SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File Number 333-08305
UTG COMMUNICATIONS INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3895294
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Limmattalstr. 10, Geroldswil Switzerland 8954
(Address of principal executive offices) (Zip Code)
(011) 411 749 31 03
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
At August 4, 1999, there were 1,778,783 shares of Common Stock, par value
$.00001 per share, outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
1
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
INDEX
PART I
Item 1 FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults upon Senior Securities
Item 4 Submission of Matters to a Vote of Security-Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signatures
2
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, March 31,
ASSETS 1999 1999
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 51,017 $ 739,218
Accounts Receivable, Net of Allowance for
Doubtful Accounts at June 30, 1999 and
March 31, 1999 of $301,118 and $372,314 respectively 1,239,186 1,167,227
Other Receivables 810,299 824,602
Prepaid Expenses and Other Current Assets 187,345 117,757
Inventory 708,915 606,140
----------- -----------
TOTAL CURRENT ASSETS 2,996,762 3,454,944
Property and Equipment, at cost, Net of Accumulated
Depreciation at June 30, 1999 and March 31, 1999 of
$2,451,528 and $2,158,682 respectively (Note 2) 2,330,054 2,579,646
Organization Costs, at cost, Net of Accumulated
Amortization at June 30, 1999 and March 31, 1999
of $8,250 and $36,160 respectively 106,923 108,953
Investment -- --
Goodwill, at cost, Net of Accumulated Amortization
of $49,307 and $45,925 202,371 205,753
Deferred Taxes (Note 5) -- --
Customer Lists Net of Accumulated Amortization at
June 30, 1999 and March 31, 1999 of $338,387 and
$291,534, respectively 872,798 645,536
Other Assets 135,663 203,283
----------- -----------
TOTAL ASSETS $ 6,644,571 $ 7,198,115
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank Overdraft $ 815,972 $ 663,925
Loans Payable 469,182 67,649
Due to Related Party -- 14,516
Accounts Payable and Accrued Expenses 3,073,735 3,835,759
Capital Lease Obligation, Current (Note 6) 252,500 253,788
----------- -----------
Total Current Liabilities 4,611,389 4,835,637
Capital Lease Obligation, Long-Term (Note 6) 413,501 473,920
Loans Payable -- 371,250
Commitments and Contingencies (Note 6) -- --
----------- -----------
TOTAL LIABILITIES 5,024,890 5,680,807
----------- -----------
STOCKHOLDERS' EQUITY (Note 7)
Common Stock - $.00001 Par Value Authorized
20,000,000 shares; 1,778,783 and 1,711,190
Issued and Outstanding at June 30, 1999 and
March 31, 1999 respectively 17 17
Additional Paid-in Capital 8,802,969 8,667,783
Accumulated Deficit (7,752,404) (7,222,639)
Treasury Stock (300,000) (300,000)
Cumulative Foreign Currency Translation Adjustment 816,002 365,738
Minority Interest (Note 3) 53,097 6,409
----------- -----------
Total Stockholders' Equity 1,619,681 1,517,308
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT) $ 6,644,571 $ 7,198,115
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For the Quarter Ended
June 30,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET SALES $ 2,699,036 $ 580,869
COST OF SALES 2,126,911 303,257
----------- -----------
GROSS PROFIT 572,125 277,612
----------- -----------
SELLING AND TECHNICAL EXPENSES
Consulting Fees -- 75,561
Technical Fees 40,587 45,252
Sales Salaries 41,066 183,461
Other Selling Expenses -- 27,186
----------- -----------
Total Selling and Technical Expenses 81,653 331,460
----------- -----------
PROFIT/LOSS FROM OPERATIONS BEFORE GENERAL AND
ADMINISTRATIVE EXPENSES 490,472 (53,848)
----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES
Management and Consulting Fees 6,979 6,644
Salaries 352,832 --
Depreciation and Amortization 295,680 164,376
Professional Fees 103,249 47,775
Travel Expenses 34,452 1,386
Employment Agency Fees 49,737 --
Rent Expenses 29,513 18,760
Insurance Expenses 9,566 --
Other Operating Expenses 151,813 46,756
----------- -----------
Total General and Administrative Expenses 1,033,821 285,697
----------- -----------
LOSS FROM OPERATIONS (543,349) (339,545)
----------- -----------
OTHER INCOME (EXPENSES)
Interest Income 80 36
Gain on Sale of Fixed Assets
Gain on Sale of Subsidiaries
Interest Expenses (21,690) (154)
Loss from Foreign Currency (6,986) --
Other Expenses 15,276 (21)
----------- -----------
Total Other Income (Expenses) (13,320) (139)
----------- -----------
INCOME/(LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST (556,669) (339,684)
INCOME TAXES -- --
----------- -----------
INCOME/(LOSS) BEFORE MINORITY INTEREST (556,669) (339,684)
----------- -----------
Extraordinary Income --
Closing Subsidiary Costs -- (1,641)
MINORITY INTEREST 26,903 --
NET INCOME / LOSS $ (529,765) $ (341,325)
=========== ===========
LOSS PER COMMON SHARE $ (0.30) $ (0.25)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Quarter Ended
June 30,
----------------------
1999 1998
-------- --------
COMPREHENSIVE INCOME (529,765) (341,325)
Net Income (Loss)
Foreign Currency Translation Adjustment 450,264 (35,632)
-------- --------
COMPREHENSIVE INCOME (LOSS) (79,501) (376,957)
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Common Stock Additional Foreign Total
----------------- Paid-In Treasury Accumulated Currency Minority Stockholders'
Shares Amount Capital Stock Deficit Adjustment Interest Equity
------ ------ ------- -------- ------- ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1999 1,711,190 $17 $8,667,783 $(7,222,639) $ 365,738 $ 6,409 $1,517,308
Net Loss - For the Three Months
Ended June 30, 1999 -- -- -- (529,765) -- -- (529,765)
Issuance of Common Stock 67,593 -- 135,186 -- -- -- 135,186
Minority Interest -- -- -- -- -- 46,688 46,688
Treasury Stock (300,000) -- -- -- (300,000)
Cumulative Foreign
Currency TranslationAdjustment -- -- -- -- 450,264 -- 450,264
--------- --- ---------- -------- ----------- ---------- ------- ----------
Balance at June 30, 1999 1,778,783 $17 $8,802,969 (300,000) $(7,752,404) $ 816,002 $53,907 $1,619,681
========= === ========== ======== =========== ========== ======= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the Quarter Ended
June 30,
---------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(529,765) $(341,325)
Adjustments to Reconcile Net Loss to
Net Cash Used by Operating Activities
Depreciation and Amortization 295,680 164,376
Changes in Certain Assets and Liabilities:
Increase/Decrease in Accounts Receivable (71,959) (112,477)
Increase in Other Receivables 14,303 32,635
Increase in Prepaid Expenses (69,588) (131,438)
Increase in Inventory 102,775 --
Increase in Organization Costs -- 6,711
Increase in Other Assets 67,620 6,852
Change in Due From Affiliate -- --
Due To/From Related Party -- 5,586
Increase in Bank Overdraft 152,047 --
Increase in Accounts Payable and Accrued Expenses (762,024) 185,224
--------- ---------
Total Cash Used by Operating Activities (952,958) (183,856)
--------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of Fixed Assets, Net (43,254) (198,886)
Investment for Subsidiary Establishment -- --
Sale of Subsidiaries -- --
Increase in Goodwill -- (9,745)
Increase in Customer Lists -- --
--------- ---------
Total Cash Provided (Used) by Investing Activities (43,254) (208,631)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Loans 30,283 --
Increase in Bank Overdraft 152,047 --
Decrease in Capital Lease Payable (61,707) 28,095
Contribution to Capital 135,186 160,000
Preceeds from Loan -- --
Offering Costs -- --
Minority Interest 46,668 --
--------- ---------
Total Cash Provided By Financing Activities 150,450 188,095
--------- ---------
EFFECTS OF EXCHANGE RATE
CHANGES ON CASH 157,561 (35,632)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (688,201) (240,024)
CASH AND CASH EQUIVALENTS - BEGINNING 739,218 363,169
--------- ---------
CASH AND CASH EQUIVALENTS - ENDING $ 51,017 $ 123,145
========= =========
CASH PAID DURING THE PERIOD FOR:
Interest Expenses $ (21,690) $ (154)
========= =========
Income Taxes $ -- $ --
========= =========
</TABLE>
5
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and
Regulation S-B. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been included.
For further information, refer to the consolidated financial statements
and footnotes included in Form 10-KSB for the year ended March 31, 1999.
The accompanying consolidated financial statements include the accounts of
UTG Communications International, Inc. (the "Company"), a holding company
organized under the laws of the state of Delaware on April 17, 1996 and
its majority-owned and/or controlled subsidiaries:
6
<PAGE>
1) Starfon Telecom Services AG, ("Starfon"), formerly UTG Communications
Holding AG, incorporated under the laws of Switzerland on February 29,
1996 (owned 100% by the Company);
2) UTG Communications Belgium N.V., ("UTG Belgium"), incorporated under
the laws of Belgium on June 27, 1996 (owned 100% by Starfon);
3) Multicom N.V., ("Multicom"), incorporated under the laws of Belgium on
April 2, 1997 (owned 100% by UTG Belgium);
4) United Telecom GmbH, ("UTG GmbH"), incorporated under the laws of
Switzerland on May 28, 1996 (owned 100% by Starfon);
5) Telelines International SA, ("Telelines"), incorporated under the laws
of Panama on July 28, 1997 (owned 100% by the Company).
6) Starpoint Card Services Ltd ("Starpoint"), incorporated under the laws
of Great Britain on November 18, 1998, (owned 51% by Telelines).
7) Star Global Ltd, ("StarGlobal"), incorporated under the laws of Jersey,
Great Britain on November 24, 1998, (owned 100% by Telelines).
All significant intercompany accounts and transactions have been
eliminated in consolidation.
