<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 March 31, 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 March 31, 1999, there were outstanding 10,329,867 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
March 31, 1999
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Consolidated Balance Sheets as of March 31, 1999 and December 31,
1998................................................................. 3
Consolidated Statements of Operations for the Three Months Ended
March 31, 1999 and 1998.............................................. 5
Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 1999 and 1998.............................................. 6
Notes to Consolidated Financial Statements........................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 18
Item 2. Changes in Securities and Use of Proceeds............................ 18
Item 5. Other Information.................................................... 18
Item 6. Exhibits and Reports on Form 8-K..................................... 18
Signatures........................................................... 20
</TABLE>
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PART I FINANCIAL INFORMATION
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(Unaudited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $ 220 $ 1,722
Accounts receivable, less allowance for doubtful accounts: 3,286 1,752
Prepaid expenses and other current assets 677 281
------------ -----------
TOTAL CURRENT ASSETS 4,183 3,755
PROPERTY AND EQUIPMENT
Land and building 1,226 1,172
Telecommunications equipment 9,093 9,013
Furniture and equipment 697 748
------------ -----------
11,016 10,933
Accumulated depreciation (8,270) (8,097)
------------ -----------
2,746 2,836
Telecommunications equipment under capital lease, net of
accumulated amortization : 1999 - $3,349; 1998 - $3,326 159 182
------------ -----------
PROPERTY AND EQUIPMENT, NET 2,905 3,018
OTHER ASSETS
Goodwill - net of accumulated amortization: 1999 - $1,028; 1998 -
$697 11,316 11,644
Cost of purchased site contracts, net of accumulated amortization: 140 174
1999 - $703; 1998 - $670
Other intangible assets, net of accumulated amortization: 602 659
1999 - $463; 1998 - $348
Investments, at cost 3,039 1,500
Prepaid commissions 1,809 1,704
Other noncurrent assets 110 224
------------ -----------
TOTAL OTHER ASSETS 17,016 15,905
------------ -----------
TOTAL $ 24,104 $ 22,678
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
March 31, 1999 and December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 8,913 $ 7,401
Accounts payable 2,165 1,205
Accrued expenses 1,413 2,059
Current portion of capital lease obligation principally with a
related party 875 869
Current portion of long-term debt with related parties 512 829
Current portion of long-term debt, others 214 199
---------- ---------
TOTAL CURRENT LIABILITIES 14,092 12,562
LONG-TERM LIABILITIES
Capital lease obligations principally with a related party, less
current portion 3,055 3,133
Long-term debt with related parties, less current portion 1,938 2,105
Long-term debt, others, less current portion 746 725
Accumulated losses of joint venture in excess of initial investment 53 61
Deferred income 14 15
---------- ---------
TOTAL LIABILITIES 19,898 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)
1,844 1,837
Common stock, no par or stated value: Authorized - 20,000,000
shares; issued and outstanding: 1999 and 1998 -
10,329,867 shares 19,835 19,835
Common stock warrants: Issued and outstanding: 1999 - 525 438
4,740,763; 1998 - 4,420,763
Additional paid-in capital 134 134
Accumulated deficit (18,132) (18,167)
---------- ---------
TOTAL SHAREHOLDER'S EQUITY 4,206 4,077
---------- ---------
TOTAL $ 24,104 $ 22,678
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1999 1998
------------------ ----------------
<S> <C> <C>
REVENUES
Call processing $ 9,940 $ 5,363
Other revenues 847 326
------------ ------------
TOTAL REVENUES 10,787 5,689
COSTS OF SALES
Call processing 6,978 3,453
Other cost of sales 423 110
Nonstandard international bad debt expense 141 --
------------ ------------
TOTAL COST OF SALES 7,542 3,563
------------ ------------
GROSS PROFIT 3,245 2,126
OPERATING EXPENSES
Selling, general and administrative expenses 1,796 1,610
Depreciation and amortization expense 582 458
------------ ------------
TOTAL OPERATING EXPENSES 2,378 2,068
------------ ------------
INCOME FROM OPERATIONS 867 58
NON-OPERATING INCOME (EXPENSE)
Interest expense, net (747) (446)
Other income 1 35
------------ ------------
TOTAL NON-OPERATING INCOME (EXPENSE) (746) (411)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE AND
JOINT VENTURE LOSS 121 (353)
Loss from joint venture -- (63)
Income tax expense (37) (6)
------------ ------------
NET INCOME (LOSS) 84 (422)
DIVIDENDS AND ACCRETION ON 8% SERIES A CONVERTIBLE (49) (41)
PREFERRED STOCK
============ ============
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
$ 35 $ (463)
============ ============
BASIC NET INCOME (LOSS) PER COMMON SHARE $ -- $ (0.10)
============ ============
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 10,329,867 4,720,661
============ ============
DILUTED NET INCOME (LOSS) PER COMMON SHARE
$ -- $ (.10)
============ ============
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 12,163,994 4,720,661
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
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MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1999 and 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 84 $ (422)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH FLOWS
FROM OPERATING ACTIVITIES:
Depreciation and amortization 582 456
Noncash interest expense 124 22
Loss from joint venture - 60
Changes in operating assets and liabilities
Receivables (1,534) (1,004)
Other current assets (369) 30
Prepaid commissions (105) -
Other noncurrent assets 114 16
Accounts payable 960 258
Accrued expenses (688) 194
Deferred income (1) (13)
---------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES (833) (403)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property and equipment (84) (135)
Cash paid for investments (1,547) (1)
---------------------------
NET CASH FLOWS FROM INVESTING ACTIVITIES (1,631) (136)
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on capital lease obligations, primarily to a related party (72) -
Proceeds from capital lease obligations with a related party - 492
Borrowings on notes payable 1,650 122
Borrowings on long-term debt with a related party - 400
Borrowings on long-term debt, others 141 -
Payments on notes payable (138) -
Payments on long-term debt with related parties (493) (271)
Payments on long-term debt, others (106) -
Proceeds from issuance of 8% Series A Convertible Preferred Stock - 50
Dividends on 8% Series A Convertible Preferred Stock - (21)
Payments on offering costs costs and origination fees (20) (13)
---------------------------
NET CASH FLOW FROM FINANCING ACTIVITIES 962 759
---------------------------
NET INCREASE (DECREASE) IN CASH (1,502) 220
CASH AT BEGINNING OF PERIOD 1,722 316
---------------------------
CASH AT END OF PERIOD $ 220 $ 536
===========================
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for interest, principally to a related party $ 359 $ 390
Cash paid during the period for income taxes 29 6
</TABLE>
See accompanying notes to consolidated financial statements.
6
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MURDOCK COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 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 March
31, 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 #
00-21463) 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 $18.1 million, and current liabilities exceed current assets by $9.9
million at March 31, 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 # 00-21463) for the
year ended December 31, 1998 as filed with the Securities and Exchange
Commission on March 31, 1999.
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"), the Company's wholly-owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated in consolidation.
2. NOTES PAYABLE AND LONG-TERM DEBT
During the first quarter of 1999, the Company received proceeds of $1,500,000
from the issuance of promissory notes to related parties. The notes bear
interest at 14% with accrued interest and principal due on November 30, 1999.
Warrants to purchase 300,000 shares of the Company's common stock were issued in
relation to the promissory notes at an exercise price of $3.25 per share. The
Company has assigned a fair value of $60,000
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to the warrants, that has been capitalized as deferred loan costs and are being
written off over the life of the notes.
As of March 31, 1999 the Company had an unpaid balance past due to an affilate
of Berthel Fisher & Company (collectively with its subsidiaries and their
affiliated leasing partnerships, "Berthel") of approximately $266,000. The
unpaid balance is in violation of certain of the covenants in the Berthel lease
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 March 31, 1999 the Company was past due on a $400,000 note payable to a
financial institution and $2 million of notes payable to individuals. As of the
date of this report, the financial institution has not made a demand for the
$400,000 note. Effective April 1, 1999, as provided for in the terms of the
notes, the interest rate on the $2.0 million of past due notes payable to
individuals 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.
The Company currently anticipates paying all past due debt with the proceeds
from the proposed credit facility (as discussed in Note 7) upon closing.
3. INCOME TAX EXPENSE
The provision for income taxes consisted of the following for the periods ended
March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Current: 1999 1998
---- ----
<S> <C> <C>
Federal $ - $ -
State 37,500 5,821
</TABLE>
At March 31, 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 has 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 claims that Incomex is in violation
of certain covenants of the loan agreement, including provisions relating to
certain obligations of Incomex to make payments to Eilco based on Incomex's
income from telecommunications services provided to a group of hotels in Mexico.
Incomex disputes these claims and initiated the arbitration proceedings to
resolve the dispute. An arbitration hearing with respect to this matter
commenced on April 21, 1999. Eilco is seeking the amount due on the loan and
additional damages which may be in excess of $1,000,000 plus legal fees. The
Company's position is that the Company owes, at the most, the principal balance
due on the loan and is not in violation of any of the covenants. The Company
intends to defend the claims vigorously, but
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can not make any assurances as to the outcome of this matter. No loss has been
recorded in the consolidated financial statements with respect to the matter in
excess of the amount due on the loan.
On July 20, 1998, Oncor Communications, Inc. ("Oncor") 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 teminated a
long distance service agreement with Oncor and claimed damages based on amounts
which Oncor alleged to have advanced to Incomex, lost profits for the period in
which the Company was alleged to have breached the contract, attorneys' 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. On April 21, 1999 an agreement
was reached with Oncor to settle this claim. Under the settlement, the Company
paid $150,000 to Oncor in return for a release by Oncor of its claims. Such
liability was accrued as of March 31, 1999.
5. INVESTMENTS
During 1998, the Company reached an agreement to invest in ACTEL Integrated
Communication, Inc. ("ACTEL") of Mobile, Alabama. As of March 31, 1999, the
Company had invested $1,676,711, and from April 1, 1999 through May 10, 1999 had
invested an additional $980,000.
During 1998, the Company reached an initial lending/investment agreement with
AcNet S.A. de C.V. ("AcNet") of Mexico. As of March 31, 1999, the Company had
invested $1,361,974, and from April 1, 1999 through May 10, 1999 had invested an
additional $563,258.
