitely.
11.12 Compliance with Law. Network acknowledges and agrees
that TESC's ability to Perform under this Lease is subject to, all applicable
federal state and local laws, rules and regulations, including without
limitation: (1) all provisions of the Communications Act of 1934, as amended
from time to time during the term of this Lease; and (2) the rules and
regulations of the Federal Communications Commission or any successor agency
thereto, as amended from time to time.
11.13 Benefits. This Lease shall be binding upon, and shall
redound to the benefit of, both of the parties hereto and their respective
successors and assigns.
11.14 Remedies Cumulative. It is agreed that the rights and
remedies herein provided in case of default or breach by either party of this
Lease are cumulative and shall not affect in any manner any other remedies that
the other party may have by reason of such default or breach. The exercise of
any right or remedy herein provided shall be without prejudice to the right to
exercise any other right or remedy provided herein, at law, or in equity.
<PAGE>
11.15 Attorney-Fees. In the event of any suit or action to
enforce or interpret this Lease or any provision thereof, the prevailing party
shall be entitled to recover its costs, expenses and reasonable attorney fees,
both at trial and on appeal, in addition to all other sums allowed by law.
11.16 Corporate Guarantee. Upon execution of this Lease,
Network will provide the TESC Parties with: (i) a guarantee (the "Guarantee") in
the form set forth in Exhibit C hereto executed by Simmonds Capital Limited
("Guarantor"), an Ontario, Canada corporation having a principal place of
business at 580 Granite Court, Pickering, Ontario LIW3Z4 Canada; and (ii) a
resolution of the Board of Directors of Simmonds Capital Limited approving,
adopting, ratifying and confirming the Guarantee, which has been duly certified
by the Secretary of Guarantor. In the event that Network fails to provide either
document to TESC as scheduled in this Section 11.16, TESC shall be entitled to
terminate this Lease effective immediately upon delivery of written notice to
Network. Any such termination shall be without prejudice to any other rights or
remedies that TESC might have under this Lease, at law, in equity or otherwise.
11.17 Insurance Requirements.
11.17.1 Network shall, at its sole expense, keep the
following insurance coverages in full force and effect during the term of this
Lease:
(a) Commercial General Liability coverage
which includes Premises/Operations, Products/Completed Operations, Contractual
Liability, Independent Contractors, Broad Form Property Damage, and Personal
Advertising Injury with limits of not less than One Million United States
Dollars ($1,000,000.00) per occurrence;
(b) Broadcasters Liability insurance
coverage which includes Personal/Advertising Injury, Bodily Injury and Property
Damage with limits of not less than One Million United States Dollars
($1,000,000) per occurrence and
(c) Umbrella Liability insurance coverage
following the form underlying policies with limits of not less than Ten
Million United States Dollars ($10,000,000) per occurrence.
11.17.2 TESC, its Affiliates and the officers and
employees of each shall be named as additional insureds on all of the above
coverages. Network for itself and its insurer hereby waives any rights of
subrogation against TESC, its Affiliates and the officers and employees of each.
<PAGE>
11.17.3 The foregoing coverages shall be evidenced by
a certificate of insurance acceptable to TESC. Such certificate shall be issued
by an insurance carrier with an A.M. Best rating of "A-" or better and shall be
provided, with such endorsements as required hereunder, to TESC upon execution
of this Lease by Network. Such insurance certificate shall provide: (i) that the
coverages thereon shall not be substantially modified or canceled without thirty
(30) days' prior written notice to TESC; and (ii) that TESC shall be notified in
writing of Network's failure to renew any policy on the certificate by each
policy anniversary date during the term of this Lease. The foregoing insurance
shall be provided in the form of "occurrence" policies.
11.17.4 Network's indemnity obligations set forth
above shall not be negated or reduced by virtue of Network's insurance carrier's
denial of insurance coverage for the occurrence or event which is the subject
matter of the claim or refusal to defend TESC and/or any of its Affiliates.
11.17.5 Compliance by Network with the requirements
of this section as to carrying insurance and furnishing proof thereof to TESC
shall not relieve network of its indemnity liability set forth above or its
liability to TESC specified in any other provision of this Lease.
IN WITNESS WHEREOF, the parties hereto have entered into this Lease as of the
date first set forth above.
AMERICAN DIGITAL COMMUNICATIONS, TRANSPONDER ENCRYPTION
INC. (NETWORK) SERVICES CORPORATION
__________________ _______________________
John G. Simmonds Mark Jackson
Chairman & CEO President
<PAGE>
EXHIBIT A
Programming Schedule
The Video Programming Service consists of four (4) video channels of racetrack
programming which is largely comprised of horse racing. The Programming Service
is currently identified as "TrackPower", by Network, and shall be deemed to
include the same service operated under any other name in the future. The Data
Programming Service will consist of one (1) data channel programming which is
largely comprised of wagering related information, and shall be deemed to
include the same service operated under any other name in the future.
<PAGE>
EXHIBIT B
Residential Customer Agreement
<PAGE>
EXHIBIT C
Corporate Guarantee
To induce Transponder Encryption Services Corporation ("TESC")
to enter into the Satellite Capacity Lease (the "Lease") dated June 4th 1999
between the TESC and American Digital Communications, Inc. ("Network"), the
undersigned ("Guarantor") hereby unconditionally guarantees and promises to
perform any and all of NETWORK's obligations under the Lease.
1 . This Guarantee is a continuing guarantee which shall remain
effective until all of NETWORK's obligations under the Lease have been fully
performed.
2. The obligations hereunder are joint and several, and independent of
the obligations of NETWORK. A separate action or actions may be brought and
prosecuted against Guarantor whether or not action is brought against NETWORK or
whether NETWORK is joined in any such action or actions (provided, however, that
Guarantor may bring NETWORK into any such action as permitted under applicable
law) and Guarantor waives the benefit of any statute of limitations affecting
its liability under this Guarantee or the enforcement hereof.
3. This Guarantee shall not be impaired by any modification,
supplement, extension or amendment of any contract or agreement to which TESC
and NETWORK may hereafter agree, nor by any modification, release or other
alteration of any of the indebtedness thereby guaranteed or of any security
therefor, nor by any agreements or arrangements whatever with NETWORK or anyone
else.
4. Guarantor waives any and all right to assert against TESC any claim
or defense based upon an election of remedies by TESC which, in any manner
impairs, affects, reduces, releases, destroys and/or extinguishes TESC's
subrogation rights and or Guarantor's right to proceed against NETWORK for
reimbursement, and/or any other rights of Guarantor against NETWORK and/or
against any other person or security, including, but not limited to, any defense
based upon an election of remedies by TESC under the terms of the Rules of Civil
Procedure of the State of Colorado, and/or any similar law of Colorado, or of
any other State, or of the United States. Guarantor waives any right to require
TESC to: (a) proceed against NETWORK; (b) proceed against or exhaust any
security held from NETWORK; or (c) pursue any other remedy in TESC's power
whatsoever. Any and all present and future debts and obligations of NETWORK to
Guarantor are hereby waived and postponed in favor of and subordinated to the
full payment and performance to TESC. Guarantor waives all
<PAGE>
presentments, demands for performance, notices of non-performance, protests,
notices of protest, notices of dishonor, notices of default, notices of
acceptance of this Guarantee, notice of any and all other notices to which
Guarantor might otherwise be entitled, and the right to a trial in any action
hereunder or arising out of TESC's transactions with NETWORK.
5. Guarantor agrees to pay an attorney fees and all other costs and
expenses which may be incurred by TESC in the enforcement of this Guarantee or
any claim hereunder or under any other instrument or guarantee, to the maximum
extent permitted by law.
