<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
| | 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
---------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Iowa 42-1337746
------------------------------ -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1112 29th Avenue S.W., Cedar Rapids, Iowa 52404
-----------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: 319-362-6900
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-------- --------
On June 30, 1999, there were outstanding 10,398,468 shares of the Registrant's
no par value Common Stock.
Transitional Small Business Disclosure Format (check one):
Yes No X
-------- --------
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MURDOCK COMMUNICATIONS CORPORATION
FORM 10-QSB
June 30, 1999
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Consolidated Balance Sheets as of June 30, 1999 and December 31,
1998 ................................................................ 3
Consolidated Statements of Operations for the Three Months Ended
June 30, 1999 and 1998 and for the Six Months Ended June 30, 1999
and 1998............................................................. 5
Consolidated Statements of Cash Flows for the Six Months Ended June
30, 1999 and 1998.................................................... 6
Notes to Consolidated Financial Statements........................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 22
Item 2. Changes in Securities and Use of Proceeds............................ 22
Item 4. Submission of Matters to a Vote of Security Holders.................. 23
Item 5. Other Information.................................................... 24
Item 6. Exhibits and Reports on Form 8-K..................................... 24
Signatures........................................................... 25
</TABLE>
2
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PART I FINANCIAL INFORMATION
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------------- ---------------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 204 $ 1,722
Accounts receivable, less allowance for doubtful accounts: 2,777 1,752
Notes receivable 1,000 -
Prepaid expenses and other current assets 534 281
--------------------- -------------------
TOTAL CURRENT ASSETS 4,515 3,755
--------------------- -------------------
PROPERTY AND EQUIPMENT
Land and building 1,271 1,172
Telecommunications equipment 9,073 9,013
Furniture and equipment 748 748
--------------------- -------------------
11,092 10,933
Accumulated depreciation (8,377) (8,097)
--------------------- -------------------
2,715 2,836
Telecommunications equipment under capital lease, net of
accumulated amortization : 1999 - $3,319; 1998 - $3,291 174 182
--------------------- -------------------
PROPERTY AND EQUIPMENT, NET 2,889 3,018
--------------------- -------------------
OTHER ASSETS
Goodwill - net of accumulated amortization: 1999 - $1,351; 1998 - 10,990 11,644
$697
Cost of purchased site contracts, net of accumulated amortization:
1999 - $736; 1998 - $670 118 174
Other intangible assets, net of accumulated amortization:
1999 - $619; 1998 - $348 649 659
Investments, at cost 5,785 1,500
Prepaid commissions 1,867 1,704
Other noncurrent assets 92 224
--------------------- -------------------
TOTAL OTHER ASSETS 19,501 15,905
--------------------- -------------------
TOTAL $ 26,905 $ 22,678
===================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
June 30, 1999 and December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
--------------------- --------------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 13,276 $ 7,401
Accounts payable 1,777 1,205
Accrued expenses 1,204 2,059
Current portion of capital lease obligation principally with a 826 869
related party
Current portion of long-term debt with related parties 555 829
Current portion of long-term debt, others 138 199
--------------------- -------------------
TOTAL CURRENT LIABILITIES 17,776 12,562
LONG-TERM LIABILITIES
Capital lease obligations principally with a related party, less 3,033 3,133
current portion
Long-term debt with related parties, less current portion 1,869 2,105
Long-term debt, others, less current portion 698 725
Accumulated losses of joint venture in excess of initial investment 36 61
Deferred income 11 15
--------------------- -------------------
TOTAL LIABILITIES 23,423 18,601
--------------------- -------------------
SHAREHOLDERS' EQUITY
8% Series A Convertible Preferred Stock, $100 stated value:
authorized 50,000 shares; issued and outstanding: 1999
and 1998 - 18,920 shares ($1,892 liquidation value) 1,853 1,837
Common stock, no par or stated value: authorized - 40,000,000 shares -
1999; 20,000,000 shares - 1998; issued and outstanding:
1999 - 10,398,468 shares; 1998 - 10,329,867 shares 20,005 19,835
Common stock warrants: issued and outstanding: 1999 - 4,990,763; 1998 -
4,420,763 539 438
Additional paid-in capital 134 134
Accumulated deficit (19,049) (18,167)
--------------------- -------------------
TOTAL SHAREHOLDERS' EQUITY
3,482 4,077
--------------------- -------------------
TOTAL $ 26,905 $ 22,678
===================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended and Six Months Ended June 30, 1999 and 1998
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
REVENUES
Call processing $ 8,030 $ 9,034 $ 17,970 $ 14,410
Other revenues 969 461 1,816 787
--------------------------------- -------------------------------
TOTAL REVENUES 8,999 9,495 19,786 15,197
COSTS OF SALES
Call processing 5,388 5,814 12,366 9,441
Other cost of sales 511 180 934 290
Nonstandard vendor related bad debt expense 771 - 771 -
Nonstandard international bad debt expense (2) - 139 -
---------------------------------- -------------------------------
TOTAL COST OF SALES 6,668 5,994 14,210 9,731
---------------------------------- -------------------------------
GROSS PROFIT 2,331 3,501 5,576 5,466
OPERATING EXPENSES
Selling, general and administrative expenses 2,039 1,854 3,835 3,289
Depreciation and amortization expense 619 455 1,201 913
---------------------------------- -------------------------------
TOTAL OPERATING EXPENSES 2,658 2,309 5,036 4,202
---------------------------------- --------------------------------
INCOME (LOSS) FROM OPERATIONS (327) 1,192 540 1,264
NONOPERATING INCOME (EXPENSE)
Interest expense, net (844) (587) (1,591) (1,033)
Other income 346 6 347 26
---------------------------------- -------------------------------
TOTAL NONOPERATING INCOME (EXPENSE) (498) (581) (1,244) (1,007)
---------------------------------- -------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE AND
JOINT VENTURE LOSS (825) 611 (704) 257
Loss from joint venture - (50) - (113)
Income tax expense (38) - (75) (6)
---------------------------------- -------------------------------
NET INCOME (LOSS) (863) 561 (779) 138
DIVIDENDS AND ACCRETION ON 8% SERIES A CONVERTIBLE
PREFERRED STOCK (54) (42) (103) (82)
---------------------------------- ------------------------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (917) $ 519 $ (882) $ 56
================================== ==============================
BASIC NET INCOME (LOSS) PER COMMON SHARE $ (0.09) $ 0.10 $ (0.09) $ 0.01
================================== ==============================
BASIC WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 10,331,873 5,046,822 10,330,502 4,884,643
================================== ==============================
DILUTED NET INCOME (LOSS) PER COMMON SHARE $ (0.09) $ 0.07 $ (0.09) $ 0.01
================================== ==============================
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,331,873 8,121,206 10,330,502 5,630,207
================================== ==============================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1999 and 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
---------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
NET INCOME (LOSS) $ (779) $ 138
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH FLOWS
FROM OPERATING ACTIVITIES:
Depreciation and amortization, 1,201 911
Noncash interest expense 233 79
Gain on sale of equipment (5) -
Loss from joint venture - 113
Changes in operating assets and liabilities, excluding the effects of
acquisitions:
Receivables (1,026) (1,193)
Other current assets (253) (45)
Prepaid commissions (163) -
Other noncurrent assets 132 133
Accounts payable 572 (77)
Accrued expenses (789) 126
Deferred income (4) (25)
-----------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES (881) 160
-----------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property and equipment (299) (317)
Proceeds from sale of equipment 13 1
Payments for site contracts (13) -
Cash paid for investments (4,285) -
Cash paid for note receivable (1,000) -
Cash advanced to joint venture (25) -
Cash paid for acquisitions - (31)
Cash acquired with acquisitions - (2)
-----------------------------
NET CASH FLOWS FROM INVESTING ACTIVITIES (5,609) (349)
-----------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on capital lease obligations, primarily to a related party (144) -
Proceeds from capital lease obligations with a related party - 808
Borrowings on notes payable 6,773 2,100
Borrowings on long-term debt, others 143 -
Payments on notes payable (898) -
Payments on long-term debt with related parties (530) (2,056)
Payments on long-term debt, others (230) -
Proceeds from issuance of 8% Series A Convertible Preferred
Stock - 267
Dividends on 8% Series A Convertible Preferred Stock - (43)
Proceeds from issuance of common stock 18 -
Payments on offering costs and origination fees (160) (110)
-----------------------------
NET CASH FLOW FROM FINANCING ACTIVITIES 4,972 966
-----------------------------
NET INCREASE (DECREASE) IN CASH (1,518) 777
CASH AT BEGINNING OF PERIOD 1,722 316
-----------------------------
CASH AT END OF PERIOD $ 204 $ 1,093
=============================
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for interest, principally to a $ 364 $ 845
related party
Cash paid during the period for income taxes 31 6
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
MURDOCK COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been
prepared by Murdock Communications Corporation (the "Company") in accordance
with generally accepted accounting principles for interim financial reporting
and the regulations of the Securities and Exchange Commission for quarterly
reporting. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial
information. The foregoing unaudited interim consolidated financial statements
reflect all adjustments which, in the opinion of management, are necessary to
reflect a fair presentation of the financial position, the results of the
operations and cash flows of the Company and its subsidiaries for the interim
periods presented. All adjustments, in the opinion of management, are of a
normal and recurring nature. Operating results for the three months ended and
six months ended June 30, 1999 are not necessarily indicative of the results
that may be expected for the full year ended December 31, 1999. For further
information, refer to the financial statements and footnotes thereto for the
year ended December 31, 1998, included in the Company's Annual Report on Form
10-KSB (Commission File # 000-21463) as filed with the Securities and Exchange
Commission on March 31, 1999.
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 $19.1 million, and current liabilities exceed current assets by $13.3
million at June 30, 1999. 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 in Note 1 in the
Company's Annual Report on Form 10-KSB (Commission File #000-21463) for the year
ended December 31, 1998 as filed with the Securities and Exchange Commission on
March 31, 1999 and the other matters discussed under "Forward-Looking
Statements" in this report.