See also Management's Discussion and Analysis of Financial Condition
and Results of Operation for additional information regarding
organizational changes of the Company.
b) Line of Business
The Company is a switch-based provider of private voice, fax and
data management telecommunication services throughout Europe.
c) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
d) Organization Costs
Organization costs consist of legal and other administrative costs
incurred relating to the formation of the Company. These costs have
been capitalized and will be amortized over a period of five years.
e) Goodwill
Goodwill represents the cost in excess of the fair market value of
the acquisitions of certain subsidiaries. Amortization is being
computed using the straight-line method over a period of forty
years.
f) Customer Lists
Customer lists present the costs of the acquisition of subscriber
names at their fair market value. Amortization is being computed
using the straight-line method over a period of three years.
g) Property and Equipment
7
<PAGE>
Property and equipment is stated at cost. Depreciation is computed
using the straight-line method based upon the estimated useful lives
of the various classes of assets. Maintenance and repairs are
charged to expense as incurred.
h) Bank Overdraft
The Company maintains overdraft facilities at certain banks. Such
overdraft positions are included in current liabilities.
i) Translation of Foreign Currency
The Company translates the foreign currency financial statements of
its Swiss, Belgium and United Kingdom subsidiaries in accordance
with the requirements of Statement of Financial Accounting Standards
No. 52, "Foreign Currency Translation." Assets and liabilities are
translated at current exchange rates, and related revenues and
expenses are translated at average exchange rates in effect during
the period. Resulting translation adjustments are recorded as a
separate component in stockholders' equity. Foreign currency
transaction gains and losses are included in the statement of
operations.
j) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
k) Loss Per Share
Loss per share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the
period. Weighted average common shares outstanding were 1,745,491
and 1,343,190 for the quarters ended June 30, 1999 and June 30,
1998, respectively. Average common equivalent shares outstanding
have not been included, as the computation would not be dilutive.
l) Income Taxes
Income taxes are provided for based on the liability method of
accounting pursuant to Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes." The liability method
requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences
between the reported amount of assets and liabilities and their tax
basis.
m) Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximates fair
value due to the relatively short maturity of these instruments.
n) Stock-Based Compensation
8
<PAGE>
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", encourages, but does not require
companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue
to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
Interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock.
o) Long-Lived Assets
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", was issued (SFAS No. 121).
SFAS No.121 requires that long-lived assets and certain identifiable
intangibles to be held and used or disposed of by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. The Company has adopted this statement and determined
that no impairment loss need be recognized for applicable assets of
continuing operations.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
June 30, 1999 March 31, 1999
Telecommunications Equipment $ 4,781,582 $ 4,738,328
Computer Equipment & Software
Furniture and Fixtures
Less: Accumulated Depreciation (2,451,528) (2,158,682)
----------- -----------
$ 2,330,054 $ 2,579,656
=========== ===========
Depreciation expense for the quarter ended June 30, 1999 and 1998 was $295,680
and $164,376, respectively.
NOTE 3 - MINORITY INTEREST
At June 30, 1999 there was a minority interest in the Company's
subsidiary, Starpoint Card Sales Ltd., of 49% of the total stockholders'
equity of $53,097.
NOTE 4 - FOREIGN OPERATIONS
As described in Note 1b, substantially all of the Company's
operations are located throughout Europe and the majority of its identifiable
assets are located in Switzerland, Belgium and the United Kingdom.
9
<PAGE>
NOTE 5 - INCOME TAXES
The components of the provision for income taxes are as follows:
Current Tax Expense
U.S. Federal $ --
State and Local --
----------
Total Current --
----------
Deferred Tax Expense
U.S. Federal $ --
State and Local --
----------
Total Deferred --
----------
Total Tax Provision from Continuing
Operations $ --
==========
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
Federal Income Tax Rate ( 34.0)%
Deferred Tax Charge (Credit) --
Effect on Valuation Allowance 34.0%
State Income Tax, Net of Federal Benefit --
----------
Effective Income Tax Rate 0.0%
==========
At June 30, 1999, the Company had net carryforward losses of
approximately $7,752,404. Because of the current uncertainty of realizing
the benefit of the tax carryforward, a valuation allowance equal to the
tax benefit for deferred taxes has been established. The full realization
of the tax benefit associated with the carryforward depends predominantly
upon the Company's ability to generate taxable income during the
carryforward period.
Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and amounts used for income
tax purposes. Significant components of the Company's deferred tax assets
and liabilities at June 30, 1999 are as follows:
Deferred Tax Assets
Loss Carryforwards $ 7,752,404
Less: Valuation Allowance (7,752,404
-----------
Net Deferred Tax Assets $ --
===========
Net operating loss carryforwards expire starting in 2007 through
2011. Per year availability is subject to change of ownership limitations
under Internal Revenue Code Section 382.
10
<PAGE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
a) The Company's future minimum annual aggregate rental
payments required under operating and capital leases that have
initial or remaining non-cancelable lease terms in excess of one
year are as follows as of June 30, 1999:
Operating Capital
Leases Leases
2000 $ 132,750 $ 240,240
2001 60,000 240,240
2002 60,000 213,230
2003 60,000 127,230
2004 60,000 3,439
2005 and thereafter --
---------
Total Minimum Lease Payments $ 372,750 $ 817,501
Less: Amounts Representing Interest (151,500)
Present Value of Future Minimum
Lease Payments 666,001
Less: Current Maturities (252,500)
Total $ 413,501
=========
Rent expense under operating leases for the the quarter ended June 30, 1999 was
$29,513.
b) The Company is a party to claims and lawsuits arising in
the normal course of operations. Management is of the opinion that these
claims and lawsuits will not have a material effect on the financial
position of the Company. The Company believes these claims and lawsuits
should not exceed $50,000 and accordingly has established a reserve
included in accounts payable and accrued expenses.
NOTE 7 - STOCK OPTIONS
Effective June 30, 1999, the Company issued 67,593 shares of Common
Stock to an investor for a purchase price of $2.00 per share. For each share of
Common Stock purchased, the investor received three warrants, each to purchase
one share of Common Stock at $2.00, $3.00 and $4.50, respectively. The warrants
will expire after five years from date of issuance.
NOTE 8 - SUBSEQUENT EVENTS
The Company has completed its development of a credit card based phone service
for the Swiss market. The Company has launched this product together with the
Manor Group, a large department store chain in Switzerland on July 19, 1999.
This product allows holders of credit cards issued by Manor to use the credit
card as a post-paid phonecard and to benefit from discounts for international
and national long distance telecommunication services.
The Company has entered into a Stock Purchase Agreement dated as of August 9,
1999 with Ueli Ernst, the Company's Chairman and Chief Executive Officer, to
aquire a majority of the capital stock of Music Line AG, a Swiss corporation
("Music Line"), in consideration for 1,750,000 shares of the Company's common
stock, the assignment to Mr. Ernst of a receivables account in the principal
amount of approximately $790,000, and, if Music Line's net profits reach at
least $300,000 during the fiscal year ending March 31, 2000 or March 31, 2001,
an additional 350,000 shares of the Company's common stock. Consummation of this
agreement is subject to the approval of the holders of two-thirds of the
Company's shares of common stock not held by Mr. Ernst or persons affiliated or
associated with him. If the transaction is approved by the requisite number of
the Company's shareholders, it is anticipated that Music Line, a music CD and
videotape marketing company with a significant distribution in Europe, will
become the Company's e-commerce service provider.
On August 12, 1999, the Company issued an aggregate of 179,130 shares of common
stock and warrants to purchase an aggregate of 1,103,625 shares of common stock
at a purchase price of $15.00 per share expiring in 2002 to certain stockholders
of record on March 20, 1998. This issuance was made in connection with the
Company's 13:1 reverse stock split effected on March 23, 1998. In connection
with the reverse stock split, the Board of Directors of the Company authorized
the issuance of one warrant for each share of Company common stock held by each
stockholder of record on March 20, 1998. In addition, the Board of Directors of
the Company authorized the distribution to stockholders who continuously held
shares of Company common stock from March 20, 1998 through September 21, 1998 a
number of shares of Company common stock equal to not more than 20% of the
amount of shares of Company common stock continuously held by stockholders
during that time period to compensate such stockholders for a decrease in the
market value of the Company's shares of Common Stock following the reverse stock
split.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis relates to the financial condition and
results of operations of the Company for the quarter ended June 30, 1999. This
information should be read in conjunction with the Company's consolidated
11
<PAGE>
financial statements appearing elsewhere herein. All references herein to the
Company shall, unless the context otherwise requires, be deemed to include UTG
Communications International, Inc. and its subsidiaries.
General
The Company commenced operations in April 1996 and is a holding company for a
number of operating subsidiaries organized at various times since February 1996.
Through its operating subsidiaries, the Company is operating in Switzerland,
Belgium and the United Kingdom.
The Company has received an aggregate of approximately $8,802,990 in equity
capital. Since inception, the Company's operations have been focused on
establishing and enhancing its switch-based European communications network and
expanding its European customer base.
The Company's revenue is generated from long distance telecom services provided
to retail corporate customers and wholesale customers. The Company's wholesale
customers comprise international telecom carriers and national telecoms, and the
Company's retail customers comprise medium-sized companies located in
Switzerland, Belgium and the United Kingdom. In Switzerland, the Company has
entered into an interconnection agreement with Swisscom, the national Swiss
telecommunications carrier. The Company intends to enter into interconnection
agreements with telecommunications carriers in the United Kingdom, Belgium and
other European countries into which the Company may expand in the future. The
interconnection with national telecommunication carriers, which became possible
as a result of the deregulation of the European telecommunications markets in
January 1998, enables the Company to offer both domestic and international
telecommunications services to its customers and eliminates the need to route
all outgoing calls through London. Management believes that entering into
interconnection agreements with national telecommunications carriers will result
in an increase in traffic volume for the Company and will allow the Company to
reduce fixed overhead costs considerably.
The Company holds an International Simple Resale ("ISR") license in the United
Kingdom and, during the fiscal year ended March 31, 1999, was granted an
International Facility License ("IFL") by the United Kingdom. The ISR license
permits the Company to engage in the resale of international telecom services in
the United Kingdom and the IFL license enables the Company to own facilities for
international services such as circuits. By operating its own facilities, the
Company can avoid the costs associated with leased line charges and,
accordingly, reduce its operating expenses.
During the fiscal year ended March 31, 1999, the Company entered into a joint
venture agreement with eight individual distributors for the purpose of
establishing a distribution network for telecommunication cards in the United
Kingdom. The Company and its eight distribution partners formed StarPoint Card
Services Ltd, located in London with the Company holding 51% of StarPoint's
equity and the Company's partners holding the remaining 49%. In addition, during
the fiscal year ended March 31, 1999, the Company formed StarGlobal Ltd., a
wholly-owned indirect subsidiary organized under the laws of the United Kingdom,
with the intent to resume the Company's wholesale and carrier-to-carrier
business. StarGlobal's new equipment can handle traffic worth USD 25 million per
year with a gross margin of about 5 to 8% depending on the destination.
The Company has completed its development of a credit card based phone service
for the Swiss market. This product allows holders to use the credit card as a
post-paid phonecard and to benefit from discounts for international and national
long distance communication. The Company has launched this product and program
with the Manor group, a large deparment store chain in Switzerland.
The Company has entered into a Stock Purchase Agreement dated as of August 9,
1999 with Ueli Ernst, the Company's Chairman and Chief Executive Officer, to
aquire a majority of the capital stock of Music Line AG, a Swiss corporation
("Music Line"), in consideration for 1,750,000 shares of the Company's common
stock, the assignment to Mr. Ernst of a receivables account in the principal
amount of approximately $790,000, and, an additional 350,000 shares of the
Company's common stock if Music Line's net profits reach at least $300,000
during the fiscal year ending March 31, 2000 or March 31, 2001. Consummation of
this agreement is subject to the approval of the holders of two-thirds of the
Company's shares of common stock not held by Mr. Ernst or persons affiliated or
associated with him. If the transaction is approved by the requisite number of
the Company's shareholers, it is anticipated that Music Line, a music CD and
videotape marketing company with an extensive distribution in Europe, will
become the Company's e-commerce service provider.