6. This Guarantee shall be governed by and construed in accordance with
the laws of the State of Colorado. The federal and state courts in the State of
Colorado shall have exclusive jurisdiction to bear and determine any claims,
disputes, actions or suits which may arise under or out of this Guarantee. The
parties agree and voluntarily consent to the personal jurisdiction of and waive
any objection to venue in, such courts for such purposes and agree to accept
service of process outside the State of Colorado in any matter to be submitted
to any such court pursuant hereto.
7. No modification of this Guarantee shall be effective for any purpose
unless it is in writing and executed by an officer of TESC authorized to do so.
IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guarantee
effective as of the 4th day of June, 1999.
Witness GUARANTOR:
Simmonds Capital Limited
STATE OF COLORADO )
COUNTY OF APAPAHOE )
This guarantee was acknowledged before me this ____, by as of ______, a
corporation having a principal place of business at 5701 S. Santa Fe, Littleton,
CO 80120. WITNESS my hand and official seal.
SEAL
Exhibit 10.3
LICENSE AGREEMENT
THIS AGREEMENT is entered into as of November 8, 1996, by Simmonds
Capital Limited, a corporation incorporated pursuant to the laws of the province
of Ontario ("Licensor"), and American Digital Communications, Inc., a
corporation incorporated pursuant to the laws of the State of Wyoming
("Licensee").
RECITALS
A. Licensor acquired a license for the Products from Midland
International Corporation ("MIC"), a wholly-owned subsidiary of the
Licensor, pursuant to a license agreement dated the date hereof, a copy
of which is attached hereto as Schedule 1.
B. Licensor and MIC are distributors of commercial and mobile radio
products under the Trademark, as defined.
C. Licensor is the sole and exclusive owner of the License.
D. Licensee is a distributor of communications products.
E. Licensor desires to sell, assign and grant to Licensee a limited
exclusive license to use the Trademark and to sell the products, as
hereinafter defined, in the Territory, as hereinafter defined, and
Licensee desires to obtain such license, in accordance with the terms
and provisions contained in this Agreement.
AGREEMENT
In consideration of the foregoing and the mutual promises and covenants
contained in this Agreement, the parties agree as follows:
ARTICLE 1
DEFINITIONS
1.1 "Affiliate" of a person means an entity which controls, is
controlled by or is under common control with such person.
1.2 "Agreement" means this agreement including any recitals or
schedules hereto.
1.3 "Confidential Information" means any and all data or
information disclosed by one party to this Agreement to another party to this
Agreement (a) which either party receives from the other party or of which it
becomes aware or with which it comes in contact as a consequence of or in
connection with this Agreement or any prior agreement, understanding or
discussion between the parties or their respective Affiliates; (b) which has
value to the party disclosing such information and is not generally known by its
competitors; and (c) which is considered by the party disclosing such
information to be confidential or proprietary,
<PAGE>
whether or not marked as such. Confidential Information shall include but is not
limited to information related to, contained in or consisting of trade secrets,
commercial secrets, industrial secrets, business contacts, customer lists,
supplier lists, ideas, concepts, designs, drawings, specifications,
work-in-process, research, developments, methods, processes, know-how,
contractual relationships, intellectual property, patent applications,
technology, computer software, source codes, object codes, financial condition
or performance, plans, strategies, distribution arrangements and other similar
information, whether existing prior to or after the date of this Agreement,
provided that Confidential Information shall not include information which (i)
was disclosed to one party to this Agreement by a source other than another
party to this Agreement or its Affiliates or agents without restriction on
disclosure and without, to the knowledge of the recipient of the information,
any breach of an obligation of confidentiality; (ii) is generally known to the
public or in the electronics industry through no fault of the recipient of the
information or its Affiliates; (iii) is approved for disclosure by the
disclosing party to this Agreement in writing; (iv) is required to be disclosed
by operation of law or the requirement of a court or governmental agency; or (v)
is independently developed by a party or its Affiliates without use, directly or
indirectly, of any Confidential Information of the other party or its
Affiliates.
1.4 "Consumer Products" means consumer wireless products and
consumer electronic products consisting of consumer communications equipment,
consumer automotive equipment, consumer marine equipment, consumer amateur radio
products and consumer audio products and/or video home entertainment equipment,
including, but not limited to, citizen band radios, GMRS radios, marine radios,
scanners, intercoms, radio recorders, car radios, itinerant radios, consumer GPS
marine products, satellite receivers, video cassette recorders, video cameras,
stereophonic and high fidelity components and/or systems, compact disc players,
laser disc players, cordless telephones, consumer paging products, telephones
with video, and other telephones and antennas and other accessories for the
foregoing. The definition of Consumer Products specifically excludes cellular
telephones, personal communications systems (PCS) telephones, commercial and
two-way paging products, commercial wireless satellite antennas, and the land
mobile radio ("LMR") and LMR antenna products, and all other electronic or
communications equipment for use in the professional and commercial market and
antennas and other accessories for the foregoing;
1.5 "License" means the license granted under Article 3 of
this Agreement.
1.6 "License Agreement" means that certain license agreement
dated November 8, 1996 between the Licensor and Midland International
Corporation, attached hereto as Schedule 1.
1.7 "License Fee" means the non-refundable fee set out in
Article 4.
1.8 "Products" means and is expressly limited to land mobile
radio products bearing the Trademark manufactured by or for Licensor in the
commercial and professional markets. Specifically excluded from the definition
of Products are Consumer Products.
1.9 "Territory" means the world, excluding the following
countries:
-2-
<PAGE>
(i) the United States of America and its territories
and possessions;
(ii) Canada;
(iii) United Kingdom, Ireland, Germany, Holland,
Belgium, Luxembourg, France, Spain, Portugal, Malta, Italy, Austria,
Switzerland, Greece, Cyprus, Turkey, Norway, Sweden, Finland, Iceland, Denmark;
(iv) Cameroon, Nigeria, Oman, Benin, Yemen, Toga,
Burkina Faso, Senegal, Gambia, Sierra Leone, Liberia, Ivory Coast, Ghana, Gabon,
Algeria, Congo, Morocco, Angola, Gibraltar, Namibia, Western Sahara, South
Africa, Mauritania, Swaziland, Botswana, Niger, Mozambique, Chad, Sudan,
Ethiopia, Zimbabwe, Somalia, Kenya, Malawi, Uganda, Tanzania, Zaire, Central
African Republic and Rwanda;
(v) Iran, Iraq, United Arab Emirates, Saudi Arabia,
Bahrain, Qatar, Kuwait, Syria, Jordan, Israel, Lebanon, Egypt, Libya;
(vi) India, Afghanistan, Pakistan, Bangladesh,
Burundi, Sri Lanka, Georgia, Turkmenistan, Kazakstan;
(vii) Guinea Bisseau, Guinea, Equatorial Guinea,
Canary Islands, Mali, Madagascar, Mauritius;
(viii) Anguilla, Antigua and Barbuda, Aruba, Bahamas,
Barbados, Belize, Bermuda, Bonaire, British Virgin Islands, Cayman Islands,
Cuba, Curacao, Dominica, Dominican Republic, Grenada, Guadeloupe, Guyana, Haiti,
Jamaica, Martinique, Montserrat, Netherlands Antilles, Puerto Rico, Saint Lucia,
Saint Vincent and the Grenadines, Trinidad and Tobago, Turks and Caicos Island,
Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panama.
1.10 "Trademark" means and is limited to (i) the registered
trademark "Midland" in all countries in the Territory and all future
registrations obtained by Licensor or its Affiliates in the Territory; (ii) all
existing and future rights of Licensor and its Affiliates to the name "Midland"
in all countries in the Territory in which trademark registration has not been
obtained; and (iii) all existing and future logos used in connection therewith,
whether or not registered in all countries in the Territory.
