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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1998.
[ ] Transition Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ___ to ____.
Commission file number 000-21463
Murdock Communications Corporation
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(Exact name of small business issuer as specified in its charter)
Iowa 42-1337746
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1112 29th Avenue S.W., Cedar Rapids, Iowa 52404
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 319-362-6900
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Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class which registered
NA NA
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, No Par Value
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(Title of class)
Redeemable Common Stock Purchase Warrants
-----------------------------------------
(Title of class)
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Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
the Form 10-KSB. [ ]
State the issuer's revenues for its most recent fiscal year.
$33,988,099.
The aggregate market value of the common stock held by nonaffiliates of
the issuer as of March 15, 1999 was $17,941,805. Shares of common stock held by
any executive officer or director of the issuer and any person who beneficially
owns 10% or more of the outstanding common stock have been excluded from this
computation because such persons may be deemed to be affiliates. This
determination of affiliate status is not a conclusive determination for other
purposes.
On March 15, 1999, there were outstanding 10,329,867 shares of the
issuer's no par value common stock.
Transitional Small Business Disclosure Format (check one):
Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1999 Annual Meeting of the
Shareholders of the issuer are incorporated by reference into Part III of this
report.
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PART I
Unless indicated otherwise, the information in this report with respect
to Murdock Communications Corporation and its subsidiaries ("MCC" or the
"Company") gives effect to (i) the acquisition (the "PIC Acquisition") by MCC on
October 31, 1997 of two affiliated companies, Priority International
Communications, Inc. ("PIC") and PIC Resources Corp. ("PIC Resources"), and PIC
Resources' wholly owned subsidiary ATN Communications, Inc. ("ATN"), and (ii)
the acquisition (the "Incomex Acquisition") by MCC on February 13, 1998 of
Incomex, Inc. ("Incomex"). Effective January 1, 1999, PIC Resources was merged
into PIC, and all references in this report to "PIC" include PIC Resources and
ATN.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
MCC is a provider of operator services and call processing to North
American payphones, hotels and institutions, database profit management services
and telecommunications billing and collection services for the hospitality
industry, outsourced operator services for the telecommunications industry, and
telecommunications systems and services to the lodging industry. Through a
series of acquisitions and new product developments, the Company has transformed
itself during 1998 from a reseller of AT&T network services to U.S. hotels to a
provider of a wide range of complementary telecommunications services in North
America. The Company operates through three principal business units:
- Murdock Technology Services ("MTS") is a division of the
Company which provides database profit management services and
other telecommunications management and consulting services;
- PIC and ATN (collectively, "PIC/ATN") are wholly owned
subsidiaries of the Company which provide operator services,
call processing and related valued added services; and
- Incomex is a wholly owned subsidiary of the Company which
provides billing and collection services for calls to the
United States from resort hotels in Mexico.
MCC was incorporated as an Iowa corporation in 1989.
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THE COMPANY'S PRINCIPAL BUSINESS UNITS
MURDOCK TECHNOLOGY SERVICES. MTS was formed as a division of the
Company in 1998 to provide database profit management services and other value
added services to the hospitality telecommunications management market.
MTS's principal product, the MCC Telemanager(TM), is a proprietary
software and hardware product created to help manage telecommunication
installations and services in the hospitality market. The Telemanager was
introduced to the market in September 1997 and there were 174 units installed as
of December 31, 1998 as compared to 80 units as of December 31, 1997. The
Telemanager uses proprietary computer software to monitor telephone activity at
a hotel and enable the hotel to identify problems and opportunities for revenue
growth by producing reports reflecting an analysis of the costs and revenues
derived from the hotel's telecommunications system. The Telemanager provides the
Company's customers with information regarding the hotel's telecommunications
system in management reports which are easy to read and understand by persons
lacking specialized expertise in telecommunications. MTS generates this
information by remotely accessing information from the customer's premise-based
call processing equipment. The information is then analyzed based on proprietary
computer software programs developed by MCC. The results of this analysis are
summarized in reports and graphs that are remotely transmitted to the customer.
The Telemanager generates revenues through a one-time fee for the initial
installation and audit and a monthly service fee.
The Company has initially focused its marketing of the Telemanager to
the North American hospitality industry with special emphasis toward hotels
which participated in the AT&T Lodging Partnership program, hotels and resorts
in Mexico under contract with Incomex and hotels using the Company's operator
services. In future periods, the Company anticipates expanding the market for
the MCC Telemanager and its other telecommunications consulting services outside
of the hospitality industry to include other businesses. See "Forward-Looking
Statements."
MTS is the successor to the Company's historical operating unit which
marketed AT&T operator services to the hospitality market through the AT&T
Lodging Partnership. The Company and AT&T terminated the Lodging Partnership
arrangement in the fourth quarter of 1998. See "Recent Developments -
Termination of AT&T Lodging Partnership" below. MTS also continues to offer
one-plus long distance services and automated call processing services ("OSP
Services") on a limited basis and telecommunications equipment to its customers
in the hospitality industry.
PIC/ATN OPERATOR SERVICES. PIC/ATN offers telecommunications services
to payphone operators, consumer service providers, hotels and other
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institutions in the United States and Mexico. PIC and ATN operate in concert to
provide marketing, service delivery and customer support for owners and
aggregators of telecommunications services. PIC/ATN provides both live operator
services and automated call processing services. The operator center, located in
Mobile, Alabama, features 50 live operator stations and automated call platforms
currently generating approximately 220,000 completed calls and 2 million minutes
monthly. PIC/ATN also offers credit card billing services, automated collection
and messaging delivery services, voice mail services and telecommunications
consulting. At December 31, 1998, PIC/ATN provided telecommunications services
to and maintained site contracts with approximately 207 customers throughout the
United States, compared to 257 customers at December 31, 1997. Each customer may
represent from one to 2,000 telephone numbers that are processed by PIC/ATN. The
total size of PIC's database increased substantially in 1998 to approximately
17,000 telephone numbers at December 31, 1998.
INCOMEX TELECOMMUNICATIONS SERVICES. Incomex contracts with Mexican
resort hotels to provide billing and collection services for calls to the United
States. As of December 31, 1998, Incomex provided telecommunications services to
more than 95 hotel and motel resort properties representing approximately 15,000
rooms, compared to approximately 80 hotel and motel resort properties
representing approximately 10,600 rooms at February 13, 1998. Incomex's target
market includes 1,300 Mexican resort hotels representing approximately 325,000
rooms. Incomex offers value added customer services, training and technology to
enhance the profitability of the telephone departments of Mexican resort hotels.
RECENT DEVELOPMENTS
TERMINATION OF AT&T LODGING PARTNERSHIP. In light of the declining call
volumes and narrow profit margins experienced by the Company under the Lodging
Partnership with AT&T, the Company and AT&T agreed to terminate the Lodging
Partnership arrangement effective October 15, 1998. AT&T agreed to purchase all
of the customer contracts under the Lodging Partnership and to directly manage
the existing customers under the contracts. As a result, the Company recorded a
one-time gain in the fourth quarter of $453,396. Revenues to the Company from
the AT&T agreement ended in the fourth quarter of 1998.
PIC EARN-OUT SETTLEMENT. The Company's agreement for the PIC
Acquisition contained an earn-out provision (the "PIC Earn-Out") which required
that the Company issue additional shares of Common Stock to the former
shareholders of PIC to the extent that the combined earnings before interest,
taxes, depreciation and amortization ("EBITDA") of PIC for either of the first
two full twelve-month periods after closing exceeds $1,000,000. Shares of Common
Stock with a market value of $1.25 per share based on average trading value
would be issued for each dollar of EBITDA over $1,000,000 during either of the
twelve-month periods. In December 1998, the Company and the former shareholders
of PIC agreed to settle the PIC Earn-Out based on historical and projected
financial information with respect to PIC. Pursuant to the settlement, the
Company issued an aggregate of 2,300,000 shares of Common Stock to the former
shareholders of
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PIC in December 1998. The Company agreed to file a registration statement
covering these shares following the filing of this Form 10-KSB.
The Company also agreed with two of the former PIC shareholders who had
received promissory notes (the "PIC Notes") pursuant to the PIC Acquisition that
the PIC Notes would bear interest at an annual rate of 14% from the date of the
settlement agreement. At December 31, 1998, an aggregate of $317,203 was
outstanding under these notes. In January 1999, the notes were paid in full. The
Company also entered into a deferred payment arrangement with Wayne Wright, one
of the former PIC shareholders who is also a member of the Company's Board of
Directors, pursuant to which Mr. Wright will receive $300,000 payable in 24
equal monthly installments commencing in January 1999.
INCOMEX EARN-OUT SETTLEMENT. The Company's agreement for the Incomex
Acquisition contained an earn-out provision (the "Incomex Earn-Out") which
required that the Company make a cash payment to the Incomex shareholders equal
to 60% of Incomex's net income before income taxes ("IBT") during the period
from February 1, 1998 through July 31, 1998, and issue additional shares of
Common Stock at the end of each of the two periods of 12 consecutive full
calendar months during the 24 month period beginning August 1, 1998 to the
extent that Incomex's IBT exceeds $400,000 during either such 12 month period.
Shares of Common Stock with a market value of $1.50 per share based on average
trading value would be issued for each dollar of IBT over $400,000 during either
of the twelve month periods. In December 1998, the Company and the shareholders
of Incomex agreed to settle the Incomex Earn-Out based on historical and
projected financial information with respect to Incomex. Pursuant to the
settlement, the Company agreed to issue an aggregate of 1,500,000 shares of
Common Stock to the shareholders of Incomex and cash consideration in the amount
of $861,432. Each Incomex shareholder could elect to receive the cash
consideration in the form of either an immediate cash payment or the issuance of
a note and warrants. The notes (the "Incomex Notes") bear interest at an annual
rate of 14% and all interest and principal on the Incomex Notes are due on
November 15, 1999. Warrants (the "Incomex Warrants") to purchase 200 shares of
Common Stock at an exercise price of $3.25 per share were issued for each $1,000
of principal under the Incomex Notes. In December 1998, the Company committed to
make cash payments of $84,515 (excluding a prior advance of $32,000) and issued
Incomex Notes in the aggregate principal amount of $744,917 and Incomex Warrants
to purchase an aggregate of 155,384 shares of Common Stock. The Company also
agreed with three of the former Incomex shareholders to issue $340,000 in notes
payable due no later than April 1, 1999.
COMPETITION
Competition in the telecommunications industry is intense. PIC/ATN
competes with numerous other providers of alternative operator services and call
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processing services. PIC/ATN's customers, which include telephone owners and
aggregators, are extremely attentive to the competitive environment and the
competitive efforts of alternative operator service providers to acquire new
customers. Incomex competes with several competitors who also focus on the hotel
and payphone markets in Mexico. MTS competes with up to nine telecommunications
consulting companies which target the lodging industry. The Company's operator
and call processing services also compete with a variety of long distance
interexchange carriers, including Sprint, MCI and AT&T. Each of the major long
distance interexchange carriers provide callers with the ability to "dial
around" payphones, hotel and other telephone systems by using special codes such
as 10-ATT, 10-10 or 1-800 phone numbers. The Company believes that competition
in its markets is based principally on price, quality, reliability and customer
service. Each of the Company's business units may face competition from
companies with greater financial, technical, marketing and other resources than
the Company. There can be no assurance that the Company will be able to compete
successfully in its markets.
SIGNIFICANT CUSTOMERS
Prior to 1998, the Company derived a substantial part of its revenues
from the AT&T Lodging Partnership. The Company and AT&T terminated the Lodging
Partnership arrangement in the fourth quarter of 1998. See "Recent Developments
- - Termination of AT&T Lodging Partnership" above. During 1998, the Company
derived approximately 12% and 24% of its revenues from two customers for
PIC/ATN's call processing services.
SALES AND MARKETING
The Company will seek to expand its business based on the development
and delivery to its customers of value-added services, proprietary software
technology and value-added equipment and management offerings.
VALUE-ADDED EQUIPMENT AND MANAGEMENT OFFERINGS. By including
value-added equipment offerings as a part of its long distance offerings, MCC
believes that it is able to meet the total telecommunications needs of payphone
operators, hotel properties and other institutions and businesses more fully
than either the interexchange carriers or the OSP Service companies. The Company
offers its customers a single point of contact telecommunications management
program.
MTS'S SALES FORCE. MTS has an internal sales staff which consisted of
two full-time sales managers and one full-time sales agent as of December 31,
1998. This sales force generally concentrates on the largest management and
franchise companies in the lodging industry. MTS also uses strategic
relationships
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with other lodging technology suppliers to market its management and consulting
services.
PIC/ATN. PIC/ATN has an internal sales staff which consisted of three
persons as of December 31, 1998. PIC/ATN's sales force concentrates its sales
efforts on direct marketing and referral based marketing. PIC/ATN also
participates in trade organizations to maintain its presence in the industry.
INCOMEX. Incomex has an internal sales staff which consisted of three
persons as of December 31, 1998. Incomex's internal sales force is supplemented
by six external sales agents.
INTELLECTUAL PROPERTY
The Company does not currently have any material patent or trademark
registrations. The Company principally relies on trade secrets and proprietary
know-how in the operation of its business.
REGULATION
OVERVIEW. The Company's services are subject to federal and state
regulation. The Federal Communications Commission (the "FCC") exercises
jurisdiction over all facilities of, and services offered by, telecommunications
common carriers to the extent those facilities are used to provide, originate or
terminate interstate or international communications. State regulatory
commissions retain some jurisdiction over the same facilities and services to
the extent they are used to originate or terminate intrastate common carrier
communications. The Company holds various federal and state regulatory
authorizations.
FEDERAL REGULATION. The Telecommunications Act of 1996 (the
"Telecommunications Act") became effective February 8, 1996. The
Telecommunications Act preempts state and local laws to the extent that they
prevent competitive entry into the provision of any telecommunications service.
Subject to this limitation, however, state and local governments retain most of
their existing regulatory authority. The Telecommunications Act imposes a
variety of new duties on incumbent local exchange carriers in order to promote
competition in local exchange and access services. The Company does not believe
that the Telecommunications Act has had a significant effect on the Company's
operations.
The Company also makes informational filings with the FCC with respect
to all tariffs charged for OSP services. The FCC may request further information
with respect to, or otherwise challenge, any tariffs that the FCC considers to
be unreasonably high. As of December 31, 1998, the FCC had not commented on or
challenged the Company's tariffs.
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STATE REGULATION. The Company is also subject to various state laws and
regulations. Most public utilities commissions subject alternative operator and
call processing service providers such as the Company to some form of
certification requirement, which requires providers to obtain authority from the
state public utilities commission prior to the initiation of service. In most
states, the Company also is required to file tariffs setting forth the terms,
conditions and prices for services that are classified as intrastate (for
example, inter-LATA calls that are within a single state). The Company also is
required to update or amend its tariffs when it adjusts its rates or adds new
products, and is subject to various reporting and record-keeping requirements.
Accordingly, each time the Company changes its tariffs with respect to
intrastate services, it must obtain the necessary regulatory approvals from the
state. The length of time required to obtain certification or approval for a
tariff varies from state to state, but generally does not exceed a period of
between 90 days and 6 months.
Many states also require prior approval for transfers of control of
certified carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
offerings and incurrence by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory authorities for failure to comply with
state laws and/or the rules, regulations and policies of state regulatory
authorities. Fines or other penalties also may be imposed for such violations.
There can be no assurance that state utilities commissions or third parties will
not raise issues with regard to the Company's compliance with applicable laws or
regulations.
EMPLOYEES
As of December 31, 1998, MCC had 124 full-time employees and 39
part-time employees, including 90 full-time employees and 39 part-time employees
at PIC/ATN, five full-time and no part-time employees at Incomex and 26
full-time and no part-time employees at MTS. The Company believes its
relationships with its employees are good. None of the Company's employees is
subject to a collective bargaining agreement.
ITEM 2. DESCRIPTION OF PROPERTY
MCC maintains its principal business offices in Cedar Rapids, Iowa,
where it owns and occupies approximately 8,000 square feet of combined office
and warehouse space, subject to a first mortgage held by Venture Investments, an
unrelated third party. The Company believes that this space is adequate for the
Company's present needs.
The Company also has a Harris Model 2020 switching center in Mobile,
Alabama, where it has purchased an office building with 33,000 square feet,
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subject to a first mortgage held by Sunmed Management, Inc., of which 12,500
square feet is currently occupied.
The following sets forth certain information with respect to the
significant facilities leased by the Company through PIC/ATN and Incomex.
<TABLE>
<CAPTION>
CURRENT
APPROX. MONTHLY
LOCATION SQUARE FOOTAGE RENT LESSOR LEASE TERMINATION
- -------- -------------- ---- ------ -----------------
<S> <C> <C> <C> <C>
Austin, Texas 2,100 $3,240 Kucera June 1, 2001
Huntington Beach, California 850 $1,223 MUAA, Inc. August 1, 2000
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Incomex and EILCO Leasing Services, Inc. ("Eilco"), a creditor of
Incomex, have commenced an arbitration proceeding to resolve a dispute regarding
a loan agreement between Incomex and Eilco. Eilco claims that Incomex is in
violation of certain covenants of the loan agreement, including provisions
relating to certain obligations of Incomex to make payments to Eilco based on
Incomex's income from telecommunications services provided to a group of hotels
in Mexico. This matter is scheduled for an arbitration hearing on April 21,
1999. Eilco is seeking the amount due on the loan and additional damages which
may be in excess of $1,000,000 plus legal fees. The Company's position is that
it owes only the amount due on the loan. The Company intends to defend the
claims against it and Incomex vigorously, but no assurance can be given as to
the outcome of this matter.
On July 20, 1998, Operator Communications, Inc. ("Oncor") filed a
lawsuit in the District Court of Dallas County, Texas against the Company,
Incomex, and an unrelated third party. Oncor alleges that the defendants
improperly terminated a long distance service agreement with Oncor and claims
damages based on amounts which Oncor alleges to have advanced to the Company,
lost profits for the period in which the Company is alleged to have breached the
contract, attorneys' fees and for interference with contractual relations in an
unspecified amount. The Company has asserted a counterclaim for accounting,
breach of contract, misrepresentation and payment of attorneys' fees. This case
is at a preliminary stage and it is not possible to assess fully the merits of
the Oncor's claims. The Company intends to defend the claims against it and
Incomex vigorously, but no assurance can be given as to the outcome of this
matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
HISTORICAL TRADING INFORMATION AND DIVIDEND POLICY
During all of 1997, the Common Stock was traded on the Nasdaq SmallCap
Market under the symbol "MURC" and the Company's Redeemable Common Stock
Purchase Warrants ("Warrants") were traded on the Nasdaq SmallCap Market under
the symbol "MURCW." Effective January 2, 1998, the Common Stock and the Warrants
were delisted from the Nasdaq SmallCap Market and commenced trading on the
Nasdaq Bulletin Board under the same trading symbols. The following table sets
forth the high and low bid quotations for the Common Stock and Warrants as
reported by Nasdaq. Such transactions reflect interdealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Common Stock Warrants
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Quarter High Low High Low
- ------- ---- --- ---- ---
<S> <C> <C> <C> <C>
FISCAL 1997
First $4.75 $3.13 $1.50 $0.75
Second 4.69 2.88 1.13 0.56
Third 3.50 2.44 0.94 0.31
Fourth 3.81 0.69 0.88 0.25
FISCAL 1998
First $2.63 $0.69 $0.31 $0.06
Second 3.31 2.25 0.25 0.13
Third 4.50 2.75 0.44 0.19
Fourth 4.25 2.13 0.25 0.13
</TABLE>
At December 31, 1998, there were approximately 155 holders of record of
Common Stock.
The Company has not paid any cash dividends on the Common Stock in the
last three years. The Company intends to retain any earnings for use in the
operation and expansion of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
In December 1998, the Company issued 2,300,000 shares of Common Stock
to the former shareholders of PIC pursuant to the PIC Earn-Out. The shares were
issued in a private placement exempt from the registration requirements of
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the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
Section 4(2) of the Securities Act.
In December 1998, the Company issued 1,500,000 shares of Common Stock
to the former shareholders of Incomex pursuant to the Incomex Earn-Out.
The Company also issued Incomex Notes in the aggregate principal amount of
$744,918 and Incomex Warrants to purchase an aggregate of 155,384 shares of
Common Stock to certain of the former shareholders of Incomex pursuant to the
Incomex Earn-Out. The Incomex Notes bear interest at an annual rate of 14% and
all interest and principal on the Incomex Notes are due on November 15, 1999.
The Incomex Warrants may be exercised at any time between December 1998 and
December 2003 to purchase shares of Common Stock at an exercise price of $3.25
per share. The shares of Common Stock, the Incomex Notes and the Incomex
Warrants were issued in a private placement exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act.
During the fourth quarter of 1998, the Company completed an offering of
notes and warrants to certain of its directors and executive officers and to a
limited number of outside investors. The notes bear interest at an annual rate
of 14% and all principal and all interest on the notes are due on November 30,
1999. The Company paid the purchasers of the notes an origination fee of 1% and
issued warrants to purchase 10,000 shares of Common Stock for each $50,000 in
principal amount of the notes. The warrants are exercisable at an exercise price
of $3.25 per share (although one outside investor received warrants to purchase
80,000 shares of Common Stock at an exercise price of $2.50 per share) and may
be exercised at any time on or before November 30, 2003. The Company issued
$3,420,000 aggregate principal amount of the notes and warrants to purchase
684,000 shares of Common Stock, and the Company received net proceeds of
$3,380,800. The notes and the warrants were issued in a private placement exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) of the Securities Act.
During the fourth quarter of 1998, the Company entered into an
agreement with a consultant to provide advisory services to the Company.
Pursuant to this agreement, the Company issued two warrants to the consultant to
purchase up to 10,000 shares of Common Stock each at exercise prices of $3.60
per share and $3.00 per share, respectively. The warrants may be exercised at
any time between November 30, 1999 and November 30, 2003. The warrants were
issued in a private placement exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act.
Effective December 31, 1998, certain subsidiaries and affiliated
leasing partnerships of Berthel Fisher & Company ("Berthel") exercised warrants
to purchase an aggregate of 1,100,000 shares of Common Stock at an exercise
price
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of $1.30 per share, resulting in total proceeds to the Company of $1,430,000.
The shares of Common Stock were issued to Berthel in a private placement exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) of the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
MCC is a provider of operator services and call processing to North
American payphones, hotels and institutions, database profit management services
and telecommunications billing and collection services for the hospitality
industry, outsourced operator services for the telecommunications industry, and
telecommunications systems and services to the lodging industry.
From its inception in 1989 through 1994, the Company's primary source
of revenue was generated by providing operator services to the hospitality
industry as an OSP Services provider. Due to declining call volumes, caused in
part by the use of proprietary calling cards and other dial-around activities
(such as 1-800-CALL ATT), the Company entered into a contract with AT&T in
October 1994 to route operator services traffic to AT&T through the Lodging
Partnership program. Under the Lodging Partnership, AT&T processed the calls,
carried call traffic and billed the end user. In return, AT&T paid MCC
commissions on the calls dialed.
In light of the declining call volumes and narrow profit margins
experienced by the Company under the Lodging Partnership with AT&T, the Company
and AT&T agreed to terminate the Lodging Partnership arrangement effective
October 15, 1998. AT&T agreed to purchase all of the customer contracts under
the Lodging Partnership and to directly manage the existing customers under the
contracts. As a result, the Company recorded a one-time gain in the fourth
quarter of $453,396. Revenues to the Company from the AT&T agreement ended in
the fourth quarter of 1998. The decision to end the AT&T relationship followed
the Company's growth in 1998 as a provider of telecommunications services as a
result of the commercial introduction of the Telemanager in September 1997, the
completion of the PIC Acquisition in October 1997 and the completion of the
Incomex Acquisition in February 1998. The Company currently conducts its
business through three principal business units: (i) MTS, which provides
telecommunications management and consulting services, (ii) PIC/ATN, which
provides operator services and related valued added services, and (iii) Incomex,
which provides billing and collection services for calls to the United States
from resort hotels in Mexico.
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RESULTS OF OPERATIONS
The following table sets forth statements of operations items and the
percentages that such items bear to revenues:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues................................... 100% 100%
Cost of sales.............................. 67 75
Selling, general, and administrative....... 22 56
Depreciation and amortization.............. 5 25
Loss from impairment of property,
equipment and intangible assets.......... - 16
---- -----
Total operating expenses................... 27 172
Operating income (loss).................... 6 (72)
Interest expense........................... 7 10
Loss from joint venture.................... - 12
Income taxes............................... - -
---- -----
Net loss................................... (1)% (94)%
==== =====
</TABLE>
The information for the year ended December 31, 1997 in the preceding
table includes statement of operations data for PIC after the consummation of
the PIC Acquisition on October 31, 1997. The information for the year ended
December 31, 1998 in the preceding table includes statement of operations data
for Incomex after the consummation of the Incomex Acquisition on February 13,
1998.
REVENUES. Consolidated revenues increased $25.6 million, or 305%, to
$34.0 million for the twelve months ended December 31, 1998 from $8.4 million
for the twelve months ended December 31, 1997. Revenues during the twelve months
ended December 31, 1998 consisted of $5.2 million attributable to MTS, $20.8
million attributable to PIC/ATN compared with $1.9 million in the previous year
following its acquisition on October 31, 1997, and $8.0 million attributable to
the Incomex following its acquisition in February 1998. Call processing revenues
generated from MTS through its Lodging Partnership program decreased $2.5
million, or 54%, to $2.1 million for the twelve months ended December 31, 1998
from $4.6 million for the twelve months ended December 31, 1997. This decrease
was the result of declining room counts contracted under the Lodging Partnership
program, decreased call counts per room from the previous year and the
termination of the AT&T agreement effective October 1998. Revenues from other
service income generated by MTS increased $790,000, or 642%, to $913,000 for the
twelve months ended December 31, 1998 from $123,000 for the twelve months ended
December 31, 1997. Telemanager revenues were $635,000 for the twelve months
ended December 31, 1998, compared to none for the twelve months ended December
31, 1997.
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<PAGE> 15
In October 1998, the Company and AT&T agreed to end the Lodging
Partnership. Under this agreement, AT&T will directly manage all customers in
the Lodging Partnership. The Company reported a one-time gain of $453,396 during
the fourth quarter of 1998 relating to the termination of its agreement with
AT&T. Revenues of $2.0 million and marginal net profits have been recognized by
the Company from the AT&T agreement for the twelve months ended December 31,
1998. These revenues and net profits will not be present in future periods.
COST OF SALES. Consolidated cost of sales increased $16.5 million, or
262%, to $22.8 million for the twelve months ended December 31, 1998 from $6.3
million for the twelve months ended December 31, 1997. Cost of sales during the
twelve months ended December 31, 1998 consisted of $3.4 million attributable to
MTS, $14.7 million attributable to PIC/ATN and $4.7 million attributable to
Incomex following its acquisition in February 1998. Costs associated with call
processing revenues for MTS decreased $1.9 million, or 40%, to $2.9 million for
the twelve months ended December 31, 1998 from $4.8 million for the twelve
months ended December 31, 1997.
A nonstandard charge of $390,000 was taken in the fourth quarter of 1998
as a result of a dispute in collection procedures and policies with a billing
and collection processor for Incomex. The Company has changed vendors and does
not expect a reaccurance of this issue, except for approximately $100,000 in the
first two months of 1999.
GROSS PROFIT. Consolidated gross operating profit increased $9.1
million, or 423%, to $11.2 million for the twelve months ended December 31, 1998
from $2.1 million for the twelve months ended December 31, 1997. Gross operating
profit during the twelve months ended December 31, 1998, consisted of $1.9
million attributable to MTS compared to $1.6 million in 1997, $6.1 million
attributable to PIC/ATN compared to $500,000 in 1997, and $3.2 million
attributable to Incomex following its acquisition in February 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Consolidated selling,
general and administrative expense increased $2.8 million, or 59%, to $7.5
million for the twelve months ended December 31, 1998 from $4.7 million for the
twelve months ended December 31, 19997. Selling, general and administrative
expense during the twelve months ended December 31, 1998 consisted of $3.5
million attributable to MTS and Corporate compared to $4.3 million in 1997, $2.7
million attributable to PIC/ATN compared to $403,000 in 1997, and $1.3 million
attributable to Incomex following its acquisition in February 1998. MTS and
Corporate selling, general and administrative expense decreased $500,000, or
13%, to $3.5 million for the twelve months ended
15
<PAGE> 16
December 31, 1998 from $4.0 million for the twelve months ended December 31,
1997. The decrease was primarily due to a reduction in commissions and costs
associated with the termination of the AT&T agreement in October 1998.
DEPRECIATION AND AMORTIZATION EXPENSE. Consolidated depreciation and
amortization expense decreased $0.3 million, or 14%, to $1.8 million for the
twelve months ended December 31, 1998 from $2.1 million for the twelve months
ended December 31, 1997. Depreciation and amortization expenses during the
twelve months ended December 31, 1998 consisted of $1.4 million attributable to
MTS and Corporate, $436,000 attributable to PIC/ATN and $12,000 attributable to
Incomex. The completion of the PIC Acquisition in October 1997 resulted in
additional goodwill and acquisition cost amortization of $406,000 for the twelve
months ended December 31, 1998. The completion of the Incomex Acquisition in
February 1998 resulted in goodwill and acquisition cost amortization of $162,000
for the twelve months ended December 31,1998. Such increases were offset by a
decrease in depreciation of property and equipment due to the impairment loss
recorded in 1997 of $1.4 million. As a result of the PIC Earn-Out settlement and
the Incomex Earn-Out settlement recorded in the fourth quarter of 1998 (see
Notes 3 and 4 to Notes to Consolidated Financial Statements) the Company
recorded additional goodwill of $4.4 million which will be amortized over the
remaining life of the original goodwill. This will result in higher amortization
expense in future periods.
GAIN ON AT&T AGREEMENT BUYOUT. The Company's agreement with AT&T was
amended during 1998 to terminate as of October 15, 1998. Under the amendment,
AT&T will directly manage the existing customers under the contracts and AT&T
assumed liability for all commissions owed to the existing customers for the
period March 1, 1998 to October 15, 1998. As a result, the Company recorded a
one-time gain in the fourth quarter of 1998 of $453,396 representing the
commissions assumed by AT&T less the write-off of owned equipment at the
existing customers properties.
INTEREST EXPENSE. Consolidated interest expense, including amortization
of debt discount, increased $1.6 million, or 186%, to $2.4 million for the
twelve months ended December 31, 1998 from $847,000 for the twelve months ended
December 31, 1997. The primary reason for the increased interest expense was due
to additional debt incurred related to the PIC Acquisition and the acquisition
of fixed assets. Interest expense during the twelve months ended December 31,
1998 consisted of $1.5 million attributable to MTS and Corporate, $524,000
attributable to PIC/ATN and $356,000 attributable to Incomex following its
acquisition in February 1998. Interest expense incurred by MTS and Corporate
increased $790,000 or 102%, to $1.5 million for the twelve months ended December
31, 1998 from $775,000 for the twelve months ended December 31, 1997.
16
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company's current liabilities of $12.6
million exceeded current assets of $3.8 million resulting in a working capital
deficit of $8.8 million. During 1998, the Company used $0.7 million in cash for
operating activities and $2.8 million in investing activities. The Company
received proceeds from new debt financing of $7.6 million and repaid borrowings
on notes payable and made payments on capital lease obligations of $2.9 million.
These activities resulted in an increase in available cash of $1.2 million for
the twelve months ended December 31, 1998.
The Company's principal sources of capital to date have been public and
private offerings of debt and equity securities and lease and debt financing
arrangements with Berthel to purchase telecommunications equipment. The total
amount of lease and debt financing with Berthel at December 31, 1998 was $6.2
million. The Company currently makes monthly lease and debt payments of
approximately $163,000, in the aggregate, pursuant to these financing
arrangements. As of December 31, 1998, the Company was current on all lease
payments to Berthel. However, subsequent to year-end, the Company has not made
the February and March 1999 payments. Berthel only has the right to demand that
the Company cure this violation, but has not made such a demand as of March 22,
1999.