In order to be able to continue to provide its customers with state of the art
communication services and to benefit from the opportunities created by the
Internet, the Company has developed an Internet strategy. The Company intends to
become an Internet services provider (ISP) to take advantage of the efficiancies
created by its existing switches and its access to the Internet backbone. The
Company intends to offer these services (and related consulting and support
servcies), to retail and other Internet services providers in Europe. The
Company also intends to diversify into e-commerce and to operate Internet
shopping platforms for its telecommnications services and other retail
industries, including music, media and software distribution.
The Company deems an expansion into Internet-related services, such as
e-commerce, with its high growth potential, a competive necessitiy in the
markets in which it currently operates. The Company believes that establishing
an e-commerce business would synergistically supplement its conventional
telecommnications services and its newly developed Internet services.
The Company is currently exploring several appropriate opportunities in its core
markets and in Germany as well as in other countries. The Company will carefully
evaluate expansion of its operation into other European countries as and when
business, market and regulatory conditions permit.
There can be no assurance that any of the Company's new activities commenced
during the quarter ended June 30, 1999 or any of its efforts to expand its
business in its core markets or any other countries will result in successful
commercial operations.
Financial Condition
At June 30, 1999, the, Company had a negative working capital of $1,614,627 and
an accumulated deficit of $7,752,404, as compared to a negative working capital
of $1,751,943 and an accumulated deficit of $ 7,222,636, respectively, at March
31 1999.
Effective June 30, 1999, the Company exercised a call option under a
subscription agreement, dated January 17, 1998 and sold to an accredited and
sophisticated investor 67,593 shares of common stock at a price of $ 2.00 and,
for no additional consideration, warrants to purchase an additional 67,593
shares of common stock at $3.00, $4.00 or $4.50 per share. As of June 30, 1999,
the Company had received $135,187 for such shares and warrants for which
Interfinance Investment Ltd. is entitled to a commission of $4,056, which
commission has not yet been paid.
Based upon the Company's plan of operation, the Company estimates that its
existing financing resources (including the available resources pursuant to the
call right under the above-mentioned subscription agreement), together with
funds generated from operations, will be sufficient to fund the Company's
current working capital requirements. However, there can be no assurance in that
regard.
An expansion of the Company's business through the acquisition of other
telecommunication providers or companies in other industries, the planned
expansion of the Company's business into the Internet or significant investments
in infrastructure and marketing would require additional debt or equity
financing from third parties. There can be no assurance that any such financing
will be timely available. Accordingly, the Company may have to forego
opportunities for expanding its business.
The Company believes that its network has adequate switching capacity to serve
its projected volume of traffic through the end of calender 1999. The Company's
network is designed to take advantage of deregulation across Europe. It can
perform distributive least-cost routing by using its hub sites in European
cities to direct traffic to carriers within a country, across the its network to
another country for termination, or back to the switches in Zurich, Belgium and
London for routing to the desired destination. The selected path is based on the
least cost.
13
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This provides a large amount of flexibility to the Company and ensures the
quality of the connections and lowest cost. With this distributive architecture,
the capacity of the Company`s switches is not expected to be a limiting factor
for the expansion of the Company's business. The opening of the European
telecommunications markets is expected to allow the Company to take full
advantage of its network flexibility.
Accounts payable and accrued expenses amounted to approximately $3,073,735 at
June 30, 1999 compared to $3,835,759 at March 31, 1999.
Results of operations
During the quarter ended June 30, 1999, the Company could achieve the expected
gross margins in all of its business segments. Sales of the Company's wholesale
division have not met mangements expectations.
Quarter Ended
June 30,
1999 1998
---- ----
Sales $2,699,036 $ 580,869
During the quarter ended June 30, 1999, the Company recorded net sales of
$2,699,036, compared to $580,869 during the quarter ended June 30, 1998. This
increase of 464% in net sales is the result of increased revenue in Switzerland,
Belgium and the adddition of the Company's distribution business in the United
Kingdom. Management expects an additional increase in the Company's net sales as
a result of the Company's new postpaid calling card services in Switzerland and
the addition of Music Line.
Quarter Ended June 30,
1999 1998
---- ----
Gross Profit $572,125 $277,612
Gross profit for the three months ended June 30, 1999 increased to $572,125 (or
21.1% of the Company's sales) as compared to a gross profit of $277,612 (or
47.8% of the Company's sales) during the same period in 1998. The absolute
increase of the Company's gross profit resulted from the increase of the
Company's net sales. The relative decrease of the Company's gross profit is the
result of the fact that a significant part of the Company's sales were generated
in the Company's distribution business in the United Kingdom which has a
relatively low margin.
The Company's revenue has been generated primarily from long distance and
international telecom services provided to retail corporate customers in
Switzerland and Belgium and its wholesale customers, as well as its prepaid card
distribution in the United Kingdom. As the Company's retail and wholesale
customer base grows and the Company's own prepaid and postpaid card services as
well as Internet and e-commerce services are added to the Company's range of
products and services, management believes its gross margin will increase in
line with the increase in sales from these products and services.
Quarter Ended June 30,
1999 1998
---- ----
Cost of Sales $2,126,911 $303,257
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Cost of sales was $2,126,911 for the quarter ended June 30, 1999, as compared to
$303,257 for the same period in 1998, of which approximately 85% was
attributable to carrier charges and the balance was attributable to costs for
leased lines and related activities. Carrier charges and transport (leased
lines) charges per unit are ultimately dependent on the Company's ability to
generate high volumes of traffic. Management expects that the relative amount of
cost of sales will decrease with the introduction of its new calling card
services in Switzerland, Belgium and the United Kingdom.
Quarter Ended June 30
1999 1998
---- ----
Selling and
Technical Expenses $81,653 $331,460
Selling and technical expenses were $81,653 for the quarter ended June 30, 1999
compared to $331,460 for the corresponding period in 1998. In addition, during
the fiscal year ended March 31, 1999, the Company began to employ certain
persons who previously had performed technical and sales services as independent
contractors to the Company. This shift resulted in an additional decrease in
technical and sales-related expenses paid to third parties.
Quarter Ended June 30,
1999 1998
----- -----
General and
Administrative Expenses $1,033,821 $285,697
General and administrative expenses were $1,033,821 for the quarter ended June
30, 1999 compared to $285,697 for the corresponding period in 1998. This
increase is due to the increase in the Company's activities, in particular the
addition of new employees (including individuals who previously performed
technical and sales services as independent contractors), increased depreciation
and amortization expenses related to newly acquired equipment and increased
travel and other administrative expenses.
Quarter Ended June 30,
1999 1998
---- ----
Net Income/(Loss) ($529,765) $(341,325)
In the quarter ended June 30, 1999, the Company realized net sales of $2,699,036
and a net loss of $529,765 compared to net sales of $580,869 and a net loss of
$341,325 during the quarter ended June 30, 1998. The increased loss in absolute
terms was due to higher operating expenses resulting from the increase in the
Company's activities. The relative decrease in the Company's net loss resulted
from the increase in sales and the relative decrease in operating expenses.
15
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As a result of the addition of its new postpaid card services and the completion
of the reorganization of the Company's wholesale business, management expects an
increase in revenues in the quarter ending September 30, 1999, although no
assurances can be given in this regard.
Year 2000
The Company is in the process of reviewing its computer systems to insure it
will not suffer catastrophic failures in connection with the change in the
calendar on January 1, 2000, but has not expended material amounts in this
respect. The Company has upgraded most of its computer software and has received
confirmation from the respective software developers that such software is year
2000 compliant. The Company continues to upgrade its computer systems where
necessary and expects that all of the Company's significant computer systems
will be year 2000 compliant by August 1999. The Company currently believes that
the cost of year 2000-related corrections will not have a material effect on the
Company's business, operations or financial condition. The Company may also be
exposed in the event any of the carriers with whom the Company currently (or in
the future) is contracting for network access experiences a catastrophic failure
in connection with the change of calendar on January 1, 2000. While the Company
is attempting to obtain assurances from its carriers in this respect, there can
be no assurance that it will be successful in its attempts or that such
assurances, if obtained, will provide the Company with sufficient protection in
the event one of its carriers experiences a catastrophic year 2000 problem.
FORWARD-LOOKING STATEMENTS
Investment in the Company's securities involves a high degree of risk. In
evaluating an investment in the Company's securities, Company stockholders and
prospective investors should carefully consider the risk factors discussed in
the Company's Registration Statement on Form S-3/A, Registration No. 333-8305,
which was declared effective on June 11, 1999, the information detailed in the
Company's Form 10-KSB for the fiscal year ended March 31, 1999 and this Form
10-QSB under Item 2 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations," as well as information contained in the
Company's other filings with the Securities and Exchange Commission.
Certain statements in this Report under Item 1 and Item 6 regarding the
Company's estimates, present view of future circumstances or events and
statements containing words such as "estimates," "anticipates," "intends" and
"expects" or words of similar import, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including, without limitation, statements regarding the Company's ability to
meet future working capital requirements and future cash requirements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. Forward-looking statements speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information future events
or otherwise. Risk factors include, among others, delays in expanding the
Company's network; need for additional financing; failure to receive or delays
in receiving regulatory approval; general economic and business conditions;
industry capacity; industry trends; demographic changes; competition; material
16
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costs and availability; the loss of any significant customers; changes in
business strategy or development plans; quality of management; availability,
terms and deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; changes in, or the failure to comply with,
government regulations including changes in industry regulations; and other
factors referenced in this Report.
Part II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No changes have occurred in the status of the legal proceedings previously
disclosed by the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective June 30, 1999, the Company exercised a call option under a
subscription agreement, dated January 16, 1998 and sold to an accredited and
sophisticated investor 67,5930 shares of common stock at a price of $2.00 per
share and, for no additional consideration, warrants to purchase an additional
67,593 shares of common stock at $3.00, $4.00 or $4.50 per share. As of June 30,
1999 the Company had received an amount equal to $135,186 for such shares and
warrants. In connection with this issuance, Interfinance Investment Ltd., an
affiliate of the Company controlled by the Company's Chief Executive Officer,
acted as placement agent and is entitled to a placement fee of 5%, or $6,750, of
the gross proceeds to the Company, which fee has not yet been paid. Under the
terms of the subscription agreement, as amended, the Company has the right,
subject to certain conditions, to request the subscriber to purchase up to an
additional 87,407 shares of Common Stock upon the same terms and purchase price
on or prior to June 30, 1999. These transactions were exempt from the
registration requirements of the Securities Act of 1933 by reason of the
exemption provided by Section 4(2) thereunder and on the basis of certain
representations provided by the subscriber including that it is an "accredited
investor."