RECLASSIFICATIONS
Certain amounts in the 1998 unaudited interim consolidated financial statements
have been reclassified to conform to the current year's presentation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, the
accounts of Priority International Communications, Inc. and ATN Communications,
Incorporated ("PIC/ATN") and effective February, 1998, the accounts of Incomex,
Inc. ("Incomex"), its wholly owned subsidiaries. Significant intercompany
accounts and transactions have been eliminated in consolidation.
7
<PAGE> 8
2. NOTES PAYABLE AND LONG-TERM DEBT
During the second quarter of 1999, the Company received proceeds of $2,475,000
from the issuance of promissory notes to related parties and certain
individuals. The notes bear interest at 18% with accrued interest and principal
due on November 30, 1999.
The Company received proceeds of $500,000 from the issuance of a promissory note
with a financial institution. The note bears interest at 10.5% and all principal
and unpaid accrued interest are due March 31, 2000.
In June 1999, the Company completed a bridge financing in the amount of
$2,000,000. Pursuant to the bridge financing, the Company issued a note in the
principal amount of $2,000,000. This principal and all unpaid accrued interest
at 12% per annum was due July 21, 1999. The Company is past due on this note
and, effective July 22, 1999, as provided for in the terms of the note, the
interest accrues on the unpaid balance at 14% per annum from the due date to
thirty days thereafter, at 16% per annum for the period commencing 31 days from
the due date and ending 60 days thereafter, and at 18% per annum for the period
commencing sixty-one days from the due date. Warrants to purchase 250,000 shares
of the Company's common stock were issued in relation to the promissory note at
an exercise price of $3.50 per share and may be exercised at anytime through
June 21, 2009. The Company has assigned a fair value of $40,000 to the warrants,
that has been capitalized as deferred loan costs and are being written off over
the life of the note. If the Company does not repay the note on or prior to
September 21, 1999, the warrants may be exercised to purchase twice the number
of shares subject to the warrants immediately prior to such date. The exercise
price and the number of shares of common stock purchasable upon the exercise of
the warrants are subject to adjustment upon the occurrence of certain events,
including stock dividends, stock splits and the issuance by the Company of
shares of common stock or other securities convertible into or exercisable to
purchase shares of common stock at a price below the then fair market value of
the Company's common stock. The Company agreed to use its best efforts to
register the warrants and the shares of common stock underlying the warrants by
August 21, 1999 and filed a registration statement for that purpose on July 21,
1999.
As of June 30, 1999 the Company received proceeds of $298,000 from a related
party from the issuance of promissory notes. These notes bear interest at 18%
per annum with principal and accrued interest due in full 180 days from the date
of the notes. During the second quarter, payments of $73,000 were made toward
the principal of the promissory note.
As of June 30, 1999 the Company had an unpaid balance past due to an affiliate
of Berthel Fisher & Company (collectively with its subsidiaries and their
affiliated leasing partnerships, "Berthel") of approximately $531,000. The
unpaid balance is in violation of certain of the covenants in the Berthel
leasing agreements. Berthel has the right to demand that the Company cure this
violation, but has not made such a demand as of the date of this report.
As of June 30, 1999 the Company was past due on $2.0 million of notes payable to
individuals. Of the $2.0 million of past due notes payable to individuals,
$300,000 has been extended to March, 2000. Effective April 1, 1999, as provided
for in the terms of the note, interest on the remaining $1.7 million of past due
notes increased from 14% to 18%. While not required by the terms of the notes,
the Company solicited from the note holders signed agreements to extend the
notes to June 30, 1999. On
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<PAGE> 9
June 30, 1999 a letter was issued to the note holders explaining that the
proposed credit facility to repay certain debt of the Company had not yet been
closed, and that the notes would continue to accumulate interest at 18% per
annum until repaid.
In April 1999, the Company entered into a loan commitment letter with a major
lending institution for a senior secured credit facility of up to $25 million.
If this facility is completed, the Company plans to use these funds for
repayment of certain debt, future investment opportunities and general
operational needs. Because there are significant conditions remaining to be
satisfied with respect to the proposed facility, including the negotiation of
definitive loan documents, there can be no assurance that the Company will
complete this credit facility, or, if completed, that the amount available under
or the other terms of the credit facility will be as presently contemplated. The
Company currently anticipates paying all past due debt with the proceeds from
the proposed credit facility upon closing.
3. INCOME TAX EXPENSE
The provision for income taxes consisted of the following for the periods ended
June 30, 1999 and 1998 (amounts expressed in thousands):
Current: 1999 1998
---- ----
Federal $ - $ -
State 75 6
At June 30, 1999, the Company has net operating loss carryforwards for federal
income tax purposes of approximately $13 million to use to offset future taxable
income. These net operating losses will expire, if unused, from December 31,
2002 through 2012.
4. CONTINGENCIES AND LEGAL PROCEEDINGS
Incomex commenced an arbitration proceeding against EILCO Leasing Services, Inc.
("Eilco"), a creditor of Incomex, to resolve a dispute regarding a loan
agreement between Incomex and Eilco. Eilco claimed that Incomex was 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.
Incomex disputed these claims and initiated the arbitration to resolve the
dispute. An arbitration hearing with respect to this matter commenced on April
21, 1999. On June 4, 1999, the arbitrator ruled that, after a credit for the
remaining principal balance of $341,444, Eilco owes Incomex damages in the sum
of $231,162, plus $3,161 for arbitration fees and expenses. Subsequent to June
30, 1999, Incomex filed a petition against Eilco in California state court for
confirmation of the arbitration award and Eilco filed a petition asserting that
the arbitrator exceeded his authority in making the arbitration award. As of
June 30, 1999, the full amount of the arbitration award has been recorded as
other income, in addition to accrued interest at 10% per annum from May 31,
1999. Due to the uncertainty of collection and pending resolution, the total
remaining amount due from Eilco is subject to the creation of a reserve in the
amount of $231,162.
On July 20, 1998, Oncor Communications, Inc. filed a lawsuit in the District
Court of Dallas County, Texas against the Company, Incomex and an unrelated
third party. Oncor alleged that the defendants improperly terminated a long
distance service agreement with Oncor and claimed damages based on amounts which
Oncor alleged to have advanced to the Company, lost profits for the period in
which the Company is alleged to have breached the contract, attorney's fees and
for interference with contractual relations in an unspecified amount. The
Company asserted a counterclaim for accounting, breach of contract,
misrepresentation and payment of attorneys' fees. The Company agreed with Oncor
to settle this claim on April 21, 1999. Under the settlement, the Company paid
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<PAGE> 10
$150,000 to Oncor in return for a release by Oncor of its claims against the
Company. The Company had previously accrued $108,000 as a reserve in connection
with this matter.
5. INVESTMENTS
During 1998, the Company reached an agreement to invest in ACTEL Integrated
Communications, Inc. ("ACTEL") of Mobile, Alabama. As of June 30, 1999, the
Company had invested $3,000,000 plus related expenses of $21,000. Effective June
21, 1999, the Company and ACTEL entered into an agreement to amend the terms of
the original Investment Agreement with respect to the Company's investment in
ACTEL. This agreement amended certain provisions of the Investment Agreement
including limiting the Company's investment in ACTEL to $3,000,000. The
$3,000,000 investment is convertible into 3,000,000 shares of ACTEL's Series A
Convertible Preferred Stock. Each share of 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. In addition, the
Company loaned $1,000,000 to ACTEL under the terms of a promissory note dated
June 23, 1999. The note bears interest at 12% per annum for the first thirty
days from this date, 14% per annum for the next thirty days, and 16% per annum
for the next thirty days. If the note remains outstanding for greater than
ninety days, the first $500,000 of the balance will continue as a loan due on
demand sixty days thereafter with an interest rate of 18% per annum for the
unpaid balance for that sixty days or part thereof, and the balance may be used
by the Company to purchase up to 500,000 shares of Series A Preferred Stock at
$1.00 per share. The Company currently expects ACTEL to repay the promissory
note prior to the ninety day period. Subsequent to June 30, 1999, $250,000 was
received from ACTEL as a partial payment on the promissory note.
During 1998, the Company reached an initial lending/investment agreement with
AcNet S.A. de C.V. ("AcNet") of Mexico. As of June 30, 1999, the Company had
invested $2,279,000 and from July 1, 1999 through August 10, 1999 had invested
an additional $111,000. In June, 1999 the Company entered into two agreements
providing the Company with separate options to acquire (i) Intercarrier
Transport Corporation ("ITC"), the holder of approximately 49% of the
outstanding shares of AcNet, and (ii) AcNet USA, Inc., an affiliate of AcNet,
for an aggregate of 2,325,000 shares of the Company's common stock and $200,000
cash. Because there are significant conditions remaining to be satisfied with
respect to these proposed acquisitions, including the negotiation of definitive
acquisition agreements, due diligence investigations and the decision to
exercise the options to complete the proposed acquisitions, the Company cannot
make assurances that the proposed acquisitions will be completed or, if
completed, that the terms of the proposed acquisitions will be as presently
contemplated. As of June 30, 1999, the Company had invested $485,000 in AcNet
USA, Inc. and from July 1, 1999 through August 10, 1999 had invested an
additional $64,000.
6. BUSINESS SEGMENT INFORMATION
In June 1997, Statement of Financial Accounting Standards 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.
The Company's three reportable segments are PIC/ATN, Incomex and Murdock
Technology Services ("MTS"). The Company provides long-distance
telecommunications services to hotels and payphone
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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 services and carrier assisted call
processing with 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 above. The Company evaluates the performance of its operating units
based on income (loss) from operations. Summarized financial information
concerning the Company's reportable segments, net of intercompany eliminations,
is shown in the following table as of and for the three months ended June 30,
1999 and 1998 (amounts expressed in thousands). The "Other" column includes
corporate related items.
