<PAGE> 1
As filed with the U.S. Securities and Exchange Commission on July 2, 1999.
Registration Statement No. 333-78399
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
MURDOCK COMMUNICATIONS CORPORATION
(Name of Small Business Issuer in Its Charter)
--------------------
<TABLE>
IOWA 4813 42-1339746
<S> <C> <C>
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
1112 29TH AVENUE S.W.
CEDAR RAPIDS, IOWA 52404
(319) 362-6900
(Address and Telephone Number of Principal Executive Office, Principal
Place of Business)
THOMAS E. CHAPLIN
CHIEF EXECUTIVE OFFICER
MURDOCK COMMUNICATIONS CORPORATION
1112 29TH AVENUE S.W.
CEDAR RAPIDS, IOWA 52404
(319) 362-6900
(Name, Address and Telephone Number of Agent for Service)
Copies of communications to:
ALBERT S. ORR, ESQ.
REINHART, BOERNER, VAN DEUREN,
NORRIS & RIESELBACH, S.C.
1000 NORTH WATER STREET, SUITE 2100
MILWAUKEE, WI 53202
(414) 298-1000
FACSIMILE (414) 298-8097
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
<PAGE> 2
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. | |
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. | |
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. | |
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. | |
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=============================================== ================== ================== ================== ================
TITLE OF EACH PROPOSED PROPOSED
CLASS OF MAXIMUM MAXIMUM
SECURITIES AMOUNT OFFERING AGGREGATE AMOUNT OF
TO BE TO BE PRICE OFFERING REGISTRATION
REGISTERED REGISTERED PER SHARE PRICE FEE
- ----------------------------------------------- ------------------ ------------------ ------------------ ----------------
<S> <C> <C> <C> <C>
COMMON STOCK, NO PAR VALUE 1,324,374 $3.54 (1) $ 4,688,284 $1,304(2)
- ----------------------------------------------- ------------------ ------------------ ------------------ ----------------
COMMON STOCK, NO PAR VALUE 3,398,252 $2.88(3) $ 9,786,966 $2,721
- ----------------------------------------------- ------------------ ------------------ ------------------ ----------------
COMMON STOCK, NO PAR VALUE 1,819,918(4) $3.143(5) $ 5,720,003(5) $1,591(2)
- ----------------------------------------------- ------------------ ------------------ ------------------ ----------------
TOTAL $5,616
=============================================== ================== ================== ================== ================
</TABLE>
(1) ESTIMATED SOLELY FOR PURPOSES OF COMPUTING THE REGISTRATION FEE
PURSUANT TO RULE 457(C) UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), BASED ON THE AVERAGE OF THE REPORTED BID AND ASKED PRICES
OF THE COMMON STOCK ON THE NASDAQ BULLETIN BOARD ON MAY 7, 1999.
(2) PREVIOUSLY PAID ON MAY 13, 1999.
(3) ESTIMATED SOLELY FOR PURPOSES OF COMPUTING THE REGISTRATION FEE
PURSUANT TO RULE 457(C) UNDER THE ACT BASED ON THE AVERAGE OF THE
REPORTED BID AND ASKED PRICES OF THE COMMON STOCK ON THE NASDAQ
BULLETIN BOARD ON JUNE 25, 1999.
(4) SHARES OF COMMON STOCK ISSUABLE ON EXERCISE OF THE COMMON STOCK
PURCHASE WARRANTS ORIGINALLY ISSUED BY THE REGISTRANT ON OCTOBER 24,
1996 AND REGISTERED ON A FORM SB-2 (REGISTRATION NO. 333-05422C) WHICH
WAS DECLARED EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION ON
OCTOBER 21, 1996. PURSUANT TO RULE 416 PROMULGATED UNDER THE ACT, THIS
REGISTRATION STATEMENT COVERS SUCH SHARES AS MAY BE ISSUABLE PURSUANT
TO THE ANTIDILUTION PROVISIONS OF THE WARRANTS.
(5) THE PROPOSED MAXIMUM AGGREGATE OFFERING PRICE FOR THE SHARES ISSUABLE
PURSUANT TO THE COMMON STOCK PURCHASE WARRANTS IS, PURSUANT TO RULE
457(G), EQUAL TO THE PRODUCT OF (I) THE EXERCISE PRICE PER SHARE OF
COMMON STOCK ISSUABLE PURSUANT THERETO AND (II) THE AGGREGATE NUMBER
OF SHARES OF COMMON STOCK ISSUABLE PURSUANT THERETO.
-----------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
2
<PAGE> 3
PROSPECTUS
[LOGO]
6,542,544 SHARES OF COMMON STOCK
We are offering shares of our common stock to the holders of 880,000 Common
Stock Purchase Warrants which we issued on October 24, 1996. The Warrants may be
exercised to purchase a total of 1,819,918 shares of common stock at $3.143 per
share.
Per Share Total
--------- -----
Exercise Price. . . . . . . . . $3.143 $5,720,003
Also, certain of our shareholders are offering up to 4,722,626 shares of our
common stock. Because these shares will be sold by the selling shareholders, we
will not receive any proceeds from the sale of these shares.
The selling shareholders have not advised us of their specific plans for the
distribution of their shares covered by this prospectus. We anticipate that the
selling shareholders will sell the shares from time to time primarily in
transactions (which may include block transactions) on the Nasdaq Bulletin Board
at the market price then prevailing. However, the selling shareholders may also
make sales in negotiated transactions or otherwise.
Our common stock is traded on the Nasdaq Bulletin Board.
Trading Symbol on Nasdaq Bulletin Board: MURC
Closing Bid Price on June 25, 1999: $2.91 per share
CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 3 OF THIS
PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
___________, 1999.
<PAGE> 4
SUMMARY
This summary highlights selected information from this document. For a
more complete description of the offering and Murdock Communications
Corporation, you should carefully read this entire document and the documents to
which we have referred you. See "Where You Can Find More Information" on page
33.
THE OFFERING
The Warrants. We are offering up to 1,819,918 shares of our common
stock to the holders of the Warrants. We originally issued the Warrants in
October 1996 in connection with our initial public offering. Each Warrant may be
exercised to purchase approximately 2.068 shares of our common stock at an
exercise price of $3.143 per share. The Warrants expire on October 21, 1999. We
may elect to redeem the Warrants if the average closing bid price of our common
stock exceeds $7.15 over a 20 trading day period preceding the notice of
redemption. The redemption price is $0.01 per Warrant. See "Plan of
Distribution" on page 31 for a more complete description of the Warrants.
The Selling Shareholders. The selling shareholders are offering for
sale up to 4,722,626 shares of our common stock. Because these shares will be
sold by the selling shareholders, we will not receive any proceeds from the sale
of these shares. For more information on the selling shareholders, please refer
to "Selling Shareholders" on page 29 and "Plan of Distribution" on page 31.
MURDOCK COMMUNICATIONS CORPORATION
1112 29th Avenue S.W.
Cedar Rapids, Iowa 52404
319-362-6900
We provide operator services and call processing to North American pay
phones, hotels and institutions, database profit management services and
telecommunications billing and collection services for the hospitality industry,
outsourced operator services for the telecommunications industry and
telecommunications systems and services to the lodging industry. Through a
series of acquisitions and new product developments, we transformed ourselves
during 1998 from primarily a reseller of AT&T network services to U.S. hotels to
a provider of a wide range of complementary telecommunications services in North
America. We operate through three principal business units:
- Murdock Technology Services ("MTS"), our division which
provides database profit management services and other
telecommunications management and consulting services;
- Priority International Communications, Inc. and ATN
Communications, Inc. (collectively, "PIC/ATN"), our wholly
owned subsidiaries which provide operator services, call
processing and related valued added services; and
- Incomex, Inc. ("Incomex"), our wholly owned subsidiary which
provides billing and collection services for calls to the
United States from resort hotels in Mexico.
We have also made investments in:
- ACTEL Integrated Communications, a provider of local exchange
communications services as a facility-based carrier based in
Mobile, Alabama; and
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<PAGE> 5
- AcNet S.A. de C.V., a provider of internet services and
network services to businesses, governments and consumers in
Mexico.
FORWARD-LOOKING STATEMENTS MAY PROVE TO BE INACCURATE
We have made forward-looking statements in this document. These
forward-looking statements include statements regarding new products we may
introduce in the future, statements about our business strategy and plans,
statements about the adequacy of our working capital and other financial
resources and other statements that are not of a historical nature. When we use
words such as "believes," "expects," "anticipates" or similar expressions, we
are making forward-looking statements. You should note that forward-looking
statements rely on a number of assumptions concerning future events and are
subject to a number of uncertainties and other factors, many of which are
outside of our control, that could cause actual results to differ materially
from the statements. These factors include those discussed under the caption
"Risk Factors" in this prospectus. We disclaim any intention or obligation to
update or revise any forward-looking statements whether as a result of new
information, future events or otherwise.
RISK FACTORS
Before purchasing our stock, you should carefully consider the
following risk factors and the other information contained in this prospectus.
WE HAVE A HISTORY OF NET LOSSES AND MAY NOT BECOME PROFITABLE.
Although we had net income of $84,000 for the quarter ended March 31,
1999, we incurred net losses of $174,000 and $7.9 million for the years ended
December 31, 1998 and 1997, respectively, and had a working capital deficit of
$9.9 million at March 31, 1999. We can not assure you that we will achieve or
sustain profitability. If we cannot achieve operating profitability or positive
cash flows, we may not be able to meet our debt service or working capital
requirements, which could have a material adverse effect on our business.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
Our business is capital intensive and requires substantial capital
investment to achieve growth. We will require additional capital in the future
for working capital as well as to finance our continuing expansion, acquisition
opportunities and development of new products and services and to fund our debt
service requirements. We do not believe that our existing capital and funds from
operations will be sufficient to meet our anticipated cash needs in 1999. To
address these needs, we have 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, we believe that the proceeds will be sufficient
to meet our 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 credit facility, including the negotiation of
definitive loan documents, we can not assure you that we will complete this
credit facility or, if completed, that the terms of the credit facility will be
as presently contemplated. If we are unable to complete the proposed credit
facility, we would expect to seek necessary financing through other debt or
equity sources. However, adequate funds may not be available when needed, or in
an amount or on terms acceptable to us. Insufficient funds may require us to
delay, scale back or eliminate some or all of our product or market development
plans and could have an adverse effect on our future performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" on pages 18-19.
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<PAGE> 6
WE ARE IN AN INTENSELY COMPETITIVE MARKET.
Competition in the telecommunications industry is intense and we expect
to face competition in each of our business units.
- PIC/ATN competes with numerous other providers of alternative
operator services and call processing services.
- Incomex competes with several competitors which also focus on the
hotel and pay phone markets in Mexico.
- MTS competes with up to nine telecommunications consulting
companies which target the lodging industry.
- Our operator and call processing services also compete with a
variety of long distance interexchange carriers, including Sprint,
MCI and AT&T.
Each of our business units may face competition from companies with
greater financial, technical, marketing and other resources than we have. We can
not assure you that we will be able to compete successfully in our markets.
OUR ACQUISITION STRATEGY MAY PLACE SIGNIFICANT DEMANDS ON OUR RESOURCES AND MAY
ADVERSELY AFFECT OUR BUSINESS.
An important component of our strategy is to grow and expand through
acquisitions. In October 1997, we completed the acquisition of PIC/ATN and in
February 1998 we completed the acquisition of Incomex. We also have made
investments in, and have entered into agreements to make additional investments
in, ACTEL Integrated Communications, Inc., a competitive local exchange carrier
which commenced operations in Alabama in April 1999, and AcNet S.A. de C.V., an
internet service provider in Mexico. Our growth strategy will depend on the
continued availability of suitable acquisition candidates and available capital
and will subject us to a number of risks, including the following:
- Our acquisitions have placed and are expected to continue to place
significant demands on our financial and management resources, as
the process of integrating acquired operations presents a
significant challenge to our management and may lead to
unanticipated costs or a diversion of management's attention from
day-to-day operations;
- We may face difficulties in integrating our past acquisitions or
other acquisitions in the future. Integrating acquisitions may
require integration of financial and information systems, network
and other physical facilities and personnel. Difficulties in
integrating these and other acquisitions can cause added costs and
loss of personnel or customers;
- We may incur unknown liabilities despite management's efforts to
investigate the operations of the acquired business; and
- The consideration we pay in an acquisition may exceed the value of
the acquired business or its contribution to our business and our
results of operations.
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The impact of these risks, and other risks arising as a result of our
acquisition strategy, could adversely affect our business.
WE DEPEND ON TWO CUSTOMERS FOR A SIGNIFICANT PERCENTAGE OF OUR SALES.
We have two significant customers from which we received approximately
12% and 24% of our revenues in 1998. We do not have long-term contracts with
these customers. An adverse change in our relationship with or the financial
viability of either of these customers could have a material adverse effect on
our business.
WE NEED TO MANAGE OUR GROWTH.
We have experienced growth in the number of our employees and the scope
of our operations. To manage potential future growth effectively, we must
improve our operational, financial and management information systems and must
hire, train, motivate and manage our employees. Our future success also will
depend on our ability to increase our customer support capability and to attract
and retain qualified technical, sales, network operations, marketing and
management personnel, for whom competition is intense. We can not assure you
that we will be able to effectively achieve or manage such growth, and failure
to do so could have a material adverse effect on our business, financial
condition and results of operations.
CURRENT PROSPECTUS AND BLUE SKY REGISTRATION REQUIRED TO EXERCISE WARRANTS
We intend to maintain a registration statement that will
permit the public sale of the common stock offered pursuant to this prospectus
upon exercise of the Warrants. However, there can be no assurance that we
will maintain a current prospectus covering the shares of common stock
underlying the Warrants. Warrant holders will have the right to exercise the
Warrants to purchase shares of common stock only if a current prospectus
relating to such shares is then in effect and only if the shares are qualified
for sale under, or may be sold pursuant to an exemption from the qualification
requirements of, the securities laws of the applicable states. At present, the
shares of common stock underlying the Warrants are not qualified for sale in any
state. No assurance can be given that we will subsequently qualify the
shares underlying the Warrants in any state. The Warrants may be deprived of
any value if a current prospectus covering the shares underlying the Warrants is
not kept effective or if such underlying shares are not qualified for sale in
the applicable states.
OUR COMMON STOCK IS TRADED ON AN ILLIQUID MARKET.
Our common stock trades on the Nasdaq Bulletin Board under the trading
symbol "MURC." Investors may find it difficult to obtain accurate quotations of
the price of our common stock and to sell our common stock on the Nasdaq
Bulletin Board. In addition, companies whose stock is listed on stock exchanges
or the Nasdaq Stock Market must adhere to the rules of such markets. These rules
include various corporate governance procedures which, among other items,
require the company to obtain shareholder approval prior to completing certain
transactions such as, among others, issuances of common stock equal to 20% or
more of the company's then outstanding common stock for less than the greater of
book or market value or the issuance of certain stock options. Companies such as
ours, whose stock is quoted on the Nasdaq Bulletin Board, are not subject to
these or any comparable rules.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGES IN THE
TELECOMMUNICATIONS INDUSTRY.
The telecommunications industry is characterized by:
- rapid technological change;
- changes in user and customer requirements and preferences;
- frequent new product and service introductions embodying new
technologies; and
- the emergence of new industry standards and practices.
These developments could quickly render our existing technology and
systems obsolete. Our inability to modify or adapt our infrastructure in a
timely manner or the expenses incurred in making such adaptations could hurt our
business.
As a result, we will be required to continually improve the
performance, features and reliability of our services, particularly in response
to competitive offerings. Our success will depend, in part, on our ability to
enhance our existing services and develop new services in a cost-effective and
timely
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manner. The development of proprietary technology entails significant
technical and business risks and requires substantial expenditures and lead
time. We may not be able to adapt successfully to customer requirements or
emerging industry standards.
WE RELY ON KEY PERSONNEL.
We depend upon the efforts of our officers and other key personnel. The
loss of certain of our key employees, including our Chairman, Guy O. Murdock,
and our Chief Executive Officer, Thomas E. Chaplin, could have a material
adverse effect on us. Although we have entered into employment agreements with
each of our executive officers, we can not assure you that we will be able to
retain them or our other key employees in the future. Furthermore, we expect
that we will need to employ additional executives and key employees in order to
successfully implement our business plan. Our success will depend on our ability
to retain key employees, employ additional capable executives and implement an
effective management structure. We plan to take out a $7 million key-man life
insurance policy for Mr. Chaplin.
OUR MANAGEMENT OWNS A LARGE PERCENTAGE OF OUR VOTING STOCK.
Our current executive officers and directors and their affiliates
beneficially own or have voting control over approximately 51% of the
outstanding shares of common stock. Accordingly, these individuals will have the
ability to influence the election of our directors. This concentration of
ownership may also have the effect of delaying, deterring or preventing a change
in control. See "Principal Shareholders" on page 27.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
Sales of substantial amounts of our common stock in the public market
could adversely affect the market price of our common stock. As of April 9,
1999, 10,329,867 shares of our common stock were outstanding.
- 3,362,019 shares, which are being offered by the selling
shareholders pursuant to this prospectus, are freely tradeable in
the public market;
- 3,795,576 shares are freely tradable in the public market, except
for shares held by our affiliates which are subject to the resale
limitations (excluding the holding period requirement) of Rule 144
under the Securities Act; and
- 3,172,272 shares are currently subject to a holding period under
Rule 144, but in less than one-year will become tradeable in the
public market subject to the resale limitations of Rule 144.
We have commitments to issue up to 9,478,533 shares of our common stock
upon the exercise of outstanding employee stock options, the exercise of
outstanding warrants and the conversion of shares of our preferred stock.
- 1,360,607 shares, which are being offered by the selling
shareholders pursuant to this prospectus and are issuable upon
exercise of warrants or conversion of shares of preferred stock,
are freely tradeable in the public market;
- 1,617,558 shares issuable upon exercise of employee stock options
will be freely tradeable in the public market, except for shares
held by our affiliates which are subject to the resale limitations
(excluding the holding period requirement) of Rule 144 under the
Securities Act;
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- 1,819,918 shares issuable upon exercise of the Warrants will be
freely tradeable in the public market upon exercise;
- 1,488,889 shares issuable upon conversion of the preferred stock
will be freely tradable in the public market, except for shares
held by our affiliates which are subject to the resale limitations
(excluding the holding period requirement) of Rule 144 under the
Securities Act; and
- 3,191,561 shares issuable upon exercise of warrants may be resold
subject to the resale limitations of Rule 144 under the Securities
Act, including warrants with respect to 250,000 shares for which
we have granted registration rights.
We can not predict the effect, if any, that sales of shares of our
common stock or the availability of such shares for sale will have on the market
price prevailing at that time. Nevertheless, the possibility that a substantial
number of shares of our common stock may be offered or sold in the public market
may adversely affect prevailing market prices for our common stock and could
impair the shareholders' ability to sell shares of their common stock, or our
ability to raise capital through the subsequent sale of our equity securities.
WE FACE YEAR 2000 RISKS.
Like many companies, we may be adversely affected by the Year 2000
computer problem. 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. We are in the process of updating our internal
computer software, other internal information technology and other internal
operating systems for purposes of Year 2000 compliance. We are also addressing
the Year 2000 compliance of our new and existing products. We currently expect
to complete our Year 2000 compliance plan during fiscal 1999 and do not expect
our costs to become Year 2000 compliant will be material to our financial
condition or results of operations. However, we can not assure you that we will
not experience any unanticipated problems in our internal systems with respect
to the Year 2000 which may have a material adverse effect on us.
Our operations may also be adversely affected to the extent that our
suppliers and other third parties are not Year 2000 compliant. We anticipate
completing surveys to our key customers and vendors during the second quarter of
1999 to assess the Year 2000 compliance status of the operating systems of such
third parties and the potential impact on us of non-compliance. However, a
number of risks relating to the Year 2000 issue may be out of our control,
including our reliance on outside links for essential services such as
communications and power. We can not assure you that a third party's failure of
systems on which our systems and operations rely to be Year 2000 compliant will
not have a material adverse effect on us.
CERTAIN MARKET INFORMATION AND DIVIDEND POLICY
During all of 1997, our common stock was traded on the Nasdaq SmallCap
Market under the symbol "MURC" and our Redeemable Common Stock Purchase Warrants
were traded on the Nasdaq SmallCap Market under the symbol "MURCW." Effective
January 2, 1998, our common stock and the Warrants were delisted from the Nasdaq
SmallCap Market and commenced trading on the Nasdaq Bulletin Board under the
same trading symbols. The following table sets forth the high and low bid
quotations for our common stock and Warrants as reported by Nasdaq. Such
transactions reflect
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<PAGE> 10
interdealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Warrants
------------ --------
Quarter High Low High Low
------- ---- --- ---- ---
<S> <C> <C> <C> <C>
FISCAL 1997
First $ 4.75 $ 3.13 $ 1.50 $ 0.75
Second 4.69 2.88 1.13 0.56
Third 3.50 2.44 0.94 0.31
Fourth 3.81 0.69 0.88 0.25
FISCAL 1998
First $2.63 $0.69 $0.31 $0.06
Second 3.31 2.25 0.25 0.13
Third 4.50 2.75 0.44 0.19
Fourth 4.25 2.13 0.25 0.13
FISCAL 1999
First 4.75 2.75 0.38 0.06
</TABLE>
At April 9, 1999, there were approximately 155 holders of record of
our common stock and approximately 1,600 beneficial holders.
We have not paid any cash dividends on our common stock in the last
three years. We intend to retain any earnings for use in the operation and
expansion of our business and, therefore, do not anticipate paying any cash
dividends in the foreseeable future. Also, our proposed credit facility will
restrict our ability to pay dividends.
USE OF PROCEEDS
If the Warrants are exercised in full, we will receive total proceeds
of $5,720,003, before deducting estimated expenses of $38,616. We anticipate
that we will use any proceeds from the exercise of the Warrants for general
corporate purposes. We will not receive any proceeds from the sale of the shares
of our common stock offered hereby by the selling shareholders.
BUSINESS
Murdock Communications Corporation ("MCC" or the "Company") provides
operator services and call processing to North American pay phones, hotels and
institutions, database profit management services and telecommunications billing
and collection services for the hospitality industry, outsourced operator
services for the telecommunications industry and telecommunications systems and
services to the lodging industry. Through a series of acquisitions and new
product developments, we transformed ourselves during 1998 from primarily a
reseller of AT&T network services to U.S. hotels to a provider of a wide range
of complementary telecommunications services in North America. We operate
through three principal business units:
- MTS, our division which provides database profit management
services and other telecommunications management and
consulting services;
- PIC/ATN, our wholly owned subsidiaries which provide operator
services, call processing and related valued added services;
and
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<PAGE> 11
- Incomex, our wholly owned subsidiary which provides billing
and collection services for calls to the United States from
resort hotels in Mexico.
We were incorporated as an Iowa corporation in 1989.
PRINCIPAL BUSINESS UNITS
Murdock Technology Services. We formed MTS as a division in 1998 to
provide database profit management services and other value-added services to
the hospitality telecommunications management market.
MTS's principal service, the MCC Telemanager(TM), is a proprietary
software and hardware system created to help manage telecommunication
installations and services in the hospitality market. The Telemanager was
introduced to the market in September 1997 and there were 174 units installed as
of December 31, 1998 as compared to 80 units as of December 31, 1997. The
Telemanager uses proprietary computer software to monitor telephone activity at
a hotel and enables the hotel to identify problems and opportunities for revenue
growth by producing reports analyzing the costs and revenues derived from the
hotel's telecommunications system. The Telemanager provides each customer with
information regarding the customer's telecommunications system in management
reports which are easy to read and understand by persons lacking specialized
expertise in telecommunications. MTS generates this information by remotely
accessing information from the customer's premise-based call processing
equipment. The information is then analyzed based on proprietary computer
software programs developed by MCC. The results of this analysis are summarized
in reports and graphs that are remotely transmitted to the customer. The
Telemanager generates revenues through a one-time fee for the initial
installation and audit, and a monthly service fee.
We have initially focused our marketing of the Telemanager to the North
American hospitality industry with special emphasis toward hotels which
participated in the AT&T Lodging Partnership program, hotels and resorts in
Mexico under contract with Incomex and hotels using our operator services. In
future periods, we anticipate expanding the market for the Telemanager and our
other telecommunications consulting services outside of the hospitality industry
to include other businesses.
MTS is the successor to our historical operating unit which marketed
AT&T operator services to the hospitality market through the AT&T Lodging
Partnership. We agreed with AT&T to terminate the Lodging Partnership
arrangement in the fourth quarter of 1998. See "Recent Developments -
Termination of AT&T Lodging Partnership" below. MTS also continues to offer
one-plus long distance services and automated call processing services ("OSP
Services") on a limited basis and telecommunications equipment to its customers
in the hospitality industry.
PIC/ATN Operator Services. PIC/ATN offers telecommunications services
to pay phone operators, consumer service providers, hotels and other
institutions in the United States and Mexico. Priority International
Communications, Inc. and ATN Communications, Inc. (collectively, "PIC/ATN"),
operate in concert to provide marketing, service delivery and customer support
for owners and aggregators of telecommunications services. PIC/ATN provides both
live operator services and automated call processing services. The operator
center, located in Mobile, Alabama, features 50 live operator stations and
automated call platforms currently generating approximately 220,000 completed
calls and 2 million minutes monthly. PIC/ATN also offers credit card billing
services, automated collection and messaging delivery services, voice mail
services and telecommunications consulting. At December 31, 1998, PIC/ATN
provided telecommunications services to and maintained site contracts with
approximately 207 customers throughout the United States, compared to 257
customers at December 31, 1997. Each customer may represent from one to 2,000
telephone numbers that are in
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<PAGE> 12
PIC/ATN's database and are processed by PIC/ATN. The total size of PIC/ATN's
database increased substantially in 1998 to approximately 17,000 telephone
numbers at December 31, 1998.
Incomex Telecommunications Services. Incomex contracts with Mexican
resort hotels to provide billing and collection services for calls to the United
States. As of December 31, 1998, Incomex provided telecommunications services to
more than 95 hotel and motel resort properties representing approximately 15,000
rooms, compared to approximately 80 hotel and motel resort properties
representing approximately 10,600 rooms at February 13, 1998. Incomex's target
market includes 1,300 Mexican resort hotels representing approximately 325,000
rooms. Incomex offers value-added customer services, training and technology to
enhance the profitability of the telephone departments of Mexican resort hotels.
RECENT DEVELOPMENTS
Investment in ACTEL. On March 10, 1999, we entered into an amended
investment agreement with ACTEL Integrated Communications, Inc., a provider of
local exchange communications services as a facility-based carrier. ACTEL has
received public service approval to become a competitive local exchange carrier
in both Louisiana and Alabama and began to offer voice and data communications
services to medium and small businesses in Alabama in April 1999. Under the
March 1999 agreement, we will receive one share of ACTEL's Series A convertible
preferred stock for every dollar invested. Each share of ACTEL's Series A
convertible preferred stock earns a 10% dividend and may be converted to 1.46
shares of ACTEL's common stock at any time on or before March 10, 2002 at our
option. As of May 28, 1999, we had invested $3.0 million in ACTEL. The $3.0
million we have invested in ACTEL constitutes approximately 84% of the currently
outstanding shares of ACTEL's capital stock and 44% of the total authorized
shares of capital stock of ACTEL.
Investment in AcNet. In March 1999, we entered into an agreement with
AcNet S.A. de C.V., a provider of internet services and network services to
businesses, governments and consumers in Mexico. As of March 1999, AcNet
provided internet services to over 13,000 customers and network services to
several of the major corporations of Mexico generating annualized revenues of
approximately $1.5 million. The March 1999 agreement revised the terms of our
investment in AcNet as follows:
- We have an option to purchase 49% of AcNet in exchange for
450,000 shares of our common stock and our agreement to
guarantee certain debt of AcNet at AcNet's request. As of
May 10, 1999, we had not guaranteed any debt of AcNet. This
option extends through July 31, 1999.
