SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 3 to
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
UMDN, INC.
(Exact name of Registrant as Specified in Its Charter)
Delaware 7299 95-4817171
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
UMDN, Inc.
217 Ashland Avenue
Santa Monica, California 90405
(310) 396-1475
(Address, including zip code, and telephone
number, including area code, of
registrant's principal executive
offices)
Kent Keith
President
UMDN, Inc.
217 Ashland Avenue
Santa Monica, California 90405
(310) 396-1475
(Name, address, including zip code, and telephone number
including area code, of agent for service)
Copies to:
Christopher P. O'Connell, Esq.
Parker, Milliken, Clark, O'Hara & Samuelian
333 South Hope Street, 27th Floor
Los Angeles, California 90071-1488
(213) 683-6500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
- --------------------------------------------------------------------------------
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please 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 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, check
the following box.
-----
CALCULATION OF REGISTRATION FEE
- --------------------------------------- ------------------ -------------------- ------------------- ------------------
Proposed Proposed
Title of Each Class Amount to be Offering Price Per Maximum Aggregate Amount of
of Shares to be Registered Registered Share Offering Price Registration Fee
- --------------------------------------- ------------------ -------------------- ------------------- ------------------
Common Stock, $.0001 Par Value per share 2,650,000 shares $.50(1) $1,325,000 $122.00
- --------------------------------------- ------------------ -------------------- ------------------- ------------------
(1) No market currently exists for the common stock of UMDN, Inc. Proposed
Offering Price Per Share estimated solely for purposes of calculating the
Registration Fee pursuant to Rule 457 under the Securities Act of 1933, as
amended.
- --------------------------------------------------------------------------------
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 said Section 8(a),
may determine.
1
Subject to Completion; dated September 25, 2002
PROSPECTUS The information in this prospectus is not complete
and may be changed. We 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 is not soliciting an offer to buy these
securities in any state where the offer or sale is
not permitted.
2,650,000 Shares Common Stock
UMDN, Inc.
Common Stock
This is an initial public offering of shares of common stock of UMDN,
Inc. All of the shares are being sold by our present shareholders or, in the
case of 200,000 shares, by the holder of an outstanding option to purchase those
shares. If that option is fully exercised we shall receive $4,000, or $.02 per
share. We shall not receive any of the proceeds from the sale of the rest of our
shares by the selling shareholders. There is no agreement among the selling
shareholders to coordinate their sales of shares of our common stock.
Prior to this Offering, there has been no public market for the common
stock. There can be no assurance that any market for the common stock will
develop as a result of this Offering.
The selling shareholders have advised us that, until a market develops
for our common stock, they will sell their shares for prices ranging from $.10
per share to $.50 per share. These prices cannot necessarily be expected to bear
any relationship to customary determinants of the value of shares of public
companies, such as the history of, and prospects for, our business; past sales
prices of our common stock in private transactions; an assessment of our
management; our present operations; our market capitalization and general
conditions in the securities markets.
If and when a public market for our common stock does develop, the
prices at which the selling shareholders may sell their shares will be
determined by that market or will be privately negotiated between the selling
shareholders and their respective buyers.
We do not expect that our common stock will qualify, at least
initially, for inclusion on The Nasdaq Stock Market. Inclusion of our shares on
the OTC Bulletin Board or the Pink Sheets will depend on the willingness of
broker-dealers to register with The Nasdaq Stock Market, Inc., which regulates
all broker-dealers, to submit quotations for our shares.
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE "RISKS OF INVESTING IN SHARES OF OUR COMMON STOCK"
SECTION BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
----------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
COMMISSION HAS APPROVED OR DISAPROVED OF THESE SECURITIES OR PASSED ON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTA-TION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
----------------------------------------------------------------
The date of this Prospectus is ____________, 2002
2
TABLE OF CONTENTS
Page
Prospectus Summary............................................................................................ 4
The Offering.................................................................................................. 4
Summary Financial Information................................................................................. 5
Risk of Investing in Shares of Our Common Stock............................................................... 5
Risks Related to our Business............................................................................ 5
Risks Associated With Our Securities..................................................................... 9
Special Note Regarding Forward-Looking Statements.............................................................11
Use of Proceeds...............................................................................................11
Management's Discussion and Analysis of Financial Condition and Results of Operations.........................12
Our Business..................................................................................................15
Legal Proceedings.............................................................................................21
Directors, Executive Officers, Promoters and Control Persons..................................................22
Executive Compensation........................................................................................24
Security Ownership of Certain Beneficial Owners and Management................................................25
Certain Transactions..........................................................................................26
Description of Securities.....................................................................................26
Selling Shareholders..........................................................................................30
Distribution..................................................................................................31
Disclosure of Securities and Exchange Commission Position on Indemnification
for Securities Act Liabilities...........................................................................32
Reports to Securityholders....................................................................................33
Legal Matters.................................................................................................33
Experts.......................................................................................................33
Available Information.........................................................................................33
Financial Statements..........................................................................................35
You should rely only on the information contained in this document. We have not
authorized anyone to provide you with information that is different. This
document may only be used where it is legal to sell these securities. The
information in this document may only be accurate on the date of this document.
3
PROSPECTUS SUMMARY
This summary highlights certain information contained elsewhere in
this Prospectus. It may not contain all of the information that is important to
your investment decision. You should read the following summary together with
RISKS OF INVESTING IN SHARES OF OUR COMMON STOCK and the more detailed
information regarding UMDN and our financial statements and the related notes
appearing elsewhere in this Prospectus.
UMDN, INC.
We are a marketing company. We have created a benefits program, that
we believe is unique, specifically for union and association members. Our goal
is to extend the collective bargaining power of the unions and associations to
purchasing power with local and national businesses. We enroll members of unions
and other large groups of consumers bound together by a common interest, which
we call "affinity groups," to use their collective buying power to elicit
discounts from businesses wanting to access these groups of consumers. We
provide the means, through live operators, an online interface and printed
materials, for our members easily to find and patronize these businesses. We
have engaged the services of Mr. Larry Hagman, who is probably best known for
playing J.R. Ewing on the Dallas television series, to act as our spokesperson
for our marketing campaign. We currently have over 285 businesses that have
agreed to provide discounts to our members. These benefits are currently being
actively promoted by unions and associations representing approximately 300,000
members. Approximately 25,000 members are in our database and receive
information directly from us. The balance of those members receive information
about us from their unions or associations. See OUR BUSINESS - Marketing.
Unlike other group marketing organizations, we derive our revenue
solely from the businesses that provide these discounts, although, at present,
only 82 of those businesses are making payments to us. See OUR BUSINESS -
Present Operations. We do not derive any revenue, whether as subscriptions or
dues or otherwise, directly from our members. We commenced operations in the Los
Angeles metropolitan area in late 1998 and seek to expand these operations both
in Los Angeles and in other metropolitan areas where we believe there are
concentrations of union members.
Our offices are located at 217 Ashland Avenue, Santa Monica,
California 90405; and our telephone number is 1-310-396-1475.
THE OFFERING
Shares offered by selling shareholders.................2,650,000 shares of common stock (including 200,000 shares issuable upon
exercise of option; see SELLING SHAREHOLDERS - Option)
Shares outstanding before this Offering................14,924,000 shares of common stock
Shares outstanding after this Offering.................15,124,000 shares of common stock, if option exercised in full
Proceeds...............................................We shall only receive $.02 per share, or a
maximum of $4,000, if the option is fully
exercised. The remaining proceeds of this Offering
will be received by the selling shareholders.
4
SUMMARY FINANCIAL INFORMATION
The following summary financial information is derived from the more
detailed financial statements appearing elsewhere in this Prospectus. This
information should be read in conjunction with those financial statements and
their related notes and MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS included elsewhere in this Prospectus. The
financial information set forth below is audited with respect to the August 31,
2001, financial statements.
Description Year Ended Nine Months Ended
August 31 May 31
---------------------------------- --------------------------------------
(unaudited)
2000 2001 2001 2002
---- ---- ---- ----
Revenue $ 97,812 $ 67,842 $ 54,245 $ 63,417
Loss from operations $ (152,390) $ (376,775) $(223,116) $(242,768)
Net loss $ (156,458) $ (390,991) $(233,344) $(258,261)
Basic and diluted loss per share $ - $ (0.11) $ (0.07) $ (0.03)
As of
As of August 31 May 31, 2002
---------------------------------- --------------------------------------
2000 2001 (unaudited)
---- ---- -----------
Cash $ 171 $ 30,704 $ 3,131
Working Capital Deficiency (excluding $ (81,660) $ (59,521) $(115,809)
deferred offering costs)
Total Assets $ 21,800 $ 49,561 $ 123,532
Total long-term debt $ 93,877 $ 127,068 $ 272,185
Proprietor/stockholders' deficiency $ (158,807) $ (168,042) $(270,303)
RISKS OF INVESTING IN SHARES OF OUR COMMON STOCK
You should carefully consider the following risk factors and all other
information contained in this Prospectus before investing in our common stock.
Investing in our common stock involves a high degree of risk. The following
risks are the material risks that could adversely affect our business, financial
condition and results of operations and could result in a complete loss of your
investment.
RISKS RELATED TO OUR BUSINESS
- -----------------------------
WE HAVE A LIMITED OPERATING HISTORY SO IT MAY BE DIFFICULT TO ASSESS OUR
FUTURE PROSPECTS
We have been in business since late 1998. To date, we have generated
only limited revenues from our operations and have depended for our continued
existence primarily on investments from our principals, their family members and
a limited number of outside investors. We expect that we shall continue to
experience negative cash flow until our business becomes more mature with a
stable base of both members and local and national businesses. Our limited
operating history offers little information to serve as a basis for evaluating
us and our long-term prospects. You should consider our prospects in light of
the risks, expenses and difficulties that companies in their early stage of
development encounter. Our success depends upon our ability to address those
risks successfully. They include, among other things:
o Whether we can assemble and maintain the necessary resources,
including financial resources, that we shall need to enter the
markets we have identified and to provide a continuing value to
our clients;
5
o Whether we can continue to build and maintain a strong management
team that can develop and execute our business strategy and
respond effectively to changes in the markets for our services;
o Whether we can successfully establish relationships and develop
networks in major metropolitan areas other than Los Angeles;
o Whether we can implement our sales and marketing strategy; and
o Whether we can further develop and manage strategic relationships
with unions and retailers to maximize acceptance of our services.
If we do not succeed in addressing these risks, our business likely
will be materially and adversely affected.
IF WE DO NOT OBTAIN FINANCING DURING 2002, OUR BUSINESS WILL BE CURTAILED
We believe that we have sufficient cash resources to enable us to
continue our present operations through the end of 2002. Our independent public
accountants have included an explanatory paragraph in their report on our
financial statements indicating there is a substantial doubt about our ability
to continue as a going concern. We believe that the implementation of our
business plan sufficient for us to become self-sustaining will require a cash
infusion of approximately $750,000. We would devote all of this sum to the
development of the Los Angeles market and believe that we can become
self-sustaining by just developing this market. We would require additional
financing to expand beyond this market. We have no commitments for this capital
nor even any assurance that this capital will be available to us. The terms of
this capital, if available at all, may be burdensome to our then existing
shareholders, including the investors in this Offering. If we are unable to
obtain financing of this magnitude by the end of this year, we expect to curtail
our operations by significant reductions in personnel and in the time spent on
our business by Mr. and Mrs. Keith. Mr. and Mrs. Keith have agreed to lend us
funds and have advised us that, if they are able to sell all or a significant
portion of their shares in this Offering, the amount available to lend will
increase. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND RESULTS OF
OPERATIONS. We anticipate that one of the primary effects of this Offering will
be the creation of a public market for our Common Stock. If Mr. and Mrs. Keith
are unable to sell sufficient shares to permit them to increase their loan to
us, our remaining cash resources are more likely to be depleted before we are
able to obtain the necessary financing. Likewise, if a public market for our
common stock does not develop, obtaining the necessary financing will be
substantially more difficult if it is obtainable at all.
IF WE ARE UNABLE TO COORDINATE THE GROWTH OF BOTH MEMBERS AND BUSINESSES,
OUR PROSPECTS WILL BE REDUCED
The growth of our business requires the coordinated growth of its two
complementary components: membership and the businesses to provide discounts to
that membership. On the one hand, without the businesses to provide the
discounts, there is nothing to attract members; and, on the other, without the
members to shop at those businesses, there is nothing to attract the businesses.
If we are unable to coordinate this growth, we may suffer a loss of either
members, if there are insufficient businesses, or businesses, if there are
insufficient members. To date, we have not had the resources necessary to market
effectively to either component on a significant scale, much less to both
simultaneously. To create and sustain a viable business with positive cash flow
will require an ongoing, sophisticated, expensive direct marketing campaign.
Based on our limited experience to date, we believe that a properly designed and
6
executed marketing campaign should attract new members, stimulate members'
patronage and create recognition among various local and national businesses
which should enable us to monitor and govern the growth of each component. We
have not been in a position to test this belief with an expanded campaign and,
therefore, cannot be sure that it will prove to be correct on a large scale.
IF WE ARE UNABLE TO SCALE-UP OUR BUSINESS MODEL AND KEEP IT FLEXIBLE, OUR GROWTH
WILL BE LIMITED
We have developed our business model through our experience with union
locals in Los Angeles, initially those in the entertainment industry and,
recently, in other industries. Members of the entertainment industry may not be
typical of unionized workers in other, more traditional unionized industries,
such as autoworkers, steelworkers, construction workers or electrical workers.
In addition, the demographics of Los Angeles may differ from the demographics of
other metropolitan areas and the demographics of various unions within each
metropolitan area may also differ. These demographics may also change over time
within metropolitan areas and particular unions. To be successful, therefore, we
expect to need to be able to adapt our business model to these many variables.
If we cannot do so, our potential for growth will be limited to those markets
that are similar to the market in Los Angeles, which will limit our expansion
possibilities.
WE MAY HAVE LIABILITY TO BOTH MEMBERS AND BUSINESSES
We are essentially a sales and marketing company. We provide a
pre-selected group of consumers to a pre-selected group of service and retail
businesses. Should a dispute arise between one or more of our members and one or
more of the businesses that provide goods and services to our members, it is
possible that we might become enmeshed in that dispute if either side decides
that we sponsored the other or that we are the agent of the other. We endeavor
to address this issue by providing in our contracts with business providers and
the terms of service with our members that we have no liability in these
circumstances; however, it is always possible that a court or jury could
conclude that, despite our efforts and disclaimers, we have liability to one or
the other of the parties in such a dispute.
WE MAY FACE COMPETITION FROM SIGNIFICANTLY LARGER BUSINESSES, WHICH MAY LIMIT
OUR ABILITY TO IMPLEMENT OUR BUSINESS PLAN
Our primary target market, union members, is a highly desirable
consumer segment. The competition for this market is intense. There are several
companies that currently work with unions to provide benefits, products or
services, or some combination, to both unions and their members, although, to
our knowledge, none of these companies works with unions to create or promote
discount networks. Many of these companies that work with unions in other ways
and other potential competitors that do not actively target unions and their
members at present have substantially greater resources than we do. Many of
these competitors and potential competitors may also have greater brand
recognition and better connections within the unions than we do. Direct
competition from these competitors and potential competitors could have a
substantial adverse effect on our business.