As of December 31, 1998, the Company had total current debt of $9.3
million.
During the first quarter of 1999, the Company raised $1.5 million from
debt financing. The Company does not believe that its existing capital and
anticipated funds from operations will be sufficient to meet its anticipated
cash needs for working capital, capital expenditures, debt obligations and
investments in acquisitions in 1999. The Company currently estimates that it
will need at least $8.5 million in debt or equity financings in 1999 in addition
to the $1.5 million debt financing discussed above, and in addition to cash
flows from operations, to fund its cash requirements, including its initial
investments in ACTEL Integrated Communications, Inc. and AcNet de C.V. In
addition, the Company may be required to obtain additional financing in the
event of new acquisition opportunities. The Company has engaged in discussions
with a number of potential investors regarding proposed debt or equity
financings. However, no assurance can be given that the Company will be able to
raise adequate funds through such financings or generate sufficient cash flows
to meet the Company's cash needs. Insufficient funds may require the Company to
delay, scale back or eliminate some or all of its market development plans or
otherwise may have a material adverse effect on the Company. See
"Forward-Looking Statements" below.
YEAR 2000 PREPARATIONS
The Year 2000 issue relates to computer hardware and software and other
systems designed to use two digits rather than four digits to define the
applicable year. As a result, the Year 2000 would be translated as two zeroes.
Because the Year 1900 could also be translated as two zeroes, systems which use
two digits could read the date incorrectly for a number of date-sensitive
applications, resulting in potential calculation errors or the shutdown of major
systems. The Company has undertaken various initiatives intended to ensure that
its computer hardware and software and other systems will function properly with
respect to
17
<PAGE> 18
dates in the Year 2000 and thereafter. The systems subject to potential Year
2000 issues include not only information technology ("IT") systems, such as
accounting and data processing, communications systems and the Company's
telecommunications switches, but also non-IT systems, such as alarm systems, fax
machines or other miscellaneous systems.
THE COMPANY'S STATE OF READINESS. The Company's main internal systems,
including IT systems such as financial systems, the Telemanager and the
Company's telecommunications switches, and non-IT systems have been tested and
are either currently believed to be Year 2000 compliant or are expected to be
Year 2000 compliant by the end of the second quarter of 1999, with the exception
of the internal accounting software system of a subsidiary which is expected to
be integrated with the Company's system in the third quarter of 1999. The
Company anticipates completing surveys to its key customers and vendors during
the second quarter of 1999.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 COMPLIANCE. The majority of
the Company's internal Year 2000 issues have been or will be corrected through
systems upgrades, including an upgrade of the Company's telecommunications
switches, some of which are being made for other business purposes. The Company
has estimates that the costs of all such upgrades will not exceed $200,000, of
which approximately $100,000 had been incurred through December 31, 1998.
RISKS TO THE COMPANY RELATING TO THE YEAR 2000 ISSUE. The Company
believes that its reasonably likely worse case scenario would involve
malfunctions of the Company's telecommunications switches or the internal
systems of the Company's customers and key vendors. Any such malfunctions which
result in serious disruption of the Company's ability to process calls could
have a material adverse effect on the Company's results of operations and
financial condition. The Company plans to monitor the Year 2000 compliance of
its significant customers and vendors. However, a number of risks relating to
the Year 2000 issue may be out of the Company's control, including the
compliance status of the Company's customers and vendors and the Company's
reliance on outside links for essential services such as power. There can be no
assurance that a failure of systems of third parties on which the Company's
systems and operations will rely to be Year 2000 compliant will not have a
material adverse effect on the Company's business, financial condition or
operating results.
THE COMPANY'S YEAR 2000 CONTINGENCY PLANS. By the end of the second
quarter of 1999, the Company expects to be substantially Year 2000 compliant. To
the extent that any of the Company systems are not Year 2000 compliant by the
end of the second quarter of 1999, the Company believes that it will have time
to implement alternative systems. The Company's ability to respond to
non-compliance by its customers and vendors will be limited.
18
<PAGE> 19
FORWARD-LOOKING STATEMENTS
This report contains statements, including statements of management's
belief or expectation, which may be forward-looking within the meaning of
applicable securities laws. Such statements are subject to known and unknown
risks and uncertainties that could cause actual future results and developments
to differ materially from those currently projected. Such risks and
uncertainties include, among others, the following:
- the Company's access to adequate debt or equity capital to
meet the Company's operating and financial needs;
- the Company's ability to integrate and assimilate the
businesses of PIC/ATN and Incomex;
- the Company's ability to respond to competition in its
markets;
- the Company's ability to expand into new markets and to
effectively manage its growth;
- customer acceptance and effectiveness of the Telemanager and
the Company's ability to develop new technology and to adapt
to technological change in the telecommunications industry;
- the risk that the Company's assessment of the Year 2000 issue,
including its identification, assessment, remediation and
testing efforts, the dates on which the Company believes it
will complete such efforts and the costs associated with such
efforts, may be incorrect because it is based upon
management's estimates, which were derived from numerous
assumptions regarding future events, available resources,
third-party remediation plans, the accuracy of testing of the
affected systems and other factors;
- changes in, or failure to comply with, governmental
regulation, including telecommunications regulations;
- the Company's reliance on its key personnel and the
availability of qualified personnel;
- general economic conditions in the Company's markets;
19
<PAGE> 20
- the risk that the Company's analyses of these risks could be
incorrect and/or the strategies developed to address them
could be unsuccessful; and
- various other factors discussed in this Annual Report on Form
10-KSB.
The Company will not update the forward-looking information to reflect
actual results or changes in the factors affecting the forward-looking
information.
The forward-looking information referred to above includes any matters
preceded by the words "anticipates," "believes," "intends," "plans," "expects"
and similar expressions as they relate to the Company and include, but are not
limited to:
- expectations regarding the Company's financial condition and
liquidity, as well as future cash flows;
- expectations regarding sales growth, sales mix, gross margins
and related matters with respect to operating results;
- expectations regarding the expansion of the Company's
business;
- the estimated costs to bring the Company's IT and non-IT
systems into compliance with respect to the Year 2000 issue
and the consequences to the Company of non-compliance by the
Company or third parties; and
- expectations regarding capital expenditures and investments in
new acquisition opportunities.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company and notes thereto
are filed under this item beginning on page F-1 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
20
<PAGE> 21
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information regarding the executive officers and directors of the
Company is incorporated herein by reference to the discussions under "Election
of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders which
will be filed on or before April 30, 1999.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated herein by reference to the discussion under "Executive
Compensation" in the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders which will be filed on or before April 30, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the discussion under "Security
Ownership" in the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders which will be filed on or before April 30, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the discussions under "Executive
Compensation--Employment Agreements" and "Certain Relationships and Related
Transactions" in the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders which will be filed on or before April 30, 1999.
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<PAGE> 22
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
a. Exhibits:
EXHIBIT NUMBER DOCUMENT DESCRIPTION
-------------- --------------------
3.1 Restated Articles of Incorporation of the Company. (1)
3.2 First Amendment to Restated Articles of Incorporation of
the Company. (2)
3.3 Second Amendment to Restated Articles of Incorporation
of the Company. (2)
3.4 Amended and Restated By-Laws of the Company. (3)
4.1 Form of Warrant Agreement between the Company and
Firstar Trust Company. (1)
4.2 Form of Redeemable Warrant. (1)
10.1 AT&T Management Company Commission Agreement, dated a
of December 16, 1995, by and between the Company and
AT&T Communications, Inc. ("AT&T"). (1) (4)
10.2 Amendment No. 1 to AT&T Management Company Commission
Agreement, dated as of January 16, 1996, by and between
the Company and AT&T. (1)
10.3 Amendment No. 2 to AT&T Management Company Commission
Agreement, dated as of January 16, 1996, by and between
the Company and AT&T. (1) (4)
10.4 Amendment No. 3 to AT&T Management Company Commission
Agreement, executed on December 13, 1996, by and between
AT&T and the Company. (5)
10.5 AT&T Management Company Commission Agreement, effective
as of January 16, 1998, by and between the Company and
AT&T. (4) (6)
10.6 Amendment to AT&T Management Company Commission
Agreement, effective as of October 15, 1998, by and
between the Company and AT&T.
22
<PAGE> 23
10.7 Stock Purchase Agreement, dated as of August 22, 1997,
among MCC Acquisition Corp., Priority International
Communications, Inc. and certain shareholders of
Priority International Communications, Inc. (7)
10.8 First Amendment to Stock Purchase Agreement, dated as of
October 31, 1997, among MCC Acquisition Corp., Priority
International Communications, Inc. and certain
shareholders of Priority International Communications,
Inc. (7)
10.9 Second Amendment to Stock Purchase Agreement, dated as
of February 27, 1998, among MCC Acquisition Corp.,
Priority International Communications, Inc. and certain
shareholders of Priority International Communications,
Inc. (6)
10.10 Stock Purchase Agreement, dated as of August 22, 1997,
among MCC Acquisition Corp., PIC Resources Corp., the
shareholders of PIC Resources Corp. and ATN
Communications Inc. (7)
10.11 First Amendment to Stock Purchase Agreement dated as of
October 31, 1997, among MCC Acquisition Corp., PIC
Resources Corp., the shareholders of PIC Resources Corp.
and ATN Communications Inc. (7)
10.12 Second Amendment to Stock Purchase Agreement, dated as
of February 27, 1998, among MCC Acquisition Corp., PIC
Resources Corp., the shareholders of PIC Resources Corp.
and ATN Communications, Inc. (6)
10.13 Amended and Restated Short-Term Note dated February 27,
1998 issued by MCC Acquisition Corp. to Bonner B.
Hardegree, trustee for the benefit of Wayne Wright, and
Bonner B. Hardegree. (6)
10.14 Form of Long-Term Note (7)
10.15 Agreement, dated as of May 21, 1998, among the Company,
MCC Acquisition Corp., Priority International
Communications, Inc., PIC Resources Corp., Wayne Wright,
Bonner Hardegree and ATN Communications, Inc. (8)
23
<PAGE> 24
10.16 Earn-Out Settlement Agreement, dated as of December 7,
1998, among the Company, MCC Acquisition Corp., Priority
International Communications, Inc., PIC Resources Corp.,
Wayne Wright, Bonner Hardegree and ATN Communications,
Inc.
10.17 Stock Purchase Agreement, dated as of February 13, 1998,
among MCC Acquisition Corp., Incomex, Inc. and the
Shareholders of Incomex, Inc. (9)
10.18 Earn-Out Settlement Agreement, dated as of December 1,
1998, among the Company, MCC Acquisition Corp., Incomex,
Inc. and the Shareholders of Incomex, Inc.
10.19 Murdock Communications Corporation 1993 Stock Option
Plan. (1) (10)
10.20 Murdock Communications Corporation 1997 Stock Option
Plan, as amended. (10)
10.21 Amended and Restated Employment Agreement, dated as of
October 1, 1998, by and between the Company and Guy O.
Murdock. (10)
10.22 Employment Agreement, dated as of January 1, 1999, by
and between the Company and Colin P. Halford. (10)
10.23 Amended and Restated Employment Agreement, dated as of
October 1, 1998, by and between the Company and Thomas
E. Chaplin. (10)
10.24 Employment Agreement, dated as of January 1, 1999, by
and between the Company and Bill R. Wharton. (10)
10.25 Employment Agreement, dated as of November 1, 1998, by
and among the Company, Priority International
Communications, Inc., PIC Resources Corp. and Bonner B.
Hardegree. (10)
10.26 Employment Agreement, dated as of November 16, 1998, by
and between the Company and Paul C. Tunink. (10)
10.27 Credit Agreement, dated as of May 31, 1994, by and
between the Company and Telecommunications Income Fund
X, L.P. (1)
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<PAGE> 25
10.28 Credit Agreement, dated as of May 31, 1994, by and
between the Company and Telecommunications Income
Fund IX, L.P. (1)
10.29 Lease Agreement for Lease #076-18000-012, dated as of
February 27, 1996, by and between the Company and
Berthel Fisher & Company Leasing, Inc. as agent for
Telecommunications Income Fund X, L.P. (1)
10.30 Lease Agreement for Lease #074-18000-016, dated as of
June 14, 1996, by and between the Company and Berthel
Fisher & Company Leasing, Inc. as agent for
Telecommunications Income Fund IX, L.P. (1)
10.31 Lease Agreement for Lease #076-18000-017, dated as of
July 3, 1996, by and between the Company and Berthel
Fisher & Company Leasing, Inc. as agent for
Telecommunications Income Fund X, L.P. (1)
10.32 Modification Agreement for 21 Leases, dated as of May
30, 1996, by and between the Company and Berthel Fisher
& Company Leasing, Inc. as agent for Telecommunications
Income Fund IX, L.P. (1)
10.33 Modification Agreement for Lease #063-17000-001, dated
as of May 30, 1996, by and between the Company and
Berthel Fisher & Company Leasing, Inc. (1)
10.34 Modification Agreement for Lease #076-17000-443, dated
as of May 30, 1996, by and between the Company and
Berthel Fisher & Company Leasing, Inc. as agent for
Telecommunications Income Fund X, L.P. (1)
10.35 Modification Agreement for Lease #076-17000-943, dated
as of May 30, 1996, by and between the Company and
Berthel Fisher & Company Leasing, Inc. as agent for
Telecommunications Income Fund X, L.P. (1)
10.36 Modification Agreement for Lease #076-18000-012, dated
as of May 30, 1996, by and between the Company and
Berthel Fisher & Company Leasing, Inc. as agent for
Telecommunications Income Fund X, L.P. (1)
25
<PAGE> 26
10.37 Modification Agreement for Lease #076-46698-000, dated
as of May 30, 1996, by and between the Company and
Berthel Fisher & Company Leasing, Inc. as agent for
Telecommunications Income Fund X, L.P. (1)
10.38 Equipment Lease #076-17000-443, dated as of May 31,
1994, by and between the Company and Berthel Fisher &
Company Leasing, Inc. (1)
10.39 Equipment Lease #076-46698-000, dated as of January 18,
1995, by and between the Company and Berthel Fisher &
Company Leasing, Inc. as agent for Telecommunications
Income Fund X, L.P. (1)
10.40 Equipment Lease/Purchase Agreement #063-18000-000, dated
as of May 30, 1996, by and between the Company and
Berthel Fisher & Company Leasing, Inc. (1)
10.41 Assignment of Lease of Security Agreement, dated as of
May 31, 1994, from Berthel Fisher & Company Leasing,
Inc. to Telecommunications Income Fund X, L.P. (1)
10.42 Demand Note for $50,000, dated as of December 26, 1995,
between the Company and Berthel Fisher & Company
Leasing, Inc. (1)
10.43 Demand Note for $200,000, dated as of January 25, 1996,
by and between the Company and Berthel Fisher & Company
Leasing, Inc. (1)
10.44 Demand Note for $200,000, dated as of January 31, 1996,
by and between the Company and Berthel Fisher & Company
Leasing, Inc. (1)
10.45 Demand Note for $100,000, dated as of February 27, 1996,
by and between the Company and Berthel Fisher & Company
Leasing, Inc. (1)
10.46 Equipment Lease, dated as of August 16, 1995, by and
between the Company and Harvey Leasing. (1)
10.47 Lease Agreement for Lease #074-18000-004, dated as of
November 30, 1995, by and between the Company and
Berthel Fisher & Company Leasing, Inc. as agent for
Telecommunications Income Fund IX, L.P. (1)
26
<PAGE> 27
10.48 Lease Agreement for Lease #074-18000-005, dated as of
November 30, 1995, by and between the Company and
Berthel Fisher & Company Leasing, Inc. as agent for
Telecommunications Income Fund IX, L.P. (1)
10.49 Lease Agreement for Lease #074-18000-006, dated as of
November 30, 1996, by and between the Company and
Berthel Fisher & Company Leasing, Inc. as agent for
Telecommunications Income Fund IX, L.P. (1)
21 Subsidiaries
24 Power of Attorney (included as part of the signature
page hereof)
27 Financial Data Schedule
(1) Filed as an exhibit to the Company's Registration Statement on Form SB-2
(File No. 333-05422C) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1997 (File No. 000-21463) and
incorporated herein by reference.
(3) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 1997 (File No. 000-21463) and
incorporated herein by reference.
(4) Portions of these exhibits were granted confidential treatment by the
Securities and Exchange Commission.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1996 (File No. 000-21463) and incorporated herein by
reference.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1997 (File No. 000-21463) and incorporated herein by
reference.
(7) Filed as an exhibit to the Company's Current Report on Form 8-K (File No.
000-21463) filed with the Securities and Exchange Commission on November 7,
1997 and incorporated herein by reference.
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<PAGE> 28
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended June 30, 1998 (File No. 000-21463) and incorporated
herein by reference.
(9) Filed as an exhibit to the Company's Current Report on Form 8-K (File No.
000-21463) filed with the Securities and Exchange Commission on February
13, 1998 and incorporated herein by reference.
(10) Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K for the three months
ended December 31, 1998.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
MURDOCK COMMUNICATIONS CORPORATION
By /s/ Thomas E. Chaplin
---------------------------------
Thomas E. Chaplin
Chief Executive Officer
Date: March 30, 1999
Each person whose signature appears below hereby appoints Guy
O. Murdock and Thomas E. Chaplin, and each of them individually, his true and
lawful attorney-in-fact, with power to act with or without the other and with
full power of substitution and resubstitution, in any and all capacities, to
sign any or all amendments to the Form 10-KSB and file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Guy O. Murdock Chairman of the Board of Directors March 30, 1999
- ------------------------------------ (Principal Executive Officer)
Guy O. Murdock
/s/ Colin P. Halford President and Director March 30, 1999
- ------------------------------------
Colin P. Halford
/s/ Thomas E. Chaplin Chief Executive Officer and Director March 30, 1999
- ------------------------------------ (Principal Financial Officer and
Thomas E. Chaplin Principal Accounting Officer)
</TABLE>
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<PAGE> 30
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ John C. Poss Director March 30, 1999
- ------------------------------------
John C. Poss
/s/ Steven R. Ehlert Director March 30, 1999
- ------------------------------------
Steven R. Ehlert
/s/ Larry A. Erickson Director March 30, 1999
- ------------------------------------
Larry A. Erickson
/s/ Wayne Wright Director March 30, 1999
- ------------------------------------
Wayne Wright
</TABLE>
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- --------------------------------------------------------------------------------
MURDOCK COMMUNICATIONS
CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
INDEPENDENT AUDITORS' REPORT
F-1
<PAGE> 32
MURDOCK COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Redeemable Securities 4
Consolidated Statements of Shareholders' Equity (Deficiency) 5
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 10
</TABLE>
F-2
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Murdock Communications Corporation
Cedar Rapids, Iowa
We have audited the accompanying consolidated balance sheets of Murdock
Communications Corporation and subsidiaries (the "Company") as of December 31,
1998 and 1997, and the related consolidated statements of operations, redeemable
securities, shareholders' equity (deficiency) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Murdock Communications Corporation
and subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations and deficit working capital raise substantial doubt about its ability
to continue as a going concern. Management's plans concerning these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
Cedar Rapids, Iowa
March 22, 1999
F-3
<PAGE> 34
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS (Notes 6 and 7) 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,722,033 $ 547,737
Accounts receivable, less allowance for doubtful
accounts: 1998 - $654,793, 1997 - $376,589 1,690,302 846,414
AT&T commission receivable (Note 2) 62,513 --
Prepaid expenses and other current assets 280,568 109,186
------------ -----------
Total current assets 3,755,416 1,503,337
------------ -----------
PROPERTY AND EQUIPMENT:
Land and building 1,171,659 463,693
Telecommunications equipment 9,013,509 8,530,536
Furniture and equipment 748,512 537,550
------------ -----------
10,933,680 9,531,779
Accumulated depreciation (8,097,752) (7,400,982)
------------ -----------
2,835,928 2,130,797
Telecommunications equipment under capital lease,
net of accumulated amortization: 1998 - $3,326,300
1997 - $3,209,405 181,630 370,706
------------ -----------
Property and equipment, net 3,017,558 2,501,503
------------ -----------
OTHER ASSETS:
Goodwill, net of accumulated amortization:
1998 - $697,324; 1997 - $70,061 11,643,882 4,133,648
Cost of purchased site contracts, net of accumulated
amortization:
1998 - $669,597, 1997 - $740,330 173,576 484,355
Other intangible assets, net of accumulated amortization:
1998 - $348,208, 1997 - $22,911 659,155 397,556
Investments, at cost (Note 17) 1,500,296 --
Prepaid commissions 1,704,444 --
Other noncurrent assets 223,963 365,654
------------ -----------
Total other assets 15,905,316 5,381,213
------------ -----------
TOTAL $ 22,678,290 $ 9,386,053
============ ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) 1998 1997
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable (Note 6) $ 7,401,371 $ 1,715,000
Outstanding checks in excess of bank balances -- 231,452
Accounts payable 1,204,690 1,684,090
Accrued expenses 2,059,362 1,453,334
Current portion of capital lease obligations
principally with a related party (Note 12) 868,754 181,322
Current portion of long-term debt with related parties (Note 7) 828,331 949,497
Current portion of long-term debt, others (Note 7) 199,287 259,654
------------ ------------
Total current liabilities 12,561,795 6,474,349
LONG-TERM LIABILITIES:
Capital lease obligations principally with a related party,
less current portion (Note 12) 3,133,077 3,375,011
Long-term debt with related parties, less current portion (Note 7) 2,105,325 3,293,829
Long-term debt, others, less current portion (Note 7) 725,381 292,493
Accumulated loss of joint venture in excess of initial
investment (Note 5) 60,393 380,913
Deferred income 15,189 51,447
------------ ------------
Total liabilities 18,601,160 13,868,042
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY (DEFICIENCY) (Note 1):
8% Series A Convertible Preferred Stock, $100 stated value (Note 8):
Authorized - 50,000 shares
Issued and outstanding: 1998 - 18,920 ($1,892,000 liquidation
value); 1997 - 16,250 shares 1,837,109 1,544,146
Common stock, no par or stated value (Note 10):
Authorized - 20,000,000 shares
Issued and outstanding: 1998 - 10,329,867 shares;
1997 - 4,458,439 shares 19,834,810 11,343,308
Common stock warrants (Note 9):
Issued and outstanding: 1998 - 4,420,763; 1997 - 2,149,279 438,905 315,400
Additional paid-in capital 134,000 134,000
Accumulated deficit (18,167,694) (17,818,843)
------------ ------------
Total shareholders' equity (deficiency) 4,077,130 (4,481,989)
------------ ------------
TOTAL $ 22,678,290 $ 9,386,053
============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 35
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
REVENUES:
<S> <C> <C>
Call processing $ 32,386,570 $ 7,629,116
Other revenue 1,601,529 788,004
------------ -----------
Total revenues 33,988,099 8,417,120
------------ -----------
COST OF SALES:
Call processing 21,859,097 5,958,335
Other cost of sales 516,220 314,322
Nonstandard international bad debt expense 390,276 --
------------ -----------
Total cost of sales 22,765,593 6,272,657
------------ -----------
GROSS PROFIT 11,222,506 2,144,463
------------ -----------
OPERATING EXPENSES:
Selling, general and administrative expense 7,468,246 4,702,754
Depreciation and amortization expense 1,848,748 2,142,773
Loss from impairment of property, equipment and intangible assets -- 1,353,010
------------ -----------
Total operating expenses 9,316,994 8,198,537
------------ -----------
INCOME (LOSS) FROM OPERATIONS 1,905,512 (6,054,074)
------------ -----------
NONOPERATING INCOME (EXPENSE):
Gain on AT&T contract buyout (Note 2) 453,396 --
Interest expense (2,426,140) (847,203)
Other income 8,906 --
------------ -----------
Total nonoperating income (expense) (1,963,838) (847,203)
------------ -----------
LOSS BEFORE INCOME TAX EXPENSE AND JOINT VENTURE LOSS (58,326) (6,901,277)
Loss from joint venture (Note 5) 41,546 993,329
Income tax expense (Note 11) 74,466 5,402
------------ -----------
NET LOSS (174,338) (7,900,008)
Dividends and accretion on 8% Series A Convertible Preferred Stock (174,513) (35,007)
------------ -----------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS (348,851) (7,935,015)
============ ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (.06) $ (1.89)
============ ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,422,783 4,208,439
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 36
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE SECURITIES
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
10% SERIES A
REDEEMABLE
PREFERRED STOCK
<S> <C>
BALANCE AT JANUARY 1, 1997 $ 24,480
Accrued dividends on 10% Series A
Redeemable Preferred Stock 170
Repurchase of 200 shares of 10% Series A
Redeemable Preferred Stock (24,650)
-----------
BALANCE AT DECEMBER 31, 1997 AND 1998 $ -
===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 37
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
8% SERIES A CONVERTIBLE COMMON STOCK
PREFERRED STOCK COMMON STOCK WARRANTS
----------------------- --------------------- -----------------------
NUMBER NUMBER NUMBER
OF OF OF
SHARES ISSUED SHARES ISSUED WARRANTS ISSUED
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1997 -- $ -- 4,152,494 $ 10,820,898 1,173,089 $ 113,336
Issuance of options to directors -- -- -- -- -- --
Accrued dividends on 10% Series A
Redeemable Preferred Stock
Exercise of common stock warrants -- -- 5,945 10,536 (3,089) (4,936)
Conversion of notes payable, accrued
interest and long-term debt with a
related party into common stock
(Note 7) -- -- 465,265 1,334,274 -- --
Issuance of 8% Series A Convertible
Preferred Stock, net of offering
costs of $87,636 16,250 1,537,364 -- -- -- --
Issuance of common stock in
connection with the acquisition of
PIC and PIC-R (Note 3) -- -- 300,000 511,874 -- --
Issuance of warrants to Berthel in
connection with lease and
note modifications -- -- -- -- 979,279 207,000
Recission of conversion of notes
payable, accrued interest and
long-term debt with a related
party into common stock (Note 7) -- -- (465,265) (1,334,274)
Accretion to conversion price of 8%
Series A Convertible Preferred Stock -- 6,782 -- -- -- --
Accrued dividends on 8% Series A
Convertible Preferred Stock -- -- -- -- -- --
Net loss for 1997 -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1997 16,250 $ 1,544,146 4,458,439 $ 11,343,308 2,149,279 $ 315,400
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
SHARE-
ADDITIONAL HOLDERS'
PAID-IN ACCUMULATED EQUITY
CAPITAL DEFICIT (DEFICIENCY)
<S> <C> <C> <C>
BALANCES AT JANUARY 1, 1997 $ 124,000 $ (9,883,658) $ 1,174,576
Issuance of options to directors 10,000 -- 10,000
Accrued dividends on 10% Series A
Redeemable Preferred Stock (170) (170)
Exercise of common stock warrants -- -- 5,600
Conversion of notes payable, accrued
interest and long-term debt with a
related party into common stock
(Note 7) -- -- 1,334,274
Issuance of 8% Series A Convertible
Preferred Stock, net of offering
costs of $87,636 -- -- 1,537,364
Issuance of common stock in
connection with the acquisition of
PIC and PIC-R (Note 3) -- -- 511,874
Issuance of warrants to Berthel in
connection with lease and
note modifications -- -- 207,000
Recission of conversion of notes
payable, accrued interest and
long-term debt with a related
party into common stock (Note 7) -- -- (1,334,274)
Accretion to conversion price of 8%
Series A Convertible Preferred Stock -- (6,782) --
Accrued dividends on 8% Series A
Convertible Preferred Stock -- (28,225) (28,225)
Net loss for 1997 -- (7,900,008) (7,900,008)
------------ ------------ ------------
BALANCES AT DECEMBER 31, 1997 $ 134,000 $(17,818,843) $ (4,481,989)
============ ============ ============
</TABLE>
(Continued)
F-7
<PAGE> 38
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
8% SERIES A CONVERTIBLE COMMON STOCK
PREFERRED STOCK COMMON STOCK WARRANTS
--------------------------- --------------------------- ----------------------
NUMBER NUMBER NUMBER
OF OF OF
SHARES ISSUED SHARES ISSUED WARRANTS ISSUED
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1997 16,250 $ 1,544,146 4,458,439 $ 11,343,308 2,149,279 $ 315,400
Issuance of 8% Series A Convertible
Preferred Stock, net of issuance
costs of $5,228 2,670 261,772 -- -- -- --
Issuance of common stock and warrants
in connection with the acquisition
of Incomex (Note 4) -- -- 1,900,000 2,494,375 155,384 29,797
Exercise of warrants by a related
party -- -- 1,100,000 1,752,396 (1,100,000) (322,396)
Issuance of warrants in connection with
debt financing with a related party
(Note 12) -- -- -- -- 350,000 165,396
Issuance of warrants in connection
with debt financing of which 739,000
are with related parties (Note 6) -- -- -- -- 2,700,000 221,288
Issuance of warrants in lieu of director
and consulting fees -- -- -- -- 45,000 5,200
Issuance of warrants in lieu of agent
fees to a related party (Note 6) -- -- -- -- 121,100 24,220
Issuance of common stock in
connection with the acquisition of PIC
(Note 3) -- -- 2,871,428 4,244,731 -- --
Accretion to conversion price of 6%
Series A Convertible Preferred Stock -- 31,191 -- -- -- --
Accrued dividends on 8% Series A
Convertible Preferred Stock -- -- -- -- -- --
Net loss for 1998
-- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1998 18,920 $ 1,837,109 10,329,867 $ 19,834,810 4,420,763 $ 438,905
============ ============ ============ ============ ============ ============
<CAPTION>
SHARE-
ADDITIONAL HOLDERS'
PAID-IN ACCUMULATED EQUITY
CAPITAL DEFICIT (DEFICIENCY)
<S> <C> <C> <C>
BALANCES AT DECEMBER 31, 1997 $ 134,000 $(17,818,843) $ (4,481,989)
Issuance of 8% Series A Convertible
Preferred Stock, net of issuance
costs of $5,228 -- -- 261,772
Issuance of common stock and warrants
in connection with the acquisition
of Incomex (Note 4) -- -- 2,524,172
Exercise of warrants by a related
party -- -- 1,430,000
Issuance of warrants in connection with
debt financing with a related party
(Note 12) -- -- 165,396
Issuance of warrants in connection
with debt financing of which 739,000
are with related parties (Note 6) -- -- 221,288
Issuance of warrants in lieu of director
and consulting fees -- -- 5,200
Issuance of warrants in lieu of agent
fees to a related party (Note 6) -- -- 24,220
Issuance of common stock in
connection with the acquisition of PIC (Note 3) -- -- 4,244,731
Accretion to conversion price of 6%
Series A Convertible Preferred Stock -- (31,191) --
Accrued dividends on 8% Series A
Convertible Preferred Stock -- (143,322) (143,322)
Net loss for 1998 -- (174,338) (174,338)
------------ ------------ ------------
BALANCES AT DECEMBER 31, 1998 $ 134,000 $(18,167,694) $ 4,077,130
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 39
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (174,338) $(7,900,008)
Adjustments to reconcile net loss to net cash flows from operating activities:
Loss from impairment of property, equipment and intangible assets -- 1,353,010
Depreciation and amortization, including amortization of technology license 1,848,748 2,226,106
Noncash interest expense 271,623 359,141
Noncash compensation expense -- 10,000
Noncash commission expense 71,000 --
Recognition of deferred gains from equipment sales with a related party -- (22,428)
Loss from joint venture 41,546 993,329
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Receivables (727,670) 783,621
Other current assets (60,285) 130,684
Prepaid commissions (730,269) --
Other noncurrent assets 260,654 (187,372)
Outstanding checks in excess of bank balances (247,255) 134,192
Accounts payable (717,933) 873,691
Accrued expenses (539,525) 64,367
Deferred income (36,258) --
----------- -----------
Net cash flows from operating activities (739,962) (1,181,667)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (766,176) (641,229)
Cash paid for acquisitions (130,155) (640,156)
Payments for site contracts (2,875) (48,697)
Capitalized software development costs -- (138,013)
Cash paid for investments (1,500,296) --
Cash advanced to joint venture (362,065) (262,869)
Cash acquired with acquisitions 16,574 49,713
----------- -----------
Net cash flows from investing activities (2,744,993) (1,681,251)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations, primarily to a related party (264,822) (217,344)
Proceeds from capital lease obligations with a related party 710,320 --
Borrowings on notes payable 5,406,000 1,470,000
Borrowings of long-term debt with related parties -- 54,021
Payments on notes payable (1,656,241) (595,000)
Payments on long-term debt with related parties (719,005) (46,016)
Payments on long-term debt, others (152,479) (15,217)
Dividends paid on 10% Series A Redeemable Preferred Stock -- (170)
Repurchase of 10% Series A Redeemable Preferred Stock and common stock warrants -- (24,480)
Proceeds from issuance of common stock and warrants 1,430,000 5,600
Proceeds from issuance of 8% Series A Convertible Preferred Stock 50,000 1,625,000
Payments for offering costs (144,522) (87,636)
----------- -----------
Net cash flows from financing activities 4,659,251 2,168,758
----------- -----------
NET INCREASE (DECREASE) IN CASH 1,174,296 (694,160)
CASH AT BEGINNING OF YEAR 547,737 1,241,897
----------- -----------
$ 1,722,033 $ 547,737
CASH AT END OF YEAR =========== ===========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the year for interest, principally to a related party $2,183,214 $ 389,438
Cash paid during the year for income taxes 24,466 5,402
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE> 40
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997 (CONTINUED)
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF 1998 NONCASH OPERATING, INVESTING AND FINANCING
ACTIVITIES:
The Company recorded the following increases as a result of its acquisition of
Incomex:
<TABLE>
<S> <C>
Accounts receivable $178,731
Other current assets 111,097
Telecommunications equipment 3,242
Furniture and equipment 52,787
Accumulated depreciation (13,851)
Goodwill 920,947
Commission advances 974,175
Other assets 9,964
Notes payable (821,697)
Outstanding checks over bank balances (15,803)
Accounts payable (133,533)
Accrued expenses (826,985)
Common stock (422,500)
--------
Cash acquired with acquisition $ 16,574
========
</TABLE>
The Company recorded deferred loan costs of $445,901 in connection with the
issuance of warrants to purchase 3,171,000 shares of common stock in the
Company in connection with debt financing and 155,384 shares of common stock in
the Company in connection with the Incomex earnout.