- We may lend up to $2 million to AcNet under a note which
accrues interest at the rate of 10% per year. We have the
right to convert the note to preferred stock that earns 20% of
the earnings of AcNet. The preferred stock may be redeemed by
AcNet for 120% of its face value plus any accumulated
dividends. As of May 28, 1999, we had loaned $2.0 million to
AcNet.
In June 1999, we entered into two agreements providing us with
separate options to acquire (i) the holder of approximately 49% of the
outstanding shares of AcNet, and (ii) AcNet USA, Inc., an affiliate of AcNet,
for an aggregate of 2,325,000 shares of our common stock. Because there are
significant conditions remaining to be satisfied with respect to these proposed
acquisitions, including the negotiation of definitive acquisitions agreements,
due diligence investigations and our decision to exercise our options to
complete the proposed acquisitions, we cannot assure you that we will complete
the proposed acquisitions or, if completed, that the terms of the proposed
acquisitions will be as presently contemplated.
Termination of AT&T Lodging Partnership. In light of the declining call
volumes and narrow profit margins we experienced under the Lodging Partnership
with AT&T, we agreed with AT&T to terminate the Lodging Partnership arrangement
effective October 15, 1998. AT&T agreed to purchase all of the customer
contracts under the Lodging Partnership and to directly manage the existing
customers under the contracts. As a result, we recorded a one-time gain in the
fourth quarter of 1998 of $453,396. Our revenues from the AT&T agreement ended
in the fourth quarter of 1998.
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<PAGE> 13
PIC Earn-Out Settlement. Our agreement for the acquisition of PIC and
PIC Resources Corp. ("PICR") contained an earn-out provision which required that
we issue additional shares of our common stock to their former shareholders to
the extent that the combined earnings before interest, taxes, depreciation and
amortization ("EBITDA") of PIC and PICR for either of the first two full
twelve-month periods after closing exceeded $1,000,000. Shares of common stock
with a market value of $1.25 per share based on average trading value would be
issued for each dollar of EBITDA over $1,000,000 during either of the
twelve-month periods. In December 1998, we agreed with the former shareholders
to settle the PIC earn-out based on historical and projected financial
information with respect to PIC. Pursuant to the settlement, we issued an
aggregate of 2,300,000 shares of our common stock to the former shareholders of
PIC in December 1998.
We also agreed with certain of the former PIC shareholders who had
received promissory notes pursuant to the agreement with PIC that these notes
would bear interest at an annual rate of 14% from the date of the settlement
agreement. At December 31, 1998, an aggregate of $338,138 was outstanding under
these notes. In January 1999, substantially all of the notes were paid in full.
We also entered into a deferred payment arrangement with Wayne Wright, one of
the former PIC shareholders who is also a member of our Board of Directors,
pursuant to which Mr. Wright would receive $300,000 payable in 24 equal monthly
installments, which commenced in January 1999.
Incomex Earn-Out Settlement. Our agreement for the Incomex acquisition
contained an earn-out provision which required that we make a cash payment to
the Incomex shareholders equal to 60% of Incomex's net income before income
taxes ("IBT") during the period from February 1, 1998 through July 31, 1998, and
issue additional shares of our common stock at the end of each of the two
periods of 12 consecutive full calendar months during the 24 month period
beginning August 1, 1998 to the extent that Incomex's IBT exceeds $400,000
during either such 12 month period. Shares of our common stock with a market
value of $1.50 per share based on average trading value would be issued for each
dollar of IBT over $400,000 during either of the twelve month periods. In
December 1998, we agreed with the former shareholders of Incomex to settle the
Incomex earn-out based on historical and projected financial information with
respect to Incomex. Pursuant to the settlement, we agreed to issue an aggregate
of 1,500,000 shares of our common stock to the shareholders of Incomex and cash
consideration in the amount of $862,314. Each Incomex shareholder could elect to
receive the cash consideration in the form of either an immediate cash payment
or the issuance of a note and warrants. The notes bear interest at an annual
rate of 14% and all interest and principal on the notes are due on November 15,
1999. Warrants to purchase 200 shares of common stock at an exercise price of
$3.25 per share were issued for each $1,000 of principal under the notes. In
December 1998, we committed to make cash payments of $85,471 (excluding a prior
advance of $32,000) and issued the notes in the aggregate principal amount of
$744,915 and the warrants to purchase an aggregate of 155,384 shares of common
stock. We also agreed with three of the former Incomex shareholders to issue
$340,000 in notes, which we expect to repay in the second quarter of 1999.
COMPETITION
Competition in the telecommunications industry is intense. PIC/ATN
competes with numerous other providers of alternative operator services and call
processing services. PIC/ATN's customers, which include telephone owners and
aggregators, are extremely attentive to the competitive environment and the
competitive efforts of alternative operator service providers to acquire new
customers. Incomex competes with several competitors who also focus on the hotel
and pay phone markets in Mexico. MTS competes with up to nine telecommunications
consulting companies which target the lodging industry. Our operator and call
processing services also compete with a variety of long distance interexchange
carriers, including Sprint, MCI and AT&T. Each of the major long distance
interexchange carriers provide callers with the ability to "dial around" pay
phones, hotel and other telephone systems by using
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<PAGE> 14
special codes such as 10-ATT, 10-10 or 1-800 phone numbers. We believe that
competition in our markets is based principally on price, quality, reliability
and customer service. Each of our business units may face competition from
companies with greater financial, technical, marketing and other resources than
us. We can not assure you that we will be able to compete successfully in our
markets.
SIGNIFICANT CUSTOMERS
Prior to 1998, we derived a substantial part of our revenues from the
AT&T Lodging Partnership. We terminated the Lodging Partnership arrangement in
the fourth quarter of 1998. See "Recent Developments-Termination of AT&T Lodging
Partnership" above. We have two significant customers from which we received
approximately 12% and 24% of our revenues in 1998 for PIC/ATN's call processing
services.
SALES AND MARKETING
We will seek to expand our business based on the development and
delivery to our customers of value-added services, proprietary software
technology and value-added equipment and management offerings.
Value-Added Equipment and Management Offerings. By including
value-added equipment offerings as a part of our long distance offerings, we
believe that we are able to meet the total telecommunications needs of pay phone
operators, hotel properties and other institutions and businesses more fully
than either the interexchange carriers or the OSP Service companies. We offer
our customers a single point of contact telecommunications management program.
MTS's Sales Force. MTS has an internal sales staff which consisted of
two full-time sales managers and one full-time sales agent as of December 31,
1998. This sales force generally concentrates on the largest management and
franchise companies in the lodging industry. MTS also uses strategic
relationships with other lodging technology suppliers to market its management
and consulting services.
PIC/ATN. PIC/ATN has an internal sales staff which consisted of three
persons as of December 31, 1998. PIC/ATN's sales force concentrates its sales
efforts on direct marketing and referral based marketing. PIC/ATN also
participates in trade organizations to maintain its presence in the industry.
Incomex. Incomex has an internal sales staff which consisted of three
persons as of December 31, 1998. Incomex's internal sales force is supplemented
by six external sales agents.
INTELLECTUAL PROPERTY
We do not currently have any material patent or trademark
registrations. We principally rely on trade secrets and proprietary know-how in
the operation of our business.
REGULATION
Overview. Our services are subject to federal and state regulation. The
Federal Communications Commission (the "FCC") exercises jurisdiction over all
facilities of, and services offered by, telecommunications common carriers to
the extent those facilities are used to provide, originate or terminate
interstate or international communications. State regulatory commissions retain
some jurisdiction over the same facilities and services to the extent they are
used to originate or terminate intrastate common carrier communications. We hold
various federal and state regulatory authorizations.
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Federal Regulation. The Telecommunications Act of 1996 (the
"Telecommunications Act") became effective February 8, 1996. The
Telecommunications Act preempts state and local laws to the extent that they
prevent competitive entry into the provision of any telecommunications service.
Subject to this limitation, however, state and local governments retain most of
their existing regulatory authority. The Telecommunications Act imposes a
variety of new duties on incumbent local exchange carriers in order to promote
competition in local exchange and access services. We do not believe that the
Telecommunications Act has had a significant effect on our operations.
We also make informational filings with the FCC with respect to all
tariffs charged for OSP services. The FCC may request further information with
respect to, or otherwise challenge, any tariffs that the FCC considers to be
unreasonably high. As of March 31, 1999, the FCC had not commented on or
challenged our tariffs.
State Regulation. We are also subject to various state laws and
regulations. Most public utilities commissions subject alternative operator and
call processing service providers such as MCC to some form of certification
requirement, which requires providers to obtain authority from the state public
utilities commission prior to the initiation of service. In most states, we are
also required to file tariffs setting forth the terms, conditions and prices for
services that are classified as intrastate (for example, inter-LATA calls that
are within a single state). We also are required to update or amend our tariffs
when we adjust our rates or add new products, and are subject to various
reporting and record-keeping requirements. Accordingly, each time we change our
tariffs with respect to intrastate services, we must obtain the necessary
regulatory approvals from the state. The length of time required to obtain
certification or approval for a tariff varies from state to state, but generally
does not exceed a period of between 90 days and 6 months.
Many states also require prior approval for transfers of control of
certified carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
offerings and incurrence by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory authorities for failure to comply with
state laws and/or the rules, regulations and policies of state regulatory
authorities. Fines or other penalties also may be imposed for such violations.
There can be no assurance that state utilities commissions or third parties will
not raise issues with regard to our compliance with applicable laws or
regulations.
EMPLOYEES
As of December 31, 1998, we had 124 full-time employees and 39
part-time employees, including 90 full-time employees and 39 part-time employees
at PIC/ATN, five full-time and no part-time employees at Incomex and 26
full-time and no part-time employees at MTS. We believe our relationship with
our employees is good. None of our employees are subject to a collective
bargaining agreement.
DESCRIPTION OF PROPERTY
We maintain our principal business offices in Cedar Rapids, Iowa, where
we own and occupy approximately 8,000 square feet of combined office and
warehouse space, subject to a first mortgage held by Venture Investments, an
unrelated third party. We believe that this space is adequate for our present
needs.
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We also have a Harris Model 2020 switching center in Mobile, Alabama,
where we have purchased an office building with 33,000 square feet, subject to a
first mortgage held by Sunmed Management, Inc. We currently occupy 12,500 square
feet of this space.
The following sets forth certain information with respect to the
significant facilities leased by MCC through PIC/ATN and Incomex.
<TABLE>
<CAPTION>
APPROX. CURRENT
SQUARE MONTHLY
LOCATION FOOTAGE RENT LESSOR LEASE TERMINATION
- -------------------------- --------- ------------ ----------- -----------------
<S> <C> <C> <C> <C>
Austin, Texas 2,100 $3,240 Kucera June 1, 2001
Huntington Beach, 850 $1,223 MUAA, Inc. August 1, 2000
California
</TABLE>
LEGAL PROCEEDINGS
Incomex has commenced an arbitration proceeding against EILCO Leasing
Services, Inc., 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 to resolve the
dispute. An arbitration hearing with respect to this matter commenced on April
21, 1999. On June 4, 1999, the arbitrator ruled that, after a credit for the
remaining principal balance of $341,444, Eilco owes Incomex damages in the sum
of $231,162, plus $3,161 for arbitration fees and expenses.
On July 20, 1998, Oncor Communications, Inc. filed a lawsuit in the
District Court of Dallas County, Texas against MCC, Incomex and an unrelated
third party. Oncor alleged that the defendants improperly terminated a long
distance service agreement with Oncor and claimed damages based on amounts which
Oncor alleged to have advanced to us, lost profits for the period in which we
are alleged to have breached the contract, attorneys' fees and for interference
with contractual relations in an unspecified amount. We asserted a counterclaim
for accounting, breach of contract, misrepresentation and payment of attorneys'
fees. We agreed with Oncor to settle this claim on April 21, 1999. Under the
settlement, we paid $150,000 to Oncor in return for a release by Oncor of
its claims against us.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide an analysis of our
financial condition and results of operations and should be read in conjunction
with our financial statements and the notes to the financial statements
contained elsewhere in this prospectus. The matters discussed in this section
that are not historical or current facts deal with potential future
circumstances and developments. Such forward-looking statements include, but are
not limited to, the development and market acceptance for new services, trends
in the results of our operations and our anticipated capital requirements and
capital resources. MCC's actual results could differ materially from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those
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<PAGE> 17
discussed below as well as those discussed under the caption "Risk Factors" and
elsewhere in this prospectus. See "Forward Looking Statements" below.
OVERVIEW
The Company is a provider of operator services and call processing to
North American pay phones, hotels and institutions, database profit management
services and telecommunications billing and collection services for the
hospitality industry, outsourced operator services for the telecommunications
industry and telecommunications systems and services to the lodging industry.
From its inception in 1989 through 1994, MCC's primary source of
revenue was generated by providing operator services to the hospitality industry
as an OSP Services provider. Due to declining call volumes, caused in part by
the use of proprietary calling cards and other dial-around activities (such as
1-800-CALL ATT), MCC entered into a contract with AT&T in October 1994 to route
operator services traffic to AT&T through the Lodging Partnership program. Under
the Lodging Partnership, AT&T processed the calls, carried call traffic and
billed the end user. In return, AT&T paid MCC commissions on the calls dialed.
In light of the declining call volumes and narrow profit margins
experienced by MCC under the Lodging Partnership with AT&T, MCC and AT&T agreed
to terminate the Lodging Partnership arrangement effective October 15, 1998.
AT&T agreed to purchase all of the customer contracts under the Lodging
Partnership and to directly manage the existing customers under the contracts.
As a result, MCC recorded a one-time gain in the fourth quarter of $453,396.
Revenues to MCC from the AT&T agreement ended in the fourth quarter of 1998. The
decision to end the AT&T relationship followed MCC's growth in 1998 as a
provider of telecommunications services as a result of the commercial
introduction of the Telemanager in September 1997, the completion of the PIC
acquisition in October 1997 and the completion of the Incomex acquisition in
February 1998. MCC currently conducts its business through three principal
business units: (i) MTS, which provides telecommunications management and
consulting services, (ii) PIC/ATN, which provides operator services and related
value-added services, and (iii) Incomex, which provides billing and collection
services for calls to the United States from resort hotels in Mexico.
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RESULTS OF OPERATIONS
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 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 or 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 $1.5 million for or the three months ended March 31,
1998. Excluding the impact of the $256,000 reclassification of certain
operator center costs in the current period form 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 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 or the three months ended March 31,
1999 from $458,000 for the three months 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 amoritized over the
remaining amoritization 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 increase was primarily due to additional debt incurred related to the
investments in ACTEL and AcNet, the cost 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.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
- -----------------------------------------------------
The information for the year ended December 31, 1997 includes statement of
operations data for PIC after the consummation of the acquisition of PIC on
October 31, 1997. The information for the year ended December 31, 1998 includes
statement of operations data for Incomex after the consummation of the Incomex
acquisition on February 13, 1998.
Revenues. Consolidated revenues increased $25.6 million, or 305%, to
$34.0 million for the twelve months ended December 31, 1998 from $8.4 million
for the twelve months ended December 31, 1997. Revenues during the twelve months
ended December 31, 1998 consisted of $5.2 million attributable to MTS, $20.8
million attributable to PIC/ATN compared with $1.9 million in the previous year
following its acquisition on October 31, 1997, and $8.0 million attributable to
Incomex following its acquisition in February 1998. Call processing revenues
generated from MTS through its Lodging Partnership program decreased $2.5
million, or 54%, to $2.1 million for the twelve months ended December 31, 1998
from $4.6 million for the twelve months ended December 31, 1997. This decrease
was the result of declining room counts contracted under the Lodging Partnership
program, decreased call counts per room from the previous year and the
termination of the AT&T agreement effective October 1998. Revenues from other
service income generated by MTS increased $790,000, or 642%, to $913,000 for the
twelve months ended December 31, 1998 from $123,000 for the twelve months ended
December 31, 1997. Telemanager revenues were $635,000 for the twelve months
ended December 31, 1998, compared to none for the twelve months ended December
31, 1997.
In October 1998, MCC and AT&T agreed to end the Lodging Partnership.
Under this agreement, AT&T will directly manage all customers in the Lodging
Partnership. MCC reported a one-time gain of $453,396 during the fourth quarter
of 1998 relating to the termination of its agreement with AT&T. Revenues of $2.0
million and marginal net profits have been recognized by MCC from the AT&T
agreement for the twelve months ended December 31, 1998. These revenues and net
profits will not be present in future periods.
Cost of Sales. Consolidated cost of sales increased $16.5 million, or
262%, to $22.8 million for the twelve months ended
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December 31, 1998 from $6.3 million for the twelve months ended December 31,
1997. Cost of sales during the twelve months ended December 31, 1998 consisted
of $3.4 million attributable to MTS, $14.7 million attributable to PIC/ATN and
$4.7 million attributable to Incomex following its acquisition in February 1998.
Costs associated with call processing revenues for MTS decreased $1.9 million,
or 40%, to $2.9 million for the twelve months ended December 31, 1998 from $4.8
million for the twelve months ended December 31, 1997.
A nonstandard charge of $390,000 was taken in the fourth quarter of
1998 as a result of a dispute in collection procedures and policies with a
billing and collection processor for Incomex. MCC has changed vendors and does
not expect a recurrence of this issue, except for approximately $100,000 in the
first two months of 1999.
Gross Profit. Consolidated gross operating profit increased $9.1
million, or 423%, to $11.2 million for the twelve months ended December 31, 1998
from $2.1 million for the twelve months ended December 31, 1997. Gross operating
profit during the twelve months ended December 31, 1998, consisted of $1.9
million attributable to MTS compared to $1.6 million in 1997, $6.1 million
attributable to PIC/ATN compared to $500,000 in 1997, and $3.2 million
attributable to Incomex following its acquisition in February 1998.
Selling, General and Administrative Expense. Consolidated selling,
general and administrative expense increased $2.8 million, or 59%, to $7.5
million for the twelve months ended December 31, 1998 from $4.7 million for the
twelve months ended December 31, 1997. Selling, general and administrative
expense during the twelve months ended December 31, 1998 consisted of $3.5
million attributable to MTS and Corporate compared to $4.3 million in 1997, $2.7
million attributable to PIC/ATN compared to $403,000 in 1997, and $1.3 million
attributable to Incomex following its acquisition in February 1998. MTS and
Corporate selling, general and administrative expenses decreased $500,000, or
13%, to $3.5 million for the twelve months ended December 31, 1998 from $4.0
million for the twelve months ended December 31, 1997. The decrease was
primarily due to a reduction in commissions and costs associated with the
termination of the AT&T agreement in October 1998.
Depreciation and Amortization Expense. Consolidated depreciation and
amortization expense decreased $0.3 million, or 14%, to $1.8 million for the
twelve months ended December 31, 1998 from $2.1 million for the twelve months
ended December 31, 1997. Depreciation and amortization expense during the twelve
months ended December 31, 1998 consisted of $1.4 million attributable to MTS and
Corporate, $436,000 attributable to PIC/ATN and $12,000 attributable to Incomex.
The completion of the acquisition of PIC in October 1997 resulted in additional
goodwill and acquisition cost amortization of $406,000 for the twelve months
ended December 31, 1998. The completion of the Incomex acquisition in February
1998 resulted in goodwill and acquisition cost amortization of $162,000 for the
twelve months ended December 31,1998. Such increases were offset by a decrease
in depreciation of property and equipment due to the impairment loss recorded in
1997 of $1.4 million. As a result of the PIC earn-out settlement and the Incomex
earn-out settlement recorded in the fourth quarter of 1998 (see Notes 3 and 4 to
Notes to Consolidated Financial Statements) MCC recorded additional goodwill of
$4.4 million which will be amortized over the remaining life of the original
goodwill. This will result in higher amortization expenses in future periods.
Gain on AT&T Agreement Buyout. MCC's agreement with AT&T was amended
during 1998 to terminate as of October 15, 1998. Under the amendment, AT&T will
directly manage the existing customers under the contracts and AT&T assumed
liability for all commissions owed to the existing customers for the period
March 1, 1998 to October 15, 1998. As a result, MCC recorded a one-time gain in
the fourth quarter of 1998 of $453,396 representing the commissions assumed by
AT&T less the write-off of owned equipment at the existing customers'
properties.
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<PAGE> 20
Interest Expense. Consolidated interest expense, including amortization
of debt discount, increased $1.6 million, or 186%, to $2.4 million for the
twelve months ended December 31, 1998 from $847,000 for the twelve months ended
December 31, 1997. The primary reason for the increased interest expense was due
to additional debt incurred related to the acquisition of PIC and the
acquisition of fixed assets. Interest expense during the twelve months ended
December 31, 1998 consisted of $1.5 million attributable to MTS and Corporate,
$524,000 attributable to PIC/ATN and $356,000 attributable to Incomex following
its acquisition in February 1998. Interest expense incurred by MTS and Corporate
increased $790,000 or 102%, to $1.5 million for the twelve months ended December
31, 1998 from $775,000 for the twelve months ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, MCC'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, MCC used $833,000 in cash
for operating activities, and $1.6 million in investing activities. MCC 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.
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 Fisher & Company, Inc. and its subsidiaries and their
affiliated leasing partnerships ("Berthel") to purchase telecommunications
equipment. MCC currently makes monthly lease and debt payments of approximately
$163,000, in the aggregate, pursuant to these financing arrangements. As of
December 31, 1998, MCC was current on all lease payments to Berthel. However,
subsequent to year-end, MCC has not made the March and April 1999 payments.
Berthel only has the right to demand that MCC cure this violation but has not
made such demand as of May 24, 1999.
From the start of 1999 through May 28, 1999, MCC raised $4.5 million
from debt financings. MCC 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. MCC currently estimates that it will need
at least $5.5 million in debt or equity financings in 1999 in addition to the
$4.5 million debt financing discussed above, and in addition to cash flows from
operations, to fund its cash requirements, including its initial investments in
ACTEL Integrated Communications, Inc. and AcNet S.A. de C.V.
In April 1999, MCC 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, MCC believes that the proceeds will be sufficient
to meet its 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 credit facility, including the negotiation of
definitive loan documents, there can be no assurance that MCC will complete this
credit facility or, if completed, that the terms of the credit facility will be
as presently contemplated. If MCC is unable to complete the proposed credit
facility, it would expect to seek necessary financing through other debt or
equity sources. However, no assurance can be given that MCC will be able to
raise adequate funds through such financings or generate sufficient cash flows
to meet MCC's cash needs. Insufficient funds may require MCC to delay, scale
back or eliminate some or all of its market development plans or otherwise may
have a material adverse effect on MCC. See "Forward-Looking Statements" below.
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 May 28, 1999. 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, 1999. The Company currently anticipates paying
all past due debt with the proceeds from the proposed credit facility upon
closing.
In June 1999, the Company completed a bridge financing in the amount of
$2,000,000. Pursuant to the bridge financing, the Company issued a note in the
principal amount of $2,000,000 and warrants to purchase 250,000 shares of common
stock to one investor. The note due bears interest at the rate of 12% per annum
and all principal and interest under the note are due on July 21, 1999. If
the Company does not repay the note when due, then the interest rate increases
to (i) 14% per annum for the period from the due date until August 20, 1999,
(ii) 16% per annum for the period from August 21, 1999 until September 21, 1999,
and (iii) 18% per annum for the period after September 21, 1999. In addition, if
the Company does not repay the note on or prior to September 21, 1999, the
warrants may be exercised to purchase twice the number of shares subject to the
warrants immediately prior to such date. The warrants are exercisable at any
time until June 21, 2009 at an exercise price of $3.50 per share. The exercise
price and the number of shares of common stock purchasable upon the exercise of
the warrants are subject to adjustment upon the occurrence of certain events,
including stock dividends, stock splits and the issuance by the Company of
shares of common stock or other securities convertible into or exercisable to
purchase shares of common stock at a price below the then applicable exercise
price of the warrants. The Company has agreed to use its best efforts to
register the warrants and the shares of common stock underlying the warrants by
August 21, 1999.
18
<PAGE> 21
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. MCC 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
MCC's telecommunications switches, but also non-IT systems, such as alarm
systems, fax machines or other miscellaneous systems.
MCC's State of Readiness. MCC's main internal systems, including IT
systems such as financial systems, the Telemanager and MCC'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. MCC anticipates completing surveys to its key
customers and vendors during the second quarter of 1999.
Costs to Address MCC's Year 2000 Compliance. The majority of MCC's
internal Year 2000 issues have been or will be corrected through systems
upgrades, including an upgrade of MCC's telecommunications switches, some of
which are being made for other business purposes. MCC estimates that the costs
of all such upgrades will not exceed $200,000, of which approximately $100,000
had been incurred through December 31, 1998.
Risks to MCC relating to the Year 2000 Issue. MCC believes that its
reasonably likely worse case scenario would involve malfunctions of MCC's
telecommunications switches or the internal systems of MCC's customers and key
vendors. Any such malfunctions which result in serious disruption of MCC's
ability to process calls could have a material adverse effect on MCC's results
of operations and financial condition. MCC plans to monitor the Year 2000
compliance of its significant customers and vendors. However, a number of risks
relating to the Year 2000 issue may be out of MCC's control, including the
compliance status of MCC's customers and vendors and MCC's reliance on outside
links for essential services such as power. There can be no assurance that a
failure of systems of third parties on which MCC's systems and operations rely
to be Year 2000 compliant will not have a material adverse effect on MCC's
business, financial condition or operating results.
MCC's Year 2000 Contingency Plans. By the end of the third quarter of
1999, MCC expects to be substantially Year 2000 compliant. To the extent that
any of MCC systems are not Year 2000 compliant by the end of the third quarter
of 1999, MCC believes that it will have time to implement alternative systems.
MCC's ability to respond to noncompliance by its customers and vendors will be
limited.
19
<PAGE> 22
FORWARD-LOOKING STATEMENTS
This prospectus 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:
- MCC's access to adequate debt or equity capital to meet MCC's
operating and financial needs;
- MCC's ability to integrate and assimilate the businesses of
PIC/ATN and Incomex;
- MCC's ability to respond to competition in its markets;
- MCC's ability to expand into new markets and to effectively manage
its growth;
- customer acceptance and effectiveness of the Telemanager and
MCC's ability to develop new technology and to adapt to
technological change in the telecommunications industry;
- the risk that MCC's assessment of the Year 2000 issue, including
its identification, assessment, remediation and testing efforts,
the dates on which MCC 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;
- MCC's reliance on its key personnel and the availability of
qualified personnel;
- general economic conditions in MCC's markets;
- the risk that MCC'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 prospectus.
MCC 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 MCC and include, but are not limited
to:
- expectations regarding MCC's financial condition and liquidity and
the proposed credit facility, as well as future cash flows;
20
<PAGE> 23
- expectations regarding sales growth, sales mix, gross margins and
related matters with respect to operating results;
- expectations regarding the expansion of MCC's business;
- the estimated costs to bring MCC's IT and non-IT systems into
compliance with respect to the Year 2000 issue and the
consequences to MCC of noncompliance by MCC or third parties; and
- expectations regarding capital expenditures and investments in new
acquisition opportunities.
21
<PAGE> 24
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding our directors and
executive officers:
<TABLE>
<CAPTION>
Name Age Current Position
---- --- ----------------
<S> <C> <C>
Guy O. Murdock 43 Chairman of the Board and Director
Thomas E. Chaplin 47 Chief Executive Officer and Director
Colin P. Halford 44 President and Director
John C. Poss (1)(2) 51 Director
Steven R. Ehlert (1)(2) 41 Director
Larry A. Erickson (1)(2) 50 Director
Wayne Wright 53 Vice Chairman of the Board and Director
Bonner B. Hardegree 51 Senior Vice President - Business Development
Paul C. Tunink 40 Vice President and Chief Financial Officer
Bill R. Wharton 37 Vice President-Operations
</TABLE>
- --------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
GUY O. MURDOCK, CHAIRMAN OF THE BOARD AND DIRECTOR. Mr. Murdock has been
Chairman of the Board and a Director since the founding of MCC in 1989. Mr.