ARTICLE 2
THE TRADEMARK
2.1 Licensee will register the Trademark in Licensor's name
and at Licensee's expense in those jurisdictions in the Territory where Licensor
reasonably determines registration may be necessary or desirable. Licensee will
register or record any other documents or material at Licensee's expense as may
be required or desirable in Licensor's reasonable opinion in the Territory in
order to safeguard the Trademark. Should the laws or regulations of the
Territory or any jurisdiction in the Territory require that the Products be
registered with, or approved by, any governmental or other authority, then
Licensee shall take such steps as are reasonably necessary
-3-
<PAGE>
to obtain such approval or registration at its expense, always, however,
ensuring that Licensor's rights in and to the Products and the Trademark and any
other rights are clearly indicated. Licensor shall, at Licensee's expense,
cooperate with Licensee in obtaining such approvals or registration. In the
event that this Agreement is terminated by Licensor less than five (5) years
after the date on which Licensee obtains approvals or registration for the
Products in a jurisdiction of the Territory, Licensor shall reimburse Licensee
for its reasonable ascertainable expenses in obtaining such approvals or
registration. Upon termination of this Agreement, Licensee shall assign to
Licensor all rights, title and interest it may have acquired in all such
approvals and registrations. Licensee is solely responsible for ensuring that
the Products are duly approved and registered in all jurisdictions of the
Territory and that its sale and distribution of the Products and use of the
Trademark at all times meets all applicable laws and regulations existing at any
time in any jurisdiction in the Territory.
2.2 Licensor represents that, without having conducted
searches or investigations of any kind or reviewed any records, it is not aware
of any infringement of the Trademark in the Territory. Licensor does not
represent or warrant that Licensor owns the Trademark, that the Trademark is
valid or enforceable in the Territory or that the Trademark is or will be free
of infringement or that it does not infringe on the rights of others, and
Licensor shall have no liability to Licensee arising from any attacks or
challenges to the validity, ownership or enforceability of the Trademark or any
registrations or applications therefor. Licensee shall promptly advise Licensor
of any infringement of the Trademark of which it becomes aware during the term
of this Agreement. Licensor shall not be required to prosecute any infringement
of the Trademark in the Territory. If Licensor undertakes prosecution of
infringement, Licensor is entitled to any amounts recovered in such action.
Licensee agrees to render reasonable assistance to Licensor in such action.
During the term of this Agreement, Licensee may at its cost prosecute any such
infringement as Licensor's agent in the Territory with the prior written consent
of Licensor, which consent shall not be unreasonably withheld. Licensee shall
keep Licensor apprised of the progress of any such proceeding. Before Licensee
may settle such proceeding, it must obtain consent to the settlement from
Licensor, acting reasonably. The parties shall mutually agree, acting
reasonably, upon the allocation to each party of any amounts recovered in such
proceedings.
2.3 Licensor shall have no responsibility in manufacturing,
packaging and exporting the Products to Licensee.
ARTICLE 3
LICENSE GRANT
3.1 Licensor hereby grants, assigns and transfers to the
Licensee all of its right, title and interest in and to the License Agreement,
as such right, title and interest is amended pursuant to the terms of this
Agreement as at and from the Effective Date. Licensor further grants, assigns
and transfers to the Licensee its customer records and the right to acquire the
benefits of any existing purchase orders, providing the Licensee also agrees to
assume liability for all warranty claims in respect of such purchase orders,
arising from and in connection with the License as at and from the Effective
Date.
-4-
<PAGE>
3.2 Licensor and Licensee hereby each confirm that the terms
and conditions contained in the License Agreement shall apply as between the
Licensor and Licensee as if they were the original parties thereunder, other
than to the extent that the License Agreement has been amended hereby.
3.3 Licensee is designated as Licensor's registered user of
the Trademark in those countries in the Territory where such registrations are
appropriate and Licensee shall co-operate with Licensor in making all
applications in connection with such designation as Licensor deems reasonably
necessary or desirable. Licensee acknowledges that it is only a licensee of the
Trademark and agrees that it shall make no claim of ownership or any other claim
to or under the Trademark, apart from its limited ability as a licensee to use
the Trademark on the limited category of Products pursuant to this Agreement.
3.4 Licensee may appoint distributors in the Territory
provided such distributors comply with all provisions of this Agreement.
Licensee shall enter into agreements with such distributors which contain terms
in favour of the Licensee which are the same as or mare onerous than those under
this Agreement. Licensee shall remain fully responsible to Licensor for the
conduct of each of its distributors. Licensee agrees to honour any existing
distribution agreements until such agreements are legally terminated.
ARTICLE 4
LICENSEE FEE AND BUYING COMMISSION
4.1 In consideration for the License, Licensee shall issue to
Licensor on the Effective Date 3,000,000 common shares issued in reliance on
Regulation S in the capital stock of the Licensee.
ARTICLE 5
PROMOTION OF PRODUCTS
5.1 Licensee shall use its best efforts to promote and market
the full range of Products and to maximize the distribution and sale of the
Products and to protect and promote the reputation and goodwill of the Products,
the Trademark and Licensor and the brand perception of the Products. 5.2
Licensee shall comply with all standards for the Products as specified by
Licensor from time to time. Licensee shall promptly notify Licensor of any
complaints or claims about the Products and shall comply with the procedure
specified by Licensor for dealing with such complaints or claims.
5.3 Licensee agrees that all marketing plans relating to the
Products in the Territory shall be developed in consultation with Licensor and
in accordance with the worldwide marketing policies of Licensor as may be
amended from time to time.
5.4 Licensee agrees to purchase from Midland Japan, attention
Mr. Mori its requirements for the Products and Licensee agrees and acknowledges
that Licensor shall have no responsibility or obligation to accept or deliver
any Products to the Licensee hereunder.
-5-
<PAGE>
ARTICLE 6
RELEASE AND INDEMNITY
6.1 As additional consideration for the License, Licensee and
its respective Affiliates, successors and assigns, hereby unconditionally
indemnify, release and hold Licensor and its respective officers, directors,
partners, shareholders, employees, Affiliates and assigns (the "Indemnified
Parties") harmless from any and all claims, losses and causes of action
whatsoever, arising from any understandings, negotiations, representations,
relationships or statements, express or implied, involving any of the
Indemnified Parties which occurred or existed or which Licensee claims to have
occurred or existed prior to the date of this Agreement.
6.2 Licensee shall at all times maintain comprehensive general
liability insurance, including product liability coverage, with minimum limits
of not less than One Million Dollars ($1,000.000). Licensor shall be a named
insured under the insurance. Upon request, Licensee shall provide to Licensor a
certificate evidencing such insurance.
ARTICLE 7
ADDITIONAL COVENANTS AND RESTRICTIONS
7.1 During the term of this Agreement, without the written
consent of Licensor, Licensee shall not and shall not cause or permit any of its
agents, Affiliates or distributors to (a) sell any Products under the Trademark
outside of the Territory, or (b) knowingly sell any Products under the Trademark
in the Territory for resale outside of such Territory.
7.2 Licensee may use the Trademark in the sale, display,
promotion and servicing of Products, but only in accordance with this Agreement
and only to the extent the Products are associated with the Trademark. Licensee
may not use or attempt to register on its own behalf the Trademark, the term
"Midland" or any logos associated therewith or any similar term or logo as part
of any mark, name, trade style or business or corporate names of Licensee or in
connection with the sale, display, servicing or promotion of any products other
than the Products except in accordance with this Agreement. No other use may be
made of the Trademark without Licensor's prior written consent. Licensor
reserves the right, acting reasonably, to review and approve all uses of the
Trademark by Licensee on Products or in Licensee's promotional material or
otherwise prior to the introduction of such use, such approval not to be
unreasonably withheld; provided, that approval will be deemed to have been given
if Licensor does not object in writing to Licensee's proposed use within 10
business days after receipt of such materials for review. The Trademark is the
exclusive property of Licensor and all rights to all goodwill developed with
respect to the Trademark or any derivation thereof shall accrue solely to the
benefit of Licensor. Licensee shall not at any time, during the term of this
Agreement or thereafter, do or cause to be done any thing, directly or
indirectly, which may affect the distinctiveness, validity, ownership or
enforceability of the Trademark.