The Company recorded a note payable of $25,000 in exchange for accrued
consulting fees.
The Company recorded a note payable of $5,000 in exchange for accrued director
fees.
The Company recorded an increase to the carrying value of the 8% Series A
Convertible Preferred Stock and a charge to accumulated deficit of $31,191
representing the current year's accretion to its conversion price.
The Company recorded an increase in accrued expense and a charge to accumulated
deficit of $143,322 for the cumulative dividends earned by the holders of the
8% Series A Convertible Preferred Stock.
The Company recorded prepaid commissions of $180,000 and accrued expenses of
$37,000 in connection with the issuance of 2,170 shares of 8% Series A
Convertible Preferred Stock.
The Company recorded long-term debt others and land and building of $525,000 in
connection with the purchase of ATN's building.
The Company recorded goodwill of $3,916,889, accounts payable of $135,000,
accrued expenses of $153,059, common stock of $4,244,731, decreased long-term
debt by $627,389 and issued 571,428 shares of common stock in connection with
the PIC earnout as discussed in Note 3.
The Company recorded goodwill of $4,103,776, accrued expenses of $59,187,
incurred notes of $1,084,915 and common stock of $2,469,609 in connection with
the Incomex purchase as discussed in Note 4.
See notes to consolidated financial statements.
SUPPLEMENTAL DISCLOSURES OF 1997 NONCASH OPERATING, INVESTING AND FINANCING
ACTIVITIES:
The Company contributed telecommunications equipment with a carrying value of
$349,574 as its initial investment in a joint venture (see Note 5).
The Company recorded the following increases as a result of its acquisitions of
PIC and PIC-R.
<TABLE>
<S> <C>
Accounts receivable $ 403,753
Other current assets 53,894
Telecommunications equipment 1,269,046
Furniture and equipment 193,787
Accumulated depreciation (244,761)
Goodwill 3,563,553
Purchased equipment location contracts 420,466
Accumulated amortization (193,125)
Other noncurrent assets 70,421
Notes payable (840,000)
Outstanding checks in excess of bank balances (97,260)
Accounts payable (279,917)
Accrued expenses (437,780)
Long-term debt with related parties (1,400,000)
Long-term debt, others (2,019,916)
Common stock (511,874)
-----------
Cash acquired with acquisitions $ 49,713
===========
</TABLE>
The Company recorded deferred loan and lease restructuring costs of $207,000
in connection with the issuance of warrants to purchase 979,279 shares of
common stock in the Company to Berthel.
In connection with the modification of capital lease obligations with Berthel,
the Company recorded additional deferred lease restructuring costs and capital
lease obligations of $210,854.
The Company recorded an increase to the carrying value of the 8% Series A
Convertible Preferred Stock and a charge to accumulated deficit of $6,782
representing the current year's accretion to its conversion price.
The Company recorded an accrued expense and a charge to accumulated deficit of
$28,225 for the cumulative dividends earned by the holders of the 8% Series A
Convertible Preferred Stock.
The Company recorded an increase in accrued expense and telecommunications
equipment under capital lease for $235,000 representing sales taxes on lease
payments.
See Notes to consolidated financial statements.
F-10
<PAGE> 41
MURDOCK COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Murdock Communications Corporation
(individually, or collectively with its wholly-owned subsidiaries
discussed below, referred to herein as the "Company") is engaged in the
business of providing operator services and call processing to North
American payphones, hotels and institutions, database profit management
services and telecommunications billing and collection services for the
hospitality industry and outsourced operator services for the
telecommunications industry.
Through a series of acquisitions and new product development, the Company
has transformed itself over the last year from a long distance reseller of
AT&T network services to U.S. hotels to being a communications provider in
North America, primarily servicing the hospitality and pay telephone
businesses.
The Company operates its business under three business units. Murdock
Technology Services ("MTS"), formerly the operating unit of Murdock
Communications Corporation, was the unit responsible for marketing of AT&T
operator services. In light of the declining volume and narrow margin of
the AT&T business, and the Company's refocused business strategy, the
Company reached an agreement with AT&T to terminate their marketing
agreement effective October 15, 1998. After the effective date of the
termination, AT&T directly managed the existing customers under the
contract and revenues from the AT&T agreement ended effective in the
fourth quarter of 1998. As a result of the termination, the Company
recorded a one-time gain in the fourth quarter of $453,396.
The MTS division was created in 1998 to meet the needs of the hospitality
telecommunications management market by providing database profit
management services and other value added telecommunication services. The
division's main product, the Telemanager, is a proprietary software and
hardware product, created to help manage telecommunication installations
and services in the hospitality market. At December 31, 1998, MTS has
installed the Telemanager in approximately 174 locations compared with 80
locations at December 31, 1997.
Effective October 31, 1997, the Company purchased Priority International
Communications, Inc. ("PIC") (see Note 3). PIC is primarily engaged in the
business of providing long-distance telecommunications services to patrons
of hotels and public and private payphone owners with which PIC has
contracts to provide such services. Services include, but are not limited
to, credit card billing services, live operator services, automated
collection and messaging delivery services, voice mail services and
telecommunications consulting. At December 31, 1998, PIC maintains site
contracts with and provides services for approximately 207 customers
throughout the United States (257 customers at December 31, 1997).
Also, on October 31, 1997, the Company purchased PIC Resources Corp.
("PIC-R") (see Note 3). PIC-R, operating through its wholly-owned
subsidiary ATN Communications, Incorporated ("ATN"), is primarily engaged
in the business of providing carrier services for long-distance
telecommunications companies throughout the United States. PIC-R handles
incoming operator assisted calls with their operators on location.
Together, PIC, PIC-R and ATN comprise the second business unit, known as
"PIC/ATN".
F-12
<PAGE> 42
On February 13, 1998, the Company purchased Incomex, Inc. ("Incomex"), the
Company's third business unit (see Note 4). Incomex is primarily engaged
in the business of providing international operator services to the
hospitality industry from Mexico to the United States. At December 31,
1998, Incomex maintains contracts with approximately 95 hotel and resort
hotel properties located in Mexico compared with approximately 80 at
February 13, 1998.
BASIS OF PRESENTATION - The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The Company has an accumulated deficit of $18.2
million, and current liabilities exceed current assets by $8.8 million at
December 31, 1998. These factors, among others, indicate that the Company
may be unable to continue as a going concern for a reasonable period of
time. Management's plans to sustain operations are discussed below.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to obtain
additional financing and refinancing as may be required, and ultimately to
attain profitable operations. Management's plans to accomplish these
objectives include, but are not limited to, the following:
- Continuing integration of the PIC/ATN and Incomex acquisitions (see
Notes 3 and 4). Management believes these acquisitions will continue
to provide additional positive cash flows as the companies are more
fully integrated and generate additional sources of call processing
traffic.
- Obtaining a line of credit which would enable the Company to
restructure its debt position and finance future growth.
- Successful implementation and market acceptance of the Telemanager
system, a new source of revenues to the Company in 1998, that is
being marketed to new and existing customers. Telemanager provides
the Company's customers with information regarding the hotel's
telecommunication system in graphs and reports that are easy to read
and understand by persons lacking specialized expertise in
telecommunications.
- During the first quarter of 1999, the Company raised $1,500,000 of
cash from debt financing (see Note 18). The Company does not believe
that its existing capital and anticipated funds from operations will
be sufficient to meet its anticipated cash needs for working capital,
capital expenditures, debt obligations and investments in
acquisitions in 1999. The Company currently estimates that it will
need at least $10 million, including the $1,500,000 above, in debt or
equity financings in 1999, or in addition to cash flows from
operations, to fund its cash requirements and initial investments in
AcNet and ACTEL (see note 17).
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company, the accounts of PIC and PIC-R
effective October 31, 1997, and effective February 13, 1998, the accounts
of Incomex, its wholly-owned subsidiaries. Significant intercompany
accounts and transactions have been eliminated in consolidation.
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
significantly from those estimates. Material estimates that are
particularly susceptible to significant change in the near-term relate to
the determination of the collectibility of receivables and impairment of
long-lived assets.
F-13
<PAGE> 43
CERTAIN RISK CONCENTRATIONS - The Company derived 12% and 24% of its
revenues in 1998 from two customers of PIC/ATN and 54% of its revenues
from AT&T in 1997. At December 31, 1998 and 1997, 3% and 12%,
respectively, of the Company's receivables were due from AT&T. The
Company's agreement with AT&T ended in the fourth quarter of 1998. Also,
substantially all of the Company's leasing arrangements are with Berthel
Fisher & Company and its subsidiaries, and their affiliated leasing
partnerships ("Berthel"). Berthel owned 14.8% and 9.2% of the Company's
outstanding common stock at December 31, 1998 and 1997, respectively.
REVENUE RECOGNITION - Revenues derived from the AT&T commission agreement
related to calls were recognized as revenues as the calls were placed.
Additional bonuses, primarily for reaching the number of contracted rooms
or calls specified in the agreement, were recognized when the specified
criteria had been met.
A growing portion of the Company's revenues are now derived from
processing long-distance telephone calls. The gross charges for these
calls are recognized as revenues by the Company as the calls are placed.
At the same time, amounts are recorded as cost of services for long
distance charges from the carrier of the calls, as well as charges for
processing the calls, bad debts and commissions to be paid based on the
Company's prior experience for these items.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. For
financial reporting purposes, depreciation and amortization are computed
on these assets using the straight-line method over their estimated useful
lives ranging from three to 28 years. For income tax purposes, accelerated
methods are used. Amortization of telecommunications equipment under
capital lease is included with depreciation expense.
The Company accounts for its telecommunications equipment leases as
capital leases under the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 13. Accordingly, the cost of the leased assets and
the related obligations under the lease agreements are recorded at the
inception of the lease. The leases are generally for four to five years.
The Company periodically reviews long-lived assets and intangible assets
for impairment whenever events or changes in circumstances indicate that
the carrying amount of these assets may not be recoverable. During 1997,
the Company recorded an impairment write-down with respect to
telecommunications equipment owned and under capital lease, purchased site
contracts and a technology license of $1,353,010 based on the estimated
discounted future cash flows expected to be generated by such assets. The
write-down primarily related to call processing equipment at hotels and a
technology license for such equipment which became functionally obsolete
upon the acquisition of PIC-R since calls can be processed directly by
PIC-R without utilizing such equipment.
GOODWILL - Goodwill is amortized on the straight-line method over 10
years.
COST OF PURCHASED SITE CONTRACTS - The cost of obtaining site contracts is
amortized over the term of the related contracts, generally one to three
years, using the straight-line method.
OTHER INTANGIBLE ASSETS - Other intangible assets consist of software
development costs, a technology license and deferred lease and loan
restructuring costs.
F-14
<PAGE> 44
Software development costs of $138,013 at December 31, 1998 and 1997 were
incurred for products and significant product enhancements subsequent to
establishment of their technological feasibility and prior to their
general release to customers. These costs were capitalized and stated net
of accumulated amortization of $68,915 and $22,911 at December 31, 1998
and December 31, 1997, respectively. The ultimate recovery of the costs is
dependent on the Company's ability to achieve a level of market acceptance
which will generate revenues and profits in amounts sufficient to permit
such recovery. The Company evaluates the recoverability of capitalized
software development costs by project on a periodic basis. Capitalized
software development costs are amortized using the straight-line method
over three years.
The technology license was stated at cost of $500,000 and net of
accumulated amortization of $258,333 at December 31, 1996 and was being
amortized over the technology's estimated useful life of five years using
the straight-line method. Such license was written-off during 1997 as
discussed above.
Deferred lease and loan restructuring costs incurred, net of amortization,
in connection with lease and loan modification agreements of $869,350 and
$282,454 at December 31, 1998 and 1997, respectively, have been deferred
and are being amortized over the restructured lease and loan agreement
term of five years using the effective interest method. Accumulated
amortization related to deferred lease and loan restructuring costs are
$279,293 and none at December 31, 1998 and 1997, respectively.
INVESTMENTS - The Company owns a note receivable convertible into
preferred stock and convertible preferred stock. Such investments are
accounted for at cost and are not readily marketable. Should these
investments experience a decline in value that is other than temporary,
the Company will recognize a loss to reflect such decline.
INCOMEX FUNCTIONAL CURRENCY - All contracts Incomex has entered into with
their customers are denominated in United States dollars.
INVESTMENT IN JOINT VENTURE - The Company's 50% investment in joint
venture is accounted for under the equity method. Losses in excess of the
Company's investment are recorded when the Company has a legal obligation
or is otherwise committed to provide additional financial support. An
other than temporary decline in the value of the investment is recognized
through a write-down or write-off of the investment.
INCOME TAXES - The Company files a consolidated federal and certain
consolidated state income tax returns with its subsidiaries. Some states
do not allow the filing of a consolidated state tax return, and therefore,
certain subsidiaries file a separate state income tax return. Deferred
income taxes are provided for the tax consequences in future years of
temporary differences between the tax basis of assets and liabilities and
their financial reporting amounts, based on enacted tax laws and tax rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized. Income
tax expense is the tax payable for the year and the change during the
period in deferred tax assets and liabilities.
ACCRETION ON PREFERRED STOCK - Up to the date of conversion, the Company
accretes the carrying value of the 8% Series A Convertible Preferred Stock
(net of offering costs incurred) to the conversion price by the effective
interest method.
CUMULATIVE DIVIDENDS ON PREFERRED STOCK - Cumulative dividends on the 8%
Series A Convertible Preferred Stock are deducted from accumulated deficit
as the dividends are earned by the holders and an accrued liability is
recorded.
F-15
<PAGE> 45
STOCK-BASED COMPENSATION - The Company measures stock-based compensation
cost with employees as the excess of the fair value of the Company's
common stock at date of grant over the amount the employee must pay for
the stock. The Company measures stock-based compensation with other than
employees as the fair value of the goods or services received or the fair
value of the equity instrument issued, whichever is more reliably
measurable.
NET LOSS PER COMMON SHARE - Basic net loss per common share is based on
the weighted average number of shares of common stock outstanding during
the year. Diluted net loss per common share is the same as basic net loss
per share due to the antidilutive effect on net loss per share of any
assumed conversion of convertible securities or exercise of options and
warrants.
RECLASSIFICATIONS - Certain amounts in the 1997 financial statements have
been reclassified to conform with the current year's presentation.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes standards
for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company has not yet determined if the
adoption of SFAS No. 133 will have an impact on the Company's consolidated
results of operations, financial position or cash flow.
2. AT&T COMMISSION AGREEMENT
During 1995, the Company entered into an agreement with AT&T with an
effective date of December 16, 1995 (the "Old Agreement"). Under the Old
Agreement, the Company received commissions based on the number of calls
made, management fees based on 10% of the commissions earned, compliance
incentive bonuses determined quarterly and paid monthly based on the
number of calls processed each month and various additional bonuses,
including a $1 million bonus to be paid in four quarterly installments for
contracting 100,000 rooms under the Old Agreement by July 1, 1996. Prior
to July 1, 1996, the Company had reached the 100,000 room threshold and
recognized the $1 million bonus. During 1996, an amended agreement was
executed which accelerated the payment dates of the final two quarterly
installments to February 28, 1997 and May 1, 1997.
The Old Agreement, as amended, included provisions for the refund of
$1,000,000 in bonuses paid to the Company by AT&T should the Company
terminate the agreement or fail to comply with the agreement. AT&T had
reserved a number of grounds to terminate the Old Agreement, as amended,
prior to its expiration, primarily related to certain compliance and
quality standards. AT&T was responsible for determining if the Company was
in compliance with certain standards set forth in the Old Agreement, as
amended, including achieving a 94% compliance rate with respect to AT&T
dialing standards. The Company achieved a compliance rate above 94% and,
therefore, has not forfeited any compliance bonuses received. Management
is not aware of any noncompliance nor has the Company been notified of any
noncompliance with the Old Agreement, as amended.
F-16
<PAGE> 46
During 1997, a new agreement was executed with an effective date of
January 16, 1998 (the "New Agreement"). By executing the New Agreement,
the Company received a signing bonus of $200,000. Under the New Agreement,
the Company received monthly commissions based on the number of calls
made, bonuses of up to $400,000 based on the number of calls processed
during the year and monthly compliance incentive bonuses based on the
number of calls processed each month. The New Agreement included
provisions for the refund of the bonus payments should the Company
terminate the New Agreement or fail to comply with the New Agreement. AT&T
was responsible for determining if the Company was in compliance with
certain standards, as set forth in the New Agreement. AT&T reserved a
number of grounds to terminate the New Agreement prior to its expiration,
with or without cause.
During 1998, the Company and AT&T agreed to terminate the agreement with
an effective date of October 15, 1998. The Company based this decision on
the declining volume and narrow margins of the AT&T business, and on the
Company's refocused business strategy. AT&T agreed to pay certain hotel
commissions otherwise payable by the Company and, as a result, the Company
recorded a one-time gain in the fourth quarter of $453,396.
3. ACQUISITION OF PIC AND PIC-R
Effective October 31, 1997, the Company purchased all of the outstanding
capital stock of PIC in exchange for a cash payment at closing of $500,000
and the issuance to certain shareholders of PIC of a promissory note in
the principal amount of $840,000 due March 1, 1998, which was subsequently
extended to June 30, 1998 (the "Short-Term Note"), and promissory notes
with an aggregate principal amount of $1,910,000 due in installments
through April 30, 1999 (the "Long-Term Notes" and, collectively with the
Short-Term Note, the "PIC Notes"). Concurrently, the Company acquired all
of the outstanding capital stock of PIC-R in exchange for a cash payment
at closing of $30,000 and the issuance by the Company of an aggregate of
300,000 shares of common stock of the Company valued at $511,874. In
connection with the PIC acquisition, the Company also loaned $400,000 to
PIC-R for capital expenditures. The acquisitions were recorded under the
purchase method for financial reporting purposes. Goodwill of $4,203,709
associated with the acquisitions is being amortized over ten years.
The PIC-R agreement provided that the Company would issue additional
shares of common stock to the extent that the combined earnings before
interest, taxes, depreciation and amortization ("EBITDA") of PIC and PIC-R
for either of the first two full twelve month periods after closing
exceeds $1,000,000. Shares of common stock with a quarterly average market
value of $1.25 were to be issued for each dollar of EBITDA over $1,000,000
during either of the twelve-month periods. The Company granted piggyback
registration rights to the PIC-R shareholders with respect to any
secondary offerings of common stock made within three years after the
closing of the PIC acquisition.
The Company's obligations under the PIC notes were subject to a collateral
interest in the shares of PIC stock and PIC-R stock acquired by the
Company pursuant to the PIC acquisition. In the event that the Company
defaulted with respect to the repayment of the Short-Term Note, the
holders of the PIC notes had the right to rescind the PIC acquisition by
surrendering the shares of common stock issued in the PIC acquisition and
the PIC notes to the Company in exchange for the return of all of the
shares of PIC and PIC-R stock. In addition, if the PIC acquisition had
been rescinded, the shareholders of PIC and PIC-R would retain the
$530,000 cash payments made at closing and the $400,000 advanced to PIC-R.
Effective May 21, 1998, the Company and the former shareholders of PIC and
PIC-R entered into an agreement to amend the terms of the original Stock
Purchase Agreements with respect to the Company's acquisition of PIC and
PIC-R. Pursuant to the original Stock Purchase Agreements, the former PIC
and PIC-R shareholders received certain special default rights to rescind
the acquisitions of PIC and PIC-R. The May 21, 1998 amendment terminated
the special default rights. Pursuant to the amendment, the Company also
issued 571,428 shares of common stock as a prepayment of $1,000,000 of the
Long-Term Notes in reverse order of their maturities of the amounts owed.
F-17
<PAGE> 47
Effective December 7, 1998, the Company and the former shareholders of PIC
and PIC-R entered into an Earn-Out Settlement Agreement. This Agreement
terminated the May 21, 1998 Agreement. Pursuant to the Earn-Out Settlement
Agreement, in full and final settlement of the earn-out rights for the
former shareholders of PIC and PIC-R, the Company issued 2,300,000 shares
of common stock; issued a $300,000 note payable in 24 monthly installments
commencing January 7, 1999; assumed $135,000 of costs associated with the
defense and settlement of a suit related to brokerage fees in connection
with the PIC acquisition; and agreed to pay in full the total outstanding
balances on the long-term notes issued to the principal shareholders. The
principal balances on the long term notes as of December 31, 1998 was
$338,138 of which $317,203 was subsequently paid in January 1999. Goodwill
of $3,916,889 associated with the amended terms of the agreement is being
amortized over the remaining life of the original goodwill which is eight
years and eleven months. Concurrent with the Earn-Out Settlement
Agreement, the Company entered into a consulting agreement with PIC's
President for two years and an employment agreement with PIC's Executive
Vice President for three years.
Pro forma results of operations (unaudited) for the Company reflecting the
PIC and PIC-R acquisitions for the year ended December 31, 1997 as if the
acquisitions had occurred on January 1, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Total revenues $ 15,745,211
Cost of sales 11,640,553
------------
Gross operating profit 4,104,658
Selling, general and administrative expense 6,624,572
Depreciation and amortization expense 3,128,578
Loss from impairment of property, equipment and intangible assets 1,353,010
------------
Loss from operations (7,001,502)
Interest expense (1,057,519)
------------
Loss before income tax expense and joint venture loss (8,059,021)
Loss from joint venture 993,329
Income tax expense 5,620
------------
Net loss $ (9,057,970)
============
Pro forma net loss attributable to common shareholders $ (9,092,977)
============
Pro forma net loss per common share $ (1.24)
============
Pro forma weighted average common shares outstanding 7,329,867
============
</TABLE>
4. ACQUISITION OF INCOMEX
On February 13, 1998, the Company entered into an agreement to purchase
all of the outstanding shares of common stock of Incomex, in exchange for
400,000 shares of common stock of the Company, valued at $422,500. The
agreement also provided for the Company to pay the selling shareholders an
aggregate amount equal to 60% of the income before income taxes of
Incomex, as defined, during the period from February 1, 1998 through July
31, 1998. The Company had also agreed to issue common stock of the Company
equal to an aggregate quarterly average market value of $1.50 for each
dollar of income before taxes of Incomex, as defined, earned in excess of
$400,000 during the two 12 month periods beginning August, 1998. The
Incomex acquisition has been recorded under the purchase method. Goodwill
of $901,219 associated with the acquisition is being amortized over ten
years.
F-18
<PAGE> 48
Concurrent with the purchase, the Company entered into employment
agreements with Incomex's Chief Executive Officer and Vice President for
three years.
Effective December 7, 1998, the Company and the former shareholders of
Incomex entered into an Earn-Out Settlement Agreement. This Agreement
amended certain provisions of the Purchase Agreement to provide full and
final settlement of the earn-out rights for the former shareholders of
Incomex. Under the terms of the Earn-Out Settlement Agreement, the Company
issued 1,500,000 shares of common stock; issued $744,915 in notes payable
maturing in one year at an annual rate of 14% and includes a 1%
origination fee; issued 155,384 warrants associated with the notes payable
entitling the holder to purchase the Company's common stock at an exercise
price of $3.25 which expire, if unexercised, on December 31, 2003; issued
$340,000 in notes payable due no later than April 1, 1999 and recorded
cash obligations of $117,479. Goodwill of $3,319,389 associated with the
amended terms of the agreement is being amortized over the remaining life
of the original goodwill which is nine years and two months.
Pro forma results of operations (unaudited) for the Company reflecting the
Incomex, PIC and PIC-R acquisitions for the years ended December 31, 1998
and 1997, as if the acquisitions had occurred on January 1, 1997, are as
follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Total revenues $ 34,468,424 $ 20,595,648
Cost of sales 23,059,280 15,297,649
------------ ------------
Gross operating profit 11,409,144 5,297,999
Selling, general and administrative expense 7,595,785 7,984,501
Depreciation and amortization expense 2,453,579 3,560,293
Loss from impairment of property, equipment
and intangible assets -- 1,353,010
------------ ------------
Income (loss) from operations 1,359,780 (7,599,805)
Gain on AT&T buyout 453,396 --
Interest expense (2,766,133) (1,413,959)
--------- ---------
Loss before income tax expense and joint venture loss (952,957) (9,013,764)
Loss from joint venture 41,546 993,329
Income tax expense 74,466 5,620
------------ ------------
Net loss $ (1,068,969) $(10,012,713)
============ ============
Pro forma net loss attributable to common shareholders $ (1,243,480) $(10,047,720)
============ ============
Pro forma net loss per common share $ (.13) $ (1.09)
============ ============
Pro forma weighted average common shares outstanding 9,232,881 9,229,867
============ ============
</TABLE>
F-19
<PAGE> 49
5. PURCHASE OF ASSETS OF INTERACTIVE COMMUNICATIONS, INC. AND FORMATION AND
OPERATION OF GUIDE STAR JOINT VENTURE
On December 13, 1996, the Company purchased all rights and interests in
interactive voice response hardware ("IVR Hardware") from Interactive
Communications, Inc. ("ICI") for a cash price of $361,600. The Company
assumed no liabilities of ICI as a result of this purchase, except that
the Company reimbursed ICI for all telephone and leasing costs incurred by
ICI prior to the date the IVR Hardware was assumed by the Company, which
totaled $64,545. Also, pursuant to this agreement, the Company entered
into an Audiotext Services Agreement with ICI covering thirty-eight IVR
Hardware platforms. This agreement was effective from January 1, 1997
until January 1, 2000, with an option to renew for successive periods of
twelve months. Under the terms of the agreement, ICI was to provide
information updating services for each IVR Hardware platform in exchange
for a $1,000 per platform monthly licensing fee to be paid by the Company.
In addition, the Company was to pay a monthly fee to ICI in the amount of
5% of the gross monthly revenues generated by the business activities
supported by the IVR Hardware platforms after the Company had received
gross revenues of $6,000,000.
On January 31, 1997, the Company entered into an agreement with an
unrelated third party to form a joint venture, Guide Star, L.L.C. The
Company contributed the IVR platforms and other assets with a carrying
value of $349,574 in exchange for a 50% ownership interest and a
preferential distribution of $496,934. The other party contributed
$209,970 in cash in exchange for a 50% ownership interest. The joint
venture provided consumer telecommunications services related to the IVR
platforms.
During the fourth quarter of 1997, management of the Company decided to
cease substantially all the operations of the Guide Star joint venture and
dispose of its assets. All assets of the joint venture have been written
down to their estimated net realizable values. The Company's net
investment in the joint venture of $(60,393) and $(380,913) at December
31, 1998 and 1997, respectively represents net liabilities of the venture
for which the Company is responsible.
Condensed financial information for the joint venture as of and
for the years ended December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
TOTAL TOTAL TOTAL NET
ASSETS LIABILITIES REVENUES LOSS
<S> <C> <C> <C> <C>
1998 $10,486 $ 70,879 $ 3,142 $ (41,546)
1997 18,286 399,199 256,705 (1,237,728)
</TABLE>
On November 30, 1997, the Company and ICI entered into a Settlement
Agreement whereby the Company agreed to pay the full amount currently due
and outstanding at that date to ICI under the Audiotext Services Agreement
of $295,000 and additional costs, fees and accrued interest of $22,196,
with interest on these unpaid amounts accruing interest at 18%. All
amounts under the Settlement Agreement were paid during 1998 and the
Company was released from its continuing obligation under the Audiotext
Services Agreement.
In July 1998, the joint venture entered into a written agreement with
MatrixMedia, the other 50% owner of the joint venture, providing for the
sale of the joint venture's remaining assets and certain
telecommunications equipment owned by the Company to MatrixMedia. Subject
to MatrixMedia obtaining financing, the Company anticipates the completion
of this transaction during the second quarter of 1999.
F-20
<PAGE> 50
6. NOTES PAYABLE
Notes payable as of December 31, 1998 and 1997, consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Past due notes payable to individuals, $400,000 of which has been provided by
related parties, bearing interest at 14%, due March 5, 1999. Warrants to
purchase 500,000 shares of the Company's common stock were issued at an
exercise price of $1.75 per share, which expire if unexercised, on March 31,
2001. A warrant to purchase 10,000 shares of the Company's common stock was
issued to Berthel at an exercise price of $1.44 per share which expires if
unexercised, on March 31, 2001. $ 500,000 $--
Notes payable to individuals, $225,000 of which has been provided by related
parties, bearing interest at 14%, due March 31, 1999. Warrants to purchase
1,486,000 shares of the Company's common stock were issued, 225,000 of which
were issued to related parties, at an exercise price of $1.75 per share which
expire, if unexercised, on March 31, 2001. Warrants to purchase 121,100 shares
of the Company's common stock were issued to Berthel in connection with the
offering with terms substantially similar to the warrants issued in the
offering. 1,486,000 --
Notes payable to individuals, $2,520,000 of which has been provided by related
parties, bearing interest at 14%, due November 30, 1999. Warrants to purchase
684,000 shares of the Company's common stock were issued, 504,000 of which
were issued to related parties. The Warrants were issued at an exercise price
of $3.25 for 604,000 warrants and $2.50 for 80,000 warrants which expire,
if unexercised, on November 30, 2003. 3,420,000 --
Notes payable to the former owners of Incomex bearing interest at 14% due
November 15, 1999. 744,915 --
Noninterest-bearing notes payable to the former owners of Incomex due
April 1, 1999. 340,000 --
Note payable to consultant bearing interest at 14%, due March 31, 1999. Warrants
to purchase 25,000 shares of the Company's common stock were issued at an
exercise price of $1.75 per share which expire, if unexercised, on March 31, 2001. 25,000 --
</TABLE>
F-21
<PAGE> 51
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Note payable to director bearing interest at 14%, due March 31, 1999. A warrant
to purchase 5,000 shares of the Company's common stock was issued at an
exercise price of $1.75 per share which expires, if unexercised, on March 31,
2000. $ 5,000 $ --
Notes payable to leasing company bearing interest ranging from 24.9% to 33.4%
due in periods ranging from December 1999 to April 2002. The notes are in
arbitration, see Note 12. 480,456 --
Variable line-of-credit with a financial institution, with interest on
borrowings payable monthly at 2% above the financial institution's
prime rate (combined rate of 10.5% at December 31, 1997), collateralized by
substantially all assets of the Company not otherwise encumbered and
personally guaranteed by the Company's Chairman of the Board. -- 250,000
Note payable to financial institution bearing interest at 12%,
collateralized by substantially all assets of the Company not otherwise
encumbered and personally guaranteed by the Company's Chairman
of the Board. -- 225,000
Note payable to financial institution bearing interest at 2% over the bank's
prime rate (combined rate of 9.75% and 10.5% at December 31, 1998 and 1997,
respectively), due March 28, 1999, collateralized by AT&T accounts and
commission receivables, inventory and certain telecommunications equipment
with a carrying value of approximately $130,000 and $180,000 at December
31, 1998 and 1997, respectively. 400,000 400,000
Note payable to the former owners of PIC bearing interest at 8%, due June 30,
1998, collateralized by a pledge of the common stock of PIC and PIC-R. -- 840,000
---------- ----------
Total $7,401,371 $1,715,000
========== ==========
</TABLE>
Also see Note 15 with respect to the estimated fair value of notes payable. Due
to the issuance of the warrants, all notes payable issued with warrants have an
effective interest rate of 18%.