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
The Company has completed its development of a credit card based phone service
for the Swiss market. The Company has launched this product together with the
Manor group, a large deparment store chain in Switzerland on July 19, 1999. This
product allows holders of credit cards issued by Manor to use the credit card as
a post-paid phonecard and to benefit from discounts for international and
national long distance telecommunication services.
The Company has entered into a Stock Purchase Agreement dated as of August 9,
1999 with Ueli Ernst, the Company's Chairman and Chief Executive Officer, to
aquire a majority of the capital stock of Music Line AG, a Swiss corporation
("Music Line"), in consideration for 1,750,000 shares of the Company's common
stock, the assignment to Mr. Ernst of a receivables account in the principal
amount of approximately $790,000, and, if Music Line's net profits reach at
least $300,000 during the fiscal year ending March 31, 2000 or March 31, 2001,
an additional 350,000 shares of the Company's common stock. Consummation of this
agreement is subject to the approval of the holders of two-thirds of the
Company's shares of common stock not held by Mr. Ernst or persons affiliated or
associated with him. If the transaction is approved by the requisite number of
the Company's shareholders, it is anticipated that Music Line, a music CD and
videotape marketing company with a significant distribution in Europe, will
become the Company's e-commerce service provider.
Part II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
17
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(a) Exhibits
10.36 Agreement dated June 30, 1999 between Medfield and the
Company.
10.37 Stock Purchase Agreement dated as of August 9, 1999
between the Company and Ulrich Ernst.
27 Financial Data Schedule.
(b) Reports on Form 8-K
During the quarter ended June 30, 1999, the Company filed a Current Report
on Form 8-K on June 28, 1999 regarding a change in the Company's principal
executive office address and telephone number.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UTG COMMUNICATIONS INTERNATIONAL, INC.
Date: August 17, 1999 By: /s/ Ueli Ernst
----------------------------------------
Ueli Ernst, Chairman and CEO
(Principal Executive Officer)
EXHIBIT INDEX
Exhibit No. Description
10.36 Agreement dated June 30, 1999 between
Medfield and the Company.
10.37 Stock Purchase Agreement dated as of August 9,
1999 between the Company and Ulrich Ernst.
27 Financial Data Schedule.
18
EXHIBIT 10.36
CONTRACT
between
Medfield Investment S.A.
Panama City, Panama
as Investor
and
UTG Communications International, Inc.
17 Cattano Avenue, Morristown, New Jersey 07960, USA
as Seller
Referring to the Subscription Agreement dated January 16, 1998, both parties
hereby agree and confirm to extend the terms of this agreement so that the
Investor and the Seller can call the options until July 31, 1999 and that the
Investor can buy the shares until that time.
All other clauses and conditions in the Agreement remain the same.
The Seller The Investor
UTG Communications International, Inc. Medfield Investment S.A.
Date: June 30, 1999 Date: June 30, 1999
Signature: /s/ Ueli Ernst Signature: /s/ H. Zuercher
EXHIBIT 10.37
August 9, 1999
STOCK PURCHASE AGREEMENT
THIS AGREEMENT, made and entered into as of this 9th day of August,
1999, by and between UTG Communications International, Inc., Limmattalstr. 10,
CH-8954 Geroldswil, Switzerland, a Delaware corporation (the "Company"), and
Ulrich Ernst, P.O. Box 13, CH-8954 Geroldswil, (the "Seller");
W I T N E S S E T H :
WHEREAS, the Seller owns 51 shares of common stock, CHF 1000 par value
(the "Common Stock"), of Music Line AG, a Swiss corporation ("Music Line");
WHEREAS, Music Line is engaged in the distribution of music CDs and
videotapes in Europe through various sales channels;
WHEREAS, the Seller desires to sell to the Company, and the Company
desires to buy from the Seller, 51 shares Common Stock of Music Line
representing 51% of the issued and outstanding shares of Common Stock of Music
Line;
WHEREAS, certain capitalized terms used herein shall have the
meaning given to them in Article X;
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants and agreements contained herein, and upon the terms and
subject to the conditions hereinafter set forth, the parties hereby agree as
follows:
ARTICLE I
TERMS OF PURCHASE AND SALE
1.1 Purchase and Sale of Shares of Music Line. Subject to the terms
and conditions set forth herein, the Seller shall sell to the Company, and the
Company shall purchase from the Seller, 51 (fifty-one) shares of Common Stock
for USD 6 million (the "Purchase Price") consisting of a fixed amount (the
"Fixed Amount") and a bonus amount (the "Bonus Amount") to be payable on the
dates and in the manner set forth in Section 1.3 below.
<PAGE>
1.2 The Closing. Subject to the satisfaction or waiver of all
conditions set forth in Articles VI and VII hereof, the Seller will transfer 51
(fifty-one) shares of Common Stock (the "Shares") to the Company, and the
Company will pay to the Seller the Purchase Price in the manner set forth in
Section 1.3(a) (the "Closing"). The Closing shall take place on the first
business day following satisfactory waiver of all of the Closing conditions set
forth in Articles VI and VII (the "Closing Date") at the offices of the Company
in Geroldswil, Switzerland at 1000 A.M. or at such other place and time as the
parties may mutually agree. At the Closing, the parties hereto shall deliver
such consideration set forth below and duly executed copies of this Agreement.
The Closing shall be deemed to have taken place at 5:00 P.M. on the Closing
Date.
1.3 Payment of Purchase Price and Transfer of Shares.
(a) The Company shall pay to the Seller the Fixed Amount of the
Purchase Price as follows:
(i) At the Closing, the Company shall (A) assign to the Seller all of its
right, title and interest in that certain accounts receivables in the
principal amount of USD 790,000; and (B) issue to the Seller 1,750,000
shares of its common stock, USD 0.0001 par value (the "Company Common
Stock").
(ii) If Music Line and its Subsidiaries shall have reached a net profit of
at least USD 300,000 during the fiscal year ended March 31, 2000 or the
fiscal year ended March 31, 2001, the Company shall pay to the Seller the
Bonus Amount of the Purchase Price by issuing to the Seller an additional
350,000 shares of Company Common Stock.
(b) At the Closing, the Company shall assign to the Seller the
receivables set forth in Section 1.3(a)(i)(A) and transfer to the Seller one or
more stock certificates representing 1,750,000 shares of Company Common Stock.
Upon confirmation that the Fixed Portion of the Purchase Price has been fully
paid in the manner set forth above, the Shares and certificate(s) therefor shall
be promptly released to the Company.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller hereby represents and warrants to the Company as follows
as of the date hereof and as of the Closing Date:
2.1 Corporate Existence of Music Line, Etc. Music Line is a
corporation duly incorporated, validly existing and in good standing under the
laws of Switzerland and has all requisite corporate power and authority to own
or lease its assets and to operate its business as presently conducted.
2
<PAGE>
ss.
2.2 Valid and Binding Obligation of Seller. This Agreement has been
duly executed and delivered on behalf of the Seller, constitutes the valid and
binding obligation of the Seller and is enforceable against the Seller in
accordance with its terms, subject to general equitable principles and except as
the enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws of general application relating
to creditors' rights.
2.3 Capitalization. The share capital of Music Line consists of CHF
100,00, divided into 100 shares of Common Stock, CHF 1000 par value. All
outstanding shares of Common Stock have been duly authorized and are validly
issued, fully paid and non-assessable without violating any preemptive rights.
Except as contemplated by this Agreement, there is not outstanding any security,
option, warrant, right, call, subscription, agreement, commitment or
understanding of any nature whatsoever, fixed or contingent, that directly or
indirectly (i) calls for the issuance, sale, pledge or other disposition of any
shares of Common Stock or of any other shares of capital of Music Line or any
Subsidiary of Music Line or any securities convertible into, or other rights to
acquire, any such shares of Common Stock or other capital stock of Music Line or
any Subsidiary of Music Line or (ii) obligates Music Line or any Subsidiary of
Music Line to grant, offer or enter into any of the foregoing or (iii) relates
to the voting or control of such shares of Common Stock, capital stock,
securities or rights, or options with respect thereto.
2.4 Consents and Approvals. No consent, approval or authorization
of, exemption by, or filing with, any governmental or regulatory authority is
required in connection with the execution, delivery and performance by the
Seller of this Agreement and the consummation by the Seller of the transactions
contemplated hereby.
2.5 No Conflicts. The execution, delivery and performance by the
Seller of this Agreement to which the Seller is a party and the consummation by
the Seller of the transactions contemplated hereby do not conflict with, or
constitute or result in a breach, default or violation of (with or without the
giving of notice or the passage of time) any of the terms, provisions or
conditions of, (i) the Articles of Incorporation, By-Laws or similar charter
document of Music Line or any Subsidiary of Music Line; (ii) any law, ordinance,
regulation or rule applicable to Music Line or any Subsidiary of Music Line;
(iii) any order, judgment, injunction or other decree by which Music Line or any
Subsidiary of Music Line or any of their respective assets or properties is
bound; or (iv) any written or oral contract, agreement, or commitment to which
Music Line or any Subsidiary of Music Line is a party or by which they or any of
their respective assets or properties is bound; nor will such execution,
delivery and performance result in the creation of any material Lien upon any
properties, assets or rights of Music Line or any Subsidiary of Music Line.
2.6 Subsidiaries. Except as set forth in Disclosure Schedule 2.6,
Music Line does not, and at the Closing will not, own any equity ownership
interest, directly or indirectly, in any person, corporation or other entity.
The entities so set forth in
3
<PAGE>
Disclosure Schedule 2.6, are collectively referred to as the "Subsidiaries" and
individually as a "Subsidiary." At the Closing, Music Line will own, either
directly or indirectly through one or more Subsidiaries, the shares of capital
stock of the Subsidiaries free and clear of any Lien (other than Permitted
Liens). At the Closing, all of the issued and outstanding shares of capital
stock of the Subsidiaries of Music Line will be validly issued, fully paid and
non-assessable, and there will not be outstanding any securities convertible
into, exchangeable for, or carrying the right to acquire, equity securities of
any of the Subsidiaries of Music Line, or subscriptions, warrants, options,
rights or other arrangements or commitments obligating any Subsidiary of Music
Line to issue or dispose of any of its equity securities or any ownership
interest therein.