<TABLE>
<CAPTION>
PIC/ATN INCOMEX MTS OTHER TOTAL
<S> <C> <C> <C> <C> <C>
1999
Revenues $4,718 $3,000 $ 1,281 $ - $8,999
Income (loss) from operations (19) 820 (233) (895) (327)
Total assets 3,833 2,757 1,874 18,441 26,905
Depreciation and amortization expense 117 4 172 326 619
Interest expense 120 98 91 535 844
Capital expenditures 145 24 46 - 215
1998
Revenues 4,881 2,890 1,724 - 9,495
Income (loss) from operations 1,073 934 (230) (585) 1,192
Total assets 2,857 2,636 8,422 - 13,915
Depreciation and amortization expense 101 3 210 141 455
Interest expense 114 114 146 213 587
Capital expenditures 57 8 117 - 182
</TABLE>
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Financial information relating to the Company's operations by geographic area as
of and for the three months ended June 30, 1999 and 1998 was as follows (amounts
expressed in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Revenues:
United States $5,976 $6,604
Mexico 3,000 2,891
Canada 23 -
------- -------
Total $8,999 $9,495
======= =======
Long-lived assets (excluding investments):
United States $14,738 $9,121
Mexico 1,867 929
------- -------
Total $16,605 $10,050
======= =======
</TABLE>
Summarized financial information concerning the Company's reportable segments,
net of intercompany eliminations, is shown in the following table as of and for
the six months ended June 30, 1999 and 1998 (amounts expressed in thousands).
The "Other" column includes corporate related items.
<TABLE>
<CAPTION>
PIC/ATN INCOMEX MTS OTHER TOTAL
<S> <C> <C> <C> <C> <C>
1999
Revenues $11,320 $5,940 $2,526 $ - $19,786
Income (loss) from operations 1,007 1,633 (412) (1,688) 540
Total assets 3,833 2,757 1,874 18,441 26,905
Depreciation and amortization expense 233 9 305 654 1,201
Interest expense 272 168 263 888 1,591
Capital expenditures 161 2 136 - 299
1998
Revenues 7,336 4,724 3,137 - 15,197
Income (loss) from operations 1,289 1,446 (491) (980) 1,264
Total assets 2,857 2,636 8,422 - 13,915
Depreciation and amortization expense 197 5 450 261 913
Interest expense 190 188 277 378 1,033
Capital expenditures 75 8 234 - 317
</TABLE>
Financial information relating to the Company's operations by geographic area as
of and for the six months ended June 30, 1999 and 1998 was as follows (amounts
expressed in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Revenues:
United States $13,798 $10,473
Mexico 5,940 4,724
Canada 48 -
======= =======
Total $19,786 $15,197
======= =======
</TABLE>
12
<PAGE> 13
7. SUBSEQUENT EVENTS
Subsequent to quarter end, the Company received proceeds of $2.0 million from
the issuance of a promissory note to a related party. The note bears interest at
12% and principal and interest are due February 9, 2000. Warrants to purchase
400,000 shares of the Company's common stock were issued in relation to the
promissory note at an exercise price of $3.94 per share. The Company assigned a
fair value of $64,000 to be written off over the term of the promissory note.
In July 1999, the Company received proceeds of $250,000 from the issuance of a
promissory note to this same related party. The note is due on the receipt of
the proceeds from the above $2.0 million note.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the Company's financial condition, results of
operations and capital resources. The discussion and analysis should be read in
conjunction with the Company's unaudited consolidated financial statements and
notes thereto included elsewhere within this report.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES - Consolidated revenues decreased $496,000, or (5.3)%, to $9.0 million
for the three months ended June 30, 1999 from $9.5 million for the three months
ended June 30, 1998. Revenues from PIC/ATN decreased $162,000 to $4.7 million
for the three months ended June 30, 1999 from $4.9 million for the three months
ended June 30, 1998, due to the restructuring of the international call traffic
with a principal customer to an outsource fee basis rather than billing the
traffic. During 1998, the Company's operator services business unit began
providing services to this customer for long distance services originating from
Mexico. During 1998, the Company provided full service in connection with the
customer's calls including billing and collections and accordingly recognized as
revenues the value of such billed services. The results were that 1998 revenues
from this customer totaled $4.2 million or 12.0% of the total revenues of the
Company.
Beginning in February, 1999, PIC/ATN, in agreement with this customer,
discontinued full service and began outsourcing the billing and collection
service and recording revenue on a fee basis only. Revenues declined, but the
gross profit margin on this customer was not materially affected by the
restructuring.
During June 1999, The Company was notified that the customer was discontinuing
its relationship with the Company having acquired operator service capabilities
of its own. Accordingly, this relationship is not expected to produce further
revenues and margins for the Company. The Company's gross profit related to this
customer was $121,000, $159,000 and $159,000 for the three months ended June 30,
1999, the six months ended June 30, 1999 and the year ended December 31, 1998,
respectively.
Revenues from Incomex increased $110,000 to $3.0 million for the three months
ended June 30, 1999 from $2.9 million for the three months ended June 30, 1998.
The increase was primarily due to an increase in the number of rooms
under contract with Mexican resort hotels and a shift towards Mexican resort
hotels with greater call traffic to the United States. Revenues from MTS
declined $444,000 to $1.3 million for the three months ended June 30, 1999
from $1.7 million for the three months ended June 30, 1998 due to the
termination of the Lodging Partnership Program with AT&T in October, 1998. Call
processing revenues generated by MTS through its Lodging Partnership Program
decreased from $827,238 for the three months ended June 30, 1998 to none for
the three months ended June 30, 1999. For the twelve months ended
December 31, 1998, the
14
<PAGE> 15
Company recognized revenues of $2.0 million and marginal net profits from the
AT&T agreement. These revenues and net profits will not be present in the
future. MTS's revenues for the three months ended June 30, 1999 consisted of
revenues from its TeleManager services and equipment sales.
COST OF SALES - Consolidated cost of sales increased $674,000, or 11.2%, to $6.7
million for the three months ended June 30, 1999 from $6.0 million for the three
months ended June 30, 1998. Consolidated cost of sales, as a percentage of
revenues, was 74.1% for the three months ended June 30, 1999 compared to 63.1%
for the three months ended June 30, 1998. The increase was primarily
attributable to the PIC/ATN segment, which experienced higher cost of sales as a
percentage of revenues due to a $771,000 nonstandard vendor related bad debt
charge as discussed below.
During the quarter ended June 30, 1999, PIC/ATN experienced a material and
unexpected increase in bad debt charges associated with one of its
telecommunications products. The Company recorded a $771,000 nonstandard vendor
related bad debt charge during the quarter ended June 30, 1999 relating to
billing and collection issues for one type of call processing service provided
by PIC/ATN to its largest customer. PIC/ATN uses an independent billing and
collection firm which advances funds to PIC/ATN before collecting from the
end-user by billing through a Bell Operating Company or other local telephone
company. This billing and collection firm reconciles amounts not ultimately
collected from the end-user through subsequent reductions of its payments to
PIC/ATN in future periods. During the second quarter of 1999, PIC/ATN
experienced an amount of reductions in these payments significantly in excess of
PIC/ATN's historical experience. These reductions have been recorded as a
nonstandard vendor related bad debt charge. This nonstandard vendor related bad
debt is associated with billing and collection through one Bell Operating
Company for calls processed primarily between June 1998 and August 1998 and
related to billing and collection for PIC/ATN's largest customer. The Company
expects to take actions to mitigate the effect of this billing and collection
issue in future periods. However, no assurance can be given that PIC/ATN will
not continue to experience similar billing and collection issues in excess of
this non-standard bad debt charge which would have a material adverse effect on
the Company's results of operations in future periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Consolidated selling, general and
administrative expenses increased $185,000, or 10.0%, to $2.0 million for the
three months ended June 30, 1999 from $1.8 million for the three months ended
June 30, 1998. Selling, general and administrative expense, as a percentage of
revenues, was 22.7% for the three months ended June 30, 1999 compared to 19.5%
for the three months ended June 30, 1998. The increase was primarily due to the
additional amount paid in the settlement of the Oncor lawsuit and increases in
other legal and compensation expenses.
DEPRECIATION AND AMORTIZATION - Consolidated depreciation and amortization
increased $164,000, or 36.0%, to $619,000 for the three months ended June 30,
1999 from $455,000 for the three months ended June 30, 1998. The increase is
primarily the result of additional goodwill of $4.4 million recorded in the
fourth quarter of 1998 for the PIC Earn-Out settlement and the Incomex Earn-Out
settlement, which is being amortized over the remaining life of the original
goodwill. This will continue to result in higher amortization expenses in future
periods.
INTEREST EXPENSE - Consolidated interest expense, including amortization of debt
discount, increased $257,000, or 43.8%, to $844,000 for the three months ended
June 30, 1999 from $587,000 for the three months ended June 30, 1998. The
increase was primarily due to additional debt incurred related to the
15
<PAGE> 16
investments in ACTEL and AcNet, the costs associated with the acquisition of
PIC/ATN and Incomex and general working capital purposes. As a result higher
interest expense will continue in future periods.
OTHER INCOME - On June 4, 1999, an arbitrator ruled on the arbitration
proceeding Incomex had commenced against Eilco, see discussion under
"Contingencies and Legal Proceedings" in this report. During the quarter ended
June 30, 1999, Incomex recorded $341,444 as other income as part of the
settlement award. The remaining $231,162 has been fully reserved as the
collectibility of the amount is uncertain.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 1998
The information for the six months ended June 30, 1998 in the following analysis
includes the statement of operations data of Incomex after the consummation of
the Incomex acquisition effective February 1998.
REVENUES - Consolidated revenues increased $4.6 million, or 30.2%, to $19.8
million for the six months ended June 30, 1999 from $15.2 for the six months
ended June 30, 1998. Revenues from PIC/ATN increased $4.0 million to $11.3
million for the six months ended June 30, 1999 from $7.3 million for the six
months ended June 30,1998 due to significant increases in the consumer
alternative dialing revenues and increases in international traffic.
During 1998, PIC/ATN's operator services business unit began providing services
to a principal customer with long distance services originating from Mexico.