Our business model is not legally protectible. The barriers to entry
into our market are relatively low. Our success will depend, in large part, on
our ability to achieve brand recognition in a very short period of time and to
provide continuous real value to our members. Our members will be recruited on
the basis of their affiliation with a union or other affinity group and will
have no investment in their membership. We cannot assume that they will have any
loyalty to us or the businesses that become part of their discount network
unless we and those businesses continue to provide value to them.
Our marketing efforts will be directed at the union members themselves
as well as at various union officials who will make decisions about associating
their union with UMDN and promoting that association. It will be extremely
important to retain the goodwill of the unions and their officials.
7
If we are unable to sustain our marketing efforts, we can expect
either that our members will no longer patronize the businesses that become part
of our network or attrition in our membership base. Either of these conditions
can be expected to impact adversely our ability to attract new businesses to our
networks.
IF OUR KEY PERSONNEL WERE NO LONGER AVAILABLE, OUR BUSINESS WOULD BE ADVERSELY
AFFECTED
We depend heavily on the management and vision of our principals, Kent
and Starla Keith, who are husband and wife, for both daily operations and
strategic planning. The loss of the services of either Kent or Starla Keith
would severely and adversely impact our business. Among the factors that might
cause us to lose the services of either Kent or Starla Keith, the business
relationship between them, from which we believe we derive a significant
benefit, might be adversely affected by any deterioration in their personal
relationship. In addition, if we are unable to provide sufficient compensation
to Mr. and Mrs. Keith, they may be forced to seek other employment, which would
reduce their ability to provide their services to us. Our relationship with Mr.
Larry Hagman is also critical to our marketing efforts. The loss of his services
would require that we re-tool the marketing campaign that we are creating. His
contract with us only requires that he perform his services on our behalf at
times and under circumstances with which he is comfortable. This contract is
terminable by either party without cause at any time and does not restrict Mr.
Hagman from performing similar services for a competitor.
In order for us to manage the growth that we anticipate, we shall
require the services of additional senior management level personnel as well as
other employees to perform critical administrative, financial, marketing, sales
and customer service functions. We have no assurance that we shall be able to
attract and retain the management and other personnel that will be necessary for
our success.
MANAGEMENT HAS BROAD DISCRETION IN IMPLEMENTING OUR BUSINESS PLAN.
The scalability and portability of our business model remain untested.
If, in our judgment, our business model requires modification, we intend to
effect that modification and to implement the modified business model, which
might differ materially from the business plan outlined in this Prospectus.
Investors in our common stock will therefore entrust their investments to our
management's judgment.
BECAUSE OUR OFFICERS AND DIRECTORS ARE PROTECTED BY LIMITATIONS ON THEIR
LIABILITY TO US AND TO YOU ND BY THEIR INDEMNIFICATION, UNDER OUR CERTIFICATE OF
INCORPORATION AND BYLAWS, THEY ARE NOT LIABLE TO YOU FOR LOSSES AND LIABILITIES
RESULTING FROM THEIR MANAGERIAL ACTS.
Our officers and directors are required to exercise good faith and
high integrity in the management of our affairs. Our certificate of
incorporation and bylaws provide, however, that the officers and directors have
no liability to the shareholders for losses sustained or liabilities incurred
arising from any transactions entered into in their managerial capacities,
unless they violate their duty of loyalty, do not act in good faith, engage in
intentional misconduct, engage in a knowing violation of the law, approve an
improper dividend or stock repurchase or derive an improper benefit from the
transaction. As a result, we and you have a more limited right to action than
would have been available if such provisions were not present. Our certificate
of incorporation and bylaws also require us to indemnify our officers and
directors against any losses or liabilities they may incur as a result of the
manner in which they operated our business or conducted our internal affairs,
provided that in connection with these activities they acted in good faith and
in a manner which they reasonably believed to be consistent with (or, at least,
not against) our best interest, and their conduct did not constitute gross
negligence, misconduct or a breach of their fiduciary obligations to us and you.
8
RISKS ASSOCIATED WITH OUR SECURITIES
- ------------------------------------
OUR COMMON STOCK HAS NEVER BEEN TRADED; THEREFORE, PRICES FOR OUR COMMON STOCK
MAY DECLINE FROM THE PRICES PAID BY INITIAL INVESTORS.
At present there is no public market for the shares of our common
stock offered hereby and there can be no assurance that a public market for
these shares will develop or that any shareholder will be able to liquidate his
investment without considerable delay, if at all. There is no underwriter
engaged to coordinate sales by our selling shareholders. There can be no
assurance that any brokerage firm will act as a market maker of our securities.
If a market should develop, the price of our common stock may be highly volatile
because of the lack of any coordination among the selling shareholders. In
addition, an active trading market for our common stock may not develop or be
sustained. The sale of an aggregate of 2,650,000 shares for cash may depress the
market price of our common stock. Factors such as those discussed in this RISKS
OF INVESTING IN OUR COMMON STOCK section may have a significant impact on the
market price of our common stock. Due to the anticipated low price of our common
stock, many brokerage firms may not be willing to effect transactions in our
common stock. Even if a purchaser finds a broker willing to effect a transaction
in our common stock, the combination of brokerage commissions, state transfer
taxes, if any, and other selling costs may exceed the selling price.
WE DO NOT INTEND TO PAY DIVIDENDS TO OUR STOCKHOLDERS.
We have never paid any dividends to our stockholders. We currently
intend to retain any future earnings for funding growth and, therefore, do not
expect to pay any dividends in the foreseeable future. Even if we determine to
pay dividends to the holders of our common stock, we can provide no assurance or
guaranty that such dividends will be paid on a regular basis.
WE SHALL INCUR SIGNIFICANT EXPENSES IN EFFECTING THIS OFFERING.
We estimate that we shall incur significant expenses of approximately
$100,000 in connection with this Offering. These expenses will decrease the
amount of funds which would otherwise be available for use in our operations.
WE MAY SELL ADDITIONAL SHARES OF OUR COMMON STOCK WITHOUT SHAREHOLDER CONSENT,
WHICH WILL DILUTE THE INVESTORS' PERCENTAGE INTEREST IN UMDN.
We intend to seek to raise additional capital after completion of this
Offering and may do so by issuing additional shares of our common stock. Our
management will have the right to determine the number of shares that we shall
offer and the purchase price per share without the consent or approval of the
investors. In addition, the investors in this Offering will have no right to
purchase shares in any subsequent offering in order to maintain their percentage
ownership interest in UMDN.
NO MARKET CURRENTLY EXISTS FOR THE SHARES OF OUR COMMON STOCK, AND NONE MAY
DEVELOP FOLLOWING THIS OFFERING. NO PRIOR MARKET EXISTS FOR THESE SHARES. THESE
SHARES WILL NOT QUALIFY FOR LISTING ON NASDAQ. OUR COMMON STOCK MAY ONLY TRADE
OVER-THE-COUNTER OR ON THE BULLETIN BOARD.
Under the current rules relating to the listing of shares on NASDAQ we
must have:
o three registered and active market makers;
9
o stockholders' equity of at least $5 million, market
capitalization of at least $50 million, or net income of at least
$750,000 in the most recently completed fiscal year or in two of
the last three most recently completed fiscal years;
o operating history of at least one year or market capitalization
of $50 million;
o public float of at least 1,000,000 shares;
o market value of public float of at least $5 million;
o a minimum bid price of $4.00 per share; and
o at least 300 stockholders who own at least 100 shares each among
other requirements.
For a continued listing, a company must maintain:
o two registered and active market makers, one of which can be a
market maker entering a stabilizing bid;
o stockholders' equity of at least $2.5 million, market
capitalization of at least $35 million, or net income of at least
$500,000 in the most recently completed fiscal year or in two of
the last three most recently completed fiscal years;
o a public float of at least 500,000 shares;
o market value of public float of at least $1 million; and
o a minimum bid price of $1.00 per share, among other requirements.
Our common stock will not initially be eligible for listing on The
Nasdaq Stock Market. Our shares should, however, be eligible for trading on both
the OTC Bulletin Board operated by The Nasdaq Stock Market, Inc. and the
Electronic Quotation Service operated by The Pink Sheets, LLC. These markets
have been created for shares that do not meet the listing requirements of The
Nasdaq Stock Market. The establishment of a market for our common stock in
either venue, however, will depend on the willingness of one or more broker -
dealers to register with the Nasdaq Stock Market, Inc. to submit bid and ask
quotations for our shares. Neither we nor the selling shareholders have received
any assurances that any broker-dealer would be wiling to do so.
SHOULD THE COMMON STOCK REMAIN TRADING ONLY IN THE OVER-THE-COUNTER MARKET,
LIQUIDITY IN THE COMMON STOCK MAY BE SEVERELY LIMITED.
Stocks in the OTC bulletin board or pink sheet market ordinarily have
much lower trading volume than on The Nasdaq Stock Market. Very few market
makers take interest in shares traded over-the-counter; and, accordingly, the
markets for such shares are less orderly than is usual for Nasdaq stocks. As a
result of the low trading volumes ordinarily obtained in over-the-counter
markets, sales of common stock in any significant amount can generally not be
absorbed without a dramatic reduction in price. Moreover, thinly traded shares
in the over-the-counter markets are more susceptible to trading manipulations
than is ordinarily the case for more actively traded shares. As a result, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, our shares.
PENNY STOCK REGULATIONS MAY IMPOSE ADDITIONAL RESTRICTIONS ON MARKETABILITY OF
OUR SECURITIES.
The Securities and Exchange Commission (the "Commission") has adopted
regulations which generally define a "penny stock" to be any equity security
that has a market price (as defined) of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exceptions. As a result,
our common stock is subject to rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of such
securities and have received the purchaser's written consent to the transaction
prior to the purchase. Additionally, for any transaction involving a penny
stock, unless exempt, the rules require the delivery, prior to the transaction,
of a risk disclosure document mandated by the Commission relating to the penny
10
stock market. The broker-dealer must also disclose the commission payable to
both the broker-dealer and the registered representative, current quotations for
the securities and, if the broker-dealer is the sole market maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to trade our securities and may affect
the ability of investors to sell our securities in the secondary market and the
price at which such investors can sell any such securities.
Stockholders should be aware that, according to the Commission, the
market for penny stocks has suffered in recent years from patterns of fraud and
abuse. Such patterns include:
- control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer;
- manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases;
- "boiler room" practices involving high pressure sales tactics and
unrealistic price projections by inexperienced sales persons;
- excessive and undisclosed bid-ask differentials and markups by
selling broker-dealers; and
- the wholesale dumping of the same securities by promoters and
broker-dealers after prices have been manipulated to a desired
level, along with the inevitable collapse of those prices with
consequent investor losses.
Our management is aware of the abuses that have occurred historically
in the penny stock market. Although we do not expect to be in a position to
dictate the behavior of the market or of broker-dealers who participate in the
market, management will strive within the confines of practical limitations to
prevent the described patterns from being established with respect to our common
stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under PROSPECTUS SUMMARY, RISKS OF INVESTING IN
SHARES OF OUR COMMON STOCK, MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF
OPERATIONS, OUR BUSINESS and elsewhere in this Prospectus constitute
forward-looking statements. These statements involve risks known to us,
significant uncertainties and other factors which may cause our actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others,
those listed under RISKS OF INVESTING IN SHARES OF OUR COMMON STOCK and
elsewhere in this Prospectus.
In some cases, you can identify forward-looking statements by
terminology, such as "may," "will," "should," "could," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "intends," "potential" or
"continue" or the negative of such terms or other comparable terminology. These
11
statements are only predictions. In evaluating these statements, you should
specifically consider various factors, including the risks outlined above. These
factors may cause our actual results to differ materially from any
forward-looking statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future events,
levels of activity, performance or achievements. We are under no duty to update
any of the forward-looking statements after the date of this Prospectus.
USE OF PROCEEDS
We shall receive no proceeds from this Offering. We may receive up to
$4,000 upon the exercise of an option to purchase 200,000 shares of our common
stock at $.02 per share. These 200,000 shares are included in this Offering. To
the extent that Mr. and Mrs. Keith receive proceeds from the sale of their
shares, they have advised us that they will use those proceeds for their living
expenses, thus increasing our available cash resources. See MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
There is no public market for the shares of our common stock. The
selling shareholders will determine the price or prices at which they will offer
their shares. Among the factors we anticipate that they may consider in doing so
are: the history of, and the prospects for, our business; past sales prices of
our common stock; an assessment of our management; our present operations; our
development and the general conditions of the securities markets at the time of
this Offering. The prices for the shares cannot necessarily be expected to bear
any relationship to our assets, earnings, book value or any other recognized
criteria of value.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ TOGETHER WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES OF UMDN, INC. INCLUDED IN THIS
PROSPECTUS, BEGINNING ON PAGE 36.
We began operations in 1998 as a sole proprietorship. Prior to
incorporation, our principals, Kent and Starla Keith, invested approximately
$150,000 in testing and refining the core concepts of our business model. This
process has continued through the date of this Prospectus, with additional loans
of approximately $250,000 and investments of approximately $325,000 provided by
our principals, their relatives and a small group of other stockholders. We
believe that we have demonstrated the feasibility and viability of our business
notwithstanding the losses that we have sustained in the years ended August 31,
2000, and 2001.
Our business model requires that we simultaneously build both a
network of fee-paying businesses and a membership base to patronize those
businesses. We derive our revenues solely from the business providers with which
we contract to provide goods and services to our members. We do not levy a
membership or subscriber charge on our members. Since inception, we have not had
the financial resources to market to either of these groups in a robust manner,
much less to both simultaneously. We have, therefore, switched the focus of our
limited personnel and financial resources from sales, to website and database
development, to union and member recruitment as our needs and growth in each
area have dictated. We believe that we simply need the means to allow us to
market effectively to both members and business providers simultaneously to
achieve profitability. During the past three years, we have demonstrated our
ability to sell our program to business providers and the willingness of local
unions to market our program to their members. The growth necessary to create a
viable business from this opportunity with positive cash flow will require an
ongoing, sophisticated and expensive marketing program. We believe that a
12
properly designed and executed marketing campaign will bring new active members
and increase usage as well as create recognition among various local and
national businesses. The goal of this campaign is a large, active membership
patronizing our business providers and enabling those business providers to
justify continuing to make the monthly payments to us on which our success
depends.
During the fiscal year ended August 31, 2001, our revenues decreased
to approximately 69% of their levels for the prior fiscal year. This decrease
was due primarily to a shift in the focus of our activities and limited
resources from creating a large, viable network of business providers to
increasing union support and recognition of the UMDN program. We anticipated the
short-term negative impact on our revenues but believe that the long-term health
of the UMDN program will be positively affected by our efforts to increase
membership and usage of our discount network. Our revenues in the fiscal year
ended August 31, 2000, included revenues from a number of business providers
that discontinued their monthly payments in the fiscal year ended August 31,
2001, because they did not receive sufficient patronage from our members. We
have continued to include many of these business providers in our program in
order to maintain a robust network for our membership so long as they undertake
to reinstate their payment program once we have increased our membership. See
OUR BUSINESS - Present Operations.