2.7 Conduct of Business. Since March 31, 1999, there have not
been any adverse events or developments which, individually or together with
other such events, could reasonably be expected to have a material adverse
effect on the Business or Condition of Music Line or of any Subsidiary of Music
Line. In addition, without limiting the foregoing, since March 31, 1999, neither
Music Line nor any Subsidiary of Music Line:
(a) has (i) declared, set aside or paid any dividend or other
distribution in respect of the capital stock of Music Line or any Subsidiary of
Music Line or (ii) directly or indirectly redeemed, purchased or otherwise
acquired any such capital stock or other equity interests;
(b) authorized, issued, sold or otherwise disposed of, or granted
any option or covered security with respect to any shares of capital stock or
other equity interests of Music Line or any Subsidiary of Music Line, or
modified or amended any right of any holder of any outstanding shares of capital
stock or other equity interests of Music Line or any Subsidiary of Music Line or
option or covered security with respect thereto;
(c) (i) increased the salary, wages or other compensation
(including, without limitation, any bonuses, commissions and any other payments)
of any officer, employee or consultant of Music Line or any Subsidiary of Music
Line whose annual salary, wages and such other compensation is, or after giving
effect to such change would be, in the aggregate, $100,000 or more per annum;
(ii) established or modified (A) targets, goals, pools or similar provisions
under any benefit plan, employment contract or other employee compensation
arrangement or (B) salary ranges, increase guidelines or similar provisions in
respect of any benefit plan, employment contract or other employee compensation
arrangement; or (iii) adopted, entered into, amended, modified or terminated (in
whole or in part) any benefit plan;
(d) (i) incurred any debt, (ii) made or agreed to make any loans to
any Person or (iii) made or agreed to make any voluntary purchase, cancellation,
prepayment
4
<PAGE>
or complete or partial discharge in advance of a scheduled payment date with
respect to, or waiver of any right of Music Line or any Subsidiary of Music Line
under, any debt of or owing to Music Line or any Subsidiary of Music Line;
(e) suffered any physical damage, destruction or other casualty loss
(whether or not covered by insurance) adversely affecting any of the real or
personal property or equipment of the material assets of Music Line or any
Subsidiary of Music Line;
(f) failed to pay or satisfy when due any obligation of Music Line
or any Subsidiary of Music Line, except when the failure would not have a
material adverse effect on the Business or Condition of Music Line or any
Subsidiary of Music Line;
(g) acquired any business or assets of any Person (whether by
merger, consolidation or otherwise) or disposed or leased, or incurred a Lien
(other than a Permitted Lien) on, any assets of Music Line or any Subsidiary of
Music Line, in each case, other than acquisitions or dispositions of inventory
in the ordinary course of business of Music Line or such Subsidiary of Music
Line consistent with past practice;
(h) entered into, amended, modified, terminated (in whole or in
part) or granted a waiver under or given any consent with respect to any
Intellectual Property;
(i) commenced any new line of business or terminated or changed any
line of the business conducted by Music Line and its Subsidiaries during the
fiscal year ended on March 31, 1999;
(j) entered into any transaction with any stockholder or Affiliate
of Music Line or any Subsidiary of Music Line;
(k) made any change in the accounting methods or procedures of Music
Line or any Subsidiary of Music Line or become subject to any conditions or
event which has or could reasonably be expected to have a material adverse
effect on the Business or Condition of Music Line or any Subsidiary of Music
Line; or
(l) entered into any agreement to do any of the things described in
the preceding paragraphs, including, without limitation, with respect to any
business combination not otherwise restricted by the preceding paragraphs.
2.8 Corporate Formalities; Books and Records.
(a) Music Line and each Subsidiary of Music Line have complied in
all material respects with all corporate formalities required to be complied
with under applicable laws.
5
<PAGE>
(b) The minute books and other similar records of Music Line and
each Subsidiary of Music Line as made available to the Seller prior to the
execution of this Agreement contain a true and complete record, in all material
respects, of all action taken at all meetings and by all written consents in
lieu of meetings of directors, members, stockholders, the management committee
or boards of directors, subcommittees and committees of the boards of directors
of Music Line and each Subsidiary of Music Line.
2.9 Financial Statements. A copy of the balance sheet of Music Line
as of June 30, l998 and the nine-month period ended March 31, 1999 and the
statements of income and retained earnings and changes in financial position of
Music Line for the year ended June 30, 1998 and the nine-month period ended
March 31, 1999 (the "Financial Statements"), have been delivered to the Company.
Except as noted therein, the Financial Statements fairly present the
consolidated financial position of Music Line and its results of operations for
the 12-month period ended December 31, 1998, in conformity with accepted
accounting standards consistently applied for such period. Between the date of
the balance sheet and the Closing Date, Music Line shall not have suffered any
changes materially adverse to its business, financial condition or results.
2.10 Liabilities. Neither Music Line nor any Subsidiary of Music
Line has any material debts, obligations or liabilities of whatever kind or
nature, either direct or indirect, absolute or contingent, matured or unmatured,
except debts, obligations and liabilities that are fully reflected in, or
reserved against on, the Financial Statements.
2.11 Accounts and Notes Receivable. The accounts and notes
receivable reflected on the Music Line balance sheet or thereafter acquired by
Music Line or its Subsidiaries on or prior to the Closing Date arose and will
have arisen from bona fide transactions in the ordinary course of business and
will have been collected in full or be fully collectible at their face amounts
(less any applicable reserves reflected on the balance sheet or thereafter
established on a basis consistent with the reserves reflected on the balance
sheet) within 90 days after the Closing Date.
2.12 Title to Properties. (a) The Seller has good and marketable
title to the Shares, free and clear of all liens, except Permitted Liens.
(b) Music Line and its Subsidiaries have good and marketable title
to all of the assets and properties which they purport to own and which are
reflected on the balance sheet of Music Line, free and clear of all Liens,
except for Permitted Liens.
2.13 Intellectual Property. At the Closing, (a) Music Line and its
Subsidiaries own or possess adequate licenses or other valid rights to use all
United States and foreign Intellectual Property which is material to the conduct
of the business, operations or financial condition of Music Line and its
Subsidiaries; (b) to Music Line's and the Seller's knowledge, the validity of
the Intellectual Property and the title thereto of
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Music Line or its Subsidiaries have not been questioned in any litigation to
which Music Line or any of its Subsidiaries has been or is a party, nor was any
such litigation threatened or claims of third parties made to Music Line or the
Seller's knowledge; and (c) the conduct of the business of Music Line and its
Subsidiaries as conducted at the Closing does not conflict with any valid
patents, trademarks, trade names, service marks or copyrights of others. The
consummation of the transactions contemplated hereby will not result in the loss
or impairment of any of the Intellectual Property.
2.14 Contracts. Each Contract to which Music Line or its
Subsidiaries are parties or by which their respective properties are bound and
which is material to the business conducted by Music Line and its Subsidiaries
(the "Music Line Contracts") is valid, binding, and enforceable in accordance
with its terms for the periods (if any) stated therein, except to the extent
enforceability may be limited by bankruptcy, insolvency, moratorium, or other
similar laws affecting creditors' rights generally and limitations on the
availability of equitable remedies; Music Line and its Subsidiaries have
fulfilled or have taken all actions necessary to enable them to fulfill when due
all of their obligations under the Music Line Contracts, and there is not, under
any of the foregoing, any existing default or event of default by Music Line or
its Subsidiaries or any event which, with or without the giving of notice or the
passage of time, would constitute a default under any of the Music Line
Contracts.
2.15 Litigation. There is no action, proceeding or investigation in
any court or before any governmental or regulatory authority pending or
threatened in writing or orally (a) against Music Line or any of its
Subsidiaries, (b) which seeks to enjoin or obtain damages in respect of the
consummation of the transactions contemplated hereby, or (c) which renders the
Company unable to hold shares in Music Line. Neither Music Line nor any of its
Subsidiaries is subject to any outstanding order, writ, judgment or decree.
2.16 Taxes. (i) All tax returns required to be filed with respect to
Music Line and its Subsidiaries have been filed in a timely manner (taking into
account all extensions of due dates), and (ii) Music Line and its Subsidiaries
have paid, or have made sufficient provision for, or have set up adequate
reserves for the payment of, all Taxes shown as due on such returns.
2.17 Compliance with Laws. Music Line and its Subsidiaries have
complied in all material respects with all laws, statutes, rules, regulations,
judgments, decrees and orders applicable to their business.
2.18 Employee Benefits and Agreements. (a) The Disclosure Schedule
contains a list of (i) all material employment contracts between Music Line and
its Subsidiaries and each executive officer thereof and (ii) all bonus,
incentive, stock option, stock purchase, phantom stock, stock appreciation
rights, performance shares, and similar plans either currently maintained by
Music Line or its Subsidiaries and each employee pension and benefit plan which
Music Line or its Subsidiaries maintain or to which any
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of such parties contributes or is required to contribute on behalf of its
employees, directors or consultants.
(b) Music Line and its Subsidiaries are not experiencing any
significant problems with any of their employees or consultants.
2.19 Licenses and Permits. Music Line and its Subsidiaries have all
material governmental licenses and permits and other governmental authorizations
and approvals required for the conduct of their businesses as presently
conducted.
2.20 Business. Music Line and its Subsidiaries are engaged in the
business of distributing music CDs and videotapes through various channels
including Internet in Europe. Substantially all of Music Line's consolidated
revenues are generated in such business. Since inception, the business operated
by Music Line and its Subsidiaries as reflected on the Financial Statement, has
at all times been solely conducted by Music Line and its Subsidiaries.
2.21 Exemption from Registration; Restrictions on Offer and Sale of
Same or Similar Securities. Assuming the representations and warranties of the
Company set forth in Section 3.5 are true and correct in all material respects,
the offer and sale of the Shares pursuant to this Agreement is exempt from the
registration requirements of the Securities Act. Neither Music Line nor any
Person authorized to act on its behalf has, in connection with the offering of
the Shares, engaged in (i) any form of general solicitation or general
advertising (as those terms are used within the meaning of Rule 501(c) under the
Securities Act), (ii) any action involving a public offering within the meaning
of section 4(2) of the Securities Act, or (iii) any action that would require
the registration under the Securities Act of the offering and sale of the Shares
pursuant to this Agreement or that would violate applicable state securities or
"blue sky" laws. Neither the Seller nor any such Person has made, directly or
indirectly, any offer or sale of Common Stock or of securities of the same or a
similar class as the shares of Common Stock to be purchased pursuant to this
Agreement that, as a result of the offer and sale of the shares of Common Stock
contemplated hereby, could fail to be entitled to the exemption from the
registration requirements of the Securities Act. As used herein, the terms
"offer" and "sale" have the meanings specified in Section 2(3) of the Securities
Act.
2.22 Affiliate Transactions. (i) There are no debts, obligations or
liabilities owed to Music Line or any Subsidiary of Music Line, on the one hand,
by any current or former stockholder or Affiliate of Music Line or of any
Subsidiary of Music Line or by any Affiliate of any such stockholder or
Affiliate; (ii) there are no debts, obligations or liabilities owed by Music
Line or any Subsidiary of Music Line, on the one hand, to any such current or
former stockholder or, on the other hand, to any Affiliate of Music Line or any
Affiliate of any such stockholder or Affiliate; (iii) neither Music Line nor any
such current or former stockholder or Affiliate provides or causes to be
provided
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any assets, services or facilities to Music Line or any Subsidiary of Music
Line; and (iv) neither Music Line nor any Subsidiary of Music Line provides or
causes to be provided any assets, services or facilities to any such current or
former stockholder or Affiliate.