During 1998, PIC/ATN provided full service in connection with this customer's
calls including billing and collections and accordingly recognized as revenues
the value of such billed services. The results were that 1998 revenues from this
customer totaled $4.2 million, or 12% of total revenues of the Company. In the
first quarter of 1999, the Company modified its relationship with the customer
whereby calls were processed and billing records were delivered to the customer
for submission to the customer's billing service. The Company received fees for
its services that were recognized as revenues rather than the billed value of
the calls. Accordingly, the revenues associated with this customer included in
the results for the six months ended June 30, 1999 represent a blending of full
service revenues, representing the period from January 1 through February 4,
1999, and fee revenues from February 5 through June 30, 1999. Total revenues
relative to the customer for the six months ended June 30, 1999 were $3.6
million or 10% of the total revenues of the Company for the period.
During June 1999, The Company was notified that the customer was discontinuing
its relationship with the Company having acquired operator service capabilities
of its own. Accordingly, this relationship is not expected to produce further
revenues and margins for the Company. The Company's gross profit related to this
Customer was $121,000, $159,000 and $159,000 for the three months ended June 30,
1999, the six months ended June 30, 1999 and the year ended December 31, 1998,
respectively.
Revenues from Incomex increased $1.2 million to $5.9 million for the six months
ended June 30, 1999 from $4.7 million for the six months ended June 30,1998. The
increase was primarily due to an increase in the number of rooms under contract
with Mexican resort hotels and a shift towards Mexican resort hotels with
greater call traffic to the United States. Revenues from MTS declined $611,000
for the six months ended June 30, 1999 from $3.1 million for the six months
ended June 30, 1998 due to the termination of the Lodging Partnership Program
with AT&T in October, 1998. Call processing revenues generated by MTS through
its Lodging Partnership Program decreased from $1.5 million for the six months
ended June 30, 1998 to none for the six months ended June 30, 1999. For the
twelve months ended December 31, 1998, the Company recognized revenues of $2.0
million and marginal net profits from the AT&T agreement. These revenues and net
profits will not be present in the future. MTS's revenue for the six months
ended June 30, 1999 consisted of revenues from its TeleManager services and
equipment sales.
COST OF SALES - Consolidated cost of sales increased $4.5 million, or 46.4%, to
$14.2 million for the six months ended June 30, 1999 from $9.7 million for the
six months ended June 30, 1998. Consolidated cost of sales, as a percentage of
revenues, was 71.7% for the six months ended June 30, 1999 compared to 64.0% for
the six months ended June 30, 1998. The increase in cost of sales is
primarily attributable to the associated increase in revenues the six months
ended June 30, 1999 and to the PIC/ATN segment which experienced higher cost of
sales as a percentage of revenues due to a $771,000 nonstandard vendor related
bad debt charge as discussed above in cost of sales for the three months ended
June 30, 1999.
The Company also recorded a nonstandard charge of $139,000 for the six months
ended June 30, 1999 associated with a dispute in collection procedures and
policies with an international billing and collection processor of Incomex that
originated in the fourth quarter of 1998. Incomex changed vendors in April 1999
and does not expect a recurrence of this issue. Excluding the impact of the
$771,000 and the $139,000 non-standard charges, consolidated cost of sales, as a
percentage of revenues, was 67.2% for the six months ended June 30, 1999. The
increase in consolidated cost of sales as a percentage of revenue is
attributable to the changes in the customer base of PIC/ATN segment,
particularly as it pertains to international traffic. The segment has seen an
increase in its international traffic, which has higher revenues and lower
margins. Additionally, the segment's principal consumer alternative dialing
customer restructured its commission plan in the second half of 1998 resulting
in higher percentage commissions for that product group and higher billing and
collection expense.
16
<PAGE> 17
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Consolidated selling, general and
administrative expenses increased $546,000, or 16.5%, to $3.8 million for the
six months ended June 30, 1999 from $3.3 million for the six months ended June
30, 1998. Selling, general and administrative expense, as a percentage of
revenues, was 19.4% for the six months ended June 30, 1999 compared to 21.6% for
the six months ended June 30, 1998.
DEPRECIATION AND AMORTIZATION - Consolidated depreciation and amortization
increased $288,000, or 31.5%, to $1.2 million for the six months ended June 30,
1999 from $913,000 for the six months ended June 30, 1998. The increase is
primarily the result of additional goodwill of $4.4 million recorded in the
fourth quarter of 1998 for the PIC Earn-Out settlement and the Incomex Earn-Out
settlement, which is being amortized over the remaining life of the original
goodwill. This will continue to result in higher amortization expenses in future
periods.
INTEREST EXPENSE - Consolidated interest expense, including amortization of debt
discount, increased $558,000, or 55.8%, to $1.6 million for the six months ended
June 30, 1999 from $1.0 million for the six months ended June 30, 1998. The
increase was primarily due to additional debt incurred related to the
investments in ACTEL and AcNet, the costs associated with the acquisition of
PIC/ATN and Incomex and general working capital purposes. As a result higher
interest expense will continue in future periods.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company's current liabilities of $17.8 million exceeded
current assets of $4.5 million resulting in a working capital deficit of $13.3
million. During the six months ended June 30,1999, the Company used $881,000 in
cash for operating activities, and used $5.6 million in investing activities.
The Company received proceeds from new debt financing of $6.9 million and made
payments on debt of $1.8 million for net cash flows from financing activities of
$5.0 million. These activities resulted in a decrease in available cash of $1.5
million for the six months ended June 30, 1999.
The Company's debt and capital lease obligations as of June 30, 1999, including
the current portion thereof, totaled $20.4 million compared to $15.3 million at
December 31, 1998. The Company's current debt and lease obligations as of June
30, 1999 totaled $14.8 million compared to $9.3 million at December 31, 1998.
The billing and collection issue with PIC/ATN's largest customer (See "Results
of Operations" above) decreased the Company's cash flow by $737,000 for the
three months ended June 30, 1999. Although the Company expects to take actions
to mitigate the effect of this billing and collection issue in future periods,
no assurance can be given that PIC/ATN will not continue to experience similar
billing and collection issues in future periods. Any continuation of this issue
could have a material adverse effect on the Company's cash flows and financial
condition.
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 Company
currently makes monthly lease and debt payments,
17
<PAGE> 18
including operating lease payments of approximately $163,000 in the aggregate,
pursuant to these financing arrangements. As of June 30, 1999, the Company has
not made a majority of the March through June 1999 payments. Berthel only has
the right to demand that the Company cure this violation, but has not made such
a demand as of the date of this report.
As of June 30, 1999, the Company raised $6.9 million from debt financing during
the first half of 1999 substantially all of which will be due before the end of
1999. 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
$18.0 million in new debt or equity financing or in extensions of current debt
financing in the next six months, in addition to cash flows from operations, to
fund its cash requirements for the next six months, including additional
investments in AcNet S.A. de C.V. and AcNet USA, Inc.
In April 1999, the Company entered into a commitment letter with a major lending
institution for a senior secured credit facility of up to $25 million. If this
facility is completed, the Company believes the proceeds to be sufficient to
meet the Company's anticipated cash needs for 1999, although future investments,
acquisitions or other transactions may require additional debt or equity
financing. Because there are significant conditions remaining to be satisfied
with respect to the proposed facility including the negotiation of definitive
loan documents, there can be no assurance that the Company will complete this
credit facility or, if completed, that the amount available under or the other
terms of the credit facility will be as presently contemplated. If the Company
is unable to complete the credit facility, the Company would expect to seek
necessary financing through debt or equity sources. However, adequate funds may
not be available when needed, or in an amount or on terms acceptable to the
Company. Insufficient funds may require the Company to delay, scale back or
eliminate some or all of its product or market development plans and could have
an adverse effect on the Company.
As of June 30, 1999 the Company was past due on $2.0 million of notes payable to
individuals. Of the $2.0 million of past due notes payable to individuals,
$300,000 has been extended to March, 2000. Effective April 1, 1999, as provided
for in the terms of the notes, the interest rate on the remaining $1.7 million
of past due notes increased from 14% to 18%. While not required by the terms of
the note, the Company solicited from the note holders signed agreements to
extend the notes to June 30, 1999. On June 30, 1999 a letter was issued to the
note holders explaining that the proposed credit facility to repay certain debt
of the Company had not yet been closed, and that the notes would continue to
accumulate interest at 18% per annum until redeemed. The Company currently
anticipates paying certain past due debt with the proceeds from the proposed
credit facility upon closing or through other debt and equity sources.
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
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
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<PAGE> 19
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 third
quarter of 1999. The Company anticipates completing surveys to its key customers
and vendors by the end of the third 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
telecommunication switches, some of which are being made for other business
purposes. The Company has estimated that the costs of all such upgrades will not
exceed $200,000, of which approximately $100,000 had been incurred through June
30, 1999.
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 could result in serious disruption of the Company's ability to
process calls and 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 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 electrical
systems. There can be no assurance that a failure of systems of third parties on
which the Company's systems and operations will rely on 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 third 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 third 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, and
therefore could have a material adverse effect on the Company's business,
financial condition or operating results.
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<PAGE> 20
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, including the
proposed credit facility;
- the amount of the Company's estimate of its nonstandard vendor
related bad debt charge during the second quarter of 1999 and the
effects of the PIC/ATN billing and collection issue on the Company's
results of operations and financial condition in future periods;
- the Company's ability to complete acquisitions of AcNet S.A. de C.V.
or AcNet USA, Inc. or the terms of such acquisitions if completed;
- 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;
- 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;
- 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 report and in the Company's
annual report on Form 10-KSB for the year ended December 31, 1998.
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<PAGE> 21
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 and the proposed credit facility, 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 noncompliance by the Company or third
parties; and
- expectations regarding capital expenditures and investments in new
acquisition opportunities.
21
<PAGE> 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Incomex commenced an arbitration proceeding against EILCO Leasing
Services, Inc. ("Eilco"), a creditor of Incomex, to resolve a dispute regarding
a loan agreement between Incomex and Eilco. Eilco claimed that Incomex was 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. Incomex disputed these claims and initiated the arbitration to
resolve the dispute. An arbitration hearing with respect to this matter
commenced on April 21, 1999. On June 4, 1999, the arbitrator ruled that, after a
credit for the remaining principal balance of $341,444, Eilco owes Incomex
damages in the sum of $231,162, plus $3,161 for arbitration fees and expenses.