In May, 2001, we realized that we could not sustain our operations
from either additional investments from our previous financing sources or from
internally generated funds. In an effort to obtain access to capital markets and
raise the funds necessary to implement our business plan fully, our shareholders
exchanged all of their shares for shares of the capital stock of Delta Capital
Technologies, Inc., a small public company. Due to the difficult capital markets
at the time, however, Delta was unable to provide us with sufficient financing;
and our shareholders exercised an option in their agreement with Delta to
rescind this transaction on November 1, 2001, by exchanging the shares they had
received in Delta for the shares they had assigned to Delta. During the period
that Delta was the holder of a majority of the shares of our outstanding common
stock, we were able to raise $175,000 through a private placement of units
consisting of shares of our common stock and warrants to purchase additional
shares of our common stock and we received an investment of an additional
$30,000 in our common stock directly from Delta and its affiliates. The
investors who purchased shares of our common stock in that private placement
retained those shares. Thus the percentage ownership of our shares by our former
shareholders immediately after the rescission of the Delta transaction was
slightly smaller than their 100% ownership immediately prior to the original
Delta transaction.
This distraction of our resources to financing activities also
contributed to lower revenues in the year ended August 31, 2001, compared to the
prior period. In addition, our expenses increased dramatically, from $250,202 in
the fiscal year ended August 31, 2000, to $444,617 in the fiscal year ended
August 31, 2001. This increase is due primarily to legal and consulting fees
incurred in connection with our financing activities and the Delta transactions,
the accrual of interest on our outstanding indebtedness and an increase in the
rate of officers' salaries. Thus the ratio of our expenses to revenues suffered
as a result of both reduced revenues and increased expenses, both of which are
largely attributable to the diversion of our efforts from operations to
financing activities.
Since the time that we rescinded the Delta transaction and became,
once again, a private company owned by a small group of shareholders, we have
simultaneously been actively seeking additional capital, redesigning and
implementing improved database capabilities and increasing our sales and union
marketing efforts. We accrue our revenues over the terms of our contracts with
our business providers. Thus, revenues in any period include funds actually
received in earlier periods and only a portion of the funds actually received
during that period. See Revenue Recognition in Note 1 of Notes to Financial
Statements. Our revenues in the nine months ended May 31, 2002, increased to
approximately 117% of their levels in the same period in the prior fiscal year.
Our revenues have also increased from quarter to quarter over the three quarters
ended February 28, 2002, from $13,600 in the quarter ended August 31, 2001, to
$17,640 in the quarter ended November 30, 2001, to $23,004 in the quarter ended
February 28, 2002. We attribute these increases, in large part, to a shift back
13
in the allocation of our resources to a focus on the expansion of our network of
business providers. Our revenues declined slightly (by $231), to $22,773, in the
quarter ended May 31, 2002. We believe that this decline is temporary and is due
to our making longer-term contracts with our business providers at lower rates
on a per month basis than those charged with respect to shorter - term contracts
that have been expiring. See OUR BUSINESS -Present Operations. Our operating
results for the nine month period ended May 31, 2002, continued to be adversely
impacted by the same expenses that increased dramatically in the fiscal year
ended August 31, 2001.
Our independent public accountants have included an explanatory
paragraph in their report on our financial statements indicating there is a
substantial doubt about our ability to continue as a going concern. We estimate
that we need to raise financing for our operations of approximately $750,000. We
would devote most of these funds to marketing to our members and potential
members and expect to concentrate these marketing efforts on direct mail
campaigns initially in the greater Los Angeles metropolitan area and then, if
additional funding were available, in the New York City metropolitan area. We
believe, based on our experience to date, that we should be able to achieve
monthly operating profitability within nine months, and a cash flow break even
within approximately fifteen months, following our receipt of $750,000 in
financing. If sufficient financial and management resources are available, we
anticipate that expansion to new metropolitan areas, including New York City,
will occur only at such time as our then existing operations have achieved
monthly profitability. We believe that our general, selling and administrative
expenses as a percent of revenues will decrease as we add to our membership base
and those members patronize our business providers at levels sufficient to
justify their monthly payments to us. We anticipate some turnover among our
providers and that we shall continually be seeking new providers within each
network. We expect, however, that, as the networks mature and become more
stable, the existence of a steady and expanding membership base will encourage
retention of existing business providers and make the acquisition of new
business providers easier and less expensive.
We do not believe that our business should be affected by seasonal
factors. Most of the services and products supplied by our network providers are
utilized throughout the year. We would anticipate spending only a relatively
small portion of any financing we receive on capital equipment, such as office
furniture and computer workstations. See USE OF PROCEEDS.
Our principal shareholders have committed to advance to us up to
$350,000 from time to time. The amount available to be advanced, however,
reduces each month by the sum of (i) the amount advanced in the prior month plus
(ii) $14,000, which is retained by Mr. and Mrs. Keith. This loan is repayable at
the demand of Mr. and Mrs. Keith but only after November, 2003. The terms of the
promissory note evidencing this loan provide for interest on the amount that we
have borrowed to accrue at an annual rate of eight percent but do not require
the payment of any portion of the principal or interest until the maturity date.
If and to the extent that Mr. and Mrs. Keith receive proceeds from the sale of
their shares in this Offering, they have advised us that the $14,000 retained by
them each month will decrease, which will increase the portion of these funds
that will be available for our operations.
At July 31, 2002, we had borrowed $163,000 under this loan. We believe
that the remaining $45,000 unborrowed under this loan should be sufficient to
fund our operating expenses through the end of 2002, at which time either we
must have obtained a minimum of $750,000 of financing to implement our business
plan in Los Angeles or we must substantially curtail our operations by reducing
the number of our employees and relying on only part time services of Kent and
Starla Keith. If we are successful in our efforts in Los Angeles, however, we
14
plan to expand our business on a national scale. See OUR BUSINESS - MARKETING.
This may require that we seek even more funding. We estimate the cost of
expanding into each new metropolitan area at approximately $700,000, some of
which may be derived from internally generated funds and some of which may
require outside financing. At this point, we have no assurance that any funding
will be available or, if it is available, that it will be on terms that will be
acceptable to us and our shareholders, including the investors in this Offering.
In addition to the loan from Kent and Starla Keith, we have borrowed
$120,000 from certain of their relatives. These loans accrue interest at an
annual rate of 8%. Principal and all accrued interest on these loans are due on
January 3, 2004. We believe that we should be able to repay all of these loans
as well as the loan from Kent and Starla Keith when they are due out of our
future cash flow if we obtain the $750,000 in financing we need by the end of
this year.
As noted elsewhere in this Prospectus (see CERTAIN TRANSACTIONS and
EXECUTIVE COMPENSATION), our principal shareholders are providing to us the use
of their office facilities for an all-inclusive monthly rental of $1,000, which
they are contributing to capital. The accommodations that we have received from
Mr. and Mrs. Keith have significantly reduced our operating cash flow
requirements. Should these accommodations no longer be made available to us, our
operating cash flow needs would increase commensurately. If we are successful,
we anticipate outgrowing our present office facilities in the near future and
have taken into account the need to move to other office facilities in
determining our cash requirements.
OUR BUSINESS
SUMMARY
UMDN is a marketing company which has created a benefits program
specifically for union and association members. Our goal is to extend the
collective bargaining power of the unions to purchasing power with local and
national businesses. We enroll members of unions and other large groups of
affiliated consumers to use their collective buying power to elicit discounts
from businesses wanting to access these groups of consumers. We provide the
means, through live operators, an online interface and printed materials, for
our members to find and patronize these businesses. We have engaged the services
of Mr. Larry Hagman to act as our spokesperson for our marketing campaign.
Unlike other affinity group marketing organizations, we derive our revenue
solely from the businesses that provide these discounts. We do not derive any
revenue, whether as subscriptions or dues or otherwise, directly from our
members. We commenced operations in the Los Angeles metropolitan area in late
1998. Upon receipt of sufficient financing (see MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS), we seek to expand
these operations both in Los Angeles and in other metropolitan areas where we
believe there are concentrations of union members.
BUSINESS STRATEGY
We market to members of unions and other affinity groups who do not
pay any fee or increased dues for membership with us. We rely for our revenue on
fees from the businesses providing goods and services to our members. Our
relationship with the unions and other affinity groups is symbiotic: we increase
the benefits that they make available to their members, making them more
attractive to new and existing members, while they provide a significant,
discrete and somewhat homogeneous group of consumers to the businesses with
which we have contracts.
15
Our business model differs from traditional affinity group marketing
or discount programs. Traditional programs, such as those of the American
Automobile Association, the American Association of Retired Persons and Costco,
charge a fee to their members and solicit national providers to supply their
members limited, well-known, discounted products and services. These national
providers either pay no fee at all or they pay a small percentage of sales.
We call the businesses that cater to our membership "Providers." There
are three classes of Providers that offer goods and services to our members:
Local Providers, National Providers and Strategic Alliance Providers.
Local Providers are generally small business establishments within
each neighborhood of a major metropolitan area where we establish a Local
Discount Network. We divide each metropolitan area into a number of smaller
neighborhoods, each consisting of two to five zip codes. Within these smaller
neighborhoods, we solicit Local Providers that provide goods and services to our
members. As a general rule we seek to contract with two Local Providers of the
same types of goods or services within each smaller neighborhood. Each Local
Provider pays a modest monthly fee to us and agrees to provide to our members
discounts that are larger than it provides to any other customer on any basis.
We believe that businesses are willing both to pay a modest fee and to provide
discounts if we can deliver to them a loyal customer base that ensures a
significant return on their investment.
National Providers are regional or national chains that provide
popular consumer outlets for all members, whether they live inside or outside
the areas where Local Discount Networks are established. National Providers
offer our members discounts on goods or services purchased from them and
generally pay to us a percentage of the revenues they derive from our members,
although they may be contracted for a flat fee on a yearly basis. Discounts may
or may not be the largest discounts available to consumers.
Strategic Alliance Providers are regional or national service
providers that provide services to our members in much the same way and for
similar fee structures as National Providers, but on a private-label or
co-branded basis. Examples of potential Strategic Alliance Providers include
telephone services, internet service providers, insurance, credit cards, online
financial services and travel services.
UNION RELATIONSHIPS
In identifying affinity groups that would be appropriate candidates
for our business, we have focused on union locals. The members of union locals
are generally concentrated geographically and, often, demographically. This
coincides naturally with our concept of Local Discount Networks catering to a
relatively homogeneous clientele. Our experience to date indicates that unions
are eager to assist us in enrolling their members because we help strengthen
union loyalty by increasing benefits with no increase in dues or other costs to
the unions or the members. This assistance takes a variety of forms such as
including our articles in their newsletters, providing us access to their
mailing lists for direct mailings, permitting us to insert our promotional
pieces in their mailings, inviting us to speak to their members and referring us
to other unions and other locals of the same union. This access affords us
credibility, provides low-cost advertising and creates a barrier to competition.
It requires, however, that we continuously work to maintain and enhance our
relationships with each local.
We actively support union activities in a variety of ways, including
lending the services of our employees and our office space, speaking at union
meetings and rallies and supporting union actions. In addition, we are planning
the creation of two free information services directed at union members and
union leaders: UnionBoycott.com and Strike411.com. These are planned as
destination websites which the union community will use to identify those
businesses that are being targeted by various unions due to problems organizing
16
or negotiating contracts. We intend to brand these websites as "Operated By
UMDN," with heavy cross-promotion between them and the UMDN.com website. Beyond
helping to drive traffic and increasing goodwill, we believe that these websites
will enable us more easily to identify businesses that may have poor relations
with their unions and should, therefore, not be considered appropriate
Providers. We are also considering a plan to create a charitable fund to which
we would contribute one percent of our gross profits and which would support
union organized charities and causes. We believe that these and similar efforts
should create considerable goodwill and evidence of our activism and commitment
to the union community, helping to solidify our position with the unions.
PRESENT OPERATIONS
At present we operate two Local Discount Networks, one in Los Angeles
and one in New York.
The Los Angeles network is currently comprised of approximately 250
Local Providers located in 53 neighborhoods offering a variety of products and
services in various categories, including health care, automotive, retail,
restaurants, legal, financial, entertainment and others. New Local Providers are
currently being added to the Los Angeles network at a rate of approximately one
to two per week. The Local Providers contract for listings on the network on
either a month-to-month, six month or one year basis. The contract provides a
degree of exclusivity to the Local Providers; generally we agree that there will
be no more than two Local Providers offering similar goods or services within
each neighborhood. The fee is determined by the length of contract, coverage
area and type of business. The initial fee collected with a new contract ranges
between $200 and $5,000 but typically averages approximately $800. We receive
the greatest benefit when the Local Providers continue to pay the fee on a
monthly basis because there are no sales costs associated with the revenue at
that time. Of the over 250 Local Providers in the Los Angeles network,
approximately 75 are in the initial terms of their contracts with us. Recurring
revenue from existing Local Providers whose initial contracts have expired is
negligible. Only one to two percent of the Local Providers formally renew their
contracts after their initial contracts expire. At present, approximately 82
Local Providers, including those in the initial terms of their contracts, are
making payments to us. We attribute the low rate of contract renewal to both a
low number of members and a low rate of usage by members, which we perceive to
be due to a lack of marketing. If a Local Provider has not experienced enough
usage but is willing to extend the discount, we often keep the business on the
network at no charge in order to maintain a robust network for our membership.
We can terminate this extension at any time and make no promises regarding
exclusivity for any Local Provider continuing to provide discounts under these
circumstances. Our current rate of sales in Los Angeles is being sustained by
one fully commissioned outside salesperson and two telemarketers, paid hourly
plus commission, who work together as a Sales Team.
The New York network was begun ahead of the scheduled roll-out at the
request of several entertainment union locals with significant bi-coastal
memberships. It is comprised of 17 Local Providers that were put under contract
on a promotional basis over a year ago after being solicited by telephone and an
additional five whose paying contracts have expired but who continue to provide
discounts to our members. Further activity in the New York network was suspended
in order to focus our limited resources on the Los Angeles market. We intend to
re-focus on the New York network as part of our first expansion efforts once we
obtain the necessary capital.
We currently have National Provider contracts with Avis Rent A Car,
FTD, RDAY Nutritional Products and ICR Credit Repair. Avis and RDAY are
contracted on a percentage of sales basis. The other accounts each paid $4,000
to $18,000 for a one-year contract. We are currently pursuing contracts with
other potential National Providers.
17
We are also pursuing Strategic Alliance Providers to provide discounts
for members and attain revenue for UMDN in large market segments. One such
market is the insurance industry where we have aggressively pursued alliances.
We have contracted with Mainstay Financial, Inc. to act as an insurance broker
to our members. This contract provides us revenues of $2.00 per month for each
UMDN member who becomes a policyholder, with provisions for greater revenue
triggered by increased volume. Additionally, through our association with
Mainstay, we expect to contract with Allied Insurance Company to offer
discounted home and auto insurance to our members and to advertise to our
members in a co-operative, co-branded direct-mail campaign ongoing throughout
2002 and into 2003. Under the terms of this contract Allied will pay for both
the mailing and materials, which will be co-developed by Allied and UMDN. Allied
will provide phone quoting services as well as a co-branded web page linked to
the "Insurance Services" section of our website, which will provide members with
real-time quotes online.
We have also contracted with Millenium Health Care Association, a
company that facilitates health insurance for low-income families by utilizing
federal and state tax incentive programs. UMDN will receive a fee of $1 per
month for each UMDN member who becomes a Millenium Health Care policyholder.
Additionally, all other Millenium policyholders will automatically be enrolled
in UMDN as part of their benefits package, thus increasing our membership base.
We are currently testing the use of NetCBC to ascertain the response
of our members and our Providers to internet access, website hosting and
development and e-commerce services provided by NetCBC. We would receive a flat
fee for service on all product offerings ranging from $3 - $5 per month per user
and $5 - $20 initial set up fee. We are currently evaluating new agreements and
products, with both NetCBC and other internet service providers, and expect to
have a nationwide Strategic Alliance in the internet service provider market
within the next several months.