6. COMMON STOCK WARRANTS
In accordance with the anti-dilutive provisions contained in the common stock
warrants issued in connection with the Company's initial public offering, the
number of shares issuable upon exercise of the warrants has increased as
follows:
<TABLE>
<CAPTION>
Warrants Applicable
(Previously convertible Common Exercise Expiration
on a one-for-one basis) Shares Price Date
----------------------- ---------- -------- ----------
<S> <C> <C> <C>
880,000 1,819,918 $3.14 1999
160,000 338,762 3.07 2001
80,000 149,755 9.75 2001
</TABLE>
7. 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 owners in the United States
through the PIC/ATN business unit. The services include, but are not limited to,
live operator services, credit card billing services, automated collection and
messaging delivery services, voice mail services, telecommunications consulting
and providing carrier services for long-distance telecommunications companies.
The incoming operator
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assisted calls are processed with the PIC/ATN operators on location. The Incomex
business unit provides international operator services to hotels and payphone
owners in Mexico on international calls from Mexico to the United States. The
MTS business unit was created in 1998 to meet the needs of the hospitality
telecommunications management market by providing database profit management
services and other value added services. The MTS business unit was formerly the
operating unit of the Company responsible for marketing of AT&T operator
services until the contract was terminated during the fourth quarter of 1998.
The accounting policies of the reportable segments are the same as those
described 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 is
shown in the following table as of and for the three months ended March 31, 1999
and 1998 (amounts expressed in thousands). The "Other" column includes the
effect of corporate related items and eliminating inter-business unit
transactions.
<TABLE>
<CAPTION>
PIC/ATN INCOMEX MTS OTHER TOTAL
1999
<S> <C> <C> <C> <C> <C>
Revenues $7,021 $2,940 $ 1,246 $ (420) $10,787
Income (loss) from operations 1,027 813 (74) (899) 867
Total assets 5,674 3,340 2,794 12,296 24,104
Depreciation and amortization expense 116 4 134 328 582
Interest expense, net 152 70 172 353 747
Capital expenditures 16 4 64 - 84
1998
Revenues 3,197 1,832 1,402 (742) 5,689
Income (loss) from operations 218 511 (273) (398) 58
Total assets 2,977 2,402 2,928 4,000 12,307
Depreciation and amortization expense 96 3 240 119 458
Interest expense, net 76 74 131 165 446
Capital expenditures 18 - 117 - 135
</TABLE>
Financial information relating to the Company's operations by geographic area as
of and for the three months ended March 31, 1999 and 1998 was as follows
(amounts expressed in thousands):
<TABLE>
<CAPTION>
1999 1998
Revenues:
<S> <C> <C>
United States $ 7,822 $ 3,857
Mexico 2,940 1,832
Canada 25 --
------- -------
Total $10,787 $ 5,689
======= =======
Long-lived assets (excluding investments):
United States $15,178 $17,423
Mexico 1,704 --
------- -------
Total $16,882 $17,423
======= =======
</TABLE>
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8. SUBSEQUENT EVENTS
In April of 1999, the Company received proceeds of $1,625,000 from the issuance
of promissory notes to related parties. The notes bear interest at 18% and the
accrued interest and principal are due on November 30, 1999.
The Company also received proceeds of $500,000 of financing from a financial
institution. The note bears interest at 10.5% and the accrued interest and
principal are due on demand, or if no demand is made, on March 30, 2000.
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 terms of the credit
facility will be as presently contemplated.
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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.
RESULTS OF OPERATIONS - The information for the three months ended March 31,
1998 in the following analysis includes the statement of operations data of
Incomex after the consummation of the Incomex acquisition effective February,
1998
Comparison of Three Months Ended March 31, 1999 and 1998
- --------------------------------------------------------
REVENUES - Consolidated revenues increased $5.1 million, or 90%, to $10.8
million for the three months ended March 31, 1999 from $5.7 million for the
three months ended March 31, 1998. Revenues from PIC/ATN increased $4.2 million
to $7.0 million for the three months ended March 31, 1999 due to an increase in
the number of telephone numbers processed by the Operator Service Center.
Revenues from Incomex increased $1.1 million to $2.9 million for the three
months ended March 31, 1999. The increase was primarily due to an increase in
the number and quality of rooms under contract with Mexican resort hotels and
the fact that Incomex results for the prior year period only reflect two months
following its acquisition effective February, 1998. Revenues from MTS declined
$155,000 to $1.2 million for the three months ended March 31, 1999. Call
processing revenues generated by MTS through its Lodging Partnership Program
decreased from $0.7 million for the three months ended March 31, 1998 to none
for the three months ended March 31, 1999 as the Company ended the Lodging
Partnership Agreement in October 1998. 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 has replaced a substantial portion of this revenue stream in the
three months ended March 31, 1999 with revenues from its TeleManager services
and other income.
COST OF SALES - Consolidated cost of sales increased $3.9 million, or 108%, to
$7.5 million for the three months ended March 31, 1999 from $3.6 million for the
three months ended March 31, 1998. Consolidated cost of sales, as a percentage
of revenues, was 69.9% for the three months ended March 31, 1999 compared to
62.6% for the three months ended March 31, 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 $256,000 reclassification of certain operator
center costs in the current period from selling, general and administrative
expense to cost of sales, higher commission expenses and additional revenues
from international traffic beginning in the
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second half of 1998 that generate approximately the same dollar volume of gross
profit per call as domestic traffic but significantly higher cost of sales as a
percentage of revenues.
The Company recorded a nonstandard charge of $141,000 for the three months ended
March 31, 1999 in addition to the $390,000 recorded for the three months ended
December 31, 1998. This charge is a result of a dispute in collection procedures
and policies with a billing and collection processor of Incomex. Incomex has
changed vendors and does not expect a recurrence of this issue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Consolidated selling, general and
administrative expenses increased $186,000 to $1.8 million for the three months
ended March 31, 1999 from $1.6 million for the three months ended March 31,
1998. Excluding the impact of the $256,000 reclassification of certain operator
center costs in the current period from selling, general and administrative
expense to cost of sales, consolidated selling, general and administrative
expenses increased $442,000, or 28%. Selling, general and administrative
expense, as a percentage of revenues, was 16.7% for the three months ended March
31, 1999 compared to 28.3%, adjusted for the operator center costs
reclassification, for the three months ended March 31, 1998.
DEPRECIATION AND AMORTIZATION - Consolidated depreciation and amortization
increased $124,000, or 27%, to $582,000 for the three months ended March 31,
1999 from $458,000 for the three months ended March 31, 1998. The increase is
primarily the result of the PIC Earn-Out settlement and the Incomex Earn-Out
settlement recorded in the fourth quarter of 1998 in which the Company recorded
additional goodwill of $4.4 million 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 $301,000, or 67.5%, to $748,000 for the three months ended
March 31, 1999 from $446,000 for the three months ended March 31, 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 March 31, 1999, the Company's current liabilities of $14.1 million exceeded
current assets of $4.2 million resulting in a working capital deficit of $9.9
million. During the three months ended March 31,1999, the Company used $833,000
in cash for operating activities, and used $1.6 million in investing activities.
The Company received proceeds from new debt financing of $1.5 million and repaid
borrowings on notes payable and made payments on capital lease obligations of
$809,000. These activities resulted in a decrease in available cash of $1.5
million for the three months ended March 31, 1999.
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The Company's long-term debt and capital lease obligations as of March 31, 1999,
including the current portion thereof, totaled $16.3 million compared to $15.3
million at December 31, 1998. The Company's current debt and capital lease
obligations as of March 31, 1999 totaled $10.5 million compared to $9.3 million
at December 31, 1998.
The Company's principal sources of capital to date have been public and private
offerings of debt and equity securities and lease and debt financing
arrangements with Berthel to purchase telecommunications equipment. The Company
currently makes monthly lease and debt payments of approximately $163,000 in the
aggregate, pursuant to these financing arrangements. As of March 31, 1999, the
Company had not made the February and March 1999 payments. Berthel only has the
right to demand that the Company cure this violation, but has not made such a
demand as of the date of this report.
From the start of 1999 through the date of this report, the Company raised $3.7
million from debt financings. 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 $6.3 million in debt or equity financings
in 1999 in addition to the $3.7 million debt financing discussed above, and in
addition to cash flows from operations, to fund its cash requirements, including
its initial investment in ACTEL and AcNet.
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 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 March 31, 1999 the Company was past due on a $400,000 note payable to a
financial institution and $2.0 million of notes payable to individuals. The
financial institution has not made a demand for the repayment of this note as of
the date of this report. The Company has subsequent to March 31, 1999 paid the
interest owed on the note. Effective April 1, 1999, as provided for in the terms
of the notes, the interest rate on the $2.0 million of past due notes payable to
individuals increased from 14% to 18%. While not required by the terms of the
note, the Company solicited from the noteholders signed agreements to extend the
notes to June 30,
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1999. The Company currently anticipates paying all past due debt with the
proceeds from the proposed credit facility upon closing.
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 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 during the second quarter of 1999.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 COMPLIANCE
The majority of the Company's internal Year 2000 issues have been or will be
corrected through systems upgrades, including an upgrade of the Company's
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 March
31, 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.
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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.
FORWARD-LOOKING STATEMENTS
This report contains statements, including statements of management's
belief or expectation, which may be forward-looking within the meaning of
applicable securities laws. Such statements are subject to known and unknown
risks and uncertainties that could cause actual future results and developments
to differ materially from those currently projected. Such risks and
uncertainties include, among others, the following:
- the Company's access to adequate debt or equity capital to meet the
Company's operating and financial needs;
- the Company's ability to integrate and assimilate the businesses of
PIC/ATN and Incomex;
- the Company's ability to respond to competition in its markets;
- the Company's ability to expand into new markets and to effectively
manage its growth;
- customer acceptance and effectiveness of the Telemanager and the
Company's ability to develop new technology and to adapt to
technological change in the telecommunications industry;
- the risk that the Company's assessment of the Year 2000 issue,
including its identification, assessment, remediation and testing
efforts, the dates on which the Company believes it will complete such
efforts and the costs associated with such efforts, may be incorrect
because it is based upon management's estimates, which were derived
from numerous assumptions regarding future events, available
resources, third-party remediation plans, the accuracy of testing of
the affected systems and other factors;
- changes in, or failure to comply with, governmental regulation,
including telecommunications regulations;
- the Company's reliance on its key personnel and the availability of
qualified personnel;
- general economic conditions in the Company's markets;
16
<PAGE> 17
- 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.