Subsequent to June 30, 1999, Incomex filed a petition against Incomex in
California state court for confirmation of the arbitration award and Eilco filed
a petition asserting that the arbitrator exceeded his authority in making the
arbitration award. As of June 30, 1999, the full amount of the arbitration award
has been recorded as other income, in addition to accrued interest at 10% per
annum from May 31, 1999. Due to the uncertainty of collection and pending
resolution, the total remaining amount due from Eilco is subject to the creation
of a reserve in the amount of $231,162.
On July 20, 1998, Oncor Communications, Inc. filed a lawsuit in the District
Court of Dallas County, Texas against the Company, Incomex and an unrelated
third party. Oncor alleged that the defendants improperly terminated a long
distance service agreement with Oncor and claimed damages based on amounts which
Oncor alleged to have advanced to the Company, lost profits for the period in
which we are alleged to have breached the contract, attorney's fees and for
interference with contractual relations in an unspecified amount. The Company
asserted a counterclaim for accounting, breach of contract, misrepresentation
and payment of attorneys' fees. The Company agreed with Oncor to settle this
claim on April 21, 1999. Under the settlement, the Company paid $150,000 to
Oncor in return for a release by Oncor of its claims against the Company. The
Company had previously accrued $108,000 as a reserve in connection with this
matter.
Item 2. Changes in Securities and Use of Proceeds.
(c) During the second quarter ended June 30, 1999, the Company issued
promissory notes in the aggregate principal amount of $2,475,000 in
a private placement exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Act"), pursuant to Section
4(2) of the Act. The notes bear interest at 18% and the principal
and accrued interest are due on November 30, 1999.
In June 1999, the Company completed a bridge financing in the amount
of $2,000,000. Pursuant to the bridge financing, the Company issued
a note in the principal amount of $2,000,000. This principal and all
unpaid accrued interest at 12% per annum was due July 21, 1999. The
Company is past due on this note and, effective July 22, 1999, as
provided for in the terms of the note, the interest accrues on the
unpaid balance at 14% per annum from the due date to thirty days
thereafter, at 16% per annum for the period commencing 31 days from
the due date and ending 60 days there after, and at 18% per annum
for the period commencing sixty-one days from the due date. Warrants
to purchase 250,000 shares of the Company's common stock were issued
in relation to the promissory note at an exercise price of $3.50 per
share and maybe exercised at anytime until June 21, 2009. If the
Company does not repay the note on or prior to September 21, 1999,
the warrants may be exercised to purchase twice the number of shares
subject to the warrants immediately prior to such date. The note and
the warrants were issued in a private placement exempt from the
registration requirements of the Act pursuant to Section 4(2) of the
Act.
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<PAGE> 23
As of June 30, 1999 the Company received proceeds of $298,000 from a
related party from the issuance of promissory notes. These notes
bear interest at 18% per annum with principal and accrued interest
due in full 180 days from the date of the notes. During the second
quarter, payments of $73,000 were made toward the principal of the
promissory note. The notes were issued in a private placement exempt
from the registration requirements of the Act pursuant to
Section4(2) of the Act.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of stockholders of the Company was held on May 25,
1999.
The matters voted upon, including the number of votes cast for, against
or withheld, as well as the number of abstentions and broker non-votes, as to
each such matter were as follows:
Proposal 1: Election of directors
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
(a) Guy O. Murdock 9,404,807 26,590
(b) Thomas E. Chaplin 9,404,807 26,590
(c) Colin P. Halford 9,404,807 26,590
(d) John C. Poss 9,404,907 26,490
(e) Steven R. Ehlert 9,404,907 26,490
(f) Wayne Wright 9,404,907 26,490
(g) Larry A. Erickson 9,404,907 26,490
</TABLE>
Proposal 2: Approval to increase the total number of authorized shares of the
Company's no par value common stock from 20,000,000 to 40,000,000.
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
<S> <C> <C> <C>
9,352,223 57,434 21,740 0
</TABLE>
Proposal 3: Ratification of appointment of Deloitte & Touche LLP as auditors
of the Company
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
<S> <C> <C> <C>
9,404,310 9,200 17,887 0
</TABLE>
23
<PAGE> 24
Item 5. Other Events
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
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)
10.1 Note and Warrant Purchase Agreement, dated as of June
21, 1999, among the Company, Priority International
Communications, Inc., Incomex, Inc. and New Valley
Corporation (4)
10.2 Stock Purchase Warrant dated June 21, 1999, from the
Company to New Valley Corporation (4)
10.3 Fixed Rate Senior Note dated June 21, 1999 from the
Company to New Valley Corporation (4)
10.4 Registration Rights Agreement, dated June 21, 1999,
between the Company and New Valley Corporation (4)
10.5 Option to Merge Agreement, dated as of June 9, 1999,
among MCC Acquisition Corp., the shareholders of
Intercarrier Transport Corporation, and Intercarrier
Transport Corporation
10.6 Option to Merge Agreement, dated June 9, 1999, among
MCC Acquisition Corp., the shareholders of AcNet USA,
Inc. and AcNet USA, Inc.
10.7 Amendment to Investment Agreement, dated as of June
21, 1999, among ACTEL Integrated Communications,
Inc., the Company, John Beck and Richard Courtney
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 reference.
(2) Filed as an exhibit to the Company's 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 report on Form 10-QSB for the
quarter ended March 31, 1997 (File No. 000-21463) and incorporated
herein by reference.
(4) Filed as an exhibit to the Company's Registration Statement on Form
SB-2 (File No. 333-78399) and incorporated herein by reference.
(b) Reports on Form 8-K: none were filed for quarter ended
June 30, 1999
24
<PAGE> 25
SIGNATURES
In accordance with the requirements 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
Date: August 13, 1999 By /s/ Thomas E. Chaplin
---------------------------------------
Thomas E. Chaplin
Chief Executive Officer
Date: August 13, 1999 By /s/ Paul C. Tunink
---------------------------------------
Paul C. Tunink
Vice President and Chief Financial
Officer
25
<PAGE> 1
EXHIBIT 10.5
OPTION TO MERGE AGREEMENT
INTERCARRIER TRANSPORT CORPORATION
This Option to Merge Agreement is entered into as of June 9, 1999 by and
among MCC ACQUISITION CORP. ("Purchaser"), a wholly owned subsidiary of MURDOCK
COMMUNICATIONS CORPORATION ("Murdock"), and the shareholders of INTERCARRIER
TRANSPORT CORPORATION ("ITC") (the "Shareholders"), all of whom are listed on
the signature page of this Agreement, and INTERCARRIER TRANSPORT CORPORATION.
RECITALS
A. Purchaser desires to have an option to merge ITC with a wholly-owned
subsidiary of Purchaser ("Merger Co.").
B. ITC desires to grant to Purchaser an option to merge ITC with Merger
Co.
C. The Shareholders desire to enter into this Agreement to facilitate the
Merger, as described below.
AGREEMENT
In consideration of the recitals and agreements set forth below, Purchaser
and each of the Shareholders agree:
1 Irrevocable Option to Purchase ITC Shares.
(a) The Shareholders hereby grant to Purchaser the continuing option
to merge ITC with a wholly-owned subsidiary of Purchaser, with ITC as the
surviving entity (the "Merger"), pursuant to the applicable laws of Texas and
Iowa, for the aggregate consideration described on Exhibit A. Purchaser may
exercise such option upon ten days' prior written notice to ITC.
(b) The closing (the "Closing") of the Merger shall take place at a
time and place agreed to by ITC and Purchaser. In the absence of such an
agreement, the closing shall be at 10 a.m. at Murdock's executive office on the
first business day ten days after the exercise of the option set forth in
section 1(a) above. At the Closing: (i) the Shareholders shall receive
certificates for their proportional share of the Murdock common stock
constituting the purchase price described on Exhibit A; (ii) the Shareholders
shall deliver to Purchaser certificates for all of the outstanding shares of
capital stock of ITC (the "ITC
<PAGE> 2
Shares"), duly endorsed for transfer; and (iii) ITC, Purchaser and Merger Co.
shall execute and deliver a merger agreement among them, and articles of merger,
reasonably satisfactory in form and substance to Purchaser.
(c) This option may be exercised by notice to ITC given at any time
prior to August 31, 2001 (the "Option Period") at which time the option shall
expire if not exercised.
(d) The Shareholders and ITC agree that, during the Option Period,
they shall cause ITC to be managed so as to ensure that ITC shall not, unless it
receives the prior written consent of Purchaser: (i) merge or consolidate ITC
with any individual, partnership, corporation, limited liability company,
association, joint stock company, trust, joint venture, unincorporated
organization or a governmental entity or any department, agency or political
division thereof; (ii) sell, lease or otherwise dispose of any of ITC's assets;
(iii) liquidate, dissolve or effect a recapitalization or reorganization of ITC
in any form of transaction; (iv) create, incur, assume, guarantee, be or remain
liable for, contingently or otherwise, or suffer to exist any indebtedness,
other than indebtedness to Murdock and the indebtedness of ITC presently
existing; or (v) conduct discussions or negotiations with respect to a
transaction of the type described in clauses (i) through (iv) with any party.
Each Shareholder represents and warrants that such Shareholder's holdings of ITC
Shares are accurately described on Exhibit A.
(e) It is intended by the parties that the Merger shall qualify as a
non-taxable reorganization pursuant to section 368(a)(1)(B) of the Internal
Revenue Code of 1986, as amended, and the parties agree to use their reasonable
best efforts to obtain an opinion of tax counsel reasonably acceptable to them
that the Merger so qualifies.
(f) As of the date of this Agreement, 675,000 shares represents
approximately 3.34% of the issued and outstanding common stock of Murdock on a
fully-diluted basis, but without giving effect to the transactions contemplated
by the Option to Merge Agreement, dated the date hereof, to which Purchaser,
Murdock and AcNet USA are parties. The parties acknowledge that such percentage
may change, based on transactions Murdock may conduct, prior to the date of
Closing. The parties also agree that the number of Murdock shares issuable
hereunder will be adjusted proportionately if Murdock issues a stock split or
stock dividend or if there is a reverse stock split or similar recapitalization
of the Murdock common stock.