Murdock served as Chief Executive Officer of MCC from 1989 to April 1997 and as
President of MCC from 1989 to July 1996.
THOMAS E. CHAPLIN, CHIEF EXECUTIVE OFFICER AND DIRECTOR. Mr. Chaplin has been
Chief Executive Officer and a Director of MCC since April 1997. From 1993 to
1996, Mr. Chaplin was the Senior Vice President and General Manager of APAC
Teleservices, Inc., a provider of outsourced customer service and sales
teleservices for large companies. From 1990 to 1993, Mr. Chaplin was President
and Chief Operating Officer of Unilens Corp., USA, a manufacturer of aspheric
multifocal contact lenses.
COLIN P. HALFORD, PRESIDENT AND DIRECTOR. Mr. Halford was appointed President of
MCC in July 1996. From 1994 to July 1996, Mr. Halford served as Vice President
of Sales and Marketing. Mr. Halford has served as a Director of MCC since 1993.
JOHN C. POSS, DIRECTOR. Mr. Poss has served as a Director of MCC since 1994.
From 1995 to present Mr. Poss has served as President of J.C. Poss & Company,
Inc., a telecommunications consulting firm. Mr. Poss served as President of
WorldQuest Networks, Inc., a provider of international facsimile services,
during 1997. From 1992 to 1995 Mr. Poss served as Senior Vice
President-Corporate Development and Planning of Intellicall, Inc., a provider of
technology, equipment and services to the telecommunications industry.
STEVEN R. EHLERT, DIRECTOR. Mr. Ehlert has served as a Director since 1995. From
1996 to 1999, Mr. Ehlert served as Vice President of Operations of Starter
Printables Division of Starter Corporation, a producer of athletic apparel and
equipment. From 1986 to 1996, Mr. Ehlert served as Director of Operations of
Galt Sand Company Incorporated, a commercial printing company specializing in
silk screened clothing.
22
<PAGE> 25
LARRY A. ERICKSON, DIRECTOR. Mr. Erickson has served as a Director of MCC since
1997. Mr. Erickson has served as Vice President and Controller of Rockwell
Collins, Inc., a provider of advanced avionics and airborne and mobile
communications systems and services to airlines, aircraft manufacturers and
business aircraft, a division of Rockwell International Corporation, since
November 1996. For more than 20 years prior to November 1996, Mr. Erickson
served in a variety of finance and accounting positions at Rockwell
International Corporation.
WAYNE WRIGHT, VICE CHAIRMAN OF THE BOARD AND DIRECTOR. Mr. Wright has served as
Vice Chairman of the Board since 1998 and as a Director of MCC since 1997. Since
March 1997, Mr. Wright has served as President of Priority International
Communications, Inc., a wholly owned subsidiary of MCC since October 1997. From
1996 to 1997, Mr. Wright served as Chairman of the Board of Priority
International Communications, Inc. From 1993 to 1996, Mr. Wright served as an
officer of U.S. Ameriphone.
BONNER B. HARDEGREE, SENIOR VICE PRESIDENT - BUSINESS DEVELOPMENT. Since
November 1998, Mr. Hardegree has served as MCC's Senior Vice President -
Business Development and as Executive Vice President of Priority International
Communications, Inc., a wholly owned subsidiary of MCC since October 1997. Mr.
Hardegree served as Vice President and Chief Financial Officer of Priority
International Communications, Inc. from January 1996 to November 1998. From
December 1992 to January 1996, Mr. Hardegree served as Vice President and Chief
Financial Officer of U.S. American Payphone Management.
PAUL C. TUNINK, VICE PRESIDENT AND CHIEF FINANCIAL OFFICER. Mr. Tunink has
served as Vice President and Chief Financial Officer of MCC since November 1998.
Mr. Tunink served as Vice President, Chief Financial Officer and Treasurer of
Stuart Entertainment, Inc., a manufacturer of gaming supplies, from April 1995
to October 1998. From April 1992 to April 1995, Mr. Tunink served as Divisional
Vice President - Finance of Younkers Inc., a retailer.
BILL R. WHARTON, VICE PRESIDENT - OPERATIONS. Mr. Wharton has served as MCC's
Vice President - Operations since 1995. From 1989 to 1995, Mr. Wharton served as
Director of Operations of MCC.
COMPENSATION OF DIRECTORS
We pay directors not employed by MCC an annual retainer equal to the
greater of (a) $12,000 or (b) $1,000 for each meeting of the Board of Directors
attended. In addition, we issue options to purchase up to 5,000 shares of our
common stock annually to each director not employed by MCC on the day after
election as a director with an exercise price equal to the closing market price
of the common stock on the date of issuance. During 1998, MCC made consulting
payments in the amount of $48,250 to J.C. Poss & Company, Inc., a corporation
controlled by John C. Poss, a director of MCC.
EXECUTIVE COMPENSATION
Cash and Other Compensation. The table which follows sets forth certain
information concerning compensation paid to, earned by or awarded to Thomas E.
Chaplin, our Chief Executive Officer, Guy O. Murdock, our Chairman of the Board,
Colin P. Halford, our President, and Bonner B. Hardegree, our Senior Vice
President Business Development (collectively, the "named executive officers")
during the years indicated below. No other executive officer's salary and bonus
exceeded $100,000 in 1998.
23
<PAGE> 26
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
OTHER COMPENSATION AWARDS
ANNUAL ANNUAL SECURITIES
NAME AND COMPENSATION COMPEN- UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SATION($) OPTIONS (#) COMPENSATION ($)
------------------ ---- ---------- --------- ---------- ------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Guy O. Murdock, 1998 $150,000 $20,000 $ -- 323,236 (2) --
Chairman of the Board (1) 1997 150,000 20,000 -- 123,236 --
1996 150,000 18,750 -- -- --
Thomas E. Chaplin, 1998 209,231 40,000 -- 600,000 (4) --
Chief Executive Officer (3) 1997 105,962 40,000 -- 400,000 --
1996 -- -- -- -- --
Colin P. Halford, 1998 139,549 25,000 -- 211,201 (5) --
President 1997 121,923 25,000 -- 136,201 --
1996 100,000 10,000 -- -- --
Bonner B. Hardegree, 1998 119,204 -- -- -- --
Senior Vice 1997 21,110 -- -- -- --
President - Business 1996 -- -- -- -- --
Development (6)
</TABLE>
- ---------------
(1) Mr. Murdock resigned as Chief Executive Officer of MCC effective April 4,
1997.
(2) Includes options to purchase 123,236 shares of common stock which were
originally granted in 1997 and which were repriced effective April 3, 1998.
(3) Mr. Chaplin commenced employment with MCC effective April 4, 1997.
(4) Includes options to purchase 400,000 shares of common stock which were
originally granted in 1997 and which were repriced effective April 3, 1998
(of which 75,000 were subsequently repriced again effective May 29, 1998 and
75,000 were subsequently repriced again effective December 31, 1998).
(5) Includes options to purchase 136,201 shares of common stock which were
originally granted in 1997 and which were repriced effective April 3, 1998.
(6) Mr. Hardegree was appointed as an executive officer of MCC effective
December 1, 1998.
Options Granted During 1998. The following table provides certain
information regarding stock options granted to the named executive officers
during the year ended December 31, 1998.
24
<PAGE> 27
<TABLE>
<CAPTION>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION
NAME GRANTED FISCAL YEAR PRICE DATE
- -------------------------- ---------------- ----------------- --------- ---------------
<S> <C> <C> <C> <C>
Guy O. Murdock............ 200,000 (1) 13.8% $2.75 April 9, 2008
Guy O. Murdock............ 123,236 (2) 8.5 2.25 April 3, 2007
Thomas E. Chaplin......... 200,000 (1) 13.8 2.75 April 9, 2008
Thomas E. Chaplin......... 250,000 (3) 17.2 2.25 April 3, 2007
Thomas E. Chaplin......... 75,000 (4) 5.2 2.94 April 3, 2007
Thomas E. Chaplin......... 75,000 (5) 5.2 3.50 April 3, 2007
Colin P. Halford.......... 75,000 (6) 5.2 2.75 April 9, 2008
Colin P. Halford.......... 136,201 (7) 9.4 2.25 April 9, 2007
Bonner B. Hardegree....... - - - -
</TABLE>
- ----------
(1) Options with respect to 100,000 shares were exercisable on the date of
grant, options with respect to 50,000 shares became exercisable on
April 9, 1999 and options with respect to 50,000 shares become
exercisable on April 9, 2000.
(2) Consists of options originally granted in 1997 and repriced effective
April 3, 1998. All of these options are currently exercisable.
(3) Consists of options originally granted in 1997 and repriced effective
April 3, 1998. Options with respect to 200,000 shares were exercisable
at December 31, 1998 and options with respect to 50,000 shares became
exercisable on April 3, 1997.
(4) Consists of options originally granted in 1997, repriced effective
April 3, 1998 to $2.25 per share and repriced again effective May 29,
1998 to $2.94 per share. All of these options are currently
exercisable.
(5) Consists of options originally granted in 1997, repriced effective
April 3, 1998 to $2.25 per share and repriced again effective December
31, 1998 to $3.50 per share. All of these options are currently
exercisable.
(6) Options with respect to 25,000 shares became exercisable on the date of
grant, options with respect to 25,000 shares became exercisable on
April 8, 1999 and options with respect to 25,000 shares become
exercisable on April 8, 2000.
(7) Consists of options originally granted in 1997 and repriced effective
April 3, 1998. Options with respect to 93,961 shares were exercisable
at December 31, 1998, options with respect to 21,120 shares became
exercisable on April 3, 1999 and options with respect to 21,120 shares
become exercisable on April 3, 2000.
Fiscal Year-End Option Values. The following table provides certain
information regarding the unexercised options held by the named executive
officers at December 31, 1998. No named executive officer exercised any options
during the year ended December 31, 1998.
25
<PAGE> 28
<TABLE>
<CAPTION>
AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VAULE OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END AT FISCAL-END
-------------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Guy. O. Murdock.............. 223,236 100,000 $ 89,523 $12,500
Thomas E. Chaplin............ 450,000 150,000 137,500 43,750
Colin P. Halford............. 157,760 92,240 100,456 32,650
Bonner B. Hardegree.......... -- -- -- --
- ----------
</TABLE>
(1) Based on the reported closing bid price of $2.875 per share of common
stock on the Nasdaq Bulletin Board on December 31, 1998.
Employment Agreements. On October 1, 1998, MCC entered into an Amended
and Restated Employment Agreement with each of Thomas C. Chaplin and Guy O.
Murdock. Each of the Amended and Restated Employment Agreements has a term
through December 31, 2001. Pursuant to the Amended and Restated Employment
Agreements, Messrs. Chaplin and Murdock will receive base salaries of not less
than $250,000 and $150,000, respectively. In addition, each of them will be
eligible to participate in MCC's bonus plan and other executive compensation
plans. Each Amended and Restated Employment Agreement contains a provision
restricting competition with MCC for a period of two years following termination
of employment. Mr. Chaplin's Amended and Restated Employment Agreement provides
that if his employment is terminated by MCC for any reason other than for cause,
Mr. Chaplin will be entitled to receive severance at an annual rate of $150,000
for two years, provided, however, that if his employment is terminated by MCC or
by Mr. Chaplin for any reason within 180 days after a sale of MCC, Mr. Chaplin
will be entitled to continuation of his then effective base salary for three
years. Mr. Murdock's Amended and Restated Employment Agreement provides that if
his employment is terminated by MCC for any reason, including for cause, Mr.
Murdock will be entitled to receive severance at an annual rate of $150,000 for
two years, provided, however, that if his employment is terminated by MCC or by
Mr. Murdock for any reason within 180 days after a sale of MCC, Mr. Murdock will
be entitled to continuation of his then effective base salary for three years.
On January 1, 1999, MCC entered into an Amended and Restated Employment
Agreement with Colin P. Halford. The Amended and Restated Employment Agreement
has a term through December 31, 2001 and provides that Mr. Halford will receive
a base salary of not less than $150,000. In addition, Mr. Halford will be
eligible to participate in MCC's bonus plan and other executive compensation
plans. The Amended and Restated Employment Agreement contains a provision
restricting competition with MCC for a period of two years following termination
of employment. Mr. Halford's Amended and Restated Employment Agreement provides
that if his employment is terminated by MCC for any reason, including for cause,
Mr. Halford will be entitled to receive severance at an annual rate of $150,000
for two years, provided, however, that if his employment is terminated by MCC or
by Mr. Halford for any reason within 180 days after a sale of MCC, Mr. Halford
will be entitled to continuation of his then effective base salary for three
years.
On November 1, 1998, MCC and its wholly owned subsidiaries PIC and PICR
entered into an Employment Agreement with Bonner B. Hardegree. The Employment
Agreement has a three-year term, with automatic one-year renewals unless either
party gives notice of termination at least one year in advance of the end of the
term. Pursuant to the Employment Agreement, Mr. Hardegree will receive a base
salary of not less than $144,000. In addition, Mr. Hardegree will be entitled to
participate in MCC's
26
<PAGE> 29
bonus plans and other compensation plans and fringe benefits for executive
officers. The Employment Agreement contains a provision restricting competition
with MCC for a period of six months following termination of employment unless
termination is by MCC without "cause" or by Mr. Hardegree for "good reason." Mr.
Hardegree's Employment Agreement provides that if his employment is terminated
by MCC without "cause" or by Mr. Hardegree for "good reason," Mr. Hardegree will
be entitled to continuation of his then effective base salary for a period equal
to the greater of (i) one year, or (ii) the remaining term of the Employment
Agreement, and if MCC terminates the Employment Agreement due to failure to
continue PIC/PICR's business or the death or disability of Mr. Hardegree, Mr.
Hardegree will be entitled to continuation of his then effective base salary for
a period of one year.
CERTAIN TRANSACTIONS
MCC obtains lease and other financing services from Berthel. Berthel is
the beneficial owner of approximately 19.2% of the common stock outstanding on
March 31, 1999. MCC paid Berthel $1,115,614 in 1998, including $840,415 for
scheduled lease payments, $133,681 for interest payments and $141,518 in sales
commissions and related fees in connection with MCC's private placement of notes
and warrants. We currently make monthly lease and debt payments to Berthel of
$133,810 in the aggregate.
Effective December 31, 1998, MCC and Berthel agreed to allow Berthel to
exercise warrants to purchase an aggregate of 1,100,000 shares of common stock
at a reduced exercise price of $1.30 per share. The original exercise price of
the warrants was $1.4375.
MCC provides telecommunications services to certain hotels managed by
Larken, Inc., a corporation controlled by Larry A. Cahill. Mr. Cahill
beneficially owns approximately 9.9% of the common stock outstanding on March
31, 1999. MCC generated revenues of $463,976 in 1998 pursuant to its contracts
with Larken, Inc., and paid commissions of $360,000 to Mr. Cahill pursuant to
such contracts.
On October 31, 1997, MCC completed its acquisition of PIC/ATN. Wayne
Wright, a former shareholder of PIC and PICR, was appointed as a director of MCC
immediately following the PIC acquisition and Bonner B. Hardegree, a former
shareholder of PIC and PICR, was appointed as an executive officer of MCC in
November 1998. MCC's agreement for the PIC acquisition contained an earn-out
provision which required that MCC issue additional shares of common stock to the
former shareholders of PIC based upon the combined earnings before interest,
taxes, depreciation and amortization of PIC and PICR for certain periods after
closing. In December 1998, MCC and the former shareholders of PIC agreed to
settle the PIC earn-out based on historical and projected financial information
with respect to PIC. Pursuant to the settlement, MCC issued an aggregate of
2,300,000 shares of common stock to the former shareholders of PIC in December
1998, including 1,580,067 shares to Mr. Wright and 283,341 shares to Mr.
Hardegree. We also agreed with Mr. Wright and Mr. Hardegree that certain notes
issued to them pursuant to the PIC acquisition would bear interest at an annual
rate of 14% from the date of the settlement agreement. At December 31, 1998, an
aggregate of $317,203 was outstanding under these notes. In January 1999, the
notes to Mr. Wright and Mr. Hardegree were paid in full. MCC also entered into a
deferred payment arrangement with Mr. Wright pursuant to which Mr. Wright would
receive $300,000 payable in 24 equal monthly installments, which commenced in
January 1999.
PRINCIPAL SHAREHOLDERS
The following table sets forth information as of March 31, 1999
regarding the beneficial
27
<PAGE> 30
ownership of shares of our common stock by (i) each person who is known to MCC
to be the beneficial owner of more than 5% of the common stock; (ii) each
director and named executive officer (defined above) individually; and (iii) all
directors and executive officers as a group. Beneficial ownership of common
stock has been determined for this purpose in accordance with Rules 13d-3 and
13d-5 of the Securities and Exchange Commission, under the Securities Exchange
Act of 1934, which provide, among other things, that a person is deemed to be
the beneficial owner of Common Stock if such person, directly or indirectly, has
or shares voting power or investment power with respect to the common stock or
has the right to acquire such ownership within sixty days after March 31, 1999.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT
PRINCIPAL SHAREHOLDER OWNED (1) OF CLASS
--------------------- ------------ --------
<S> <C> <C>
Guy O. Murdock (2) 1,839,910 16.3
Thomas E. Chaplin (3) 1,132,056 9.9
Colin P. Halford (4) 254,030 2.4
John C. Poss (5) 63,799 *
Steven R. Ehlert (6) 120,000 1.2
Wayne Wright (7) 2,720,067 26.1
Larry A. Erickson (8) 10,000 *
Bonner B. Hardegree 341,912 3.3
Berthel Fisher & Company, Inc. (9) 2,114,334 19.2
Larry A. Cahill (10) 1,086,824 9.9
All directors and executive
officers as a group
(10 persons) (11) 6,666,325 50.9
-----------------------
* Less than 1%.
</TABLE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Unless otherwise indicated
below, the persons and entities named in the table have sole voting and
sole investment power with respect to all shares beneficially owned,
subject to community property laws where applicable. Shares of common
stock subject to options that are currently exercisable or exercisable
within 60 days of March 31, 1999 are deemed to be outstanding and to be
beneficially owned by the person holding such options for the purpose of
computing the percentage ownership of such person but are not treated as
outstanding for the purpose of computing the percentage ownership of any
other person.
(2) Includes 273,236 shares subject to exercise of stock options, 195,000
shares subject to the exercise of warrants and 488,889 shares subject to
the conversion of shares of Series A Preferred Stock.
(3) Includes 550,000 shares subject to exercise of stock options, 199,000
shares subject to the exercise of warrants and 355,556 shares subject to
the conversion of shares of Series A Preferred Stock.
(4) Includes 203,880 shares subject to exercise of stock options and 50,050
shares subject to exercise of warrants.
(5) Includes 53,799 shares subject to exercise of stock options.
(6) Includes 15,000 shares subject to exercise of stock options and 105,000
shares subject to exercise of warrants.
(7) Includes 80,000 shares subject to exercise of warrants.
28
<PAGE> 31
(8) Includes 10,000 shares subject to exercise of stock options.
(9) Includes (i) 1,925,764 shares of common stock held by certain affiliates
of Berthel for which Berthel shares voting and investment power, including
418,982 shares subject to exercise of warrants and 192,888 shares subject
to the conversion of shares of Series A Preferred Stock, and (ii) 75,000
shares subject to exercise of warrants. Reflects information reported in a
Schedule 13D filed with the SEC by Berthel on January 16, 1997, as amended
on June 6, 1997, January 8, 1998, May 1, 1998, June 22, 1998, August 6,
1998 and January 13, 1999. The address of Berthel is 100 Second Street
S.E., P.O. Box 74250, Cedar Rapids, Iowa 52407.
(10) Mr. Cahill's address is 3330 Southgate Court S.W., Cedar Rapids, Iowa
52404. Includes 200,000 shares subject to exercise of warrants and 444,444
shares subject to the conversion of shares of Series A Preferred Stock.
(11) Includes 1,240,466 shares subject to exercise of stock options, 679,050
shares subject to exercise of warrants and 844,445 shares subject to the
conversion of shares of Series A Preferred Stock.
SELLING SHAREHOLDERS
The selling shareholders are offering 4,722,626 shares of our common
stock for sale pursuant to this prospectus. Additional information with respect
to the selling shareholders follows.
<TABLE>
<CAPTION>
SHARES
SHARES OF COMMON STOCK OFFERED FOR
OWNED PRIOR TO SALE SHARES TO BE OWNED
OFFERING (1) HEREBY AFTER THE OFFERING (2)
------------ ------ ----------------------------
SELLING SHAREHOLDER Number Percent
- ------------------- ------ -------
<S> <C> <C> <C> <C>
Wayne Wright (3) 2,720,067 810,000 1,910,067 18.3
Chloe Wright 250,000 250,000 0 *
Bonner B. Hardegree (4) 341,912 261,912 80,000 *
John S. Rance (5) 714,499 714,499 0 *
R. Michael Upshaw (6) 714,499 714,499 0 *
Fernando Ficachi (7) 357,335 357,335 0 *
Steve Rance (8) 181,096 66,096 115,000 1.1
Rance Family Trust (9) 60,934 60,934 0 *
Holderness Family Trust (9) 60,934 60,934 0 *
Jeannie Rance (9) 60,934 60,934 0 *
R. Michael Upshaw 55,868 55,868 0 *
David A. Coats & Terrell A. Coats, Trustees
of the David A. Coats & Terrell A. Coats
Revocable Trust (10) 40,622 40,622 0 *
Gary Newton (10) 40,622 40,622 0 *
Karri Rance Heredia (11) 20,311 20,311 0 *
Pamela Leary (11) 20,311 20,311 0 *
Angela Taylor (11) 20,311 20,311 0 *
Jason Rance (12) 5,162 5,162 0 *
Chris Clements 2,000 2,000 0 *
Scott Leblanc 100 100 0 *
William Melchionne 100 100 0 *
Cathryn Purcell 100 100 0 *
John Ellis 100 100 0 *
Courtney Shimp 100 100 0 *
Mary Ramsey 100 100 0 *
Robert Shimp 66,996 66,996 0 *
Richard Courtney 116,996 116,996 0 *
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
SHARES
SHARES OF COMMON STOCK OFFERED FOR
OWNED PRIOR TO SALE SHARES TO BE OWNED
OFFERING (1) HEREBY AFTER THE OFFERING (2)
------------ ------ ----------------------------
SELLING SHAREHOLDER Number Percent
- ------------------- ------ -------
<S> <C> <C> <C> <C>
Berthel Fisher & Co, Inc. (13) 2,114,335 516,019 1,598,316 15.2
Capital Markets Associates (14) 20,000 20,000 0 *
Gary Sherman (15) 48,852 48,852 0 *
Wheat First Securities, Custodian for
William B. McKee u/a/d 5/15/97 (16) 215,938 175,866 40,072 *
Mark Jazwin (17) 28,841 27,834 1,007 *
Barclay Investments, Inc. (15) 4,581 4,581 0 *
Edward Henderson (15) 4,581 4,581 0 *
McKee & Co. ESOP (15) 43,758 43,758 0 *
William B. McKee (15) 132,936 132,936 0 *
Ron Marusiak (18) 2,446 1,257 1,189 *
</TABLE>
- ---------------
* Less than 1%.
(1) This table is based upon information supplied by the selling shareholders.
Unless otherwise indicated in footnotes to this table, each of the
shareholders named in this table has sole voting and investment power with
respect to the shares shown as beneficially owned.
(2) Assumes sale of all shares offered hereby.
(3) Includes 80,000 shares subject to exercise of warrants. Mr. Wright is
Vice Chairman of our Board of Directors. See "Management."
(4) Mr. Hardegree is our Senior Vice President - Business Development. See
"Management."
(5) Includes 100,000 shares subject to exercise of warrants.
(6) Includes 100,000 shares subject to exercise of warrants.
(7) Includes 133,863 shares subject to exercise of warrants.
(8) Includes 5,497 shares subject to exercise of warrants offered
under this prospectus by the selling shareholder and 115,000 shares
subject to exercise of warrants not offered under this prospectus.
(9) Includes 5,066 shares subject to exercise of warrants.
(10) Includes 3,377 shares subject to exercise of warrants.
(11) Includes 1,689 shares subject to exercise of warrants.
(12) Includes 431 shares subject to exercise of warrants.
(13) Consists of shares held by certain affiliates of Berthel, including
192,888 subject to the conversion of 2,170 shares of Series A convertible
preferred stock and 278,131 shares subject to exercise in full of
warrants. information regarding Berthel's beneficial ownership of our
common stock. Berthel has provided a significant amount of lease and debt
financing to MCC. See "Certain Transactions" on page 26.
(14) All shares subject to exercise of warrants.
(15) All shares subject to the exercise of warrants. Each warrant is
exercisable to purchase units at an exercise price of $6.146 per unit.
Each unit consists of two shares of common stock and one warrant to
purchase one share of common stock at an exercise price of $9.50 per
share.
(16) Includes 175,866 shares subject to exercise of warrants offered under
prospectus and by the selling shareholder and 32,072 shares subject to
the exercise of warrants not offered under this prospectus.
(17) Includes 27,834 shares subject to exercise of warrants offered under this
prospectus and by the selling shareholder and 1,007 shares subject to the
exercise of warrants not offered under this prospectus.
(18) Includes 1,257 shares subject to exercise of warrants offered under this
prospectus and by the selling shareholder and 800 shares subject to the
exercise of warrants not offered under this prospectus.
30
<PAGE> 33
PLAN OF DISTRIBUTION
SELLING SHAREHOLDERS
The selling shareholders may, without limitation and from time to time,
sell all or a portion of their shares of common stock being registered hereunder
on any stock exchange, market or trading facility on which the common stock is
traded, at market prices prevailing at the time of sale, fixed prices or at
negotiated prices. The common stock may, without limitation, be sold by the
selling shareholders by one or more of the following methods:
- Ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
- Block trades in which the broker-dealer engaged by any of the selling
shareholders will attempt to sell the common stock as agent for such
selling shareholder but may position and resell a portion of the
block as principal to facilitate the transaction;
- Purchases by a broker-dealer as principal and resale by such
broker-dealer for its account;
- Privately negotiated transactions;
- In accordance with Rule 144 promulgated under the Securities Act of
1933, as amended, rather than pursuant to this prospectus;
- A combination of any such methods of sale; or
- Any other method permitted pursuant to applicable law.
From time to time the selling shareholders may pledge their common
stock pursuant to the margin provisions of the selling shareholder's customer
agreements with its brokers. Upon a default by such a selling shareholder, the
broker may, from time to time, offer and sell the pledged common stock.
In effecting sales, brokers-dealers engaged by the selling shareholders
may arrange for other broker-dealers to participate in such sales.
Brokers-dealers may receive commissions or discounts from the selling
shareholders (or, if any such broker-dealer acts as agent for the purchase of
such common stock, from such purchaser) in amounts to be negotiated which are
not expected to exceed those customary in the types of transactions involved.
Broker-dealers may agree with the selling shareholders to sell a specified
number of common stock at a stipulated price per share, and, to the extent such
broker-dealer is unable to do so acting as agent for the selling shareholders,
to purchase as principal any unsold common stock at the price required to
fulfill the broker-dealer commitment to the selling shareholders.
The selling shareholders and any broker-dealers or agents that
participate with the selling shareholders in sales of the common stock may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933, as
amended, in connection with such sales. In such event, any commissions received
by such broker-dealers or agents and any profit on the resale of the common
stock purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act of 1933, as amended.
MCC will pay all fees and expenses incident to the registration of our
common stock pursuant to this prospectus, other than the fees and disbursements
of counsel to the selling shareholders and underwriting discounts or
commissions, if any.