2.23 Business Relationships. Since March 31, 1999, no business
relationship of Music Line or any Subsidiary of Music Line with any customer,
supplier or any group of customers or suppliers whose purchases or sales, as the
case may be, are individually or in the aggregate material to the Business or
Condition of Music Line or any Subsidiary of Music Line has been, or to the
knowledge of Music Line or the Seller is threatened to be, terminated, canceled,
limited or changed or modified adversely, and, to the knowledge of the Seller,
there exists no present condition or state of facts or circumstances with
respect to such business relationship that would materially adversely affect the
Business or Condition of Music Line or any Subsidiary of Music Line, or prevent
Music Line or any Subsidiary of Music Line from conducting its business as
previously conducted after the consummation of the transactions contemplated by
this Agreement, in substantially the same manner in which it has heretofore been
conducted.
2.24 Disclosure. This Agreement does not, and the documents and
certificates executed by the Seller or Music Line or otherwise furnished by the
Seller or Music Line to the Company do not, and at the Closing and will not,
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements contained herein or therein, in light
of the circumstances under which they were made, not misleading.
2.25 Other Negotiations; Brokers. Neither Music Line, any Subsidiary
of Music Line, the Seller, nor any of their respective Affiliates (nor any
investment banker, financial advisor, attorney, accountant or other Person
retained by or acting for or on behalf of Music Line, any Subsidiary of Music
Line, the Seller, nor any of their respective Affiliates) (i) has entered into
any agreement that conflicts with any of the transactions contemplated by this
Agreement or (ii) has entered into any agreement or had any discussions with any
third party regarding any transaction involving Music Line, any Subsidiary of
Music Line or the Seller which could result in the Company or its members,
officers, directors, employees, agents or Affiliates being subject to any claim
for liability to said third party as a result of entering into this Agreement or
consummating the transactions contemplated hereby.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Seller as follows
as of the date hereof and as of the Closing Date:
3.1 Organization. The Company is a corporation organized, validly
existing and in good standing under the laws of Delaware and has all requisite
corporate
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power and authority to carry on its business as it is now being conducted and to
execute, deliver and perform this Agreement and to consummate the transactions
contemplated hereby.
3.2 Corporate Power and Authority. The execution, delivery and
performance by the Company of this Agreement and the consummation by the Company
of the transactions contemplated hereby have been duly authorized by all
necessary action on the part of the Company. This Agreement has been duly and
validly executed and delivered by the Company and constitutes the valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, except to the extent that such enforceability (i) may be limited
by bankruptcy, insolvency or other similar laws relating to creditors' rights
generally, and (ii) is subject to general principles of equity.
3.3 Litigation. There is no action, proceeding or investigation in
any court or before any governmental or regulatory authority pending or
threatened in writing or, to the Company's knowledge, orally threatened which
seeks to enjoin or obtain damages in respect of the consummation of the
transactions contemplated hereby.
3.4 No Conflicts. The execution, delivery and performance by the
Company of this Agreement and the consummation by the Company of the
transactions contemplated hereby do not, with or without the giving of notice or
the lapse of time, or both, (i) violate any provision of law, statute, rule or
regulation to which the Company is subject, (ii) violate any order, judgment or
decree applicable to the Company or (iii) conflict with, or result in a breach
or default under, any term or condition of the Company's Certificate of
Incorporation or By-Laws or any material agreement or other instrument to which
the Company or any of its subsidiaries is a party or by which any of them may be
bound; except for violations, conflicts, breaches or defaults which in the
aggregate would not materially hinder or impair the consummation of the
transactions contemplated hereby.
3.5 Investment Intent. The Company is an "accredited investor" as
that term is defined in Rule 501 of Regulation D promulgated under the
Securities Act. The Company is acquiring the Shares and any other shares of
Common Stock issued to it hereunder solely for its own account and not with a
view to a sale or distribution thereof in violation of any securities laws. The
Company acknowledges that it has received, or has had access to, all information
which it considers necessary or advisable to enable it to make a decision
concerning its purchase of the Shares, provided that the foregoing shall not
limit or otherwise affect the rights or remedies of the Company hereunder with
respect to the breach of any representations, warranties, covenants or
agreements of the Seller contained herein.
3.6 Consents. No consent, approval or authorization of, exemption
by, or filing with, any governmental or regulatory authority is required in
connection with the execution, delivery and performance by the Company of this
Agreement or the consummation by the Company of the transactions contemplated
hereby, excluding,
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however, consents, approvals, authorizations, exemptions and filings, if any,
which the Seller is required to obtain or make.
ARTICLE IV
CERTAIN COVENANTS OF THE PARTIES
The Seller, on the one hand, and the Company, on the other hand,
hereby covenant to and agree with one another as follows:
4.1 Access. Subject to compliance by the Company with the provisions
of Section 4.2, from the date of this Agreement to the Closing Date, the Seller
shall (i) provide the Company with access to such information as it may request
with respect to the properties, books and records of the Music Line and its
Subsidiaries and on the transactions contemplated by this Agreement, (ii) permit
the Company and its authorized representatives reasonable access during regular
business hours and upon reasonable notice to the properties, books, and records
of Music Line and its Subsidiaries, including, but not limited to, a complete
and correct certified copy Music Line's Articles of Association and By-Laws, as
currently in effect, and a certified excerpt from the Commercial Register, as
currently in effect; (iii) permit the Company to make such inspections thereof
as the Company may reasonably request; in each case to the extent necessary to
conduct customary due diligence with respect to its investment in Music Line;
and (iv) permit the Company reasonable opportunity to ask questions of and
receive answers from a person or persons acting on behalf of Music Line and/or
the Seller concerning the transfer of the Shares to the full satisfaction of the
Company.
4.2 Confidentiality.
(a) The parties hereto shall keep confidential any information which
has been made available or furnished to it (each, as the case may be, a
"Recipient") by or on behalf of the other party (each, as the case may be, a
"Provider"), in connection with the transactions contemplated by this Agreement
and the Transaction Documents (collectively, "Confidential Information"), and
shall use the Confidential Information solely in connection with the
transactions contemplated by this Agreement and the Transaction Documents. If
this Agreement is terminated, the Recipient will return all Confidential
Information to the Provider and either destroy any writings prepared by or on
behalf of the Recipient based on Confidential Information or deliver such
writings to the Provider. Confidential Information does not include information
which (i) is or becomes (but only when it becomes) generally available to the
public other than as a result of disclosure in violation of this Section 4.2, or
(ii) is or becomes (but only when it becomes) available to the Recipient on a
non-confidential basis from a source other than the Provider, or any of its
agents or advisors or employees, provided that such source is not bound by a
confidentiality agreement with the Provider in respect thereof.
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(b) The Recipient may disclose Confidential Information to any of
its directors, officers, employees, agents, advisors and, in the case of the
Company, its prospective investors, who need to know such Confidential
Information in connection with the transactions contemplated by this Agreement
or the Transaction Documents; provided that, prior to making such disclosure,
the Recipient shall inform all such persons and entities of the confidential
nature of such Confidential Information and such persons and entities shall
agree, for the benefit of the Provider, to be bound by the terms and conditions
of this Section 4.2. In any event, the Recipient will be responsible for damages
incurred by the Provider arising from any breach of this Section 4.2 by any
person or entity to whom Confidential Information shall have been furnished. The
Recipient may disclose Confidential Information if required by legal process or
by operation of applicable law (but only to the extent so required), provided
that the Recipient shall first promptly notify the Provider thereof so that the
Provider may seek an appropriate protective order and/or waive compliance by the
Recipient with the provisions of this Section 4.2.
4.3 Conduct of Business. Except for the transactions contemplated by
this Agreement, from March 31, 1999 through the Closing Date, the Seller shall
cause Music Line and its Subsidiaries to conduct their respective businesses
only in the ordinary course consistent with past practice and the terms of this
Agreement. Without limiting the generality of the foregoing, Music Line and its
Subsidiaries shall:
(a) use their best efforts to (A) preserve intact the present
business organization and reputation of Music Line and its Subsidiaries, (B)
keep available (subject to dismissals and retirements in the ordinary course of
business consistent with the past practice of Music Line) the services of the
present officers, employees and consultants of Music Line and its Subsidiaries,
(C) maintain the assets of Music Line and its Subsidiaries in good working order
and condition, ordinary wear and tear excepted, (D) maintain the good will of
customers, suppliers and lenders and other Persons with whom Music Line or any
Subsidiary of Music Line otherwise have significant business relationships and
(E) continue all current sales, marketing and promotional activities relating to
the business and operations of Music Line and its Subsidiaries;
(b) cause their respective books and records to be maintained in the
usual, regular and ordinary manner and observe all corporate formalities
required by applicable law;
(c) comply in all material respects with all laws, regulations and
orders applicable to the business and operations of Music Line and its
Subsidiaries, and promptly following receipt thereof give the Company copies of
any notice received from any governmental or regulatory authority or other
Person alleging any violation of any such law, regulation or order;
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(d) (A) administer each benefit plan, or cause the same to be so
administered, in all material respects in accordance with the applicable
provisions of all applicable laws; and (B) refrain from making any
representation or promise, oral or written, to any employee concerning any
benefit plan, except for statements as to the rights or accrued benefits of any
employee; and
(e) refrain from: (A) amending their articles of incorporation or
by-laws (or other comparable charter documents) or taking any action with
respect to any such amendment or any reorganization, liquidation or dissolution
of any such entity; (B) taking any of the actions listed in Section 2.7 hereof;
(C) violating, breaching, or defaulting under, in any material respect, or
taking or failing to take any action that (with or without notice or lapse of
time or both) would constitute a material violation or breach of, or default
under, any term or provision of any permit held or used by Music Line or any
Subsidiary of Music Line or any Contract to which Music Line or any Subsidiary
of Music Line is a party or by which any of its assets or properties is bound;
(D) (I) taking or agreeing or committing to take or omitting or agreeing or
committing to omit any action that would make any representation or warranty of
Music Line hereunder inaccurate in any material respect; or (II) taking any
action or course of action inconsistent with compliance with the covenants and
agreements of Music Line herein or which might adversely affect the interests of
the Company hereunder; and (F) entering into any agreement to engage in any of
the activities listed in this Section 4.3.
4.4 Notice and Cure. The Seller shall notify the Company promptly in
writing of, and contemporaneously shall provide the Company with true and
complete copies of any and all information or documents relating to, and shall
use its best efforts to cure before the each Closing Date, any event,
transaction or circumstance occurring after the date of this Agreement that
causes or shall cause any covenant or agreement of the Seller under this
Agreement to be breached or that renders or shall render untrue any
representation or warranty of the Seller contained in this Agreement as if the
same were made on or as of the date of such event, transaction or circumstance.