F-22
<PAGE> 52
7. LONG-TERM DEBT
Long-term debt, others as of December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Mortgage note payable to partnership due in monthly installments of $3,299,
including interest at 8.5%, until September 15, 2000, when the balance is due
The note is collateralized by a first mortgage on the Company's corporate
office facilities and land. $261,796 $278,358
Note payable to financial institution bearing interest at 11.25%, due April 9,
1999, collateralized by substantially all assets of PIC not otherwise
encumbered and personally guaranteed by certain former PIC shareholders. -- 66,165
Note payable to financial institution bearing interest at 10.25%, due August 1,
1998, collateralized by substantially all assets of PIC not otherwise
encumbered and personally guaranteed by certain former PIC shareholders. -- 38,983
Notes payable to financial institution bearing interest at 11.25%, maturing May
3, 1999 to December 2, 1999, collateralized by certain equipment and note and
lease assignments and personally guaranteed by certain former PIC shareholders. 8,830 23,199
Note payable to vendor bearing interest at 8.5%, due March 30, 1999,
collateralized by a security interest in all billable call records processed
by the vendor on behalf of PIC. -- 35,219
$120,000 variable line of credit with a financial institution, bearing interest
at 10.0%, due February 9, 1999, collateralized by substantially all assets of
PIC and personally guaranteed by certain former PIC shareholders. -- 110,223
Mortgage note payable to partnership due in monthly installments of $6,500,
including interest at 9%, due September 2008, collateralized by ATN's office
facilities and land. 514,634 --
Uncollateralized note payable to financial institution due in monthly
installments of $12,353, including interest at the financial institution's
prime rate (8.75% at December 31, 1998), until January 2000, when the
balance is due. 139,408 --
-------- --------
Total 924,668 552,147
Less current portion 199,287 259,654
-------- --------
Long-term debt, others $725,381 $292,493
======== ========
</TABLE>
F-23
<PAGE> 53
Long-term debt with related parties at December 31, 1998 and 1997 consisted of
the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Uncollateralized notes payable to Berthel due January 31, 2005, (net of discount
of $341,010 and $377,734 at December 31, 1998 and 1997, respectively).
Interest payable quarterly at 4%, beginning March 31, 1995 until maturity.
when the balance is due (effective interest rate of 11.5%). $ 658,990 $ 622,266
Uncollateralized note payable to Berthel, due in five monthly installments of
$9,494 including interest at 14% beginning on March 30, 1998, then fifty-five
installments of $20,130 including interest at 14% until February 28, 2003. 759,309 792,786
Non-interest bearing, uncollateralized note payable to the owner of PIC, (net of
discount of $46,738 at December 31, 1998) due in monthly installments of
$12,500, beginning January 1998 through January 2008 (effective interest
rate of 19.6%). 253,262 --
Note payable to Berthel due in monthly installments of $23,528 beginning
December 1, 1997 until November 1, 2002 when the balance is due including
interest at 14.5%, collateralized by all telecommunications equipment owned
by PIC-R. 839,936 988,555
Non-interest bearing notes payable to the former owners of PIC, (net of discount
of $242,840, at December 31, 1997, for an effective interest rate of 14.5%),
due in quarterly installments of $190,999, beginning on January 31, 1998
through January 31, 1999 and a balloon payment due at maturity of $955,005 on
April 30, 1999, collateralized by a pledge of the common stock of PIC and
PIC-R. During 1998, 571,428 shares of common stock were issued in exchange for
$1 million of the principal balance as discussed in Note 3, with the remaining
balance bearing interest at 12% and due December 31, 1998. The note was
repaid in January 1999. 338,138 1,667,160
Uncollateralized, noninterest bearing demand notes payable to related parties. 84,021 172,559
---------- ----------
Total 2,933,656 4,243,326
Less current portion 828,331 949,497
---------- ----------
Long-term debt with related parties $2,105,325 $3,293,829
========== ==========
</TABLE>
F-24
<PAGE> 54
Maturities of long-term debt for each of the five years subsequent to
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
RELATED
OTHER PARTIES TOTAL
<S> <C> <C> <C>
1999 $ 199,287 $ 828,331 $1,027,618
2000 501,230 523,899 1,025,129
2001 21,353 422,734 444,087
2002 23,240 460,136 483,376
2003 25,293 39,566 64,859
Thereafter 154,265 658,990 813,255
---------- ---------- ----------
Total $ 924,668 $2,933,656 $3,858,324
========== ========== ==========
</TABLE>
In June 1997, Berthel converted note obligations with a face value of $1.7
million and a carrying value of approximately $1.3 million into 465,625
shares of the Company's common stock. Additionally, the Company had agreed
to issue up to 187,067 "adjustment shares" to Berthel should the lowest
average closing trading price of the shares for any 30-day period during
the 90 days after the shares become registered fall below $4.00 per share.
Berthel had the option to rescind the transaction if the Company did not
register the shares during 1997. Such shares were not registered during
1997.
Effective December 31, 1997, the Company and Berthel agreed to rescind the
conversion and the Company reissued each of the note obligations. Interest
on each of the note obligations from the conversion date to the rescission
date was added to the principal balance outstanding or was payable on
December 31, 1997. Also, the interest rate on one of the notes was reduced
from 15.5% to 14.0% and the repayment terms were extended. In connection
with the agreement, the Company agreed to issue warrants to Berthel for
229,279 shares of common stock of the Company, at an exercise price of
$1.12 per share. The Company has assigned a fair value of $50,000 to the
warrants, that has been capitalized as deferred loan costs. The warrants
will expire, if not exercised, on December 31, 2002. Due to the issuance
of the warrants, the effective interest rate on the notes is 15.5%.
Also see Note 15 with respect to the estimated fair value of long-term
debt.
8. PREFERRED STOCK
On July 2, 1997, the Company amended its Articles of Incorporation to
authorize 1,000,000 shares of a new class of "blank check" preferred
stock.
On August 1, 1997, the Company authorized the issuance of up to 50,000
shares of Series A Convertible Preferred Stock (the "Convertible
Preferred"). The Convertible Preferred has a liquidation preference,
subject to adjustment, of $100 per share and accrues cumulative dividends
at an annual rate of 8% of the liquidation preference. Dividends are
payable quarterly at the Company's option in cash or in common stock.
Payments to holders of shares of the Convertible Preferred with respect to
liquidation or dividends must be made prior to any payments to the holders
of shares of the Company's common stock. The Convertible Preferred has no
voting rights, except as required by applicable law. The Convertible
Preferred may also be converted into common stock, at the holder's option,
commencing one year after issuance at the conversion rate of $1.125 per
share of Common Stock and is automatically converted into Common Stock
three years after issuance at the same conversion rate of $2.50 per share
of Common Stock. As of December 31, 1997, the Company had received gross
proceeds of $1,625,000 from the issuance and sale of 16,250 shares of
Convertible Preferred pursuant to a private placement offering
underwritten by Berthel and received an additional $50,000 in gross
proceeds in the first quarter of 1998 from the issuance of 500 shares of
Convertible Preferred.
F-25
<PAGE> 55
On February 26, 1998, the Company agreed to issue 2,170 shares of
Convertible Preferred to an affiliate of Berthel in exchange for the
prepayment of $180,000 of commissions and the payment of $37,000 of
commissions currently owed. This transaction was completed and the shares
issued on June 19, 1998.
9. COMMON STOCK WARRANTS
The Company has the following common stock warrants outstanding (all of
which are currently exercisable) at December 31, 1998:
APPLICABLE
COMMON EXERCISE EXPIRATION
SHARES PRICE DATE
[S] [C] [C] [C]
Issued with initial public offering 880,000 $ 3.14 1999
Issued with initial public offering 160,000 3.07 2001
Issued with initial public offering 80,000 9.75 2001
Incomex Earn-Out Settlement (Note 4) 155,384 3.25 2003
Issued with note payable (Note 6) 1,486,000 1.75 2001
Issued with note payable (Note 6) 500,000 1.75 2001
Issued with note payable (Note 6) 604,000 3.25 2003
Issued with note payable (Note 6) 80,000 2.50 2003
Issued with stock rescission (Note 7) 229,279 1.12 2002
Issued with note payable (Note 6) 5,000 1.75 2001
Issued with note payable (Note 6) 25,000 1.75 2001
Issued with offering agreement (Note 6) 10,000 1.44 2001
Issued with short-term notes payable 15,000 1.44 2001
Issued with offering agreement (Note 6) 121,100 1.75 2001
Issued with consulting agreement 50,000 2.88 1999
Issued with consulting agreement 10,000 3.60 2003
Issued with consulting agreement 10,000 3.00 2003
---------
Total outstanding 4,420,763
=========
The weighted average exercise price of the warrants was $2.48 and $3.48
and the weighted average remaining life of the warrants was 2.5 and 3
years at December 31, 1998 and 1997, respectively.
The 880,000 common stock warrants were issued in conjunction with the
initial public offering of the Company's common stock during 1996. Each
warrant is exercisable to purchase one share of common stock at a price of
$6.50 per share, subject to adjustment for dilutive issuances of stock. As
a result of the anti-dilutive provision, the exercise price at December
31, 1998 was adjusted in accordance with the agreement to $3.14. The
warrants are exercisable at any time after issuance and expire on October
21, 1999. The warrants are redeemable at the Company's option commencing
270 days after October 21, 1996 upon 30 days notice to holders at $.01 per
warrant if the closing bid price of the common stock averages in excess of
110% of the exercise price of the warrants for a period of 20 consecutive
trading days ending within 15 days of the notice of redemption.
F-26
<PAGE> 56
In connection with the offering during 1998 of promissory notes in a
private placement underwritten by Berthel, the Company issued to Berthel
warrants to purchase up to 121,100 shares of the Company's common stock at
an exercise price of $1.75 per share and warrants to purchase up to 10,000
shares at an exercise price of $1.44 per share. The warrants expire, if
not exercised, on March 31, 2001.
In conjunction with the initial public offering, the Company sold to the
underwriters, warrants to purchase 160,000 shares at $3.07 and 80,000
shares at $9.75, as adjusted, (the "Underwriters Warrants"), subject to
adjustment for dilutive issuances of stock. The Underwriters Warrants are
exercisable on October 21, 1997 or at any time thereafter for a period of
four years from October 21, 1997.
During 1996, the Company entered into a consulting agreement (the
"Agreement") with a consultant to provide advisory services to the
Company. In addition, pursuant to the Agreement, the consultant received a
warrant to purchase up to 50,000 shares of the Company's common stock at
an exercise price of $2.88 per share. The Company assigned a fair value of
$100,000 to the warrant. The warrant expires, if not exercised, on
December 20, 1999.
10. STOCK OPTION PLANS
The Company has adopted the 1993 Stock Option Plan (the "1993 Plan").
Under the 1993 Plan, options may be granted to employees to purchase up to
an aggregate of 272,529 shares of the Company's common stock. The 1993
Plan is administered by the Compensation Committee of the Board of
Directors which determines to whom options will be granted. The 1993 Plan
provides for the grant of incentive stock options (as defined in Section
422 of the Internal Revenue Code) to employees of the Company. The
exercise price of stock options granted under the 1993 Plan is established
by the Compensation Committee, but the exercise price may not be less than
the fair market value of the common stock on the date of grant of each
option. Each option shall be for a term not to exceed ten years after the
date of grant, and a participant's right to exercise an option vests at
the rate of twenty percent on the date of grant and each anniversary date
until the option is fully vested.
F-27
<PAGE> 57
A summary of stock option activity under the 1993 Plan during the years
ended December 31, 1998 and 1997, is summarized as follows:
WEIGHTED
AVERAGE
EXERCISE OPTION PRICE
PRICE PER SHARE SHARES
Balance at January 1, 1997 $ 1.81 $ 1.81 137,744
Granted 2.88 96,208
Granted 4.00 6,000
Granted 3.25 18,000
Cancelled 1.81 (25,523)
Cancelled 4.00 (4,000)
Cancelled 3.25 (3,000)
Cancelled 2.88 (1,500)
------ ----------- -------
Balance at December 31, 1997 $ 2.51 $1.81-$4.00 223,929
Granted 2.00 30,927
Cancelled 3.25 (1,000)
Cancelled 2.00 (13,255)
------ ----------- -------
Balance at December 31, 1998 $ 2.04 $1.81-$4.00 240,601
====== =========== =======
At December 31, 1998, options for 163,026 shares were exercisable (172,779
at December 31, 1997), an additional 31,928 shares were available for
future grants and the weighted average remaining life of the options
outstanding was five years. The Company has reserved 272,529 shares of
common stock in connection with the 1993 Plan at December 31, 1998 and
1997.
During 1997, the Company completed the development of the Murdock
Communications Corporation 1997 Stock Option Plan (the "1997 Stock Option
Plan"). During 1998, the Company amended the number of shares allocated to
1,727,471. The 1997 Stock Option Plan is also administered by the
Compensation Committee of the Board of Directors which determines to whom
the options will be granted. The 1997 Stock Option Plan provides for the
grant of incentive stock options (as defined in Section 422 of the
Internal Revenue Code) or nonqualified stock options to executives or
other key employees of the Company. The exercise price of the stock
options granted under the 1997 Stock Option Plan is established by the
Compensation Committee, but the exercise price may not be less than the
fair market value of the common stock on the date of the grant of each
option for incentive stock options. Each option shall be for a term not to
exceed ten years after the date of grant for non-employee directors and
five years for certain shareholders. Options cannot be exercised until the
vesting period, if any, specified by the Compensation Committee has
expired.
F-28
<PAGE> 58
A summary of stock option activity under the 1997 Stock Option Plan for
the years ended December 31, 1998 and 1997, is as follows:
WEIGHTED
AVERAGE
EXERCISE OPTION PRICE
PRICE PER SHARE SHARES
Balance at January 1, 1997 $ - $ - -
Granted 3.25 225,629
Granted 4.16 10,000
Granted 3.13 20,000
------ ----------- ---------
Balance at December 31, 1997 $ 3.28 $3.13-$4.16 255,629
Granted 2.25-3.50 400,000
Granted 3.13 17,000
Granted 2.81 165,000
Granted 2.75 535,000
Granted 2.00 4,073
Granted 2.25 225,629
Cancelled 3.25 (225,629)
Cancelled 2.00 (1,745)
------ ----------- ---------
Balance at December 31, 1998 $ 2.65 $2.00-$4.16 1,374,957
====== =========== =========
Compensation expense of none and $10,000 was recorded in connection with
the grant of these options for the years ended December 31, 1998 and 1997,
respectively. At December 31, 1998, options for 893,561 shares were
exercisable (25,000 at December 31, 1997), an additional 352,514 shares
were available for future grants and the weighted average remaining life
of the options outstanding was 6 years. The Company has reserved 1,727,471
shares of common stock in connection with the 1997 Stock Option Plan at
December 31, 1998.
The Company accounts for stock option grants and awards to employees using
the intrinsic value method. If compensation cost for stock option grants
and awards had been determined based on fair value at the grant dates for
1998 and 1997 options consistent with the method prescribed by Statement
of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS No. 123"), the Company's net loss and net loss per
share would have been the pro forma amounts indicated below:
1998 1997
Net loss attributable to
common shareholders As reported $ (348,851) $(7,935,015)
Pro forma (2,348,214) (8,073,015)
Net loss per common share As reported $ (.06) $ (1.89)
Pro forma (.43) (1.92)
F-29
<PAGE> 59
The weighted average fair values at date of grant for options granted
during 1998 and 1997 were estimated to be $1,999,400 and $138,000,
respectively. The Company's calculations were made using the Black-Scholes
option pricing model with the following weighted average assumptions: ten
years expected life; stock volatility of 153% in 1998 and 51% in 1997;
risk-free interest rate of 6% in 1998 and 1997; and no dividends during
the expected term. During the initial phase-in period, as required by SFAS
No. 123, the pro forma amounts were determined based on stock option
grants and awards in 1998 and 1997 only. The pro forma amounts for
compensation cost may not be indicative of the effects on net loss and net
loss per share for future years.
11. INCOME TAXES
The provision for income taxes consisted of the following for the years
ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current:
Federal $ -- $ --
State 74,466 5,402
----------- -----------
Total $ 74,466 $ 5,402
=========== ===========
</TABLE>
The provision for income taxes for the years ended December 31, 1998 and
1997 is less than the amounts computed by applying the statutory federal
income tax rate of 34% to the loss before income taxes due to the
following items:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Computed expected amount $ (34,000) $(2,684,200)
Amortization of goodwill 295,100 --
Meals and entertainment 11,200 8,000
Officer's life insurance 5,700 8,600
State income taxes, net of federal tax benefit 74,466 3,500
Change in valuation allowance (278,000) 2,669,502
----------- -----------
Income tax provision $ 74,466 $ 5,402
=========== ===========
</TABLE>
At December 31, 1998 the Company has net operating loss carryforwards for
federal income tax purposes of approximately $13 million ($11 million at
December 31, 1997) to use to offset future taxable income. These net
operating losses will expire, if unused, from December 31, 2008 through
2013.
Certain restrictions under the Tax Reform Act of 1986, caused by a change
in ownership resulting from sales of common stock, limit the annual
utilization of net operating loss carryforwards. The initial public
offering of the Company's common stock during 1996 resulted in such a
change in ownership. The Company estimates that the post-change taxable
income that may be offset with the pre-change net operating loss
carryforward of approximately $4.5 million will be limited annually to
approximately $600,000. The annual limitation may be increased for any
built-in gains recognized within five years of the date of the ownership
change.
F-30
<PAGE> 60
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Current:
Allowance for doubtful accounts receivable $ 150,000 $ 49,000
----------- -----------
Noncurrent:
Intangible asset amortization and valuation allowance 213,000 227,000
Differences in net book value of property and equipment 700,000 999,000
Capital lease adjustment 242,000 1,134,000
Deferred income -- 19,000
Carryforward of net operating loss 4,917,000 4,072,000
----------- -----------
6,072,000 6,451,000
----------- -----------
Total deferred tax assets 6,222,000 6,500,000
Valuation allowance for deferred tax assets (6,222,000) (6,500,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
A valuation allowance for the entire balance of deferred tax assets has
been recorded because of uncertainty over their future realization.
12. COMMITMENTS AND CONTINGENCIES
The Company is obligated under long-term capital leases for
telecommunication equipment. Substantially all of the leases are with
Berthel and have been capitalized and are personally guaranteed by the
Company's Chairman of the Board. The Company is responsible for all
property taxes, maintenance and insurance. The Company also leases certain
of its facilities under operating leases. At December 31, 1998, future
minimum rental payments on lease obligations are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES
---------------------------------------- OPERATING
BERTHEL OTHER TOTAL LEASES
<S> <C> <C> <C> <C>
Years ending December 31:
1999 $1,351,929 $ 11,646 $1,363,575 $ 91,325
2000 1,351,929 2,608 1,354,537 42,294
2001 1,232,304 997 1,233,301 10,951
2002 1,064,828 -- 1,064,828 9,780
2003 177,472 -- 177,472 7,742
---------- ---------- ---------- ----------
Minimum rental payments 5,178,462 15,251 5,193,713 $ 162,092
==========
Less amounts representing interest 1,190,555 1,327 1,191,882
---------- ---------- ----------
3,987,907 13,924 4,001,831
Less amounts due within one year 858,102 10,652 868,754
---------- ---------- ----------
Capital lease obligations due
after one year $3,129,805 $ 3,272 $3,133,077
========== ========== ==========
</TABLE>
As of December 31, 1998, the Company was current on all lease payments to
Berthel. However, subsequent to year end, the Company has not made the
February 1999 and March 1999 payments. Berthel only has the right to
demand that the Company cure this violation, but has not made such a
demand as of March 22, 1999.
F-31
<PAGE> 61
Rent expense under operating leases for the years ended December 31, 1998
and 1997 was $30,196 and $32,921, respectively.
As of February 27, 1998, the Company entered into an agreement with
Berthel to provide $700,000 of lease financing. The financing bears
interest at 14%. In connection with the lease financing, warrants to
purchase 350,000 shares of the Company's common stock were issued at an
exercise price of $1.44 per share. As of June 30, 1998, Berthel funded the
entire $700,000 of lease financing. These warrants were exercised on
December 31, 1998.
On September 30, 1997, the Company modified its existing lease agreements
with Berthel by deferring the July and August 1997 lease payments and
increasing the remaining future minimum rental payments for the payments
deferred.
During 1997, with an effective date of February 28, 1998, the Company
further modified its existing lease agreements with Berthel by deferring
the October 1997 through February 1998 lease payments until the end of the
lease term as additional payments. Total monthly lease payments are
$41,850 from March 1998 through July 1998 and $88,736 per month until
February 2003. In connection with these modifications, the Company agreed
to issue warrants to Berthel for 750,000 shares of common stock of the
Company, at an exercise price of $1.44 per share. The Company assigned a
fair value of $157,000 to the warrants, that has been capitalized as
deferred lease restructuring costs. These warrants were exercised on
December 31, 1998.
The Company's wholly-owned subsidiary, PIC, is involved in an adversary
proceeding filed in connection with two jointly administered Chapter 11
proceedings in the United States Bankruptcy Court for the Southern
District of Florida. On May 13, 1997, a joint motion of the Chapter 11
Trustees and Strategica Capital Corporation ("Strategica") was filed for
an order to show cause why certain individuals and entities, including
PIC, should not be held in civil contempt of court; for relief under Rule
70 of the Federal Rules of Civil Procedure and Rule 7070 of the Federal
Rules of Bankruptcy Procedure; and for the entry of an order of criminal
referral for criminal conduct of certain individuals and entities,
including PIC. The proceeding does not specify a dollar amount of damages.
The contempt motion was denied by the Bankruptcy Court on November 4,
1998. Strategica filed a motion for rehearing on November 16, 1998, which
was denied by the Bankruptcy Court on December 2, 1998. Strategica filed a
notice of appeal of the adverse ruling on December 11, 1998. PIC filed a
motion for attorneys' fees and costs on November 24, 1998, and a hearing
was conducted by the Bankruptcy Court on January 28, 1999 with respect to
PIC's motion. Strategica's appeal and PIC's motion for attorneys' fees and
costs are both currently pending. No assurance can be given as to the
ultimate outcome of this matter. No loss, if any, has been recorded in the
consolidated financial statements with respect to this matter.
Incomex and EILCO Leasing Services, Inc. ("Eilco"), a creditor of Incomex,
have commenced an arbitration proceeding to resolve a dispute regarding a
loan agreement between Incomex and Eilco. Eilco claims that Incomex is in
violation of certain covenants of the loan agreement, including provisions
relating to certain obligations of Incomex to make payments to Eilco based
on Incomex's income from telecommunications services provided to a group
of hotels in Mexico. This matter is scheduled for an arbitration hearing
on April 21, 1999. Eilco is seeking the amount due on the loan and
additional damages which may be in excess of $1,000,000 plus attorney
fees. The Company's position is that it owes only the amount due on the
loan and is not in violation of the covenants. Accordingly, the Company
has not recorded any loss in the consolidated financial statements with
respect to this matter in excess of the amount due on the loan. No
assurance can be given as to the ultimate outcome of this matter.
F-32
<PAGE> 62
On July 20, 1998, Operator Communications, Inc. ("Oncor") filed a lawsuit
in the District Court of Dallas County, Texas against the Company,
Incomex, and an unrelated third party. Oncor alleges that the defendants
improperly terminated a long distance service agreement with Oncor and
claims damages based on amounts which Oncor alleges to have advanced to
the Company, lost profits for the period in which the Company is alleged
to have breached the contract, attorneys' fees and for interference with
contractual relations in an unspecified amount of not less than $100,000.
The Company has asserted a counterclaim for accounting, breach of
contract, misrepresentation and payment of attorneys' fees. This case is
at a preliminary stage and it is not possible to assess fully the merits
of Oncor's claims. The Company intends to defend the claims against it and
Incomex vigorously but no assurance can be given to the outcome of this
matter. The Company has accrued $108,000 as a reserve in connection with
this matter at December 31, 1998 in accordance with SFAS No. 5 "Accounting
for Contingencies." There can be no assurance that the loss, if any, will
not exceed the reserve established by the Company
W.B. McKee Securities, Inc. ("McKee") filed suit against the Company in
U.S. District Court for the District of Arizona alleging breach of an
investment banking agreement relating to finders' fees for the PIC/ATN
acquisition. The Company and McKee entered into a settlement agreement in
the first quarter of 1999 with respect to this matter. Pursuant to the
settlement, the Company has agreed to pay $100,000 to McKee in
installments over a three-month period in return for a general release of
all claims by McKee. The effectiveness of the settlement agreement and
McKee's release is contingent on the timely payment by the Company of the
settlement amount. The settlement amount of $100,000 has been accrued by
the Company as of December 31, 1998.
On October 1, 1998, the Company entered into an Amended and Restated
Employment Agreement with Thomas C. Chaplin, Chief Executive Officer and
Guy O. Murdock, Chairman of the Board. Each of the Amended and Restated
Employment Agreements has a term through December 31, 2001. Pursuant to
the Amended and Restated Employment Agreements, Messrs. Chaplin and
Murdock will receive base salaries of not less than $250,000 and $150,000,
respectively. In addition, each of them will be eligible to participate in
the Company's bonus plan and other executive compensation plans. Each
Amended and Restated Employment Agreement contains a provision restricting
competition with the Company for a period of two years following
termination of employment. Mr. Chaplin's Amended and Restated Employment
Agreement provides that if his employment is terminated by the Company for
any reason other than for cause, Mr. Chaplin will be entitled to receive
severance at an annual rate of $150,000 for two years, provided, however,
that if his employment is terminated by the Company or by Mr. Chaplin for
any reason within 180 days after a sale of the Company, Mr. Chaplin will
be entitled to continuation of his then effective base salary for three
years. Mr. Murdock's Amended and Restated Employment Agreement provides
that if his employment is terminated by the Company for any reason,
including for cause, Mr. Murdock will be entitled to receive severance at
an annual rate of $150,000 for two years, provided, however, that if his
employment is terminated by the Company or by Mr. Murdock for any reason
within 180 days after a sale of the Company, Mr. Murdock will be entitled
to continuation of his then effective base salary for three years.
On January 1, 1999, the Company entered into an Amended and Restated
Employment Agreement with Colin P. Halford, President. The Amended and
Restated Employment Agreement has a term through December 21, 2001 and
provides that Mr. Halford will receive a base salary of not less than
$150,000. In addition, Mr. Halford will be eligible to participate in the
Company's bonus plan and other executive compensation plans. The Amended
and Restated Employment Agreement contains a provision restricting
competition with the Company for a period of two years following
termination of employment. Mr. Halford's Amended and Restated Employment
Agreement provides that if his employment is terminated by the Company for
any reason, including for cause, Mr. Halford will be entitled to receive
severance at an annual rate of $150,000 for two years, provided, however,
that if his employment is terminated by the Company or by Mr. Halford for
any reason within 180 days after a
F-33
<PAGE> 63
sale of the Company, Mr. Halford will be entitled to continuation of his
then effective base salary for three years.
On November 1, 1998, the Company and its wholly owned subsidiaries PIC and
PIC-R entered into an Employment Agreement with Bonner B. Hardegree,
Executive Vice President of PIC. The Employment Agreement has a three-year
term, with automatic one-year renewals unless either party gives notice of
termination at least one year in advance of the end of the term. Pursuant
to the Employment Agreement, Mr. Hardegree will receive a base salary of
not less than $144,000. In addition, Mr. Hardegree will be entitled to
participate in the Company's bonus plans and other compensation plans and
fringe benefits for executive officers. The Employment Agreement contains
a provision restricting competition with the Company for a period of six
months following termination of employment unless termination is by the
Company without cause or by Mr. Hardegree for good reason. Mr. Hardegree's
Employment Agreement provides that if his employment is terminated by the
Company without cause or by Mr. Hardegree for good reason, Mr. Hardegree
will be entitled to continuation of his then effective base salary for a
period equal to the greater of (i) one year, or (ii) the remaining term of
the Employment Agreement.
13. RELATED PARTY TRANSACTIONS
The Company conducts a significant amount of business with Berthel and
other affiliated entities. Berthel provided lease and other financing
services, including underwriting, to the Company. The Company also had an
agreement with an entity owned by the Company's Chairman of the Board for
the use of aircraft. The Company has also paid consulting expenses to a
member of the Company's Board of Directors and had loans with related
parties.
On July 1, 1994, the Company entered into an agreement with a minority
shareholder to provide telecommunication services to hotels owned and
managed by Larken, Inc., a company 50% owned by a minority shareholder.
Revenues of $463,976 and $603,644 were generated for the years ended
December 31, 1998 and 1997, respectively. Further, the Company had call
processing receivables from the hotels included under the agreement of
$135,983 and $79,500 at December 31, 1998 and 1997, respectively. The
agreement provides for a set payment of $25,000 per month in commissions
to be paid to the minority shareholder, until January 1, 1997, when the
commission payment was increased to $30,000 per month for a period of 24
months. Also in conjunction with this agreement, effective from July 1,
1996 and through June 30, 1997, the Company paid an additional $6,000
per month to Berthel for commissions payable to the minority shareholder
pursuant to a settlement of a dispute between Berthel and the minority
shareholder.
A summary of transactions with related parties for the years ended
December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Consulting expense $ 73,630 $ 35,181
Interest expense on related party notes payable 289,922 20,778
Commissions to minority shareholder 360,000 360,000
Interest expense on notes payable to Berthel 133,681 38,622
Lease payments to Berthel 840,415 491,175
Commissions and related fees to Berthel 141,518 115,250
Rental of aircraft -- 33,116
</TABLE>
F-34
<PAGE> 64
14. PROFIT SHARING PLAN
The Company has a profit sharing plan under Section 401(k) of the Internal
Revenue Code. Employees are eligible to participate in the plan after
completing three months of service. There were no contributions required
and no discretionary contributions made to the plan for the years ended
December 31, 1998 and 1997.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value amounts disclosed below are based on estimates prepared by
the Company utilizing valuation methods appropriate in the circumstances.
Generally accepted accounting principles do not require disclosure for
lease contracts. The carrying amount for financial instruments included
among cash, receivables, notes payable, and other short-term payables
approximates their fair value because of the short maturity of those
instruments. The estimated fair value of other significant financial
instruments are based principally on discounted future cash flows at rates
commensurate with the credit and interest rate risk involved.
The estimated fair values of the Company's other significant financial
instruments at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Note receivable $ 806,229 $ 806,229 $ -- $ --
Long-term debt 3,858,324 3,367,119 4,795,473 4,795,473
</TABLE>
16. BUSINESS SEGMENT INFORMATION
In June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", was issued effective for fiscal years ending
after December 15, 1998. The Company's reportable segments are structured
into a decentralized organizational structure resulting in three
stand-alone business units. While all three business units are engaged in
the business of providing telecommunications services to hospitality and
payphone businesses, they are managed separately largely due to a series
of acquisitions the Company completed in 1997 and 1998, as discussed in
Notes 3 and 4.