31
<PAGE> 34
WARRANTS
General. The following is a brief summary of certain provisions of the
Warrants, but such summary does not purport to be complete and is qualified in
all respects by reference to the actual text of the Warrant Agreement between
MCC and Firstar Trust Company (the "Warrant Agent"). A copy of the Warrant
Agreement is filed as an exhibit to the registration statement of which this
prospectus is a part.
Exercise Price and Terms. Each Warrant entitles the holder thereof to
purchase at any time on or prior to October 21, 1999, approximately 2.068 shares
of common stock at a price of $3.143 per share, subject to adjustment in
accordance with the anti-dilution and other provisions referred to below. The
holder of any Warrant may exercise such Warrant by surrendering the certificate
representing the Warrant to the Warrant Agent, with the subscription form on the
reverse side of such certificate properly completed and executed, together with
payment of the exercise price. The Warrants may be exercised at any time in
whole or in part at the applicable exercise price until expiration of the
Warrants. No fractional shares will be issued upon exercise of the Warrants. The
exercise price of the Warrants bears no relation to any objective criteria of
value, and should in no event be regarded as an indication of any future market
price of the securities offered hereby.
Adjustments. The exercise price and number of shares of common stock
purchasable upon the exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations and reclassification of the common stock, or sale by us of shares
of common stock or other securities convertible into common stock at a price
below the then applicable exercise price of the Warrants. Additionally, an
adjustment would be made in the case of a reclassification or exchange of the
common stock, consolidation or merger of MCC with or into another corporation
(other than a consolidation or merger in which we are the surviving corporation)
or sale of all or substantially all of our assets in order to enable warrant
holders to acquire the kind and number of shares of stock or other securities or
property receivable in such event by the holder of the number of shares of
common stock that might otherwise have been purchased upon the exercise of the
Warrant. No adjustment will be made until the cumulative adjustments in the
exercise price per share amount to $.25 or more. Originally, the Warrants were
issued at an exercise price of $6.50 per share. The current exercise price of
$3.143 per share and the number of shares issuable upon exercise of the Warrants
reflect cumulative adjustments to date.
Redemption Provisions. The Warrants are subject to redemption at $.01
per Warrant on 30 days prior written notice to the Warrant holders if the
closing bid price of the common stock averages in excess of $7.15 for a period
of 20 consecutive trading days ending within 15 days of the notice of
redemption. In the event that we exercise the right to redeem the Warrants, such
Warrants will be exercisable until the close of business on the date for
redemption fixed in such notice. If any Warrant called for redemption is not
exercised by such time, it will cease to be exercisable and its holder will be
entitled only to the redemption price. Since it is our present intention to
exercise such right, Warrant holders should presume that we would call the
Warrants for redemption if such criteria are met
Transfer, Exchange and Exercise. The Warrants are in registered form
and may be presented to the Warrant Agent for transfer, exchange or exercise at
any time on or prior to their expiration date on October 21, 1999, at which time
the Warrants become wholly void and of no value. If a market for the Warrants
develops, the holder may sell the Warrants instead of exercising them. There can
be no assurance, however, that a market for the Warrants will develop or
continue.
Warrant holder not a Shareholder. The Warrants do not confer upon
holders any voting, dividend or other rights as shareholders of MCC.
32
<PAGE> 35
Modification of Warrant. MCC and the Warrant Agent may make such
modifications to the Warrants as we deem necessary and desirable that do not
adversely affect the interests of the Warrant holders. No other modifications
may be made to the Warrants without the consent of the majority of the Warrant
holders. Modification of the number of securities purchasable upon the exercise
of any Warrant, the exercise price and the expiration date with respect to any
Warrant requires the consent of the holder of such Warrant.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
Our authorized capital stock consists of 40,000,000 shares of Common
Stock, without par value and 1,000,000 shares of Preferred Stock, without par
value (the "Preferred Stock"). The following description of our capital stock is
qualified in all respects by reference to our Restated Articles of
Incorporation.
As of April 9, 1999, approximately 10,329,867 shares of common stock
were outstanding, held of record by 155 shareholders. The holders of the common
stock are entitled to receive dividends when and as declared by the Board of
Directors out of any funds lawfully available therefor. Holders of common stock
are entitled to one vote per share on each matter submitted to a vote of MCC's
shareholders. There are no preemptive rights associated with any of the shares
of common stock. In the event of a liquidation, dissolution or winding upon of
MCC, holders of common stock are entitled to share equally and ratably in MCC
assets, if any, remaining after the payment of all of our debts and liabilities
and payment of the liquidation preference of the holders of the Preferred Stock.
The outstanding shares of common stock are, and the shares of common stock
offered by us hereby when issued will be, fully paid and nonassessable.
PREFERRED STOCK
Serial Preferred Stock. MCC's Board of Directors has the authority to
establish one or more series of Preferred Stock and to determine, with respect
to any series of Preferred Stock, the terms and rights of such series, including
(1) the designation of the series, (2) the number of shares of the series, which
number the Board of Directors may thereafter increase or decrease (unless
otherwise provided in the articles of amendment with respect to such series),
(3) whether dividends, if any, shall be cumulative or noncumulative, the
dividend rate of the series and the relation which such dividends bear to the
dividends payable on any other class or any other series of any class of stock,
(4) the dates at which dividends, if any, shall be payable, (5) the redemption
rights and price or prices, if any, for shares of the series, (6) the terms and
amount of any sinking fund provided for the purchase or redemption of shares of
the series, (7) the amounts payable on shares of the series in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of MCC, (8) whether the shares of the series will be convertible into shares of
any other class or series of stock, or any other security of MCC, and if so, the
specification of such other class or series or such other security, the
conversion price or prices or rate or rates, any adjustments thereof, the date
or dates as of which such shares will be convertible and all other terms and
conditions upon which such conversion may be made, (9) restrictions on the
issuance of shares of the same series or any other class or series, (10) the
voting rights, if any, of the holders of such series and (11) any other powers,
preferences and relative, participating, optional or other special rights of the
shares of such series, and the qualifications, limitations or restrictions
thereof. Our Articles of Amendment authorize us to issue up to 1,000,000 shares
of Preferred Stock.
33
<PAGE> 36
As of the date of this prospectus, the Board of Directors has
designated one series of preferred stock, Series A Convertible Preferred Stock
("Series A Preferred Stock"), of which 18,920 shares are issued and outstanding.
Terms of Series A Preferred Stock. Holders of shares of Series A
Preferred Stock are entitled to cumulative dividends in preference to any
dividend on our common stock at the rate of 8% of the original issuance price
per annum, payable at MCC's option in cash or in shares of common stock. If
dividends are paid in shares of common stock, the dividend rate will be based
upon the average closing bid price of the common stock over the 5-day trading
period ending the day prior to the dividend payment date.
In the event of any liquidation or winding up of MCC, holders of shares
of Series A Preferred Stock will be entitled to a distribution in preference to
the holders of common stock in an amount equal to the original issuance price
per share. Any remaining assets will be distributed among the holders of the
common stock.
Each holder of the shares of Series A Preferred Stock will have the
right to convert all or any part of such holder's shares of Series A Preferred
Stock into shares of common stock at any time commencing one year after the
first sale of shares of Series A Preferred Stock (the "Original Issuance Date").
The conversion rate will be equal to the original issuance price divided by a
conversion price of $1.125 per share.
All outstanding shares of Series A Preferred Stock will automatically
convert into shares of common stock at the Series A Conversion Rate on the third
anniversary of the Original Issuance Date.
Shares of Series A Preferred Stock have no voting rights except as
required by applicable law.
TRANSFER AGENT
The Transfer Agent for our common stock is Firstar Trust Company,
Milwaukee, Wisconsin.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
our company by Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c.,
Milwaukee, Wisconsin.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1997
and for the years then ended included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as set forth in their report
appearing elsewhere herein (which report expresses an unqualified opinion and
includes an explanatory paragraph relating to substantial doubt about MCC's
ability to continue as a going concern) and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). You may read and copy any
reports, proxy statements or other information we file at the Commission's
public reference room at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549 or at its public reference rooms in New York, New York, or Chicago,
Illinois. Please call the Commission at 1-800-SEC-0330 for further information
on the public reference rooms. You can also obtain copies of our Commission
filings by writing to the Public Reference Section of the
34
<PAGE> 37
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, many
of our Commission filings are available at the Commission's site on the World
Wide Web at "http//www.sec.gov."
We have filed a registration statement on Form SB-2 to register with
the Commission the common stock offered by this prospectus. This prospectus is
part of that registration statement. As allowed by Commission rules, this
prospectus does not contain all the information you can find in the registration
statement or the exhibits to the registration statement. Statements contained in
this prospectus concerning the provisions of documents are necessarily summaries
of such documents, and each statement is qualified in its entirety by reference
to the copy of the applicable document filed with the Commission.
35
<PAGE> 38
MURDOCK COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statements of Redeemable Securities F-6
Consolidated Statements of Shareholders' Equity (Deficiency) F-7
Consolidated Statements of Cash Flows F-9
Notes to Consolidated Financial Statements F-12
UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS:
Consolidated Balance Sheets F-37
Consolidated Statements of Operations F-39
Consolidated Statements of Cash Flows F-40
Notes to Consolidated Financial Statements F-41
</TABLE>
F-1
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Murdock Communications Corporation
Cedar Rapids, Iowa
We have audited the accompanying consolidated balance sheets of Murdock
Communications Corporation and subsidiaries (the "Company") as of December 31,
1998 and 1997, and the related consolidated statements of operations, redeemable
securities, shareholders' equity (deficiency) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Murdock Communications Corporation
and subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations and deficit working capital raise substantial doubt about its ability
to continue as a going concern. Management's plans concerning these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
March 22, 1999
F-2
<PAGE> 40
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS (Notes 6 and 7)
CURRENT ASSETS:
Cash $ 1,722,033 $ 547,737
Accounts receivable, less allowance for doubtful
accounts: 1998 - $654,793; 1997 - $376,589 1,690,302 846,414
AT&T commission receivable (Note 2) 62,513 --
Prepaid expenses and other current assets 280,568 109,186
------------ ------------
Total current assets 3,755,416 1,503,337
------------ ------------
PROPERTY AND EQUIPMENT:
Land and building 1,171,659 463,693
Telecommunications equipment 9,013,509 8,530,536
Furniture and equipment 748,512 537,550
------------ ------------
10,933,680 9,531,779
Accumulated depreciation (8,097,752) (7,400,982)
------------ ------------
2,835,928 2,130,797
Telecommunications equipment under capital lease,
net of accumulated amortization: 1998 - $3,326,300;
1997 - $3,209,405 181,630 370,706
------------ ------------
Property and equipment, net 3,017,558 2,501,503
------------ ------------
OTHER ASSETS:
Goodwill, net of accumulated amortization:
1998 - $697,324; 1997 - $70,061 11,643,882 4,133,648
Cost of purchased site contracts, net of accumulated amortization:
1998 - $669,597; 1997 - $740,330 173,576 484,355
Other intangible assets, net of accumulated amortization:
1998 - $348,208; 1997 - $22,911 659,155 397,556
Investments, at cost (Note 17) 1,500,296 --
Prepaid commissions 1,704,444 --
Other noncurrent assets 223,963 365,654
------------ ------------
Total other assets 15,905,316 5,381,213
------------ ------------
TOTAL $ 22,678,290 $ 9,386,053
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 41
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable (Note 6) $ 7,401,371 $ 1,715,000
Outstanding checks in excess of bank balances -- 231,452
Accounts payable 1,204,690 1,684,090
Accrued expenses 2,059,362 1,453,334
Current portion of capital lease obligations
principally with a related party (Note 12) 868,754 181,322
Current portion of long-term debt with related parties (Note 7) 828,331 949,497
Current portion of long-term debt, others (Note 7) 199,287 259,654
------------ ------------
Total current liabilities 12,561,795 6,474,349
LONG-TERM LIABILITIES:
Capital lease obligations principally with a related party,
less current portion (Note 12) 3,133,077 3,375,011
Long-term debt with related parties, less current portion (Note 7) 2,105,325 3,293,829
Long-term debt, others, less current portion (Note 7) 725,381 292,493
Accumulated loss of joint venture in excess of initial investment (Note 5) 60,393 380,913
Deferred income 15,189 51,447
------------ ------------
Total liabilities 18,601,160 13,868,042
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY (DEFICIENCY) (Note 1):
8% Series A Convertible Preferred Stock, $100 stated value (Note 8):
Authorized - 50,000 shares
Issued and outstanding: 1998 - 18,920 ($1,892,000
liquidation value);
1997 - 16,250 shares 1,837,109 1,544,146
Common stock, no par or stated value (Note 10):
Authorized - 20,000,000 shares
Issued and outstanding: 1998 - 10,329,867 shares; 1997 - 4,458,439
shares 19,834,810 11,343,308
Common stock warrants (Note 9):
Issued and outstanding: 1998 - 4,420,763; 1997 - 2,149,279 438,905 315,400
Additional paid-in capital 134,000 134,000
Accumulated deficit (18,167,694) (17,818,843)
------------ ------------
Total shareholders' equity (deficiency) 4,077,130 (4,481,989)
------------ ------------
TOTAL $ 22,678,290 $ 9,386,053
============ ============
</TABLE>
F-4
<PAGE> 42
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
REVENUES:
Call processing $ 32,386,570 $ 7,629,116
Other revenue 1,601,529 788,004
------------ ------------
Total revenues 33,988,099 8,417,120
------------ ------------
COST OF SALES:
Call processing 21,859,097 5,958,335
Other cost of sales 516,220 314,322
Nonstandard international bad debt expense 390,276 --
------------ ------------
Total cost of sales 22,765,593 6,272,657
------------ ------------
GROSS PROFIT 11,222,506 2,144,463
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative expense 7,468,246 4,702,754
Depreciation and amortization expense 1,848,748 2,142,773
Loss from impairment of property, equipment and intangible assets -- 1,353,010
------------ ------------
Total operating expenses 9,316,994 8,198,537
------------ ------------
INCOME (LOSS) FROM OPERATIONS 1,905,512 (6,054,074)
------------ ------------
NONOPERATING INCOME (EXPENSE):
Gain on AT&T contract buyout (Note 2) 453,396 --
Interest expense (2,426,140) (847,203)
Other income 8,906 --
------------ ------------
Total nonoperating income (expense) (1,963,838) (847,203)
------------ ------------
LOSS BEFORE INCOME TAX EXPENSE AND
JOINT VENTURE LOSS (58,326) (6,901,277)
Loss from joint venture (Note 5) 41,546 993,329
Income tax expense (Note 11) 74,466 5,402
------------ ------------
NET LOSS (174,338) (7,900,008)
Dividends and accretion on 8% Series A Convertible Preferred Stock (174,513) (35,007)
------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (348,851) $ (7,935,015)
------------ ------------
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (.06) $ (1.89)
------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,422,783 4,208,439
============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 43
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE SECURITIES
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
10% SERIES A
REDEEMABLE
PREFERRED STOCK
<S> <C>
BALANCE AT JANUARY 1, 1997 $ 24,480
Accrued dividends on 10% Series A
Redeemable Preferred Stock 170
Repurchase of 200 shares of 10% Series A
Redeemable Preferred Stock (24,650)
--------
BALANCE AT DECEMBER 31, 1997 AND 1998 $ --
========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 44
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
8% SERIES A
CONVERTIBLE COMMON STOCK
PREFERRED STOCK COMMON STOCK WARRANTS
------------------------- --------------------------- --------------------------
NUMBER NUMBER NUMBER
OF OF OF
SHARES ISSUED SHARES ISSUED WARRANTS ISSUED
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1997 -- $ -- 4,152,494 $ 10,820,898 1,173,089 $ 113,336
Insurance of options to directors -- -- -- -- -- --
Accrued dividends on 10% Series A -- -- -- -- -- --
Redeemable Preferred Stock
Exercise of common stock warrants -- -- 5,945 10,536 (3,089) (4,936)
Conversion of notes payable, accrued
interest and long-term debt with a
related party into common stock
(Note 7) -- -- 465,265 1,334,274 -- --
Issuance of 8% Series A Convertible
Preferred Stock, net of offering
costs of $87,636 16,250 1,537,364 -- -- -- --
Issuance of common stock in
connection with the acquisition of
PIC and PIC-R (Note 3) -- -- 300,000 511,874 -- --
Issuance of warrants to
Berthel in connection with lease
and note modifications -- -- -- -- 979,279 207,000
Recission of conversion of notes
payable, accrued interest and long-
term debt with a related party into
common stock (Note 7) -- -- (465,265) (1,334,274) -- --
Accretion to conversion price of 8%
Series A Convertible
Preferred Stock -- 6,782 -- -- -- --
Accrued dividends on 8% Series A
Convertible Preferred Stock -- -- -- -- -- --
Net loss for 1997 -- -- -- -- -- --
BALANCES AT DECEMBER 31, 1997 16,250 $ 1,544,146 4,458,439 $ 11,343,308 2,149,279 $ 315,400
======== ============ =========== ============ ========= =========
<CAPTION>
SHARE-
ADDITIONAL HOLDERS'
PAID-IN ACCUMULATED EQUITY
CAPITAL DEFICIT (DEFICIENCY)
<S> <C> <C> <C>
BALANCES AT JANUARY 1, 1997 $124,000 $ (9,883,658) $ 1,174,576
Insurance of options to directors 10,000 -- 10,000
Accrued dividends on 10% Series A
Redeemable Preferred Stock -- (170) (170)
Exercise of common stock warrants -- -- 5,600
Conversion of notes payable, accrued
interest and long-term debt with a
related party into common stock
(Note 7) -- -- 1,334,274
Issuance of 8% Series A Convertible
Preferred Stock, net of offering
costs of $87,636 -- -- 1,537,364
Issuance of common stock in
connection with the acquisition of
PIC and PIC-R (Note 3) -- -- 511,874
Issuance of warrants to
Berthel in connection with lease
and note modifications -- -- 207,000
Recission of conversion of notes
payable, accrued interest and long-
term debt with a related party into
common stock (Note 7) -- -- (1,334,279)
Accretion to conversion price of 8%
Series A Convertible
Preferred Stock -- (6,782) --
Accrued dividends on 8% Series A
Convertible Preferred Stock -- (28,225) (28,225)
Net loss for 1997 -- (7,900,008) (7,900,008)
-------- ------------ -----------
BALANCES AT DECEMBER 31, 1997 $134,000 $(17,818,843) $(4,481,989)
======== ============ ===========
</TABLE>
(Continued)
F-7
<PAGE> 45
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1998 AND 1997 (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
8% SERIES A CONVERTIBLE COMMON STOCK
PREFERRED STOCK COMMON STOCK WARRANTS
------------------------ --------------------- --------------------
NUMBER NUMBER NUMBER
OF OF OF
SHARES ISSUED SHARES ISSUED WARRANTS ISSUED
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1997 16,250 $ 1,544,146 4,458,439 $11,343,308 2,149,279 $315,400
Issuance of 8% Series A Convertible
Preferred Stock, net of issuance costs
of $5,228 2,670 261,772 -- -- -- --
Issuance of common stock and
warrants in connection with the
acquisition of Incomex (Note 4) -- -- 1,900,000 2,494,375 155,384 29,797
Exercise of warrants by a related
party -- -- 1,100,000 1,752,396 (1,100,000) (322,396)
Issuance of warrants in connection
with debt financing with a related
party (Note 12) -- -- -- -- 350,000 165,396
Issuance of warrants in connection
with debt financing of which 739,000
are with related parties (Note 6) -- -- -- -- 2,700,000 221,288
Issuance of warrants in lieu of director
and consulting fees -- -- -- -- 45,000 5,200
Issuance of warrants in lieu of agent
fees to a related party (Note 6) -- -- -- -- 121,100 24,220
Issuance of common stock in connection
with the acquisition of PIC (Note 3) -- -- 2,871,428 4,244,731 -- --
Accretion to conversion price of 8%
Series A Convertible Preferred Stock -- 31,191 -- -- -- --
Accrued dividends on 8% Series A
Convertible Preferred Stock -- -- -- -- -- --
Net loss for 1998 -- -- -- -- -- --
--------- ------------ ---------- ----------- --------- --------
BALANCES AT DECEMBER 31, 1998 18,920 $ 1,837,109 10,329,867 $19,834,810 4,420,763 $438,905
========= ============ ========== =========== ========= ========
<CAPTION>
SHARE-
ADDITIONAL HOLDERS'
PAID-IN ACCUMULATED EQUITY
CAPITAL DEFICIT (DEFICIENCY)
<S> <C> <C> <C>
BALANCES AT DECEMBER 31, 1997 134,000 $(17,818,843) $ (4,481,989)
Issuance of 8% Series A Convertible
Preferred Stock, net of issuance costs
of $5,228 -- -- 261,772
Issuance of common stock and
warrants in connection with the
acquisition of Incomex (Note 4) -- -- 2,524,172
Exercise of warrants by a related
party -- -- 1,430,000
Issuance of warrants in connection
with debt financing with a related
party (Note 12) -- -- 165,396
Issuance of warrants in connection
with debt financing of which 739,000
are with related parties (Note 6) -- -- 221,288
Issuance of warrants in lieu of director
and consulting fees -- -- 5,200
Issuance of warrants in lieu of agent
fees to a related party (Note 6) -- -- 24,220
Issuance of common stock in connection
with the acquisition of PIC (Note 3) -- -- 4,244,731
Accretion to conversion price of 8%
Series A Convertible Preferred Stock -- (31,191) --
Accrued dividends on 8% Series A
Convertible Preferred Stock -- (143,322) (143,322)
Net loss for 1998 -- (174,338) (174,338)
--------- ------------ ------------
BALANCES AT DECEMBER 31, 1998 $ 134,000 $(18,167,694) $ 4,077,130
========= ============ ============
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 46
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (174,338) $(7,900,008)
Adjustments to reconcile net loss to net cash flows from operating activities:
Loss from impairment of property, equipment and intangible assets -- 1,353,010
Depreciation and amortization, including amortization of technology license 1,848,748 2,226,106
Noncash interest expense 271,623 359,141
Noncash compensation expense -- 10,000
Noncash commission expense 71,000 --
Recognition of deferred gains from equipment sales with a related party -- (22,428)
Loss from joint venture 41,546 993,329
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Receivables (727,670) 783,621
Other current assets (60,285) 130,684
Prepaid commissions (730,269) --
Other noncurrent assets 260,654 (187,372)
Outstanding checks in excess of bank balances (247,255) 134,192
Accounts payable (717,933) 873,691
Accrued expenses (539,525) 64,367
Deferred income (36,258) --
----------- -----------
Net cash flows from operating activities (739,962) (1,181,667)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (766,176) (641,229)
Cash paid for acquisitions (130,155) (640,156)
Payments for site contracts (2,875) (48,697)
Capitalized software development costs -- (138,013)
Cash paid for investments (1,500,296) --
Cash advanced to joint venture (362,065) (262,869)
Cash acquired with acquisitions 16,574 49,713
----------- -----------
Net cash flows from investing activities (2,744,993) (1,681,251)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations, primarily to a related party (264,822) (217,344)
Proceeds from capital lease obligations with a related party 710,320 --
Borrowings on notes payable 5,406,000 1,470,000
Borrowings of long-term debt with related parties -- 54,021
Payments on notes payable (1,656,241) (595,000)
Payments on long-term debt with related parties (719,005) (46,016)
Payments on long-term debt, others (152,479) (15,217)
Dividends paid on 10% Series A Redeemable Preferred Stock -- (170)
Repurchase of 10% Series A Redeemable Preferred Stock and common stock warrants -- (24,480)
Proceeds from issuance of common stock and warrants 1,430,000 5,600
Proceeds from issuance of 8% Series A Convertible Preferred Stock 50,000 1,625,000
Payments for offering costs (144,522) (87,636)
----------- -----------
Net cash flows from financing activities 4,659,251 2,168,758
----------- -----------
NET INCREASE (DECREASE) IN CASH 1,174,296 (694,160)
CASH AT BEGINNING OF YEAR 547,737 1,241,897
----------- -----------
CASH AT END OF YEAR $ 1,722,033 $ 547,737
=========== ===========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the year for interest, principally to a related party $ 2,183,214 $ 389,438
Cash paid during the year for income taxes 24,466 5,402
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE> 47
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997 (CONTINUED)
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF 1998 NONCASH OPERATING, INVESTING AND FINANCING
ACTIVITIES:
The Company recorded the following increases as a result of its acquisition of
Incomex:
<TABLE>
<S> <C>
Accounts receivable $ 178,731
Other current assets 111,097
Telecommunications equipment 3,242
Furniture and equipment 52,787
Accumulated depreciation (13,851)
Goodwill 920,947
Commission advances 974,175
Other assets 9,964
Notes payable (821,697)
Outstanding checks over bank balance (15,803)
Accounts payable (133,533)
Accrued expenses (826,985)
Common stock (422,500)
---------
Cash acquired with acquisition $ 16,574
=========
</TABLE>
The Company recorded deferred loan costs of $445,901 in connection with the
issuance of warrants to purchase 3,171,000 shares of common stock in the Company
in connection with debt financing and 155,384 shares of common stock in the
Company in connection with the Incomex earnout.
The Company recorded a note payable of $25,000 in exchange for accrued
consulting fees.
The Company recorded a note payable of $5,000 in exchange for accrued director
fees.
The Company recorded an increase to the carrying value of the 8% Series A
Convertible Preferred Stock and a charge to accumulated deficit of $31,191
representing the current year's accretion to its conversion price.
The Company recorded an increase in accrued expense and a charge to accumulated
deficit of $143,322 for the cumulative dividends earned by the holders of the 8%
Series A Convertible Preferred Stock.
The Company recorded prepaid commissions of $180,000 and accrued expenses of
$37,000 in connection with the issuance of 2,170 shares of 8% Series A
Convertible Preferred Stock.
The Company recorded long-term debt, others and land and building of $525,000 in
connection with the purchase of ATN's building.
The Company recorded goodwill of $3,916,889, accounts payable of $135,000,
accrued expenses of $153,059, common stock of $4,244,731 and decreased long-term
debt by $527,389 and issued 571,428 shares of common stock in connection with
the PIC earnout as discussed in Note 3.
The Company recorded goodwill of $4,103,776, accrued expenses of $59,187, issued
notes payable of $1,084,915 and common stock of $2,469,609 in connection with
the Incomex purchase as discussed in Note 4.
See notes to consolidated financial statements.
F-10
<PAGE> 48
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997 (CONCLUDED)
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF 1997 NONCASH OPERATING, INVESTING AND FINANCING
ACTIVITIES:
The Company contributed telecommunications equipment with a carrying value of
$349,574 as its initial investment in a joint venture (see Note 5).
The Company recorded the following increases as a result of its acquisitions of
PIC and PIC-R:
<TABLE>
<S> <C>
Accounts receivable $ 403,753
Other current assets 53,894
Telecommunications equipment 1,269,046
Furniture and equipment 193,787
Accumulated depreciation (244,761)
Goodwill 3,563,553
Purchased equipment location contracts 420,466
Accumulated amortization (193,125)
Other noncurrent assets 70,421
Notes payable (840,000)
Outstanding checks in excess of bank balances (97,260)
Accounts payable (279,917)
Accrued expenses (437,780)
Long-term debt with related parties (1,400,000)
Long-term debt, others (2,019,916)
Common stock (511,874)
-----------
Cash acquired with acquisitions $ 49,713
===========
</TABLE>
The Company recorded deferred loan and lease restructuring costs of $207,000 in
connection with the issuance of warrants to purchase 979,279 shares of common
stock in the Company to Berthel.
In connection with the modification of capital lease obligations with Berthel,
the Company recorded additional deferred lease restructuring costs and capital
lease obligations of $210,854.
The Company recorded an increase to the carrying value of the 8% Series A
Convertible Preferred Stock and a charge to accumulated deficit of $6,782
representing the current year's accretion to its conversion price.