EXPANSION PLAN
We have identified an initial twenty metropolitan areas in the United
States, in addition to Los Angeles and New York City, in which we believe that
the number and concentration of union members will enable us to create viable
Local Discount Networks.
As soon as we have the financial and management resources available,
we intend to send into each of these metropolitan areas an enrollment team and
account managers. We believe that the cost of creating markets in these
metropolitan areas should be approximately $700,000 per metropolitan area, some
of which we anticipate would be provided by internally generated funds and some
of which would require financing from external sources. We anticipate that, as
each market achieves monthly profitability, we shall commence development of
another market provided that sufficient financial and management resources are
available. The enrollment teams and account managers will be employed by
independent sales organizations with which we shall contract for particular
markets. Enrollment teams establish and maintain relationships with the local
unions and their members. They also design and implement promotional activities
targeted to member registration and usage. Account managers are the customer
service team. They call on local businesses to solicit them to become Local
Providers in our Local Discount Network, and they provide customer service to
existing Local Providers. They also call on National Provider locations that are
within their territory to provide additional customer service. We also have
telemarketers in our Santa Monica offices to identify, contact and pre-qualify
local businesses that are candidates to become Local Providers in the Local
Discount Network and to schedule appointments with them for our account
managers.
18
Our telemarketers are also responsible for contacting potential
National Providers; however we have a separate national accounts team that is
responsible for the negotiation and consummation of agreements with both
National Providers and Strategic Partner Providers.
MARKETING
To supplement the activities of our enrollment teams and account
managers, we advertise in targeted publications, by direct mail, at trade shows
and in other local media outlets. Additionally, we have contracted with Larry
Hagman to be our celebrity spokesperson. Mr. Hagman, who is probably best known
for playing J. R. Ewing on the Dallas television series, has been a union member
for forty years and is also a member of our advisory board. We intend to feature
Mr. Hagman in most of our advertising campaigns in television, radio and print
in each of our targeted metropolitan areas. Under the terms of our agreement
with Mr. Hagman, he retains approval rights with respect to all marketing
materials using his name or likeness and is only required to provide his
services at times and under circumstances with which he is comfortable. This
agreement with Mr. Hagman renews each March 1 on an annual basis and is
terminable by either party without cause at any time.
Historically, our primary means of marketing to members has been
through developing relationships with Los Angeles union locals and relying on
them to reach their membership with our materials, as well as through word of
mouth from the union members themselves. These efforts are directed by our Union
Benefits Coordinator. As we continue to market to the union community in this
manner, we find ourselves with a substantial and growing database of members and
an increasing willingness in the union community to trust us with their
membership databases. Therefore, we are expanding our marketing efforts to
direct-mail and email campaigns in order to build usage with new union members
as well as with our existing members. At present, there are approximately
300,000 union and association members whose unions and associations actively
promote our membership. Of these, we have approximately 25,000 members in our
database. We include in our database only those members who register with us or
whose unions or associations provide to us information concerning them. The
25,000 members currently in our database represent only 2.5% of the
approximately 1,000,000 union members in Los Angeles and represent members in
only 45 of approximately 2000 union locals in Los Angeles.
We expect to devote most of our direct mail efforts to marketing to
current and potential members and to utilize for this purpose membership lists
that we have already received from a number of union locals in Los Angeles as
well as lists we intend to attempt to acquire from new union affiliates and from
list vendors. One goal of the direct marketing campaign is to encourage new
member registration. We expect to be able to sign up large numbers of our target
users, the union and association members. This is a free program, coming to them
ostensibly from their own union or association as part of their benefits
package.
We recognize, however, that simply enrolling members is not the key to
our success. Based on our own historical data we believe that usage is the key
to our success, and our marketing resources are allocated accordingly. When we
designed our network structure, it was with the idea that we must have an
abundance of members available to patronize our Providers. Our business model
contemplates that our neighborhood Local Discount Networks will have relatively
small numbers of Providers and high numbers of members per Provider. We believe
that we can accomplish this because there are so many different types of
potential businesses with which we can contract. We do not need a large number
of them in any one neighborhood in order to generate considerable revenue. We
have estimated that our total market of union and association members and their
family members in Los Angeles is approximately 3,500,000. We believe that we
need only capture less than 10% of our total potential user market as members
19
within the next two years to be successful. There are 500,000 small businesses
in Los Angeles County, and we believe that we need to contract with less than 1%
of this market as Providers to be successful.
An important benefit to creating our Local Discount Networks in
distinct neighborhoods is that, when we add unions with membership bases that
primarily live in certain areas, we can focus our sales efforts on those
neighborhoods where we know the union members live or work. Our initial target
is to have approximately 105 members for every individual Provider in each Local
Discount Network. Our best estimates, based on anecdotal evidence from the
cross-section of Providers that we currently have, is that the average Provider
needs, on average, five purchases per month from our members in order to make
its association with us profitable enough that it will continue paying our
monthly fees for referrals. This means that we would need fewer than 5% of our
members to be active in any given month to achieve our targets.
We have developed and refined our database and information collection
techniques to provide information concerning Provider usage by our members. We
believe that this data should enable us to fine-tune our marketing activities
and to select the types and locations of potential Providers that will benefit
our membership the most, and that will therefore benefit the most from our
membership, within each neighborhood. We anticipate that these data collection
and data management capabilities will be vitally important.
While we recognize that union members, as a whole, may be somewhat
homogeneous, we also recognize the significant demographic and geographic
diversity of our present and prospective membership base and that different
types of local Providers may be more or less appealing to different segments of
this membership base. We have the ability to adapt our selection of Providers
and potential Providers to each neighborhood within our Local Discount Networks
and to provide some rational, predictive data to support our marketing efforts
to particular prospective Providers. This same data will also enable us to
provide a basis for the fees that we charge to particular local Providers and to
justify different fees for different local Providers.
We have created newsletters for both members and Providers, which are
delivered through both email and conventional mail. Member targeted newsletters
promote the various benefits of membership in UMDN as well as highlight
individual Providers in our network. We promote activism with feature articles
on the history and current state of the nation's unions. The purpose of these
newsletters is to build usage of the Provider network as well as build awareness
of UMDN's activism and commitment to the union community. Provider targeted
newsletters feature UMDN activities which are designed to increase member
traffic to the Provider businesses. This may include the activities of our
spokesperson, Larry Hagman, our activities with associated unions, new unions
associating with us, as well as ways the Providers can increase the value of
their contract with us. These newsletters are designed as positive reinforcement
of the Providers' involvement with us.
COMPETITION
As noted earlier (see OUR BUSINESS-BUSINESS STRATEGY), traditional
affinity group marketing or discount programs are generally based on a fee for
membership structure, with the programs earning their revenues primarily from
subscription or membership fees charged to the members and only secondarily, if
at all, from the providers of goods and services to the members. To the best of
our knowledge, no existing affinity group marketing or discount program utilizes
small local businesses to form local discount networks. Additionally, we know of
no other company that markets local businesses specifically to the union
community. We believe that these components, which are the core of our business
model, distinguish us from all other affinity group marketing or discount
programs. Nonetheless, in the past few years there have been several companies
that have tried to market their services specifically to or for unions or their
members; and we expect that there will be others. There are many companies with
20
stronger ties in the union community and more resources than we currently
possess that could become competitors. We believe that our most formidable
competition is yet to surface and will be in the form of a potential
competitor's substantial increase of its resources devoted to the development
and marketing of products and services that compete with our Providers' products
and services.
The American Federation of Labor-Congress of Industrial Organizations
(more commonly known by its acronym as the AFL-CIO) created a program in 1986
called "Union Privilege" (now also called "Union Plus by Union Privilege"). The
purpose was to provide members consumer benefits and strengthen member
recruitment. The program is built on a "Unions Choose" philosophy that
necessitates that each international AFL-CIO union decide independently which
Privilege programs they will endorse and how they will promote those programs to
their members. Additionally, the program is not funded by union dues and, after
more than fifteen years of operation, still only includes six national providers
offering services at a discount and a limited self-employment or supplemental
insurance program. This suggests to us that this program is not robustly managed
or promoted. The six national providers in the Union Privilege program complete
with some of our National Providers. The Union Privilege program does not
preclude efforts by individual unions to offer other benefits to their members,
such as participation in our program, even if they have chosen actively to
promote Union Privilege programs. If we are successful, we anticipate that Union
Privilege or others may attempt to emulate our business model.
In order to remain successful when confronted by that challenge or the
challenge of other potential competition, we shall need to maintain vigorous
marketing to existing members and to adjust continually our business model to
remain innovative.
OFFICE SPACE
Our offices are currently located in a building owned by the founders.
We rent our office space on a month-to-month basis, with utilities, for
$1,000.00 per month which Kent and Starla Keith contribute to capital. See
CERTAIN TRANSACTIONS. We anticipate, if this Offering is successful, that we
shall need to relocate our operations to more conventional and larger office
space.
EMPLOYEES
We currently have six employees. In addition to Kent and Starla Keith,
who are our only executive employees, we have four additional full-time
employees engaged in sales, union relations and clerical functions and one
independent contractor salesperson. We believe that our relations with all of
our employees are good.
LEGAL PROCEEDINGS
There are no material legal proceedings pending to which UMDN is a
party, and we are unaware of any contemplated material legal actions against us.
21
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
OFFICERS AND DIRECTORS
The names and ages of our directors and executive officers are set
forth below. All Directors are elected annually by the stockholders to serve
until the next annual meeting of the stockholders and until their successors are
duly elected and qualified. Officers are elected annually by the Board of
Directors to serve at the pleasure of the Board.
Name Age Position(s) with UMDN
- ---- --- ---------------------
Kent Keith 36 President and Director
Starla Keith 42 Secretary, Treasurer, Chief Financial
Officer and Director
Maj Hagman 73 Director
Gary Horowitz 65 Director
Michael Posner 62 Director
The co-founders of UMDN are Kent and Starla Keith, who remain our
senior management. As a general rule, Kent Keith is primarily responsible for
the design and implementation of all of our information technology systems,
including net development, database management and reporting; and Starla Keith
is primarily responsible for all financial, human resource and administrative
operations. Kent and Starla Keith together manage all sales and marketing
activities, the creation and realization of our product offerings and plans for
the future operation of the business.
Prior to the founding of UMDN in 1998, Starla Keith was, from 1979 to
1984, an equity owner in, and Vice President-Sales and Marketing for, Shalimar
Real Estate Inc. and Angel Investment, Inc., both Colorado-based real estate
development companies. Ms. Keith was a co-owner and operator, with Mr. Keith, of
First National Food Company, a restaurant located in Pacific Palisades,
California, from 1987 to 1990. Additionally, From 1992 to 1999, Ms. Keith was
President of Community Properties, a California-based real estate development
company of which she was also a founder, which specialized in the development of
H.U.D. housing. From 1990 to 1997, Ms. Keith held the positions of Western Sales
Manager, Regional Manager and District Manager with Bristol-Meyers Squibb
(1996-1997), Laerdal Medical Corporation (1992-1996) and Zimmer Elektromedizin
(1990-1992). Ms. Keith is currently a Trustee of the New Roads Foundation, an
educational foundation dedicated to building schools in the Los Angeles area.
She has also been a Trustee of AOF/Pacific Affordable Housing Corp., a
California non-profit corporation. Starla Keith has been a member of the Screen
Actors Guild Union for over thirteen years. Ms. Keith received a Bachelor of
Science degree in Advertising/Public Relations from the University of Colorado
and a Masters of Business Administration degree from Pepperdine University.
Kent Keith began his professional career while attending San Diego
State University as a Sales Manager for Balloonatiks, Inc., a California based
events producer and retailer of specialty products, from 1985 to 1987. During
his tenure there, Mr. Keith was directly responsible for the creation of the
Wholesale Division and subsequently held the position of Division Director. Mr.
Keith was co-owner and operator, with Mrs. Keith, of First National Food Company
from 1987 to 1990. In 1992 Mr. Keith briefly held the position of Territory
Manager for Shield Health Care, a Southern California medical supplies
distributor before founding the Keith Kompany in 1992, Keith Kompany was a Los
Angeles eyewear distributorship that marketed the exclusive lines of Calvin
Klein, Gianfranco Ferre and others, for the world's two largest eyewear
manufacturers, Marchon, Inc. and The Safilo Group, until 2000. Additionally, Mr.
Keith is a member of American MENSA, is a certified ABO Speaker/Trainer and has
acted as an outside sales consultant, training sales personnel for both medical
and eyewear companies.
22
Maj Hagman is the wife of Mr. Larry Hagman, our spokesperson, whom she
met in London while she was working as a designer consultant to fashion houses.
Since moving to California with Mr. Hagman in 1965, she has engaged in real
estate development activities and continued with her design activities. Ms.
Hagman serves on the Boards of Directors of, and volunteers her services to, the
John Wayne Cancer Institute, the Susan Komen Foundation, the Solar Electric
Light Fund, the Ventura County Museum of Art and History and the Ojai Music
Festival.
Gary Horowitz was President and a Director of SolutionsAmerica, Inc.
from 1999 to 2001. From June, 1998 through April 1999, Mr. Horowitz was
President of Recovery Network, Inc., a cable television network programming
subject matter relating to addiction and health issues. From July 1993 through
March 1996, he was President and chief executive officer of Harmony Holding,
Inc., a publicly-held company whose shares are traded on The Nasdaq Stock Market
and which owned and operated a group of television commercial and music video
production companies. Mr. Horowitz served as director, publisher and chief
executive officer of the alternative weekly publication "LA Weekly" and was
co-founder of Wakeford/Orloff, a producer of television advertising for major
American corporations and of motion pictures.
Michael Posner is a founding partner of the law firm Posner & Rosen
LLP. Mr. Posner is a litigation attorney representing primarily unions and
employees. He is a Fellow of the College of Labor and Employment Lawyers and a
member of the Labor and Employment sections of both the American and California
Bar Associations. From 1994 to 1997, Mr. Posner was the Union Co-Chair of the
Committee on the Development of Labor Law Under the National Labor Relations Act
and one the editors-in-chief of The Developing Labor Law supplements. Mr. Posner
is also a member of the Los Angeles County Bar Association Committee on Labor
Law and its Executive Committee and the Los Angeles Advisory Council of the
American Arbitration Association. Mr. Posner is a frequent speaker at American
Bar Association, Los Angeles County Bar Association, American Arbitration
Association and ALI-ABA programs. From 1997 to 1998, Mr. Posner was the co-Chair
of the entertainment Industry Labor Law Conference of the Los Angeles County Bar
Association Labor Law Committee.
BOARD OF ADVISORS
We have relationships with several individuals who provide particular
services or particular expertise for our benefit from time to time at our
request: Mr. Larry Hagman, Mr. Mark Galanty and Mr. Larry Zuccolotto. As opposed
to our Board of Directors, which provides oversight, vision and general
direction to our business, members of our Board of Advisors provide their
particular expertise to our management on an as-needed basis. Members of our
Board of Advisors receive no compensation for their services other than options
to purchase shares of our common stock (see DESCRIPTION OF SECURITIES -
OUTSTANDING OPTIONS AND WARRANTS).
Larry Hagman, has been in the entertainment industry for over fifty
years. Mr. Hagman is President of MajLar Productions and is also a member of the
Board of Directors of the Kidney Foundation of America. Mr. Hagman is our
spokesperson.