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.
17
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On July 20, 1998, Oncor Communications, Inc. ("Oncor") 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 teminated
a long distance service agreement with Oncor and claimed damages based on
amounts which Oncor alleged to have advanced to Incomex, lost profits for the
period in which the Company was alleged to have breached the contract,
attorneys' 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. On April 21, 1999
an agreement was reached with Oncor to settle this claim. Under the settlement,
the Company paid $150,000 to Oncor in return for a release by Oncor of its
claims. Such liability was accrued as of March 31, 1999.
Item 2. Changes in Securities and Use of Proceeds.
(c) During the first quarter ended March 31, 1999, the Company issued
promissory notes in the aggregate principal amount of $1,500,000 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 14% and the principal and accrued interest are due on November
30, 1999.
Item 5. Other Information
On March 31, 1999, the Company announced that it had completed a
calculation of the adjusted exercise price of its Common Stock Purchase
Warrants. The adjusted exercise price of $3.143 reflects the cumulative effect
of adjustments to the original exercise price of $6.50 per share due to
issuances of common stock (and warrants, options and other securities
convertible into or exercisable for common stock) by the Company between date of
issuance of the Warrants and March 31, 1999. The adjustments also resulted in
an increase in the number of shares of the Company's common stock for which each
Common Stock Purchase Warrant may be exercised. Each of the 880,000 outstanding
warrants may now be exercised for approximately 2.068 shares of common stock, or
1,819,918 shares of common stock in the aggregate.
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)
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<PAGE> 19
10.1 Second Amended and Restated Stock Option Agreement,
effective as of June 30, 1998, between the Company
and Thomas E. Chaplin.
10.2 Investment Agreement, dated as of March 10, 1999
between ACTEL Integrated Communications, Inc. and
Murdock Communications Corporation.
10.3 Option Agreement, effective as of January 1, 1999,
among Ashton Communications Corporation,
Intercarrier Transport, Inc., AcNet S.A. de C.V.,
Julian Pascoe, Murdock Communications Corporation
and Incomex, Inc.
27 Financial Data Schedule
(1) Filed as an exhibit to the Company's Registration Statement on Form SB-2
(File No. 333-05422C) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's 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.
b) Reports on Form 8-K: The Company filed a Form 8-K on March 31, 1999,
reporting the following:
Item 5. That the Company had completed a calculation of the
adjusted exercise price of its Common Stock Purchase
Warrants. The adjusted exercise price of $3.143 reflects
the cumulative effect of adjustments to the original
exercise price of $6.50 per share due to issuances of
common stock (and warrants, options and other securities
convertible into or exercisable for common stock) by the
Company between date of issuance of the Warrants and March
31, 1999.
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<PAGE> 20
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: May 17, 1999 By /s/ Thomas E. Chaplin
--------------------------------
Thomas E. Chaplin
Chief Executive Officer
Date: May 17, 1999 By /s/ Paul C. Tunink
--------------------------------
Paul C. Tunink
Vice President and Chief
Financial Officer
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<PAGE> 1
EXHIBIT 10.1
MURDOCK COMMUNICATIONS CORPORATION
SECOND AMENDED AND RESTATED
STOCK OPTION AGREEMENT
THIS SECOND AMENDED AND RESTATED STOCK OPTION AGREEMENT, effective as
of June 30, 1998, is between THOMAS E. CHAPLIN ("Optionee") and MURDOCK
COMMUNICATIONS CORPORATION (the "Corporation").
RECITALS
A. The Company and Optionee desire to enter into this
Agreement to amend and restate the terms and conditions of the options
previously granted to Optionee on April 4, 1997 (the "Original Grant Date"), as
first amended and restated on April 3, 1998.
B. All capitalized terms in this Agreement shall have the
meaning assigned to them in the attached Appendix.
AGREEMENTS
NOW, THEREFORE, it is hereby agreed as follows:
1. Grant of Option. The Corporation hereby grants to
Optionee, on the terms and subject to the conditions provided in this Agreement,
a Non-Statutory Option to purchase all or any part of up to 400,000 shares of
the Corporation's Common Stock. The Option Shares shall be purchasable from time
to time during the option term specified in Paragraph 2 at the Exercise Price.
2. Option Term. This option shall have a term of ten (10)
years measured from the Original Grant Date and shall accordingly expire at the
close of business on the Expiration Date, unless sooner terminated in accordance
with Paragraph 5 or 6.
3. Limited Transferability. This option shall be neither
transferable nor assignable by Optionee other than by will or by the laws of
descent and distribution following Optionee's death and may be exercised, during
Optionee's lifetime, only by Optionee or in accordance with the terms of a
Qualified Domestic Relations Order. The assigned portion shall be exercisable
only by the person or persons who acquire a proprietary interest in the option
pursuant to such Qualified Domestic Relations Order. The terms applicable to the
assigned portion shall be the same as those in effect for this option
immediately prior to such assignment and shall be set forth in such documents
issued to the assignee as the Plan Administrator may deem appropriate.
<PAGE> 2
4. Exercisability/Vesting.
(a) The percentage of Option Shares that are available
for purchase upon exercise of the option granted hereby shall be in accordance
with the Vesting Schedule attached as Exhibit A. Such option shall remain so
exercisable until the Expiration Date or sooner termination of the option term
under Paragraphs 5 or 6. Any option for unvested Option Shares shall lapse and
be forfeited upon Optionee's cessation of Service prior to vesting of those
Option Shares.
(b) Optionee shall, in accordance with the Vesting
Schedule, vest in the Option Shares in installments over his period of Service.
Vesting in the Option Shares may be accelerated pursuant to the provisions of
Paragraph 6. In no event, however, shall any additional Option Shares vest
following Optionee's cessation of Service.
5. Cessation of Service. The option term specified in
Paragraph 2 shall terminate (and this option shall cease to be outstanding)
prior to the Expiration Date should any of the following provisions become
applicable:
(i) Should Optionee cease to remain in Service for any
reason (other than death or because of a termination for Cause) while this
option is outstanding, then, to the extent Optionee would have been entitled to
exercise this option immediately prior to cessation of Service, Optionee shall
have a period of three (3) months (commencing with the date of such cessation of
Service) during which to exercise the option for Option Shares vested as of the
cessation of Service, but in no event shall this option be exercisable at any
time after the Expiration Date.
(ii) Should Optionee die while this option is
outstanding, then the personal representative of Optionee's estate or the person
or persons to whom the option is transferred pursuant to Optionee's will or in
accordance with the laws of descent and distribution shall have the right to
exercise this option. Such right shall lapse and this option shall cease to be
outstanding upon the earlier of (A) the expiration of the twelve (12)-month
period measured from the date of Optionee's death or (B) the Expiration Date.
(iii) Should Optionee's Service be terminated for Cause,
then this option (including all vested and unvested portions) shall terminate
immediately and cease to remain outstanding.
(iv) During the limited post-Service exercise period,
this option may not be exercised in the aggregate for more than the number of
Option Shares in which Optionee is, at the time of Optionee's cessation of
Service, vested in accordance with the Vesting Schedule. Upon the expiration of
such limited exercise period or (if earlier) upon the Expiration Date, this
option shall terminate and cease to be outstanding for any vested Option Shares
for which the option has not been exercised. To the extent
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<PAGE> 3
Optionee is not vested in the Option Shares at the time of Optionee's cessation
of Service, this option shall immediately terminate and cease to be outstanding
with respect to those shares.
(v) In the event of a Corporate Transaction, the
provisions of Paragraph 6 shall govern the period for which this option is to
remain exercisable following Optionee's cessation of Service and shall supersede
any provisions to the contrary in this paragraph.
6. Special Termination of Option.
(a) All the Option Shares subject to this option at
the time of a Corporate Transaction, but not otherwise vested, shall
automatically vest so that this option shall, immediately prior to the effective
date of the Corporate Transaction, become exercisable for all of the Option
Shares and may be exercised for any or all of the Option Shares.
(b) Immediately following the Corporate Transaction,
this option shall terminate and cease
to be outstanding.
(c) This Agreement shall not in any way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
7. Adjustment in Option Shares. Should any change be made
to the Common Stock by reason of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration, appropriate adjustments shall be made to (i) the total
number and/or class of securities subject to this option and (ii) the Exercise
Price in order to reflect such change and thereby preclude a dilution or
enlargement of benefits hereunder.
8. Stockholder Rights. The holder of this option shall not
have any stockholder rights with respect to the Option Shares until such person
shall have exercised the option, paid the Exercise Price and become a holder of
record of the purchased shares.
9. Manner of Exercising Option.
(a) In order to exercise this option with respect to
all or any part of the Option Shares for which this option is at the time
exercisable, Optionee (or any other person or persons exercising the option)
must take the following actions:
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<PAGE> 4
(i) Pay the aggregate Exercise Price for the purchased
shares in cash or check made payable to the Corporation.
(ii) Furnish to the Corporation appropriate
documentation that the person or persons exercising the option (if other than
Optionee) have the right to exercise this option.
(iii) Execute and deliver to the Corporation such
written representations as may be requested by the Corporation in order for it
to comply with the applicable requirements of federal and state securities laws.
(iv) Make appropriate arrangements with the Corporation
for the satisfaction of all federal, state and local income and employment tax
withholding requirements applicable to the option exercise.
(v) Execute such other agreements as the Corporation
may reasonably deem appropriate.
(b) As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto.
(c) In no event may this option be exercised for any
fractional shares.
10. Compliance with Laws and Regulations.
(a) The exercise of this option and the issuance of
the Option Shares upon such exercise shall be subject to compliance by the
Corporation and Optionee with all applicable requirements of law relating
thereto and with all applicable regulations of any stock exchange (or the Nasdaq
National Market or Small Cap Market, if applicable) on which the Common Stock
may be listed for trading at the time of such exercise and issuance.
(b) The inability of the Corporation to obtain
approval from any regulatory body having authority deemed by the Corporation to
be necessary to the lawful issuance and sale of any Common Stock pursuant to
this option shall relieve the Corporation of any liability with respect to the
non-issuance or sale of the Common Stock, as to which such approval shall not
have been obtained. The Corporation, however, shall use its best efforts to
obtain all such approvals.