The Company recorded an accrued expense and a charge to accumulated deficit of
$28,225 for the cumulative dividends earned by the holders of the 8% Series A
Convertible Preferred Stock.
The Company recorded an increase in accrued expense and telecommunications
equipment under capital lease for $235,000 representing sales taxes on lease
payments.
See notes to consolidated financial statements.
F-11
<PAGE> 49
MURDOCK COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Murdock Communications Corporation (individually,
or collectively with its wholly-owned subsidiaries discussed below, referred
to herein as the "Company") is engaged in the business of providing operator
services and call processing to North American payphones, hotels and
institutions, database profit management services and telecommunications
billing and collection services for the hospitality industry and outsourced
operator services for the telecommunications industry.
Through a series of acquisitions and new product development, the Company
has transformed itself over the last year from a long distance reseller of
AT&T network services to U.S. hotels to being a communications provider in
North America, primarily servicing the hospitality and pay telephone
businesses.
The Company operates its business under three business units. Murdock
Technology Services ("MTS"), formerly the operating unit of Murdock
Communications Corporation, was the unit responsible for marketing of AT&T
operator services. In light of the declining volume and narrow margin of the
AT&T business, and the Company's refocused business strategy, the Company
reached an agreement with AT&T to terminate their marketing agreement
effective October 15, 1998. After the effective date of the termination,
AT&T directly managed the existing customers under the contract and revenues
from the AT&T agreement ended effective in the fourth quarter of 1998. As a
result of the termination, the Company recorded a one-time gain in the
fourth quarter of $453,396.
The MTS division was created in 1998 to meet the needs of the hospitality
telecommunications management market by providing database profit management
services and other value added telecommunication services. The division's
main product, the Telemanager, is a proprietary software and hardware
product, created to help manage telecommunication installations and services
in the hospitality market. At December 31, 1998, MTS has installed the
Telemanager in approximately 174 locations compared with 80 locations at
December 31, 1997.
Effective October 31, 1997, the Company purchased Priority International
Communications, Inc. ("PIC") (see Note 3). PIC is primarily engaged in the
business of providing long-distance telecommunications services to patrons
of hotels and public and private payphone owners with which PIC has
contracts to provide such services. Services include, but are not limited
to, credit card billing services, live operator services, automated
collection and messaging delivery services, voice mail services and
telecommunications consulting. At December 31, 1998, PIC maintains site
contracts with and provides services for approximately 207 customers
throughout the United States (257 customers at December 31, 1997).
Also, on October 31, 1997, the Company purchased PIC Resources Corp.
("PIC-R") (see Note 3). PIC-R, operating through its wholly-owned subsidiary
ATN Communications, Incorporated ("ATN"), is primarily engaged in the
business of providing carrier services for long-distance telecommunications
companies throughout the United States. PIC-R handles incoming operator
assisted calls with their operators on location. Together, PIC, PIC-R and
ATN comprise the second business unit, known as "PIC/ATN".
F-12
<PAGE> 50
On February 13, 1998, the Company purchased Incomex, Inc. ("Incomex"), the
Company's third business unit (see Note 4). Incomex is primarily engaged in
the business of providing international operator services to the hospitality
industry from Mexico to the United States. At December 31, 1998, Incomex
maintains contracts with approximately 95 hotel and resort hotel properties
located in Mexico compared with approximately 80 at February 13, 1998.
BASIS OF PRESENTATION - The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The Company has an accumulated deficit of $18.2 million,
and current liabilities exceed current assets by $8.8 million at December
31, 1998. These factors, among others, indicate that the Company may be
unable to continue as a going concern for a reasonable period of time.
Management's plans to sustain operations are discussed below.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company
be unable to continue as a going concern. The Company's continuation as a
going concern is dependent upon its ability to generate sufficient cash flow
to meet its obligations on a timely basis, to obtain additional financing
and refinancing as may be required, and ultimately to attain profitable
operations. Management's plans to accomplish these objectives include, but
are not limited to, the following:
- Continuing integration of the PIC/ATN and Incomex acquisitions (see
Notes 3 and 4). Management believes these acquisitions will continue to
provide additional positive cash flows as the companies are more fully
integrated and generate additional sources of call processing traffic.
- Obtaining a line of credit which would enable the Company to
restructure its debt position and finance future growth.
- Successful implementation and market acceptance of the Telemanager
system, a new source of revenues to the Company in 1998, that is being
marketed to new and existing customers. Telemanager provides the
Company's customers with information regarding the hotel's
telecommunication system in graphs and reports that are easy to read
and understand by persons lacking specialized expertise in
telecommunications.
- During the first quarter of 1999, the Company raised $1,500,000 of cash
from debt financing (see Note 18). The Company does not believe that
its existing capital and anticipated funds from operations will be
sufficient to meet its anticipated cash needs for working capital,
capital expenditures, debt obligations and investments in acquisitions
in 1999. The Company currently estimates that it will need at least $10
million, including the $1,500,000 above, in debt or equity financings
in 1999, in addition to cash flows from operations, to fund its cash
requirements and initial investments in AcNet and ACTEL (see Note 17).
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company, the accounts of PIC and PIC-R effective October
31, 1997, and effective February 13, 1998, the accounts of Incomex, its
wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant change in the near-term relate to the
determination of the collectibility of receivables and impairment of
long-lived assets.
F-13
<PAGE> 51
CERTAIN RISK CONCENTRATIONS - The Company derived 12% and 24% of its
revenues in 1998 from two customers of PIC/ATN and 54% of its revenues from
AT&T in 1997. At December 31, 1998 and 1997, 3% and 12%, respectively, of
the Company's receivables were due from AT&T. The Company's agreement with
AT&T ended in the fourth quarter of 1998. Also, substantially all of the
Company's leasing arrangements are with Berthel Fisher & Company and its
subsidiaries, and their affiliated leasing partnerships ("Berthel"). Berthel
owned 14.8% and 9.2% of the Company's outstanding common stock at December
31, 1998 and 1997, respectively.
REVENUE RECOGNITION - Revenues derived from the AT&T commission agreement
related to calls were recognized as revenues as the calls were placed.
Additional bonuses, primarily for reaching the number of contracted rooms or
calls specified in the agreement, were recognized when the specified
criteria had been met.
A growing portion of the Company's revenues are now derived from processing
long-distance telephone calls. The gross charges for these calls are
recognized as revenues by the Company as the calls are placed. At the same
time, amounts are recorded as cost of services for long distance charges
from the carrier of the calls, as well as charges for processing the calls,
bad debts and commissions to be paid based on the Company's prior experience
for these items.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. For
financial reporting purposes, depreciation and amortization are computed on
these assets using the straight-line method over their estimated useful
lives ranging from three to 28 years. For income tax purposes, accelerated
methods are used. Amortization of telecommunications equipment under capital
lease is included with depreciation expense.
The Company accounts for its telecommunications equipment leases as capital
leases under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 13. Accordingly, the cost of the leased assets and the related
obligations under the lease agreements are recorded at the inception of the
lease. The leases are generally for four to five years.
The Company periodically reviews long-lived assets and intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of these assets may not be recoverable. During 1997, the
Company recorded an impairment write-down with respect to telecommunications
equipment owned and under capital lease, purchased site contracts and a
technology license of $1,353,010 based on the estimated discounted future
cash flows expected to be generated by such assets. The write-down primarily
related to call processing equipment at hotels and a technology license for
such equipment which became functionally obsolete upon the acquisition of
PIC-R since calls can be processed directly by PIC-R without utilizing such
equipment.
GOODWILL - Goodwill is amortized on the straight-line method over 10 years.
COST OF PURCHASED SITE CONTRACTS - The cost of obtaining site contracts is
amortized over the term of the related contracts, generally one to three
years, using the straight-line method.
OTHER INTANGIBLE ASSETS - Other intangible assets consist of software
development costs, a technology license and deferred lease and loan
restructuring costs.
F-14
<PAGE> 52
Software development costs of $138,013 at December 31, 1998 and 1997 were
incurred for products and significant product enhancements subsequent to
establishment of their technological feasibility and prior to their general
release to customers. These costs were capitalized and stated net of
accumulated amortization of $68,915 and $22,911 at December 31, 1998 and
December 31, 1997, respectively. The ultimate recovery of the costs is
dependent on the Company's ability to achieve a level of market acceptance
which will generate revenues and profits in amounts sufficient to permit
such recovery. The Company evaluates the recoverability of capitalized
software development costs by project on a periodic basis. Capitalized
software development costs are amortized using the straight-line method over
three years.
The technology license was stated at cost of $500,000 and net of accumulated
amortization of $258,333 at December 31, 1996 and was being amortized over
the technology's estimated useful life of five years using the straight-line
method. Such license was written-off during 1997 as discussed above.
Deferred lease and loan restructuring costs incurred, net of amortization,
in connection with lease and loan modification agreements of $869,350 and
$282,454 at December 31, 1998 and 1997, respectively, have been deferred and
are being amortized over the restructured lease and loan agreement term of
five years using the effective interest method. Accumulated amortization
related to deferred lease and loan restructuring costs are $279,293 and none
at December 31, 1998 and 1997, respectively.
INVESTMENTS - The Company owns a note receivable convertible into preferred
stock and convertible preferred stock. Such investments are accounted for at
cost and are not readily marketable. Should these investments experience a
decline in value that is other than temporary, the Company will recognize a
loss to reflect such decline.
INCOMEX FUNCTIONAL CURRENCY - All contracts Incomex has entered into with
their customers are denominated in United States dollars.
INVESTMENT IN JOINT VENTURE - The Company's 50% investment in joint venture
is accounted for under the equity method. Losses in excess of the Company's
investment are recorded when the Company has a legal obligation or is
otherwise committed to provide additional financial support. An other than
temporary decline in the value of the investment is recognized through a
write-down or write-off of the investment.
INCOME TAXES - The Company files a consolidated federal and certain
consolidated state income tax returns with its subsidiaries. Some states do
not allow the filing of a consolidated state tax return, and therefore,
certain subsidiaries file a separate state income tax return. Deferred
income taxes are provided for the tax consequences in future years of
temporary differences between the tax basis of assets and liabilities and
their financial reporting amounts, based on enacted tax laws and tax rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized. Income
tax expense is the tax payable for the year and the change during the period
in deferred tax assets and liabilities.
ACCRETION ON PREFERRED STOCK - Up to the date of conversion, the Company
accretes the carrying value of the 8% Series A Convertible Preferred Stock
(net of offering costs incurred) to the conversion price by the effective
interest method.
CUMULATIVE DIVIDENDS ON PREFERRED STOCK - Cumulative dividends on the 8%
Series A Convertible Preferred Stock are deducted from accumulated deficit
as the dividends are earned by the holders and an accrued liability is
recorded.
F-15
<PAGE> 53
STOCK-BASED COMPENSATION - The Company measures stock-based compensation
cost with employees as the excess of the fair value of the Company's common
stock at date of grant over the amount the employee must pay for the stock.
The Company measures stock-based compensation with other than employees as
the fair value of the goods or services received or the fair value of the
equity instrument issued, whichever is more reliably measurable.
NET LOSS PER COMMON SHARE - Basic net loss per common share is based on the
weighted average number of shares of common stock outstanding during the
year. Diluted net loss per common share is the same as basic net loss per
share due to the antidilutive effect on net loss per share of any assumed
conversion of convertible securities or exercise of options and warrants.
RECLASSIFICATIONS - Certain amounts in the 1997 financial statements have
been reclassified to conform with the current year's presentation.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The Company has not yet determined if the adoption of SFAS
No. 133 will have an impact on the Company's consolidated results of
operations, financial position or cash flow.
2. AT&T COMMISSION AGREEMENT
During 1995, the Company entered into an agreement with AT&T with an
effective date of December 16, 1995 (the "Old Agreement"). Under the Old
Agreement, the Company received commissions based on the number of calls
made, management fees based on 10% of the commissions earned, compliance
incentive bonuses determined quarterly and paid monthly based on the number
of calls processed each month and various additional bonuses, including a $1
million bonus to be paid in four quarterly installments for contracting
100,000 rooms under the Old Agreement by July 1, 1996. Prior to July 1,
1996, the Company had reached the 100,000 room threshold and recognized the
$1 million bonus. During 1996, an amended agreement was executed which
accelerated the payment dates of the final two quarterly installments to
February 28, 1997 and May 1, 1997.
The Old Agreement, as amended, included provisions for the refund of
$1,000,000 in bonuses paid to the Company by AT&T should the Company
terminate the agreement or fail to comply with the agreement. AT&T had
reserved a number of grounds to terminate the Old Agreement, as amended,
prior to its expiration, primarily related to certain compliance and quality
standards. AT&T was responsible for determining if the Company was in
compliance with certain standards set forth in the Old Agreement, as
amended, including achieving a 94% compliance rate with respect to AT&T
dialing standards. The Company achieved a compliance rate above 94% and,
therefore, has not forfeited any compliance bonuses received. Management is
not aware of any noncompliance nor has the Company been notified of any
noncompliance with the Old Agreement, as amended.
F-16
<PAGE> 54
During 1997, a new agreement was executed with an effective date of January
16, 1998 (the "New Agreement"). By executing the New Agreement, the Company
received a signing bonus of $200,000. Under the New Agreement, the Company
received monthly commissions based on the number of calls made, bonuses of
up to $400,000 based on the number of calls processed during the year and
monthly compliance incentive bonuses based on the number of calls processed
each month. The New Agreement included provisions for the refund of the
bonus payments should the Company terminate the New Agreement or fail to
comply with the New Agreement. AT&T was responsible for determining if the
Company was in compliance with certain standards, as set forth in the New
Agreement. AT&T reserved a number of grounds to terminate the New Agreement
prior to its expiration, with or without cause.
During 1998, the Company and AT&T agreed to terminate the agreement with an
effective date of October 15, 1998. The Company based this decision on the
declining volume and narrow margins of the AT&T business, and on the
Company's refocused business strategy. AT&T agreed to pay certain hotel
commissions otherwise payable by the Company and, as a result, the Company
recorded a one-time gain in the fourth quarter of $453,396.
3. ACQUISITION OF PIC AND PIC-R
Effective October 31, 1997, the Company purchased all of the outstanding
capital stock of PIC in exchange for a cash payment at closing of $500,000
and the issuance to certain shareholders of PIC of a promissory note in the
principal amount of $840,000 due March 1, 1998, which was subsequently
extended to June 30, 1998 (the "Short-Term Note"), and promissory notes with
an aggregate principal amount of $1,910,000 due in installments through
April 30, 1999 (the "Long-Term Notes" and, collectively with the Short-Term
Note, the "PIC Notes"). Concurrently, the Company acquired all of the
outstanding capital stock of PIC-R in exchange for a cash payment at closing
of $30,000 and the issuance by the Company of an aggregate of 300,000 shares
of common stock of the Company valued at $511,874. In connection with the
PIC acquisition, the Company also loaned $400,000 to PIC-R for capital
expenditures. The acquisitions were recorded under the purchase method for
financial reporting purposes. Goodwill of $4,203,709 associated with the
acquisitions is being amortized over ten years.
The PIC-R agreement provided that the Company would issue additional shares
of common stock to the extent that the combined earnings before interest,
taxes, depreciation and amortization ("EBITDA") of PIC and PIC-R for either
of the first two full twelve month periods after closing exceeds $1,000,000.
Shares of common stock with a quarterly average market value of $1.25 were
to be issued for each dollar of EBITDA over $1,000,000 during either of the
twelve-month periods. The Company granted piggyback registration rights to
the PIC-R shareholders with respect to any secondary offerings of common
stock made within three years after the closing of the PIC acquisition.
The Company's obligations under the PIC notes were subject to a collateral
interest in the shares of PIC stock and PIC-R stock acquired by the Company
pursuant to the PIC acquisition. In the event that the Company defaulted
with respect to the repayment of the Short-Term Note, the holders of the PIC
notes had the right to rescind the PIC acquisition by surrendering the
shares of common stock issued in the PIC acquisition and the PIC notes to
the Company in exchange for the return of all of the shares of PIC and PIC-R
stock. In addition, if the PIC acquisition had been rescinded, the
shareholders of PIC and PIC-R would retain the $530,000 cash payments made
at closing and the $400,000 advanced to PIC-R.
Effective May 21, 1998, the Company and the former shareholders of PIC and
PIC-R entered into an agreement to amend the terms of the original Stock
Purchase Agreements with respect to the Company's acquisition of PIC and
PIC-R. Pursuant to the original Stock Purchase Agreements, the former PIC
and PIC-R shareholders received certain special default rights to rescind
the acquisitions of PIC and PIC-R. The May 21, 1998 amendment terminated the
special default rights. Pursuant to the amendment, the Company also issued
571,428 shares of common stock as a prepayment of $1,000,000 of the
Long-Term Notes in reverse order of
F-17
<PAGE> 55
their maturities of the amounts owed.
Effective December 7, 1998, the Company and the former shareholders of PIC
and PIC-R entered into an Earn-Out Settlement Agreement. This Agreement
terminated the May 21, 1998 Agreement. Pursuant to the Earn-Out Settlement
Agreement, in full and final settlement of the earn-out rights for the
former shareholders of PIC and PIC-R, the Company issued 2,300,000 shares of
common stock; issued a $300,000 note payable in 24 monthly installments
commencing January 7, 1999; assumed $135,000 of costs associated with the
defense and settlement of a suit related to brokerage fees in connection
with the PIC acquisition; and agreed to pay in full the total outstanding
balances on the long-term notes issued to the principal shareholders. The
principal balances on the long term notes as of December 31, 1998 was
$338,138 of which $317,203 was subsequently paid in January 1999. Goodwill
of $3,916,889 associated with the amended terms of the agreement is being
amortized over the remaining life of the original goodwill which is eight
years and eleven months. Concurrent with the Earn-Out Settlement Agreement,
the Company entered into a consulting agreement with PIC's President for two
years and an employment agreement with PIC's Executive Vice President for
three years.
Pro forma results of operations (unaudited) for the Company reflecting the
PIC and PIC-R acquisitions for the year ended December 31, 1997 as if the
acquisitions had occurred on January 1, 1997 are as follows:
<TABLE>
<S> <C>
Total revenues $ 15,745,211
Cost of sales 11,640,553
------------
Gross operating profit 4,104,658
Selling, general and administrative expense 6,624,572
Depreciation and amortization expense 3,128,578
Loss from impairment of property, equipment and intangible asset 1,353,010
------------
Loss from operations (7,001,502)
Interest expense (1,057,519)
------------
Loss before income tax expense and joint venture loss (8,059,021)
Loss from joint venture 993,329
Income tax expense 5,620
------------
Net loss $ (9,057,970)
------------
Pro forma net loss attributable to common shareholders $ (9,092,977)
------------
Pro forma net loss per common share $ (1.24)
------------
Pro forma weighted average common shares outstanding 7,329,867
============
</TABLE>
4. ACQUISITION OF INCOMEX
On February 13, 1998, the Company entered into an agreement to purchase all
of the outstanding shares of common stock of Incomex, in exchange for
400,000 shares of common stock of the Company, valued at $422,500. The
agreement also provided for the Company to pay the selling shareholders an
aggregate amount equal to 60% of the income before income taxes of Incomex,
as defined, during the period from February 1, 1998 through July 31, 1998.
The Company had also agreed to issue common stock of the Company equal to an
aggregate quarterly average market value of $1.50 for each dollar of income
before taxes of Incomex, as defined, earned in excess of $400,000 during the
two 12 month periods beginning August, 1998. The Incomex
F-18
<PAGE> 56
acquisition has been recorded under the purchase method. Goodwill of
$901,219 associated with the acquisition is being amortized over ten years.
Concurrent with the purchase, the Company entered into employment agreements
with Incomex's Chief Executive Officer and Vice President for three years.
Effective December 7, 1998, the Company and the former shareholders of
Incomex entered into an Earn-Out Settlement Agreement. This Agreement
amended certain provisions of the Purchase Agreement to provide full and
final settlement of the earn-out rights for the former shareholders of
Incomex. Under the terms of the Earn-Out Settlement Agreement, the Company
issued 1,500,000 shares of common stock; issued $744,915 in notes payable
maturing in one year at an annual rate of 14% and includes a 1% origination
fee; issued 155,384 warrants associated with the notes payable entitling the
holder to purchase the Company's common stock at an exercise price of $3.25
which expire, if unexercised, on December 31, 2003; issued $340,000 in notes
payable due no later than April 1, 1999 and recorded cash obligations of
$117,479. Goodwill of $3,319,389 associated with the amended terms of the
agreement is being amortized over the remaining life of the original
goodwill which is nine years and two months.
Pro forma results of operations (unaudited) for the Company reflecting the
Incomex, PIC and PIC-R acquisitions for the years ended December 31, 1998
and 1997, as if the acquisitions had occurred on January 1, 1997, are as
follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Total revenues $ 34,468,424 $ 20,595,648
Cost of sales 23,059,280 15,297,649
------------ ------------
Gross operating profit 11,409,144 5,297,999
Selling, general and administrative expense 7,595,785 7,984,501
Depreciation and amortization expense 2,453,579 3,560,293
Loss from impairment of property, equipment
and intangible assets -- 1,353,010
------------ ------------
Income (loss) from operations 1,359,780 (7,599,805)
Gain on AT&T buyout 453,396 --
Interest expense (2,766,133) (1,413,959)
------------ ------------
Loss before income tax expense and joint venture loss (952,957) (9,013,764)
Loss from joint venture 41,546 993,329
Income tax expense 74,466 5,620
------------ ------------
Net loss $ (1,068,969) $(10,012,713)
============ ============
Pro forma net loss attributable to common shareholders $ (1,243,480) $(10,047,720)
============ ============
Pro forma net loss per common share $ (.13) $ (1.09)
============ ============
Pro forma weighted average common shares outstanding 9,232,881 9,229,867
============ ============
</TABLE>
F-19
<PAGE> 57
5. PURCHASE OF ASSETS OF INTERACTIVE COMMUNICATIONS, INC. AND FORMATION AND
OPERATION OF GUIDE STAR JOINT VENTURE
On December 13, 1996, the Company purchased all rights and interests in
interactive voice response hardware ("IVR Hardware") from Interactive
Communications, Inc. ("ICI") for a cash price of $361,600. The Company
assumed no liabilities of ICI as a result of this purchase, except that the
Company reimbursed ICI for all telephone and leasing costs incurred by ICI
prior to the date the IVR Hardware was assumed by the Company, which totaled
$64,545. Also, pursuant to this agreement, the Company entered into an
Audiotext Services Agreement with ICI covering thirty-eight IVR Hardware
platforms. This agreement was effective from January 1, 1997 until January
1, 2000, with an option to renew for successive periods of twelve months.
Under the terms of the agreement, ICI was to provide information updating
services for each IVR Hardware platform in exchange for a $1,000 per
platform monthly licensing fee to be paid by the Company. In addition, the
Company was to pay a monthly fee to ICI in the amount of 5% of the gross
monthly revenues generated by the business activities supported by the IVR
Hardware platforms after the Company had received gross revenues of
$6,000,000.
On January 31, 1997, the Company entered into an agreement with an unrelated
third party to form a joint venture, Guide Star, L.L.C. The Company
contributed the IVR platforms and other assets with a carrying value of
$349,574 in exchange for a 50% ownership interest and a preferential
distribution of $496,934. The other party contributed $209,970 in cash in
exchange for a 50% ownership interest. The joint venture provided consumer
telecommunications services related to the IVR platforms.
During the fourth quarter of 1997, management of the Company decided to
cease substantially all the operations of the Guide Star joint venture and
dispose of its assets. All assets of the joint venture have been written
down to their estimated net realizable values. The Company's net investment
in the joint venture of $(60,393) and $(380,913) at December 31, 1998 and
1997, respectively represents net liabilities of the venture for which the
Company is responsible.
Condensed financial information for the joint venture as of and for the
years ended December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
TOTAL TOTAL TOTAL NET
ASSETS LIABILITIES REVENUES LOSS
<S> <C> <C> <C> <C>
1998 $10,486 $ 70,879 $ 3,142 $ (41,546)
1997 18,286 399,199 256,705 (1,237,728)
</TABLE>
On November 30, 1997, the Company and ICI entered into a Settlement
Agreement whereby the Company agreed to pay the full amount currently due
and outstanding at that date to ICI under the Audiotext Services Agreement
of $295,000 and additional costs, fees and accrued interest of $22,196, with
interest on these unpaid amounts accruing interest at 18%. All amounts under
the Settlement Agreement were paid during 1998 and the Company was released
from its continuing obligation under the Audiotext Services Agreement.
In July 1998, the joint venture entered into a written agreement with
MatrixMedia, the other 50% owner of the joint venture, providing for the
sale of the joint venture's remaining assets and certain telecommunications
equipment owned by the Company to MatrixMedia. Subject to MatrixMedia
obtaining financing, the Company anticipates the completion of this
transaction during the second quarter of 1999.
F-20
<PAGE> 58
6. NOTES PAYABLE
Notes payable as of December 31, 1998 and 1997, consisted of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Past due notes payable to individuals, $400,000 of which has been provided
by related parties, bearing interest at 14%, due March 5, 1999. Warrants to
purchase 500,000 shares of the Company's common stock were issued at an
exercise price of $1.75 per share, which expire if unexercised, on March
31, 2001. A warrant to purchase 10,000 shares of the Company's common stock
was issued to Berthel at an exercise price of $1.44 per share which expires
if unexercised, on March 31, 2001. $ 500,000 $ -
Notes payable to individuals, $225,000 of which has been provided by related
parties, bearing interest at 14%, due March 31, 1999. Warrants to purchase
1,486,000 shares of the Company's common stock were issued, 225,000 of
which were issued to related parties, at an exercise price of $1.75 per
share which expire, if unexercised, on March 31, 2001. Warrants to purchase
121,100 shares of the Company's common stock were issued to Berthel in
connection with the offering with terms substantially similar to the
warrants issued in the offering. 1,486,000 -
Notes payable to individuals, $2,520,000 of which has been provided by
related parties, bearing interest at 14%, due November 30, 1999. Warrants
to purchase 684,000 shares of the Company's common stock were issued,
504,000 of which were issued to related parties. The Warrants were issued
at an exercise price of $3.25 for 604,000 warrants and $2.50 for 80,000
warrants which expire, if unexercised, on November 30, 2003. 3,420,000 -
Notes payable to the former owners of Incomex bearing interest at 14% due
November 15, 1999. 744,915 -
Noninterest-bearing notes payable to the former owners of Incomex due April
1, 1999. 340,000 -
Note payable to consultant bearing interest at 14%, due March 31, 1999.
Warrants to purchase 25,000 shares of the Company's common stock were
issued at an exercise price of $1.75 per share which expire, if
unexercised, on March 31, 2001. 25,000 -
</TABLE>
F-21
<PAGE> 59
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Note payable to director bearing interest at 14%, due March 31, 1999. A
warrant to purchase 5,000 shares of the Company's common stock was issued
at an exercise price of $1.75 per share which expires, if unexercised, on
March 31, 2000. $ 5,000 $ -
Notes payable to leasing company bearing interest ranging from 24.9% to
33.4% due in periods ranging from December 1999 to April 2002. The notes
are in arbitration, see Note 12. 480,456 -
Variable line-of-credit with a financial institution, with interest on
borrowings payable monthly at 2% above the financial institution's prime
rate (combined rate of 10.5% at December 31, 1997), collateralized by
substantially all assets of the Company not otherwise encumbered and
personally guaranteed by the Company's Chairman of the Board. - 250,000
Note payable to financial institution bearing interest at 12%,
collateralized by substantially all assets of the Company not otherwise
encumbered and personally guaranteed by the Company's Chairman of the
Board. - 225,000
Note payable to financial institution bearing interest at 2% over the bank's
prime rate (combined rate of 9.75% and 10.5% at December 31, 1998 and 1997,
respectively), due March 28, 1999, collateralized by AT&T accounts and
commission receivables, inventory and certain telecommunications equipment
with a carrying value of approximately $130,000 and $180,000 at December
31, 1998 and 1997, respectively. 400,000 400,000
Note payable to the former owners of PIC bearing interest at 8%, due June
30, 1998, collateralized by a pledge of the common stock of PIC and PIC-R. - 840,000
----------- -----------
Total $ 7,401,371 $ 1,715,000
=========== ===========
</TABLE>
Also see Note 15 with respect to the estimated fair value of notes payable.