7.3 At the request of Licensor, Licensee shall affix to all
Products and display in a reasonable manner in all promotional literature and
materials the following legend or such other legend as Licensor may prescribe
from time to time:
-6-
<PAGE>
"Midland" is a registered trademark of Simmonds Capital Limited,
Toronto, Ontario, Canada, used under license.
7.4 Licensor shall have no liability for any product
warranties extended by Licensee or its suppliers. Licensee shall indemnify and
hold Licensor and its officers, directors, employees, shareholders, Affiliates
and assigns harmless from all claims, demands, damages, costs, liabilities,
actions and causes of action arising from any breach of warranty by Licensee or
its suppliers or any failure of or defect in any Products sold or distributed by
Licensee.
7.5 Licensor shall have no responsibility, obligation or
liability to accept or deliver any Products which Licensee may order pursuant to
this Agreement and Licensee further acknowledges and agrees that all purchases
of Products are to be co-ordinated through Midland Japan, attention Mr. Mori.
7.6 Licensee shall conduct its business in compliance with
applicable laws and regulations. Licensee may use the Trademark only in
connection with the distribution and sale of products of standard commercial
quality when put to their intended use. Licensor shall have the right to conduct
an annual inspection of the operations and facilities of Licensee and its
supplier and distributors to ensure compliance with the covenants contained in
this Section 7.6.
7.7 Licensee shall assume responsibility for compliance with
all applicable laws and regulations, including but not limited to customs laws
and regulations, in connection with the importation, distribution and sale of
Products bearing the Trademark.
ARTICLE 8
CONFIDENTIALITY
8.1 The parties acknowledge that they may receive or come into
contact with Confidential Information in connection with this Agreement or prior
dealings between the parties or their Affiliates. A party receiving Confidential
Information (the "Recipient") shall not disclose to others or use for any
purpose any Confidential Information of the other party without the written
consent of the party disclosing the Confidential Information (the "Discloser").
The Recipient shall use the same care and discretion, but in no event less than
reasonable care and discretion, to prevent unauthorized use or disclosure of
Confidential Information as it employs with similar information of its own. The
covenants of confidentiality herein contained will apply after the date of this
Agreement to any Confidential Information, whether disclosed prior to or after
such date.
8.2 The parties acknowledge that any breach by them of the
provisions of Section 8.1 could cause irreparable injury to the Discloser which
would not be fully compensable in damage. Accordingly, the Discloser shall be
entitled to obtain junctive relief from a court of competent jurisdiction
against any breach or threatened breach by the Recipient of such provisions,
without the necessity of posting bond or proving lack of an adequate remedy at
law.
-7-
<PAGE>
ARTICLE 9
ARBITRATION
9.1 Unless either party elects to bring an action for
injunctive relief under Article 8, any dispute, controversy or claim arising out
of or relating to this Agreement or any breach hereof shall be resolved by
arbitration in accordance with the then existing Rules of Conciliation and
Arbitration of the International Chamber of Commerce, as modified hereby.
9.2 Unless otherwise agreed by the parties, the arbitration
panel shall consist of three arbitrators, one to be appointed by Licensor and
one to be appointed by Licensee, with the third to be appointed by the two
arbitrators appointed by Licensor and Licensee. If either of the parties fails
to appoint an arbitrator within 30 days after receipt of notice of the
appointment by the other of its arbitrator, or if the two arbitrators fail to
appoint a third, then the International Chamber of Commerce will have the power,
at the request of either party, to make the appointment(s) which has not been
made as contemplated above.
9.3 The arbitrator shall not have the power of amiables
compositeurs. Unless the parties otherwise agree the arbitration shall take
place in Toronto, Ontario, Canada. Both parties shall be entitled to
representation by counsel, to appear and present oral and written evidence and
argument, to compel the testimony of witnesses and the production of documents,
to obtain a written list of the other party's witnesses and documents prior to
the hearing, and to examine and cross-examine witnesses. The substantive law
governing this Agreement shall also govern the arbitration proceeding. The
arbitration proceedings, all pleadings and evidence therein, and the arbitral
award shall be in the English language, with any translation into another
language to be at the expense of Licensee. The arbitral award shall be in
writing and shall explain the reasons for the award. The arbitral award shall be
final and binding on the parties. The expense of arbitration shall be shared
equally by the parties unless otherwise decided by the arbitrators.
9.4 Each party agrees that final judgment on an arbitral award
rendered against it in any action or proceeding relating to this Agreement shall
be conclusive and may be enforced, to the extent permitted by applicable law, in
any jurisdiction within or without the Territory by suit on the judgment, a
certified copy of which shall be conclusive evidence thereof, or by such other
means provided by applicable law.
ARTICLE 10
TERM AND TERMINATION
10.1 Unless terminated in accordance with this Article 10 or
other provisions under this Agreement, this Agreement shall be for a term
commencing on the date hereof and continuing indefinitely.
10.2 This Agreement may be terminated at any time by Licensee
by giving 30 days written notice to Licensor.
10.3 Without prejudice to any rights of action or any claims
for damage or rights accrued at the date of termination, Licensor may terminate
this Agreement:
-8-
<PAGE>
(a) in the event of a breach of any term of this Agreement by
Licensee, provided that Licensee retains the right to cure any
such breach not later than thirty (30) days following notice
of the breach given to Licensee;
(b) immediately in the event Licensee takes steps to enter into
liquidation or becomes insolvent, bankrupt or enters into a
deed of arrangement for the benefit of its creditors or
commits any equivalent act or thing under any applicable law,
or if a receiver is appointed for its assets or business.
10.4 Upon any termination of this Agreement by the parties or
by Licensee or by operation of law, the Licensee and all rights of Licensee to
use the Trademark shall immediately terminate, and Licensee shall immediately
discontinue all use of the Trademark, except as necessary in the reasonable
judgment of Licensor to enable Licensee to dispose of any then existing
inventories of Licensee which display the Trademark. Licensor shall not be
liable to Licensee or any Affiliate for any damage, loss or expense
reimbursement or any refund of all or part of the License Fee arising from any
termination of this Agreement. All payments due under this Agreement immediately
become payable to Licensor.
ARTICLE 11
MISCELLANEOUS
11.1 Nothing in this Agreement shall be construed to deem
Licensor and Licensee partners, joint ventures, principal and agent or vendor
and distributor, or create any relationship other than licensor-licensee.
Licensee is not a distributor, representative or agent of Licensor, and neither
party shall have the right to contract for or to bind the other in any way.
11.2 Each party consents to service of process upon it in any
proceeding brought pursuant to the terms hereof by mailing copies of any notice
or pleadings by registered mail, return receipt requested, to it at its address
set forth in Section 11.4. The foregoing shall not limit the right of either
party to serve process in any other manner permitted by applicable law and shall
not limit the ability of either party to bring any proceeding or to obtain
execution of any judgment rendered in any such proceeding in any other
jurisdiction in which the other party or any of its property or assets may be
found.
11.3 This Agreement shall be governed by and construed in
accordance with the laws of the Province of Ontario.
11.4 Any notice required or permitted hereunder shall be in
writing and may be hand delivered or sent by commercial overnight courier,
registered or certified mail or facsimile transmission:
(a) to Licensor:
Simmonds Capital Limited
Suite 1050
5255 Yonge Street
Willowdale, Ontario
M2N 6P4
-9-
<PAGE>
Attention: Chief Executive Officer
Facsimile: (416) 221-3800
(b) with a copy to:
Heenan Blaikie
Barristers & Solicitors
Suite 2600
Royal Bank Plaza, South Tower
Toronto, Ontario
M5J 2J4
Attention: W. Fraser McDonald
Facsimile: (416) 360-8425
(c) to Licensee:
Americans Digital Communications, Inc.