The Company's three reportable segments are PIC/ATN, Incomex and MTS. The
Company provides long-distance telecommunications services to hotels and
payphone owners in the United States through the PIC/ATN business unit.
The services include, but are not limited to, live operator services,
credit card billing services, automated collection and messaging delivery
services, voice mail services, telecommunications consulting and providing
carrier services for long-distance telecommunications companies. The
incoming operator assisted calls are processed with the PIC/ATN operators
on location. The Incomex business unit provides international operator
services to hotels and payphone owners in Mexico on international calls
from Mexico to the United States. The MTS business unit was created in
1998 to meet the needs of the hospitality telecommunications management
market by providing database profit management services and other value
added services. The MTS business unit was formerly the operating unit of
the Company responsible for marketing of AT&T operator services until the
contract was terminated during the fourth quarter of 1998.
The accounting policies of the reportable segments are the same as those
described in Note 1. The Company evaluates the performance of its
operating units based on income (loss) from operations.
F-35
<PAGE> 65
Summarized financial information concerning the Company's reportable
segments is shown in the following table (amounts expressed in thousands).
The "Other" column includes the effect of eliminating inter-business unit
transactions.
MTS AND
PIC/ATN INCOMEX CORPORATE OTHER TOTAL
1998:
Revenues $24,094 $ 7,921 $ 5,262 $(3,289) $33,988
Income (loss) from
operations 2,544 1,958 (2,596) 1,906
Total assets 5,591 2,463 16,818 (2,194) 22,678
Depreciation and
amortization expense 436 12 771 629 1,848
Capital expenditures 800 134 357 1,291
1997:
Revenues 1,369 7,048 8,417
Income (loss) from
operations 17 (7,064) (7,047)
Total assets 2,642 7,728 (984) 9,386
Depreciation and
amortization expense 73 2,070 2,143
Capital expenditures 284 357 641
Financial information relating to the Company's operations by geographic
area was for the years ended December 31, 1998 and 1997 as follows
(amounts expressed in thousands):
1998 1997
Revenues:
United States $26,009 $ 8,417
Mexico 7,921 --
Canada 58 --
------- -------
Total $33,988 $ 8,417
------- -------
Long-lived assets (excluding investments):
United States $15,719 $ 7,883
Mexico 1,704 --
------- -------
Total $17,423 $ 7,883
======= =======
17. INVESTMENTS
During 1998, the Company reached an agreement to invest in ACTEL
Integrated Communications, Inc. ("ACTEL") of Mobile, Alabama. As of
December 31, 1998, the Company had invested $694,067, and from January 1,
1999 through March 22, 1999, had invested an additional $586,000. On March
10, 1999, the Company and ACTEL entered into an Investment Agreement
whereby, the Company receives one share of Series A Convertible Preferred
Stock for every dollar invested. Each Series A Convertible Preferred Stock
earns a 10% dividend and may be converted to 1.46 shares of common stock
at any time on or before March 10, 2002 at the option of the Company.
F-36
<PAGE> 66
ACTEL, based in Mobile, Alabama, will provide local exchange
communications services as a facility-based carrier. ACTEL has received
public service approval to become a competitive local exchange carrier in
both Louisiana and Alabama and will begin to offer voice and data
communications services to medium and small businesses in April 1999.
Initially, resale service will commence in Mobile, Alabama and in New
Orleans, Louisiana, through an interconnect agreement with Bell South. An
advanced Lucent AnyMedia(TM) MultiService Module is being installed in
Mobile. It will enable proprietary retail services to be provided to the
Mobile, Alabama market later this spring. At that time ACTEL will own its
local service lines, sell monthly services and become a facility-based
carrier providing proprietary voice and data services to the targeted
market of medium and small businesses.
During 1998, the Company reached an initial lending/investment agreement
with AcNET de C.V. ("AcNet") of Mexico. As of December 31, 1998, the
Company had invested $806,229, and from January 1, 1999 through March 22,
1999, had invested an additional $403,000. The initial agreement in August
1998 provided for an option to purchase 49% of AcNet for $2 million. The
option was renewed beyond the original October 1998 expiration and revised
in March 1999 to the following: the Company may lend up to $2 million to
AcNet on a 10% note and convert the note to preferred stock that earns 20%
of the earnings of AcNet, as defined in the agreement. The preferred
stock may be redeemed by AcNet for 120% of its face value plus any
accumulated dividends. Additionally, the Company possesses an option to
acquire 49% of the common stock of AcNet in exchange for 450,000 shares of
the Company's common stock and the guarantee by the Company of certain
debt of AcNet by March 30, 1999. As of March 22, 1999, no amounts had been
guaranteed by the Company. The option extends through July 31, 1999.
AcNet provides internet services and network services to businesses,
governments and consumers in Mexico by authority of concessions provided
by the Mexican government. As of March 1999, AcNet provided internet
services to over 13,000 customers and network services to several of the
major corporations in Mexico generating annualized revenues of
approximately $1.5 million.
18. SUBSEQUENT EVENT
During the first quarter of 1999, the Company received proceeds of
$1,500,000 from the issuance of promissory notes to related parties. The
notes bear interest at 14% and the accrued interest and principal are due
on November 30, 1999. Warrants to purchase 300,000 shares of the
Company's common stock were issued in relation to the promissory notes at
an exercise price of $3.25 per share.
F-37
<PAGE> 1
EXHIBIT 10.6
AMENDMENT TO AT&T MANAGEMENT COMPANY
COMMISSION AGREEMENT
The AT&T Management Company Commission Agreement entered into as of
January 16, 1997 ("Agreement"), between AT&T Corp. ("AT&T") and MURDOCK
COMMUNICATIONS CORPORATION ("Agent") is amended, effective upon signing by both
parties, as follows:
WHEREAS, Agent desires to no longer manage telecommunications services
for Telephones at the Locations and therefore, wishes to terminate the
Agreement; and
WHEREAS, AT&T has agreed to the termination of said Agreement; and
WHEREAS, both parties desire to close out any payments due under said
Agreement and to set forth Agent's obligations to AT&T regarding the
relationship that AT&T desires to pursue with the Locations.
NOW, THEREFORE in consideration of the mutual benefits accruing to each
party, the parties hereby covenant and agree as follows:
1. The Agreement shall officially expire as of October 15, 1998
("Expiration Date").
2. No later than close of business October 9, 1998, Agent shall provide
information required by AT&T to enable AT&T's payment of any commissions due and
owing from Agent to the Locations for the approximate time period from March
1998 through the Expiration Date hereunder. Such information shall include, but
not be limited to, the Location payee name, the address, the amount of
commissions owed to such Location, federal tax identification numbers and any
other information that AT&T deems necessary in completing such action. AT&T
shall not be obligated to pay such commissions until said information has been
provided to AT&T by Agent.
3. Contingent upon Agent providing the information in accordance with
paragraph 2, above, AT&T agrees to pay to Agent Twelve Thousand Five Hundred
Dollars ($12,500).
4. AT&T shall pay to Agent the Compliance Incentive Bonus that has been
earned by Agent, as set forth in Section 5.0 of the Agreement, for the period of
June 16, 1998 through September 15, 1998, subject to adjustment in accordance
with subsection 5.5. For the period of September 16 through October 15, 1998,
the Compliance Incentive Bonus shall not be subject to any adjustment, but as
earned. Such bonus payments shall be made within forty-five (45) days of the
Expiration Date of the Agreement.
5. Agent agrees to provide detailed contact information for all of the
Locations covered under the Agreement and to provide any assistance to AT&T that
is necessary in the transition of the relationship with the Location from Agent
to AT&T. Agent shall work with AT&T to
<PAGE> 2
develop a letter, to be signed jointly by Agent and AT&T, to be mailed to the
Locations informing of said transition.
6. Agent agrees that effective with this Amendment, and up to twenty-four
(24) months after the Expiration Date, Agent shall not compete with AT&T for 0+
services at any of the Locations covered hereunder.
7. In the event of an inconsistency between the terms of the Agreement and
this Amendment, the terms of this Amendment shall prevail.
<TABLE>
<CAPTION>
MURDOCK COMMUNICATIONS CORPORATION AT&T CORP.
<S> <C>
/s/ Colin P. Halford /s/ John C. Powell
- ----------------------------------------- --------------------------------------------
Authorized Signature Authorized Signature
Colin P. Halford John C. Powell
- ----------------------------------------- --------------------------------------------
Typed or Printed Name Typed or Printed Name
President Sales Vice President
- ----------------------------------------- --------------------------------------------
Title Title
10/8/98 10/15/98
- ----------------------------------------- --------------------------------------------
Date Date
319-362-6900 Contract #
- ---------------------------------------- ---------
Contact Telephone Number Agent ID
---------
Location #
---------
</TABLE>
2
<PAGE> 1
EXHIBIT 10.16
EARN-OUT SETTLEMENT AGREEMENT
THIS EARN-OUT SETTLEMENT AGREEMENT (the "Agreement") is entered into as
of the 7th day of December, 1998, by and among MURDOCK COMMUNICATIONS
CORPORATION ("Murdock"), MCC ACQUISITION CORP., a wholly owned subsidiary of
Murdock ("MCCAC"), PRIORITY INTERNATIONAL COMMUNICATIONS, INC., a wholly owned
subsidiary of MCCAC ("PIC"), PIC RESOURCES CORPORATION, a wholly owned
subsidiary of MCCAC ("PICR"), WAYNE WRIGHT and BONNER HARDEGREE, ( together the
"Shareholders") and ATN COMMUNICATIONS, INC. ("ATN") a wholly owned subsidiary
of PICR.
RECITALS
A. Murdock, MCCAC, PIC, PICR, the Shareholders and ATN mutually desire
to enter into this Agreement and hereby each acknowledge the receipt of good and
valuable consideration therefor.
B. A Stock Purchase Agreement dated as of August 22, 1997, as amended
to date (the "PIC Agreement"), was entered into by and among MCCAC, PIC and the
Shareholders.
C. A Stock Purchase Agreement dated as of August 22, 1997, as amended
to date (the "PICR Agreement"), was entered into by and between MCCAC, PICR, ATN
and the Shareholders.
D. That certain Letter Agreement dated October 29, 1997 addressed to
the Shareholders of PICR and ATN (the "Letter Agreement") was executed and
delivered by Murdock in conjunction with the execution of the PIC Agreement and
the PICR Agreement.
E. That certain Agreement dated May 21, 1998 (the "May 1998 Agreement")
was executed and delivered by the parties hereto.
F. The parties hereto desire to make certain additional agreements and
to modify certain terms and conditions of the PIC Agreement, the PICR Agreement
and the May 1998 Agreement all as expressly stated herein.
AGREEMENTS
In consideration of the recitals and the mutual agreements which
follow, the parties agree:
1. Termination of the May 1998 Agreement. The May 1998 Agreement is
terminated and of no further force or effect.
2. Settlement of Earn Out Right. In full and final settlement of the
earn-out rights set forth in section 1.3 of the PICR Agreement, the Letter
Agreement, as amended to the date of this Agreement and the May 1998 Agreement,
(the "Earn-Out Rights"), upon execution of this Agreement, Murdock shall issue
2,300,000 shares of its voting common stock, (the "Shares") to the Shareholders.
Additionally, Murdock shall undertake with Wayne Wright a deferred payment
arrangement whereby, Wright shall receive $300,000.00 payable in 24 equal
monthly
<PAGE> 2
installments commencing on the date of execution of the Agreement. Such payments
shall be considered as part of the settlement of the Earn-Out Right. The Parties
acknowledge that with respect to the issuance of the Shares, the Shareholders
may designate certain other parties to receive Shares and Murdock agrees,
subject to applicable securities laws, to comply with the written instructions,
as executed by the Shareholders, to issue the Shares according to the directions
of the Shareholders, such instructions to be delivered concurrently with the
execution of this Agreement. In accordance with applicable securities laws, the
stock certificates evidencing the Shares shall bear a standard restrictive
legend indicating that the Shares were not registered under the securities laws
and cannot be resold except pursuant to a registration statement or in a
transaction exempt from federal and applicable state securities registration
requirements. Upon receipt of the Shares, the Earn Out Rights shall expire and
be of no further force or effect.
3. Brokerage Fees. Murdock or the Subsidiaries shall be fully
responsible for the costs associated with the defense and settlement of the
McFarland/Grossman action seeking brokerage fees in connection with the PIC
Agreement. Murdock acknowledges that a settlement providing for payment of a
total of $ 120,000.00 to McFarland Grossman has been entered into and partially
paid as of the date of this agreement.
4. Release. The Shareholders are hereby released from any and all
liabilities which have arisen or may arise in the future in connection with any
and all representations, warranties or other assurances whether expressed or
implied or any contingent liabilities, including indemnities, that were
originally or subsequently accepted in connection with any of the Agreements,
Amendments or Disclosures heretofore entered into by the parties or delivered by
the Shareholders. It is the intent of the parties, that the execution and
actions of this Agreement shall constitute full and final settlement and
acceptance of all aspect of the agreements and undertaking of the parties,
including indemnities, with respect to the PIC Agreement and the PICR Agreement
as amended to the date hereof.
5. Pay-off of Long-Term Notes. Upon execution of this Agreement,
MCCAC shall pay in full the total outstanding balance on the Promissory Notes
("Long Term Notes") issued by MCCAC to each of Wayne Wright and Bonner
Hardegree, both dated October 29, 1997 in the original principal amounts of $
1,664,119.39 and $ 209,497.01 respectively. The parties acknowledge and agree
that the total outstanding balance on these two promissory notes is $214,883.39
and $ 96,650.01 respectively. Any amounts of installments due and payable prior
to the execution of this Agreement and any amounts that remain unpaid after the
date of this Agreement and until paid, shall bear interest at the rate of 14.0%
per anum, from the due date. Upon such payment of principal due and interest, if
any, Messrs. Wright and Hardegree shall return the original promissory notes to
MCCAC marked "Canceled" and "Paid in Full".
6. Earn-Out Forecast. In connection with the settlement discussions
evidenced by this Agreement, the Shareholders were asked to furnish certain
information regarding forecast earnings and profits for PIC and PICR, such
having been used as the basis for negotiations and agreement between the parties
hereto. Murdock and MCCAC acknowledge that this forecast was prepared on a "best
efforts" basis and the Shareholders make no representation other than that the
forecast was prepared in good faith using reasonable forecast methods and based
on the factual assumptions reasonably believed by the Shareholders to be
accurate at the time. The Shareholders make no other representations or
warranties with respect to the earn-out forecast.
7. Release from Personal Guarantees. Murdock shall use its reasonable
efforts to secure the release of the Shareholders from any personal liability
they may have under any
2
<PAGE> 3
corporate obligations of Murdock or its Subsidiaries or under the loan
agreements between Murdock and Compass Bank and Berthel Fisher & Co. Murdock
agrees that in the absence of release from such personal liability, Mssr. Wright
and Hardegree, shall be fully and completely indemnified by Murdock in
connection with such personal liabilities.
8. Employment and Consulting Agreements. Upon execution of this
Agreement, PIC shall enter into (1) a two year consulting agreement with Wayne
Wright for nominal compensation and (2) a three year employment agreement with
Bonner Hardegree providing for annual compensation of $ 144,000.00 plus
reasonable and customary benefits. Both agreements shall be guaranteed by
Murdock and MCCAC and shall contain provision for incentive bonus and other
performance incentive opportunities as approved by the MCC Board of Directors.
The respective form of these agreements are (made a part of this Agreement and)
attached hereto as exhibits "A" and "B".
9. Registration Rights. Murdock agrees to file a registration statement
registering the resale of all shares originally issued to the Shareholders and
those shares issued in connection with this Agreement at a time reasonable in
conjunction with the 1998 year end audit and financial reporting and to use its
reasonable best efforts to have such registration statement declared effective
by the Securities and Exchange Commission as quickly as reasonably possible
after such filing.
10. Closing. The parties agree that the closing shall occur as soon as
practicable following the date of this Agreement, but in no respect later than
January 1, 1999. With respect to the shares being issued pursuant to this
Agreement, the issue date of such shares shall be the same as the date of
closing as herein stated.
11. Miscellaneous. This Agreement shall be construed and enforced in
accordance with the laws of the State of Iowa without regard to conflicts of law
principles. The parties have participated jointly in the negotiation and
drafting of this Agreement. In the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if drafted jointly
by the parties and no presumption of burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any provisions of this
Agreement. This Agreement may be amended or modified in whole or in part, only
by duly authorized agreement in writing executed in the same manner as this
Agreement and which makes reference to this Agreement. this Agreement may be
executed in counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same agreement.
MCC ACQUISITION CORP.
BY/s/ Thomas E. Chaplin
-------------------------------------------------
Thomas E. Chaplin,
Chief Executive Officer
MURDOCK COMMUNICATIONS
CORPORATION
BY/s/ Thomas E. Chaplin
-------------------------------------------------
Thomas E. Chaplin
Chief Executive Officer
3
<PAGE> 4
PRIORITY INTERNATIONAL
COMMUNICATIONS, INC.
BY/s/ Wayne Wright
-------------------------------------------------
Wayne Wright, President
PIC RESOURCES CORP.
BY/s/ Wayne Wright
-------------------------------------------------
Wayne Wright, President
SHAREHOLDERS
/s/ Wayne Wright
---------------------------------------------------
Wayne Wright
/s/ Bonner Hardegree
---------------------------------------------------
Bonner Hardegree
ATN COMMUNICATIONS, INC.
BY/s/ Wayne Wright
-------------------------------------------------
Wayne Wright, CEO
4
<PAGE> 1
EXHIBIT 10.18
EARN-OUT SETTLEMENT AGREEMENT
This Agreement is entered into as of December 1, 1998 by and among MCC
Acquisition Corp., an Iowa corporation ("MCCAC"), MURDOCK COMMUNICATIONS
CORPORATION, an Iowa corporation ("Murdock"), and all of the former shareholders
of INCOMEX, INC. listed on the signature page to this Agreement (the
"Shareholders").
RECITALS
A. MCCAC and the Shareholders are parties to a Stock Purchase
Agreement dated as of February 13, 1998 (the "Purchase Agreement") pursuant to
which MCCAC acquired all of the issued and outstanding common stock of INCOMEX,
Inc. ("INCOMEX").
B. MCCAC, Murdock and the Shareholders desire to finally settle
certain provisions of the Purchase Agreement.
C. MCCAC is a wholly-owned subsidiary of Murdock.
AGREEMENT
In consideration of the recitals and the mutual agreements which
follow, each party to this Agreement agrees:
1. Settlement of Earn Out Rights.
(a) In full and final settlement of the earn-out rights set
forth in section 1.3(a) of the Purchase Agreement, MCCAC will pay to the
Shareholders, according to their respective Proportional Shares, an aggregate
amount (the "IBT Payment") equal to 60% of the IBT (as defined below) of INCOMEX
during the period from February 1, 1998 through July 31, 1998. "IBT" shall mean
net income before income taxes, determined according to GAAP except that, solely
for purposes of calculating IBT, the cost of operator services provided to
INCOMEX by ATN Communications Inc. shall be the lower of (i) the actual costs of
such services billed to INCOMEX plus bad debt expense and uncollectible charges
or (ii) $5.90 per eight-minute call billed to INCOMEX plus bad debt expense and
uncollectible charges.
(b) The IBT Payment shall be payable within 30 days of the
confirmation by Deloitte & Touche of INCOMEX IBT for the period from February 1,
1998 through October 31, 1998, but in no event later than March 1, 1999. At each
Shareholder's option (to be exercised by sending MCCAC a notice
<PAGE> 2
in the form of Exhibit B within ten days after the date of such Shareholder's
execution and delivery of this Agreement), such Shareholder's Proportional Share
of the IBT Payment shall be payable either (a) in cash, or (b) by delivery of a
Murdock promissory note (the "Note") in the principal amount of the
Shareholder's Proportional Share of the IBT Payment. The Note will be payable in
full one year after the issue date, will bear interest at an annual rate of 14%
and will include a 1% origination fee. The Note will also carry a detachable
five-year warrant entitling the holder to purchase 200 shares of Murdock common
stock for each $1,000 of principal at an exercise price of $3.25 per share. Upon
the execution and delivery of this Agreement, section 1.3(a) of the Purchase
Agreement shall expire and be of no further force or effect.
(c) In full and final settlement of the earn-out rights set
forth in section 1.3 (b) of the Purchase Agreement, upon execution and delivery
of this Agreement by all parties, Murdock shall issue 1,500,000 shares of its
voting common stock (collectively, the "Shares") in the aggregate to the
Shareholders, to be allocated according to the Shareholders' respective
Proportional Shares (as shown on Exhibit A). In accordance with applicable
securities laws, the stock certificates evidencing the Shares shall bear a
standard restrictive legend indicating that the Shares were not registered under
the securities laws and cannot be resold except pursuant to a registration
statement or in a transaction exempt from federal and applicable state
securities registration requirements. Upon receipt of the Shares, section 1.3(b)
of the Purchase Agreement shall expire and be of no further force or effect.
2. Observer Rights. One representative designated in writing by
Shareholders holding a majority in interest of the aggregate Proportional Shares
shall be entitled to attend meetings of Murdock's Board of Directors as an
observer for a period of one year after the issuance of the Shares.
3. Miscellaneous. This Agreement may be amended or modified in whole
or in part, only by a duly authorized agreement in writing executed in the same
manner as this Agreement and which makes reference to this Agreement. This
Agreement may be executed in counterparts, each of which shall be deemed an
original but all of which together shall constitute one and the same agreement.
MCC ACQUISITION CORP.
BY/s/ Thomas E. Chaplin
-------------------------------------------------
Thomas E. Chaplin,
Chief Executive Officer
2
<PAGE> 3
MURDOCK COMMUNICATIONS
CORPORATION
BY/s/ Thomas E. Chaplin
-------------------------------------------------
Thomas E. Chaplin,
Chief Executive Officer
THE SHAREHOLDERS
/s/ John S. Rance
---------------------------------------------------
John S. Rance
/s/ R. Michael Upshaw
---------------------------------------------------
R. Michael Upshaw
/s/ Fernando Ficachi
---------------------------------------------------
Fernando Ficachi
/s/ Steve Rance
---------------------------------------------------
Steve Rance
/s/ Gloria Rance, Trustee
---------------------------------------------------
Trustee of the Rance Family Trust
/s/ John Holderness
---------------------------------------------------
Trustee of the
Holderness Family Trust
/s/ Jeannie Rance
---------------------------------------------------
Jeannie Rance
/s/ Robert Upshaw
---------------------------------------------------
Robert Upshaw
/s/ David A. Coats
---------------------------------------------------
Trustee of the David A. Coats
& Terrell A. Coats
Revocable Trust
3
<PAGE> 4
/s/ Terrell Coats
---------------------------------------------------
Trustee of the David A. Coats
& Terrell A. Coats
Revocable Trust
/s/ Gary Newton
---------------------------------------------------
Gary Newton
/s/ Karri Rance-Heredia
---------------------------------------------------
Karri Rance Heredia
/s/ Pamela Leary
---------------------------------------------------
Pamela Leary
/s/ Angela Taylor
---------------------------------------------------
Angela Taylor
/s/ Jason Rance
---------------------------------------------------
Jason Rance
4
<PAGE> 1
EXHIBIT 10.20
MURDOCK COMMUNICATIONS CORPORATION
1997 STOCK OPTION PLAN
(as amended through September 30, 1998)
This Stock Option Plan, hereinafter referred to as the Plan, is adopted by
Murdock Communications Corporation, an Iowa Corporation.
1. Purpose. The purpose of this Plan is to strengthen Murdock
Communications Corporation by providing an incentive to its key
employees and directors thereby encouraging them to devote their
abilities and industry to the success of the Company's business
enterprise. It is intended that this purpose be achieved by extending
to key employees and directors of the Company an added long-term
incentive for high levels of performance and unusual efforts through
the grant of options to purchase shares of the Company's common stock
under the Murdock Communications Corporation 1997 Stock Option Plan.
2. Definitions. For purposes of the Plan:
(a) "Agreement" means the written agreement between the Company
and an Optionee evidencing the grant of an Option and setting
forth the terms and conditions thereof.
(b) "Board" means the Board of Directors of the Company.
(c) "Cause" means (i) intentional failure to perform reasonably
assigned duties, (ii) dishonesty or willful misconduct in the
performance of an Optionee's duties, (iii) any act of (A)
fraud or intentional misrepresentation, or (B) embezzlement,
misappropriation or conversion of assets or opportunities of
the Company or (iv) willful violation of any law, rule or
regulation in connection with the performance of an
Optionee's duties (other than traffic violations or similar
offenses).
(d) "Change in Capitalization" means any increase or reduction in
the number of Shares, or any change (including, but not
limited to, a change in value) in the Shares or exchange of
Shares for a different number or kind of shares or other
securities of the Company, by reason of a reclassification,
recapitalization, merger, consolidation, reorganization,
stock dividend, stock split or reverse stock split,
combination or exchange of shares or other similar events.
(e) A "Change in Control" shall be deemed to have occurred upon
the approval by the Company's stockholders of (i) a merger or
consolidation of the Company with or into another Corporation
(other than a merger or consolidation in which the Company is
the surviving corporation and which does not result in any
capital reorganization or reclassification or other change in
the Company's then outstanding shares of common stock);
<PAGE> 2
(ii) a sale or disposition of all or substantially all of the
Company's assets; or (iii) a plan of liquidation or
dissolution of the Company.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
(g) "Committee" means a committee consisting solely of at least
two (2) nonemployee Directors appointed by the Board to
administer the Plan and to perform the functions set forth
herein.
(h) "Company" means Murdock Communications Corporation, an Iowa
based corporation.
(i) "Director Option" means an Option granted to a Nonemployee
Director pursuant to Section 5.
(j) "Disability" means a physical or mental infirmity which
impairs the Optionee's ability to perform substantially his
or her duties for a period of one hundred eighty (180)
consecutive days.
(k) "Eligible Employee" means any officer or other key employee
of the Company or a Subsidiary designated by the Committee as
eligible to receive Options subject to the conditions set
forth herein.
(l) "Employee Options" means an Option granted to an Eligible
Employee pursuant to Section 6.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
n) "Fair Market Value" on any date means the closing price
of the Shares on such date on the principal national
securities exchange on which such Shares are listed or
admitted to trading, or if such Shares are not so listed or
admitted to trading, the arithmetic mean of the per Share
closing bid price and per Share closing asked price on such
date as quoted on the National Association of Securities
Dealers Automated Quotation System or such then market in
which such prices are regularly quoted, or, if there have
been no published bid or asked quotations with respect to
Shares on such date, the Fair Market Value shall be the value
established by the Board in good faith and in accordance with
Section 422 of the Code.
(o) "Incentive Stock Option" means an Option satisfying the
requirements of Section 422 of the Code and designated by the
Committee as an Incentive Stock Option.
(p) "Nonqualified Stock Option" means an Option which is not an
Incentive Stock Option.
(q) "Nonemployee Director" means a director of the Company who is
not an employee of the Company or any Subsidiary.
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<PAGE> 3
(r) "Option" means an Employee Option, a Director Option, or
either or both of them.
(s) "Optionee" means a person to whom an Option has been granted
under the Plan.
(t) "Parent" means any corporation which is a parent corporation
(within the meaning of Section 424(e) of the Code) with
respect to the Company.
(u) "Plan" means the Murdock Communications Corporation 1997
Stock Option Plan.
(v) "Shares" means the common stock, no par value per share, of
the Company.
(w) "Subsidiary" means any corporation which is a subsidiary
corporation (within the meaning of Section 424(f) of the
Code) with respect to the Company.
(x) "Successor Corporation" means a corporation, or a parent or
subsidiary thereof within the meaning of Section 424(a) of
the Code, which issues or assumes a stock option in a
transaction to which Section 424(a) of the Code applies.
(y) "Ten-Percent Stockholder" means an Eligible Employee, who, at
the time an Incentive Stock Option is to be granted to him or
her, owns (within the meaning of Section 422(b) (6) of the
Code) stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the
Company, or of a Parent or a Subsidiary.
3. Administration.
(a) The Plan shall be administered by the Committee which shall
hold meetings at such times as may be necessary for the
proper administration of the Plan. The Committee shall keep
minutes of its meetings. A quorum shall consist of not less
than two members of the Committee and a majority of a quorum
may authorize any action. Any decision or determination
reduced to writing and signed by a majority of all of the
members shall be as fully effective as if made by a majority
vote at a meeting duly called and held. No member of the
Committee shall be liable for any action, failure to act,
determination or interpretation made in good faith with
respect to this Plan or any transaction hereunder, except for
liability arising from his or her own willful misfeasance,
gross negligence or reckless disregard of his or her duties.
The Company hereby agrees to indemnify each member of the
Committee for all costs and expenses and, to the extent
permitted by applicable law, any liability incurred in
connection with defending against, responding to, negotiation
for the settlement of or otherwise dealing with any claim,
cause of action
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<PAGE> 4
or dispute of any kind arising in connection with any actions
in administering this Plan or in authorizing or denying
authorization to any transaction hereunder.
(b) Subject to the express terms and conditions set forth herein,
the Committee shall have the power from time to time to
determine those Eligible Employees to whom Employee Options
shall be granted under the Plan and the number of Incentive
Stock Options and/or Nonqualified Stock Options to be granted
to each Eligible Employee and to prescribe the terms and
conditions (which need not be identical) of each Employee
Option, including the purchase price per Share subject to
each Employee Option, and make any amendment or modification
to any agreement consistent with the terms of the Plan;
(c) Subject to the express terms and conditions set forth herein,
the Committee shall have the power from time to time:
(1) to construe and interpret the Plan and the Options
granted thereunder and to establish, amend and revoke
rules and regulations for the administration of the
Plan, including, but not limited to, correcting any
defect or supplying any omission, or reconciling any
inconsistency in the Plan or in any Agreement, in the
manner and to the extent it shall deem necessary or
advisable to make the Plan fully effective, and all
decisions and determinations by the Committee in the
exercise of this power shall be final, binding and
conclusive upon the Company, its Subsidiaries, the
Optionees and all other persons having any interest
therein;
(2) to determine the duration and purposes for leaves of
absence which may be granted to an Optionee on an
individual basis without constituting a termination of
employment or service for purposes of the Plan;
(3) to exercise its discretion with respect to the powers
and rights granted to it as set forth in the Plan;
(4) generally, to exercise such powers and to perform such
acts as are deemed necessary or advisable to promote the
best interests of the Company with respect to the Plan.
4 Stock Subject to Program.
(a) The maximum number of Shares that may be made the subject of
Options granted under the Plan is 1,727,471 Shares (or the
number and kind of shares of stock or other securities to
which such Shares are adjusted upon a Change in
Capitalization pursuant to Section 8) and the Company shall
reserve for the purposes of the Plan, out of its authorized
but unissued
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<PAGE> 5
Shares or out of Shares held in the Company's treasury, or
partly out of each, such number of Shares as shall be
determined by the Board.
(b) Whenever any outstanding Option or portion thereof expires,
is canceled or is otherwise terminated for any reason (other
than upon the surrender of the Option pursuant to Section
7(e) hereof), the Shares allocable to the canceled or
otherwise terminated Option or portion thereof may again be
the subject of Options granted hereunder.
(c) Stock certificates representing Shares purchased under the
Plan shall be conspicuously endorsed with the following
legend:
"The shares of stock represented by this certificate are
subject to certain restrictions on transfer contained in the
corporation's Stock Option Plan, a copy of which is on file
at, and will be furnished without charge to the record holder
of this certificate upon written request to, the
corporation's principal place of business or registered
office."