Mark Galanty is a principal partner in, and Senior Account Executive
of, Galanty & Co, a Los Angeles advertising firm specializing in corporate,
government and union advertising campaigns. Mr. Galanty provides advice on our
marketing campaigns, materials and message and directs much of our work with Mr.
Hagman.
Larry Zuccolotto provides insurance industry expertise. He is
currently the Director of Benefits & Operations for Association Benefits
Consultants, an affiliate of Link-Allen. Mr. Zuccolotto has been engaged in
structuring and implementing employee and employer benefit programs for over
twenty years. He has spent the past several years creating policies and discount
programs for associations throughout the State of California.
23
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Each of our directors is entitled to receive reasonable out-of-pocket
expenses incurred in attending meetings of our Board of Directors, but directors
are not compensated for services provided in their capacities as directors.
There is no compensation committee and no compensation policies have been
adopted. We also grant to each non-employee director ten year options to acquire
100,000 shares of our common stock at the fair market value of such shares on
the date on which they become directors. These options, which are granted
pursuant to the 2002 Stock Option Plan of UMDN, Inc., described below (see
EXECUTIVE COMPENSATION-STOCK OPTION PLAN), vest as to 25,000 shares immediately
and as to 25,000 additional shares on each of the first three anniversaries of
the grant date if the optionee then remains a director. On April 16, 2002, we
granted these options to Ms. Hagman and to Messrs. Horowitz and Posner with
exercise prices of $.25 per share, which was determined to be the fair market
value of our shares on that date.
Effective as of August 29, 2000, we entered into employment contracts
with our founders and principal officers, Kent and Starla Keith. These are each
five-year contracts, terminating on August 28, 2005, although we may terminate
them earlier for cause and Mr. or Mrs. Keith may terminate them earlier with or
without cause. Each contract provided for monthly compensation of $10,000, which
has never been paid in full. As of November 1, 2001, Mr. and Mrs. Keith waived
all of their claims for accrued compensation and agreed to reduce their salaries
to $7,000 apiece. They have also agreed to defer their salaries until such time
as we and they agree that we are in a position to resume paying them. Since May
31, 2002, we have not paid either Mr. or Mrs. Keith their salaries but are
continuing to accrue them. Mr. and Mrs. Keith have advised us that they
anticipate that, if and to the extent they successfully sell some of their
shares in this Offering, they will be able to make more of a loan available to
us. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
On September 1, 2001, we entered into a one-year Consulting Agreement
with Mr. Gary Horowitz. Under this Consulting Agreement Mr. Horowitz agreed to
assist us in our capital raising efforts and we issued to Mr. Horowitz, as
compensation, a fully vested, five-year option to purchase 100,000 shares of our
Common Stock at $.02 per share. This option is in addition to the option granted
to Mr. Horowitz when he later became a non-employee director.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards Payouts
Securities
Other Annual Restricted Underlying LTIP
Name Year Ended Salary Bonus Compensation Stock Options/ Payouts All Other
and Principal Position August 31 ($) ($) ($) Awards SARs (#) ($) Compensation($)
- -------------------------- ------------ ---------- -------- -------------- ------------ ------------ -------- --------------
Kent Keith, President 2001 50,000 0 0 0 0 0 0
Starla Keith, CFO 2001 50,000 0 0 0 0 0 0
24
STOCK OPTION PLAN
On April 16, 2002, our directors and majority shareholders approved
the adoption of the 2002 Stock Option Plan of UMDN, Inc. This Plan provides for
the issuance of both incentive and non-qualified stock options to our employees,
our non-employee directors and our consultants. The total number of shares that
may be subject to options issued under this Plan is twenty percent of the total
number of shares of our Common Stock outstanding from time to time. At present,
there are 14,924,000 shares of our Common Stock outstanding. Therefore, the
total number of shares that may be subject to options granted under this Plan on
the date hereof is 2,984,800. If the maximum number of shares of our Common
Stock are sold in this Offering, the total number of shares that could be
subject to options granted under this Plan would increase to 3,024,800. In order
to comply with certain provisions of the Internal Revenue Code of 1986, as
amended, the total number of shares that may be subject to incentive stock
options granted under this Plan may never exceed 2,000,000, irrespective of the
number of shares of common stock outstanding. No options may be granted under
this Plan after the tenth anniversary of the date on which the Plan was adopted
nor may any option granted under this Plan extend beyond the tenth anniversary
of the date of grant of the option. Options granted under this Plan may not be
transferred except by will or the laws of descent and distribution. As noted
above, we have granted options to purchase 300,000 shares under this Plan to our
newly elected, non-employee directors. These options are non-qualified options.
This Plan is administered by a Committee of our Board of Directors or,
if, as at present, no committee has been appointed, by our entire Board of
Directors. Subject to the provisions of the Plan and, with respect to incentive
stock options, the restrictions contained in the Internal Revenue Code, the
administrators have complete discretion to determine who is to receive options;
the number of shares to be covered by each option; the exercise price, term and
vesting schedule of the options; the manner of payment of the exercise price of
the options; and all other terms and conditions of the options. Rules prescribed
by the Internal Revenue Code with respect to incentive stock options require
that the exercise price of the incentive stock options be not less than the fair
market value of the stock on the date of grant or, if the grantee is already a
10% shareholder, 110% of that fair market value and that the aggregate fair
market value (determined at the time the option is granted) of shares with
respect to which incentive stock options may be granted to any one individual,
which are exercisable for the first time during any calendar year, cannot exceed
$100,000.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth information, as of August 31, 2002, with
respect to the beneficial ownership of the outstanding shares of our common
stock as of such date plus, where relevant for particular beneficial owners,
shares which such beneficial owner has the right to acquire by (i) any holder
known to us to own more than five percent (5%) of the outstanding shares; (ii)
each of our officers and directors; and (iii) our directors and officers as a
group. Each of the persons listed below has sole voting and investment power
with respect to the shares listed as beneficially owned.
Name and Address of Beneficial Owner* Number of Shares Percent of Class
- ------------------------------------- ---------------- ----------------
Kent Keith (1) 12,547,880(2) 84.08%
Starla Keith (1) 12,547,880(2) 84.08%
Maj Hagman (3) 448,255(4) 2.94%
Gary Horowitz 200,000 (4) less than 1%
Michael Posner 100,000(4) less than 1%
William and Paula Rhoadarmer (5) 1,394,212 9.34%
All Officers and Directors as a group 12,947,880(4) 85.75%
25
(1) Kent Keith is President and a Director of UMDN, and Starla Keith
is Vice President, Secretary, Chief Financial Officer and a
Director of UMDN.
(2) Includes, in the case of Kent Keith, 6,273,940 shares owned by
Starla Keith and, in the case of Starla Keith, 6,273,940 shares
owned by Kent Keith. Each of Kent and Starla Keith disclaims
beneficial ownership of the shares owned by the other.
(3) Includes 48,255 shares owned by, and 300,000 shares subject to
options granted to, Mr. Larry Hagman, who is Ms. Hagman's husband
and in which Ms. Hagman disclaims beneficial ownership
(4) All subject to the exercise of options. Includes 25,000 shares
(125,000 shares in the case of Mr. Horowitz) which the individual
has the right to acquire within sixty days by exercising such
options. Percentages are based on those shares only.
(5) William and Paula Rhoadarmer are the parents of Starla Keith.
Unless otherwise indicated, the address of all persons listed in the table above
is c/o UMDN, Inc., 217 Ashland Avenue, Santa Monica, California 90405.
CERTAIN TRANSACTIONS
Kent and Starla Keith have agreed to lend to us, or to apply for our
benefit up to $350,000 at our request from time to time under a Promissory Note,
executed as of November 1, 2001. See MANAGEMENT'S DICUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. We must pay interest on each
advance under this Promissory Note at eight percent. All interest and principal
are due on the demand of Kent and Starla Keith, so long as that demand is made
on or after November 1, 2003. At July 31, 2002, we had borrowed a total of
$163,000 under this Promissory Note.
Kent and Starla Keith have also leased to us our present office
facilities which are located in a building they own. Under this lease we pay to
Kent and Starla Keith $1,000 per month, which they contribute to our capital.
The lease is on a month-to-month basis.
DESCRIPTION OF SECURITIES
GENERAL
We are authorized to issue up to forty million (40,000,000) shares of
common stock, $.0001 par value per share, of which fourteen million nine hundred
twenty-four thousand (14,924,000) are issued and outstanding, and ten million
(10,000,000) shares of preferred stock, $.0001 par value per share, of which
none is issued or outstanding.
COMMON STOCK
Subject to the rights of holders of preferred stock, if any, holders
of shares of our common stock are entitled to share equally on a per share basis
in such dividends as may be declared by our Board of Directors out of funds
legally available therefor. There are no plans to pay dividends with respect to
the shares of our common stock. Upon our liquidation, dissolution or winding up,
after payment of creditors and the holders of our senior securities, including
preferred stock, if any, our assets will be divided pro rata on a per share
basis among the holders of the shares of our common stock. The common stock is
not subject to any liability for further assessments. There are no conversion or
redemption privileges nor any sinking fund provisions with respect to the common
stock and the common stock is not subject to call. The holders of common stock
do not have any pre-emptive or other subscription rights.
26
Holders of shares of common stock are entitled to cast one vote for
each share held at all stockholders meetings for all purposes, including the
election of directors. The common stock does not have cumulative voting rights
except to the extent provided under the California General Corporation Law (see
DESCRIPTION OF SECURITIES - APPLICABILITY OF CALIFORNIA GENERAL CORPORATION
LAW). All of the issued and outstanding shares of common stock are fully paid,
validly issued and non-assessable.
PREFERRED STOCK
Our Board of Directors has the authority, without further action by
the holders of the outstanding common stock, to issue all ten million
(10,000,000) shares of preferred stock from time to time in one or more classes
or series, to fix the number of shares constituting any class or series and the
stated value thereof, if different from the par value, and to fix the terms of
any such series or class, including dividend rights, dividend rates, conversion
or exchange rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price and the liquidation preference of
such class or series. The rights of the holders of common stock will be subject
to, and may be adversely affected by, the rights of holders of any preferred
stock that may be issued in the future. Issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from attempting to
acquire, a majority of our outstanding voting stock.
On April 5, 2001, just prior to the acquisition of all of our common
stock by Delta Capital Technologies, Inc. in a transaction that was later
rescinded (see MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS), we created a Series A Preferred Stock consisting of
1,050,000 shares and issued these shares as a stock dividend to our shareholders
on the basis of three shares of Series A Preferred Stock for every ten shares of
common stock then owned by our shareholders. Each of these shares was
convertible into ten shares of our common stock. Our shareholders continued to
hold these shares while Delta owned the common stock and, after the transaction
with Delta was rescinded, converted them into common stock. Those shares of
Series A Preferred Stock have reverted to the status of authorized but unissued
shares of Preferred Stock. There are no shares of preferred stock issued or
outstanding on the date hereof.
OUTSTANDING OPTIONS AND WARRANTS
As part of our capital raising efforts in 2001, we issued 712,000
units, each unit consisting of one share of our common stock and a warrant
expiring May 31, 2003, to purchase one additional share of our common stock at a
price of $.75 per share if exercised on or prior to May 31, 2002, or $1.00 per
share, if exercised thereafter. These warrants are fully vested and may be
exercised, in whole or in part, at any time and from time to time prior to their
expiration date. None of these warrants has been exercised.
In consideration for services rendered and to be rendered by several
individuals, including Mr. Larry Hagman, other members of our Board of Advisors
and our counsel, for our benefit, we have also issued options to purchase an
aggregate of 1,100,000 shares of our common stock at prices ranging from $.02 to
$.25 per share. The shares issuable upon the exercise of one of these options
are covered by this Prospectus. See SELLING SHAREHOLDERS. These are all fully
vested, five or ten year options and expire on various dates from August 31,
2005, to April 15, 2012. These options are in addition to those granted to Mr.
Horowitz and the other newly elected non-employee directors. See EXECUTIVE
COMPENSATION-COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.
27
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public market,
or the availability of shares for sale, could adversely affect the prevailing
market price of our common stock and our ability to raise capital by another
offering of equity securities.
If the option is exercised in full, we shall have 15,124,000, shares
of common stock outstanding, assuming no other exercise of outstanding options
or warrants. After the Offering all of the shares sold in this Offering will be
immediately tradeable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), except for any shares purchased by an
"affiliate" of ours, as that term is defined in the Securities Act. Affiliates
will be subject to the resale limitations of Rule 144 under the Securities Act.
We issued the currently 14,924,000 outstanding shares of our common
stock in private transactions in reliance upon one or more exemptions contained
in the Securities Act. These shares are deemed "restricted securities" as
defined in Rule 144. Of these restricted securities, 14,611,745 shares have been
held for more than one year as of July 31, 2002, and, therefore, are immediately
eligible for public sale without restriction under the Securities Act except as
described below. The remaining 312,255 shares were acquired from August, 2001 to
April, 2002, and therefore will not be eligible for public sale until the first
anniversaries of those dates.
Under the Securities Act, the sale of any securities into the public
market must be registered unless the transaction is exempt from registration.
Rule 144 provides an exemption for securities acquired in private transactions
without the requirement of registering the sale of the shares but requires that
they not be sold into the public market for at least a year after purchase.
For holders who are our "affiliates" and for all other holders who
sell after one, but before two, years following the issuance of the securities,
there are additional requirements before such shares can be sold on the open
market. Our "affiliates" are persons who, at any time during the 90 days
preceding a sale by them directly or indirectly through intermediaries control,
are controlled by, or are under common control with, us. For these sales to be
exempt under Rule 144, (i) we must be current in our reporting obligations under
the Securities Exchange Act of 1934, (ii) the number of shares sold within any
three month period is limited, (iii) the sales must be made in brokers'
transactions and (iv) the seller must provide notice to the SEC.
The current reporting obligation is met if we have been subject to the
reporting requirements of Section 13 or Section 15(d) of the Securities Exchange
Act for at least 90 days immediately proceeding the sale and have filed all
required reports during the 12 months proceeding the sale (or such shorter
period as we have been subject to these requirements).
The number of restricted shares that may be sold in any three month
period is the greater of:
1. one percent of the then outstanding shares of common stock; or
2. the average weekly trading volume in the common stock during the
four calendar weeks immediately preceding the date on which
notice of the sale is filed with the SEC.
When determining the number of shares sold by an affiliate within the three
month period, they must be aggregated with sales of unrestricted shares during
the same time period. If a person is selling both convertible securities and the
class of securities into which the convertible securities may be converted, the
number of sales of both types must be aggregated together. If securities which
were pledged are being sold pursuant to a default of such pledge, the sales of
both the pledgee and the pledgor must be aggregated. If shares are given by gift
and the donee sells shares of the same securities within one year after the
28
gift, sales of both the donor and the donee must be aggregated. If a trust sells
shares within one year of acquiring them from the settlor of that trust, the
sales of the trust and the settlor must be aggregated. If a person's estate or
beneficiary sells shares, the number of shares sold by the decedent within the
same time period must be aggregated with sales by the estate or the beneficiary
unless the estate or beneficiary is not an affiliate at the time of sale.
Finally, sales by two or more persons who agree to act in concert in selling the
securities must be aggregated.
A broker's transaction is a transaction in which neither the broker
nor the seller solicits or arranges for the solicitation of buy orders and in
which the broker only executes a sale as the seller's agent and receives only a
normal commission.