3773 Cherry Creek North Drive
Suite 615
Denver, Colorado 80209
Attention: Mr. Gene Klawetter
Facsimile: (303) 377-9705
(d) with a copy to:
Brasher & Company
Attorneys and Counselors at Law
90 Madison Street
Suite 707
Denver, Colorado 80206
Attention: Mr. John Brasher
Facsimile: (303) 355-3063
or to such other address or facsimile number as either party may notify
the other in writing in accordance with this Section 11.4.
11.5 This Agreement may be executed in counterparts, each of
which shall be deemed an original and both of which, taken together, shall
constitute one and the same instrument. A facsimile signature of this Agreement
shall be valid if followed by a signed hard copy.
11.6 This constitutes the entire agreement of the parties with
regard to the subject matter hereof, and may not be modified, altered or amended
except in writing and signed by all parties hereto. Any prior agreement and any
other agreement, arrangement and
-10-
<PAGE>
understanding between the parties or their Affiliates, written or oral, express
or implied, are hereby terminated.
11.7 (a) This Agreement shall be binding on and enure to the
benefit of the parties hereto. Licensor may assign this
Agreement or any rights hereunder to any successor owner or
assignee of the Trademark by giving written notice to
Licensee.
(b) Licensee may not assign this Agreement or grant a sublicense
of all or any of its rights except with the prior written
consent of Licensor and then only to a party which undertakes
in a written instrument reasonably acceptable to Licensor to
abide by and agree to perform all covenants, obligations and
restrictions of and upon Licensee under this Agreement. The
parties hereto specifically consent to the assignment of this
Agreement or any right or entitlement under this Agreement to
American Digital Corporation, a wholly owned subsidiary of the
Licensee incorporated under the laws of the Province of
Ontario, provided that it complies with the terms and
provisions contained in this section.
11.8 If any provision of this Agreement is determined by an
arbitrator or a court of competent jurisdiction to violate any applicable law or
public policy, such provision shall be severed herefrom, provided such severance
may be effected in such a way as not to destroy the essential meaning and intent
of this Agreement, and the remaining provisions hereof shall remain in full
force and effect.
11.9 All dollar amounts in this Agreement are in currency of
the United States of America.
11.10 This Agreement may be executed in one or more
counterparts, which can include facsimile counterparts, each of which when so
executed shall constitute an original and all of which together shall constitute
one and the same agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date set forth above.
SIMMONDS CAPITAL LIMITED
By:
------------------------------------
AMERICAN DIGITAL COMMUNICATIONS, INC.
By:
------------------------------------
<PAGE>
SCHEDULE 1
LICENSE AGREEMENT
THIS AGREEMENT is entered into November 13, 1996, by Midland
International Corporation, a corporation incorporated pursuant to the laws of
the State of Delaware ("Licensor") and Simmonds Capital Limited, a corporation
incorporated pursuant to the laws of the province of Ontario ("Licensee").
RECITALS
A. Licensor is a distributor of commercial and mobile radio products
under the Trademark, as defined.
B. Licensor is a wholly-owned subsidiary of the Licensee.
C. Licensor is in the process of winding up its affairs.
D. Licensor is the sole and exclusive owner of the License.
E. Licensee is a distributor of communications products.
F. Licensor desires to sell, assign and grant to Licensee the exclusive
license to use the Trademark and to sell the products, as hereinafter
defined, in the Territory, as hereinafter defined, and Licensee desires
to obtain such license, in accordance with the terms and provisions
contained in this Agreement.
AGREEMENT
In consideration of the foregoing and the mutual promises and covenants
contained in this Agreement. the parties agree as follows:
ARTICLE 1
DEFINITIONS
1.1 "Affiliate" of a person means an entity which controls, is
controlled by or is under common control with such person.
1.2 "Agreement" means this agreement including any recitals or
schedules hereto.
1.3 "Confidential Information" means any and all data or
information disclosed by one party to this Agreement to another party to this
Agreement (a) which either party receives from the other party or of which it
becomes aware or with which it comes in contact as a consequence of or in
connection with this Agreement or any prior agreement, understanding or
discussion between the parties or their respective Affiliates; (b) which has
value to the party disclosing such information and is not generally known by its
competitors; and (c) which is considered by the party disclosing such
information to be confidential or proprietary,
-11-
<PAGE>
whether or not marked as such. Confidential Information shall include but is not
limited to information related to, contained in or consisting of trade secrets,
commercial secrets, industrial secrets, business contacts, customer lists,
supplier lists, ideas, concepts, designs, drawings, specifications,
work-in-process, research, developments, methods, processes, know-how,
contractual relationships, intellectual property, patent applications,
technology, computer software, source codes, object codes, financial condition
or performance, plans, strategies, distribution arrangements and other similar
information, whether existing prior to or after the date of this Agreement,
provided that Confidential Information shall not include information which (i)
was disclosed to one party to this Agreement by a source other than another
party to this Agreement or its Affiliates or agents without restriction on
disclosure and without, to the knowledge of the recipient of the information,
any breach of an obligation of confidentiality; (ii) is generally known to the
public or in the electronics industry through no fault of the recipient of the
information or its Affiliates; (iii) is approved for disclosure by the
disclosing party to this Agreement in writing; (iv) is required to be disclosed
by operation of law or the requirement of a court or governmental agency; or (v)
is independently developed by a party or its Affiliates without use, directly or
indirectly, of any Confidential Information of the other party or its
Affiliates.
1.4 "Consumer Products" means consumer wireless products and
consumer electronic products consisting of consumer communications equipment,
consumer automotive equipment, consumer marine equipment, consumer amateur radio
products and consumer audio products and/or video home entertainment equipment,
including, but not limited to, citizen band radios, GMRS radios, marine radios,
scanners, intercoms, radio recorders, car radios, itinerant radios, consumer GPS
marine products, satellite receivers, video cassette recorders, video cameras,
stereophonic and high fidelity components and/or systems, compact disc players,
laser disc players, cordless telephones, consumer paging products, telephones
with video, and other telephones and antennas and other accessories for the
foregoing. The definition of Consumer Products specifically excludes cellular
telephones, personal communications systems (PCS) telephones, commercial and
two-way paging products, commercial wireless satellite antennas, and the land
mobile radio ("LMR") and LMR antenna products, and all other electronic or
communications equipment for use in the professional and commercial market and
antennas and other accessories for the foregoing;
1.5 "License" means the license granted under Article 3 of
this Agreement.
1.6 "License Fee" means the non-refundable fee set out in
Article 4.
1.7 "Products" means and is expressly limited to land mobile
radio products bearing the Trademark manufactured by or for Licensor in the
commercial and professional markets. Specifically excluded from the definition
of Products are Consumer Products.
1.8 "Territory" means the world, excluding the following
countries:
(i) the United States of America;
(ii) Canada;
-2-
<PAGE>
(iii) United Kingdom, Ireland, Germany, Holland,
Belgium, Luxembourg, France, Spain, Portugal, Malta, Italy, Austria,
Switzerland, Greece, Cyprus, Turkey, Norway, Sweden, Finland, Iceland, Denmark;
(iv) Cameroon, Nigeria, Oman, Benin, Yemen, Togo,
Burkina Faso, Senegal, Gambia, Sierra Leone, Liberia, Ivory Coast, Ghana, Gabon,
Algeria, Congo, Morocco, Angola, Gibraltar, Namibia, Western Sahara, South
Africa, Mauritania, Swaziland, Botswana, Niger, Mozambique, Chad, Sudan,
Ethiopia, Zimbabwe, Somalia, Kenya, Malawi, Uganda, Tanzania, Zaire, Central
African Republic and Rwanda;
(v) Iran, Iraq, United Arab Emirates, Saudi Arabia,
Bahrain, Qatar, Kuwait, Syria, Jordan, Israel, Lebanon, Egypt, Libya;
(vi) India, Afghanistan, Pakistan, Bangladesh,
Burundi, Sri Lanka, Georgia, Turkmenistan, Kazakstan;
(vii) Guinea Bisseau, Guinea, Equatorial Guinea,
Canary Islands, Mali, Madagascar, Mauritius;
(viii) Anguilla, Antigua and Barbuda, Aruba, Bahamas,
Barbados, Belize, Bermuda, Bonaire, British Virgin Islands, Cayman Islands,
Cuba, Curacao, Dominica, Dominican Republic, Grenada, Guadeloupe, Guyana, Haiti,
Jamaica, Martinique, Montserrat, Netherlands Antilles, Puerto Rico, Saint Lucia,
Saint Vincent and the Grenadines, Trinidad and Tobago, Turks and Caicos Island,
Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panama.