Due to the issuance of the warrants, all notes payable issued with warrants
have an effective interest rate of 18%.
F-22
<PAGE> 60
7. LONG-TERM DEBT
Long-term debt, others as of December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Mortgage note payable to partnership due in monthly installments of $3,299,
including interest at 8.5%, until September 15, 2000, when the balance is
due. The note is collateralized by a first mortgage on the Company's
corporate office facilities and land. $ 261,796 $ 278,358
Note payable to financial institution bearing interest at 11.25%, due April
9, 1999, collateralized by substantially all assets of PIC not otherwise
encumbered and personally guaranteed by certain former PIC shareholders. - 66,165
Note payable to financial institution bearing interest at 10.25%, due August
1, 1998, collateralized by substantially all assets of PIC not otherwise
encumbered and personally guaranteed by certain former PIC shareholders. - 38,983
Notes payable to financial institution bearing interest at 11.25%, maturing
May 3, 1999 to December 2, 1999, collateralized by certain equipment and
note and lease assignments and personally guaranteed by certain former PIC
shareholders. 8,830 23,199
Note payable to vendor bearing interest at 8.5%, due March 30, 1999,
collateralized by a security interest in all billable call records
processed by the vendor on behalf of PIC. - 35,219
$120,000 variable line of credit with a financial institution, bearing
interest at 10.0%, due February 9, 1999, collateralized by substantially
all assets of PIC and personally guaranteed by certain former PIC
shareholders. - 110,223
Mortgage note payable to partnership due in monthly installments of $6,500,
including interest at 9%, due September 2008, collateralized by ATN's
office facilities and land. 514,634 -
Uncollateralized note payable to financial institution due in monthly
installments of $12,353, including interest at the financial institution's
prime rate (8.75% at December 31, 1998), until January 2000, when the
balance is due. 139,408 -
--------- --------
Total 924,668 552,147
Less current portion 199,287 259,654
--------- --------
Long-term debt, others $725,381 $292,493
========= ========
</TABLE>
F-23
<PAGE> 61
Long-term debt with related parties at December 31, 1998 and 1997 consisted
of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Uncollateralized notes payable to Berthel due January 31, 2005, (net of
discount of $341,010 and $377,734 at December 31, 1998 and 1997,
respectively). Interest payable quarterly at 4%, beginning March 31, 1995
until maturity, when the balance is due (effective interest rate of 11.5%). $ 658,990 $ 622,266
Uncollateralized note payable to Berthel, due in five monthly installments
of $9,494 including interest at 14% beginning on March 30, 1998, then
fifty-five installments of $20,130 including interest at 14% until February
28, 2003. 759,309 792,786
Non-interest bearing, uncollateralized note payable to the owner of PIC,
(net of discount of $46,738 at December 31, 1998) due in monthly
installments of $12,500, beginning January 1998 through January 2008
(effective interest rate of 19.6%). 253,262 -
Note payable to Berthel due in monthly installments of $23,528 beginning
December 1, 1997 until November 1, 2002 when the balance is due including
interest at 14.5%, collateralized by all telecommunications equipment owned
by PIC-R. 839,936 988,555
Non-interest bearing notes payable to the former owners of PIC, (net of
discount of $242,840, at December 31, 1997, for an effective interest rate
of 14.5%), due in quarterly installments of $190,999, beginning on January
31, 1998 through January 31, 1999 and a balloon payment due at maturity of
$955,005 on April 30, 1999, collateralized by a pledge of the common stock
of PIC and PIC-R. During 1998, 571,428 shares of common stock were issued
in exchange for $1 million of the principal balance as discussed in Note 3,
with the remaining balance bearing interest at 12% and due December 31,
1998. The note was repaid in January 1999. 338,138 1,667,160
Uncollateralized, noninterest bearing demand notes payable to related
parties. 84,021 172,559
---------- ----------
Total 2,933,656 4,243,326
Less current portion 828,331 949,497
---------- ----------
Long-term debt with related parties $2,105,325 $3,293,829
========== ==========
</TABLE>
F-24
<PAGE> 62
Maturities of long-term debt for each of the five years subsequent to
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
RELATED
OTHER PARTIES TOTAL
<S> <C> <C> <C>
1999 $199,287 $ 828,331 $1,027,618
2000 501,230 523,899 1,025,129
2001 21,353 422,734 444,087
2002 23,240 460,136 483,376
2003 25,293 39,566 64,859
Thereafter 154,265 658,990 813,255
-------- --------- ----------
Total $924,668 $2,933,656 $3,858,324
======== ========== ==========
</TABLE>
In June 1997, Berthel converted note obligations with a face value of $1.7
million and a carrying value of approximately $1.3 million into 465,625
shares of the Company's common stock. Additionally, the Company had agreed
to issue up to 187,067 "adjustment shares" to Berthel should the lowest
average closing trading price of the shares for any 30-day period during the
90 days after the shares become registered fall below $4.00 per share.
Berthel had the option to rescind the transaction if the Company did not
register the shares during 1997. Such shares were not registered during
1997.
Effective December 31, 1997, the Company and Berthel agreed to rescind the
conversion and the Company reissued each of the note obligations. Interest
on each of the note obligations from the conversion date to the rescission
date was added to the principal balance outstanding or was payable on
December 31, 1997. Also, the interest rate on one of the notes was reduced
from 15.5% to 14.0% and the repayment terms were extended. In connection
with the agreement, the Company agreed to issue warrants to Berthel for
229,279 shares of common stock of the Company, at an exercise price of $1.12
per share. The Company has assigned a fair value of $50,000 to the warrants,
that has been capitalized as deferred loan costs. The warrants will expire,
if not exercised, on December 31, 2002. Due to the issuance of the warrants,
the effective interest rate on the notes is 15.5%.
Also see Note 15 with respect to the estimated fair value of long-term debt.
8. PREFERRED STOCK
On July 2, 1997, the Company amended its Articles of Incorporation to
authorize 1,000,000 shares of a new class of "blank check" preferred stock.
On August 1, 1997, the Company authorized the issuance of up to 50,000
shares of Series A Convertible Preferred Stock (the "Convertible
Preferred"). The Convertible Preferred has a liquidation preference, subject
to adjustment, of $100 per share and accrues cumulative dividends at an
annual rate of 8% of the liquidation preference. Dividends are payable
quarterly at the Company's option in cash or in common stock. Payments to
holders of shares of the Convertible Preferred with respect to liquidation
or dividends must be made prior to any payments to the holders of shares of
the Company's common stock. The Convertible Preferred has no voting rights,
except as required by applicable law. The Convertible Preferred may also be
converted into common stock, at the holder's option, commencing one year
after issuance at the conversion rate of $1.125 per share of Common Stock
and is automatically converted into Common Stock three years after issuance
at the same conversion rate per share of Common Stock. As of December 31,
1997, the Company had received gross proceeds of $1,625,000 from the
issuance and sale of 16,250 shares of Convertible Preferred pursuant to a
private placement offering underwritten by Berthel and received an
additional $50,000 in gross proceeds in the first quarter of 1998 from the
issuance of 500 shares of Convertible Preferred.
F-25
<PAGE> 63
On February 26, 1998, the Company agreed to issue 2,170 shares of
Convertible Preferred to an affiliate of Berthel in exchange for the
prepayment of $180,000 of commissions and the payment of $37,000 of
commissions currently owed. This transaction was completed and the shares
issued on June 19, 1998.
9. COMMON STOCK WARRANTS
The Company has the following common stock warrants outstanding (all of
which are currently exercisable) at December 31, 1998:
<TABLE>
<CAPTION>
APPLICABLE
COMMON EXERCISE EXPIRATION
SHARES PRICE DATE
<S> <C> <C> <C>
Issued with initial public offering 880,000 $ 3.14 1999
Issued with initial public offering 160,000 3.07 2001
Issued with initial public offering 80,000 9.75 2001
Incomex Earn-Out Settlement (Note 4) 155,384 3.25 2003
Issued with note payable (Note 6) 1,486,000 1.75 2001
Issued with note payable (Note 6) 500,000 1.75 2001
Issued with note payable (Note 6) 604,000 3.25 2003
Issued with note payable (Note 6) 80,000 2.50 2003
Issued with stock rescission (Note 7) 229,279 1.12 2002
Issued with note payable (Note 6) 5,000 1.75 2001
Issued with note payable (Note 6) 25,000 1.75 2001
Issued with offering agreement (Note 6) 10,000 1.44 2001
Issued with short-term notes payable 15,000 1.44 2001
Issued with offering agreement (Note 6) 121,100 1.75 2001
Issued with consulting agreement 50,000 2.88 1999
Issued with consulting agreement 10,000 3.60 2003
Issued with consulting agreement 10,000 3.00 2003
-----------
Total outstanding 4,420,763
-----------
</TABLE>
The weighted average exercise price of the warrants was $2.48 and $3.48 and
the weighted average remaining life of the warrants was 2.5 and 3 years at
December 31, 1998 and 1997, respectively.
The 880,000 common stock warrants were issued in conjunction with the
initial public offering of the Company's common stock during 1996. Each
warrant is exercisable to purchase one share of common stock at a price of
$6.50 per share, subject to adjustment for dilutive issuances of stock. As a
result of the anti-dilutive provision, the exercise price at December 31,
1998 was adjusted in accordance with the agreement to $3.14. The warrants
are exercisable at any time after issuance and expire on October 21, 1999.
The warrants are redeemable at the Company's option commencing 270 days
after October 21, 1996 upon 30 days notice to holders at $.01 per warrant if
the closing bid price of the common stock averages in excess of 110% of the
exercise price of the warrants for a period of 20 consecutive trading days
ending within 15 days of the notice of redemption.
In connection with the offering during 1998 of promissory notes in a private
placement underwritten by Berthel, the Company issued to Berthel warrants to
purchase up to 121,100 shares of the Company's common stock at an exercise
price of $1.75 per share and warrants to purchase up to 10,000 shares at an
exercise price of $1.44 per share. The warrants expire, if not exercised, on
March 31, 2001.
F-26
<PAGE> 64
In conjunction with the initial public offering, the Company sold to the
underwriters, warrants to purchase 160,000 shares at $3.07 and 80,000 shares
at $9.75, as adjusted, (the "Underwriters Warrants"), subject to adjustment
for dilutive issuances of stock. The Underwriters Warrants are exercisable
on October 21, 1997 or at any time thereafter for a period of four years
from October 21, 1997.
During 1996, the Company entered into a consulting agreement (the
"Agreement") with a consultant to provide advisory services to the Company.
In addition, pursuant to the Agreement, the consultant received a warrant to
purchase up to 50,000 shares of the Company's common stock at an exercise
price of $2.88 per share. The Company assigned a fair value of $100,000 to
the warrant. The warrant expires, if not exercised, on December 20, 1999.
10. STOCK OPTION PLANS
The Company has adopted the 1993 Stock Option Plan (the "1993 Plan"). Under
the 1993 Plan, options may be granted to employees to purchase up to an
aggregate of 272,529 shares of the Company's common stock. The 1993 Plan is
administered by the Compensation Committee of the Board of Directors which
determines to whom options will be granted. The 1993 Plan provides for the
grant of incentive stock options (as defined in Section 422 of the Internal
Revenue Code) to employees of the Company. The exercise price of stock
options granted under the 1993 Plan is established by the Compensation
Committee, but the exercise price may not be less than the fair market value
of the common stock on the date of grant of each option. Each option shall
be for a term not to exceed ten years after the date of grant, and a
participant's right to exercise an option vests at the rate of twenty
percent on the date of grant and each anniversary date until the option is
fully vested.
A summary of stock option activity under the 1993 Plan during the years
ended December 31, 1998 and 1997, is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE OPTION PRICE
PRICE PER SHARE SHARES
<S> <C> <C> <C>
Balance at January 1, 1997 $ 1.81 $ 1.81 137,744
Granted 2.88 96,208
Granted 4.00 6,000
Granted 3.25 18,000
Canceled 1.81 (25,523)
Canceled 4.00 (4,000)
Canceled 3.25 (3,000)
Canceled 2.88 (1,500)
------- ------------ -------
Balance at December 31, 1997 $ 2.51 $ 1.81-$4.00 223,929
Granted 2.00 30,927
Canceled 3.25 (1,000)
Canceled 2.00 (13,255)
------- ------------ -------
Balance at December 31, 1998 $ 2.04 $ 1.81-$4.00 240,601
======= ============ =======
</TABLE>
At December 31, 1998, options for 163,026 shares were exercisable (172,779
at December 31, 1997), an additional 31,928 shares were available for future
grants and the weighted average remaining life of the options outstanding
was five years. The Company has reserved 272,529 shares of common stock in
connection with the 1993 Plan at December 31, 1998 and 1997.
F-27
<PAGE> 65
During 1997, the Company completed the development of the Murdock
Communications Corporation 1997 Stock Option Plan (the "1997 Stock Option
Plan"). During 1998, the Company amended the number of shares allocated to
1,727,471. The 1997 Stock Option Plan is also administered by the
Compensation Committee of the Board of Directors which determines to whom
the options will be granted. The 1997 Stock Option Plan provides for the
grant of incentive stock options (as defined in Section 422 of the Internal
Revenue Code) or nonqualified stock options to executives or other key
employees of the Company. The exercise price of the stock options granted
under the 1997 Stock Option Plan is established by the Compensation
Committee, but the exercise price may not be less than the fair market value
of the common stock on the date of the grant of each option for incentive
stock options. Each option shall be for a term not to exceed ten years after
the date of grant for non-employee directors and five years for certain
shareholders. Options cannot be exercised until the vesting period, if any,
specified by the Compensation Committee has expired.
A summary of stock option activity under the 1997 Stock Option Plan for the
years ended December 31, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE OPTION PRICE
PRICE PER SHARE SHARES
<S> <C> <C> <C>
Balance at January 1, 1997 $ - $ - -
Granted 3.25 225,629
Granted 4.16 10,000
Granted 3.13 20,000
----- ------------ ---------
Balance at December 31, 1997 $3.28 $ 3.13-$4.16 255,629
Granted 2.25-3.50 400,000
Granted 3.13 17,000
Granted 2.81 165,000
Granted 2.75 535,000
Granted 2.00 4,073
Granted 2.25 225,629
Canceled 3.25 (225,629)
Canceled 2.00 (1,745)
----- ------------ ---------
Balance at December 31, 1998 $2.65 $ 2.00-$4.16 1,374,957
===== ============ =========
</TABLE>
Compensation expense of none and $10,000 was recorded in connection with the
grant of these options for the years ended December 31, 1998 and 1997,
respectively. At December 31, 1998, options for 893,561 shares were
exercisable (25,000 at December 31, 1997), an additional 352,514 shares were
available for future grants and the weighted average remaining life of the
options outstanding was 6 years. The Company has reserved 1,727,471 shares
of common stock in connection with the 1997 Stock Option Plan at December
31, 1998.
The Company accounts for stock option grants and awards to employees using
the intrinsic value method. If compensation cost for stock option grants and
awards had been determined based on fair value at the grant dates for 1998
and 1997 options consistent with the method prescribed by Statement of
Financial Accounting
F-28
<PAGE> 66
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS No.
123"), the Company's net loss and net loss per share would have been the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C> <C>
Net loss attributable to common shareholders As reported $ (348,851) $ (7,935,015)
Pro forma (2,348,214) (8,073,015)
Net loss per common share As reported $ (.06) $ (1.89)
Pro forma (.43) (1.92)
</TABLE>
The weighted average fair values at date of grant for options granted during
1998 and 1997 were estimated to be $1,999,400 and $138,000, respectively.
The Company's calculations were made using the Black-Scholes option pricing
model with the following weighted average assumptions: ten years expected
life; stock volatility of 153% in 1998 and 51% in 1997; risk-free interest
rate of 6% in 1998 and 1997; and no dividends during the expected term.
During the initial phase-in period, as required by SFAS No. 123, the pro
forma amounts were determined based on stock option grants and awards in
1998 and 1997 only. The pro forma amounts for compensation cost may not be
indicative of the effects on net loss and net loss per share for future
years.
11. INCOME TAXES
The provision for income taxes consisted of the following for the years
ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
Current:
<S> <C> <C>
Federal $ - $ -
State 74,466 5,402
-------- --------
Total $ 74,466 $ 5,402
======== ========
</TABLE>
The provision for income taxes for the years ended December 31, 1998 and
1997 is less than the amounts computed by applying the statutory federal
income tax rate of 34% to the loss before income taxes due to the following
items:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Computed expected amount $ (34,000) $ (2,684,200)
Amortization of goodwill 295,100 -
Meals and entertainment 11,200 8,000
Officer's life insurance 5,700 8,600
State income taxes, net of federal tax benefit 74,466 3,500
Change in valuation allowance (278,000) 2,669,502
--------- ------------
Income tax provision $ 74,446 $ 5,402
========= ============
</TABLE>
At December 31, 1998 the Company has net operating loss carryforwards for
federal income tax purposes of approximately $13 million ($11 million at
December 31, 1997) to use to offset future taxable income. These net
operating losses will expire, if unused, from December 31, 2008 through
2013.
F-29
<PAGE> 67
Certain restrictions under the Tax Reform Act of 1986, caused by a change in
ownership resulting from sales of common stock, limit the annual utilization
of net operating loss carryforwards. The initial public offering of the
Company's common stock during 1996 resulted in such a change in ownership.
The Company estimates that the post-change taxable income that may be offset
with the pre-change net operating loss carryforward of approximately $4.5
million will be limited annually to approximately $600,000. The annual
limitation may be increased for any built-in gains recognized within five
years of the date of the ownership change.
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
Deferred tax assets:
Current:
<S> <C> <C>
Allowance for doubtful accounts receivable $ 150,000 $ 49,000
----------- -----------
Noncurrent:
Intangible asset amortization and valuation allowance 213,000 227,000
Differences in net book value of property and equipment 700,000 999,000
Capital lease adjustment 242,000 1,134,000
Deferred income - 19,000
Carryforward of net operating loss 4,917,000 4,072,000
----------- -----------
6,072,000 6,451,000
----------- -----------
Total deferred tax assets 6,222,000 6,500,000
Valuation allowance for deferred tax assets (6,222,000) (6,500,000)
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
</TABLE>
A valuation allowance for the entire balance of deferred tax assets has been
recorded because of uncertainty over their future realization.
12. COMMITMENTS AND CONTINGENCIES
The Company is obligated under long-term capital leases for
telecommunication equipment. Substantially all of the leases are with
Berthel and have been capitalized and are personally guaranteed by the
Company's Chairman of the Board. The Company is responsible for all property
taxes, maintenance and insurance. The Company also leases certain of its
facilities under operating leases. At December 31, 1998, future minimum
rental payments on lease obligations are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES
--------------------------------------------------- OPERATING
BERTHEL OTHER TOTAL LEASES
Years ending December 31:
<S> <C> <C> <C> <C>
1999 $1,351,929 $ 11,646 $1,363,575 $ 91,325
2000 1,351,929 2,608 1,354,537 42,294
2001 1,232,304 997 1,233,301 10,951
2002 1,064,828 1,064,828 9,780
2003 177,472 177,472 7,742
---------- -------- ---------- --------
Minimum rental payments 5,178,462 15,251 5,193,713 $162,092
--------
Less amounts representing interest 1,190,555 1,327 1,191,882
---------- -------- ----------
3,987,907 13,924 4,001,831
Less amounts due within one year 858,102 10,652 868,754
---------- -------- ----------
Capital lease obligations due
after one year $3,129,805 $ 3,272 $3,133,077
========== ======== ==========
F-30
</TABLE>
<PAGE> 68
As of December 31, 1998, the Company was current on all lease payments to
Berthel. However, subsequent to year end, the Company has not made the
February 1999 and March 1999 payments. Berthel only has the right to demand
that the Company cure this violation, but has not made such a demand as of
March 22, 1999.
Rent expense under operating leases for the years ended December 31, 1998
and 1997 was $30,196 and $32,921, respectively.
As of February 27, 1998, the Company entered into an agreement with Berthel
to provide $700,000 of lease financing. The financing bears interest at 14%.
In connection with the lease financing, warrants to purchase 350,000 shares
of the Company's common stock were issued at an exercise price of $1.44 per
share. As of June 30, 1998, Berthel funded the entire $700,000 of lease
financing. These warrants were exercised on December 31, 1998.
On September 30, 1997, the Company modified its existing lease agreements
with Berthel by deferring the July and August 1997 lease payments and
increasing the remaining future minimum rental payments for the payments
deferred.
During 1997, with an effective date of February 28, 1998, the Company
further modified its existing lease agreements with Berthel by deferring the
October 1997 through February 1998 lease payments until the end of the lease
term as additional payments. Total monthly lease payments are $41,850 from
March 1998 through July 1998 and $88,736 per month until February 2003. In
connection with these modifications, the Company agreed to issue warrants to
Berthel for 750,000 shares of common stock of the Company, at an exercise
price of $1.44 per share. The Company assigned a fair value of $157,000 to
the warrants, that has been capitalized as deferred lease restructuring
costs. These warrants were exercised on December 31, 1998.
The Company's wholly-owned subsidiary, PIC, is involved in an adversary
proceeding filed in connection with two jointly administered Chapter 11
proceedings in the United States Bankruptcy Court for the Southern District
of Florida. On May 13, 1997, a joint motion of the Chapter 11 Trustees and
Strategica Capital Corporation ("Strategica") was filed for an order to show
cause why certain individuals and entities, including PIC, should not be
held in civil contempt of court; for relief under Rule 70 of the Federal
Rules of Civil Procedure and Rule 7070 of the Federal Rules of Bankruptcy
Procedure; and for the entry of an order of criminal referral for criminal
conduct of certain individuals and entities, including PIC. The proceeding
does not specify a dollar amount of damages. The contempt motion was denied
by the Bankruptcy Court on November 4, 1998. Strategica filed a motion for
rehearing on November 16, 1998, which was denied by the Bankruptcy Court on
December 2, 1998. Strategica filed a notice of appeal of the adverse ruling
on December 11, 1998. PIC filed a motion for attorneys' fees and costs on
November 24, 1998, and a hearing was conducted by the Bankruptcy Court on
January 28, 1999 with respect to PIC's motion. Strategica's appeal and PIC's
motion for attorneys' fees and costs are both currently pending. No
assurance can be given as to the ultimate outcome of this matter. No loss,
if any, has been recorded in the consolidated financial statements with
respect to this matter.
Incomex and EILCO Leasing Services, Inc. ("Eilco"), a creditor of Incomex,
have commenced an arbitration proceeding to resolve a dispute regarding a
loan agreement between Incomex and Eilco. Eilco claims that Incomex is in
violation of certain covenants of the loan agreement, including provisions
relating to certain obligations of Incomex to make payments to Eilco based
on Incomex's income from telecommunications services provided to a group of
hotels in Mexico. This matter is scheduled for an arbitration hearing on
April 21, 1999. Eilco is seeking the amount due on the loan and additional
damages which may be in excess of $1,000,000 plus attorney fees. The
Company's position is that it owes only the amount due on the loan and is
not in violation of the covenants. Accordingly, the Company has not recorded
any loss in the consolidated financial statements with respect to this
matter in excess of the amount due on the loan. No assurance can be given as
to the ultimate outcome of this matter.
F-31
<PAGE> 69
On July 20, 1998, Operator Communications, Inc. ("Oncor") filed a lawsuit in
the District Court of Dallas County, Texas against the Company, Incomex, and
an unrelated third party. Oncor alleges that the defendants improperly
terminated a long distance service agreement with Oncor and claims damages
based on amounts which Oncor alleges to have advanced to the Company, lost
profits for the period in which the Company is alleged to have breached the
contract, attorneys' fees and for interference with contractual relations in
an unspecified amount of not less than $100,000. The Company has asserted a
counterclaim for accounting, breach of contract, misrepresentation and
payment of attorneys' fees. This case is at a preliminary stage and it is
not possible to assess fully the merits of Oncor's claims. The Company
intends to defend the claims against it and Incomex vigorously but no
assurance can be given to the outcome of this matter. The Company has
accrued $108,000 as a reserve in connection with this matter at December 31,
1998 in accordance with SFAS No. 5 "Accounting for Contingencies." There can
be no assurance that the loss, if any, will not exceed the reserve
established by the Company.
W.B. McKee Securities, Inc. ("McKee") filed suit against the Company in U.S.
District Court for the District of Arizona alleging breach of an investment
banking agreement relating to finders' fees for the PIC/ATN acquisition. The
Company and McKee entered into a settlement agreement in the first quarter
of 1999 with respect to this matter. Pursuant to the settlement, the Company
has agreed to pay $100,000 to McKee in installments over a three-month
period in return for a general release of all claims by McKee. The
effectiveness of the settlement agreement and McKee's release is contingent
on the timely payment by the Company of the settlement amount. The
settlement amount of $100,000 has been accrued by the Company as of December
31, 1998.
On October 1, 1998, the Company entered into an Amended and Restated
Employment Agreement with Thomas C. Chaplin, Chief Executive Officer and Guy
O. Murdock, Chairman of the Board. Each of the Amended and Restated
Employment Agreements has a term through December 31, 2001. Pursuant to the
Amended and Restated Employment Agreements, Messrs. Chaplin and Murdock will
receive base salaries of not less than $250,000 and $150,000, respectively.
In addition, each of them will be eligible to participate in the Company's
bonus plan and other executive compensation plans. Each Amended and Restated
Employment Agreement contains a provision restricting competition with the
Company for a period of two years following termination of employment. Mr.
Chaplin's Amended and Restated Employment Agreement provides that if his
employment is terminated by the Company for any reason other than for cause,
Mr. Chaplin will be entitled to receive severance at an annual rate of
$150,000 for two years, provided, however, that if his employment is
terminated by the Company or by Mr. Chaplin for any reason within 180 days
after a sale of the Company, Mr. Chaplin will be entitled to continuation of
his then effective base salary for three years. Mr. Murdock's Amended and
Restated Employment Agreement provides that if his employment is terminated
by the Company for any reason, including for cause, Mr. Murdock will be
entitled to receive severance at an annual rate of $150,000 for two years,
provided, however, that if his employment is terminated by the Company or by
Mr. Murdock for any reason within 180 days after a sale of the Company, Mr.
Murdock will be entitled to continuation of his then effective base salary
for three years.
On January 1, 1999, the Company entered into an Amended and Restated
Employment Agreement with Colin P. Halford, President. The Amended and
Restated Employment Agreement has a term through December 21, 2001 and
provides that Mr. Halford will receive a base salary of not less than
$150,000. In addition, Mr. Halford will be eligible to participate in the
Company's bonus plan and other executive compensation plans. The Amended and
Restated Employment Agreement contains a provision restricting competition
with the Company for a period of two years following termination of
employment. Mr. Halford's Amended and Restated Employment Agreement provides
that if his employment is terminated by the Company for any reason,
including for cause, Mr. Halford will be entitled to receive severance at an
annual rate of $150,000 for two years, provided, however, that if his
employment is terminated by the Company or by Mr. Halford for any reason
within 180 days after a sale of the Company, Mr. Halford will be entitled to
continuation of his then effective base salary for three years.