11. Successors and Assigns. Except to the extent otherwise
provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to
the benefit of, and
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<PAGE> 5
be binding upon, the Corporation and its successors and assigns and Optionee,
Optionee's assigns and the legal representatives, heirs and legatees of
Optionee's estate.
12. Notices. Any notice required to be given or delivered to
the Corporation under the terms of this Agreement shall be in writing and
addressed to the Corporation at its principal corporate offices. Any notice
required to be given or delivered to Optionee shall be in writing and addressed
to Optionee at the address indicated below Optionee's signature line below. All
notices shall be deemed effective upon personal delivery or upon deposit in the
U.S. mail, postage prepaid and properly addressed to the party to be notified.
13. Construction. This Agreement and the option evidenced
hereby are made and granted pursuant to the Plan and are in all respects limited
by and subject to the terms of the Plan. All decisions of the Plan Administrator
with respect to any question or issue arising under the Plan or this Agreement
shall be conclusive and binding on all persons having an interest in this
option.
MURDOCK COMMUNICATIONS CORPORATION
BY /s/ Guy O. Murdock
------------------------------------------
Guy O. Murdock, Chairman
/s/ Thomas E. Chaplin
--------------------------------------------
Thomas E. Chaplin
5
<PAGE> 6
APPENDIX
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Option Agreement.
B. Board shall mean the Corporation's Board of Directors.
C. Cause shall be determined by the Board and shall mean fraud,
dishonesty, acts of negligence in the course of employment with the Corporation,
misrepresentation to the shareholders or directors of the Corporation,
commission of a felony or a failure, other than by reason of death or
disability, to follow and/or perform a specific directive of the Board. The
foregoing definition shall not be deemed to be inclusive of all the acts or
omissions which the Corporation (or any Parent or Subsidiary) may consider as
grounds for the dismissal or discharge of Optionee or any other individual in
the Service of the Corporation (or any Parent or Subsidiary).
D. Code shall mean the Internal Revenue Code of 1986, as amended.
E. Common Stock shall mean the Corporation's common stock.
F. Corporate Transaction shall mean (i) either of the following
stockholder-approved transactions to which the Corporation is a party:
(a) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to such
transaction, or
(b) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets, and
(c) the sale of outstanding securities possessing more than
50% of the total combined voting power of the Corporation to a person or persons
different than the persons (or any combination thereof) holding those securities
immediately prior to such transaction.
G. Corporation shall mean Murdock Communications Corporation.
H. Domestic Relations Order shall mean any judgment, decree or order
(including approval of a property settlement agreement) which provides or
otherwise conveys, pursuant to applicable state domestic relations laws
(including community property laws), marital property rights to any spouse or
former spouse of the Optionee.
<PAGE> 7
I. Exercise Date shall mean the date on which the option shall have
been exercised in accordance with Paragraph 9 of the Agreement.
J. Exercise Price shall, except as otherwise indicated on Exhibit A,
mean $2.25 per share, the Fair Market Value of the Common Stock on April 3,
1998.
K. Expiration Date shall mean April 4, 2007.
L. Fair Market Value per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question, as the price is reported by
the National Association of Securities Dealers on the Nasdaq National Market or
any successor system. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange determined
by the Plan Administrator to be the primary market for the Common Stock, as such
price is officially quoted in the composite tape of transactions on such
exchange. If there is no closing selling price for the Common Stock on the date
in question, then the Fair Market Value shall be the closing selling price on
the last preceding date for which such quotation exists.
(iii) If the Common Stock is at the time neither listed on any
Stock Exchange nor traded on the Nasdaq National Market, then the Fair Market
Value shall be determined by the Plan Administrator after taking into account
such factors as the Plan Administrator shall deem appropriate.
M. 1934 Act shall mean the Securities Exchange Act of 1934, as
amended.
N. Non-Statutory Option shall mean an option not intended to satisfy
the requirements of Code Section 422.
O. Option Shares shall mean the number of shares of Common Stock
subject to the option as specified in Paragraph 1.
P. Optionee shall mean Thomas E. Chaplin.
Q. Original Grant Date shall mean April 4, 1997.
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<PAGE> 8
R. Plan Administrator shall mean either the Board or the Compensation
Committee of the Board.
S. Qualified Domestic Relations Order shall mean a Domestic Relations
Order which substantially complies with the requirements of Code Section 414(p).
The Plan Administrator shall have the sole discretion to determine whether a
Domestic Relations Order is a Qualified Domestic Relations Order.
T. Service shall mean Optionee's performance of services for the
Corporation (or any Parent or Subsidiary) in the capacity of an employee.
U. Stock Exchange shall mean the American Stock Exchange or the New
York Stock Exchange.
V. Vesting Schedule shall mean the vesting schedule attached as
Exhibit A, as such vesting schedule is subject to acceleration in the event of a
Corporate Transaction.
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<PAGE> 9
EXHIBIT A
Vesting Schedule
- ----------------
The percentage of Option Shares that are available for purchase upon
exercise of the option granted hereby shall be as follows:
- - 75,000 shares vest on April 4, 1997.
- - 50,000 shares vest on April 4, 1998.
- - 50,000 shares vest on April 4, 1999.
- - 75,000 shares vest upon achievement by the Corporation of
quarterly operating revenue, operating income and pre-tax earnings
(loss) targets set forth in a budget that has been approved by the
Board prior to the beginning of such quarter.
- - 75,000 shares vest upon the completion of the Corporation's first
profitable fiscal quarter, excluding, for the purposes of such
calculation, extraordinary income and gains. THE EXERCISE PRICE
FOR THE PORTION OF THE OPTION RELATING TO THESE 75,000 SHARES
SHALL BE $2.9375 PER SHARE, THE FAIR MARKET VALUE OF THE COMMON
STOCK ON THE DATE SUCH OPTION SHARES VESTED.
- - 75,000 shares vest on December 31, 1998. THE EXERCISE PRICE FOR
THE PORTION OF THE OPTION RELATING TO THESE 75,000 SHARES SHALL BE
$3.50 PER SHARE.
<PAGE> 1
EXHIBIT 10.2
INVESTMENT AGREEMENT
$3,500,000 OF CONVERTIBLE PREFERRED STOCK
THIS INVESTMENT AGREEMENT, dated as of March 10, 1999, is by
and between ACTEL INTEGRATED COMMUNICATIONS, INC. (the "Company") and MURDOCK
COMMUNICATIONS CORPORATION (the "Investor").
1. Purchase and Sale of Securities. Subject to the terms,
covenants and conditions of this Agreement, the Company will issue and sell, and
the Investor shall buy, shares of the Company's Series A Convertible Preferred
Stock (the "Shares").
1.1 Consideration. The consideration to be paid by the
Investor for the Shares to be issued to and purchased by it is $1.00 per Share
("Share Price"). The Investor has already advanced $1,078,069.32 to the Company
to be applied to the purchase of 1,078,069.32 Shares to be issued, at the
Closing, to the Investor.
1.2 Requests for Funds. Upon any and all requests by the
President or the Board of Directors of the Company, the Investor will advance to
the Company additional funds up to an aggregate of $3,500,000, including funds
previously advanced, to be applied to the purchase of Shares at the Share Price
("Requests for Funds"). If the Investor fails to comply with any Request for
Funds within fourteen (14) days of such Request for Funds, (a) the Board of
Directors may elect not to sell the Investor any additional Shares, and may
issue all remaining Shares to raise capital from other sources, (b) Investor
shall be entitled to select only one member to the Board of Directors. The
Shares shall have the rights and preferences set forth in the Statement of Terms
attached hereto as Exhibit B to this Agreement (the "Statement of Terms"), which
is incorporated herein by reference.
1.3 Option. The President or the Board of Directors of the
Company may request funding in excess of $3,500,000 from Investor ("Additional
Requests for Funds"), and if Investor satisfies all such requests within
fourteen (14) days of each request, then upon the earliest of the following
events, the Company shall grant Investor at no additional cost or expense an
option ("Option") to acquire 3,900,000 shares of common stock ("Option Shares"):
(a) all shares of common stock of the Company are listed on a national
securities exchange, or (b) all of the common stock or substantially all of the
assets of the Company are acquired, assigned, or transferred to or exchanged for
the publicly traded stock of a third party. The date on which the Company is
required to grant the Option to Investor pursuant to this Paragraph 1.3 shall be
referred to herein as the "Option Date."
<PAGE> 2
1.3.1 Notice. The Company shall deliver to Investor forty-five
(45) days prior written notice of its intent to cause either of the events
described above in (a) and (b), with the Option in writing conditioned on the
occurrence of either such event and effective on the Option Date.
1.3.2 Exercise and Reservation of Shares. Investor may
exercise its option at any time on or after the Option Date. So long as Investor
timely complies with all Additional Requests for Funds before the Option Date,
the Company shall not issue or affect in any manner whatsoever the shares of
common stock necessary to permit Investor to exercise its Option and acquire the
Option Shares. However, if Investor elects to not satisfy any Additional Request
for Funds, the Company may issue all authorized but unissued shares of common
stock to any parties pursuant to terms and conditions it deems appropriate.
1.3.3 Reduction of Option Shares. If Investor elects to
satisfy any but not all Additional Requests for Funds before either of the
events described in 1.3(a) and (b) above, the Company shall grant Investor an
Option pursuant to the terms set forth in Sections 1.3. and 1.3.1, except that
the number of Option Shares shall be reduced from 3,900,000 to the number of
shares of common stock that are unissued and not committed for other purposes on
the Option Date.
2. The Closing. Subject to the conditions hereof, the
transactions described herein will be closed (the "Closing") at 9:00 A.M. at the
offices of the Company and/or at such other place as all the parties hereto may
agree on March 10, 1999 (the "Closing Date").
3. Conditions to Closing. All of the obligations of the
Investor to purchase the Shares are subject to the accuracy on the Closing Date
of all the representations and warranties by the Company contained herein, and
to the performance by the Company of all the terms, covenants and conditions on
its part to be performed hereunder on or prior to the Closing Date, and to the
satisfaction of the following additional conditions precedent:
3.1 Opinion of Counsel. The Investor shall have received
from counsel for the Company, a favorable opinion, dated the date hereof,
addressed to the Investor, confirming the Company's due organization, the
authorization and enforceability of this Investment Agreement and the valid
issuance of the Shares.