The Seller also shall notify the Company promptly in writing of, and shall use
its best efforts to cure, before the Closing, any violation or breach of any
representation, warranty, covenant or agreement made by the Seller in this
Agreement, whether occurring or arising before, on or after the date of this
Agreement. No notice given pursuant to this Section 4.4 shall have any effect on
the representations, warranties, covenants or agreements contained in this
Agreement for purposes of determining satisfaction of any condition contained
herein or shall in any way limit the Company's right to seek indemnity under
Article VIII.
4.5 Lines of Business. The Seller shall not, and shall not permit
Music Line or any of its Subsidiaries to, without the prior written consent of
the Company, engage in any material activity in any line of business other than
the business conducted on or prior to March 31, 1999.
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ARTICLE V
(a) Non-Compete. For a period of one (1) year from the Closing Date
(the "Restricted Period"), the Seller shall not, without the prior written
consent of the Company, directly or indirectly, whether as an employee,
director, independent contractor, consultant, licensor, licensee, stockholder,
partner, or otherwise, engage or assist others to engage in or have any interest
in any business which competes with the business conducted by Music Line or its
subsidiaries directly or indirectly at such time in any jurisdictions in which
the Company then operates the business currently conducted by Music Line, or
licenses third parties to carry on, such business; provided, however, that the
Seller may own directly or indirectly, solely as an investment, securities of
any Person which engages in such in any such business which are traded on any
national securities exchange as long as none of them (y) is a controlling person
of, or a member of a group which controls, such Person or (z) (when added
together with any other securities held by the Seller directly or indirectly),
owns 1% or more of any class of securities of such Person.
(b) The Seller further agrees that during the Restricted Period, he
shall not, directly or indirectly, (i) solicit, induce, enter into any agreement
with, or attempt to influence any individual who was an employee or consultant
of Music Line or any of its Subsidiaries at any time prior to the Closing or
during the Restricted Period, to terminate his or her employment or consulting
relationship with Music Line or any of its subsidiaries or to become employed by
the Seller or any individual or entity controlled by the Seller or by which the
Seller is employed or (ii) interfere in any other way with the employment, or
other relationship, of any employee or consultant of Music Line or its
Affiliates.
ARTICLE VI
CONDITIONS TO THE COMPANY'S OBLIGATIONS
The obligations of the Company to consummate the transactions
contemplated hereby shall be subject to the satisfaction on or prior to the
Closing Date of all of the following conditions, except such conditions as the
Company may waive:
6.1 Representations, Warranties and Covenants of the Seller. The
Seller shall have complied in all material respects with all of its agreements
and covenants contained herein required to be complied with at or prior to the
Closing Date, and all the representations and warranties of the Seller contained
herein shall be true in all material respects on and as of the Closing Date with
the same effect as though made on and as of the Closing Date, except as
otherwise contemplated hereby, and except to the extent that such
representations and warranties expressly make reference to a specified date and
as to such representations and warranties the same shall continue on the Closing
Date to have been true as of the specified date.
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6.2 Further Action. All action (including notifications and filings)
that shall be required to be taken by the Seller in order to consummate the
transactions contemplated hereby shall have been taken and all consents,
approvals, authorizations and exemptions from third parties that shall be
required in order to enable the Seller to consummate the transactions
contemplated hereby shall have been duly obtained (except for such actions,
consents, approvals, authorizations and exemptions, the absence of which would
not prohibit consummation of such transactions or render such consummation
illegal), and, as of the Closing Date, the transactions contemplated hereby
shall not violate any applicable law or governmental regulation.
6.3 No Governmental or Other Proceeding. No order of any court or
governmental or regulatory authority or body which restrains or prohibits the
transactions contemplated hereby shall be in effect on the Closing Date and no
suit or investigation by any government agency to enjoin the transactions
contemplated hereby or seek damages or other relief as a result thereof shall be
pending or threatened as of the Closing Date.
6.4 Shareholder consent: The Company shall have received the consent
of the holders of two-thirds of the outstanding shares of the Company`s Common
stock held by persons other than the seller and persons who are affiliated or
associated with the seller to this Agreement and the consummation of the
transactions contemplated hereby.
ARTICLE VII
CONDITIONS TO THE SELLER'S OBLIGATIONS
The obligations of the Seller to consummate the transactions
contemplated hereby shall be subject to the satisfaction on or prior to the
Closing Date of all of the following conditions, except such conditions as the
Seller may waive:
7.1 Representations, Warranties and Covenants of the Company. The
Company shall have complied in all material respects with all of its agreements
and covenants contained herein required to be complied with at or prior to the
Closing Date, and the representations and warranties of the Company contained
herein shall be true in all material respects on and as of the Closing Date with
the same effect as though made on and as of the Closing Date, except as
otherwise contemplated hereby, and except to the extent that such
representations and warranties expressly make reference to a specified date and
as to such representations and warranties the same shall continue on the Closing
Date to have been true as of the specified date.
7.2 Further Action. All action (including notifications and filings)
that shall be required to be taken by the Company in order to consummate the
transactions contemplated hereby shall have been taken and all consents,
approvals, authorizations and exemptions from third parties that shall be
required in order to enable the Seller to consummate the transactions
contemplated hereby shall have been duly obtained (except
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for such actions, consents, approvals, authorizations and exemptions, the
absence of which would not prohibit consummation of such transactions or render
such consummation illegal), and, as of the Closing Date, the transactions
contemplated hereby shall not violate any applicable law or governmental
regulation.
7.3 No Governmental or Other Proceeding. No order of any court or
governmental or regulatory authority or body which restrains or prohibits the
transactions contemplated hereby shall be in effect on the Closing Date and no
suit or investigation by any government agency to enjoin the transactions
contemplated hereby or seek damages or other relief as a result thereof shall be
pending or threatened in writing as of the Closing Date.
ARTICLE VIII
SURVIVAL AND INDEMNIFICATION
8.1 Survival. The representations and warranties contained herein
and the covenants and agreements to be performed or complied with after the
Closing shall survive the Closing for a period of one year except for Music
Line's representations set forth in Section 2.16 which shall survive the Closing
until the expiration of a period of six months following the expiration of the
applicable statute of limitation. A claim for indemnification by a party against
the other under this Article VIII for inaccuracy in a representation or warranty
or breach of any covenants and agreements contained herein must be asserted in
writing and in accordance with Section 8.3 prior to the expiration of the
applicable time period referenced above, following which such claims shall be
barred for all purposes. If written notice of a claim for indemnification is
given in accordance with Section 8.3 prior to the expiration of the applicable
time period referenced above, then the representation, warranty, covenant, or
agreement applicable to such claim shall survive until, but only for purposes
of, resolution of such claim.
8.2 Indemnification. Subject to the provisions of Section 8.1, from
and after the Closing, each of (i) the Company and (ii) the Seller shall
indemnify and hold harmless the Company, its directors, officers, agents and
employees (other than the Seller) (the party seeking indemnification being
referred to as the "Indemnified Party") from and against any and all claims,
losses, liabilities and damages, including, without limitation, amounts paid in
settlement, reasonable costs of investigation and reasonable fees and
disbursements of counsel, arising out of or resulting from the inaccuracy of any
representation or warranty, or the breach of any covenant or agreement,
contained herein or in any instrument or certificate delivered pursuant hereto,
by the party against whom indemnification is sought (the "Indemnifying Party").
8.3 Notice of Claim. The Indemnified Party shall promptly notify the
Indemnifying Party in writing of any claim for indemnification, specifying in
detail the basis of such claim, the facts pertaining thereto and, if known, the
amount, or an estimate of the amount, of the liability arising therefrom. The
Indemnified Party shall provide to
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the Indemnifying Party as promptly as practicable thereafter all information and
documentation necessary to support and verify the claim asserted and the
Indemnifying Party shall be given reasonable access to all books and records in
the possession or control of the Indemnified Party which the Indemnifying Party
reasonably determines to be related to such claim.
8.4 Defense. If the facts giving rise to a right to indemnification
arise out of the claim of any third party, or if there is any claim against a
third party, the Indemnifying Party may assume the defense or the prosecution
thereof, including the employment of counsel, at its cost and expense. The
Indemnified Party shall have the right to employ counsel separate from counsel
employed by the Indemnifying Party in any such action and to participate
therein, but the fees and expenses of such counsel employed by the Indemnified
Party shall be at its expense. The Indemnifying Party shall not be liable for
any settlement of any such claim effected without its prior written consent
which consent shall not be unreasonably withheld. Whether or not the
Indemnifying Party does choose to so defend or prosecute such claim, all the
parties hereto shall cooperate in the defense or prosecution thereof and shall
furnish such records, information and testimony, and attend at such conferences,
discovery proceedings, hearings, trials and appeals, as may be reasonably
requested in connection therewith. The Indemnifying Party shall be subrogated to
all rights and remedies of the Indemnified Party to the extent of any
indemnification provided hereunder.
ARTICLE IX
TERMINATION PRIOR TO CLOSING
9.1 Termination of Agreement. This Agreement may be terminated at
any time prior to the Closing:
(i) by the mutual written consent of the Company and the Seller;
(ii) by the Seller in writing if the Closing shall not have occurred
on or before September 31, 1999 or such other date to which the
Closing Date hereunder been extended by the mutual agreement of the
parties hereto; or
(iii) by either party, if the other party shall (x) fail to perform
in any material respect its agreements contained herein required to
be performed prior to the Closing, or (y) materially breach any of
its representations, warranties, covenants or agreements contained
herein, which failure or breach is not cured within five business
days after the party seeking to terminate has notified the other
party of its intent to terminate this Agreement pursuant to this
clause.
9.2 Termination of Obligations. Termination of this Agreement
pursuant to this Article IX shall terminate all obligations of the parties
hereunder, except for the obligations under Sections 4.2 and 11.9 and 11.10;
provided, however, that termination pursuant to clause (ii) or (iii) of Section
9.1 shall not relieve the defaulting or
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breaching party from any liability to the other party hereto resulting from its
willful breach of this Agreement.
ARTICLE X
DEFINITIONS
As used in this Agreement, the following defined terms shall have
the meanings indicated below:
"Actions or Proceedings" means any action, suit, proceeding,
arbitration or governmental or regulatory authority investigation or audit.
"Affiliate" means, as applied to any Person, (i) any other Person
directly or indirectly controlling, controlled by or under common control with,
that Person, (ii) any other Person that owns or controls five percent (5%) or
more of any class of equity securities (including any equity securities issuable
upon the exercise of any Option) of that Person or any of its Affiliates, or
(iii) any member, director, partner, officer, agent, employee or relative of
such Person. For the purposes of this definition, "control" (including with
correlative meanings, the terms "controlling," "controlled by," and "under
common control with") as applied to any Person, means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of that Person, whether through ownership of voting securities or
by contract or otherwise.
"Agreement" means this Stock Purchase Agreement, the Exhibits,
Schedules, Disclosure Schedules and the certificates delivered in connection
herewith, as the same may be amended, modified or restated from time to time in
accordance with the terms hereof.