2. Injunctive Relief. The parties hereto agree that any party may apply
for and obtain from any U.S. state or federal court appropriate injunctive
relief prohibiting the violation of the terms of this Agreement. Such remedy
shall be cumulative and not exclusive.
2
<PAGE> 3
3. Waiver. Any party to this Agreement may, at any time prior to the
Closing, waive any of the terms or conditions of this Agreement or agree to an
amendment or modification to this Agreement by an agreement in writing.
4. Notices. All notices and other communications among the parties shall
be in writing and shall be deemed to have been duly given when (i) delivered in
person, (ii) two days after delivery to a reputable overnight courier service,
or (iii) five days after posting in the United States mail having been sent
registered or certified mail return receipt requested:
(a) If to Purchaser, to:
MCC Acquisition Corp.
Attn: Thomas E. Chaplin
1112 29th Avenue, S.W.
Cedar Rapids, IA 52404
Telephone No.: 319-362-6900
(b) If to ITC and/or any Shareholder, to:
R.S. Ashton
c/o AcNet USA, Inc.
200 South 10th Street
Suite 400
McAllen, Texas 78501-4871
Telephone No.: 956-984-4000
or to such other address or addresses as the parties may from time to time
designate in writing.
5. Reliance. Each of the parties to this Agreement shall be deemed to
have relied upon the accuracy of the written representations and warranties made
to it in or pursuant to this Agreement, notwithstanding any investigations
conducted by or on its behalf or notice, knowledge or belief to the contrary.
6. Construction; Governing Law. This Agreement shall be construed and
enforced in accordance with the laws of the State of Iowa, U.S.A., 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 or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of any
provisions of this Agreement.
3
<PAGE> 4
7. Captions; Counterparts. The captions in this Agreement are for
convenience only and shall not be considered a part of or affect the
construction or interpretation of any provision of this Agreement. This
Agreement may be executed in two or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
8. Other Agreements. The parties acknowledge that in connection with the
Merger certain other agreements will be entered into. The parties agree to
negotiate the terms and conditions of such definitive agreements in good faith.
The parties further agree as follows:
(a) Certain of the Shareholders have relationships with other
companies that are active in various technology markets. Accordingly, the
following companies shall not be deemed competitors with ITC in connection with
any noncompetition clauses incorporated in the definitive agreements: Ashton
Systems Corporation; The Ashton Group, Inc.; Texas Facilities Service
Corporation; L&L Consultores S.A. de C.V.; CSX S.A. de C.V.; and ICT Consulting,
Inc., except as Murdock may consent in writing.
(b) A new Mexican corporation known as AcNet Internet S.A. de C.V.
has been formed to transact value added services in Mexico. This newly-formed
entity has issued 49,999 shares of its 50,000 total authorized shares directly
to ITC.
(c) All authorized and issued shares of AcNet Panama, S.A. are held
by ITC.
9. Irrevocable Proxies; Enforceability. Each Shareholder hereby grants to
Murdock an irrevocable proxy to vote such Shareholder's ITC Shares in connection
with any shareholder vote required in connection with the Merger. Each
Shareholder acknowledges that such proxy is coupled with an interest by virtue,
among other things, of Murdock's loans to AcNet, S.A. de C.V. Each Shareholder
hereby irrevocably waives any statutory dissenter's or appraisal rights in
connection with the Merger. ITC and each Shareholder represent and warrant to
Purchaser and Murdock that the ITC board of directors has duly approved the
Merger and that this Agreement is a valid and binding obligation of each of
them, enforceable according to its terms, except as such enforceability may be
limited by bankruptcy or creditors' rights laws. ITC and each Shareholder agree
that, without limiting their other remedies, Purchaser and Murdock may
specifically enforce this Agreement in any court of appropriate jurisdiction.
10. Amendments. 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.
4
<PAGE> 5
11. Publicity. All press releases or other public communications of any
nature whatsoever relating to the transactions contemplated by this Agreement,
and the method of the release for publication thereof, shall be subject to the
prior mutual approval of Purchaser and ITC, which approval shall not be
unreasonably withheld by any party; provided, however, that nothing herein shall
prevent any party from publishing such press releases or other public
communications as such party may consider necessary in order to satisfy such
party's legal or contractual obligations.
IN WITNESS WHEREOF the parties have hereunto caused this Agreement to be
duly executed as of the date first above written.
MCC ACQUISITION CORP.
By:/s/ Thomas E. Chaplin
-------------------------------------
Thomas E. Chaplin,
Chief Executive Officer
SHAREHOLDERS
/s/ Rae Stewart Ashton
-------------------------------------
Rae Stewart Ashton
/s/ Melinda R. Chagnon
-------------------------------------
Melinda R. Chagnon
MURDOCK COMMUNICATIONS CORPORATION
By:/s/ Thomas E. Chaplin
-------------------------------------
Thomas E. Chaplin,
Chief Executive Officer
INTERCARRIER TRANSPORT CORPORATION
By:/s/ Rae Stewart Ashton
-------------------------------------
Rae Stewart Ashton,
Chief Executive Officer
5
<PAGE> 6
EXHIBIT A
INTERCARRIER TRANSPORT CORPORATION
<TABLE>
<CAPTION>
Murdock Common Stock Payable as
Purchase Price Total ITC Shares
- ------------------------ ------------------------------- -----------------------
<S> <C> <C>
Rae Stewart Ashton 634,500 940
Melinda R. Chagnon 40,500 60
</TABLE>
<PAGE> 1
EXHIBIT 10.6
OPTION TO MERGE AGREEMENT
ACNET USA, INC.
This Option to Merge Agreement is entered into as of June 9, 1999 by and
among MCC ACQUISITION CORP. ("Purchaser"), a wholly owned subsidiary of MURDOCK
COMMUNICATIONS CORPORATION ("Murdock"), and the shareholders of ACNET USA, INC.
("AcNet USA") (the "Shareholders"), all of whom are listed on the signature page
of this Agreement, and ACNET USA, INC.
RECITALS
A. Purchaser desires to have an option to merge AcNet USA with a
wholly-owned subsidiary of Purchaser ("Merger Co.").
B. AcNet USA desires to grant to Purchaser an option to merge AcNet USA
with Merger Co.
C. The Shareholders desire to enter into this Agreement to facilitate the
Merger, as described below.
AGREEMENT
In consideration of the recitals and agreements set forth below, the
parties agree:
1 Irrevocable Option to Purchase AcNet USA Shares.
(a) AcNet USA hereby grants to Purchaser the continuing option to
merge AcNet USA with a wholly-owned subsidiary of Purchaser, with AcNet USA as
the surviving entity (the "Merger"), pursuant to the applicable laws of Texas
and Iowa, for the aggregate consideration described on Exhibit A. Purchaser may
exercise such option upon ten days' prior written notice to AcNet USA.
(b) The closing (the "Closing") of the Merger shall take place at a
time and place agreed to by AcNet USA and Purchaser. In the absence of such an
agreement, the Closing shall be at 10 a.m. at Murdock's executive office on the
first business day ten days after the exercise of the option set forth in
section 1(a) above. At the Closing: (i) the Shareholders shall receive cash and
certificates for their respective shares of the Murdock common stock
constituting the purchase
<PAGE> 2
price described on Exhibit A; (ii) the Shareholders shall deliver to Purchaser
certificates for all of the outstanding shares of capital stock of AcNet USA
(the "AcNet USA Shares"), duly endorsed for transfer; and (iii) AcNet USA,
Purchaser and Merger Co. shall execute and deliver a merger agreement among
them, and articles of merger, reasonably satisfactory in form and substance to
Purchaser.
(c) This option may be exercised by notice to AcNet USA given at any
time prior to December 31, 1999 (the "Option Period") at which time the option
shall expire if not exercised.
(d) The Shareholders and AcNet USA agree that, during the Option
Period, they shall cause AcNet USA to be managed so as to ensure that AcNet USA
shall not, unless it receives the prior written consent of Purchaser: (i) merge
or consolidate AcNet USA with any individual, partnership, corporation, limited
liability company, association, joint stock company, trust, joint venture,
unincorporated organization or a governmental entity or any department, agency
or political division thereof; (ii) sell, lease or otherwise dispose of any of
AcNet USA's assets; (iii) liquidate, dissolve or effect a recapitalization or
reorganization of AcNet USA in any form of transaction; (iv) create, incur,
assume, guarantee, be or remain liable for, contingently or otherwise, or suffer
to exist any indebtedness, other than indebtedness to Murdock and the
indebtedness of AcNet USA presently existing; or (v) conduct discussions or
negotiations with respect to a transaction of the type described in clauses (i)
through (iv) with any party. Each Shareholder represents and warrants that such
Shareholder's holdings of AcNet USA Shares are accurately described on Exhibit
A.
(e) The parties intend that the Merger shall qualify as a non-taxable
reorganization pursuant to Section 368(a)(1)(A) of the Internal Revenue Code of
1986, as amended, except to the extent of the cash paid in the transaction, and
the parties agree to use their reasonable best efforts to obtain an opinion of
tax counsel reasonably acceptable to them that the Merger so qualifies.
(f) On the Closing date, AcNet USA and Intercarrier Transport
Corporation ("ITC") will enter into a management agreement under which AcNet USA
will manage the business and activities of ITC, with reimbursement to AcNet USA
for the reasonable costs and expenses (including an overhead allocation of 3%)
incurred by AcNet USA in providing such management services. The management
agreement will terminate on the earlier of (i) the purchase by Purchaser or
Murdock of the ITC Stock or (ii) December 31, 1999.
(g) On the Closing date, AcNet USA and AcNet S.A. de C.V. ("ACN")
will enter into a management agreement under which AcNet USA will manage the
business and activities of ACN, with reimbursement to AcNet USA for
2
<PAGE> 3
the reasonable costs and expenses (including an overhead allocation of 3%)
incurred by AcNet USA in providing such management services. The ACN management
agreement will terminate upon termination of AcNet USA's management agreement
with ITC.