F-32
<PAGE> 70
On November 1, 1998, the Company and its wholly owned subsidiaries PIC and
PIC-R entered into an Employment Agreement with Bonner B. Hardegree,
Executive Vice President of PIC. The Employment Agreement has a three-year
term, with automatic one-year renewals unless either party gives notice of
termination at least one year in advance of the end of the term. Pursuant to
the Employment Agreement, Mr. Hardegree will receive a base salary of not
less than $144,000. In addition, Mr. Hardegree will be entitled to
participate in the Company's bonus plans and other compensation plans and
fringe benefits for executive officers. The Employment Agreement contains a
provision restricting competition with the Company for a period of six
months following termination of employment unless termination is by the
Company without cause or by Mr. Hardegree for good reason. Mr. Hardegree's
Employment Agreement provides that if his employment is terminated by the
Company without cause or by Mr. Hardegree for good reason, Mr. Hardegree
will be entitled to continuation of his then effective base salary for a
period equal to the greater of (i) one year, or (ii) the remaining term of
the Employment Agreement.
13. RELATED PARTY TRANSACTIONS
The Company conducts a significant amount of business with Berthel and other
affiliated entities. Berthel provided lease and other financing services,
including underwriting, to the Company. The Company also had an agreement
with an entity owned by the Company's Chairman of the Board for the use of
aircraft. The Company has also paid consulting expenses to a member of the
Company's Board of Directors and had loans with related parties.
On July 1, 1994, the Company entered into an agreement with a minority
shareholder to provide telecommunication services to hotels owned and
managed by Larken, Inc., a company 50% owned by a minority shareholder.
Revenues of $463,976 and $603,644 were generated for the years ended
December 31, 1998 and 1997, respectively. Further, the Company had call
processing receivables from the hotels included under the agreement of
$135,983 and $79,500 at December 31, 1998 and 1997, respectively. The
agreement provides for a set payment of $25,000 per month in commissions to
be paid to the minority shareholder, until January 1, 1997, when the
commission payment was increased to $30,000 per month for a period of 24
months. Also in conjunction with this agreement, effective from July 1, 1996
and through June 30, 1997, the Company paid an additional $6,000 per month
to Berthel for commissions payable to the minority shareholder pursuant to a
settlement of a dispute between Berthel and the minority shareholder.
A summary of transactions with related parties for the years ended December
31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Consulting expense $ 73,630 $ 35,181
Interest expense on related party notes payable 289,922 20,778
Commissions to minority shareholder 360,000 360,000
Interest expense on notes payable to Berthel 133,681 38,622
Lease payments to Berthel 840,415 491,175
Commissions and related fees to Berthel 141,518 115,250
Rental of aircraft - 33,116
</TABLE>
14. PROFIT SHARING PLAN
The Company has a profit sharing plan under Section 401(k) of the Internal
Revenue Code. Employees are eligible to participate in the plan after
completing three months of service. There were no contributions required and
no discretionary contributions made to the plan for the years ended December
31, 1998 and 1997.
F-33
<PAGE> 71
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value amounts disclosed below are based on estimates prepared by
the Company utilizing valuation methods appropriate in the circumstances.
Generally accepted accounting principles do not require disclosure for lease
contracts. The carrying amount for financial instruments included among
cash, receivables, notes payable, and other short-term payables approximates
their fair value because of the short maturity of those instruments. The
estimated fair value of other significant financial instruments are based
principally on discounted future cash flows at rates commensurate with the
credit and interest rate risk involved.
The estimated fair values of the Company's other significant financial
instruments at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------ ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Note receivable $ 806,229 $ 806,229 $ - $ -
Long-term debt 3,858,324 3,367,119 4,795,473 4,795,473
</TABLE>
16. BUSINESS SEGMENT INFORMATION
In June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information", was issued effective for fiscal years ending after
December 15, 1998. The Company's reportable segments are structured into a
decentralized organizational structure resulting in three stand-alone
business units. While all three business units are engaged in the business
of providing telecommunications services to hospitality and payphone
businesses, they are managed separately largely due to a series of
acquisitions the Company completed in 1997 and 1998, as discussed in Notes 3
and 4.
The Company's three reportable segments are PIC/ATN, Incomex and MTS. The
Company provides long-distance telecommunications services to hotels and
payphone owners in the United States through the PIC/ATN business unit. The
services include, but are not limited to, live operator services, credit
card billing services, automated collection and messaging delivery services,
voice mail services, telecommunications consulting and providing carrier
services for long-distance telecommunications companies. The incoming
operator assisted calls are processed with the PIC/ATN operators on
location. The Incomex business unit provides international operator services
to hotels and payphone owners in Mexico on international calls from Mexico
to the United States. The MTS business unit was created in 1998 to meet the
needs of the hospitality telecommunications management market by providing
database profit management services and other value added services. The MTS
business unit was formerly the operating unit of the Company responsible for
marketing of AT&T operator services until the contract was terminated during
the fourth quarter of 1998.
The accounting policies of the reportable segments are the same as those
described in Note 1. The Company evaluates the performance of its operating
units based on income (loss) from operations.
F-34
<PAGE> 72
Summarized financial information concerning the Company's reportable
segments is shown in the following table (amounts expressed in thousands).
The "Other" column includes the effect of eliminating inter-business unit
transactions.
<TABLE>
<CAPTION>
MTS
AND
PIC/ATN INCOMEX CORPORATE OTHER TOTAL
1998:
<S> <C> <C> <C> <C> <C>
Revenues $24,094 $7,921 $5,262 $(3,289) $33,988
Income (loss) from operations 2,544 1,958 (2,596) - 1,906
Total assets 5,591 2,463 16,818 (2,194) 22,678
Depreciation and amortization expense 436 12 771 629 1,848
Capital expenditures 800 134 357 - 1,291
1997:
Revenues 1,369 7,048 - 8,417
Income (loss) from operations 17 (7,064) - (7,047)
Total assets 2,642 7,728 (984) 9,386
Depreciation and amortization expense 73 2,070 - 2,143
Capital expenditures 284 357 - 641
</TABLE>
Financial information relating to the Company's operations by geographic
area was for the years ended December 31, 1998 and 1997 as follows (amounts
expressed in thousands):
<TABLE>
<CAPTION>
1998 1997
Revenues:
<S> <C> <C>
United States $26,009 $8,417
Mexico 7,921 -
Canada 58 -
------- ------
Total $33,988 $8,417
------- ------
Long-lived assets (excluding investments):
United States $15,719 $7,883
Mexico 1,704 -
------- ------
Total $17,423 $7,883
======= ======
</TABLE>
17. INVESTMENTS
During 1998, the Company reached an agreement to invest in ACTEL Integrated
Communications, Inc. ("ACTEL") of Mobile, Alabama. As of December 31, 1998,
the Company had invested $694,067, and from January 1, 1999 through March
22, 1999, had invested an additional $586,000. On March 10, 1999, the
Company and ACTEL entered into an Investment Agreement whereby, the Company
receives one share of Series A Convertible Preferred Stock for every dollar
invested. Each Series A Convertible Preferred Stock earns a 10% dividend and
may be converted to 1.46 shares of common stock at any time on or before
March 10, 2002 at the option of the Company.
F-35
<PAGE> 73
ACTEL, based in Mobile, Alabama, will provide local exchange communications
services as a facility-based carrier. ACTEL has received public service
approval to become a competitive local exchange carrier in both Louisiana
and Alabama and will begin to offer voice and data communications services
to medium and small businesses in April 1999. Initially, resale service will
commence in Mobile, Alabama and in New Orleans, Louisiana, through an
interconnect agreement with Bell South. An advanced Lucent AnyMedia(TM)
MultiService Module is being installed in Mobile. It will enable proprietary
retail services to be provided to the Mobile, Alabama market later this
spring. At that time ACTEL will own its local service lines, sell monthly
services and become a facility-based carrier providing proprietary voice and
data services to the targeted market of medium and small businesses.
During 1998, the Company reached an initial lending/investment agreement
with AcNET de C.V. ("AcNet") of Mexico. As of December 31, 1998, the Company
had invested $806,229, and from January 1, 1999 through March 22, 1999, had
invested an additional $403,000. The initial agreement in August 1998
provided for an option to purchase 49% of AcNet for $2 million. The option
was renewed beyond the original October 1998 expiration and revised in March
1999 to the following: the Company may lend up to $2 million to AcNet on a
10% note and convert the note to preferred stock that earns 20% of the
earnings of AcNet, as defined in the agreement. The preferred stock may be
redeemed by AcNet for 120% of its face value plus any accumulated dividends.
Additionally, the Company possesses an option to acquire 49% of the common
stock of AcNet in exchange for 450,000 shares of the Company's common stock
and the guarantee by the Company of certain debt of AcNet by March 30, 1999.
As of March 22, 1999, no amounts had been guaranteed by the Company. The
option extends through July 31, 1999.
AcNet provides internet services and network services to businesses,
governments and consumers in Mexico by authority of concessions provided by
the Mexican government. As of March 1999, AcNet provided internet services
to over 13,000 customers and network services to several of the major
corporations of Mexico generating annualized revenues of approximately $1.5
million.
18. SUBSEQUENT EVENT
During the first quarter of 1999, the Company received proceeds of
$1,500,000 from the issuance of promissory notes to related parties. The
notes bear interest at 14% and the accrued interest and principal are due on
November 30, 1999. Warrants to purchase 300,000 shares of the Company's
common stock were issued in relation to the promissory notes at an exercise
price of $3.25 per share.
* * * * *
F-36
<PAGE> 74
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.
F-37
<PAGE> 75
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 SHAREHOLDERS' EQUITY 4,206 4,077
---------- ---------
TOTAL $ 24,104 $ 22,678
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE> 76
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.
F-39
<PAGE> 77
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.
F-40
<PAGE> 78
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
F-41
<PAGE> 79
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 affiliate
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 8) 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. On June 4, 1999, the arbitrator ruled that, after
a credit for the remaining principal balance of $341,444, Eilco owes Incomex
damages in the sum of $231,162, plus $3,161 for arbitration fees and expenses.
F-42
<PAGE> 80
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
F-43
<PAGE> 81
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>
F-44
<PAGE> 82
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.
In June 1999, the Company completed a bridge financing in the amount of
$2,000,000. Pursuant to the bridge financing, the Company issued a note in the
principal amount of $2,000,000 and warrants to purchase 250,000 shares of common
stock to one investor. The note bears interest at the rate of 12% per annum and
all principal and interest under the note are due on July 21, 1999. If the
Company does not repay the note when due, then the interest rate increases to
(i) 14% per annum for the period from the due date until August 20, 1999, (ii)
16% per annum for the period from August 21, 1999 until September 21, 1999, and
(iii) 18% per annum for the period after September 21, 1999. In addition, if the
Company does not repay the note on or prior to September 21, 1999, the warrants
may be exercised to purchase twice the number of shares subject to the warrants
immediately prior to such date. The warrants are exercisable at any time until
June 21, 2009 at an exercise price of $3.50 per share. The exercise price and
the number of shares of common stock purchasable upon exercise of the warrants
are subject to adjustment upon the occurrence of certain events, including stock
dividends, stock splits and the issuance by the Company of shares of common
stock or other securities convertible into or exercisable to purchase shares of
common stock at a price below the then applicable exercise price of the
warrants. The Company has agreed to use its best efforts to register the
warrants and the shares of common stock underlying the warrants by August 21,
1999.
F-45
<PAGE> 83
You should rely only on the information contained in this document or
other information we referred you to. We have not authorized anyone to provide
you with information that is different. This prospectus does not constitute an
offer to sell or the solicitation of an offer to buy any security other than the
shares of common stock offered by this prospectus, nor does it constitute an
offer to sell or a solicitation of an offer to buy shares of common stock in any
jurisdiction where such offer or solicitation would be unlawful. Neither the
delivery of this prospectus nor any sales made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of MCC since the date hereof.
TABLE OF CONTENTS
Page
Summary............................................
Risk Factors.......................................
Certain Market Information
and Dividend Policy................................
Use of Proceeds....................................
Business...........................................
Management's Discussion and Analysis of
Financial Condition and Results
of Operations......................................
Management.........................................
Certain Transactions...............................
Principal Shareholders.............................
Selling Shareholders...............................
Plan of Distribution...............................
Description of Capital Stock.......................
Legal Matters......................................
Experts............................................
Where You Can Find More Information................
Consolidated Financial Statements.................. F-1
[LOGO]
6,542,544 SHARES OF COMMON STOCK
-------------------------------
PROSPECTUS
-------------------------------
_______, 1999
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Iowa Business Corporation Act (the "IBCA") authorizes
corporations to limit or eliminate the personal liability of directors to
corporations and their shareholders for monetary damages for breach of
directors' fiduciary duty of care. Our Restated Articles of Incorporation (the
"Articles") limit the liability of our directors to the Company or its
shareholders to the fullest extent permitted by the IBCA or any other applicable
laws presently or hereinafter in effect. Specifically, directors of the Company
will not be personally liable for or with respect to any acts or omissions in
the performance of his duties as a director of the Company except for a breach
of the director's duty of loyalty to the Company or its shareholders, for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, for a transaction in which the director derives an
improper personal benefit or for unlawful distributions.
The inclusion of this provision in the Articles may have the
effect of reducing the likelihood of derivative litigation against directors,
and may discourage or deter shareholders or management from bringing a lawsuit
against directors for breach of their duty of care, even though such an action,
if successful, might otherwise have benefited the Company and our shareholders.
The Articles also provide mandatory indemnification rights to any
officer or director of the Company to the full extent permitted by Iowa law or
any applicable laws presently or hereafter in effect.
Unless a corporation's articles of incorporation provide
otherwise, the IBCA requires a corporation to indemnify a director or officer
who was completely successful in the defense of any proceeding to which the
director or officer was a party because the director or officer is or was a
director or officer of the corporation and permits a director or officer to
apply for court-ordered indemnification if the director or officer is fairly and
reasonably entitled to indemnification in view of all of the relevant
circumstances. The Articles do not limit the foregoing indemnification rights of
the directors and officers of the Company. In addition, our By-Laws provide
that, to the fullest extent permitted by Iowa law, we may indemnify the officers
and directors.
We intend to maintain insurance for each director and officer of
the Company covering certain expenses, liability or losses he may incur that
arise by reason of his being a director or officer of the Company or subsidiary
company, whether or not we would have the power to indemnify such person against
such expenses, liability or loss under the Iowa General Corporation Law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the offering are as follows:
<TABLE>
<CAPTION>
Item Amount
- ---- ------
<S> <C>
Securities and Exchange Commission Registration Fee................................. $ 5,616
Legal Fees and Expenses............................................................. 20,000
Accounting Fees and Expenses........................................................ 10,000
Miscellaneous Expenses.............................................................. 3,000
Total................................................................. $38,616
=======
</TABLE>
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<PAGE> 85
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On the effective date of the Company's initial public offering, the
Company issued 822,221 shares of common stock in exchange for 22,450 shares of
its preferred stock and associated common stock warrants. The Company did not
receive any proceeds with respect to this exchange, and did not pay any fee or
commission with respect to the solicitation of offers to exchange. The Company
conducted the exchange as an offering exempt from registration under the
Securities Act of 1933, as amended (the "Act"), pursuant to section 3(a)(9) of
the Act.
Also in July 1996, the Company completed the first tranche of a bridge
financing as a private placement exempt from the registration requirements of
the Act pursuant to Rule 506 of Regulation D under the Act. The first tranche of
the bridge financing consisted of $400,000 aggregate principal amount of 12%
convertible promissory notes (the "Conversion Bridge Notes"). The Convertible
Bridge Notes were automatically converted into units of $5.00 per unit effective
upon the Company's initial public offering. The Convertible Bridge Notes were
sold to 11 purchasers. The Company paid commissions of $24,000 to two placement
agents in connection with the offering of the Convertible Bridge Notes, and the
Company received net proceeds of approximately $372,000. In August 1996, the
Company completed the second tranche of the bridge financing as a private
placement exempt from the registration requirements of the Act pursuant to Rule
506 of Regulation D under the Act. The second tranche of the bridge financing
consisted of the sale of a 13% promissory note in the principal amount of
$250,000 to one purchaser along with an associated warrant to purchase 41,667
units (the "Bridge Warrant"). The Bridge Warrant was exercisable at any time
after the completion of the offering until its expiration on August 5, 1998. The
exercise price of the Bridge Warrant was $6.00 per unit. The Company paid
commissions of $15,000 to two placement agents in connection with the offering
of the Note and the Bridge Warrant, and the Company received net proceeds of
approximately $232,000.
In January 1997, certain subsidiaries and affiliated leasing
partnerships of Berthel Fisher & Company ("Berthel") exercised warrants to
purchase an aggregate of 227,142 shares of common stock at a de minimis exercise
price. The shares of common stock were issued to Berthel in a private placement
exempt from the registration requirements of the Act pursuant to Section 4(2) of
the Act.
In January 1997, the Company issued a warrant to purchase up to 50,000
shares of the Company's common stock to Blalock & Company ("Blalock") with an
exercise price of $2.50 per share. The warrant was issued pursuant to a
consulting agreement dated December 20, 1996, between the Company and Blalock
providing for advisory services by Blalock to the Company. The Company has
assigned a fair value of $100,000 to the warrant. The warrant was issued in
reliance upon exemption from registration provided by section 4(2) of the Act.
In June 1997, certain affiliates of Berthel agreed to convert note
obligations with an aggregate principal amount of $1.7 million and a carrying
value to the Company of $1.3 million into 465,625 shares of the Company's common
stock. On December 31, 1997, the Company and Berthel agreed to rescind the note
conversion. In connection with this rescission, in January 1998, the Company
issued notes to Berthel which are identical in all material respects to the
notes originally canceled, Berthel delivered to the Company its certificates for
the 465,625 shares of the Company's common stock and the Company issued warrants
to Berthel exercisable to purchase up to 229,279 shares of the Company's common
stock at an exercise price of $1.12 per share. The Company issued the notes and
the warrants to Berthel pursuant to the exemption from the registration
requirements of the Act provided by Section 4(2) of the Act.
II-2
<PAGE> 86
In September 1997, the Company commenced an offering of up to
$5,000,000 of its preferred stock in a private placement exempt from the
registration requirements of the Act pursuant to Rule 506 of Regulation D under
the Act. The Company paid commissions of up to 7% of the gross proceeds of the
offering to its placement agent. The Company had sold a total of 16,250 shares
of Preferred Stock in the offering and received gross cash proceeds of
$1,625,000, paid commissions of $64,750, paid other expenses of $23,250 and
received net proceeds of approximately $1,537,000 from the issuance and sale of
shares of the preferred stock pursuant to the offering.
In October 1997, the Company issued 300,000 shares of common stock to
the former shareholders of PIC Resources Corp. ("PICR") pursuant to the
Company's acquisition of PICR. The shares were issued in a private placement
exempt from the registration requirements of the Act pursuant to Section 4(2) of
the Act.
In February 1998, the Company issued 400,000 shares of common stock to
the former shareholders of Incomex, Inc. ("Incomex") pursuant to the Company's
acquisition of Incomex. The shares were issued in a private placement exempt
from the registration requirements of the Act pursuant to Section 4(2) of the
Act.
In February 1998, the Company agreed to issue 2,170 shares of its
Preferred Stock to Berthel in exchange for the prepayment of $180,000 in
commissions and the payment of $37,000 in commissions currently owed. This
transaction was completed and the shares were issued on June 19, 1998. The
issuance of the shares was made pursuant to the exemption from the registration
requirements of the Act provided by Section 4(2) of the Act.
In March 1998, the Company issued promissory notes with an aggregate
principal amount of $500,000 to five persons in a private placement exempt from
the registration requirements of 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
March 5, 1999. Along with the notes, the Company also issued warrants to
purchase an aggregate of 500,000 shares of the Company's common stock at an
exercise price of $1.75 per share.
Also in March 1998, the Company issued warrants to purchase an
aggregate of 1,100,000 shares of the Company's common stock at an exercise price
of $1.4375 to Berthel in connection with $700,000 of lease financing and the
financing of certain capital leases provided to the Company by Berthel. The
Company issued the warrants to Berthel pursuant to the exemption from the
registration requirements of the Act provided by Section 4(2) of the Act.
Effective December 31, 1998, Berthel exercised these warrants to purchase an
aggregate of 1,100,000 shares of common stock at an exercise price of $1.30 per
share, resulting in total proceeds to the Company of $1,430,000. The shares of
common stock were issued to Berthel in a private placement exempt from the
registration requirements of the Act pursuant to Section 4(2) of the Act.
In April 1998, the Company issued a promissory note in the principal
amount of $5,000 and warrants to purchase 5,000 shares of common stock to one of
the Company's outside directors in lieu of the payment of director's fees and
issued a promissory note in the principal amount of $25,000 and warrants to
purchase 25,000 shares of the Company's common stock to a consultant in lieu of
payment of consultant fees. These notes and warrants have terms identical to the
notes and warrants sold in the offering described in the subsequent paragraph
and were issued in a private placement exempt from the registration requirements
of the Act pursuant to Rule 506 of Regulation D under the Act.
In April and May of 1998, the Company completed an offering of
$1,486,000 aggregate principal amount of promissory notes in a private placement
exempt from the registration requirements of the Act
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<PAGE> 87
pursuant to Rule 506 of Regulation D under the Act. The notes bear interest at
14% and the principal and accrued interest are due on March 31, 1999. Along with
the notes, the Company also issued warrants to purchase an aggregate of
1,486,000 shares of the Company's common stock at an exercise price of $1.75 per
share. The warrants expire on March 31, 2001. The Company paid commissions of
$96,880 to its placement agent and received net proceeds of approximately
$1,386,000 in the offering. In connection with the offering, the Company also
issued to its placement agent warrants to purchase 121,100 shares of common
stock with terms substantially similar to the warrants issued to investors in
the offering.
In May 1998, the Company issued 571,428 shares of common stock to the
former shareholders of Priority International Communications, Inc. ("PIC") as a
prepayment of $1,000,000 in principal due under notes issued by the Company in
October 1997 in connection with the acquisition by the Company of PIC. The
shares of common stock were issued pursuant to the exemption from the
registration requirements of the Act provided by Section 4(2) of the Act.
In September 1998, the Company issued promissory notes in the aggregate
principal amount of $370,000 in a private placement exempt from the registration
requirements of 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 1,
1999.
In December 1998, the Company issued 2,300,000 shares of common stock
to the former shareholders of PIC and PICR pursuant to the settlement of certain
earn-out provisions relating to the Company's acquisition of PIC and PICR. The
shares were issued in a private placement exempt from the registration
requirements of the Act, pursuant to Section 4(2) of the Act.
In December 1998, the Company issued 1,500,000 shares of common stock
to the former shareholders of Incomex pursuant to certain earn-out provisions of
the agreement with Incomex. The Company also issued notes in the aggregate
principal amount of $744,915 and warrants to purchase an aggregate of 155,384
shares of common stock to certain of the former shareholders of Incomex pursuant
to the settlement of certain earn-out provisions relating to the Company's
acquisition of Incomex. The notes bear interest at an annual rate of 14% and all
interest and principal on the Incomex notes are due on November 15, 1999. The
warrants may be exercised at any time between December 1998 and December 2003 to
purchase shares of common stock at an exercise price of $3.25 per share. The
shares of common stock, the notes and the warrants were issued in a private
placement exempt from the registration requirements of the Act pursuant to
Section 4(2) of the Act.
During the fourth quarter of 1998, the Company completed an offering of
notes and warrants to certain of its directors and executive officers and to a
limited number of outside investors. The notes bear interest at an annual rate
of 14% and all principal and all interest on the notes are due on November 30,
1999. The Company paid the purchasers of the notes an origination fee of 1% and
issued warrants to purchase 10,000 shares of common stock for each $50,000 in
principal amount of the notes. The warrants are exercisable at an exercise price
of $3.25 per share (although one outside investor received warrants to purchase
80,000 shares of common stock at an exercise price of $2.50 per share) and may
be exercised at any time on or before November 30, 2003. The Company issued
$3,420,000 aggregate principal amount of the notes and warrants to purchase
684,000 shares of common stock, and the Company received net proceeds of
$3,380,800. The notes and the warrants were issued in a private placement exempt
from the registration requirements of the Act pursuant to Section 4(2) of the
Act.
During the fourth quarter of 1998, the Company entered into an
agreement with a consultant to provide advisory services to the Company.
Pursuant to this agreement, the Company issued two
II-4
<PAGE> 88
warrants to the consultant to purchase up to 10,000 shares of common stock each
at exercise prices of $3.60 per share and $3.00 per share, respectively. The
warrants may be exercised at any time between November 30, 1999 and November 30,
2003. The warrants were issued in a private placement exempt from the
registration requirements of the Act pursuant to Section 4(2) of the Act.
During the first quarter of 1999, the Company received proceeds of
$1,500,000 from the issuance of promissory notes to related parties. The notes
bear interest at 14% and the accrued interest and principal are due on November
30, 1999. Warrants to purchase 300,000 shares of the Company's common stock were
issued in relation to the promissory notes at an exercise price of $3.53 per
share. The warrants may be exercised at any time until December 31, 2003. The
warrants were issued in a private placement exempt from the registration
requirements of the Act pursuant to Section 4(2) of the Act.
In April 1999, the Company completed an offering of $1,625,000
aggregate principal amount of promissory notes to five of its directors and
executive officers in a private placement exempt from the registration
requirements of the Act pursuant to Section 4(2) of the Act. The notes bear
interest at 18% and the principal and accrued interest are due on November 30,
1999. The Company paid the purchasers of the notes an origination fee of 0.5%.
In June 1999, the Company completed a bridge financing in the amount of
$2,000,000. Pursuant to the bridge financing, the Company issued a note in the
principal amount of $2,000,000 and warrants to purchase 250,000 shares of common
stock to one investor. The note bears interest at the rate of 12% per annum and
all principal and interest under the note are due on July 21, 1999. If the
Company does not repay the note when due, then the interest rate increases to
(i) 14% per annum for the period from the due date until August 20, 1999, (ii)
16% per annum for the period from August 21, 1999 until September 21, 1999, and
(iii) 18% per annum for the period after September 21, 1999. In addition, if
the Company does not repay the note prior to September 21, 1999, the warrants
may be exercised to purchase twice the number of shares subject to the warrants
immediately prior to such date. The warrants are exercisable at any time until
June 21, 2009 at an exercisable price of $3.50 per share. The note and the
warrants were issued in a private placement exempt from the registration
requirements of the Act pursuant to Section 4(2) of the Act.
ITEM 27. EXHIBITS.
The following exhibits are filed as part of this registration
statement.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DOCUMENT DESCRIPTION
- -------------- --------------------
<S> <C>
3.1 Restated Articles of Incorporation of the Company. (1)
3.2 First Amendment to Restated Articles of Incorporation of the
Company. (2)
3.3 Second Amendment to Restated Articles of Incorporation of
the Company. (2)
3.4 Amended and Restated By-Laws of the Company. (3)
4.1 Form of Warrant Agreement between the Company and Firstar
Trust Company. (1)
4.2 Form of Redeemable Warrant. (1)
5 Opinion of Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, s.c.
10.1 AT&T Management Company Commission Agreement, dated as of
December 16, 1995, by and between the Company and AT&T
Communications, Inc. ("AT&T"). (1)(4)
</TABLE>
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<PAGE> 89
<TABLE>
<S> <C>
10.2 Amendment No. 1 to AT&T Management Company Commission
Agreement, dated as of January 16, 1996, by and between the
Company and AT&T. (1)
10.3 Amendment No. 2 to AT&T Management Company Commission
Agreement, dated as of January 16, 1996, by and between the
Company and AT&T. (1) (4)
10.4 Amendment No. 3 to AT&T Management Company Commission
Agreement, executed on December 13, 1996, by and between
AT&T and the Company. (5)
10.5 AT&T Management Company Commission Agreement,
effective as of January 16, 1998, by and between the
Company and AT&T. (4)(6)
10.6 Amendment to AT&T Management Company Commission Agreement,
effective as of October 15, 1998, by and between the Company
and AT&T. (7)
10.7 Stock Purchase Agreement, dated as of August 22, 1997, among
MCC Acquisition Corp., Priority International
Communications, Inc. and certain shareholders of Priority
International Communications, Inc. (8)
10.8 First Amendment to Stock Purchase Agreement, dated as of
October 31, 1997, among MCC Acquisition Corp., Priority
International Communications, Inc. and certain shareholders
of Priority International Communications, Inc. (8)
10.9 Second Amendment to Stock Purchase Agreement, dated as of
February 27, 1998, among MCC Acquisition Corp., Priority
International Communications, Inc. and certain shareholders
of Priority International Communications, Inc. (6)
10.10 Stock Purchase Agreement, dated as of August 22, 1997, among
MCC Acquisition Corp., PIC Resources Corp., the shareholders
of PIC Resources Corp. and ATN Communications Inc.(8)
10.11 First Amendment to Stock Purchase Agreement dated as of
October 31, 1997, among MCC Acquisition Corp., PIC Resources
Corp., the shareholders of PIC Resources Corp. and ATN
Communications Inc. (8)
</TABLE>
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<PAGE> 90
<TABLE>
<S> <C>
10.12 Second Amendment to Stock Purchase Agreement, dated as of
February 27, 1998, among MCC Acquisition Corp., PIC
Resources Corp., the shareholders of PIC Resources Corp. and
ATN Communications, Inc. (6)
10.13 Amended and Restated Short-Term Note dated February 27, 1998
issued by MCC Acquisition Corp. to Bonner B. Hardegree,
trustee for the benefit of Wayne Wright, and Bonner B.