5. Option Grants for Nonemployee Directors.
(a) Grant. Subject to the provisions of the Plan and to Section 4
(a) above, the Committee shall have full and final authority
to select those Nonemployee Directors who will receive
Director Options, the terms and conditions of which shall be
set forth in an Agreement. The purchase price therefor of
each Director Option shall be as provided in this Section 5
and such Director Options shall be exercisable, in whole or
in part, in four equal installments as follows: (i) with
respect to the first installment, immediately upon execution
and delivery of the Director Option (the "Grant"), (ii) with
respect to the second installment, on December 31, of the
year of the Grant, (iii) with respect to the third
installment, on December 31 of the year next succeeding the
year of the Grant, and (iv) with respect to the last
installment, on December 31 of the year two years after the
date of the Grant. Such Director Options shall be evidenced
by an Agreement containing such other terms and conditions
not inconsistent with the provisions of this Plan as
determined by the Board.
(b) Purchase Price. The purchase price for Shares under each
Director Option shall be at least equal to 100% of the Fair
Market Value of a Share on the date the Director Option is
granted.
(c) Duration. Director Options shall be for a term of ten (10)
years.
6. Option Grants for Eligible Employees.
(a) Grant. Subject to the provisions of the Plan and to Section
4(a) above, the Committee shall have full and final authority
to select those Eligible Employees who will receive Employee
Options, the terms and conditions of which shall be set forth
in an Agreement; provided; however, that no
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<PAGE> 6
Eligible Employee shall receive any Incentive Stock Options
unless he is an employee of the Company, a Parent or a
Subsidiary at the time the Incentive Stock Option is granted.
(b) Purchase Price. The purchase price or the manner in which the
purchase price is to be determined for Shares under each
Employee Option shall be determined by the Committee and set
forth in the Agreement, provided that the purchase price per
Share under each Incentive Stock Option shall not be less
than 100% of the Fair Market Value of a Share on the date the
Employee Option is granted (110% in the case of an Incentive
Stock Option granted to a Ten-Percent Stockholder).
(c) Duration. Employee Options granted hereunder shall be for
such term as the Committee shall determine, provided that no
Employee Option shall be exercisable after the expiration of
ten (10) years from the date it is granted (five (5) years in
the case of an Incentive Stock Option granted to a
Ten-Percent Stockholder). The Committee may, subsequent to
the granting of any Employee Option, extend the term thereof
but in no event shall the term as so extended exceed the
maximum term provided for in the preceding sentence.
(d) Modification or Substitution. The Committee may, in its
discretion, modify outstanding Employee Options or accept the
surrender of outstanding Employee Options (to the extent not
exercised) and grant new Options in substitution for them.
Notwithstanding the foregoing, no modification of an Employee
Option shall adversely alter or impair any rights or
obligations under the Employee Option without the Optionee's
consent.
7. Terms and Conditions Applicable to All Options
(a) Non-transferability. No Option granted hereunder shall be
transferable by Optionee to whom granted otherwise than by
will or the laws of descent and distribution, and an Option
may be exercised during the lifetime of such Optionee only by
the Optionee or his or her guardian or legal representative.
The terms of such Option shall be final, binding and
conclusive upon the beneficiaries, executors, administrators,
heirs and successors of the Optionee.
(b) Vesting and Method of Exercise.
(1) Subject to Section 7(e) hereof, each Option shall
become exercisable in the manner, including installments
(which need not be equal), and at such times as may be
designated by the Committee and set forth in the
Agreement. To the extent not exercised, installments
shall accumulate and be exercisable, in whole or in
part, at any time after becoming exercisable, but not
6
<PAGE> 7
later than the date the Option expires; provided,
however, that the Agreement may provide for the
forfeiture of vested and non-vested Options upon the
occurrence of specified events. The Committee may
accelerate the exercisability of any Option or portion
thereof at any time.
(2) The exercise of an Option shall be made only by a
written notice delivered in person or by mail to the
Secretary of the Company at the Company's principal
executive office, specifying the number of Shares to be
purchased and accompanied by payment therefor and
otherwise in accordance with the Agreement pursuant to
which the Option was granted. The purchase price for any
Shares purchased pursuant to the exercise of an Option
shall be paid in full upon such exercise, by any one or
a combination of the following: (i) cash or (ii)
transferring Shares to the Company upon such terms and
conditions as determined by the Committee. The written
notice pursuant to this Section 7(b)(2) may also provide
instructions from the Optionee to the Company that upon
receipt of the purchase price in cash from the
Optionee's broker or dealer, designated as such on the
written notice, in payment for any Shares purchased
pursuant to the exercise of an Option, the Company shall
issue such Shares directly to the designated broker or
dealer. Any Shares transferred to the Company as payment
of the purchase price under an Option shall be valued at
their Fair Market Value on the day preceding the date of
exercise of such Option. If requested by the Committee,
the Optionee shall deliver the Agreement evidencing the
Option to the Secretary of the Company who shall endorse
thereon a notation of such exercise and retum such
Agreement to the Optionee. No fractional Shares (or cash
in lieu thereof) shall be issued upon exercise of an
Option and the number of Shares that may be purchased
upon exercise shall be rounded to the nearest number of
whole Shares.
(c) Rights of Optionees. No Optionee shall be deemed for any
purpose to be the owner of any Shares subject to any Option
unless and until (i) the Option shall have been exercised
pursuant to the terms thereof, (ii) the Company shall have
issued and delivered the Shares to the Optionee and (iii) the
Optionee's name shall have been entered as a stockholder of
record on the books of the Company. Thereupon, the Optionee
shall have full voting, dividend and other ownership rights
with respect to such Shares.
(d) Termination of Employment or Service. Unless otherwise
provided in the Agreement evidencing the Option, an Option
shall terminate upon or following an Optionee's termination
of employment with the Company and its Subsidiaries or
service as a director of the Company and its Subsidiaries as
follows:
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<PAGE> 8
(1) if an Optionee's employment or service as a director
terminates for any reason other than death, Disability
or Cause, the Optionee may at any time within three (3)
months after his or her termination of employment or
service as a director, exercise an Option to the extent,
and only to the extent, that the Option or portion
thereof was exercisable on the date of termination;
(2) in the event the Optionee's employment or service as a
director terminates as a result of Disability, the
Optionee may at any time within one (1) year after such
termination exercise such Option to the extent, and only
to the extent, the Option or portion thereof was
exercisable at the date of such termination;
(3) if an Optionee's employment or service as a director
terminates for Cause, the Option shall terminate
immediately and no rights thereunder may be exercised;
(4) if an Optionee dies while a director or an employee of
the Company or any Subsidiary or within three months
after termination as described in clause (1) of this
Section 7(d) or within one (1) year after termination as
a result of Disability as described in clause (2) of
this Section 7(d), the Option may be exercised at any
time within one (1) year after the Optionee's death by
the person or persons to whom such rights under the
Option shall pass by will or by the laws of descent and
distribution; provided, however, that an Option may be
exercised to the extent, and only to the extent, that
the Option or portion thereof was exercisable on the
date of death or earlier termination.
Notwithstanding the foregoing, (i) in no event may any Option
be exercised by anyone after the expiration of the term of
the Option and (ii) a termination of service as a director
shall not be deemed to occur so long as the director
continues to serve the Company as either a director or
director emeritus.
(e) Effect of Change in Control. Notwithstanding anything
contained in the Plan or an Agreement to the contrary, in the
event of a Change in Control, all Options outstanding on the
date of such Change in Control shall become immediately and
fully exercisable.
8. Adjustment Upon Changes in Capitalization.
(a) Subject to Section 9, in the event of a Change in
Capitalization, the maximum number and class of Shares or
other stock or securities with respect to which Options may
be granted under the Plan, the number and class of Shares or
other stock or securities which are subject to outstanding
8
<PAGE> 9
Options granted under the Plan, and the purchase price
therefor, if applicable shall be appropriately and equitable
adjusted.
(b) Any such adjustment in the Shares or other stock or
securities subject to outstanding Incentive Stock Options
(including any adjustments in the purchase price) shall be
made in such manner as not to constitute a modification as
defined by Section 424(h)(3) of the Code and only to the
extent otherwise permitted by Sections 422 and 424 of the
Code.
(c) If, by reason of a change in Capitalization, an Optionee
shall be entitled to exercise an Option with respect to new,
additional or different shares of stock or securities, such
new, additional or different shares shall thereupon by
subject to all of the conditions which were applicable to the
Shares subject to the Option, as the case may be, prior to
such Change in Capitalization.
9. Effect of Certain Transactions.
Subject to Section 7(e), in the event of (i) the liquidation or
dissolution of the Company or (ii) a merger or consolidation of the
Company (a "Transaction"), the Plan and the Options issued hereunder
shall continue in effect in accordance with their respective terms and
each Optionee shall be entitled to receive in respect of each Share
subject to any outstanding Options, as the case may be, upon exercise
of any Option, the same number and kind of stock, securities, cash,
property, or other consideration that each holder of a Share was
entitled to receive in the Transaction in respect of a Share. In the
event that, after a Transaction, there occurs any change of a type
described in Section 2(d) hereof with respect to the shares of the
surviving or resulting corporation, then adjustments similar to, and
subject to the same conditions as, those in Section 8 hereof shall be
made by the Committee.
10. Termination and Amendment of the Program.
(a) The Plan shall terminate on the day preceding the tenth
anniversary of the date of its adoption by the Board and no
Option may be granted thereafter. The Board may sooner
terminate or amend the Plan at any time and from time to
time; provided, however, that to the extent necessary under
Section 16(b) of the Exchange Act and the rules and
regulations promulgated thereunder or other applicable law,
no amendment shall be effective unless approved by the
stockholders of the Company in accordance with applicable law
and regulations at an annual or a special meeting held within
twelve (12) months after the date of adoption of such
amendment.
(b) Except as provided in Sections 8 and 9 hereof, rights and
obligations under any Options granted before any amendment or
termination of the Plan shall not be adversely altered or
impaired by such amendment or
9
<PAGE> 10
termination, except with the consent of the Optionee, nor
shall any amendment or termination deprive any Optionee of
any Shares which he may have acquired through or as a result
of the Plan.
11. Non-Exclusivity of the Plan. The Adoption of the Plan by the Board
shall not be construed as amending, modifying or rescinding any
previously approved incentive arrangement or as creating any
limitations on the power of the Board to adopt such other incentive
arrangements as it may deem desirable, including, without limitation,
the granting of stock options otherwise than under the Plan, and such
arrangements may be either applicable generally or only in specific
cases.
12. Limitation of Liability. As illustrative of the limitations of
liability of the Company, but not intended to be exhaustive thereof,
nothing in the Plan shall be construed to:
(a) give any person any right to be granted an Option other than
at the sole discretion of the Committee;
(b) give any person any rights whatsoever with respect to Shares
except as specifically provided in the Plan;
(c) limit in any way the right of the Company to terminate the
employment of any person at any time; or
(d) be evidence of any agreement or understanding, expressed or
implied, that the Company will employ any person at any
particular rate of compensation or for any particular period
of time.
13. Regulations and Other Approvals; Governing Law.
(a) This Plan and the rights of all persons claiming hereunder
shall be construed and determined in accordance with the laws
of the State of Iowa.
(b) The obligation of the Company to sell or deliver Shares with
respect to Options granted under the Plan shall be subject to
all applicable laws, rules and regulations, including all
applicable federal and state securities laws, and the
obtaining of all such approvals by governmental agencies as
may be deemed necessary or appropriate by the Committee.
(c) The Plan is intended to comply with Rule 16b-3 promulgated
under the Exchange Act and the Committee shall interpret and
administer the provisions of the Plan or any Agreement in a
manner consistent therewith. Any provisions inconsistent with
such Rule shall by inoperative and shall not affect the
validity of the Plan.
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<PAGE> 11
(d) The Board may make such changes as may be necessary or
appropriate to comply with the rules and regulations of any
government authority, or to obtain for Eligible Employees
granted Incentive Stock Options the tax benefits under the
applicable provisions of the Code and regulations promulgated
thereunder.
14 Effective Date. The effective date of the Plan shall be the date of its
adoption by the Board.
11
<PAGE> 1
EXHIBIT 10.21
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is made
effective as of October 1, 1998, by and between MURDOCK COMMUNICATIONS
CORPORATION, an Iowa corporation (the "Corporation"), and GUY O. MURDOCK (the
"Employee").
RECITAL
The Corporation and the Employee desire to amend and restate
the Employment Agreement between them originally dated August 16, 1996.
AGREEMENTS
In consideration of the mutual covenants and agreements set
forth in this Agreement, the parties agree as follows:
1. Employment. The Corporation employs the Employee and the
Employee accepts employment with the Corporation on the terms and conditions set
forth in this Agreement.
2. Term. The original term of the Employee's employment
hereunder shall commence on the date of this Agreement and continue until
December 31, 2001, and renew automatically from year to year thereafter, unless
terminated earlier pursuant to paragraph 6 of this Agreement or unless written
notice is given by either party to the other at least 90 days before the end of
the original term or any renewal term that such employment shall cease as of the
end of such term (the "Employment Period").
3. Duties. The Employee will initially serve as the
Corporation's Chairman of the Board and will perform the duties specified in the
Corporation's By-Laws and specified by the Board of Directors from time to time.
The Employee will devote his entire business time, effort, skill and attention
to such employment.
4. Compensation.
(a) Base Salary. The Employee shall receive a base
annual salary of $150,000, payable in regular and equal semi-monthly
installments ("Base Salary").
(b) Salary Adjustment. The Compensation Committee of
the Board of Directors (the "Compensation Committee") will review at least
annually the Employee's Base Salary to determine whether it should be increased.
<PAGE> 2
(c) Incentive Bonus. During the term of this Agreement,
the Employee will be eligible to participate in an incentive compensation
program to be developed by the Compensation Committee. The terms and conditions
of such program, including the amount of any bonus payable to the Employee, and
the performance objectives to be met for a bonus to be paid, will be in the sole
discretion of the Compensation Committee.
(d) Stock Options. The Corporation has reserved 5% of
its outstanding Common Stock for issuance pursuant to a qualified stock option
plan and an additional 5% for a non-qualified performance option plan. The
number of option shares issuable to the Employee, and the terms and conditions
of any such grant, including (but not limited to) term, exercise price and
vesting, will be in the sole discretion of the Compensation Committee.
5. Fringe Benefits.
(a) Group Insurance. The Employee will be eligible to
participate in the Corporation's group insurance programs on the same terms and
conditions as are available to other employees of the Corporation generally.
(b) Vacation. The Employee will be entitled to receive
paid vacations annually according to the vacation policy established by the
Corporation. Such vacation shall be taken at such times and in such intervals as
are mutually acceptable to the Employee and the Corporation.
(c) Generally. In addition to the benefits described
above, the Corporation will provide the Employee with the same fringe benefits
as are enjoyed by other employees of the Corporation generally.
6. Termination of Employment.
(a) Generally. Except as provided in section 6(b), if
the Employee's employment is terminated by the Corporation for any reason, the
Employee (or if the Employee dies, his heirs or beneficiaries) will be entitled
to receive, as his exclusive severance benefit, compensation at the rate of
$150,000 per year for a period of two years after the date of such termination.
(b) Termination Following a Sale of the Company. "Sale
of the Company" shall mean a sale or other transfer not in the ordinary course
of business of all or substantially all of the Corporation's assets, or a
merger, tender offer or other transaction, or series of related transactions,
the effect of which is to cause more than 50% of the Corporation's issued and
outstanding voting capital stock to be beneficially owned, by one person or
entity or a group of related or affiliated persons or entities. Notwithstanding
any of the other provisions of this
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<PAGE> 3
section 6 if, following a Sale of the Company, the Employee's employment
terminates for any reason prior to the 180th day after such Sale of the Company,
whether such termination is initiated by the Employee or the Corporation (and
regardless of the existence or lack of cause), the Employee (or if the Employee
dies, his heirs or beneficiaries) will be entitled to receive, as his exclusive
severance benefit, and the Corporation will pay and provide his then Base Salary
for a period of three years after the date of such termination.
7. Noncompetition. The parties agree that the Corporation's
customer contacts and relations are established and maintained at great expense
and by virtue of the Employee's employment with the Corporation, the Employee
will have unique and extensive exposure to and personal contact with the
Corporation's customers, and that he will be able to establish a unique
relationship with those individuals and entities that will enable him, both
during and after employment, to unfairly compete with the Corporation. The
parties further agree that the Corporation's customers and business contacts are
a small percentage of the total number of organizations, associations and
individuals who are customers or potential customers for companies offering the
same or similar services and products offered by the Corporation. Further, the
parties agree that the terms and conditions of the following restrictive
covenants are reasonable and necessary for the protection of the Corporation's
business, trade secrets and confidential information and to prevent great damage
or loss to the Corporation as a result of action taken by the Employee. The
Employee acknowledges that the noncompete restrictions and nondisclosure of
confidential information restrictions contained in this Agreement are reasonable
and the consideration provided for herein is sufficient to fully and adequately
compensate the Employee for agreeing to such restrictions.
(a) During Term of Employment. The Employee hereby
covenants and agrees that, during his employment with the Corporation, he shall
not, directly or indirectly, either individually or as an employee, officer,
principal, agent, partner, shareholder, owner, trustee, beneficiary,
co-venturer, distributor or consultant or in any other capacity, participate in,
become associated with, provide assistance to, engage in or have a financial or
other interest in any business, activity or enterprise which is competitive with
the Corporation or any successor or assign of the Corporation. The ownership of
less than a 2% interest in a corporation whose shares are traded in a recognized
stock exchange or traded in the over-the-counter market, even though that
corporation may be a competitor of the Corporation, shall not be deemed
financial participation in a competitor.
(b) Upon Termination of Employment. Employee agrees
that during a period after termination of his employment with the Corporation
equal to two years, he will not, directly or indirectly, either individually or
as an
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<PAGE> 4
employee, officer, agent, partner, shareholder, owner, trustee, beneficiary,
co-venturer, distributor, consultant or in any other capacity:
(i) Canvass, solicit or accept from any person or
entity who is an "Active Customer" of the Corporation any business in
competition with the business of the Corporation or the successors or assigns of
the Corporation. "Active Customer" shall mean any account which received within
the twelve months prior to the Employee's termination of employment, any
products or services supplied by or on behalf of the Corporation and any
prospective account which was under active solicitation by the Corporation
during the final twelve months of Employee's employment with the Corporation.
(ii) Request or advise any of the Active
Customers, suppliers or other business contacts of the Corporation who currently
have or have had business relationships with the Corporation within twelve
months preceding the date of the Employee's termination of employment, to
curtail or cancel any of their business or relations with the Corporation.
(iii) Induce or attempt to induce any employee,
officer, director, sales representative, consultant or other personnel of the
Corporation to terminate his relationship or breach his agreements with the
Corporation.
(iv) Participate in, become associated with,
provide assistance to, engage in or have a financial or other interest in any
business, activity or enterprise within the "Restricted Territory" which is
competitive with the business of the Corporation or any successor or assign of
the Corporation; provided, however, that the ownership of less than 2% of the
stock of a corporation whose shares are traded in a recognized stock exchange or
traded in the over-the-counter market, even though that corporation may be a
competitor of the Corporation, shall not be deemed financial participation in a
competitor. For purposes of this Agreement, the "Restricted Territory" shall
mean the Continental United States.
8. Confidential Information. The parties agree that the
Corporation's customers, business connections, customer lists, procedures,
operations, techniques, trade secrets, proprietary information and other aspects
of its business (the "Confidential Information") are established at great
expense and protected as Confidential Information and provide the Corporation
with a substantial competitive advantage in conducting its business. The parties
further agree that by virtue of the Employee's employment with the Corporation,
he will have access to, and be entrusted with, secret, confidential and
proprietary information, and that the Corporation would suffer great loss and
injury if the Employee would disclose this information or use it to compete with
the
4
<PAGE> 5
Corporation. Therefore, the Employee agrees that during the term of his
employment, and (a) until such time as the Confidential Information becomes
generally available to the public through no fault of the Employee, (b) until
such time as the Confidential Information no longer provides benefit to the
Corporation or (c) for a period of two years after the expiration of the
Employment Period, whichever occurs sooner, the Employee will not, directly or
indirectly, either individually or as an employee, officer, agent, partner,
shareholder, owner, trustee, beneficiary, co-venturer, distributor, consultant
or in any other capacity, use or disclose, or cause to be used or disclosed, any
Confidential Information acquired by the Employee during his employment with the
Corporation whether owned by the Corporation prior to or discovered and
developed by the Corporation subsequent to the Employee's employment, and
regardless of the fact that the Employee may have participated in the discovery
and the development of that information.
9 Relationship with Suppliers. The parties agree that the
profitability and goodwill of the Corporation depends on continued, amicable
relations with its suppliers and the Employee agrees, during his employment with
the Corporation and for two years thereafter, he will not cause, request or
advise any suppliers of the Corporation to curtail or cancel their business with
the Corporation.
10. Common Law of Torts and Trade Secrets. The parties agree
that nothing in this Agreement shall be construed to limit or negate the common
law of torts or trade secrets where it provides the Corporation with broader
protection than that provided herein.
11. Inventions and Improvements. The Employee agrees that
every improvement, invention, process, technique, apparatus, method,
manufacturing system, computer program, design or other creation that the
Employee may invent, discover, conceive or originate by himself or in
conjunction with any other person that relates in any respect to the business of
the Corporation now or hereafter carried on by it shall be the exclusive
property of the Corporation. The Employee understands and agrees that in partial
consideration of his employment for the compensation herein stated, all such
developments, inventions, improvements, products, processes, apparatuses,
methods, designs and other creations shall be the exclusive property of the
Corporation. If the Employee shall fail to make or refuse to make an assignment
to the Corporation of any development, invention, improvement, process,
apparatus, technique, method, computer program, design or other creation
heretofore referred to, the Corporation shall have the authority, and this
Agreement shall operate to give the Corporation authority to execute, seal and
deliver, as the act of the Employee, any license, any license agreement,
contract, assignment or other instrument in writing that may be necessary or
proper to convey to the Corporation the entire right, title and interest
5
<PAGE> 6
in and to said invention or development heretofore referred to. The Employee
hereby agrees to hold the Corporation and its assigns harmless by reason of the
Corporation's acts pursuant to this paragraph. The Employee further agrees that,
during the term of this Agreement and at any time thereafter whenever reasonably
necessary for the protection of the Corporation, he shall cooperate with and be
compensated by the Corporation and its counsel in the prosecution and/or defense
of any litigation at the cost of the Corporation which may arise in connection
with the inventions or other creations referred to above, without any liability
or cost to the Employee.
12. Specific Performance. The parties acknowledge and agree
that breach of this Agreement by the Employee would cause irreparable damage to
the Corporation and that monetary damages alone would not provide the
Corporation with an adequate remedy for breach of this Agreement. Therefore, if
any controversy arises concerning the rights or obligations of the Employee
under this Agreement, such rights or obligations shall be specifically enforced
by an injunction order issued by a court of competent jurisdiction. Such remedy,
however, shall be cumulative and nonexclusive and shall be in addition to any
other remedy to which the parties may be entitled.
13. Sale, Consolidation or Merger. In the event of a
consolidation or merger of the Corporation with or into another corporation or
entity, or the sale of substantially all of the operating assets of the
Corporation to another corporation, entity or individual, the
successor-in-interest shall be deemed to have assumed all liabilities of the
Corporation under this Agreement.
14. Waiver. The failure of either party to insist, in any
one or more instances, upon performance of the terms or conditions of this
Agreement shall not be construed as a waiver or a relinquishment of any right
granted hereunder or of the future performance of any such term, covenant or
condition.
15. Severability. In the event that any provision shall be
held to be invalid or unenforceable for any reason whatsoever, it is agreed such
invalidity or unenforceability shall not affect any other provision of this
Agreement and the remaining covenants, restrictions and provisions hereof shall
remain in full force and effect and any court of competent jurisdiction may so
modify the objectionable provision as to make it valid, reasonable and
enforceable. Furthermore, the parties specifically acknowledge the covenants and
agreements contained in sections 7 and 8 hereof are separate agreements.
16. Amendment. This Agreement may only be amended by an
agreement in writing signed by all of the parties hereto.
6
<PAGE> 7
17. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Iowa.
18. Benefit. This Agreement shall be binding upon and inure
to the benefit of and shall be enforceable by and against the Corporation, its
successors and assigns, and the Employee, his heirs, beneficiaries and legal
representatives. It is agreed that the rights and obligations of the Employee
may not be delegated or assigned except as specifically set forth in this
Agreement.
MURDOCK COMMUNICATIONS CORPORATION
BY /s/ Thomas E. Chaplin
------------------------------------------
Thomas E. Chaplin
Chief Executive Officer
/s/ Guy O. Murdock
---------------------------------------------
Guy O. Murdock
Approved by the Compensation Committee of the Board of Directors as of the 30th
day of December, 1998.
/s/ Larry Erickson
---------------------------------------------
Larry Erickson, Director and
Chairman of the
Compensation Committee
7
<PAGE> 1
EXHIBIT 10.22
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is made
effective as of January 1, 1999, by and between MURDOCK COMMUNICATIONS
CORPORATION, an Iowa corporation (the "Corporation"), and COLIN P. HALFORD (the
"Employee").
RECITAL
The Corporation and the Employee desire to amend and restate
the Employment Agreement between them originally dated August 16, 1996.
AGREEMENTS
In consideration of the mutual covenants and agreements set
forth in this Agreement, the parties agree as follows:
1. Employment. The Corporation employs the Employee and the
Employee accepts employment with the Corporation on the terms and conditions set
forth in this Agreement.
2. Term. The original term of the Employee's employment
hereunder shall commence on the date of this Agreement and continue until
December 31, 2001, and renew automatically from year to year thereafter, unless
terminated earlier pursuant to paragraph 6 of this Agreement or unless written
notice is given by either party to the other at least 90 days before the end of
the original term or any renewal term that such employment shall cease as of the
end of such term (the "Employment Period").
3. Duties. The Employee will initially serve as the
Corporation's President and will perform the duties specified in the
Corporation's By-Laws and specified by the Board of Directors from time to time.
The Employee will devote his entire business time, effort, skill and attention
to such employment.
4. Compensation.
(a) Base Salary. The Employee shall receive a base
annual salary of $150,000, payable in regular and equal semi-monthly
installments ("Base Salary").
(b) Salary Adjustment. The Compensation Committee of
the Board of Directors (the "Compensation Committee") will review at least
annually the Employee's Base Salary to determine whether it should be increased.
<PAGE> 2
(c) Incentive Bonus. During the term of this Agreement,
the Employee will be eligible to participate in an incentive compensation
program to be developed by the Compensation Committee. The terms and conditions
of such program, including the amount of any bonus payable to the Employee, and
the performance objectives to be met for a bonus to be paid, will be in the sole
discretion of the Compensation Committee.
(d) Stock Options. The Corporation has reserved 5% of
its outstanding Common Stock for issuance pursuant to a qualified stock option
plan and an additional 5% for a non-qualified performance option plan. The
number of option shares issuable to the Employee, and the terms and conditions
of any such grant, including (but not limited to) term, exercise price and
vesting, will be in the sole discretion of the Compensation Committee.
5. Fringe Benefits.
(a) Group Insurance. The Employee will be eligible to
participate in the Corporation's group insurance programs on the same terms and
conditions as are available to other employees of the Corporation generally.
(b) Vacation. The Employee will be entitled to receive
paid vacations annually according to the vacation policy established by the
Corporation. Such vacation shall be taken at such times and in such intervals as
are mutually acceptable to the Employee and the Corporation.
(c) Generally. In addition to the benefits described
above, the Corporation will provide the Employee with the same fringe benefits
as are enjoyed by other employees of the Corporation generally.
6. Termination of Employment.
(a) Generally. Except as provided in section 6(b), if
the Employee's employment is terminated by the Corporation for any reason, the
Employee (or if the Employee dies, his heirs or beneficiaries) will be entitled
to receive, as his exclusive severance benefit, compensation at the rate of
$150,000 per year for a period of two years after the date of such termination.
(b) Termination Following a Sale of the Company. "Sale
of the Company" shall mean a sale or other transfer not in the ordinary course
of business of all or substantially all of the Corporation's assets, or a
merger, tender offer or other transaction, or series of related transactions,
the effect of which is to cause more than 50% of the Corporation's issued and
outstanding voting capital stock to be beneficially owned, by one person or
entity or a group of related or affiliated persons or entities. Notwithstanding
any of the other provisions of this
2
<PAGE> 3
section 6 if, following a Sale of the Company, the Employee's employment
terminates for any reason prior to the 180th day after such Sale of the Company,
whether such termination is initiated by the Employee or the Corporation (and
regardless of the existence or lack of cause), the Employee (or if the Employee
dies, his heirs or beneficiaries) will be entitled to receive, as his exclusive
severance benefit, and the Corporation will pay and provide his then Base Salary
for a period of three years after the date of such termination.
7. Noncompetition. The parties agree that the Corporation's
customer contacts and relations are established and maintained at great expense
and by virtue of the Employee's employment with the Corporation, the Employee
will have unique and extensive exposure to and personal contact with the
Corporation's customers, and that he will be able to establish a unique
relationship with those individuals and entities that will enable him, both
during and after employment, to unfairly compete with the Corporation. The
parties further agree that the Corporation's customers and business contacts are
a small percentage of the total number of organizations, associations and
individuals who are customers or potential customers for companies offering the
same or similar services and products offered by the Corporation. Further, the
parties agree that the terms and conditions of the following restrictive
covenants are reasonable and necessary for the protection of the Corporation's
business, trade secrets and confidential information and to prevent great damage
or loss to the Corporation as a result of action taken by the Employee. The
Employee acknowledges that the noncompete restrictions and nondisclosure of
confidential information restrictions contained in this Agreement are reasonable
and the consideration provided for herein is sufficient to fully and adequately
compensate the Employee for agreeing to such restrictions.
(a) During Term of Employment. The Employee hereby
covenants and agrees that, during his employment with the Corporation, he shall
not, directly or indirectly, either individually or as an employee, officer,
principal, agent, partner, shareholder, owner, trustee, beneficiary,
co-venturer, distributor or consultant or in any other capacity, participate in,
become associated with, provide assistance to, engage in or have a financial or
other interest in any business, activity or enterprise which is competitive with
the Corporation or any successor or assign of the Corporation. The ownership of
less than a 2% interest in a corporation whose shares are traded in a recognized
stock exchange or traded in the over-the-counter market, even though that
corporation may be a competitor of the Corporation, shall not be deemed
financial participation in a competitor.
(b) Upon Termination of Employment. Employee agrees
that during a period after termination of his employment with the Corporation
equal to two years, he will not, directly or indirectly, either individually or
as an
3
<PAGE> 4
employee, officer, agent, partner, shareholder, owner, trustee, beneficiary,
co-venturer, distributor, consultant or in any other capacity:
(i) Canvass, solicit or accept from any
person or entity who is an "Active Customer" of the Corporation any business in
competition with the business of the Corporation or the successors or assigns of
the Corporation. "Active Customer" shall mean any account which received within
the twelve months prior to the Employee's termination of employment, any
products or services supplied by or on behalf of the Corporation and any
prospective account which was under active solicitation by the Corporation
during the final twelve months of Employee's employment with the Corporation.
(ii) Request or advise any of the Active
Customers, suppliers or other business contacts of the Corporation who currently
have or have had business relationships with the Corporation within twelve
months preceding the date of the Employee's termination of employment, to
curtail or cancel any of their business or relations with the Corporation.
(iii) Induce or attempt to induce any
employee, officer, director, sales representative, consultant or other personnel
of the Corporation to terminate his relationship or breach his agreements with
the Corporation.
(iv) Participate in, become associated with,
provide assistance to, engage in or have a financial or other interest in any
business, activity or enterprise within the "Restricted Territory" which is
competitive with the business of the Corporation or any successor or assign of
the Corporation; provided, however, that the ownership of less than 2% of the
stock of a corporation whose shares are traded in a recognized stock exchange or
traded in the over-the-counter market, even though that corporation may be a
competitor of the Corporation, shall not be deemed financial participation in a
competitor. For purposes of this Agreement, the "Restricted Territory" shall
mean the Continental United States.