(h) On the Closing date, ITC and ACN will enter into a
telecommunications services agreement having terms and conditions which are
acceptable to MCC and R.S. Ashton.
(i) As of the date of this Agreement, 1,650,000 shares represents
approximately 7.78% of the issued and outstanding common stock of Murdock on a
fully-diluted basis, but without giving effect to the transactions contemplated
by the Option to Merge Agreement among Purchaser, Murdock and ITC dated the date
hereof. The parties acknowledge that such percentage may change, based on
transactions Murdock may conduct, prior to the date of Closing. The parties also
agree that the number of Murdock shares issuable hereunder will be adjusted
proportionately if Murdock issues a stock split or stock dividend or if there is
a reverse split or similar recapitalization of the Murdock common stock.
2. Injunctive Relief. The parties hereto agree that any party may apply
for and obtain from any U.S. state or federal court appropriate injunctive
relief prohibiting the violation of the terms of this Agreement. Such remedy
shall be cumulative and not exclusive.
3. Waiver. Any party to this Agreement may, at any time prior to the
Closing, waive any of the terms or conditions of this Agreement or agree to an
amendment or modification to this Agreement by an agreement in writing.
4. Notices. All notices and other communications among the parties shall
be in writing and shall be deemed to have been duly given when (i) delivered in
person, (ii) two days after delivery to a reputable overnight courier service,
or (iii) five days after posting in the United States mail having been sent
registered or certified mail return receipt requested:
(a) If to Purchaser, to:
MCC Acquisition Corp.
Attn: Thomas E. Chaplin
1112 29th Avenue, S.W.
Cedar Rapids, IA 52404
Telephone No.: 319-362-6900
3
<PAGE> 4
(b) If to AcNet USA and/or any Shareholder, to:
AcNet USA, Inc.
Attn: R.S. Ashton
200 South 10th Street
Suite 400
McAllen, Texas 78501-4871
Telephone No.: 956-984-4000
or to such other address or addresses as the parties may from time to time
designate in writing.
5. Reliance. Each of the parties to this Agreement shall be deemed to
have relied upon the accuracy of the written representations and warranties made
to it in or pursuant to this Agreement, notwithstanding any investigations
conducted by or on its behalf or notice, knowledge or belief to the contrary.
6. Construction; Governing Law. This Agreement shall be construed and
enforced in accordance with the laws of the State of Iowa, U.S.A., 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 or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of any
provisions of this Agreement.
7. Captions; Counterparts. The captions in this Agreement are for
convenience only and shall not be considered a part of or affect the
construction or interpretation of any provision of this Agreement. This
Agreement may be executed in two or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
8. Other Agreements. The parties acknowledge that in connection with the
Merger certain other agreements will be entered into. The parties agree to
negotiate the terms and conditions of such definitive agreements in good faith.
The parties further agree as follows:
(a) Certain of the Shareholders have relationships with other
companies that are active in various technology markets. Accordingly, the
following companies shall not be deemed competitors with AcNet USA in connection
with any noncompetition clauses incorporated in the definitive agreements:
Ashton Systems Corporation; The Ashton Group, Inc.; Texas Facilities Service
Corporation; L&L Consultores S.A. de C.V.; CSX S.A. de C.V.;
4
<PAGE> 5
and ICT Consulting, Inc. The Shareholders represent and warrant that such
entities do not derive revenues from the target markets of AcNet USA, AcNet,
S.A. de C.V. or Murdock, except as Murdock may consent in writing.
(b) At or prior to the Closing, R.S. Ashton and Cesar Nava will enter
into employment agreements with AcNet USA. R.S. Ashton will be the Chief
Executive Officer of AcNet USA and a director/director general of AcNet USA,
AcNet S.A. de C.V., AcNet Internet S.A. de C.V. and AcNet Panama S.A.
(collectively, the "AcNet Companies"). Mr. Ashton's first year salary shall be
$50,000, his second year salary shall be $100,000 and his third year salary
shall be $150,000. Mr. Ashton's employment agreement will provide for medical
coverage in the United States and Mexico, as well as the use of a 2000 Jeep
Cherokee Limited and driver while traveling in Mexico. Cesar Nava shall be
Senior Vice President of Network Services and a director of the AcNet Companies.
His salary shall be $124,000 and he shall receive U.S. and Mexican medical
coverage. Mr. Nava will receive a signing bonus of $74,000. Mr. Ashton and Mr.
Nava will be eligible for bonuses and options as approved by Murdock's Board of
Directors. Their base salaries shall be subject to annual review by the
Compensation Committee of Murdock's Board of Directors, but will not be
decreased without the employee's consent. Each of the employment agreements
shall provide that if the employee is terminated by the company without Cause,
or by the employee with Good Reason, prior to the end of the three-year term,
the employee shall receive as severance payment in full of the base salary due
for the remaining term, plus one year of additional base salary (at year 3
levels), all paid within 15 days after the termination; provided, in no event
shall aggregate severance consideration exceed three years' base salary. "Cause"
will include conviction of a felony, material misappropriation of funds, and
willful failure to comply with a lawful and material directive of the Board of
Directors of Murdock which is not inconsistent with the employment agreement.
"Good Reason" means a material change in the employee's duties, title or
authority, requiring relocation to an area not approved by the employee, and a
material breach of the agreements with the employee. Each employment agreement
will prohibit competition by the employee for a six-month post-termination
period.
(c) Mr. Ashton and Mr. Nava shall have the right to name or fill two
seats on the Board of Directors of any of the AcNet Companies. Each such board
shall consist of five to seven directors of which two shall be selected by
Murdock; the remaining one to three directors shall be elected unanimously by
the other directors.
(d) The Shareholders represent and warrant that all of the
outstanding ownership rights and interests in AcNet Panama S.A., a Panama
corporation, are and at Closing will be held by ITC.
5
<PAGE> 6
(e) Murdock shall provide up to 100,000 shares, in the aggregate, of
Murdock common stock to be utilized by the AcNet Companies in connection with
the recruitment and retention of qualified executives. Any grants of such shares
(or options therefor) shall be approved by the Board of Directors of AcNet USA.
(f) In the event that Murdock sells greater than 50% of its aggregate
interest in the AcNet Companies, or if Mr. Ashton's employment agreement is
terminated prior to the end of the three-year term, Mr. Ashton shall be granted
observer rights on the Murdock Board of Directors.
(g) In addition to standard officer/director indemnification, AcNet
USA will indemnify and hold Messrs. Ashton and Nava harmless from any loss,
cost, damage or expense either of them may suffer as a result of acting as a
legal representative of any of the AcNet companies in Mexico or Panama, except
to the extent such liability resulted from such person's bad faith or
intentional violations of law.
9. Irrevocable Proxies; Enforceability. Each Shareholder hereby grants to
Murdock an irrevocable proxy to vote such Shareholder's AcNet USA Shares in
connection with any shareholder vote required in connection with the Merger.
Each Shareholder acknowledges that such proxy is coupled with an interest by
virtue, among other things, of Murdock's loans to AcNet, S.A. de C.V. Each
Shareholder hereby irrevocably waives any statutory dissenter's or appraisal
rights in connection with the Merger. AcNet USA and each Shareholder represent
and warrant to Purchaser and Murdock that the AcNet USA board of directors has
duly approved the Merger and that this Agreement is a valid and binding
obligation of each of them, enforceable according to its terms, except as such
enforceability may be limited by bankruptcy or creditors' rights laws. AcNet and
each Shareholder agree that, without limiting their other remedies, Purchaser
and Murdock may specifically enforce this Agreement in any court of appropriate
jurisdiction.
10. Amendments. 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.
11. Publicity. All press releases or other public communications of any
nature whatsoever relating to the transactions contemplated by this Agreement,
and the method of the release for publication thereof, shall be subject to the
prior mutual approval of Purchaser and AcNet USA, which approval shall not be
unreasonably withheld by any party; provided, however, that nothing herein shall
prevent any party from publishing such press releases or other public
6
<PAGE> 7
communications as such party may consider necessary in order to satisfy such
party's legal or contractual obligations.
12. Miscellaneous Items.
(a) All loans payable by AcNet USA, AcNet and the related companies
to R.S. Ashton and other stockholders and employees will be paid in full on or
prior to the Closing date. The aggregate amount of such loans is less than
$250,000.
(b) Murdock will indemnify R.S. Ashton against any loss or liability
resulting from personal guarantees made by R.S. Ashton with respect to any of
the companies and disclosed in writing to Murdock prior to the Closing, and will
use its best efforts to have R.S. Ashton released from all such guarantees
within 30 days after the Closing. None of such guarantees have been granted
after June 1, 1999.
(c) AcNet USA will use reasonable good faith efforts to obtain
audited financial statements prior to the Closing. If the Closing does not
occur, then the cost of such audit will be paid by Murdock and will be deducted
from the loans payable by AcNet to Murdock. In addition, Murdock will pay up to
$10,000 of the aggregate legal fees incurred by R.S. Ashton, AcNet USA and
related companies in connection with the transaction.
(d) The Shareholders will be entitled to piggyback registration
rights with respect to the Murdock common stock they receive under this
Agreement.
IN WITNESS WHEREOF the parties have hereunto caused this Agreement to
be duly executed as of the date first above written.
MCC ACQUISITION CORP.
By:/s/ Thomas E. Chaplin
-----------------------------------
Thomas E. Chaplin,
Chief Executive Officer
7
<PAGE> 8
SHAREHOLDERS
/s/ Rae Stewart Ashton
-----------------------------------
Rae Stewart Ashton
/s/ Cesar Nava Diaz Ceballos
-----------------------------------
Cesar Nava Diaz Ceballos
/s/ Mary E. Ashton
------------------------------------
Mary E. Ashton
/s/ Laurie Sanford
------------------------------------
Laurie Sanford
/s/ Mary Grace Gudis
-----------------------------------
Mary Grace Gudis
/s/ Jesus Reyna Herrera
-----------------------------------
Jesus Reyna Herrera
/s/ Arthur William Adams, Jr.