3.2 Charter Documents. The Investor shall have received a
copy of the Articles of Incorporation of the Company, as amended to incorporate
the Statement of Terms, certified by the Secretary of the Company. The Investor
shall also have received a copy of the Company's By-Laws.
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3.3 Corporate Resolutions. A copy of the resolutions
adopted by the Company's Board of Directors and shareholders (if necessary),
certified by the Secretary of the Company, authorizing and approving (a) the
execution, performance and delivery of this Investment Agreement, (b) the
issuance of the Shares, and (c) the other transactions contemplated hereby,
shall have been delivered to the Investor.
3.4 Proceedings and Documents. All proceedings taken or
to be taken in connection with the transactions contemplated by this Investment
Agreement to be consummated at, or prior to, the execution and Closing hereof
and all other documents, schedules, exhibits, opinions and certificates in
connection therewith shall each be satisfactory in form and substance to the
Investor, and the Investor shall have received copies of all such documents and
all other documents which the Investor has requested in connection with said
transactions and of all corporate proceedings in connection therewith, in form
and substance satisfactory to the Investor.
3.5 Board Agreement. The Company and the Investor shall
have entered into the Support, Voting, and Board Composition Agreement attached
hereto as Exhibit A.
4. Representations and Warranties. In order to induce the
Investor to purchase the Shares, the Company makes the following representations
and warranties as of the Closing Date :
4.1 Existence and Rights. The Company is a corporation
duly organized and validly existing under the laws of the State of Alabama. The
Company has delivered to the Investor a true, complete and correct copy of the
Articles of Incorporation and By-Laws, including all amendments thereto, in
effect or to be in effect as of the Closing. The Company has all corporate power
and authority to own and operate its assets and carry on its business. The
Company has the corporate power and adequate authority to enter into and perform
this Investment Agreement and to issue the Securities to be issued hereunder.
4.2 Agreement Authorized. The execution and delivery of
this Investment Agreement and the other agreements referred to herein and the
performance by the Company of each of their respective terms, covenants and
agreements are not in contravention of, or in conflict with, any law, ordinance,
regulation, governmental license, approval or tariff known to the Company or any
order or decision of any court, any term or provision of the Company's Articles
of Incorporation or By-Laws, or the terms of any agreement, restriction or
undertaking to which the Company is a party or by which it is bound. The
execution and performance of this Investment Agreement by the Company are
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duly authorized. All action on the part of the Company, and all necessary or
appropriate approvals and consents for the due execution, delivery and
performance of this Investment Agreement, including the creation, issuance and
sale of the Shares, have been duly and validly obtained or taken. This
Investment Agreement constitutes, and on the Closing Date will constitute, the
valid and binding obligation of the Company enforceable against the Company in
accordance with its terms, except as enforcement may be limited by bankruptcy,
insolvency, moratorium and similar laws of general application affecting
creditors' rights, and except as enforcement may be limited by general equitable
principles.
4.3 Capitalization.
(a) Following issuance to the Investor of the Shares,
and immediately after the Closing: (i) the entire authorized capital stock of
the Company will consist of 10,000,000 shares of common stock of a par value of
$ per share (the "Common Stock") and 3,500,000 shares of Series A Convertible
Preferred Stock of a par value of $1.00 per share (the "Series A Preferred");
and (ii) the Company's issued and outstanding capital stock will consist of
1,000,000 shares of Common Stock and 1,078,069.32 shares of Series A Preferred.
Except for certain stock appreciation rights to be approved by the Company's
Board of Directors, the Company does not have, and on the Closing Date will not
have, any outstanding subscriptions, options, warrants or other rights for the
issuance or purchase of any stock or other securities, nor any securities
convertible or exchangeable for any of its stock or other securities, or any
understandings or commitments of any kind for the issuance of stock or
securities convertible into stock or other securities, and the Company is under
no contractual obligation to register under the Securities Act of 1933 any of
its presently outstanding securities or any of its securities that may
subsequently be issued. Assuming the payment by the Investor of the
consideration for the Shares, the Shares will be, when issued, duly and validly
issued, fully paid and nonassessable.
4.4 Subsidiaries, Other Investments. The Company has no
subsidiaries, or any investment in any other business or corporation. For the
purpose of this Agreement the term "Subsidiary" or "Subsidiaries" means any
corporation or other entity of which the securities having a majority of the
voting power in electing the Board of Directors are owned by the Company either
directly or by another subsidiary.
4.5 Litigation. To the knowledge of Company, there is no
litigation or other proceeding (including any government proceedings or
investigation) pending or, to the knowledge of the Company, threatened against
or affecting, the Company, or the assets of the Company, or which questions the
validity of this Agreement or of any action taken or to be taken pursuant to or
in connection with the provisions of this Agreement. Without limiting the
generality
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of the foregoing, to the knowledge of the Company, there is no pending or
threatened action, proceeding or investigation involving the prior employment or
consultancy of any of the Company's employees or consultants or their use of any
information or techniques alleged to be proprietary to any other person or
business. To the knowledge of the Company there is no basis for any of the
foregoing. Notwithstanding the foregoing, Investor acknowledges that the Company
has and will have from time to time transactional and adjudicatory matters
pending before state public service commissions and other regulatory bodies,
including without limitation, applications for certificates of authority and
requests for letters of nonopposition. Further, Investor is aware and has
possession of correspondence dated February 5, 1999 from ALLTEL Corporation and
a complaint filed by Alltel in the United States District Court for the Southern
District of Alabama demanding that the Company cease and desist its use of the
name "Actel."
4.6 Indebtedness. The Company has no outstanding
Indebtedness (as defined herein), except for liabilities reflected on the
balance sheet and accounts payable journals delivered to the Investor prior to
Closing. "Indebtedness" means all obligations which, in accordance with
generally accepted accounting principles, are normally classified upon a balance
sheet as liabilities, but excludes any and all indebtedness incurred in the
ordinary course of business between the date of the Balance Sheet and the
Closing.
4.7 Compliance with Laws, Instruments, Etc. To the
Company's knowledge, the Company is not in violation in any material respect of
its Articles of Incorporation or By-Laws, as amended, or, any applicable law,
statute or regulation of any federal, state, municipal or other governmental or
quasi-governmental agency, board, bureau or body relating to the conduct of its
business or maintenance, operation or use of the assets of the Company. To the
Company's knowledge, the Company is not in violation or default in any material
respect with respect to any order, license, regulation or demand of any court or
governmental agency, or in default in any material respect under any indenture,
mortgage, lease, agreement or other instrument under which it is bound. The
Company has complied with and performed each and every material obligation
required to be complied with and performed pursuant to each contract, lease,
license, mortgage, indenture, instrument and other agreement to which it is
bound or obligated, and there is no material default by the Company, and to its
knowledge, by any other party thereto, under any such contract, lease, license,
mortgage, indenture, instrument or other agreement now existing, or which would
come into existence with the passage of time, the giving of notice, or both.
4.8 Securities Laws. The sale and delivery of the Shares
(based upon the Investor's representations in section 8), are exempt from the
requirement of registration under the Securities Act of 1933, as amended
("Securities Act") and applicable state "Blue Sky" laws.
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4.9 Brokers. The Company has not incurred any liability
for any finders' fees, brokerage fees or similar fees or expenses in connection
with entering into this transaction with the Investor.
4.10 Related Transactions. Except for matters disclosed
on Schedule 4.10 and compensation to current employees, and disregarding any
relationship with the Investor or any subsidiary of the Investor, no current or
former officer or managerial employee of the Company (or any person actually or
constructively related to such director, officer, managerial employee or
shareholder within the meaning of section 267(a) of the Internal Revenue Code),
is presently:
(a) A party to any material transaction with the
Company (including, but not limited to, any contract, agreement or other
arrangement providing for the furnishing of services by, or rental of real or
personal property from, or otherwise requiring payments to, any such officer or
employee or such associate);
(b) The direct or indirect owner of any interest of
greater than one (1%) percent in any corporation, firm, association or business
organization which is a competitor or a potential competitor or supplier of the
Company; or
(c) The recipient of income from any source other
than the Company which should properly accrue to the Company.
4.11 Employee Matters. To the Company's knowledge, no
officer or employee of the Company has entered into any agreement which is now
in effect with any person, corporation, partnership or business organization
other than the Company requiring such person to assign any interest in any
invention or trade secrets or to keep confidential any trade secrets or other
proprietary information or containing any prohibition or restriction on
competition or solicitation of customers.
4.12 Bank Accounts. Schedule 4.12 hereto contains a true,
complete and correct list of each bank or other depository account or safe
deposit box maintained by the Company, including the name of the bank or other
depository and the names and titles of all persons authorized to draw thereon or
having access thereto.
4.13 Disclosure. To the Company's knowledge, neither this
Agreement nor any of the schedules, attachments, written statements, documents,
certificates or other items required hereby contain any untrue statement of a
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material fact or omit a material fact necessary to make each such statement
contained herein or therein not misleading.
5. Affirmative Covenants. From and after the Closing Date and
so long as the Investor owns any of the Shares or at least fifty-one (51%)
percent of the outstanding Common Stock or the Company is indebted to the
Investor, the Company shall comply with each of the following actions:
5.1 Payment of Dividends. The Company shall duly make all
dividend payments on the Shares, as the same become due and payable, in
accordance with the Statement of Terms, and shall otherwise comply with the
Statement of Terms.
5.2 Taxes. The Company shall accurately prepare all tax
returns required by law to be filed on behalf of the Company. The Company
promptly shall pay and discharge all taxes, assessments and governmental charges
or levies imposed by applicable law upon it or upon its income or profit, or
upon its properties, real, personal or mixed.
5.3 Maintain Corporate Rights and Facilities. The Company
shall maintain and preserve its corporate existence and shall use its best
efforts to acquire, maintain and preserve all its rights, franchises and
qualifications adequate for the conduct of its business and the ownership of its
properties.
5.4 Insurance. The Company shall maintain insurance
against all such liabilities, hazards and risks (including without limitation
product liability claims), and in at least such amounts (in the case of property
casualty insurance at least replacement cost), as are usually carried by persons
engaged in the same or a similar business. All such insurance shall be effected
under valid and enforceable policies issued by insurers of recognized
responsibility, except that the Company may effect worker's compensation or
similar insurance in respect of operations in any state or other jurisdiction
through an insurance fund operated by such state or other jurisdiction.