8. Confidential Information. The parties agree that the
Corporation's customers, business connections, customer lists, procedures,
operations, techniques, trade secrets, proprietary information and other aspects
of its business (the "Confidential Information") are established at great
expense and protected as Confidential Information and provide the Corporation
with a substantial competitive advantage in conducting its business. The parties
further agree that by virtue of the Employee's employment with the
4
<PAGE> 5
Corporation, he will have access to, and be entrusted with, secret, confidential
and proprietary information, and that the Corporation would suffer great loss
and injury if the Employee would disclose this information or use it to compete
with the Corporation. Therefore, the Employee agrees that during the term of his
employment, and (a) until such time as the Confidential Information becomes
generally available to the public through no fault of the Employee, (b) until
such time as the Confidential Information no longer provides benefit to the
Corporation or (c) for a period of two years after the expiration of the
Employment Period, whichever occurs sooner, the Employee will not, directly or
indirectly, either individually or as an employee, officer, agent, partner,
shareholder, owner, trustee, beneficiary, co-venturer, distributor, consultant
or in any other capacity, use or disclose, or cause to be used or disclosed, any
Confidential Information acquired by the Employee during his employment with the
Corporation whether owned by the Corporation prior to or discovered and
developed by the Corporation subsequent to the Employee's employment, and
regardless of the fact that the Employee may have participated in the discovery
and the development of that information.
9. Relationship with Suppliers. The parties agree that the
profitability and goodwill of the Corporation depends on continued, amicable
relations with its suppliers and the Employee agrees, during his employment with
the Corporation and for two years thereafter, he will not cause, request or
advise any suppliers of the Corporation to curtail or cancel their business with
the Corporation.
10. Common Law of Torts and Trade Secrets. The parties agree
that nothing in this Agreement shall be construed to limit or negate the common
law of torts or trade secrets where it provides the Corporation with broader
protection than that provided herein.
11. Inventions and Improvements. The Employee agrees that
every improvement, invention, process, technique, apparatus, method,
manufacturing system, computer program, design or other creation that the
Employee may invent, discover, conceive or originate by himself or in
conjunction with any other person that relates in any respect to the business of
the Corporation now or hereafter carried on by it shall be the exclusive
property of the Corporation. The Employee understands and agrees that in partial
consideration of his employment for the compensation herein stated, all such
developments, inventions, improvements, products, processes, apparatuses,
methods, designs and other creations shall be the exclusive property of the
Corporation. If the Employee shall fail to make or refuse to make an assignment
to the Corporation of any development, invention, improvement, process,
apparatus, technique, method, computer program, design or other creation
heretofore referred to, the Corporation shall have the authority, and this
Agreement shall operate to give the Corporation authority to execute, seal and
deliver, as the act of the Employee, any license, any license agreement,
contract, assignment or other instrument in writing that may be necessary or
proper to convey to the Corporation the entire right, title and interest
5
<PAGE> 6
in and to said invention or development heretofore referred to. The Employee
hereby agrees to hold the Corporation and its assigns harmless by reason of the
Corporation's acts pursuant to this paragraph. The Employee further agrees that,
during the term of this Agreement and at any time thereafter whenever reasonably
necessary for the protection of the Corporation, he shall cooperate with and be
compensated by the Corporation and its counsel in the prosecution and/or defense
of any litigation at the cost of the Corporation which may arise in connection
with the inventions or other creations referred to above, without any liability
or cost to the Employee.
12. Specific Performance. The parties acknowledge and agree
that breach of this Agreement by the Employee would cause irreparable damage to
the Corporation and that monetary damages alone would not provide the
Corporation with an adequate remedy for breach of this Agreement. Therefore, if
any controversy arises concerning the rights or obligations of the Employee
under this Agreement, such rights or obligations shall be specifically enforced
by an injunction order issued by a court of competent jurisdiction. Such remedy,
however, shall be cumulative and nonexclusive and shall be in addition to any
other remedy to which the parties may be entitled.
13. Sale, Consolidation or Merger. In the event of a
consolidation or merger of the Corporation with or into another corporation or
entity, or the sale of substantially all of the operating assets of the
Corporation to another corporation, entity or individual, the
successor-in-interest shall be deemed to have assumed all liabilities of the
Corporation under this Agreement.
14. Waiver. The failure of either party to insist, in any
one or more instances, upon performance of the terms or conditions of this
Agreement shall not be construed as a waiver or a relinquishment of any right
granted hereunder or of the future performance of any such term, covenant or
condition.
15. Severability. In the event that any provision shall be
held to be invalid or unenforceable for any reason whatsoever, it is agreed such
invalidity or unenforceability shall not affect any other provision of this
Agreement and the remaining covenants, restrictions and provisions hereof shall
remain in full force and effect and any court of competent jurisdiction may so
modify the objectionable provision as to make it valid, reasonable and
enforceable. Furthermore, the parties specifically acknowledge the covenants and
agreements contained in sections 7 and 8 hereof are separate agreements.
16. Amendment. This Agreement may only be amended by an
agreement in writing signed by all of the parties hereto.
6
<PAGE> 7
17. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Iowa.
18. Benefit. This Agreement shall be binding upon and inure
to the benefit of and shall be enforceable by and against the Corporation, its
successors and assigns, and the Employee, his heirs, beneficiaries and legal
representatives. It is agreed that the rights and obligations of the Employee
may not be delegated or assigned except as specifically set forth in this
Agreement.
MURDOCK COMMUNICATIONS CORPORATION
BY /s/ Guy O. Murdock
---------------------------------------
Guy O. Murdock,
Chairman of the Board
/s/ Colin P. Halford
---------------------------------------
Colin P. Halford
Approved by the Compensation Committee of the Board of Directors as of the
day of , 199 .
---------------------------------------
Larry Erickson, Director and
Chairman of the
Compensation Committee
7
<PAGE> 1
EXHIBIT 10.23
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is made
effective as of October 1, 1998, by and between MURDOCK COMMUNICATIONS
CORPORATION, an Iowa corporation (the "Corporation"), and THOMAS E. CHAPLIN (the
"Employee").
RECITAL
The Corporation and the Employee desire to amend and restate
the Employment Agreement between them originally dated April 4, 1997.
AGREEMENTS
In consideration of the mutual covenants and agreements set
forth in this Agreement, the parties agree as follows:
1. Employment. The Corporation employs the Employee and the
Employee accepts employment with the Corporation on the terms and conditions set
forth in this Agreement.
2. Term. The original term of the Employee's employment
hereunder shall commence on the date of this Agreement and continue until
December 31, 2001, and renew automatically from year to year thereafter, unless
terminated earlier pursuant to paragraph 6 of this Agreement or unless written
notice is given by either party to the other at least 90 days before the end of
the original term or any renewal term that such employment shall cease as of the
end of such term (the "Employment Period").
3. Duties. The Employee will initially serve as the
Corporation's Chief Executive Officer and will perform the duties specified in
the Corporation's By-Laws and specified by the Board of Directors from time to
time. The Employee will devote his entire business time, effort, skill and
attention to such employment.
4. Compensation.
(a) Base Salary. The Employee shall receive a base
annual salary of $250,000, payable in regular and equal semi-monthly
installments ("Base Salary").
(b) Salary Adjustment. The Compensation Committee of
the Board of Directors (the "Compensation Committee") will review at least
annually the Employee's Base Salary to determine whether it should be increased.
<PAGE> 2
(c) Incentive Bonus. During the term of this Agreement,
the Employee will be eligible to participate in an incentive compensation
program to be developed by the Compensation Committee. The terms and conditions
of such program, including the amount of any bonus payable to the Employee, and
the performance objectives to be met for a bonus to be paid, will be in the sole
discretion of the Compensation Committee.
(d) Stock Options. The Corporation and the Employee
executed and delivered a Stock Option Agreement in conjunction with the
execution and delivery of the original Employment Agreement between them.
Additional options have been, and may be in the future, granted to the Employee.
5. Fringe Benefits.
(a) Group Insurance. The Employee will be eligible to
participate in the Corporation's group insurance programs on the same terms and
conditions as are available to other employees of the Corporation generally.
(b) Vacation. The Employee will be entitled to receive
four weeks of paid vacation annually. Such vacation shall be taken at such times
and in such intervals as are mutually acceptable to the Employee and the
Corporation.
(c) Automobile. The Corporation will provide the
Employee with full use of an automobile (retail price not to exceed $30,000)
owned or leased by the Corporation for use in carrying out his duties for the
Corporation and for use in such personal business as he deems appropriate. The
Corporation agrees to provide adequate insurance for the automobile and
occupants and to pay maintenance costs necessary to keep the automobile in good
operating condition.
(d) Generally. In addition to the benefits described
above, the Corporation will provide the Employee with the same fringe benefits
as are enjoyed by other employees of the Corporation generally.
6. Termination of Employment.
(a) Generally. Except as provided in section 6(b), if
the Employee's employment is terminated by the Corporation for any reason other
than Cause (as defined herein), the Employee will be entitled to receive, as his
exclusive severance benefit, compensation at the rate of $150,000 per year for a
period equal to the period of noncompetition described in section 7(b) after the
date of such termination. If the Employee's Employment is terminated by the
Employee or is terminated by the Corporation with Cause, the payments for
2
<PAGE> 3
compensation and vested rights to fringe benefits shall be pro rated to the date
of termination. "Cause" shall mean death, disability which, in the opinion of
the Board of Directors, renders the Employee unable to perform his duties under
this Agreement, fraud, dishonesty, acts of negligence in the course of
employment, misrepresentation to the shareholders or Board of Directors, the
commission of an act constituting a felony or the Employee's failure to follow
and/or perform a specific directive of the Board of Directors.
(b) Termination Following a Sale of the Company. "Sale
of the Company" shall mean a sale or other transfer not in the ordinary course
of business of all or substantially all of the Corporation's assets, or a
merger, tender offer or other transaction, or series of related transactions,
the effect of which is to cause more than 50% of the Corporation's issued and
outstanding voting capital stock to be beneficially owned by one person or
entity or a group of related or affiliated persons or entities. Notwithstanding
any of the other provisions of this section 6 if, following a Sale of the
Company, the Employee's employment terminates for any reason, prior to the 180th
day after such Sale of the Company, whether such termination is initiated by the
Employee or the Corporation (and regardless of the existence or lack of Cause),
the Employee (or if the Employee dies, his heirs or beneficiaries) will be
entitled to receive, as his exclusive severance benefit, and the Corporation
will pay and provide his then Base Salary for a period of three years after the
date of such termination.
7. Noncompetition. The parties agree that the Corporation's
customer contacts and relations are established and maintained at great expense
and by virtue of the Employee's employment with the Corporation, the Employee
will have unique and extensive exposure to and personal contact with the
Corporation's customers, and that he will be able to establish a unique
relationship with those individuals and entities that will enable him, both
during and after employment, to unfairly compete with the Corporation. The
parties further agree that the Corporation's customers and business contacts are
a small percentage of the total number of organizations, associations and
individuals who are customers or potential customers for companies offering the
same or similar services and products offered by the Corporation. Further, the
parties agree that the terms and conditions of the following restrictive
covenants are reasonable and necessary for the protection of the Corporation's
business, trade secrets and confidential information and to prevent great damage
or loss to the Corporation as a result of action taken by the Employee. The
Employee acknowledges that the noncompete restrictions and nondisclosure of
confidential information restrictions contained in this Agreement are reasonable
and the consideration provided for herein is sufficient to fully and adequately
compensate the Employee for agreeing to such restrictions.
3
<PAGE> 4
(a) During Term of Employment. The Employee hereby
covenants and agrees that, during his employment with the Corporation, he shall
not, directly or indirectly, either individually or as an employee, officer,
principal, agent, partner, shareholder, owner, trustee, beneficiary,
co-venturer, distributor or consultant or in any other capacity, participate in,
become associated with, provide assistance to, engage in or have a financial or
other interest in any business, activity or enterprise which is competitive with
the Corporation or any successor or assign of the Corporation. The ownership of
less than a 2% interest in a corporation whose shares are traded in a recognized
stock exchange or traded in the over-the-counter market, even though that
corporation may be a competitor of the Corporation, shall not be deemed
financial participation in a competitor.
(b) Upon Termination of Employment. Employee agrees
that during a period after termination of his employment with the Corporation
equal to two years, he will not, directly or indirectly, either individually or
as an employee, officer, agent, partner, shareholder, owner, trustee,
beneficiary, co-venturer, distributor, consultant or in any other capacity:
(i) Canvass, solicit or accept from any person or
entity who is an "Active Customer" of the Corporation any business in
competition with the business of the Corporation or the successors or assigns of
the Corporation. "Active Customer" shall mean any account which received within
the twelve months prior to the Employee's termination of employment, any
products or services supplied by or on behalf of the Corporation and any
prospective account which was under active solicitation by the Corporation
during the final twelve months of Employee's employment with the Corporation.
(ii) Request or advise any of the Active
Customers, suppliers or other business contacts of the Corporation who currently
have or have had business relationships with the Corporation within twelve
months preceding the date of the Employee's termination of employment, to
curtail or cancel any of their business or relations with the Corporation.
(iii) Induce or attempt to induce any employee,
officer, director, sales representative, consultant or other personnel of the
Corporation to terminate his relationship or breach his agreements with the
Corporation.
(iv) Participate in, become associated with,
provide assistance to, engage in or have a financial or other interest in any
business, activity or enterprise within the "Restricted Territory" which is
competitive with the business of the Corporation or any successor or assign of
the Corporation; provided, however, that the ownership of less than 2% of the
stock of a corporation whose shares are traded in a recognized stock exchange or
traded in the over-the-
4
<PAGE> 5
counter market, even though that corporation may be a competitor of the
Corporation, shall not be deemed financial participation in a competitor. For
purposes of this Agreement, the "Restricted Territory" shall mean the
Continental United States.
8. Confidential Information. The parties agree that the
Corporation's customers, business connections, customer lists, procedures,
operations, techniques, trade secrets, proprietary information and other aspects
of its business (the "Confidential Information") are established at great
expense and protected as Confidential Information and provide the Corporation
with a substantial competitive advantage in conducting its business. The parties
further agree that by virtue of the Employee's employment with the Corporation,
he will have access to, and be entrusted with, secret, confidential and
proprietary information, and that the Corporation would suffer great loss and
injury if the Employee would disclose this information or use it to compete with
the Corporation. Therefore, the Employee agrees that during the term of his
employment, and (a) until such time as the Confidential Information becomes
generally available to the public through no fault of the Employee, (b) until
such time as the Confidential Information no longer provides benefit to the
Corporation or (c) for a period of two years after the expiration of the
Employment Period, whichever occurs sooner, the Employee will not, directly or
indirectly, either individually or as an employee, officer, agent, partner,
shareholder, owner, trustee, beneficiary, co-venturer, distributor, consultant
or in any other capacity, use or disclose, or cause to be used or disclosed, any
Confidential Information acquired by the Employee during his employment with the
Corporation whether owned by the Corporation prior to or discovered and
developed by the Corporation subsequent to the Employee's employment, and
regardless of the fact that the Employee may have participated in the discovery
and the development of that information.
9. Relationship with Suppliers. The parties agree that the
profitability and goodwill of the Corporation depends on continued, amicable
relations with its suppliers and the Employee agrees, during his employment with
the Corporation and for two years thereafter, he will not cause, request or
advise any suppliers of the Corporation to curtail or cancel their business with
the Corporation.
10. Common Law of Torts and Trade Secrets. The parties agree
that nothing in this Agreement shall be construed to limit or negate the common
law of torts or trade secrets where it provides the Corporation with broader
protection than that provided herein.
11. Inventions and Improvements. The Employee agrees that
every improvement, invention, process, technique, apparatus, method,
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<PAGE> 6
manufacturing system, computer program, design or other creation that the
Employee may invent, discover, conceive or originate by himself or in
conjunction with any other person that relates in any respect to the business of
the Corporation now or hereafter carried on by it shall be the exclusive
property of the Corporation. The Employee understands and agrees that in partial
consideration of his employment for the compensation herein stated, all such
developments, inventions, improvements, products, processes, apparatuses,
methods, designs and other creations shall be the exclusive property of the
Corporation. If the Employee shall fail to make or refuse to make an assignment
to the Corporation of any development, invention, improvement, process,
apparatus, technique, method, computer program, design or other creation
heretofore referred to, the Corporation shall have the authority, and this
Agreement shall operate to give the Corporation authority to execute, seal and
deliver, as the act of the Employee, any license, any license agreement,
contract, assignment or other instrument in writing that may be necessary or
proper to convey to the Corporation the entire right, title and interest in and
to said invention or development heretofore referred to. The Employee hereby
agrees to hold the Corporation and its assigns harmless by reason of the
Corporation's acts pursuant to this paragraph. The Employee further agrees that,
during the term of this Agreement and at any time thereafter whenever reasonably
necessary for the protection of the Corporation, he shall cooperate with and be
compensated by the Corporation and its counsel in the prosecution and/or defense
of any litigation at the cost of the Corporation which may arise in connection
with the inventions or other creations referred to above, without any liability
or cost to the Employee.
12. Specific Performance. The parties acknowledge and agree
that breach of this Agreement by the Employee would cause irreparable damage to
the Corporation and that monetary damages alone would not provide the
Corporation with an adequate remedy for breach of this Agreement. Therefore, if
any controversy arises concerning the rights or obligations of the Employee
under this Agreement, such rights or obligations shall be specifically enforced
by an injunction order issued by a court of competent jurisdiction. Such remedy,
however, shall be cumulative and nonexclusive and shall be in addition to any
other remedy to which the parties may be entitled.
13. Sale, Consolidation or Merger. In the event of a
consolidation or merger of the Corporation with or into another corporation or
entity, or the sale of substantially all of the operating assets of the
Corporation to another corporation, entity or individual, the
successor-in-interest shall be deemed to have assumed all liabilities of the
Corporation under this Agreement.
14. Waiver. The failure of either party to insist, in any
one or more instances, upon performance of the terms or conditions of this
Agreement
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<PAGE> 7
shall not be construed as a waiver or a relinquishment of any right granted
hereunder or of the future performance of any such term, covenant or condition.
15. Severability. In the event that any provision shall be
held to be invalid or unenforceable for any reason whatsoever, it is agreed such
invalidity or unenforceability shall not affect any other provision of this
Agreement and the remaining covenants, restrictions and provisions hereof shall
remain in full force and effect and any court of competent jurisdiction may so
modify the objectionable provision as to make it valid, reasonable and
enforceable. Furthermore, the parties specifically acknowledge the covenants and
agreements contained in sections 7 and 8 hereof are separate agreements.
16. Amendment. This Agreement may only be amended by an
agreement in writing signed by all of the parties hereto.
17. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Iowa.
18. Benefit. This Agreement shall be binding upon and inure
to the benefit of and shall be enforceable by and against the Corporation, its
successors and assigns, and the Employee, his heirs, beneficiaries and legal
representatives. It is agreed that the rights and obligations of the Employee
may not be delegated or assigned except as specifically set forth in this
Agreement.
MURDOCK COMMUNICATIONS CORPORATION
BY /s/ Guy O. Murdock
-----------------------------------
Guy O. Murdock, Chairman
/s/ Thomas E. Chaplin
-------------------------------------
Thomas E. Chaplin
Approved by the Compensation Committee of the Board of Directors as of the 30th
day of December, 1998.
/s/ Larry Erickson
-------------------------------------
Larry Erickson, Director and
Chairman of the
Compensation Committee
7
<PAGE> 1
EXHIBIT 10.24
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is made
effective as of January 1, 1999, by and between MURDOCK COMMUNICATIONS
CORPORATION, an Iowa corporation (the "Corporation"), and BILL R. WHARTON (the
"Employee").
RECITAL
The Corporation and the Employee desire to amend and restate
the Employment Agreement between them originally dated August 16, 1996.
AGREEMENTS
In consideration of the mutual covenants and agreements set
forth in this Agreement, the parties agree as follows:
1. Employment. The Corporation employs the Employee and the
Employee accepts employment with the Corporation on the terms and conditions set
forth in this Agreement.
2. Term. The original term of the Employee's employment
hereunder shall commence on the date of this Agreement and continue until
December 31, 2001, and renew automatically from year to year thereafter, unless
terminated earlier pursuant to paragraph 6 of this Agreement or unless written
notice is given by either party to the other at least 90 days before the end of
the original term or any renewal term that such employment shall cease as of the
end of such term (the "Employment Period").
3. Duties. The Employee will initially serve as the
Corporation's Vice President of Operations and will perform the duties specified
in the Corporation's By-Laws and specified by the Board of Directors from time
to time. The Employee will devote his entire business time, effort, skill and
attention to such employment.
4. Compensation.
(a) Base Salary. The Employee shall receive a base
annual salary of $100,000, payable in regular and equal semi-monthly
installments ("Base Salary").
(b) Salary Adjustment. The Compensation Committee of
the Board of Directors (the "Compensation Committee") will review at least
annually the Employee's Base Salary to determine whether it should be increased.
<PAGE> 2
(c) Incentive Bonus. During the term of this Agreement,
the Employee will be eligible to participate in an incentive compensation
program to be developed by the Compensation Committee. The terms and conditions
of such program, including the amount of any bonus payable to the Employee, and
the performance objectives to be met for a bonus to be paid, will be in the sole
discretion of the Compensation Committee.
(d) Stock Options. The Corporation has reserved 5% of
its outstanding Common Stock for issuance pursuant to a qualified stock option
plan and an additional 5% for a non-qualified performance option plan. The
number of option shares issuable to the Employee, and the terms and conditions
of any such grant, including (but not limited to) term, exercise price and
vesting, will be in the sole discretion of the Compensation Committee.
5. Fringe Benefits.
(a) Group Insurance. The Employee will be eligible to
participate in the Corporation's group insurance programs on the same terms and
conditions as are available to other employees of the Corporation generally.
(b) Vacation. The Employee will be entitled to receive
paid vacations annually according to the vacation policy established by the
Corporation. Such vacation shall be taken at such times and in such intervals as
are mutually acceptable to the Employee and the Corporation.
(c) Generally. In addition to the benefits described
above, the Corporation will provide the Employee with the same fringe benefits
as are enjoyed by other employees of the Corporation generally.
6. Termination of Employment.
(a) Generally. Except as provided in section 6(b), if
the Employee's employment is terminated by the Corporation for any reason, the
Employee (or if the Employee dies, his heirs or beneficiaries) will be entitled
to receive, as his exclusive severance benefit, compensation at the rate of
$100,000 per year for a period of two years after the date of such termination.
(b) Termination Following a Sale of the Company. "Sale
of the Company" shall mean a sale or other transfer not in the ordinary course
of business of all or substantially all of the Corporation's assets, or a
merger, tender offer or other transaction, or series of related transactions,
the effect of which is to cause more than 50% of the Corporation's issued and
outstanding voting capital stock to be beneficially owned, by one person or
entity or a group of related or affiliated persons or entities. Notwithstanding
any of the other provisions of this
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<PAGE> 3
section 6 if, following a Sale of the Company, the Employee's employment
terminates for any reason prior to the 180th day after such Sale of the Company,
whether such termination is initiated by the Employee or the Corporation (and
regardless of the existence or lack of cause), the Employee (or if the Employee
dies, his heirs or beneficiaries) will be entitled to receive, as his exclusive
severance benefit, and the Corporation will pay and provide his then Base Salary
for a period of three years after the date of such termination.
7. Noncompetition. The parties agree that the Corporation's
customer contacts and relations are established and maintained at great expense
and by virtue of the Employee's employment with the Corporation, the Employee
will have unique and extensive exposure to and personal contact with the
Corporation's customers, and that he will be able to establish a unique
relationship with those individuals and entities that will enable him, both
during and after employment, to unfairly compete with the Corporation. The
parties further agree that the Corporation's customers and business contacts are
a small percentage of the total number of organizations, associations and
individuals who are customers or potential customers for companies offering the
same or similar services and products offered by the Corporation. Further, the
parties agree that the terms and conditions of the following restrictive
covenants are reasonable and necessary for the protection of the Corporation's
business, trade secrets and confidential information and to prevent great damage
or loss to the Corporation as a result of action taken by the Employee. The
Employee acknowledges that the noncompete restrictions and nondisclosure of
confidential information restrictions contained in this Agreement are reasonable
and the consideration provided for herein is sufficient to fully and adequately
compensate the Employee for agreeing to such restrictions.
(a) During Term of Employment. The Employee hereby
covenants and agrees that, during his employment with the Corporation, he shall
not, directly or indirectly, either individually or as an employee, officer,
principal, agent, partner, shareholder, owner, trustee, beneficiary,
co-venturer, distributor or consultant or in any other capacity, participate in,
become associated with, provide assistance to, engage in or have a financial or
other interest in any business, activity or enterprise which is competitive with
the Corporation or any successor or assign of the Corporation. The ownership of
less than a 2% interest in a corporation whose shares are traded in a recognized
stock exchange or traded in the over-the-counter market, even though that
corporation may be a competitor of the Corporation, shall not be deemed
financial participation in a competitor.
(b) Upon Termination of Employment. Employee agrees
that during a period after termination of his employment with the Corporation
equal to two years, he will not, directly or indirectly, either individually or
as an
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<PAGE> 4
employee, officer, agent, partner, shareholder, owner, trustee, beneficiary,
co-venturer, distributor, consultant or in any other capacity:
(i) Canvass, solicit or accept from any person or
entity who is an "Active Customer" of the Corporation any business in
competition with the business of the Corporation or the successors or assigns of
the Corporation. "Active Customer" shall mean any account which received within
the twelve months prior to the Employee's termination of employment, any
products or services supplied by or on behalf of the Corporation and any
prospective account which was under active solicitation by the Corporation
during the final twelve months of Employee's employment with the Corporation.
(ii) Request or advise any of the Active
Customers, suppliers or other business contacts of the Corporation who currently
have or have had business relationships with the Corporation within twelve
months preceding the date of the Employee's termination of employment, to
curtail or cancel any of their business or relations with the Corporation.
(iii) Induce or attempt to induce any employee,
officer, director, sales representative, consultant or other personnel of the
Corporation to terminate his relationship or breach his agreements with the
Corporation.
(iv) Participate in, become associated with,
provide assistance to, engage in or have a financial or other interest in any
business, activity or enterprise within the "Restricted Territory" which is
competitive with the business of the Corporation or any successor or assign of
the Corporation; provided, however, that the ownership of less than 2% of the
stock of a corporation whose shares are traded in a recognized stock exchange or
traded in the over-the-counter market, even though that corporation may be a
competitor of the Corporation, shall not be deemed financial participation in a
competitor. For purposes of this Agreement, the "Restricted Territory" shall
mean the Continental United States.
8. Confidential Information. The parties agree that the
Corporation's customers, business connections, customer lists, procedures,
operations, techniques, trade secrets, proprietary information and other aspects
of its business (the "Confidential Information") are established at great
expense and protected as Confidential Information and provide the Corporation
with a substantial competitive advantage in conducting its business. The parties
further agree that by virtue of the Employee's employment with the Corporation,
he will have access to, and be entrusted with, secret, confidential and
proprietary information, and that the Corporation would suffer great loss and
injury if the Employee would disclose this information or use it to compete with
the
4
<PAGE> 5
Corporation. Therefore, the Employee agrees that during the term of his
employment, and (a) until such time as the Confidential Information becomes
generally available to the public through no fault of the Employee, (b) until
such time as the Confidential Information no longer provides benefit to the
Corporation or (c) for a period of two years after the expiration of the
Employment Period, whichever occurs sooner, the Employee will not, directly or
indirectly, either individually or as an employee, officer, agent, partner,
shareholder, owner, trustee, beneficiary, co-venturer, distributor, consultant
or in any other capacity, use or disclose, or cause to be used or disclosed, any
Confidential Information acquired by the Employee during his employment with the
Corporation whether owned by the Corporation prior to or discovered and
developed by the Corporation subsequent to the Employee's employment, and
regardless of the fact that the Employee may have participated in the discovery
and the development of that information.
9. Relationship with Suppliers. The parties agree that the
profitability and goodwill of the Corporation depends on continued, amicable
relations with its suppliers and the Employee agrees, during his employment with
the Corporation and for two years thereafter, he will not cause, request or
advise any suppliers of the Corporation to curtail or cancel their business with
the Corporation.
10. Common Law of Torts and Trade Secrets. The parties agree
that nothing in this Agreement shall be construed to limit or negate the common
law of torts or trade secrets where it provides the Corporation with broader
protection than that provided herein.
11. Inventions and Improvements. The Employee agrees that
every improvement, invention, process, technique, apparatus, method,
manufacturing system, computer program, design or other creation that the
Employee may invent, discover, conceive or originate by himself or in
conjunction with any other person that relates in any respect to the business of
the Corporation now or hereafter carried on by it shall be the exclusive
property of the Corporation. The Employee understands and agrees that in partial
consideration of his employment for the compensation herein stated, all such
developments, inventions, improvements, products, processes, apparatuses,
methods, designs and other creations shall be the exclusive property of the
Corporation. If the Employee shall fail to make or refuse to make an assignment
to the Corporation of any development, invention, improvement, process,
apparatus, technique, method, computer program, design or other creation
heretofore referred to, the Corporation shall have the authority, and this
Agreement shall operate to give the Corporation authority to execute, seal and
deliver, as the act of the Employee, any license, any license agreement,
contract, assignment or other instrument in writing that may be necessary or
proper to convey to the Corporation the entire right, title and interest
5
<PAGE> 6
in and to said invention or development heretofore referred to. The Employee
hereby agrees to hold the Corporation and its assigns harmless by reason of the
Corporation's acts pursuant to this paragraph. The Employee further agrees that,
during the term of this Agreement and at any time thereafter whenever reasonably
necessary for the protection of the Corporation, he shall cooperate with and be
compensated by the Corporation and its counsel in the prosecution and/or defense
of any litigation at the cost of the Corporation which may arise in connection
with the inventions or other creations referred to above, without any liability
or cost to the Employee.
12. Specific Performance. The parties acknowledge and agree
that breach of this Agreement by the Employee would cause irreparable damage to
the Corporation and that monetary damages alone would not provide the
Corporation with an adequate remedy for breach of this Agreement. Therefore, if
any controversy arises concerning the rights or obligations of the Employee
under this Agreement, such rights or obligations shall be specifically enforced
by an injunction order issued by a court of competent jurisdiction. Such remedy,
however, shall be cumulative and nonexclusive and shall be in addition to any
other remedy to which the parties may be entitled.
13. Sale, Consolidation or Merger. In the event of a
consolidation or merger of the Corporation with or into another corporation or
entity, or the sale of substantially all of the operating assets of the
Corporation to another corporation, entity or individual, the
successor-in-interest shall be deemed to have assumed all liabilities of the
Corporation under this Agreement.
14. Waiver. The failure of either party to insist, in any
one or more instances, upon performance of the terms or conditions of this
Agreement shall not be construed as a waiver or a relinquishment of any right
granted hereunder or of the future performance of any such term, covenant or
condition.
15. Severability. In the event that any provision shall be
held to be invalid or unenforceable for any reason whatsoever, it is agreed such
invalidity or unenforceability shall not affect any other provision of this
Agreement and the remaining covenants, restrictions and provisions hereof shall
remain in full force and effect and any court of competent jurisdiction may so
modify the objectionable provision as to make it valid, reasonable and
enforceable. Furthermore, the parties specifically acknowledge the covenants and
agreements contained in sections 7 and 8 hereof are separate agreements.
16. Amendment. This Agreement may only be amended by an
agreement in writing signed by all of the parties hereto.
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<PAGE> 7
17. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Iowa.
18. Benefit. This Agreement shall be binding upon and inure
to the benefit of and shall be enforceable by and against the Corporation, its
successors and assigns, and the Employee, his heirs, beneficiaries and legal
representatives. It is agreed that the rights and obligations of the Employee
may not be delegated or assigned except as specifically set forth in this
Agreement.
MURDOCK COMMUNICATIONS CORPORATION
BY /s/ Guy O. Murdock
------------------------------------------
Guy O. Murdock,
Chairman of the Board
/s/ Bill R. Wharton
---------------------------------------------
Bill R. Wharton
Approved by the Compensation Committee of the Board of Directors as of the
day of , 199 .
---------------------------------------------
Larry Erickson, Director and
Chairman of the
Compensation Committee
7
<PAGE> 1
EXHIBIT 10.25
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is effective as of the 1st day
of November, 1998 by and between PRIORITY INTERNATIONAL COMMUNICATIONS, INC.