"Business and/or Condition" means the business, condition (financial
or otherwise), results of operations and assets of Music Line and its
Subsidiaries taken as a whole.
"Business Day" means a day other than Saturday, Sunday or any day on
which banks located in the State of New York and the City of Zurich, Switzerland
are authorized or obligated to close.
"Closing" has the meaning given to it in Section 1.2.
"Closing Date" has the meaning given to it in Section 1.2.
18
<PAGE>
"Common Stock" has the meaning given to it in the forepart to this
Agreement.
"Company" has the meaning given to it in the forepart to this
Agreement.
"Contract" means any agreement, lease, license, evidence of
indebtedness, mortgage, indenture, security agreement or other contract or other
commitment (whether written or oral).
"Disclosure Schedule" means the schedules delivered to the Company
by or on behalf of the Seller and to the Seller by or on behalf of the Company,
containing all lists, descriptions, exceptions and other information and
materials as are required to be included therein by the Seller pursuant to
Article II and by the Company pursuant to Article III of this Agreement.
"Intellectual Property" means all patents and patent rights,
trademarks and trademark rights, trade names and trade name rights, service
marks and service mark rights, service names and service name rights, brand
names, inventions, processes, formulae, copyrights and copyright rights, trade
dress, business and product names, logos, slogans, trade secrets, industrial
models, processes, designs, methodologies, computer programs (including all
source codes) and related documentation, technical information, manufacturing,
engineering and technical drawings, know-how and all pending applications for
and registrations of patents, trademarks, service marks and copyrights.
"Laws" means all laws, statutes, rules, regulations, ordinances and
other pronouncements having the effect of law of the United States, any foreign
country or any domestic or foreign state, county, city or other political
subdivision or of any Governmental or Regulatory Authority.
"Liens" means any mortgage, pledge, assessment, security interest,
lease, lien, adverse claim, levy, charge or other encumbrance of any kind, or
any conditional sale Contract, title retention Contract or Contract committing
to grant any of the foregoing.
"Permitted Liens" means (a) Liens for current taxes not yet due and
payable or for taxes the validity of which is being contested in good faith by
appropriate proceedings, and (b) Liens which individually or in the aggregate do
not materially and adversely affect the business, operations or financial
condition of Music Line and the Subsidiaries, taken as a whole.
"Person" means any individual, corporation, joint stock corporation,
limited liability company or partnership, general partnership, limited
partnership,
19
<PAGE>
proprietorship, joint venture, other business organization, trust, union,
association or governmental or regulatory authority.
"Purchase Price" has the meaning given to it in Section 1.1.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations thereunder.
"Company Charter" means any and all of the charter documents of the
Company, including but not limited to a Certificate of Incorporation, By-Laws,
Articles of Association and/or Memorandum, as the case may be.
"Subsidiary" means any Person in which Music Line, directly or
indirectly through Subsidiaries or otherwise, beneficially owns more than fifty
percent (50%) of either the equity interests in, or the voting control of, such
Person.
"Tax" or "Taxes" means all federal, state, local or foreign net or
gross income, gross receipts, net proceeds, sales, use, ad valorem, value added,
franchise, bank shares, withholding, payroll, employment, excise, property,
alternative or add-on minimum, environmental or other taxes, assessments,
duties, fees, levies or other governmental charges of any nature whatever,
whether disputed or not, together with any interest, penalties, additions to tax
or additional amounts with respect thereto.
ARTICLE XI
MISCELLANEOUS
11.1 Entire Agreement. This Agreement (including the Disclosure
Schedule and Exhibits) constitutes the sole understanding of the parties with
respect to the subject matter hereof. No amendment, modification or alteration
of the terms or provisions of this Agreement shall be binding unless the same
shall be in writing and duly executed by the parties hereto.
11.2 Successors and Assigns. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors of the parties hereto; provided, however, that this Agreement may not
be assigned by any party without the prior written consent of the other party
hereto, except that the Company may, at its election and without the prior
written consent of the Seller, assign this Agreement to any direct or indirect
wholly-owned subsidiary or any other affiliate of the Company in connection with
a permitted transfer of the Shares so long as the representations and warranties
of the Company made herein are equally true of such assignee. If this Agreement
is assigned with such consent or pursuant to such exceptions, the terms and
conditions hereof shall be binding upon and shall inure to the benefit of the
20
<PAGE>
parties hereto and their respective assigns; provided, however, that no
assignment of this Agreement or any of the rights or obligations hereof shall
relieve any party of its obligations under this Agreement. With the exception of
the parties to this Agreement, (except as set forth in Article V) there shall
exist no right of any person to claim a beneficial interest in this Agreement or
any rights occurring by virtue of this Agreement.
11.3 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
11.4 Headings. The headings of the Sections and paragraphs of this
Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
11.5 No Waiver. No action taken pursuant to this Agreement,
including any investigation by or on behalf of any party hereto, will be deemed
to constitute a waiver by the party taking any action of compliance with any
representation, warranty or agreement contained herein. The waiver by any party
hereto of any condition or of a breach of any other provision of this Agreement
will not operate or be construed as a waiver of any other condition or
subsequent breach. The waiver by any party of any of the conditions precedent to
its obligations under the Agreement will not preclude it from seeking redress
for breach of this Agreement other than with respect to the condition so waived.
11.6 Expenses. The Seller and the Company shall each pay all costs
and expenses incurred by it or on its behalf in connection with this Agreement
and the transactions contemplated hereby, including, without limiting the
generality of the foregoing, fees and expenses of its own financial consultants,
accountants and counsel.
11.7 Notices. Any notice, request, instruction or other document
(each, a "notice") to be given hereunder by any party hereto to any other party
hereto shall be in writing and delivered personally or sent by registered or
certified mail, postage prepaid,
if to the Seller to:
Ueli Ernst
P.O.Box 13.
CH-8954 Geroldswil, Switzerland
Facsimile: 011 411 856 17 69
21
<PAGE>
if to the Company to:
UTG Communications International, Inc.
Attn: Board of Directors
Limmattalstr 10,
CH-8954 Geroldswil, Switzerland
Facsimile: 011 411 749 31 09
11.8 Further Assurances. From and after the Closing Date, each
party, at the request of the other party and at the requesting party's expense,
will take all such action and execute and deliver all such documents and
instruments as shall be reasonably necessary or appropriate to implement or
effectuate the transactions contemplated by this Agreement and to enable the
Company and the Seller to enjoy the respective benefits contemplated by this
Agreement (including without limitation confirming and vesting title to the
Shares in the Company as contemplated herein).
11.9 Governing Law. The validity, performance and enforcement of
this Agreement and any agreement entered into pursuant hereto, unless expressly
provided to the contrary, will be governed by the Laws of New York, without
giving effect to the principles of conflicts of law thereof.
11.10 Consent to Arbitration.
[(a) Either party shall have the right (but not the obligation), in
addition to all other rights and remedies provided by law, to compel the other
parties to binding arbitration in accordance with the then existing Rules for
Non-Administered Arbitration of Business Disputes of the Center for Public
Resources ("CPR") by a single arbitrator. The arbitrator shall be selected from
the CPR Panels of Distinguished Neutrals and shall be an attorney admitted to
practice in the state of New York with at least 10 years of experience in
commercial law. The arbitration shall be governed by the United States
Arbitration Act, 9 U.S.C. ss.ss.1-16, and judgment upon the award rendered by
the arbitrator may be entered by any court having jurisdiction thereof. The
place of arbitration shall be New York, New York. The arbitration shall begin
within thirty (30) days of the initiating party's notice of its intent to
arbitrate unless the parties agree in writing to an extension. The fees and
expenses of the arbitration shall be borne equally by the parties hereto.
(b) Except as provided in paragraph (a) above, the procedures
specified in this Section 11.10 shall be the sole and exclusive procedures for
the resolution of disputes between the parties arising out of or relating to
this Agreement; provided, however, that a party may seek a preliminary
injunction or other preliminary judicial relief if in its judgment such action
is necessary to avoid irreparable damage and, provided further, that the
arbitrator is specifically empowered to grant injunctive relief and specific
performance.]
22
<PAGE>
11.11 Public Announcements. The Seller and the Company shall consult
with each other before issuing any press releases or otherwise making any public
statements with respect to this Agreement and the transactions contemplated
hereby and shall not issue any such press release or make any public statement
prior to such consultation.
11.12 Specific Performance. The Seller, on the one hand, and the
Company, on the other hand, each acknowledges that the other will be irreparably
harmed and that there will be no adequate remedy at law in the event of a
violation by it of any of its covenants or agreements which are contained in
this Agreement. It is accordingly agreed that, in addition to any other remedies
which may be available upon the breach of such covenants and agreements, the
Seller or the Company, as the case may be, shall have the right to obtain
injunctive relief to restrain any breach or threatened breach of, or otherwise
to obtain specific performance of, the other's covenants or agreements contained
in this Agreement.
11.13 Gender, Etc. Unless the context of this Agreement otherwise
requires, (i) words of any gender include each other gender, (ii) words using
the singular or plural number also include the plural or singular number,
respectively, (iii) the terms "hereof," "herein," "hereby" and derivative or
similar words refer to this entire Agreement, (iv) the terms "Article" or
"Section" refer to the specified Article or Section of this Agreement, and (v)
the phrases "ordinary course of business" and "ordinary course of business
consistent with past practice" refer to the business and practice of Music Line
and its Subsidiaries.
11.14 Exhibits. The parties agree that if any Exhibit hereto is
incomplete upon execution hereof, the parties will agree to final documentation
for such Exhibit containing terms and provisions in form and substance
reasonably acceptable to both parties.
[signature page to follow]
23
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed on its behalf as of the date first above written.
UTG COMMUNICATIONS INTERNATIONAL, INC.
By: /s/ Klaus Brenner
--------------------------
Name: Klaus Brenner
Title: Treasurer
ULRICH ERNST
/s/ Ulrich Ernst
------------------------------
24
<PAGE>
DISCLOSURE SCHEDULES
Schedule 2.6 - Music Line Subsidiaries (each 100%-owned by Music Line)
SSC AG
JM Sontel AG
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from UTG
COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 51,017
<SECURITIES> 0
<RECEIVABLES> 2,049,485
<ALLOWANCES> 0
<INVENTORY> 708,915
<CURRENT-ASSETS> 2,996,762
<PP&E> 2,330,054
<DEPRECIATION> 2,451,528
<TOTAL-ASSETS> 6,644,571
<CURRENT-LIABILITIES> 4,421,496
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 8,802,970
<TOTAL-LIABILITY-AND-EQUITY> 6,644,571
<SALES> 2,699,036
<TOTAL-REVENUES> 2,699,036
<CGS> 2,126,911
<TOTAL-COSTS> 1,224,293
<OTHER-EXPENSES> 13,320
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,690
<INCOME-PRETAX> (556,669)
<INCOME-TAX> 0
<INCOME-CONTINUING> (556,669)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (556,669)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.14)
</TABLE>