1.9 "Trademark" means and is limited to (i) the registered
trademark "Midland" in all countries in the Territory and all future
registrations obtained by Licensor or its Affiliates in the Territory; (ii) all
existing and future rights of Licensor and its Affiliates to the name "Midland"
in all countries in the Territory in which trademark registration has not been
obtained; and (iii) all existing and future logos used in connection therewith,
whether or not registered in all countries in the Territory.
ARTICLE 2
THE TRADEMARK
2.1 Licensee will register the Trademark in Licensor's name
and at Licensee's expense in those jurisdictions in the Territory where Licensor
reasonably determines registration may be necessary or desirable. Licensee will
register or record any other documents or material at Licensee's expense as may
be required or desirable in Licensor's reasonable opinion in the Territory in
order to safeguard the Trademark. Should the laws or regulations of the
Territory or any jurisdiction in the Territory require that the Products be
registered with, or approved by, any governmental or other authority, then
Licensee shall take such steps as are reasonably necessary to obtain such
approval or registration at its expense, always, however, ensuring that
Licensor's rights in and to the Products and the Trademark and any other rights
are clearly indicated. Licensor shall, at Licensee's expense, cooperate with
Licensee in obtaining such approvals or registration. In the event that this
Agreement is terminated by Licensor less than five (5) years after the date on
which Licensee obtains approvals or registration for the Products in a
-3-
<PAGE>
jurisdiction of the Territory, Licensor shall reimburse Licensee for its
reasonable ascertainable expenses in obtaining such approvals or registration.
Upon termination of this Agreement, Licensee shall assign to Licensor all
rights, title and interest it may have acquired in all such approvals and
registrations. Licensee is solely responsible for ensuring that the Products are
duly approved and registered in all jurisdictions of the Territory and that its
sale and distribution of the Products and use of the Trademark at all times
meets all applicable laws and regulations existing at any time in any
jurisdiction in the Territory.
2.2 Licensor represents that, without having conducted
searches or investigations of any kind or reviewed any records, it is not aware
of any infringement of the Trademark in the Territory. Licensor does not
represent or warrant that Licensor owns the Trademark, that the Trademark is
valid or enforceable in the Territory or that the Trademark is or will be free
of infringement or that it does not infringe on the rights of others, and
Licensor shall have no liability to Licensee arising from any attacks or
challenges to the validity, ownership or enforceability of the Trademark or any
registrations or applications therefor. Licensee shall promptly advise Licensor
of any infringement of the Trademark of which it becomes aware during the term
of this Agreement. Licensor shall not be required to prosecute any infringement
of the Trademark in the Territory. If Licensor undertakes prosecution of
infringement, Licensor is entitled to any amounts recovered in such action.
Licensee agrees to render reasonable assistance to Licensor in such action.
During the term of this Agreement, Licensee may at its cost prosecute any such
infringement as Licensor's agent in the Territory with the prior written consent
of Licensor, which consent shall not be unreasonably withheld. Licensee shall
keep Licensor apprised of the progress of any such proceeding. Before Licensee
may settle such proceeding, it must obtain consent to the settlement from
Licensor, acting reasonably. The parties shall mutually agree, acting
reasonably, upon the allocation to each party of any amounts recovered in such
proceedings.
2.3 Licensor shall have no responsibility in manufacturing,
packaging and exporting the Products to Licensee.
ARTICLE 3
LICENSE GRANT
3.1 Subject to any existing distribution agreements in or
relating to the Territory as disclosed to Licensee, Licensor grants to Licensee
an exclusive license to use the Trademark solely in connection with the sale and
distribution of Products in the Territory.
3.2 Licensee is designated as Licensor's registered user of
the Trademark in those countries in the Territory where such registrations are
appropriate and Licensee shall co-operate with Licensor in making all
applications in connection with such designation as Licensor deems reasonably
necessary or desirable. Licensee acknowledges that it is only a licensee of the
Trademark and agrees that it shall make no claim of ownership or any other claim
to or under the Trademark, apart from its limited ability as a licensee to use
the Trademark on the limited category of products pursuant to this Agreement.
3.3 Licensee may appoint distributors in the Territory
provided such distributors comply with all provisions of this Agreement.
Licensee shall enter into agreements
-4-
<PAGE>
with such distributors which contain terms in favour of the Licensee which are
the same as or more onerous than those under this Agreement. Licensee shall
remain fully responsible to Licensor for the conduct of each of its
distributors. Licensee agrees to honour any existing distribution agreements
until such agreements are legally terminated.
ARTICLE 4
LICENSEE FEE AND BUYING COMMISSION
4.1 In consideration for the License, Licensee agrees to
release Licensor from its obligation to pay US$900,000 to Licensee.
ARTICLE 5
PROMOTION OF PRODUCTS
5.1 Licensee shall use its best efforts to promote and market
the full range of Products and to maximize the distribution and sale of the
Products and to protect and promote the reputation and goodwill of the Products,
the Trademark and Licensor and the brand perception of the Products.
5.2 Licensee shall comply with all standards for the Products
as specified by Licensor from time to time. Licensee shall promptly notify
Licensor of any complaints or claims about the Products and shall comply with
the procedure specified by Licensor for dealing with such complaints or claims.
5.3 Licensee agrees that all marketing plans relating to the
Products in the Territory shall be developed in consultation with Licensor and
in accordance with the worldwide marketing policies of Licensor as may be
amended from time to time.
5.4 Licensee agrees to purchase from Midland Japan, attention
Mr. Mori its requirements for the Products and Licensee agrees and acknowledges
that Licensor shall have no responsibility or obligation to accept or deliver
any Products to the Licensee hereunder.
ARTICLE 6
RELEASE AND INDEMNITY
6.1 As additional consideration for the License, Licensee and
its respective Affiliates, successors and assigns, hereby unconditionally
indemnify, release and hold Licensor and its respective officers, directors,
partners, shareholders, employees, Affiliates and assigns (the "Indemnified
Parties") harmless from any and all claims, losses and causes of action
whatsoever, arising from any understandings, negotiations, representations,
relationships or statements, express or implied, involving any of the
Indemnified Parties which occurred or existed or which Licensee claims to have
occurred or existed prior to the date of this Agreement.
6.2 Licensee shall at all times maintain comprehensive general
liability insurance, including product liability coverage, with minimum limits
of not less than One Million Dollars ($1,000,000). Licensor shall be a named
insured under the insurance. Upon request, Licensee shall provide to Licensor a
certificate evidencing such insurance.
-5-
<PAGE>
ARTICLE 7
ADDITIONAL COVENANTS AND RESTRICTIONS
7.1 During the term of this Agreement, without the written
consent of Licensor, Licensee shall not and shall not cause or permit any of its
agents, Affiliates or distributors to (a) sell any Products under the Trademark
outside of the Territory, or (b) knowingly sell any Products under the Trademark
in the Territory for resale outside of such Territory.