-----------------------------------
Arthur William Adams, Jr.
/s/ Eduardo Nava Diaz Ceballos
-----------------------------------
Eduardo Nava Diaz Ceballos
/s/ Olga Cardenas Lopez
-----------------------------------
Olga Cardenas Lopez
/s/ Ivan Villalobos Hernandez
-----------------------------------
Ivan Villalobos Hernandez
/s/ Kyle Edward Evans, Jr.
-----------------------------------
Kyle Edward Evans, Jr.
/s/ Jack L. Ashton
-----------------------------------
Jack L. Ashton
/s/ Julian Pascoe Martinez
-----------------------------------
Julian Pascoe Martinez
8
<PAGE> 9
/s/ Melinda R. Chagnon
-----------------------------------
Melinda R. Chagnon
MURDOCK COMMUNICATIONS CORPORATION
By:/s/ Thomas E. Chaplin
-----------------------------------
Thomas E. Chaplin,
Chief Executive Officer
ACNET USA, INC.
BY/s/ Rae Stewart Ashton
-----------------------------------
Rae Stewart Ashton,
Chief Executive Officer
9
<PAGE> 10
EXHIBIT A
ACNET USA, INC.
---------------
<TABLE>
<CAPTION>
PURCHASE CONSIDERATION
-------------------------------------------
AcNet USA Shares of Murdock
Shareholders Shares Held Common Stock Cash
- ------------------------------------ -------------------- ------------------------- -----------------
<S> <C> <C> <C>
Rae Stewart Ashton 800 1,320,000 $160,000
Cesar Nava Diaz Ceballos 130 214,500 26,000
Mary E. Ashton 15 24,750 3,000
Eduardo Nava Diaz Ceballos 5 8,250 1,000
Julian Pascoe Martinez 8 13,200 1,600
Melinda R. Chagnon 15 24,750 3,000
Olga Cardenas Lopez 1 1,650 200
Ivan Villalobos Hernandez 3 4,950 600
Kyle Edward Evans, Jr. 1 1,650 200
Jack L. Ashton 5 8,250 1,000
Arthur William Adams, Jr. 1 1,650 200
Jesus Reyna Herrera 6 9,900 1,200
Mary Grace Gudis 5 8,250 1,000
Laurie Sanford 5 8,250 1,000
==================================== ==================== ========================= =================
Totals 1,000 1,650,000 $200,000
</TABLE>
<PAGE> 1
EXHIBIT 10.7
AMENDMENT TO INVESTMENT AGREEMENT
THIS AMENDMENT TO INVESTMENT AGREEMENT ("Amendment"), dated as of June
21,1999, is by and between ACTEL INTEGRATED COMMUNICATIONS, INC. (the
"Company"), MURDOCK COMMUNICATIONS CORPORATION (the "Investor"), John Beck,
shareholder, and Richard Courtney, shareholder.
RECITALS
1. Investor, Company, and shareholders entered into a certain
Investment Agreement ("Agreement") dated March 10, 1999 whereby Investor was
provided an opportunity to invest sufficient capital to acquire 3,500,000 shares
of Series A Preferred Stock of the Company convertible into a maximum of
5,100,000 shares of common stock of the Company;
2. Investor has provided a total amount of three million ($3,000,000)
dollars and has on two occasions not provided requested funding within fourteen
(14) days of Requests for Funds (as defined in the Agreement) by the Company's
President pursuant to Section 1.2 of the Agreement;
3. Company and Investor believe and acknowledge that it is in the best
interests of Company, and of Investor, to broaden and diversify the base of
investors in Company;
4. Company and Investor desire that Company not request and Investor
not provide any further investment in Company by Investor to further the
interests of diversifying Company's investment base;
5. Investor and Company desire to amend and clarify the Agreement as
set forth herein;
AGREEMENTS
In consideration of the recitals and the mutual agreements which
follow, the Company and Investor agree as follows:
<PAGE> 2
1. Loan. The Investor agrees to loan $1,000,000 to the Company on the
terms and conditions set forth in a Promissory Note mutually agreeable to the
parties, to be executed and delivered to the Investor by the Company.
2. Forgiveness and Waiver of Defaults. Company and Investor hereby
forgive each other with prejudice of any and all existing known and unknown
defaults by either or both and forever waive all remedies for same. Forgiveness
of any failure to fund and/or defaults by Investor is conditioned upon
Investor's loan to Company of the amounts set forth in Paragraph 1 above. The
parties hereby reserve any and all rights they may have with respect to future
defaults under this Amendment.
3. Relief from Negative Covenants, Restrictions, and Limitations.
Investor hereby irrevocably consents to Company's issuance of any equity
security of any type, class, series and quantity, with any conversion,
liquidation, dividend or voting rights, of any value, to any person whatsoever,
notwithstanding any other agreement, including without limitation the Investment
Agreement and any Exhibit thereto, the Articles of Incorporation or By-laws of
the Company, or any other right or entitlement by law, agreement, understanding
or contract. However, until Investor converts its Series A Preferred Stock,
Company shall not sell any preferred stock senior to that currently authorized.
Investor further irrevocably consents hereby to any loan or debt financing to
Company from any source and secured by any property or equity security, provided
such debt financing is subject to terms and conditions deemed acceptable by the
Company's board of directors. To enhance Company's ability to raise additional
capital, Investor further irrevocably consents to such actions deemed in the
Company's best interest by its Board of Directors, including without limitation
(a) any increase in the Company's authorized shares of common stock, (b) any
increase in the number of Series A Preferred Stock, and (c) the creation of
different classes or series of common or preferred stock. Investor shall
cooperate with Company to cause any amendments to the Company's Articles of
Incorporation or By-laws necessary for any debt financing or private or public
placement of any security described above by Company, in the discretion of the
Company's board of directors.
4. Specific Amendments to the Investment Agreement. The Investment
Agreement is hereby amended specifically as set forth below.
(a) Paragraphs 5.10, 7.1(a), 7.1(b), and 7.3, are hereby
deleted in their entirety effective as of March 10, 1999.
2
<PAGE> 3
(b) Paragraph 10.1 as amended shall provide: "All
representations and warranties contained herein or made by or on behalf of the
Company in writing in connection with the transactions contemplated herein shall
be true and correct as of the Closing and shall survive the consummation of the
transaction contemplated hereby until June 22, 1999."
(c) Investor and Company agree to execute and deliver the
Agreement to License and Assign Trademark attached hereto.
5. Specific Amendments to Exhibit A to the Investment Agreement.
Exhibit A to the Investment Agreement is hereby amended as follows:
a. Paragraph 2 shall be amended to terminate the Board Composition
Agreement attached to the Investment Agreement as Exhibit A upon issuance of
10,000,000 shares of common stock, public offering, or acquisition of 25% of the
authorized common stock of the Company:
"2. Notwithstanding anything contrary in this Statement of Terms, the
parties obligations under this Exhibit "A" shall expire and the
Company's board of directors shall be elected according to the then
effective Articles of Incorporation and By-laws of the Company upon any
of the following events: (a) the issuance of a number of shares of
common stock that with all previously issued or committed shares of
common stock total 10,000,000 shares of common stock; or (b) the
registration of any of the Company's securities with the Securities and
Exchange Commission."
6. Director. Notwithstanding anything to the contrary in the Investment
Agreement or any exhibit thereto, including, without limitation, Exhibit A,
Investor shall have only one representative on the Company's Board or Directors
pursuant to paragraph 2 of Exhibit A as amended hereby.
7. Specific Amendments to Exhibit B to the Investment Agreement and
Articles of Incorporation.
(a) Exhibit B to the Investment Agreement is hereby amended
specifically as set forth below. Investor shall execute any and all documents to
amend the Company's Articles of Incorporation in such a manner as to make such
Articles of Incorporation consistent with any and all terms of Exhibit B as
amended hereby: Paragraphs 6, 7, and 8 are hereby deleted as of this date.
3
<PAGE> 4
(b) Notwithstanding, however, anything to the contrary
contained in the Investment Agreement, as amended, in no event: (1) shall an
increase in or issuance of authorized shares of Common Stock of the Company
(other than a split thereof) increase the number of shares of Common Stock to
which Investor is entitled upon surrender and conversion of the Series A
Preferred Stock or (2) shall Investor have preemptive rights with respect to
Series A Preferred Stock or Common Stock.
8. Integration. This Amendment shall supercede any and all terms of the
Agreement and any exhibit thereto inconsistent with the terms hereof. This
Amendment shall further serve as an agreement among shareholders should any term
herein be inconsistent with the terms and/or requirements of the Company's
Articles of Incorporation or By-laws.
ACTEL INTEGRATED COMMUNICATIONS, INC.
BY/s/ John Beck
------------------------------------
Its President
------------------------------
MURDOCK COMMUNICATIONS CORPORATION
BY/s/ Thomas E. Chaplin
------------------------------------
Its Chief Executive Officer
------------------------------
/s/ John Beck
--------------------------------------
John Beck, Shareholder
/s/ Richard Courtney
--------------------------------------
Richard Courtney, Shareholder
4
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 204
<SECURITIES> 0
<RECEIVABLES> 3,132
<ALLOWANCES> 355
<INVENTORY> 0
<CURRENT-ASSETS> 4,515
<PP&E> 14,585
<DEPRECIATION> 11,696
<TOTAL-ASSETS> 26,905
<CURRENT-LIABILITIES> 17,776
<BONDS> 0
0
1,853
<COMMON> 20,005
<OTHER-SE> (18,376)
<TOTAL-LIABILITY-AND-EQUITY> 26,905
<SALES> 1,094
<TOTAL-REVENUES> 19,786
<CGS> 827
<TOTAL-COSTS> 14,210
<OTHER-EXPENSES> 3,835
<LOSS-PROVISION> 1,397
<INTEREST-EXPENSE> 1,591
<INCOME-PRETAX> (704)
<INCOME-TAX> 75
<INCOME-CONTINUING> (779)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (779)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