5.5 Financial Reports. The Company shall provide the
Investor with monthly and annual financial statements. All such financial
statements will be prepared according to GAAP.
5.6 Budget. On or before 30 days prior to the end of each
fiscal year commencing with the fiscal year ending December 31, 1999, the
Company shall furnish to the Investor a business plan for the Company (including
an operating and capital budget) for each of the next two succeeding fiscal
years and projections of (i) the balance sheet of the Company at the end of each
such fiscal year, (ii) statements of income and expense and of shareholders'
equity of
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the Company for each of such fiscal years, (iii) statements of cash flow of the
Company for each such fiscal year, and (iv) a budget of capital expenditures to
be incurred by the Company for each such fiscal year. The Company shall,
promptly upon any material revision of the foregoing, provide such revisions to
the Investor. The business plan referred to above shall include management's
intentions with regard to anticipated significant business developments or
objectives of the Company.
5.7 Books and Records; Inspection. The Company shall keep
proper, complete and accurate books of record and account. The Investor upon
reasonable notice and during regular business hours shall have the right to
visit and inspect any of the properties, books and records of the Company (and
to make copies and take extracts therefrom), to discuss the Company's affairs,
finances and accounts with, and be advised of the same by, its directors,
officers, employees, consultants, legal counsel and independent accountants.
5.8 Maintain Properties. The Company shall keep its
properties in good repair, working order and condition, ordinary wear and tear
excepted, and from time to time make all prudent, needful or proper repairs,
replacements, extensions, additional betterments and improvements thereto, so
that the business carried on by the Company may be efficiently conducted at all
times in accordance with sound business management.
5.9 Compliance with Instruments, Laws, Etc. The Company
shall comply in all material respects with the terms, requirements, restrictions
and limitations of any applicable law, statute or regulation of any federal,
state, municipal or other governmental or quasi-governmental agency, board,
bureau or body materially relating to the conduct of its business and
maintenance and operation of its respective properties and shall further comply
with and perform the terms, conditions and covenants contained in any contract,
lease, license, mortgage, indenture, instrument or other agreement under which
the Company is obligated.
5.10 Notices. Upon the Company's obtaining knowledge of
any of the following, promptly notify in writing the Investor of the same and
what action the Company proposes to take, and shall thereafter keep the Investor
fully informed, with respect thereto:
(a) Any material breach of or default by the Company
in the fulfillment of any of the terms, covenants or conditions of this
Agreement or any loan agreement or material contract or governmental license,
permit or tariff by which it is bound or to which it is a party, or the
existence or occurrence of any condition, event, act or omission which, with the
giving of notice or the passage of time or both, would constitute an Event of
Default under
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this Agreement (as defined in section 7) or under any loan agreement or material
contract, or governmental license, permit or tariff by which it is bound or to
which it is a party.
(b) Any material litigation, investigation,
administrative proceeding or determination, fine, penalty or other materially
important dispute to which the Company is a party or by which it is affected.
(c) Any material change or modification in existing
contracts, agreements or commitments to which the Company is a party or is
bound.
(d ) Any inquiry, offer or proposal of whatever kind
(whether written or oral) which it receives from any person concerning the
possible sale, merger or other acquisition of the Company, or any portion
thereof, and which it deems to be bona fide. Promptly after the Company becomes
aware of any such offer or proposal made to any of its shareholders, it shall
advise the Investor of the same.
5.11 Board of Directors. The Company's Board of Directors
shall initially consist of four members, and meetings shall be held at least
monthly. Prior to September 30, 1999 providing Investor has complied with all
Requests for Funds, and thereafter providing that the Investor has purchased
3,500,000 shares of Series A Convertible Preferred Stock, the Board of Directors
shall be constituted in accordance with Exhibit A attached hereto and made a
part hereof. The By-Laws of the Company shall contain a provision for
indemnification of directors, to the extent permitted by applicable law and as
otherwise satisfactory to the Board of Directors . The Investor's
representatives shall be entitled to whatever director's fee and other
remunerations as are paid by the Company to outside directors and shall be
reimbursed promptly for all reasonable out-of-pocket expenses incurred in
connection with such representatives' service to the Company. The Company shall
furnish the Investor, at least 48 hours in advance, with copies of the agenda
for each Board of Directors and shareholders' meeting and shall furnish copies
of the minutes of all Board of Directors and shareholders' meetings within 7
days after such meeting. The Investor's nominees shall be entitled to submit
agenda items to meetings of the Board of Directors and any committees thereof,
and the Investor's nominees shall be entitled to be members of any committees of
the Board of Directors that are established.
6. Negative Covenants. From and after the Closing Date and so
long as the Investor holds any of the Shares or at least fifty-one ( 51%)
percent of the outstanding Common Stock or the Company is indebted to the
Investor, the Company will not do or take any of the following actions without
the consent of
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the Investor or the prior consent of a majority of the Company's Board of
Directors:
6.1 Stock Redemption. Purchase or otherwise acquire,
redeem or retire any Common Stock or preferred stock or other securities of the
Company, excluding (a) the purchase, pursuant to a buy/sell agreement approved
by the Board of Directors of the shares of Common Stock held by the current
shareholders of the company and (b) any rights granted pursuant to any employee
benefit plan approved by a majority of the Board of Directors, or agree or
commit to do any of the foregoing.
6.2 Investments, Loans and Advances. Make or have
outstanding any loans or advances to, or investments in (through the acquisition
of securities or stock or otherwise), any other person, firm, or corporation,
except:
(a) Advances in the ordinary course of business to
suppliers in respect to the purchase of supplies or equipment;
(b) By endorsement of negotiable instruments for
deposit or collection in the ordinary course of business;
(c) Investments in obligations of the United States
Government or deposits in or certificates of deposit issued by financial
institutions;
(d) Travel and other advances to employees in the
ordinary course of business; or
(e) Investments in commercial paper and/or money
market funds.
6.3 Acquisition or Sale of Business; Merger or
Consolidation. Purchase or otherwise acquire the stock, shares, or other
securities, or the assets or business, of any person or other entity; or
liquidate, dissolve, merge, consolidate, reorganize, recapitalize or otherwise
alter its legal status or commence any proceedings therefor; or sell, lease,
transfer, or dispose of, in any way, any personal or real property assets,
except assets sold or leased in the ordinary and normal course of business; or
assign or transfer any substantial part of its intangible business rights
necessary for the continuance of its business as now conducted or planned.
6.4 Change Capital Structure. Increase or decrease the
number of its authorized shares, or vary or alter the terms, par value or rights
of shares of any class or type of stock, or issue or agree to issue any stock or
other securities of the Company, or any options, warrants or other rights to
acquire such
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Common Stock or other equity securities, or securities convertible into Common
Stock or other equity securities of the Company or create any new class of stock
of the Company.
6.5 Officers' Salaries and Loans. Compensation for each
officer and managerial employee of the Company shall not exceed the amounts
established from time to time by the Board of Directors. The term
"compensation", for purposes of this section, shall include all remuneration for
services rendered, whether such payment be called salary, bonus, drawing
account, profit sharing, withdrawals or other form of recompense (but shall not
include fringe benefits, such as health and life insurance generally available
to all salaried employees). No loans or advances, either direct or indirect,
will be made by the Company to any officer, consultant, managerial employee,
director or shareholder, or to any person actually or constructively related to
any of the foregoing within the meaning of section 267(a) of the Internal
Revenue Code; provided, however, that the Company may make reasonable advances
to employees for documented, reimbursable travel and entertainment expenses to
be incurred with respect to business of the Company.
6.6 Amend, Violate Charter, Etc. Amend or change its
Articles of Incorporation or By-Laws, or violate or breach any of the provisions
thereof.
6.7 Dealings with Insiders. Allow or permit any director,
officer, managerial employee, consultant or shareholder (other than the
Investor), or persons actually or constructively related to such director,
officer, employee, consultant or shareholder (within the meaning of section
267(c) of the Internal Revenue Code) to have either directly or indirectly an
interest in any corporation, partnership, proprietorship, association or other
person or entity which furnishes, rents or sells services or products to the
Company or to which the Company furnishes, rents or sells services or products.
For the purposes of this section, there shall be disregarded any relationship
with the Investor, or any subsidiary of the Investor, or any interest which
arises solely from the ownership of less than a 1% equity interest in any
corporation whose stock is regularly traded on any national securities exchange
or quoted on the National Association of Securities Dealers Automated Quotation
System and in which such person has no other role.
6.8 Dividends. Declare or pay any dividends, or make
other distributions, in cash, property or stock, with respect to the Common
Stock.
6.9 Pension and Profit Sharing Plan or Arrangements.
Establish or make any contribution to any employee pension benefit plan, or
other pension or profit sharing plan or arrangement, whereby any part of the
profits or earnings of the Company is shared with any person, firm or
corporation.
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6.10 Permitted Indebtedness. Create, incur, assume or
suffer to exist any new indebtedness, liability, guaranty or indemnity of any
kind, whether accrued, absolute, contingent or otherwise, except: (a) borrowings
from financial institutions, not in excess of $100,000; (b) current trade
payables and expenses incurred in the ordinary course of business; (c) wages or
other compensation due to employees and agents of the Company for services
actually performed; (d) liabilities for customer deposits in reasonable amounts
obtained in the ordinary course of business; (e) liabilities for taxes not yet
due; and (f) purchase money indebtedness for capital expenditures allowed by
section 6.12, provided any security therefor complies with section 6.11(d).
6.11 Liens. Create or suffer to exist, any claim,
assessment, pledge, security interest, mortgage, encumbrance or other lien in
favor of any person, including the lien of a conditional seller, upon any of its
properties or assets, now owned or hereafter acquired, including treasury
shares; provided, however, that this restriction shall not be applicable to nor
prevent the following:
(a) Liens for taxes, assessments or governmental
charges not delinquent or being contested in good faith; undetermined liens and
charges incident to construction and not resulting from any delinquent
obligation for the payment of money on account of such construction; the
lessor's rights in leasehold property, and easements, restrictions, minor title
irregularities and similar matters which have no adverse effect as a practical
matter upon the ownership and use of the properties;
(b) Liens or deposits in connection with indebtedness
not in violation of section 6.10 above, workmen's compensation or other
insurance or to secure customs duties, public or statutory obligations or
mechanics or materialmen's claims not delinquent; or to secure performance of
contracts or bids (other than contracts for the payment of money borrowed), or
deposits required by law or governmental regulations or by a court order,
decree, judgment or rule as a condition to the transaction of business or the
exercise of any right, privilege or license or other liens of a like nature made
in the ordinary course of business;
(c) Liens in favor of the Investor; and
(d) Purchase money mortgages or liens on any property
acquired after the date hereof to be used by the Company in the normal course of
its business and created or incurred simultaneously with the acquisition of such
property, if such mortgage or lien is limited to the property so acquired and
the indebtedness secured by such mortgage or lien does not exceed 80% of the
purchase price of such property.