Finally, the seller must give notice that the seller is making the
sale. The seller must submit copies of Form 144, which gives details of the
shares to be sold, to the SEC and to any securities exchange on which the stock
is traded if the total sales by the seller during any three-month period exceeds
500 shares or has an aggregate sale price of more than $10,000.
The foregoing summary of Rule 144 is not a complete description.
DELAWARE ANTI-TAKEOVER LAW PROVISIONS
As a Delaware corporation, we are subject to Section 203 of the
General Corporation Law. In general, Section 203 prevents an "interested
stockholder" (defined generally as a person owing 15% or more of a Delaware
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with such Delaware corporation for three years
following the date such person became an interested stockholder unless (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination, (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by the directors who are also
officers of the corporation and by certain employee stock plans), or (iii)
following the transaction in which such person became an interested stockholder,
the business combination is approved by the board of directors of the
corporation and authorized at a meeting of stockholders by the affirmative vote
of the holders of two-thirds of the outstanding voting stock of the corporation
not owned by the interested stockholder. Under Section 203, the restrictions
described above also do not apply to certain business combinations proposed by
an interested stockholder following the public announcement or notification of
one of certain extraordinary transactions involving the corporation and a person
who had not been an interested stockholder during the previous three years or
who became an interested stockholder with the approval of the corporation's
board of directors and if such business combination is approved by a majority of
the board members who were directors prior to any person becoming an interested
stockholder. The provisions of Section 203 requiring a super-majority vote to
approve certain corporate transactions could have the effect of discouraging,
delaying or preventing hostile takeovers, including those that might result in
the payment of a premium over market price or changes in control or management
of UMDN.
LIMITATION ON LIABILITY OF DIRECTORS
Our certificate of incorporation provides that our directors will not
be personally liable to us or our stockholders for monetary damages for breach
of their fiduciary duty of care as directors, including breaches which
constitute gross negligence. By its terms and in accordance with the Delaware
General Corporation Law, however, this provision does not eliminate or limit the
29
liability of our directors (i) for breaches of their duty of loyalty to us or
our stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law, (relating to unlawful payments or
dividends or unlawful stock repurchases or redemptions), or (iv) for any
improper benefit.
APPLICABILITY OF CALIFORNIA GENERAL CORPORATION LAW
Although we are incorporated in Delaware, Section 2115 of the
California General Corporation Law makes certain provisions of that statute
applicable to corporations incorporated in other states if, as in our case, (i)
a majority of the outstanding shares of the corporation are owned by California
residents, (ii) on average, a majority of the sales, payroll and property of the
corporation are located in California and (iii) the shares of the corporation
are not listed or traded on the American or New York Stock Exchanges or as
National Market Securities on The Nasdaq Stock Market. As a result, we are
subject to, among others, those provisions of the California General Corporation
Law that impose annual election and cumulative voting requirements for all
directors, establish the standard of care to be exercised by directors, limit
our ability to indemnify our directors, restrict our ability to establish
supermajority voting requirements, establish special voting requirements for a
sale of substantially all of our assets to a controlling shareholder and
dissenters' rights for business combination transactions and require us to
provide access and reports to our shareholders. We shall remain subject to these
California provisions until such time as (i) a majority of our outstanding
shares are no longer owned by California residents or (ii) on average, a
majority of our sales, payroll and property are no longer located in California
or (iii) our shares are listed or traded on the American or New York Stock
Exchanges or as National Market Securities on The Nasdaq Stock Market.
DIVIDEND POLICY
We have not paid any dividends on our common stock since our inception
and do not intend to pay dividends on our common stock in the foreseeable
future. Any earnings which we may realize in the foreseeable future will be
retained to finance our growth.
SELLING SHAREHOLDERS
The following table identifies each of our shareholders who is
offering shares of our common stock in this Offering, the number of shares of
our Common Stock owned by that shareholder prior to this Offering, the number of
shares offered by that shareholder and the number of shares, and percentage of
the outstanding shares, to be owned by that shareholder after this Offering,
assuming all of that shareholder's shares are sold in this Offering. This table
assumes that none of our outstanding options or warrants is exercised.
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
Amount of Percentage of
Amount of Amount of Securities Owned Securities Owned
Securities Owned Securities to be After Offering After Offering
Name Before Offering Offered Complete Complete
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
Kent Keith (1) 12,547,880 (2) 2,000,000 (2) 10,547,880 (2) 70.68% (2)
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
Starla Keith (1) 12,547,880 (2) 2,000,000 (2) 10,547,880 (2) 70.68% (2)
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
Golden Gate Partners 80,000 16,000 64,000 Less than 1%
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
Pat Nakahara 200,000 40,000 160,000 1.07%
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
30
Randy O'Connell 40,000 8,000 32,000 Less than 1%
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
Marjorie Keith 40,000 8,000 32,000 Less than 1%
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
Jim and Evelyn Price 40,000 8,000 32,000 Less than 1%
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
David Boone 40,000 8,000 32,000 Less than 1%
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
Tomas Gonzalez 40,000 8,000 32,000 Less than 1%
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
Gary Wise 40,000 8,000 32,000 Less than 1%
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
The Michael and Gail 80,000 16,000 64,000 Less than 1%
Giovannini 1995 Trust
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
Evelyn Hellebuyck 40,000 8,000 32,000 Less than 1%
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
Bonanza Management Ltd. 40,000 8,000 32,000 Less than 1%
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
Joseph Lynch 101,653 10,000 91,653 Less than 1%
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
Don Wylie 20,000 4,000 16,000 Less than 1%
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
Paula and William 1,394,212 280,000 1,114,212 7.47%
Rhoadarmer
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
Cheryl Watkins-Bremont 12,000 2,000 10,000 Less than 1%
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
Larry Hagman (3) 48,255 10,000 38,255 Less than 1%
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
Richard Walker(4) 200,000 200,000 0 0%
- ----------------------------- --------------------- --------------------- --------------------- ---------------------
(1) Kent Keith and Starla Keith are directors and officers. See
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS - OFFICERS AND
DIRECTORS.
(2) Includes before Offering, in the case of Kent Keith, 6,273,940
shares owned by Starla Keith and, in the case of Starla Keith, 6,273,940 shares
owned by Kent Keith and after the Offering, in the case of Kent Keith, 5,273,940
shares owned by Starla Keith and, in the case of Starla Keith, 6,273,940 shares
owned by Kent Keith. Each of Kent Keith and Starla Keith are offering 1,000,000
shares individually pursuant to this Registration Statement. Each of Kent and
Starla Keith disclaims beneficial ownership of the shares owned by the other.
(3) Larry Hagman is a member of the Board of Advisors. See DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS - BOARD OF ADVISORS.
(4) Assumes exercise of option issued to Mr. Walker to purchase
200,000 shares at $.02 per share. See SELLING SHAREHOLDERS--OPTION.
DISTRIBUTION
Prior to this Offering, there has been no public market for our common
stock. There can be no assurance that our common stock will be quoted in the
over-the-counter market, either on the OTC Bulletin Board or in the Pink Sheets.
This Offering is not conditioned upon the quotation of our stock in the
over-the-counter market.
Each selling shareholder may sell the shares offered hereby
independently of the others No broker or dealer has been retained or is under
any obligation to buy or sell any shares.
The selling shareholders have advised us that, until a market develops
for our common stock, they will sell their shares for prices ranging from $.10
per share to $.50 per share. These prices cannot necessarily be expected to bear
any relationship to customary determinants of the value of shares of public
companies, such as the history of, and prospects for, our business; past sales
31
prices of our common stock in private transactions; and assessment of our
management; our present operations; our market capitalization and general
conditions in the securities markets.
If and when a public market for our common stock does develop, the
prices at which the selling shareholders may sell their shares will be
determined by that market or will be privately negotiated between the selling
shareholders and their respective buyers.
In accordance with Rule 416 under the Securities Act of 1933, the
selling shareholders may also sell in this Offering such additional number of
shares of our common stock as may be issued with respect to the offered shares
as a result of stock splits, stock dividends or similar transactions.
Any and all of the shares of common stock may be offered for sale
pursuant to this Prospectus by the selling shareholders from time to time.
Accordingly, no estimate can be given as to the numbers of shares of our common
stock that will be held by the selling shareholders upon consummation of any
such sales.
Under the securities laws of certain states, the shares may be sold
only through registered or licensed broker-dealers or pursuant to available
exemptions from such requirements. In addition, in certain states the shares may
not be sold unless the shares have been registered or qualified for sale or an
exemption from such requirement is available and is complied with.
We shall pay certain expenses in connection with this Offering,
estimated to be approximately $100,000; but we shall not pay for any
underwriting commissions and discounts, if any, or counsel fees or other
expenses of the selling shareholders. We have agreed to indemnify the selling
shareholders, their directors, officers, agents and representatives, and any
underwriters acting on their behalf, against certain liabilities, including
certain liabilities under the Securities Act of 1933. The selling shareholders
have also agreed to indemnify us, our directors, officers, agents and
representatives against certain liabilities, including certain liabilities under
the Securities Act of 1933.
OPTION
On August 25, 2001, we issued to Mr. Richard Walker an option to
purchase 300,000 shares of our common stock at $.02 per share in consideration
for certain consulting services to be performed by an entity controlled by Mr.
Walker. This option was fully vested at the time of its issuance. At that time
we also agreed with Mr. Walker to include the shares issuable upon his exercise
of the option in the first registration statement we filed with the SEC. On June
2, 2002, we agreed with Mr. Walker to terminate the consulting services
agreement and to reduce the number of shares subject to the option from 300,000
shares to 200,000 shares; however we, at the same time, specifically confirmed
our agreement regarding the registration of those 200,000 shares. This
Prospectus, therefore, relates to the sale of the shares issuable upon the
exercise of that option as well as to sales of other shares of our common stock
by the other selling shareholders.
DISCLOSURE OF SECURITIES AND EXCHANGE COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our certificate of incorporation provides that, subject to the
determination that such officer or director is so entitled, we shall indemnify
our officers and directors from and against any and all expenses and liabilities
arising from their actions in their official capacities and as to actions in
another capacity by reason of holding such office, to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law or other
applicable laws.
32
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, we have been informed that, in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is unenforceable.
REPORTS TO SECURITYHOLDERS
We shall furnish to holders of our securities annual reports
containing audited financial statements. Contemporaneously with this offering,
we have registered our securities with the Securities and Exchange Commission
under the provisions of Section 12(g) of the Securities Exchange Act of 1934, as
amended, and, in accordance therewith, we shall be required to comply with
certain reporting, proxy solicitation, and other requirements of the Exchange
Act.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon
for UMDN by Parker, Milliken, Clark, O'Hara & Samuelian, a Professional
Corporation, Los Angeles, California. We have granted a five-year option to
purchase 50,000 shares of our common stock at $.25 per share to a member of this
law firm (see DESCRIPTION OF SECURITIES - Outstanding Options and Warrants).
EXPERTS
Certain of the financial statements of UMDN included in this
Prospectus, to the extent and for the periods indicated in their report, have
been audited by Gumbiner, Savett, Finkel, Fingleson & Rose, Inc., independent
certified public accountants, whose report thereon appears elsewhere herein.
AVAILABLE INFORMATION
We have filed with the Commission, Washington, D.C. 20549, a
Registration Statement on Form SB-2 under the Securities Act of 1933, as
amended, with respect to our common stock offered hereby. This Prospectus does
not contain all of the information set forth in the registration statement and
the exhibits and schedules to the registration statement. For further
information with respect to UMDN, Inc. and our common stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed as a part of the Registration Statement. Statements contained in this
Prospectus concerning the contents of any contract or any other document are not
necessarily complete; reference is made in each instance to copy of such
contract or any other document filed as an exhibit to the registration
statement. Each such statement is qualified in all respects by such reference to
such exhibit. After the offering, we shall be subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and, in
accordance therewith, will be required to file annual, quarterly and special
reports, proxy statements and other information with the SEC. The registration
statement, including exhibits and schedules thereto, may be inspected without
charge at the Commission's principal office in Washington D.C., and copies of
all or any part thereof may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 after payment of fees
prescribed by the Commission. The telephone number of the Commission is
1-800-SEC-0330. The Commission also maintains a World Wide Web site which
provides online access to reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
at the address http://www.sec.gov. We intend to furnish holders of our common
stock with annual reports containing financial statements audited by independent
accountants beginning with the fiscal year ending August 31, 2002.
You should rely only on the information contained in this Prospectus.
We have not authorized any other person to provide you with different
33
information. If anyone provides you with different or inconsistent information,
you should not rely on it. We are not making an offer to sell these securities
in any jurisdiction where the offer or sale is not permitted. You should assume
that the information appearing in this Prospectus is accurate as of the date on
the front cover of this Prospectus only. Our business, financial condition,
results of operations and prospects may have changed since that date.
Additional risks and uncertainties not currently known or that are not
currently deemed material may also impair our business operations. The risks and
uncertainties described in this document and other risks and uncertainties which
we may face in the future may have a greater impact on those who purchase our
common stock. These purchasers will purchase our common stock at the market
price or at a privately negotiated price and will run the risk of losing their
entire investment.
34
UMDN, INC.
FINANCIAL REPORT
For the years ended August 31, 2000 and
2001 and the nine months ended May 31,
2001 and 2002
TABLE OF CONTENTS
Page
----
Report of Independent Certified Public Accountants 36
Financial statements:
Balance sheets 37
Statements of operations 38
Statements of proprietors'/stockholders' deficiency 39
Statements of cash flows 40-41
Notes to financial statements 42-49
35
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
UMDN, Inc.
Santa Monica, California
We have audited the accompanying balance sheets of UMDN, Inc. (formerly a
proprietorship) as of August 31, 2000 and 2001 and the related statements of
operations, proprietors'/stockholders' deficiency, 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of UMDN, Inc. as of August 31,
2000 and 2001 and the results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company has incurred net losses since its inception and has experienced
liquidity problems. Those conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to those
matters are described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
GUMBINER, SAVETT, FINKEL, FINGLESON & ROSE, INC.
Santa Monica, California
January 11, 2002, except for first paragraph of
Note 9 as to which the date is March 11, 2002
36
UMDN, INC.
BALANCE SHEETS
August 31, 2000, August 31, 2001
and May 31, 2002
ASSETS
August 31, August 31, May 31,
2000 2001 2002
-------------- -------------- ------------
(unaudited)
CURRENT ASSETS
Cash $ 171 $ 30,704 $ 3,131
Accounts receivable 550 - 2,400
Prepaid legal fees and other 4,349 310 310
Deferred offering costs - - 100,295
-------------- -------------- ------------
TOTAL CURRENT ASSETS 5,070 31,014 106,136
-------------- -------------- ------------
PROPERTY AND EQUIPMENT, at cost,
net of accumulated depreciation (Notes 5 and 6) 16,730 18,547 17,396
-------------- -------------- ------------
TOTAL ASSETS $ 21,800 $ 49,561 $ 123,532
============== ============== =============
LIABILITIES AND PROPRIETORS' /STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 19,260 $ 20,987 $ 26,262
Accrued interest 2,321 11,453 6,102
Accrued officers' salaries 50,000 - -
Consulting fees payable - 31,000 -
Legal fees payable - 13,794 63,005
Current portion of long-term debt (Note 6) 1,375 2,673 2,790
Deferred income 13,774 10,628 23,491
-------------- -------------- ------------
TOTAL CURRENT LIABILITIES 86,730 90,535 121,650
-------------- -------------- ------------
LONG-TERM DEBT (Note 6) 3,877 7,068 5,185
-------------- -------------- ------------
NOTES PAYABLE, STOCKHOLDERS (Note 3) 90,000 120,000 267,000
-------------- -------------- ------------
COMMITMENT (Note 8)
PROPRIETORS'/STOCKHOLDERS' DEFICIENCY (Note 9)
Series A convertible preferred stock, .0001 par value:
Authorized 10,000,000 shares;
Issued and outstanding, 1,050,000 shares at
August 31, 2001 - 105 -
Common stock, .0001 par value:
Authorized 40,000,000 shares;
Issued and outstanding, 4,320,000 and 14,924,000
shares at August 31, 2001 and May 31, 2002,
respectively - 432 1,492
Paid-in capital - 222,412 377,457
Accumulated deficit - (390,991) (649,252)
Proprietors' deficiency (158,807) - -
-------------- -------------- ------------
TOTAL PROPRIETORS'/STOCKHOLDERS'
DEFICIENCY (158,807) (168,042) (270,303)
-------------- -------------- ------------
TOTAL LIABILITIES AND PROPRIETORS'/
STOCKHOLDERS' DEFICIENCY $ 21,800 $ 49,561 $ 123,532
============== ============== =============
See accompanying notes to financial statements.