("PIC"), PIC RESOURCES CORPORATION ("PICR"), both Texas corporations having
their offices and place of business at 5806 Mesa Drive, Suite 260, Austin, Texas
78731 (hereinafter PIC and PICR are collectively referred to as the "Company"),
MURDOCK COMMUNICATIONS CORPORATION, an affiliate of the Company which guarantees
the obligation of the Company hereunder (hereinafter called "Murdock") and
BONNER B. HARDEGREE, an individual currently residing at 3000 County Road 425,
Thorndale, Texas (hereinafter referred to as "Employee").
WITNESSETH
WHEREAS, The Company is currently engaged in the telecommunications
business;
WHEREAS, Employee currently is employed by the Company;
WHEREAS, the Company and Employee desire to renegotiate the terms of
employment whereby the Employee is employed by the Company; and
WHEREAS, Employee desires to be so employed by the Company;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the Company and Employee hereby agree as follows:
1. EMPLOYMENT TERM, The Company agrees to employ Employee, and
Employee agrees to be so employed under the terms and conditions of this
Agreement. Employment shall be for a term of three (3) years effective as of
November 1, 1998 and terminating thirty-six (36) months thereafter. This
Agreement shall thereafter be automatically renewed for successive additional
terms of one (1) year each unless either party gives the other at least one (1)
year prior written notice of its intent not to renew the Agreement.
2. TIME AND EFFORTS. Employee shall conscientiously devote
substantially all of his business time and attention in discharging his duties
to the Company as defined herein. Employee may serve on the board of directors
of other entities and engage in such civic activities and passive investment
activities as long as such activities do not materially interfere with
Employee's duties hereunder. Provided, however, that he shall not serve as a
director of a company which competes with the Company or Murdock.
3. DUTIES. Employee shall be employed as the Vice President and Chief
Financial Officer of each of PIC and PICR and as such shall report to the
President and the Board of Directors of each such Company. Employee's duties
shall be: (a) those generally performed by similarly situated officers with
Employee's title, (b) those generally performed by a chief operating officer of
a similarly situated company, and (c) those generally performed by a senior
<PAGE> 2
vice president of development for a similarly situated company, as the same may
be assigned by the President or the Board of Directors of PIC and PICR. In the
performance of his duties, Employee shall make his principal office in the
Austin, Texas area.
4. COMPENSATION. As compensation for his services hereunder, the
Company shall pay to Employee a base salary at the rate of $144,000.00 per
annum, which salary shall be paid to Employee in accordance with the general
practice of the Company. Salary payments shall be subject to withholding and
other applicable taxes. In addition to the foregoing, Employee shall be entitled
to receive an annual salary bonus at the good faith discretion of the Board of
Directors and the Company agrees to conduct an annual review of the Employee
with respect to compensation, bonuses and benefits by comparison to other
executive employees of Murdock and its affiliated companies.
5. EXPENSES. Employee may incur reasonable expenses for promoting the
Company's business, including expenses for entertainment, travel and similar
items in accordance with Company policy, procedures and directives. The Company
will reimburse Employee for all such expense upon Employee's prompt presentation
(not less frequently than monthly) of an itemized account of such expenditures.
6. BENEFITS. The Company shall at its expense provide the following
benefits to Employee:
(a) Key Man Insurance. The Company may apply for and procure as
owner and for its own benefit insurance on Employee's life, in any
amount and form or forms that the Company may choose. Employee shall
have no interest in any such policy or policies. Employee shall,
however, at the Company's request, submit to all medical examinations,
shall all information and execute all documents that are required by
the insurance company or companies to whom the Company has applied.
(b) Medical and Dental Benefits. The Company agrees to provide to
Employee and his family hospital, surgical and medical and dental
benefits commensurate with the Company's flexible benefits plan for all
executives.
(c) Vacation and Other Benefits. Employee shall be entitled to
three (3) weeks of vacation time each year.
(d) Disability Insurance. If the Employee can qualify for
disability insurance, the Company shall at its expense maintain
disability insurance equal to 50 percent of Employee's base salary.
(e) Automobile Allowance. Employee shall be paid an automobile
expense allowance of $500.00 per month.
(f) Other Benefits. Employee shall also receive such other
benefits as other executive level employees of Murdock or its
affiliates commonly receive.
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7. CONFIDENTIALITY.
(a) Employee acknowledges and agrees during his employment with
the Company and at any time subsequent thereto that all Confidential
Materials and Information are and shall remain the sole and exclusive
property of the Company, and Employee acknowledges that he has no
rights thereto or interest therein. For purposes of this Agreement the
term "Confidential Materials and Information" shall mean (I) all
confidential or secret processes, plans, formulae, data (including cost
and performance data), inventions, machinery, drawings, papers,
writings, specifications, manufacturing procedures and techniques,
methods, technology, know-how, programs, devices and materials relating
to the business, products (either existing or under development),
services or activities of the Company or its affiliates, regardless of
whether or not any or all of the foregoing are or may be patented or
copyrighted, (ii) any other information or aspect of or related to the
Company's or its affiliates' trade, business, products or activities
which are designated or treated by the Company or its affiliates as
confidential, secret or of a proprietary nature, or (iii) any customer
or supplier usages and requirements and any of the Company's or its
affiliates' lists of clients, customers, suppliers and business
contacts.
(b) Except as required by law or in the course of Employees'
employment with the Company, Employee agrees that he shall not, during
his employment with the Company or at any time subsequent thereto,
directly or indirectly, copy or reproduce, cause to be copied or
reproduced, divulge, use, furnish, disclose or otherwise make known or
accessible to anyone other than the Company's officers, directors,
employees, affiliates, associates, agents and representatives who have
a need to know in order to fulfill their respective responsibilities on
behalf of the Company, any of the Confidential Materials and
Information or any knowledge or information with respect to the
Confidential Materials and information.
8. NON-COMPETITION AND NON-INTERVENTION
(a) Employee agrees that while Employee is employed by the
Company, Employee shall not, directly or indirectly, as an individual
proprietor, partner, stockholder, agent, consultant, advisor, director,
officer, joint venturer or investor, or in any other capacity
whatsoever, engage in or in any manner be employed by or associated
with any person company, association, partnership, trust, corporation
business or other entity engaged in any business or enterprise (whether
or not for profit) which competes with the business of the Company or
its affiliates.
(b) Employee further agrees that while he is employed by the
Company and for six (6) months thereafter if Employee terminates his
employment without "Good Reason" (as herein defined) or if Employer
terminates his employment for other than "For Cause" (as herein
defined), Employee shall not, directly or indirectly, whether alone or
by
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any act in concert with others, employ, attempt to employ, recruit or
otherwise solicit or induce or influence to leave his employment any
employee of the company or its affiliates for any purpose which,
directly or indirectly, would serve to compete with the Company or its
affiliates; furthermore, Employee will not induce any client, customer,
supplier, vendor or agent of the Company or its affiliates to leave or
cease doing business with the company or its affiliates or otherwise
interfere with or hinder the operations of the Company or its
affiliates while he is employed by the Company.
9. TERMINATION.
(a) Termination Prior to Expiration of Employment Term.
Employment pursuant to this Agreement may be terminated by the
Company, and Employee discharged, prior to the expiration of his term
set forth herein only by a majority vote of the Board of Directors of
the Company. Employee may terminate this Agreement at any time upon
sixty (60) days written notice.
(b) Termination by the Company For Cause. The Company may at its
option terminate Employee's employment for cause ("For Cause") pursuant
to this Agreement by giving written notice of termination to Employee
without prejudice to any other remedy to which the Company may be
entitled either at law, in equity or under this Agreement. Termination
shall be For Cause if Employee: (i) willfully breaches or habitually
neglects the duties that Employee is required to perform under the
terms of this Agreement; (ii) willfully violates reasonable and
substantial rules governing employee performance; (iii) fails to comply
with lawful directives of the Board of Directors or any superior of the
Company which directives are consistent with the material provisions of
this Agreement; (iv) fails to use his best efforts to preserve and
enhance the Company's business; (v) commits clearly dishonest acts
toward the Company; (vi) is convicted of a felony with all appeals
periods with respect to such conviction having expired or with any
final appeals having been pursued unsuccessfully to conclusion; or
(vii) engages in any pattern of prolonged absence from work without
satisfactory explanation or reason therefor.
(c) Termination on Other Extraordinary Grounds. This Agreement
shall terminate immediately on the occurrence of any one of the
following events: (i) the occurrence of circumstances that make it
impossible or impracticable for the business of the Company to be
continued; (ii) the death of Employee; (iii) the loss by Employee of
legal capacity; or (iv) the continued incapacity on the part of
Employee to substantially perform his duties for a continuous period of
180 days, unless waived by the Company.
(d) Effect of Termination. In the event of the termination of
employment pursuant to this Agreement prior to the completion of the
term of employment specified herein, for any reason, Employee shall be
entitled to the compensation and benefits earned prior to the date of
termination as provided for in this Agreement, computed pro rata up to
and including the date of termination. Except as otherwise stated
herein, Employee shall be entitled to no further compensation and will
be relieved of all duties
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and obligations under this Agreement at the date of termination except
as provided in Paragraphs 7 and 8 above.
(e) Termination by Employee for Good Reason. Employee shall have
the right to terminate the Agreement for "Good Reason" which shall
include: (i) the Company's failure in any material respect to perform
any provision of the Agreement, which failure is not cured within
thirty (30) days of written notice specifying the failure; (ii) any
material reduction in the duties and responsibilities of Employee under
the Agreement; provided, however, that any two (2) of the three (3)
duties listed in Section 3 may be reduced or eliminated by the Company
without Employee's consent; (iii) the transfer of Employee to
employment by any subsidiary or affiliate of the Company which is not a
successor to the business operations of the Company unless agreed to in
writing by Employee; (iv) the failure of Employee to be elected or
appointed to a senior management position within both PIC and PICR; (v)
the relocation of Employee's workplace from the Austin, Texas
metropolitan area; (vi) the failure by an entity that is the survivor
in a merger with the Company, or that acquires substantially all of the
assets of the Company to assume the obligations under the Agreement;
(vii) the action of the Company in giving Employee notice of intent not
to renew the Agreement under Section 1 hereof; or (viii) after six (6)
months following a change of control to an entity other than Murdock or
any affiliate of Murdock and for a period of thirty (30) days
thereafter, Employee's termination of this Agreement.
10. LIQUIDATED DAMAGES. In the event that the Company (or either of
them) shall terminate this Agreement other than For Cause or that Employee shall
terminate this Agreement for Good Reason, then the Company shall be liable to
Employee for liquidated damages in an amount equal to the total of the base
salary to which Employee would have been entitled during the greater of (a) the
remainder of the term of the employment under this Agreement or (b) one (1)
year.
11. SEVERANCE PAY. Notwithstanding the foregoing, if the Company
terminates this Agreement for any of the reasons stated in Section 9(c) hereof,
then Employee shall be entitled to receive, as his sole remedy severance pay in
the amount of twelve (12) months base salary existing at the time of such
termination.
12. REMEDY FOR BREACH BY EMPLOYEE. Both parties recognize that the
services to be performed by Employee are special and unique,. Accordingly, if
Employee breaches the terms and conditions of this Agreement, or shall threaten
a breach of any such terms and conditions, then the Company shall be entitled to
institute legal and equitable proceedings in any court of competent jurisdiction
and to obtain injunctive relief for a violation of Section 7 or 8 hereof,
without the necessity of posting a bond, to protect itself from such breach and
the Company shall be entitled to recover any and all costs and expenses,
including reasonable counsel fees in enforcing this Agreement and the provisions
of this Paragraph against Employee.
13. INDEMNITY. To the fullest extent permitted by law, the Company
shall indemnify Employee and hold him harmless for all acts or decisions made by
him in good faith and in a
5
<PAGE> 6
manner a prudent person would believe to be in the best interest of the Company
while performing services for the Company.
14. SEVERABILITY. The Company and Employee hereby recognize and agree
that because any breach of the provisions of this Agreement by Employee would
result in irreparable harm and damage to the overall reputation of the Company
and to its business and affairs, the restrictions set forth in this Agreement by
which Employee has agreed to be bound, are reasonable, both as to the covenants
of and the duties and restrictions accepted by Employee herein, including in
terms of extent, time and geographic area. Therefore, whenever possible,
Employee and the Company desire that each provision of this Agreement be
interpreted in such a manner as to be effective, valid and enforceable under
applicable law. However, if any of the covenants, duties or restrictions which
Employee has accepted hereunder, or any other provisions of this Agreement would
be deemed to be unreasonable (such as because any or all of them may be too
broad) so that they would be unenforceable or invalid under such applicable law,
then such paragraph, provision, covenant, duty or restriction shall be reformed
in order to conform with such applicable law so that it shall bind Employee and
the Company; such reformation to be which such provision shall be invalid or
unenforceable, and the remainder of such covenant, duty, restriction, provision
or paragraph shall continue to be binding and in full force and effect.
15. NOTICES. Any notice, payment, request, instruction or other
document to be delivered under this Agreement shall be deemed sufficiently given
if in writing and delivered personally mailed by certified mail, postage
prepaid, to Employee at its address listed above and to the Company at the
address listed above or to any changed address that the parties may designate by
like notice. The effective date of such notice shall be its mailing date.
16. GUARANTY. By its signature hereto, Murdock does hereby fully
guarantee to Employee the performance by the Company of the obligations to
Employee arising under this Agreement as if Murdock were a party to this
Agreement and agrees to be jointly and severally liable with PIC and PICR for
such obligations.
17. MISCELLANEOUS.
(a) Entire Agreement. This Agreement represents the entire
understanding of the parties with respect to its subject matter and
supersedes all prior agreements, written or oral, concerning the
subject matter hereof and may not be changed or modified in any regard
except by an instrument in writing and signed by a duly authorized
officer of the Company and by Employee. No inferences shall be drawn
from any variance between this Agreement and any prior written
negotiations or letters of intent with respect to or drafts of this
Agreement.
(b) Binding Effect. All terms and provisions of this Agreement
shall be binding upon and inure to the benefit of and be enforceable by
the Company, and its successors, assigns and legal representatives. The
rights and benefits of the Company under this Agreement shall be
transferable and assignable to any business entity with which the
Company may merge or to which it may transfer all or a substantial part
of its
6
<PAGE> 7
assets, and all the covenants and agreements hereunder shall ensure to
the benefit of and be enforceable by the successors and assigns of any
such transferee or assignee. The obligations of Employee shall be
binding upon his heirs, executors, administrators and legal
representatives.
(c) Counterparts. This Agreement may be executed in one or more
counterparts, each one of which shall be deemed to be an original, but
all of which together shall constitute one and the same instrument.
(d) Non-Waiver. No delay or omission by the Company in enforcing
any of the terms or conditions of this Agreement shall be construed as
or constitute a waiver thereof or bar thereto, and no waiver of any
breach hereunder shall be construed as or constitute a waiver of any
other or subsequent breach or a bar to the enforcement of such terms or
conditions on any future occasion.
(e) Construction. This Agreement shall be deemed to be made under
the laws of the State of Texas, for all purposes shall be governed by,
enforced under and construed in accordance with the laws of said State,
without regard to principles of conflicts of law, and shall be deemed
performable in Austin,Texas.
(f) Headings. Headings in this Agreement are for convenience of
reference only and shall not be used to interpret or construe its
provisions.
IN WITNESS WHEREOF, the Company and Employee have caused this Agreement
to be executed to take effect as an instrument under seal as of the day and year
first above written.
COMPANY:
PRIORITY INTERNATIONAL
COMMUNICATIONS, INC.
By: /s/ Thomas E. Chaplin
January 28, 1999 Name: Thomas E. Chaplin
- ----------------------------- Title: Chairman
DATE
7
<PAGE> 8
PIC RESOURCES CORPORATION
By: /s/ Thomas E. Chaplin
January 28, 1999 Name: Thomas E. Chaplin
- ----------------------------- Title: Chairman
DATE
EMPLOYEE:
January 28, 1999 /s/ Bonner B. Hardegree
- ----------------------------- BONNER B. HARDEGREE
DATE
GUARANTOR:
MURDOCK COMMUNICATIONS
CORPORATION
By: /s/ Thomas E. Chaplin
January 28, 1999 Name: Thomas E. Chaplin
- ----------------------------- Title: Chief Executive Officer
DATE
8
<PAGE> 1
EXHIBIT 10.26
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made as of November 16, 1998, by
and between MURDOCK COMMUNICATIONS CORPORATION, an Iowa corporation (the
"Corporation"), and PAUL TUNINK (the "Employee").
RECITALS
The Corporation and the Employee acknowledge the following:
A. The Employee has valuable expertise and experience which
will enable him to provide valuable business and management services to the
Corporation.
B. The Corporation desires to assure itself of the
Employee's services and the Employee desires to make his services available to
the Corporation on the terms and conditions set forth below.
AGREEMENTS
In consideration of the mutual covenants and agreements set
forth in this Agreement, the parties agree as follows:
1. Employment. The Corporation employs the Employee and the
Employee accepts employment with the Corporation on the terms and conditions set
forth in this Agreement.
2. Term. The original term of the Employee's employment
hereunder shall commence on the date of this Agreement and continue until
November 30, 1999, and renew automatically from year to year thereafter, unless
terminated earlier pursuant to paragraph 6 of this Agreement or unless written
notice is given by either party to the other at least 90 days before the end of
the original term or any renewal term that such employment shall cease as of the
end of such term (the "Employment Period").
3. Duties. The Employee will initially serve as the
Corporation's Vice President and Chief Financial Officer and will perform the
duties specified in the Corporation's By-Laws and specified by the Board of
Directors from time to time. The Employee will devote his entire business time,
effort, skill and attention to such employment.
<PAGE> 2
4. Compensation.
(a) Base Salary. The Employee shall receive a base
annual salary of $128,000, payable in accordance with the customary payroll
practices of the Corporation ("Base Salary").
(b) Salary Adjustment. The Employee's Base Salary shall
in no event be decreased. The Compensation Committee of the Board of Directors
(the "Compensation Committee") will review at least annually the Employee's Base
Salary to determine whether it should be increased.
(c) Incentive Bonus. During the term of this Agreement,
the Employee will be eligible to participate in the Corporation's incentive
compensation program. The Employee will be eligible for an annual incentive
bonus of up to 35% of the Employee's Base Salary in 1999, increasing up to 50%
in the year 2000 and in every year thereafter. The terms and conditions of such
incentive bonus, including the amount of any bonus payable to the Employee and
the performance objectives to be met for a bonus to be paid, will be in the sole
discretion of the Compensation Committee.
(d) Stock Options. The Corporation will issue to the
Employee 75,000 nonqualified stock option shares at the closing price of such
stock on November 16, 1998. The terms and conditions of such issuance are set
forth in the Nonqualified Stock Option Grant Agreement attached hereto.
(e) Relocation Expenses. The Corporation will reimburse
the Employee for "Approved Relocation Expenses" incurred by the Employee in
moving his immediate family and their personal property from Omaha, Nebraska to
the Cedar Rapids, Iowa area. For the purposes of this Agreement, "Approved
Relocation Expenses" shall mean commissions necessary to sell the Employee's
home in Omaha, Nebraska, all reasonable and necessary moving expenses and
reasonable temporary housing costs in the Cedar Rapids area prior to the
culmination of the Employee's move to the Cedar Rapids area. The Corporation
will increase, when necessary, the amount of those Approved Relocation Expenses
that are taxable as personal compensation in order to offset any tax
consequences to the Employee of such expenses. If the Employee voluntarily
terminates his employment with the Corporation at any time before the Employee's
completion of one year of employment, the Employee shall reimburse the
Corporation for all Approved Relocation Expenses previously paid to the
Employee.
2
<PAGE> 3
5. Fringe Benefits.
(a) Group Insurance. The Employee will be eligible to
participate in the Corporation's group insurance programs on the same terms and
conditions as are available to other employees of the Corporation generally.
(b) Vacation. The Employee will be entitled to receive
three weeks of paid vacation in 1999 and four weeks of paid vacation in the year
2000 and in every year thereafter. Such vacation shall be taken at such times
and in such intervals as are mutually acceptable to the Employee and the
Corporation.
(c) Generally. In addition to the benefits described
above, the Corporation will provide the Employee with the same fringe benefits
as are enjoyed by other employees of the Corporation generally.
6. Termination of Employment. If the Employee's employment
is terminated by the Corporation for any reason, including but not limited to
the expiration or nonrenewal of this Agreement, except for termination for
"Cause," the Employee (or if the Employee dies, his heirs or beneficiaries) will
be entitled to receive, as his exclusive severance benefits, the following:
(a) Health Insurance. The Employee will continue to
receive health insurance benefits under the same terms and conditions as
received prior to termination until the earlier of the Employee's procurement of
new employment with comparable health insurance benefits or the expiration of a
period of one year after the date of such termination.
(b) Base Salary. The Employee will continue to receive
his then Base Salary for a period of one year after the date of such
termination.
For purposes of this Agreement, "Cause" shall mean the
occurrence of any of the following events, as determined in the sole discretion
of the Corporation's Board of Directors:
(i) the commission by Employee of any act of
intentional dishonesty that is material to the Corporation;
(ii) the conviction of Employee for an offense
which constitutes a felony under federal, state or local laws;
3
<PAGE> 4
(iii) the failure of Employee to follow and/or
perform a specific and lawful directive of the Corporation's Board of Directors,
which failure continues for a period of 30 days after receipt of written notice
by the Employee; and
(iv) the intentional and prolonged failure of
Employee to devote his best efforts to the performance of his duties and
responsibilities hereunder.
In the event of termination of the Employee for Cause,
the Employee shall receive only such compensation and benefits as he earned
through the date of such termination.
7. Noncompetition. The parties agree that the Corporation's
customer contacts and relations are established and maintained at great expense
and by virtue of the Employee's employment with the Corporation, the Employee
will have unique and extensive exposure to and personal contact with the
Corporation's customers, and that he will be able to establish a unique
relationship with those individuals and entities that will enable him, both
during and after employment, to unfairly compete with the Corporation. The
parties further agree that the Corporation's customers and business contacts are
a small percentage of the total number of organizations, associations and
individuals who are customers or potential customers for companies offering the
same or similar services and products offered by the Corporation. Further, the
parties agree that the terms and conditions of the following restrictive
covenants are reasonable and necessary for the protection of the Corporation's
business, trade secrets and confidential information and to prevent great damage
or loss to the Corporation as a result of action taken by the Employee. The
Employee acknowledges that the noncompete restrictions and nondisclosure of
confidential information restrictions contained in this Agreement are reasonable
and the consideration provided for herein is sufficient to fully and adequately
compensate the Employee for agreeing to such restrictions.
(a) During Term of Employment. The Employee hereby
covenants and agrees that, during his employment with the Corporation, he shall
not, directly or indirectly, either individually or as an employee, officer,
principal, agent, partner, shareholder, owner, trustee, beneficiary,
co-venturer, distributor or consultant or in any other capacity, participate in,
become associated with, provide assistance to, engage in or have a financial or
other interest in any business, activity or enterprise which is competitive with
the Corporation or any successor or assign of the Corporation. The ownership of
less than a 2% interest in a corporation whose shares are traded in a recognized
stock exchange or traded in
4
<PAGE> 5
the over-the-counter market, even though that corporation may be a competitor of
the Corporation, shall not be deemed financial participation in a competitor.
(b) Upon Termination of Employment. Employee agrees
that during a period after termination of his employment with the Corporation
equal to one year, he will not, directly or indirectly, either individually or
as an employee, officer, agent, partner, shareholder, owner, trustee,
beneficiary, co-venturer, distributor, consultant or in any other capacity:
(i) Canvass, solicit or accept from any person or
entity who is an "Active Customer" of the Corporation any business in
competition with the business of the Corporation or the successors or assigns of
the Corporation. "Active Customer" shall mean any account which received within
the twelve months prior to the Employee's termination of employment, any
products or services supplied by or on behalf of the Corporation and any
prospective account which was under active solicitation by the Corporation
during the final twelve months of Employee's employment with the Corporation.
(ii) Request or advise any of the Active
Customers, suppliers or other business contacts of the Corporation who currently
have or have had business relationships with the Corporation within twelve
months preceding the date of the Employee's termination of employment, to
curtail or cancel any of their business or relations with the Corporation.
(iii) Induce or attempt to induce any employee,
officer, director, sales representative, consultant or other personnel of the
Corporation to terminate his relationship or breach his agreements with the
Corporation.
(iv) Participate in, become associated with,
provide assistance to, engage in or have a financial or other interest in any
business, activity or enterprise within the "Restricted Territory" which is
competitive with the business of the Corporation or any successor or assign of
the Corporation; provided, however, that the ownership of less than 2% of the
stock of a corporation whose shares are traded in a recognized stock exchange or
traded in the over-the-counter market, even though that corporation may be a
competitor of the Corporation, shall not be deemed financial participation in a
competitor. For purposes of this Agreement, the "Restricted Territory" shall
mean the Continental United States.
8. Confidential Information. The parties agree that the
Corporation's Customers, business connections, customer lists, procedures,
5
<PAGE> 6
operations, techniques, trade secrets, proprietary information and other aspects
of its business (the "Confidential Information") are established at great
expense and protected as Confidential Information and provide the Corporation
with a substantial competitive advantage in conducting its business. The parties
further agree that by virtue of the Employee's employment with the Corporation,
he will have access to, and be entrusted with, secret, confidential and
proprietary information, and that the Corporation would suffer great loss and
injury if the Employee would disclose this information or use it to compete with
the Corporation. Notwithstanding the above, Confidential Information does not
include: (i) information that is publicly available, or (ii) information
developed by the Employee without using Confidential Information. Therefore, the
Employee agrees that during the term of his employment, and (a) until such time
as the Confidential Information becomes generally available to the public
through no fault of the Employee, (b) until such time as the Confidential
Information no longer provides benefit to the Corporation or (c) for a period of
one year after the expiration of the Employment Period, whichever occurs sooner,
the Employee will not, directly or indirectly, either individually or as an
employee, officer, agent, partner, shareholder, owner, trustee, beneficiary,
co-venturer, distributor, consultant or in any other capacity, intentionally use
or disclose, or cause to be used or disclosed, any Confidential Information
acquired by the Employee during his employment with the Corporation whether
owned by the Corporation prior to or discovered and developed by the Corporation
subsequent to the Employee's employment, and regardless of the fact that the
Employee may have participated in the discovery and the development of that
information.
9. Relationship with Suppliers. The parties agree that the
profitability and goodwill of the Corporation depends on continued, amicable
relations with its suppliers and the Employee agrees, during his employment with
the Corporation and for one year thereafter, he will not cause, request or
advise any suppliers of the Corporation to curtail or cancel their business with
the Corporation.
10. Common Law of Torts and Trade Secrets. The parties agree
that nothing in this Agreement shall be construed to limit or negate the common
law of torts or trade secrets where it provides the Corporation with broader
protection than that provided herein.
11. Inventions and Improvements. The Employee agrees that
every improvement, invention, process, technique, apparatus, method,
manufacturing system, computer program, design or other creation that the
Employee may invent, discover, conceive or originate by himself or in
conjunction with any other person that relates in any respect to the business of
the Corporation
6
<PAGE> 7
now or hereafter carried on by it shall be the exclusive property of the
Corporation. The Employee understands and agrees that in partial consideration
of his employment for the compensation herein stated, all such developments,
inventions, improvements, products, processes, apparatuses, methods, designs and
other creations shall be the exclusive property of the Corporation. If the
Employee shall fail to make or refuse to make an assignment to the Corporation
of any development, invention, improvement, process, apparatus, technique,
method, computer program, design or other creation heretofore referred to, the
Corporation shall have the authority, and this Agreement shall operate to give
the Corporation authority to execute, seal and deliver, as the act of the
Employee, any license, any license agreement, contract, assignment or other
instrument in writing that may be necessary or proper to convey to the
Corporation the entire right, title and interest in and to said invention or
development heretofore referred to. The Employee hereby agrees to hold the
Corporation and its assigns harmless by reason of the Corporation's acts
pursuant to this paragraph. Notwithstanding the foregoing, this section 11 shall
not restrict the Employee from using information clearly in the public domain
and his own general knowledge, skills and experience to whatever extent and in
whatever way he wishes. The Employee further agrees that, during the term of
this Agreement and at any time thereafter whenever reasonably necessary for the
protection of the Corporation, he shall cooperate with and be compensated by the
Corporation and its counsel in the prosecution and/or defense of any litigation
at the cost of the Corporation which may arise in connection with the inventions
or other creations referred to above, without any liability or cost to the
Employee.
12. Specific Performance. The parties acknowledge and agree
that breach of this Agreement by the Employee would cause irreparable damage to
the Corporation and that monetary damages alone would not provide the
Corporation with an adequate remedy for breach of this Agreement. Therefore, if
any controversy arises concerning the rights or obligations of the Employee
under this Agreement, such rights or obligations shall be specifically enforced
by an injunction order issued by a court of competent jurisdiction. Such remedy,
however, shall be cumulative and nonexclusive and shall be in addition to any
other remedy to which the parties may be entitled.
13. Sale, Consolidation or Merger. In the event of a
consolidation or merger of the Corporation with or into another corporation or
entity, or the sale of substantially all of the operating assets of the
Corporation to another corporation, entity or individual, the
successor-in-interest shall be deemed to have assumed all liabilities of the
Corporation under this Agreement.
7
<PAGE> 8
14. Waiver. The failure of either party to insist, in any
one or more instances, upon performance of the terms or conditions of this
Agreement shall not be construed as a waiver or a relinquishment of any right
granted hereunder or of the future performance of any such term, covenant or
condition.
15. Severability. In the event that any provision shall be
held to be invalid or unenforceable for any reason whatsoever, it is agreed such
invalidity or unenforceability shall not affect any other provision of this
Agreement and the remaining covenants, restrictions and provisions hereof shall
remain in full force and effect and any court of competent jurisdiction may so
modify the objectionable provision as to make it valid, reasonable and
enforceable. Furthermore, the parties specifically acknowledge the covenants and
agreements contained in sections 7 and 8 hereof.
16. Amendment. This Agreement may only be amended by an
agreement in writing signed by all of the parties hereto.
17. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Iowa.
18. Benefit. This Agreement shall be binding upon and inure
to the benefit of and shall be enforceable by and against the Corporation, its
successors and assigns, and the Employee, his heirs, beneficiaries and legal
representatives. It is agreed that the rights and obligations of the Employee
may not be delegated or assigned except as specifically set forth in this
Agreement.
MURDOCK COMMUNICATIONS CORPORATION
BY /s/ Thomas E. Chaplin
-------------------------------------------
Thomas E. Chaplin,
Chief Executive Officer
/s/ Paul Tunink
---------------------------------------------
Paul Tunink
8
<PAGE> 1
EXHIBIT 21
Subsidiaries of Murdock Communications Corporation
As of December 31, 1998, the subsidiaries of Murdock Communications
Corporation were as follows:
Name Jurisdiction of Incorporation or
- ---- --------------------------------
Organization
------------
MCC Acquisition Corp. Iowa
Priority International Communications Texas
Inc.
ATN Communications, Inc. Delaware
INCOMEX, Inc. California
Guide*Star, L.L.C. (1) Iowa
- ----------------------------
(1) Murdock Communications Corporation has a 50% ownership interest in this
limited liability company.
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,722,033
<SECURITIES> 0
<RECEIVABLES> 2,345,095
<ALLOWANCES> 654,793
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<CURRENT-ASSETS> 280,568
<PP&E> 14,441,610
<DEPRECIATION> 11,424,052
<TOTAL-ASSETS> 22,678,290
<CURRENT-LIABILITIES> 12,561,795
<BONDS> 18,601,160
0
1,837,109
<COMMON> 19,834,810
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<TOTAL-LIABILITY-AND-EQUITY> 22,678,270
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<TOTAL-REVENUES> 33,988,099
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<INCOME-PRETAX> (99,872)
<INCOME-TAX> 74,466
<INCOME-CONTINUING> (174,338)
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