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6.12 Capital Expenditures. Make or incur any
expenditures, indebtedness, or lease obligations for fixed assets in excess of
$250,000 in the aggregate within any 12-month period.
6.13 Changes in Management or Business. Make any change
in the officers of the Company or make any significant change in the nature of
the Business. The Company will not enter into any agreements which would
restrict the Company's right or ability to perform under this Agreement or its
Articles of Incorporation or By-Laws.
6.14 Changes in Accounting Period or Methods. Change the
Company's fiscal year from the year ending December 31 or change any accounting
method employed in the preparation of its financial statements.
7. Events of Default and Remedies.
7.1 Events of Default. So long as any of the Shares are
still owned by the Investor, any one or more of the following shall constitute
an "Event of Default" as the term is used herein, provided the Company has not
cured such Event of Default within ten (10) days of written notice of same:
(a) Default in the payment on the required due date
of dividends declared on the Shares pursuant to section 2(b) of the Statement of
Terms;
(b) Default shall occur under the provision of any
indenture, loan agreement or other instrument under which any evidence of
indebtedness of the Company has been or may be issued;
(c) Default shall occur in the observance or
performance by the Company of any term, covenant or other provision of this
Investment Agreement, or any other agreement executed in connection herewith
which is not remedied to the Investor's satisfaction within 15 days after
written notice thereof to the Company;
(d) If any representation or warranty made by the
Company herein, or made by the Company in any exhibit, statement or certificate
attached to this Investment Agreement or furnished to the Investor in connection
with this Investment Agreement, proves untrue in any material respect on the
date as of which made or as of which the same is to be effective;
(e) The Company becomes bankrupt, or makes an
assignment for the benefit of creditors, or applies for or consents to the
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appointment of a trustee or receiver or for the major part of its properties.
Notwithstanding anything to the contrary in this Paragraph 7, the Company shall
not have any opportunity to cure any default occuring in this Sub-Paragraph
7.1(e);
(f) A trustee or receiver is appointed for the
Company or for a material part of its properties and the order of such
appointment is not discharged, vacated or stayed within 60 days after such
appointment;
(g) Any judgment, writ or warrant of attachment or of
any similar post-judgment process in an amount in excess of $25,000 shall be
entered or filed against the Company or against any of its properties or assets
and remains unpaid, unvacated, unbonded or unstayed for a period of 30 days; or
(h) Bankruptcy, reorganization, arrangement,
insolvency, or liquidation proceedings, or other proceedings for relief under
any bankruptcy or similar law or laws for the relief of debtors, are instituted
by or against the Company and, if so instituted, are consented to by the
Company, or, if contested, are not dismissed by the adverse parties or by an
order, decree or judgment within 60 days after such institution. Notwithstanding
anything to the contrary in this Paragraph 7, the Company shall not have any
opportunity to cure any default occuring in this Sub-Paragraph 7.1(h).
7.2 Notice to Holder. When any condition, event or act
described in section 7.1 has occurred or exists, the Company agrees to give
notice thereof to the Investor within three business days of knowledge of such
condition, event or act.
7.3 Put. When any Event of Default described in section
7.1 has occurred and for so long as such Event of Default is continuing, the
Investor may at its option and without notice, put the Shares to the Company and
require the Company to immediately pay in cash therefor $1.00 per share plus any
accrued and unpaid dividends thereon.
7.4 Expenses; Audit. The Company agrees to pay to the
Investor all reasonable costs and expenses incurred by them (including
reasonable attorneys' fees) in connection with the enforcement or amendment of
any provisions of this Investment Agreement. In addition, when an Event of
Default has occurred, the Investors shall be entitled to retain, at the
Company's expense, an independent certified public accountant, chosen by the
Investors, to conduct an audit of the Company's financial statements.
7.5 Remedies Cumulative. The remedies provided in this
section 7 are in addition to, and not in limitation of, any other rights and
remedies
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the Investor may have upon an Event of Default. The Investor may exercise any or
all of the remedies provided by this section 7.
8. Representations and Warranties of Investor. The Investor
represents and warrants to the Company:
8.1 Capacity. The Investor has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of and to protect its own interest in connection with the
acquisition of the Shares.
8.2 Accredited Investor. The Investor is an "accredited
investor" as defined in Regulation D promulgated under the Securities Act.
8.3 Restricted Securities. The Investor acknowledges and
is aware the Shares will be issued pursuant to applicable exemptions from
registration under the securities laws of the United States and certain states
in which the Shares may be offered and sold, and the regulations promulgated
thereunder and the Shares have not been registered under the Securities Act in
reliance upon the exemption from registration provided by sections 3(b) and 4(2)
thereof and Regulation D promulgated thereunder, and, in connection therewith,
the Investor covenants and agrees that it will not offer, sell or otherwise
transfer the Shares unless and until the Shares are registered pursuant to the
Securities Act and the laws of all jurisdictions, which in the opinion of the
Company may be applicable, or unless the Shares are otherwise exempt from
registration thereunder. Investor further acknowledges that it has committed no
act that could cause the sale and delivery of the Shares to not be exempt from
the requirement of registration under the Securities Act of 1933, as amended
("Securities Act") and applicable state "Blue Sky" laws.
8.4 Investment Purpose. The Investor is making this
investment for its own account and not for the account of others and not with a
view to the distribution of Shares, and has no present intention of reselling or
dividing any Shares so acquired.
8.5 Existence and Rights. The Investor is a corporation
duly organized and validly existing under the laws of the State of Iowa. The
Investor has the corporate power and corporate authority to enter into and
perform this Investment Agreement.
8.6 Agreement Authorized. The execution and delivery of
this Investment Agreement and the other agreements referred to herein and the
performance by the Investor of each of the respective terms, covenants and
agreements are not in contravention of, or in conflict with, any law, ordinance,
15
<PAGE> 16
regulation, governmental license, approval or tariff known to the Investor or
any known order or decision of any court, any term or provision of the
Investor's Articles of Incorporation or By-Laws, or the terms of any agreement,
restriction or undertaking to which the Investor is a party or by which it is
bound. All action on the part of the Investor, and all necessary or appropriate
approvals and consents for the due execution, delivery and performance of this
Investment Agreement, including the ability to provide the funding required
hereby have been duly and validly obtained or taken. This Investment Agreement
constitutes, and on the Closing Date will constitute, the valid and binding
obligation of the Investor enforceable against the Investor in accordance with
its terms, except as enforcement may be limited by bankruptcy, insolvency,
moratorium and similar laws of general application affecting creditors' rights,
and except as enforcement may be limited by general equitable principles.
8.7 Proceedings and Documents Satisfactory. By executing
this Investment Agreement, the Investor warrants that all proceedings taken in
connection with this Investment Agreement have been acceptable and that all
documents and other information desired or requested by the Investor have been
provided and were and are, in form and substance, satisfactory to the Investor.
8.8 Risks. Investor is aware of all material risks
associated with investments in start-up companies generally and start-up
telecommunications companies specifically, including without limitation
companies engaging in the competitive local exchange, long distance, and
internet markets of the Southeast United States of America. Except as
specifically set forth in this Agreement, Investor does not rely on any
statement or omission by any officer, agent, employee of the Company in
evaluating whether to invest in the Company.
8.9 Business Plan. Investor has reviewed and consents to
the Company's strategy, goals, and methods of execution of same as set forth in
the Company's current business plan ("Business Plan"). Investor does not rely on
any and understands that there has not and cannot be any representations,
warranties or assurances by the Company that the goals, projections, plans,
milestones, revenues, and intentions set forth in the Business Plan will be met,
achieved, successful, reached, received or realized in any manner or degree
whatsoever. The Company shall, however, use its best efforts to meet the goals
set forth in the Business Plan.
9. Transfer of Securities.
9.1 Transferability. Transfer of the Shares shall be made
only on the books of the Company, respectively, by the holder of record thereof
or by their legal representatives who shall furnish proper evidence of authority
to transfer, or by their attorney thereunto authorized by power of attorney duly
16
<PAGE> 17
executed and filed with the secretary of the Company. The holder in whose name
the Shares stands on the books of the Company shall be deemed by the Company to
be owner thereof for all purposes.
9.2 Restrictive Legends. Unless and until otherwise
permitted by this section, each instrument evidencing Shares issued or to be
issued under this Agreement shall contain or otherwise be imprinted with a
suitable legend in substantially the following form:
"This security has not been registered under the Securities
Act of 1933 or any state securities act, and has been acquired for investment
and not with view to, or for sale in connection with, any distribution thereof
within the meaning of the Securities Act of 1933, as amended. Also, this
security may be transferred only pursuant to an Investment Agreement dated as of
March 3, 1999 (the "Investment Agreement"). Notwithstanding any other provisions
contained herein, no transfer of this security shall be made unless the
conditions specified in section 9 of said Investment Agreement have been
fulfilled. A copy of the Investment Agreement is on file and available for
inspection at the principal offices of the Company."
10. Additional Provisions.
10.1 Survival of Representations and Warranties. 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
transactions contemplated hereby for one year from the Closing.
10.2 Successors and Assigns. This Investment Agreement
shall be binding upon and inure to the benefit of the Investor and the Company
and their respective successors and assigns.
10.3 Notices. All notices, demands, and communications
provided for herein or made hereunder shall be hand-delivered, or sent by a
nationally recognized overnight courier, prepaid, addressed in each case as
follows, until some other address shall have been designated in a written notice
given in like manner, and shall be deemed to have been given or made when so
delivered or sent:
(a) if to the Company:
AcTel Integrated Communications, Inc.
1509 Government Street
Suite 300
17
<PAGE> 18
Mobile, AL 36604
(b) if to Investor:
Murdock Communications Corporation
1112 29th Avenue, S.W.