37
UMDN, INC.
STATEMENTS OF OPERATIONS
For the years ended August 31, 2000 and 2001
and the nine months ended May 31, 2001 and 2002
Years Ended Nine Months Ended
--------------- --------------------------------
(unaudited)
August 31, August 31, May 31, May 31,
2000 2001 2001 2002
-------------- -------------- ------------------ --------------------
REVENUE $ 97,812 $ 67,842 $ 54,245 $ 63,417
-------------- -------------- ------------------ --------------------
OPERATING EXPENSES
General, selling and administrative
expense 250,202 384,424 223,722 303,632
Rescinded transaction costs (Note 4) - 60,193 53,639 2,553
-------------- -------------- ------------------ --------------------
TOTAL OPERATING EXPENSES 250,202 444,617 277,361 306,185
-------------- -------------- ------------------ --------------------
LOSS FROM OPERATIONS (152,390) (376,775) (223,116) (242,768)
INTEREST EXPENSE 4,068 14,216 10,228 15,493
-------------- -------------- ------------------ --------------------
NET LOSS $(156,458) $(390,991) $(233,344) $(258,261)
============== ============== ================== ===================
Basic and diluted loss per common share $(0.11) $(0.07) $(0.03)
======== ========== ==========
See accompanying notes to financial statements.
38
UMDN, INC.
STATEMENTS OF PROPRIETORS'/ STOCKHOLDERS' DEFICIENCY
For the years ended August 31, 2000, 2001 and the nine months ended May 31, 2002
Proprietors' Common Stock Preferred Stock Paid-in Accumulated
-----------------------------------------
Deficiency Shares Amount Shares Amount Capital Deficit Total
-----------------------------------------------------------------------------------------------
Balance, September 1, 1999 $ (20,898) - $ - - $ - $ - $ - $ (20,898)
Contributions 18,549 - - - - - - 18,549
Net loss (156,458) - - - - - - (156,458)
-----------------------------------------------------------------------------------------------
Balance, August 31, 2000 (158,807) - - - - - - (158,807)
Proprietors' deficiency contributed
with respect to incorporation 158,807 3,136,970 314 - - (159,121) - -
Preferred stock issued (Note 9) - - - 1,050,000 105 (105) - -
Common stock issued to unrelated parties - 120,000 12 - - 29,988 - 30,000
Common stock issued with respect to
private placement, including 40,000
shares to related parties, net of
offering costs of $36,733 (Note 3) - 700,000 70 - - 126,186 - 126,256
Exercise of stock options by
related party. - 348,552 35 - - 129,965 - 130,000
Common stock issued in exchange
for services (Note 9) - 14,478 1 - - 4,499 - 4,500
Stock options granted in exchange for - - - - - 79,000 - 79,000
for services (Note 9)
Contribution to capital in exchange
for rent (Note 3) - - - - - 12,000 - 12,000
Net loss - - - - - - (390,991) (390,991)
-----------------------------------------------------------------------------------------------
Balance, August 31, 2001 - 4,320,000 432 1,050,000 105 222,412 (390,991) (168,042)
Conversion of preferred stock
into common stock (unaudited)
(Note 9) - 10,500,000 1,050 (1,050,000) (105) (945) - -
Common stock issued in exchange
for services (unaudited)
(Note 9) - 104,000 10 - - 25,990 - 26,000
Contributions to capital in exchange for
rent (unaudited) (Note 3) - - - - - 9,000 - 9,000
Contributions to capital in exchange for
salaries (unaudited) (Note 3) - - - - - 98,000 - 98,000
Stock options granted in exchange for
services (unaudited) (Note 9) - - - - - 23,000 - 23,000
Net loss (unaudited) - - - - - - (258,261) (258,261)
-----------------------------------------------------------------------------------------------
Balance, May 31, 2002 (unaudited) $ - 14,924,000 $1,492 $ - $ - $ 377,457 $ (649,252) $ (270,303)
===============================================================================================
See accompanying notes to financial statements.
39
UMDN, INC.
STATEMENTS OF CASH FLOWS
For the years ended August 31, 2000 and 2001 and
the nine months ended May 31, 2001 and 2002
Years Ended Nine months ended
---------------------------------- --------------------------------
August 31, August 31, May 31, May 31,
2000 2001 2001 2002
---------------- ---------------- ---------------- --------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (156,458) $ (390,991) $ (233,344) $ (258,261)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 2,798 4,624 3,213 5,149
Transactions in exchange for services - 83,500 14,500 147,000
Transactions in exchange for rent - 12,000 9,000 9,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 350 550 550 (2,400)
(Increase) decrease in prepaid legal fees (4,349) 4,039 4,150 -
Increase in deferred offering costs - - - (100,295)
Increase in accounts payable 8,880 1,728 24,806 5,275
Increase (decrease) in consulting fees payable - 31,000 28,000 (31,000)
Increase in legal fees payable - 13,794 - 49,211
Increase (decrease) in accrued interest 490 9,132 6,441 (5,351)
Increase (decrease) in accrued officers' salaries 50,000 (50,000) (42,000) -
Increase (decrease) in deferred income 4,187 (3,146) (4,496) 12,863
-------------- ---------------- ---------------- -----------------
Net cash used in operating activities (94,102) (283,770) (189,180) (168,809)
-------------- ---------------- ---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchased (19,529) (6,442) (412) (3,997)
-------------- ---------------- ---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock - 286,256 224,444 -
Proprietor's capital contributions 18,549 - - -
Proceeds from notes payable, stockholders 90,000 30,000 30,000 147,000
Long-term debt incurred 6,189 6,029 - -
Long-term debt paid (936) (1,540) (1,066) (1,767)
-------------- ---------------- ---------------- -----------------
Net cash provided by financing activities 113,802 320,745 253,378 145,233
-------------- ---------------- ---------------- -----------------
NET INCREASE (DECREASE) IN CASH 171 30,533 63,786 (27,573)
CASH - BEGINNING OF YEAR - 171 171 30,704
-------------- ---------------- ---------------- -----------------
CASH - END OF YEAR $ 171 $ 30,704 $ 63,957 $ 3,131
============== ================ ================ =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest paid $ 3,579 $ 5,084 $ 3,787 $ 20,844
(Continued)
40
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended August 31, 2001, common stock increased by $314 and
paid-in capital decreased by $159,121 when the assets of the proprietorship were
transferred and its liabilities were assumed by the Company in exchange for
shares of common stock issued to the proprietors.
During the year ended August 31, 2001, preferred stock increased and paid-in
capital decreased by $105 as a result of the issuance of shares of preferred
common stock as a stock dividend (Note 9).
During March 2002, common stock increased by $1,050 and preferred stock and
paid-in capital decreased by $105 and $945 respectively as a result of
conversion of preferred stock into common stock (Note 9).
During the nine months ended May 31, 2002, common stock was issued for
liquidation of accounts payable of $26,000 relating to services rendered.
41
UMDN, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended August 31, 2000 and
2001 and the nine months ended May 31, 2001
and 2002 (unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Formation of the Company and business:
The Company provides sales and marketing services through a
benefits program that it created specifically for unions and
association members. This benefits program utilizes the
collective bargaining power of the unions to obtain purchasing
power with businesses ("providers"). The Company enrolls members
of unions and other large affinity groups to leverage their
buying power to elicit proprietary discounts for their benefit
from both local and national businesses. The Company provides
their services through live operators, an online interface and
printed materials. The Company's revenues are derived from the
businesses that provide the discounts.
The Company began its business in 1998 and was a proprietorship
through August 2000. As such, the financial statements for the
year ended August 31, 2000 include only items relating to the
business of the predecessor proprietorship. Upon incorporation
in the state of Delaware in August 2000, all of the assets of
the proprietorship were transferred and its liabilities were
assumed by the Company in exchange for shares of common stock
issued to the proprietors.
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue recognition:
Revenue is recognized ratably over the terms of provider
agreements, generally six months to one year. Amounts received
from provider agreements for which revenue has not been
recognized, net of related commissions, are reported as deferred
revenue. Subsequent to the expiration of provider agreements, if
a new contractual agreement has not been entered into, the
Company, at its option, may decide to allow the vendors to
remain on the vendor network listing without receiving listing
payments.
Depreciation:
Depreciation is computed principally on the straight-line method
based on the estimated useful lives of the assets, generally as
follows:
Computer equipment 3-5 years
Furniture and fixtures 10 years
(Continued)
42
UMDN, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended August 31, 2000 and 2001 and
the nine months ended May 31, 2001 and 2002 (unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deferred taxes on income:
The Company records deferred taxes on income for transactions
that are reported in different years for financial reporting and
tax purposes using an asset and liability method whereby assets
and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply in the year
in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in operations
in the period that includes the enactment date.
Loss per common share:
Basic and diluted loss per common share is computed by dividing
the net loss by the weighted average number of common shares
outstanding for the period. The weighted average number of
common shares outstanding for computing the basic and diluted
loss per common share was 3,616,195 for the year ended August
31, 2001, and 3,452,705 and 7,894,222 for the nine months ended
May 31, 2001 and 2002, respectively. For purposes of the above
calculation, the preferred shares outstanding are antidilutive.
Stock-based compensation:
The Company accounts for stock-based compensation arrangements
in accordance with provisions of APB No. 25, "Accounting for
Stock Issued to Employees" and related interpretations, and
complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25,
compensation cost for employees is recognized based on the
difference, if any, on the date of grant between the fair value
of the Company's common stock and the amount an employee must
pay to acquire the stock. The Company accounts for stock-based
compensation arrangements to consultants in accordance with the
provisions of SFAS No. 123.
NOTE 2: BASIS OF PRESENTATION AND GOING CONCERN
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern.
However, the Company has sustained operating losses since its
inception. In addition, the Company has used substantial amounts
of working capital in its operations. Further, at August 31,
2001 and May 31, 2002, current liabilities exceeded current
assets by approximately $59,000 and $116,000 (excluding deferred
offering costs), respectively, and total liabilities exceeded
total assets by approximately $168,000 and $270,000
respectively. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
(Continued)
43
UMDN, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended August 31, 2000 and 2001 and
the nine months ended May 31, 2001 and 2002 (unaudited)
(Continued)
NOTE 2: BASIS OF PRESENTATION AND GOING CONCERN (Continued)
In view of these matters, realization of a major portion of the
assets in the accompanying balance sheet is dependent upon
continued operations of the Company, which in turn is dependent
upon the Company's ability to meet its working capital and cash
flow needs, and the success of its future operations. Management
believes that actions presently being taken by the principal
stockholders by advancing a $350,000 line of credit provides the
opportunity for the Company to continue as a going concern
through the end of 2002, and longer if they are successful in
selling their shares through a public offering and advancing a
portion of the proceeds to the Company. As of August 2002,
$45,000 remains available under the line of credit. Management
also believes that if sufficient funds are not raised by the end
of 2002, the Company will have to curtail its operations.
NOTE 3: RELATED PARTY TRANSACTIONS
Notes payable, stockholders:
The Company was indebted to certain of its stockholders in the
amount of $90,000, $120,000 and $267,000 as of August 31, 2000
and 2001 and May 31, 2002, respectively, on notes payable
bearing interest ranging from 7% to 9% per annum, due through
January, 2004. Notes payable in the amount of $50,000 and
$80,000 as of August 31, 2000 and 2001 and May 31, 2002,
respectively, were guaranteed by the principal
officers/stockholders of the Company. Interest expense on these
notes amounted to approximately $2,300 and $10,000 for the years
ended August 31, 2000 and 2001, respectively, and $7,000 and
$11,000 for the nine months ended May 31, 2001 and 2002,
respectively.
Rent:
The Company leases its office facility from its majority
stockholders on a month-to-month basis. Rent charged by the
stockholders was contributed to capital and amounted to $12,000
for the year ended August 31, 2001 and $9,000 for each of the
nine month periods ended May 31, 2001 and 2002.
Salaries:
Salaries charged by the two principal officers amounting to
$98,000 were accrued and contributed to capital for the nine
months ended May 31, 2002. Since May 31, 2001, the Company has
accrued salaries for the two principal officers in the amount of
$14,000 per month. Salaries for the two principal officers for
the other periods presented were accrued and paid.
(Continued)
44
UMDN, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended August 31, 2000 and 2001 and
the nine months ended May 31, 2001 and 2002 (unaudited)
NOTE 3: RELATED PARTY TRANSACTIONS (Continued)
Common stock:
The Company issued 388,552 shares of common stock to related
parties for $140,000 during the year ended August 31, 2001.
Note payable:
In November 2001, the Company entered into a promissory note
with its majority stockholders and officers under which it may
borrow up to $350,000. Interest is payable at 8% per annum.
Payment of the balance outstanding plus interest is due in
November 2003. At May 31, 2002, $147,000 was outstanding under
this note.
NOTE 4: STOCK PURCHASE AND SALE AGREEMENT
In May 2001, the Company's stockholders entered into a stock
purchase and sale agreement with Delta Capital Technologies,
Inc. ("DCTG"), whereby the stockholders received 1,000,000
shares of DCTG common stock in exchange for their shares of the
Company's common stock. Due to the difficulty of raising capital
financing, DCTG was unable to provide the needed financing for
the Company. In November 2001, the Company exercised an option
in the agreement with DCTG to rescind this transaction. Expenses
incurred with respect to this agreement and its reversal have
been included in the statements of operations as rescinded
transactions costs.
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
August 31, August 31, May 31,
2000 2001 2002
------------- -------------- ---------------
(unaudited)
Computer equipment $14,764 $21,205 $25,202
Furniture and fixtures 4,765 4,765 4,765
------ ------- -------
19,529 25,970 29,967
Less accumulated depreciation 2,799 7,423 12,571
------- ------- --------
$16,730 $18,547 $17,396
====== ====== ======
(Continued)
45
UMDN, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended August 31, 2000 and 2001 and
the nine months ended May 31, 2001 and 2002 (unaudited)
NOTE 6: LONG-TERM DEBT
Long-term debt consisted of the following:
August 31, August 31, May 31,
2000 2001 2002
------------- -------------- ---------------
(unaudited)
Notes, collateralized by computer equipment,
payable $425 per month through June 2004,
including interest ranging from 15% to 45%
per annum. $5,252 $9,741 $7,975
Current portion 1,375 2,673 2,790
----- ----- -----
Noncurrent portion $3,877 $7,068 $5,185
===== ===== =====
Maturities of long-term debt during the succeeding five years as
of August 31, 2001 are approximately $2,700 (2002); $2,900
(2003); $3,100 (2004); $600 (2005) and $500 (2006).