7.2 Licensee may use the Trademark in the sale, display,
promotion and servicing of Products, but only in accordance with this Agreement
and only to the extent the Products are associated with the Trademark. Licensee
may not use or attempt to register on its own behalf the Trademark, the term
"Midland" or any logos associated therewith or any similar term or logo as part
of any mark, name, trade style or business or corporate names of Licensee or in
connection with the sale, display, servicing or promotion of any products other
than the Products except in accordance with this Agreement. No other use may be
made of the Trademark without Licensor's prior written consent. Licensor
reserves the right, acting reasonably, to review and approve all uses of the
Trademark by Licensee on Products or in Licensee's promotional material or
otherwise prior to the introduction of such use, such approval not to be
unreasonably withheld; provided, that approval will be deemed to have been given
if Licensor does not object in writing to Licensee's proposed use within 10
business days after receipt of such materials for review. The Trademark is the
exclusive property of Licensor and all rights to all goodwill developed with
respect to the Trademark or any derivation thereof shall accrue solely to the
benefit of Licensor. Licensee shall not at any time, during the term of this
Agreement or thereafter, do or cause to be done any thing, directly or
indirectly, which may affect the distinctiveness, validity, ownership or
enforceability of the Trademark.
7.3 At the request of Licensor, Licensee shall affix to all
Products and display in a reasonable manner in all promotional literature and
materials the following legend or such other legend as Licensor may prescribe
from time to time:
"Midland" is a registered trademark of Simmonds Capital Limited,
Toronto, Ontario, Canada, used under license.
7.4 Licensor shall have no liability for any product
warranties extended by Licensee or its suppliers. Licensee shall indemnify and
hold Licensor and its officers, directors, employees, shareholders, Affiliates
and assigns harmless from all claims, demands, damages, costs, liabilities,
actions and causes of action arising from any breach of warranty by Licensee or
its suppliers or any failure of or defect in any Products sold or distributed by
Licensee, unless such Products were manufactured, supplied or distributed by
Licensor and are covered by Licensor's warranty.
7.5 Licensor shall have no responsibility, obligation or
liability to accept or deliver any Products which Licensee may order pursuant to
this Agreement and Licensee further acknowledges and agrees that all purchases
of Products are to be co-ordinated through Midland Japan, attention Mr. Mori.
-6-
<PAGE>
7.6 Licensee shall conduct its business in compliance with
applicable laws and regulations. Licensee may use the Trademark only in
connection with the distribution and sale of Products of standard commercial
quality when put to their intended use. Licensor shall have the right to conduct
an annual inspection of the operations and facilities of Licensee and its
supplier and distributors to ensure compliance with the covenants contained in
this Section 7.6.
7.7 Licensee shall assume responsibility for compliance with
all applicable laws and regulations, including but not limited to customs laws
and regulations, in connection with the importation, distribution and sale of
Products bearing the Trademark.
ARTICLE 8
CONFIDENTIALITY
8.1 The parties acknowledge that they may receive or come into
contact with Confidential Information in connection with this Agreement or prior
dealings between the parties or their Affiliates. A party receiving Confidential
Information (the "Recipient") shall not disclose to others or use for any
purpose any Confidential Information of the other party without the written
consent of the party disclosing the Confidential Information (the "Discloser").
The Recipient shall use the same care and discretion, but in no event less than
reasonable care and discretion, to prevent unauthorized use or disclosure of
Confidential Information as it employs with similar information of its own. The
covenants of confidentiality herein contained will apply after the date of this
Agreement to any Confidential Information, whether disclosed prior to or after
such date.
8.2 The parties acknowledge that any breach by them of the
provisions of Section 8.1 could cause irreparable injury to the Discloser which
would not be fully compensable in damage. Accordingly, the Discloser shall be
entitled to obtain injunctive relief from a court of competent jurisdiction
against any breach or threatened breach by the Recipient of such provisions,
without the necessity of posting bond or proving lack of an adequate remedy at
law.
ARTICLE 9
ARBITRATION
9.1 Unless either party elects to bring an action for
injunctive relief under Article 8, any dispute, controversy or claim arising out
of or relating to this Agreement or any breach hereof shall be resolved by
arbitration in accordance with the then existing Rules of Conciliation and
Arbitration of the International Chamber of Commerce, as modified hereby.
9.2 Unless otherwise agreed by the parties, the arbitration
panel shall consist of three arbitrators, one to be appointed by Licensor and
one to be appointed by Licensee, with the third to be appointed by the two
arbitrators appointed by Licensor and Licensee. If either of the parties fails
to appoint an arbitrator within 30 days after receipt of notice of the
appointment by the other of its arbitrator, or if the two arbitrators fail to
appoint a third, then the International Chamber of Commerce will have the power,
at the request of either party, to make the appointment(s) which has not been
made as contemplated above.
9.3 The arbitrator shall not have the power of amiable
compositors. Unless the parties otherwise agree the arbitration shall take place
in Toronto, Ontario, Canada. Both
-7-
<PAGE>
parties shall be entitled to representation by counsel, to appear and present
oral and written evidence and argument to compel the testimony of witnesses and
the production of documents, to obtain a written list of the other party's
witnesses and documents prior to the hearing, and to examine and cross-examine
witnesses. The substantive law governing this Agreement shall also govern the
arbitration proceeding. The arbitration proceedings, all pleadings and evidence
therein, and the arbitral award shall be in the English language, with any
translation into another language to be at the expense of Licensee. The arbitral
award shall be in writing and shall explain the reasons for the award. The
arbitral award shall be final and binding on the parties. The expense of
arbitration shall be shared equally by the parties unless otherwise decided by
the arbitrators.
9.4 Each party agrees that final judgment on an arbitral award
rendered against it in any action or proceeding relating to this Agreement shall
be conclusive and may be enforced, to the extent permitted by applicable law, in
any jurisdiction within or without the Territory by suit on the judgment, a
certified copy of which shall be conclusive evidence thereof, or by such other
means provided by applicable law.
ARTICLE 10
TERM AND TERMINATION
10.1 Unless terminated in accordance with this Article 10 or
other provisions under this Agreement, this Agreement shall be for a term
commencing on the date hereof and continuing indefinitely.
10.2 This Agreement may be terminated at any time by Licensee
by giving 30 days written notice to Licensor.
10.3 Without prejudice to any rights of action or any claims
for damage of rights accrued at the date of termination, Licensor may terminate
this Agreement:
(a) in the event of a breach of any term of this Agreement by
Licensee, provided that Licensee retains the right to cure any
such breach not later thirty (30) days following notice of the
breach given to Licensee;
(b) immediately in the event Licensee takes steps to enter into
liquidation or becomes insolvent, bankrupt or enters into a
deed of arrangement for the benefit of its Creditors or
commits any equivalent act or thing under any applicable law,
or if a receiver is appointed for its assets or business.
10.4 Upon any termination of this Agreement by the parties or
by Licensee or by operation of law, the Licensee and all rights of Licensee to
use the Trademark shall immediately terminate, and Licensee shall immediately
discontinue all use of the Trademark, except as necessary in the reasonable
judgment of Licensor to enable Licensee to dispose of any then existing
inventories of Licensee which display the Trademark. Licensor shall not be
liable to Licensee or any Affiliate for any damage, loss or expense
reimbursement or any refund of all or part of the License Fee arising from any
termination of this Agreement. All payments due under this Agreement immediately
become payable to Licensor.
-8-
<PAGE>
ARTICLE 11
MISCELLANEOUS
11.1 Nothing in this Agreement shall be construed to deem
Licensor and Licensee partners, joint ventures, principal and agent or vendor
and distributor, or create any relationship other than licensor-licensee.
Licensee is not a distributor, representative or agent of Licensor, and neither
party shall have the right to contract for or to bind the other in any way.
11.2 Each party consents to service of process upon it in any
proceeding brought pursuant to the terms hereof by mailing copies of any notice
or pleadings by registered mail, return receipt requested to it at its address
set forth in Section 11.4. The foregoing shall not limit the right of either
party to serve process in any other manner permitted by applicable law and shall
not limit the ability of either party to bring any proceeding or to obtain
execution of any judgment rendered in any such proceeding in any other
jurisdiction in which the other party or any of its property or assets may be
found.