Cedar Rapids, IA 52404
10.4 No Waiver, Remedies Cumulative. No delay on the part
of the Investor in exercising any right, power or privilege under this
Investment Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege hereunder or thereunder
preclude other or further exercise thereof, or the exercise of any other right,
power or privilege. The rights and remedies provided in this Investment
Agreement are cumulative and are in addition to all rights or remedies which the
Investor and such other holders otherwise may have in law or in equity or by
statute or otherwise.
10.5 Amendments and Waivers. This Investment Agreement
may not be changed or amended orally, and no waiver hereunder may be oral, but
any change or amendment hereto or any waiver hereunder must be in writing and
signed by the party or parties against whom such change, amendment or waiver is
sought to be enforced.
10.6 Integration. This Investment Agreement, the
appendices and exhibits annexed hereto and documents, schedules and certificates
referred to herein contain the entire agreement between the Company and the
Investor with respect to the transactions contemplated herein; and none of the
parties shall be bound by nor shall be deemed to have made any representations
and/or warranties except those contained herein and therein.
10.7 Separability. If any provision of this Investment
Agreement is held for any reason to be unenforceable by a court of competent
jurisdiction, the remainder of this Investment Agreement shall, nevertheless,
remain in full force and effect in such jurisdiction.
10.8 Headings. The headings in this Investment Agreement
are intended solely for convenience of reference and shall be given no effect in
the construction or interpretation of this Agreement.
10.9 Governing Law. This Investment Agreement is made in
the State of Alabama and shall be governed by and construed in accordance with
the internal laws of said State. The parties consent to the personal
jurisdiction of
18
<PAGE> 19
said state and the exclusive venue for any litigation concerning this Investment
Agreement shall be Mobile, Alabama.
10.10 Counterparts. This Agreement may be executed in two
or more counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute the same instrument.
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
19
<PAGE> 1
EXHIBIT 10.3
OPTION AGREEMENT
THIS AGREEMENT is made effective as of the 1st of January, 1999, by and between
ASHTON COMMUNICATIONS CORPORATION ("ACC"), INTERCARRIER TRANSPORT, INC. ("ICT"),
AcNET, S.A. DE C.V. ("AcNet"), Julian Pascoe ("Pascoe") (collectively, the
"Ashton Group" or "Sellers")
and
INCOMEX, INC. ("Incomex") and MURDOCK COMMUNICATIONS CORPORATION ("MCC")
(collectively, the "MCC Group" or "Purchasers").
In consideration of the following mutual agreements and other consideration
described below, the parties hereto agree:
1. BY MCC: Option to Purchase Stock of AcNet
a. MCC shall have the continuing non-assignable (other than to a
wholly owned subsidiary of MCC) option to purchase from ICT,
and upon exercise of such option, ICT shall sell to MCC, such
number and shares of AcNet held by ICT as thereafter equals
49% of the "Stock" (as defined below) of AcNet pursuant to the
terms and conditions of this Agreement.
b. MCC shall have the continuing, assignable option to purchase
from Pascoe, and upon exercise of such option, Pascoe shall
sell to MCC, such number and shares of AcNet held by Pascoe as
thereafter equals 1% of the "Stock" (as defined below) of
AcNet pursuant to the terms and conditions of this Agreement.
c. For purposes of this Agreement, the term "Stock" includes all
the issued and outstanding capital shares or equity interests
of AcNet.
d. MCC acknowledges that the shareholders of ICT prefer that the
proposed transaction be structured as a sale of 100% of ICT
rather than the sale by ICT of AcNet Stock. MCC agrees to
cooperate with ICT in defining an appropriate structure,
provided, however, in no event will MCC consider or be
required to consider any alternative that in its sole opinion
alters the basic economic structure and characteristics of the
proposed transaction.
<PAGE> 2
2. BY MCC: Option to Purchase Preferred Stock of AcNet
a. MCC shall have the continuing non-assignable (other than to a
wholly owned subsidiary of MCC) option to purchase from AcNet,
and upon exercise of such option, AcNet shall sell to MCC, up
to U.S. $2,000,000 of "Preferred Shares" (as defined below) of
AcNet pursuant to the terms and conditions of this Agreement.
b. Preferred Shares shall mean a newly created class of equity
securities of AcNet with the following attributes.
i. The Preferred Shares shall be validly authorized and
issued by AcNet under Mexican law.
ii. The Preferred Shares shall bear all rights typically
associated with Preferred Shares issued by U.S.
corporations, including but not limited to a
liquidation preference over the other classes of
Stock of AcNet, provided, however, that the Preferred
Shares shall have no voting rights and shall not be
convertible into common stock of AcNet.
iii. The Preferred Shares, as a class, shall accrue
dividends on a cumulative basis equal to 20% of the
earnings before interest and taxes ("EBIT") of AcNet.
Accrued dividends shall be paid upon declaration by
the Board of Directors of AcNet.
iv. The Preferred Shares may be redeemed by AcNet at any
time at a price equal to 120% of the face amount,
plus accrued dividends.
3. CONSIDERATION FOR OPTION: As consideration for this option to purchase
the Stock and the Preferred Stock of AcNet, MCC and Incomex have
extended loans to AcNet in the amount of U.S. $850,000 evidenced by one
or more promissory notes. The AcNet and ICT acknowledges receipt of such
funds and further acknowledges that such loan constitutes adequate and
sufficient consideration for this option.
4. ACQUISITION PRICE:
a. Stock of AcNet:
2
<PAGE> 3
i. The aggregate exercise consideration to
purchase the Stock from ICT pursuant to Section 1.a
shall be
(1) 450,000 shares of the Common Stock of MCC.
(2) Guarantee by MCC of amounts owed by AcNet to
Cisco Systems, Inc. and Duetsche Capital,
provided, however, that the aggregate amount
of such guarantee(s) will not exceed U.S.
$1,000,000. Such guarantee must be
consummated on or before March 30, 1999.
ii. The aggregate exercise consideration to
purchase the Stock from Pascoe pursuant to Section
1.b shall be one dollar (U.S. $1.00), provided,
however, that MCC shall have no right to exercise the
option pursuant to 1.b unless it has exercised the
option to purchase Stock from ICT pursuant to Section
1.a.
b. Preferred Stock of AcNet: The exercise consideration to
purchase the Preferred Stock of AcNet pursuant to Section 2
shall be, at the option of MCC, any combination of
i. U.S. funds in amounts equal to the face
value of the Preferred Shares so purchased; and, or
ii. Conversion of any loans, plus accrued
interest made by MCC or Incomex to AcNet.
5. CLOSING. The closing of the purchase of Stock and Preferred Stock
pursuant to this Agreement shall take place at a time and a place
agreed to by Sellers and the Purchasers. If the parties cannot agree,
the closing shall be five business days after MCC's notice of exercise
and at MCC's executive offices.
6. OPTION PERIOD. This option may be exercised in whole or in part by
notice from MCC to the Sellers given at any time prior to 11:59 p.m.
Pacific Time, July 31, 1999.
7. ACC, AcNet and ICT agree that, during the Option Period, ACC, AcNet
and/or ICT shall not, unless it receives the prior written consent of
MCC: (1) merge or consolidate ACC, AcNet or ICT with any individual,
partnership, corporation, limited liability company, governmental
entity or
3
<PAGE> 4
any department, agency or political division thereof; (ii) sell, lease
or otherwise dispose of any of AcNet assets; (iii) liquidate, dissolve
or effect a recapitalization or reorganization of ACC, ICT or AcNet in
any form of transaction; (iv) create, incur, assume, guarantee, be or
remain liable for, contingently or otherwise, or suffer to exist any
funded indebtedness, other than the indebtedness presently existing or
indebtedness funded by MCC; or (v) conduct discussions or negotiations
with respect to a transaction of the type described in clauses (i)
through (iv) with any party.
8. Injunctive Relief. The parties hereto agree that any party may apply
for and obtain from any state or federal court injunctive relief
prohibiting the violation of the terms of this agreement. Such remedy
shall be cumulative and not exclusive.
9. Binding Effect. This Agreement shall be binding upon, inure to the
benefit of and be enforceable by and against ACC, ICT, AcNet, Pascoe,
Incomex, MCC and their respective successors, transferees and other
assigns. Each of the parties hereby warrants that its officers,
executing this Agreement on each party's behalf is duly authorized to
enter into this Agreement as the binding act of the same.
10. Interim Disbursements. MCC reserves the right to make interim
"Pre-Option Exercise Disbursements" either to ACC or directly to AcNet,
and any and all such disbursements shall be considered Loans until and
if MCC exercises its right to purchase Preferred Stock under this
Option Agreement. Each Loan made hereunder shall be evidenced by a
Promissory Note emitted by the borrower, with a due date not to exceed
December 31, 1999.
11. Performance of Necessary Acts. ACC, ICT and AcNet shall perform any
further acts and execute and deliver or cause to be delivered by AcNet
any additional documents, which may be reasonably necessary to carry
out the provision of this Agreement. ICT represents and warrants that
it has, and covenants, that at all times during the Option period it
will have sufficient authorized shares of AcNet reserved for issuance
upon exercise of MCC's option under this Agreement.
12. Governing Law. This Agreement has been executed by MCC and shall be
governed and constructed in accordance with the internal Laws of the
State of Texas, United States of America.
13. Amendment, Waiver and Consent. This Agreement may be amended, or any
provision of this Agreement may be waived only if such amendment or
waiver is set forth in writing executed by the parties. No course of
dealing
4
<PAGE> 5
between the parties will be deemed effective to modify, amend or
discharge any part of this Agreement or any rights or obligations of
any party under or by reason of this Agreement.
In witness to the foregoing, the parties hereto have executed this agreement on
the date first above written.
Ashton Communications Corporation Murdock Communications Corporation
/s/ Rae Ashton /s/ Guy Murdock
- -------------------------------- -----------------------------------
Rae Ashton, President Guy Murdock, Chairman
Intercarrier Transport, Inc. Incomex, Inc.
/s/ Rae Ashton /s/ John Rance
- -------------------------------- -----------------------------------
Rae Ashton, President John Rance, Chief Executive Officer
AcNet S.A. de C.V.
/s/ Rae Ashton
- --------------------------------
Rae Ashton, Director General
Julian Pascoe
/s/ Julian Pascoe
- --------------------------------
5
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