NOTE 7: TAXES ON INCOME
As of August 31, 2001 and May 31, 2002, the Company had
available net operating loss carryforwards amounting to
approximately $350,000 and $610,000, respectively, that may be
applied against future federal and state taxable income and that
expire through 2021 for federal tax purposes and 2009 for state
tax purposes.
Temporary differences giving rise to deferred tax assets consist
of the net operating loss carryforwards. Since the Company
cannot determine if it is more likely than not that the deferred
tax assets will be realized, deferred tax assets recognized for
loss carryforwards are fully offset by a valuation allowance of
approximately $140,000 at August 31, 2001 and $240,000 at May
31, 2002.
NOTE 8: COMMITMENT
On November 1, 2001, the Company entered into employment
agreements with its two principal officers expiring in August
2005. For the nine months ended May 31, 2002 the officers
contributed their salaries to paid-in capital. As part of the
agreement, the officers have been granted monthly salaries of
$7,000 each. The officers may defer future salaries for an
undetermined period of time with rights to demand payment at any
time.
(Continued)
46
UMDN, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended August 31, 2000 and 2001 and
the nine months ended May 31, 2001 and 2002 (unaudited)
NOTE 9: STOCKHOLDERS' EQUITY
Preferred stock:
During the year ended August 31, 2001, 1,050,000 shares of
series A preferred stock were issued as a stock dividend. In
March 2002, all of the shares of series A preferred stock were
converted into 10,500,000 shares of common stock based on a
conversion ratio of ten shares of common stock for each share of
series A preferred stock. All of the shares of series A
preferred stock were retired in March 2002 and have reverted to
the status of authorized, but unissued shares of preferred
stock.
Common stock:
The Company issued 14,478 and 104,000 shares of common stock,
for promotional and consulting services provided during the year
ended August 31, 2001 and the nine months ended May 31, 2002,
respectively. For the year ended August 31, 2001, the services
rendered amounted to $4,500, and the number of shares issued was
based on the fair value of the shares at the time of
incorporation in August 2001 as established by the board of
directors. For the period ended May 31, 2002, the services
rendered amounted to $26,000, and the number of shares issued
was based on the value of the private placement shares sold at
$.25 per share in August 2001.
Stock options:
The Company has granted stock options for the purchase of shares
of the Company's common stock to some of its consultants. The
exercise price of the options outstanding at August 31, 2001
ranged from $.02 to $.25 per share and these options expire
through 2012. Some of these options were granted at prices below
fair market value, which resulted in charges to expense of
$79,000, $10,000 and $23,000 for the year ended August 31, 2001
and nine months ended May 31, 2001 and 2002, respectively. The
weighted average remaining contractual life for the options was
2 years and 11 months, 3 years and 5 months and 5 years and 2
months as of August 31, 2000 and 2001, and May 31, 2002,
respectively. These options were fully vested as of August 31,
2001.
Following is a summary of options activity for the years ended
August 31, 2000 and 2001 and the nine months ended May 31, 2002:
Weighted
Average
Exercise
Shares Price
--------- ------------
Balance outstanding and exercisable, August 31, 1999 -
Options granted 548,552 $.26
Options exercised (348,552) .37
-------
Balance outstanding and exercisable, August 31, 2000 200,000 .05
Options granted 300,000 .02
-------
Balance outstanding and exercisable, August 31, 2001 500,000 .03
Options granted 650,000 .21
-------
Balance outstanding and exercisable,
May 31, 2002 1,150,000 $.14
=========
(Continued)
47
UMDN, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended August 31, 2000 and 2001 and
the nine months ended May 31, 2001 and 2002 (unaudited)
NOTE 9: STOCKHOLDERS' EQUITY (Continued)
Stock options: (Continued)
In April 2002, the Company adopted the 2002 Stock Option Plan of
UMDN, Inc. which provides for the issuance of both incentive and
non-qualified stock options to employees, non-employee directors
and consultants. Under the plan, the Company may issue stock
options for up to 20% of the total number of shares of common
stock outstanding from time to time. Vesting of the stock
options to employees and consultants is determined by a
committee of the board of directors. Options granted to
non-employee directors vest equally over four years commencing
on the date of grant. During April 2002, the Company granted
non-qualified options to purchase 300,000 shares of the
Company's common stock for $.25 per share to non-employee
directors, which was the fair value at the date of grant, of
which 75,000 were vested as of May 31, 2002.
The weighted-average fair value at the date of grant for options
granted for the year ended August 31, 2001 and for the nine
months ended May 31, 2002 was $.19 and $.21 per option,
respectively. The weighted-average fair value of these options
at the date of grant was estimated using the Black-Scholes
option-pricing model with the following weighted-average
assumptions for the year ended August 31, 2001 and for the nine
months ended May 31, 2002, respectively: risk-free interest
rates of 5.2% and 5.2%, dividends yields of 0% and 0%,
volatility factors of the expected market price of the Company's
common stock of 10.0% and 10.0%, and a weighted-average expected
life of the options of 3.2 and 5.5 years.
Warrants:
In connection with the private placement of the Company's common
stock during the year ended August 31, 2001, the Company granted
warrants for the purchase of 700,000 shares of the Company's
common stock for $.75 per share on or before May 31, 2002 and
$1.00 per share thereafter. In connection with the issuance of
common stock for services, the Company also granted warrants for
the purchase of 12,000 shares of Company's common stock for
$1.00 per share during April 2002. The warrants are currently
exercisable and expire on May 31, 2003.
(Continued)
48
UMDN, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended August 31, 2000 and 2001 and
the nine months ended May 31, 2001 and 2002 (unaudited)
NOTE 10: PRO FORMA EARNINGS PER SHARE
The weighted-average fair value at the date of grant for options
granted for the year ended August 31, 2001 and for the nine
months ended May 31, 2002 was $.19 and $.21 per option,
respectively. The weighted-average fair value of these options
at the date of grant was estimated using the Black-Scholes
option-pricing model with the following weighted-average
assumptions for the year ended August 31, 2001 and for the nine
months ended May 31, 2002, respectively: risk-free interest
rates of 5.2% and 5.2%, dividends yields of 0% and 0%,
volatility factors of the expected market price of the Company's
common stock of 10.0% and 10.0%, and a weighted-average expected
life of the options of 3.2 and 5.5 years.
Pro forma loss and pro forma loss per share are not presented
since the Company accounts for all stock options under SFAS
No.123 and the pro forma amounts would be the same as the
historical reported amounts and therefore are antidilutive.
49
2,650,000 shares of
common stock
PROSPECTUS
____________ 2002
DEALER PROSPECTUS DELIVERY OBLIGATION
Until _______, all dealers that effect transactions in these
securities, whether or not participating in this Offering, may be required to
deliver a Prospectus. This is in addition to the dealers' obligation to deliver
a Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
50
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "GCL")
empowers a corporation to indemnify its directors and officers and to purchase
insurance with respect to liability arising out of the performance of their
duties as directors and officers. The GCL provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's by-laws, any agreement, vote of stockholders or otherwise.
Article IV of our Certificate of Incorporation eliminates the personal
liability of directors to the fullest extent permitted by Section 102 of the
GCL. Our Certificate of Incorporation provides for indemnification of all
persons whom it shall have the power to indemnify to the fullest extent
permitted pursuant to Sections 102(b)(7) and 145 of the GCL.
The effect of the foregoing is to require UMDN, Inc. to the extent
permitted by law to indemnify the officers and directors of UMDN, Inc. for any
claim arising against such persons in their official capacities if such person
acted in good faith and in a manner that he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
UMDN, Inc. pursuant to the foregoing provisions, we have been informed that in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
We do not currently have any liability insurance coverage for our
officers and directors.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses payable by UMDN.
in connection with the sale of the securities being registered. All amounts are
estimates except the SEC registration fee:
SEC registration fee* $ 184
State Registration Fees* $ 15,000
EDGAR Conversion expense $ 2,000
Printing and engraving expenses* $ 10,000
Accounting fees and expenses* $ 25,000
Legal fees and expenses* $ 25,000
Transfer agent's fees and expenses* $ 2,000
Escrow agent's fees and expenses* $ 1,000
Miscellaneous* $ 19,816
---------
Total $ 100,000
=========
* Estimated
II-1
Item 26. Recent Sales of Unregistered Securities.
Set forth below is information regarding the issuance and sales of
UMDN, Inc. common stock without registration during the last three years. Other
than as set forth below, no such sales involved the use of an underwriter and no
commissions were paid in connection with the sale of any securities. All of the
issuances were made in arm's length transactions which did not involve a public
offering.
We issued 1,568,485 shares* of common stock to Kent Keith, and
1,568,485 shares* of common stock to Starla Keith, in consideration for their
contribution of the initial assets of the company upon inception, valued at
approximately $150,000, on August 26, 2000.
We issued an option to Paula and William Rhoadarmer which they then
exercised to purchase 348,552 shares* of common stock for $130,000 between
October 20, 2000 and January 9, 2001.
We issued 2,413 shares* of common stock to Joseph A. Lynch, in
consideration for entering into a consulting agreement with the Company, valued
at $900, on October 26, 2000.
We issued 12,065 shares* of common stock to Larry Hagman, in
consideration for his agreeing to act as spokesperson for UMDN, valued at
$4,500, on April 5, 2001.
We issued 1,050,000 shares of Series A Preferred Stock to the existing
shareholders as a dividend for no consideration on April 6, 2001, which, because
it does not fall within the definition of "Sale" as included in Section 2(a)(3)
of the Securities Act of 1933 pursuant to 17 CFR Section 231.929, was not
required to be registered.
On May 4, 2001, all the then current shareholders of common stock
exchanged all of their outstanding shares of common stock for 1,000,000 shares
of common stock of Delta Capital Technologies, Inc. On November 1, 2001, all the
prior shareholders elected to exercise an option to reacquire their shares in
exchange for the return to Delta Capital Technologies, Inc. of the 1,000,000
shares of common stock of Delta Capital Technologies, Inc. These transactions
were exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended, as transactions by an issuer, which includes its control
persons, not involving a public offering.
We issued 10,500,000 shares of common stock in conversion of the
outstanding Series A Preferred Stock on a ten to one basis for no consideration
on March 11, 2002, in reliance on exemptions contained in Section 3(a)(9) of the
Securities Act of 1933, as amended, and similar exemptions in states in which
such securities were issued.
We issued 700,000 shares of common stock and warrants to purchase
700,000 additional shares of common stock to 12 unrelated private investors, 5
of whom are accredited investors and 7 of whom are unaccredited investors,
pursuant to a private placement for $175,000 between April 23, 2001 and August
28, 2001. We issued 12,000 shares of common stock and a warrant to purchase an
additional 12,000 shares of common stock to an individual, a related party who
is an accredited investor, as a finder's fee in connection with the private
placement on April 12, 2002.
We issued 120,000 shares of common stock to creditors of UMDN, Inc. in
conversion of $30,000 of outstanding loans on May 25, 2001 in reliance on
exemptions contained in Section 3(a)(9) of the Securities Act of 1933, as
amended, and similar exemptions in states in which such securities were issued.
II-2
We issued options for 1,050,000 shares of common stock to various
unrelated and related individuals in consideration for their acting as advisors
to the Company or for being members of the Board of Directors of the Company
between August 25, 2000 and March 18, 2002.
We issued 92,000 shares of common stock to Joseph Lynch for services
valued at $23,000 on November 15, 2001.
Except as otherwise noted above, the Company issued the above
securities in reliance on exemptions contained in Section 4(2) of the Securities
Act of 1933, as amended, and similar exemptions in states in which such
securities were issued. The sales of shares (except those noted above as being
within different exemptions) were sold for less than $1,000,000.00 in aggregate,
were sold without the use of general solicitation or advertising in any form,
and UMDN, Inc. undertook to determine that the individuals and entities
purchasing the shares were purchasing for their own accounts and to inform such
individuals and entities of the limitations on resale of such shares, including
placement of a legend on the share certificates issued.
* Reflects number of shares owned subsequent to the approximate 0.24
for one reverse stock split on April 5, 2001.
II-3
Item 27. Exhibits
Exhibit
Number Name
3.1 Certificate of Incorporation*
3.2 Bylaws*
5. Opinion of Parker, Milliken, Clark, O'Hara & Samuelian*
10.1 Employment Agreement, dated as of August 29, 2000, between UMDN, Inc.
and Kent Keith*
10.2 Amendment, dated as of November 1, 2001, to Employment Agreement,
dated August 29, 2000, between UMDN, Inc. and Kent Keith*
10.3 Employment Agreement, dated August 29, 2000, between UMDN, Inc. and
Starla Keith*
10.4 Amendment, dated as of November 1, 2001, to Employment Agreement,
dated August 29, 2000, between UMDN, Inc. and Starla Keith*
10.5 Lease Agreement, dated September 1, 2000, between UMDN, Inc. and Kent
and Starla Keith*
10.6 Promissory Note of UMDN in the principal amount of up to $350,000
payable to Kent and Starla Keith*
10.7 2002 Stock Option Plan of UMDN, Inc.*
10.8 Consulting Agreement, dated March 1, 2001, between UMDN, Inc. and Mr.
Larry Hagman*
23.1 Consent of Gumbiner, Savett, Finkel, Fingelson & Rose, Inc., dated
September 25, 2002
23.2 Consent of Parker, Milliken, Clark, O'Hara & Samuelian (see Exhibit
5.)*
- ----------
* heretofore filed
II-4
Item 28. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which the undersigned registrant offers
or sells securities, a post-effective amendment to this registration
statement to:
(a) include any Prospectus required by section 10(a)(3) of the
Securities Act.
(b) reflect in the Prospectus any facts or events which, individually
or together, represent a fundamental change in the information
set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be
reflected in the form of Prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
and
(c) include any additional or changed material information on the
plan of distribution.
(2) That, for the purpose of determining liability under the Securities
Act, the undersigned registrant will treat each post-effective
amendment as a new registration statement of the securities offered,
and the offering of the securities at that time as the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing on Form SB-2 and authorized this
amendment to its registration statement to be signed on its behalf by the
undersigned, in the County of Los Angeles, State of California, on September 25,
2002.
UMDN, INC.
By: /s/ Kent Keith
-------------------------------------
Kent Keith, President
By: /s/ Starla Keith
-------------------------------------
Starla Keith, Chief Financial Officer
In accordance with the requirements of the Securities Act of 1933, this
amendment to registration statement was signed by the following persons in the
capacities and on the dates indicated.
NAME TITLE DATE
/s/ Kent Keith
- ------------------------------- President and Director September 25, 2002
Kent Keith
/s/ Starla Keith
- ------------------------------- Chief Financial Officer September 25, 2002
Starla Keith and Director
/s/ Maj Hagman
- ------------------------------- Director September 25, 2002
Maj Hagman
/s/ Gary Horowitz
- ------------------------------- Director September 25, 2002
Gary Horowitz
/s/ Michael Posner
- ------------------------------- Director September 25, 2002
Michael Posner
II-6
23.1 Consent of Gumbiner, Savett, Finkel, Fingelson & Rose, Inc.,
dated September 25, 2002
II-7