11.3 This Agreement shall be governed by and construed in
accordance with the laws of the Province of Ontario.
11.4 Any notice required or permitted hereunder shall be in
writing and may be hand delivered or sent by commercial overnight courier,
registered or certified mail or facsimile transmission;
(a) to Licensor
Midland International Corporation
Suite 1050
5255 Yonge Street
Willowdale, Ontario
M2N 6P4
Attention: Chief Executive Officer
Facsimile: (416) 221-3800
(b) to Licensee:
Simmonds Capital Limited
Suite 1050
5255 Yonge Street
Willowdale, Ontario
M2N 6P4
Attention: Chief Executive Officer
Facsimile: (416) 221-3800
or to such other address or facsimile number as either party may notify
the other in writing in accordance with this Section 11.4.
-9-
<PAGE>
11.5 This Agreement may be executed in counterparts, each of
which shall be deemed an original and both of which, taken together, shall
constitute one and the same instrument. A facsimile signature of this Agreement
shall be valid if followed by a signed hard copy.
11.6 This constitutes the entire agreement of the parties with
regard to the subject matter hereof, and may not be modified, altered or amended
except in writing and signed by all parties hereto. Any prior agreement and any
other agreement, arrangement and understanding between the parties or their
Affiliates, written or oral, express or implied, are hereby terminated.
11.7 (a) This Agreement shall be binding on and ensure to the
benefit of the parties hereto. Licensor may not assign this
Agreement or any rights hereunder to any successor owner or
assignee of the Trademark, other than to American Digital
Communications, Inc. ("ADC, Inc."), without giving written
notice to Licensee and ADC, Inc.
(b) Licensee may not assign this Agreement or grant a sublicense
of all or any of its rights except with the prior written
consent of Licensor and then only to a party which undertakes
in a written instrument reasonably acceptable to Licensor to
abide by and agree to perform all covenants, obligations and
restrictions of and upon Licensee under this Agreement.
11.8 If any provision of this Agreement is determined by an
arbitrator or a court of competent jurisdiction to violate any applicable law or
public policy, such provision shall be severed herefrom, provided such severance
may be effected in such a way as not to destroy the essential meaning and intent
of this Agreement and the remaining provisions hereof shall remain in full force
and effect.
11.9 All dollar amounts in this Agreement are in currency of
the United States of America.
11.10 This Agreement may be executed in one or more
counterparts, which can include facsimile counterparts, each of which when so
executed shall constitute an original and all of which together shall constitute
one and the same agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed as of the date set forth above.
MIDLAND INTERNATIONAL CORPORATION
By: ____________________________________
SIMMONDS CAPITAL LIMITED
By: ____________________________________
-10-
<PAGE>
[Letterhead of Heenan Blaikie]
November 13, 1996
American Digital Communications, Inc.
3773 Cherry Creek North Drive
Suite 615
Denver, Colorado 80209
- - and -
Brasher & Company
90 Madison Street
Suite 707
Denver, Colorado 80209
Dear Sirs:
Re: Assignment of License Rights to American Digital Communications, Inc.
We have acted as counsel to Simmonds Capital Limited ("SCL") in
connection with the grant, assignment and transfer of all of SCL's right, title
and interest in and to the License Rights (as such term is defined in the Asset
Purchase Agreement described below) to American Digital Communications, Inc.
("ADC, Inc.") and the granting by SCL and Midland International Corporation
("MIC") to ADC, Inc. of a right to purchase certain in-stock inventory of SCL
and MIC. As such, we have participated in the preparation of: (i) the asset
purchase agreement (the "Asset Purchase Agreement") dated November 8, 1996 among
SCL, MIC, ADC, Inc. and American Digital Corporation; and (ii) the license
agreement (the "License Agreement") dated November 8, 1996, between SCL and ADC,
Inc.
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of the constating documents, articles and by-laws of SCL,
such corporate records of SCL, such certificates and letters of public officials
and officers of SCL, and such other documents, and have considered such
questions of law and made such other investigations, as we have deemed relevant
or necessary as the basis for the opinions hereinafter expressed. In all such
examinations, we have assumed the genuineness of all signatures, the legal
capacity of all individuals, the authenticity of all documents submitted to us
as originals, the conformity to original documents of ail documents submitted to
us as certified, conformed or photostatic copies or facsimiles thereof and the
authenticity of the originals of such certified, conformed or photostatic copies
or facsimiles.
We express no opinion as to any matters governed by any laws other than
the laws of the Province of Ontario and the federal laws of Canada applicable
therein.
In expressing the enforceability opinion set forth in paragraph 4, we
have assumed that the Asset Purchase Agreement and the License Agreement
constitute legal, valid and binding obligations of the parties thereto other
than SCL, and are enforceable against such parties in
-11-
<PAGE>
accordance with their respective terms, subject to the qualifications on
enforceability referred to in the following paragraph.
With respect to the opinions expressed in paragraph 1 hereof, we have
relied, without independent verification, upon a certificate of status from the
Ministry of Consumer and Corporate Relations for SCL dated November 13, 1996.
The opinions expressed below are subject to the qualification that the
rights and remedies of the parties to the Asset Purchase Agreement and the
License Agreement contained in the said agreements may be subject to and
affected by the laws relating to bankruptcy, insolvency, reorganization or
creditors' rights generally and by the equitable or statutory powers of the
courts to stay proceedings before them, to stay the execution of judgments and
to grant relief against forfeiture. Further, the enforcement of the Asset
Purchase Agreement and the License Agreement, or any judgment arising out of or
in connection therewith is subject to the general principles of equity. In
particular, we express no opinion as to whether a court will order an
injunction, specific performance or other equitable remedies with respect to any
particular provision of the Asset Purchase Agreement and the License Agreement.
Based and relying upon and subject to the foregoing, we are of the
opinion that:
SCL is a corporation incorporated and existing under the laws
of the Province of Ontario. SCL has full corporate power and
authority to own its properties and assets and to carry on its
business as currently conducted by it.
SCL has the requisite corporate power and authority to execute
and deliver and to carry out its obligations under the Asset
Purchase Agreement and the License Agreement.
All necessary corporate action has been taken by SCL to
authorize the execution and delivery by it of the Asset
Purchase Agreement and the License Agreement and the
performance of its obligations thereunder.
Each of the Asset Purchase Agreement and the License Agreement
has been duly authorized, executed and delivered by SCL and
constitutes a legal, valid and binding obligation of SCL
enforceable against SCL in accordance with its terms.
The execution and delivery by SCL of the Asset Purchase
Agreement and License Agreement and the performance by SCL of
its obligations thereunder do not and will not result in any
breach or violation of, or conflict with any of the provisions
of, (i) the constating documents or by-laws of SCL, or (ii)
the provisions of any law, statute, rule or regulation
applicable to SCL.
No approval, authorization, consent, permit or other action
by, or filing with, any governmental body or authority or any
regulatory
-2-
<PAGE>
agency, body or tribunal having jurisdiction is required in
connection with the execution and delivery by SCL of the Asset
Purchase Agreement or the License Agreement or the performance
by SCL of its obligations thereunder.
This opinion is provided solely for your use in connection with the
above referenced transaction and may not be relied upon by you for any other
purpose or quoted from or relied upon by any other person.
Yours very truly,
Heenan Blaikie
-3-
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in the Registration Statement of American Digital
Communications, Inc. on Form SB-2 of our report dated May 27, 1999, except for
Note 11, as to which the date is June 10, 1999, relating to the financial
statements of American Digital Communications, Inc. as of February 28, 1999 and
1998 and the related statements of operations, stockholders' equity and cash
flows for the years then ended.
Denver, Colorado
February 3, 2000 CAUSEY DEMGEN & MOORE INC.