Hardegree. (6)
10.14 Form of Long-Term Note. (8)
10.15 Agreement, dated as of May 21, 1998, among the
Company, Murdock Acquisition Corp., Priority
International Communications, Inc., PIC Resources
Corp., Wayne Wright, Bonner Hardegree and ATN
Communications, Inc. (9)
10.16 Earn-Out Settlement Agreement, dated as of December
7, 1998, among the Company, Murdock Acquisition
Corp., Priority International Communications, Inc.,
PIC Resources Corp., Wayne Wright, Bonner Hardegree
and ATN Communications, Inc. (7)
10.17 Stock Purchase Agreement, dated as of February 13, 1998,
among MCC Acquisition Corp., Incomex, Inc. and the
Shareholders of Incomex, Inc. (10)
10.18 Earn-Out Settlement Agreement, dated as of December 1, 1998,
among the Company, Murdock Acquisition Corp., Incomex, Inc.
and the Shareholders of Incomex, Inc. (8)
10.19 Murdock Communications Corporation 1993 Stock Option
Plan. (1)
10.20 Murdock Communications Corporation 1997 Stock Option Plan,
as amended. (7)
10.21 Amended and Restated Employment Agreement, dated as
of October 1, 1998, by and between the Company and
Guy O. Murdock. (6)
10.22 Employment Agreement, dated as of January 1, 1999, by and
between the Company and Colin P. Halford. (6)
</TABLE>
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<PAGE> 91
<TABLE>
<S> <C>
10.23 Amended and Restated Employment Agreement, dated as
of October 1, 1998, by and between the Company and
Thomas E. Chaplin. (6)
10.24 Employment Agreement, dated as of January 1, 1999, by and
between the Company and Bill R. Wharton. (6)
10.25 Employment Agreement, dated as of November 1, 1998, by and
among the Company, Priority International Communications,
Inc., PIC Resources Corp. and Bonner B. Hardegree. (6)
10.26 Employment Agreement, dated as of November 16, 1998, by and
between the Company and Paul C. Tunink. (6)
10.27 Form of Lease Agreement. (11)
10.28 Note and Security Agreement, Note #079-21846-000,
dated as of October 28, 1997, by and among PIC
Resources, ATN Communications, Inc., Priority
International Communications, Inc. and Berthel
Fisher & Company Leasing, Inc. (11)
10.29 Note and Warrant Purchase Agreement, dated as of June 21, 1999,
by and among the Company, Priority International Communications,
Inc., Incomex, Inc., MCC Acquisition Corp., and New Valley
Corporation.
10.30 Stock Purchase Warrant dated June 21, 1999 from the Company to
New Valley Corporation.
10.31 Fixed Rate Senior Note dated June 21, 1999 from the Company to
New Valley Corporation.
10.32 Registration Rights Agreement, dated as of June 21, 1999, between
the Company and New Valley Corporation.
21 Subsidiaries (7)
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, s.c. (included in its opinion filed as Exhibit 5
hereto).
24 Power of Attorney (11)
</TABLE>
(1) Filed as an exhibit to the Company's registration statement on Form
SB-2 (File No. 333-05422C) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1997 (File No. 000-21463) and
incorporated herein by reference.
(3) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 1997 (File No. 000-21463) and
incorporated herein by reference.
(4) Portions of these exhibits were granted confidential treatment by the
Securities and Exchange Commission.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996 (File No. 000-21463) and incorporated
herein by reference.
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<PAGE> 92
(6) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1997 (File No. 000-21463) and incorporated
herein by reference.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1998 (File No. 000-21463) and incorporated
herein by reference.
(8) Filed as an exhibit to the Company's Current Report on Form 8-K (File
No. 000-21463) filed with the Securities and Exchange Commission on
November 7, 1997 and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1998 (File No. 000-21463) and
incorporated herein by reference.
(10) Filed as an exhibit to the Company's Current Report on Form 8-K (File
No. 000-21463) filed with the Securities and Exchange Commission on
February 13, 1998 and incorporated herein by reference.
(11) Previously Filed.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant undertakes as follows:
1. To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(a) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933, as amended;
(b) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement; notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(c) To include any additional or changed material
information with respect to the plan of distribution not previously disclosed in
the registration statement or any material change to such information in the
registration statement; provided, however, that paragraphs 1(a) and (b) will not
apply if the information required to be included in a post effective amendment
by those paragraphs is contained in periodic reports filed by the Registrant
pursuant to section 13 or 16(b) of the Securities Exchange Act of 1934, as
amended, and which are incorporated by reference in this registration statement.
2. That, for the purposes of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
4. To supplement the prospectus, after the end of the
subscription period, to include the results of the subscription offer, the
transactions by the underwriters during the subscription period, the amount of
unsubscribed securities that the underwriters will purchase and the terms of any
later reoffering.
II-9
<PAGE> 93
If the underwriters make any public offering of the securities on terms
different from those on the cover page of the prospectus, the Registrant will
file a post-effective amendment to state the terms of such offering.
5. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, (the "Act") may be permitted to directors,
officers or persons controlling the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been informed that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
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<PAGE> 94
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
Pre-Effective Amendment No. 1 to Registration Statement to be signed on its
behalf by the undersigned, in the City of Cedar Rapids, State of Iowa, on the
29th day of June, 1999.
MURDOCK COMMUNICATIONS CORPORATION
By /s/ Thomas E. Chaplin
----------------------------
Thomas E. Chaplin
Chief Executive Officer
Date: June 29, 1999
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to Registration Statement has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<S> <C> <C>
* Chairman of the Board of Directors June 29, 1999
- ------------------------------------ (Principal Executive Officer)
Guy O. Murdock
/s/ Thomas E. Chaplin Chief Executive Officer and Director June 29, 1999
- ------------------------------------ (Principal Financial Officer and Principal
Thomas E. Chaplin Accounting Officer)
* Vice Chairman of the Board of Directors June 29, 1999
- ------------------------------------
Wayne Wright
* President and Director June 29, 1999
- ------------------------------------
Colin P. Halford Director June 29, 1999
*
- ------------------------------------
John C. Poss Director June 29, 1999
*
- ------------------------------------
Steven R. Ehlert Director June 29, 1999
*
- ------------------------------------
Larry A. Erickson Director
/s/ Thomas E. Chaplin
- ------------------------------------
*Attorney-in-Fact June 29, 1999
</TABLE>
II-11
<PAGE> 1
EXHIBIT 5
REINHART, BOERNER, VAN DEUREN,
NORRIS & RIESELBACH, s.c.
1000 North Water Street
Milwaukee, WI 53202
July 2, 1999
Murdock Communications Corporation
1112 29th Avenue S.W.
Cedar Rapids, IA 52404
Gentlemen: Re: Registration Statement on Form SB-2
We have acted as counsel for Murdock Communications Corporation, an
Iowa corporation (the "Company"), in connection with the Company's offering to
certain holders of Common Stock Purchase Warrants (the "Public Warrants") of up
to 1,819,918 shares of its common stock, no par value (the "Common Stock"), and
up to 4,722,626 shares of Common Stock to be sold by certain selling
shareholders, including shares issuable upon exercise of outstanding warrants
(the "Selling Shareholder Warrants" and, collectively with the Public Warrants,
the "Warrants").
In such capacity, we have examined, among other documents, the Amended
and Restated Articles of Incorporation of the Company, as amended, a certificate
of good standing issued by the Secretary of State of the State of Iowa and the
Registration Statement on Form SB-2 (File No. 333-78399) filed by the Company
with the Securities and Exchange Commission (the "Commission") on May 13, 1999,
as amended by Pre-Effective Amendment No. 1 to the Registration Statement, to be
filed by the Company with the Commission on the date hereof or shortly
hereafter. Based upon the foregoing, and upon such further examination as we
have deemed relevant and necessary, we are of the opinion that the shares of
Common Stock to be offered by the Company upon exercise of the Public Warrants
and the shares of Common Stock offered by the selling shareholders have been
legally and validly authorized under the Company's Amended and Restated Articles
of Incorporation, as amended, and the laws of the State of Iowa, and such shares
have been, or will be when issued in accordance with the description set forth
in the Registration Statement and the terms of the Warrants, legally and validly
issued and fully-paid and nonassessable.
<PAGE> 2
Murdock Communications Corporation
July 2, 1999
Page 2
We hereby consent to the use of our name beneath the caption "Legal
Matters" in the prospectus forming part of the Registration Statement and to the
filing of a copy of this opinion as an exhibit thereto. In giving our consent,
we do not admit that we are "experts" within the meaning of section 11 of the
Act or within the category of persons whose consent is required by section 7 of
the Act.
Yours very truly,
REINHART, BOERNER, VAN DEUREN,
NORRIS & RIESELBACH, s.c.
BY /s/ Albert S. Orr
Albert S. Orr
<PAGE> 1
EXHIBIT 10.29
EXECUTION COPY
NOTE AND WARRANT PURCHASE AGREEMENT
Dated as of June 21, 1999
by and among
MURDOCK COMMUNICATIONS CORPORATION,
as the Issuer,
PRIORITY INTERNATIONAL COMMUNICATIONS, INC.,
ATN COMMUNICATIONS, INC., INCOMEX, INC.,
and MCC ACQUISITION CORP.,
as Guarantors,
and
each of the purchasers of securities
listed on Schedule 1 hereto,
as the Purchasers
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
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ARTICLE 1. DEFINITIONS....................................................................................1
ARTICLE 2. ISSUANCE AND PURCHASE OF NOTES AND WARRANTS....................................................4
Section 2.1. Authorization of Issuance of the Notes and Warrants...........................4
Section 2.2. Purchase and Sale of Notes and Warrants.......................................4
Section 2.3. Interest on the Notes.........................................................4
Section 2.4. Maturity of Notes; Prepayments................................................4
Section 2.5. Investment Representations and Covenants......................................4
ARTICLE 3. OTHER PROVISIONS RELATING TO THE NOTES.........................................................5
Section 3.1. Making of Payments............................................................5
Section 3.2. Default Rate of Interest......................................................5
Section 3.3. Calculation of Interest.......................................................6
Section 3.4. Usury.........................................................................6
Section 3.5. Ranking of Notes..............................................................6
ARTICLE 4. CONDITIONS PRECEDENT TO PURCHASE OF THE NOTES AND THE WARRANTS.................................6
Section 4.1. Documentation.................................................................6
Section 4.2. Resolutions...................................................................7
Section 4.3. No Injunction, etc............................................................7
Section 4.4 No Defaults...................................................................7
Section 4.5. Representations Accurate......................................................7
ARTICLE 5. REPRESENTATIONS AND WARRANTIES.................................................................8
Section 5.1. Corporate Existence .........................................................8
Section 5.2. Authorization; No Conflict....................................................8
Section 5.3. Approvals.....................................................................8
Section 5.4. Binding Obligations...........................................................8
Section 5.5. Federal Reserve Regulations...................................................9
Section 5.6. Offering of Notes and Warrants................................................9
Section 5.7. Financial Information.........................................................9
Section 5.8. Solvency......................................................................9
Section 5.9. Material Adverse Change.......................................................9
Section 5.10. Absence of Default............................................................9
Section 5.11. Litigation, Legislation, etc.................................................10
</TABLE>
<PAGE> 3
<TABLE>
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<S> <C> <C>
Section 5.12. Government Regulation........................................................10
Section 5.13. Taxes........................................................................10
Section 5.14. ERISA........................................................................10
Section 5.15. Labor Controversies..........................................................10
Section 5.16. Ownership and Condition of Properties........................................10
Section 5.17. Intellectual Property........................................................11
Section 5.18. Accuracy of Information......................................................11
Section 5.19. Certain Indebtedness.........................................................11
Section 5.20. No Burdensome Agreements.....................................................11
Section 5.21. Consents.....................................................................11
Section 5.22. Subsidiaries.................................................................11
Section 5.23. Trade Relations..............................................................11
Section 5.24. Capitalization of Issuer.....................................................12
ARTICLE 6. COVENANTS.....................................................................................12
Section 6.1. Preservation of Corporate Existence..........................................12
Section 6.2. Compliance with Laws.........................................................12
Section 6.3. Records and Accounts.........................................................12
Section 6.4. Maintenance of Properties....................................................12
Section 6.5. Use of Proceeds..............................................................13
Section 6.6. Employee Plans...............................................................13
Section 6.7. Subordination of Insider Indebtedness; Agreement to
Grant Liens..................................................................13
Section 6.8. Indebtedness.................................................................13
Section 6.9. Liens........................................................................14
Section 6.10. Restricted Payments, etc.....................................................15
Section 6.11. Consolidation, Merger, Subsidiaries, etc.....................................15
Section 6.12. Asset Dispositions, etc......................................................15
Section 6.13. Transactions with Affiliates.................................................15
Section 6.14. Inconsistent Agreements......................................................15
ARTICLE 7. GUARANTY......................................................................................15
Section 7.1. The Guaranty.................................................................15
Section 7.2. Demand by the Holders........................................................16
Section 7.3. Enforcement of Guaranty......................................................17
Section 7.4. Waivers......................................................................17
Section 7.5. Benefits of Guaranty.........................................................17
Section 7.6. Modification of Notes, etc...................................................17
Section 7.7. Reinstatement................................................................18
Section 7.8. Waiver of Subrogation, etc...................................................19
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
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<S> <C> <C>
Section 7.9 Contribution Rights..........................................................19
Section 7.10. Election of Remedies, Etc....................................................19
Section 7.11. Continuing Guaranty..........................................................20
Section 7.12. Limitation on Guaranty Obligations...........................................20
ARTICLE 8. EVENTS OF DEFAULT.............................................................................21
Section 8.1. Events of Default............................................................21
Section 8.2. Remedies on Default..........................................................21
ARTICLE 9 REGISTRATION; EXCHANGE; SUBSTITUTION
OF NOTES AND WARRANT CERTIFICATES.............................................................22
Section 9.1. Registration of Notes and Warrant Certificates...............................22
Section 9.2. Transfer and Exchange of Notes and Warrant Certificates......................22
Section 9.3. Replacement of Notes and Warrant Certificates................................23
ARTICLE 10. MISCELLANEOUS.................................................................................23
Section 10.1. Notices......................................................................23
Section 10.2. No Waiver....................................................................24
Section 10.3. Amendments, Etc..............................................................24
Section 10.4. Successors and Assigns.......................................................24
Section 10.5. Governing Law................................................................24
Section 10.6. Survival of Representations and Warranties...................................24
Section 10.7. Severability.................................................................25
Section 10.8. Counterparts.................................................................25
Section 10.9. Entire Agreement.............................................................25
Section 10.10. Cost and Expenses............................................................25
Section 10.11. Consent to Jurisdiction......................................................25
</TABLE>
<PAGE> 5
Schedules and Exhibits
Schedule 1 Purchasers
Exhibit A - Form of Note
Exhibit B - Form of Warrant Certificate
Exhibit C - Form of Registration Rights Agreement
-iv-
<PAGE> 6
NOTE AND WARRANT PURCHASE AGREEMENT
THIS NOTE AND WARRANT PURCHASE AGREEMENT dated as of June 21, 1999 by
and among MURDOCK COMMUNICATIONS CORPORATION, an Iowa corporation, as issuer of
the Notes and the Warrants (the "Issuer"), PRIORITY INTERNATIONAL
COMMUNICATIONS, INC., a Texas corporation, ATN COMMUNICATIONS, INC., a Delaware
Corporation, INCOMEX, INC., a California corporation, and MCC ACQUISITION CORP.,
an Iowa corporation, as guarantors (the "Guarantors"), and each of the Persons
listed on Schedule 1 hereto (each a "Purchaser" and, collectively, the
"Purchasers").
WHEREAS, the Issuer desires to issue and each of the Purchasers desires
to purchase the Notes and the Warrants described herein on the terms and
conditions set forth herein;
NOW, THEREFORE, for and in consideration of the mutual premises,
covenants and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, agree as follows:
ARTICLE 1.
DEFINITIONS
In addition to the other terms defined herein, the following terms used
herein shall have the meanings herein specified (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Affiliate" of any Person means any other Person which, directly or
indirectly, controls or is controlled by or under common control with such
Person. A Person shall be deemed to be "controlled by" any other Person if such
other Person possesses, directly or indirectly, power (a) to vote 5% or more of
the securities having ordinary voting power for the election of directors of
such Person or (b) to direct or cause the direction of the management or
policies of such Person whether by contract or otherwise.
"Agreement" shall mean this Note and Warrant Purchase Agreement, as the
same may be amended or otherwise modified from time to time in accordance with
the terms hereof.
"Applicable Law" shall mean all applicable provisions of constitutions,
statutes, rules, regulations and orders of all governmental authorities and
regulatory bodies and all orders and decrees of all courts, tribunals and
arbitrators.
"Business Day" shall mean any day on which commercial banks located in
New York, New York are required or permitted by law to be open for the purpose
of conducting a commercial banking business.
<PAGE> 7
"Closing Date" shall mean June 21, 1999 or such later date on which
the conditions set forth in Article 4 hereof are satisfied.
"Common Stock" shall mean the Common Stock of the Issuer, no par value
per share, 40,000,000 shares of which are authorized pursuant to the articles of
incorporation of the Issuer, and of which 10,329,867 shares are outstanding as
of the Closing Date.
"Default" shall mean any event that, with notice or lapse of time or
both, would constitute an Event of Default.
"Dollar" and the sign "$" shall mean the lawful money of the United
States of America.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and any successor statute of similar import, together with the
regulation thereunder, in each case as in effect from time to time. References
to sections of ERISA also refer to any successor sections.
"Event of Default" shall mean any of the events specified in
Section 8.1 hereof.
"Exercise Price" shall mean $3.50 per share of Common Stock, as
adjusted from time to time in accordance with the terms of the Warrant
Certificates.
"Financing Transaction" shall mean (a) the closing and initial funding
of the contemplated $25,000,000 credit facility arranged by Paribas, or (b) any
other financing transaction or series of related financing transactions (i)
consummated by the Issuer or any of its Subsidiaries after the date hereof, and
(ii) consisting of the issuance of equity or debt securities of the Issuer or
any of its Subsidiaries or the incurrence by the Issuer or any of its
Subsidiaries of indebtedness for borrowed money (other than (A) borrowings under
lines of credit existing as of the date hereof in the ordinary course of
business up to the maximum principal amount that may be incurred under such
lines of credit as of the date hereof, (B) up to $3,000,000 to be raised by
Issuer through a sale of a new series of preferred stock in conjunction with the
financing described in clause (a) of this definition, or (C) any issuances of
common stock or preferred stock to current holders of the Issuer's debt in
exchange therefor).
"GAAP" means generally accepted accounting principles in effect from
time to time in the United States.
"Issuer" has the meaning set forth in the preamble to this Agreement,
and shall include the Issuer's successors and assigns.
"Material Adverse Effect" shall mean a material adverse effect on (a)
the properties, operations, business or financial condition of the Issuer and
its Subsidiaries, taken as a whole, (b) the Issuer's ability to pay the Notes in
accordance with the terms thereof, or (c) the Issuer's or any Guarantor's
ability to perform its obligations under the Transaction Documents.
<PAGE> 8
"Maturity Date" shall mean July 21, 1999.
"Note" shall mean a Fixed Rate Senior Note due July 21, 1999, issued by
the Issuer pursuant to Section 2.1 hereof in substantially the form of Exhibit A
hereto, maturing on the Maturity Date, or such earlier date as provided herein,
and bearing interest as set forth in this Agreement, and each promissory note
delivered in substitution, extension or exchange for any such Note pursuant to
the provisions of this Agreement.
"Person" shall mean an individual, corporation, limited liability
company, partnership, joint venture, trust, unincorporated association or other
entity, or a government or any political subdivision or agency thereof.
"Purchaser" has the meaning set forth in the preamble to this
Agreement, and shall include the successors and registered assigns of any
Purchaser permitted under this Agreement and the other Transaction Documents.
"Registration Rights Agreement" shall mean the registration rights
agreement among the Issuer and the Purchasers, in the form of Exhibit C hereto,
as the same may be amended or otherwise modified from time to time.
"Requisite Holders" shall mean the Requisite Purchasers and the holders
of Warrant Certificates for the purchase of more than fifty percent (50%) of all
shares of Common Stock issuable upon exercise of all Warrant Certificates.
"Requisite Purchasers" shall mean Purchasers who individually or
collectively hold more than fifty percent (50%) of the outstanding principal
amount of the Notes.
"Stock" means capital stock of the Issuer, whether common or preferred
and whether voting or nonvoting.
"Transaction Documents" shall mean, collectively, this Agreement, the
Notes, the Warrant Certificates and the Registration Rights Agreement, in each
case either as originally executed or as the same may be amended or otherwise
modified from time to time.
"Warrant Certificate" shall mean a stock purchase warrant issued and
delivered by the Issuer on the Closing Date pursuant to Article 2 hereof, in
each case in substantially the form of Exhibit B hereto, and each stock purchase
warrant issued and delivered in substitution or exchange for any Warrant
Certificate.
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<PAGE> 9
ARTICLE 2.
ISSUANCE AND PURCHASE OF THE NOTES AND WARRANTS
Section 1.1. Authorization of Issuance of the Notes and Warrants. The
Issuer has duly authorized the issuance and sale, on the terms and subject to
the conditions set forth herein, of one or more Notes in the aggregate principal
amount of up to $2,000,000, to be dated as of the Closing Date. The Issuer has
duly authorized the issuance and sale, on the terms and subject to the
conditions set forth herein, of Warrant Certificates evidencing warrants for the
purchase of 250,000 shares of the Common Stock of the Issuer (subject to
adjustment as provided therein).
Section 1.2. Purchase and Sale of Notes and Warrants. The Issuer hereby
agrees to sell to the Purchasers and, subject to the terms and conditions set
forth herein and in reliance upon the representations and warranties of the
Issuer contained herein, Purchasers hereby agree to purchase from the Issuer the
Notes and the Warrant Certificates described in Section 2.1 hereof for an
aggregate purchase price of $2,000,000. The purchase price paid by each
Purchaser for the Note and Warrant Certificate issued to such Purchaser on the
Closing Date shall be equal to the principal amount of such Note issued to such
Purchaser. The Issuer shall pay when due any and all state and federal issue
taxes which may be payable in respect of the issuance of the Warrant
Certificates or the issuance of any shares of Common Stock of the Issuer upon
exercise of the Warrant Certificates.
Section 1.3. Interest on the Notes. Interest on the Notes shall accrue
at a rate per annum equal to twelve percent (12.00%), subject to the provisions
of Article 3 hereof. Interest shall be payable (i) upon any prepayment of the
Note to the date of prepayment on the amount prepaid, or (ii) at maturity of the
Note, whether on the Maturity Date, by acceleration or otherwise.
Section 1.4. Maturity of the Notes; Prepayments.
(a) The outstanding principal amount of the Notes, together with
accrued and unpaid interest thereon, shall become due and payable on the
Maturity Date.
(b) Upon the occurrence of a Financing Event, the outstanding
principal amount of all Notes shall be due and payable in an amount equal to the
lesser of (i) the outstanding principal amount of the Notes and (ii) the
aggregate gross cash proceeds from such Financing Event.
(c) The Issuer may prepay the Notes in whole or in part at any
time, provided that (i) the Issuer provides at least one (1) days' prior written
notice to the Purchasers of such proposed prepayment, and (ii) such prepayment
is accompanied by all accrued and unpaid interest on the amount prepaid to the
date of prepayment.
Section 1.5. Investment Representations and Covenants. Each Purchaser
represents and warrants that it is purchasing the Note and Warrant Certificate
to be issued to such Purchaser on the Closing Date for its own account, for
investment purposes and not with a view to the distribution
-4-
<PAGE> 10
thereof. Each Purchaser agrees that it will not, directly or indirectly, offer,
transfer, sell, assign, pledge, hypothecate or otherwise dispose of any of the
Notes or Warrant Certificates (or solicit any offers to buy, purchase or
otherwise acquire or take a pledge of the Notes or Warrant Certificates) except
in compliance with all applicable securities laws, and in any event without (i)
an effective registration statement under the Securities Act of 1933, as
amended, and all applicable state securities laws, or (ii) an opinion of
counsel, which counsel shall be reasonably satisfactory to the Issuer and its
counsel, that registration is not required under the Securities Act of 1933, as
amended, or any applicable state securities laws (the Issuer hereby acknowledges
that King & Spalding is acceptable counsel). In addition, the transfer of any
shares of Common Stock issued after the Closing Date shall be restricted in the
same manner and to the same extent as the Notes and the Warrant Certificates
issued on the Closing Date, and the certificates representing such shares of
Common Stock shall bear substantially the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED UNTIL (I) A
REGISTRATION STATEMENT UNDER THE ACT OR SUCH APPLICABLE STATE
SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR
(II) DELIVERY OF AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE
ISSUER THAT REGISTRATION UNDER SUCH ACT OR SUCH APPLICABLE STATE
SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED
TRANSFER.
The Purchasers and the Issuer agree to execute such other documents and
instruments as counsel for the Purchasers and counsel for the Issuer reasonably
deem necessary to effect the compliance of the issuance of the Notes and the
Warrant Certificates, and any shares of Common Stock issued after the Closing
Date, with all applicable federal and state securities laws.
ARTICLE 3.
OTHER PROVISIONS RELATING TO THE NOTES
Section 1.6. Making of Payments. Except as otherwise expressly provided
in this Agreement, the Issuer shall make each payment of principal of and
interest on the Notes not later than 2:00 p.m. (New York, New York time) on the
day when due in Dollars by wire transfer of immediately available funds in
accordance with the written instructions of the Purchasers. All payments
received after that hour shall be deemed to have been received by the Purchaser
on the next following Business Day.
Section 1.7. Default Rate of Interest. If the Issuer shall fail to pay
on the due date therefor, whether on the Maturity Date, by acceleration or
otherwise, any principal owing under the Notes,
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<PAGE> 11
then, in lieu of the interest rate otherwise applicable, interest shall accrue
on such unpaid principal from the due date to but excluding the date on which
such principal is paid in full (i) for the period commencing on the due date and
ending thirty (30) days thereafter, at a rate per annum equal to fourteen
percent (14%), (ii) for the period commencing on the thirty-first (31st) day
following the due date and ending sixty (60) days thereafter, at a rate per
annum equal to sixteen percent (16%), and (iii) for the period commencing on the
sixty-first (61st) day following the due date to but excluding the date on which
such principal is paid in full, at a rate per annum equal to eighteen percent
(18%) (interest accruing pursuant to this Section 3.2, the "Default Rate").
Interest calculated at the Default Rate shall be due and payable upon demand by
the Purchasers.
Section 1.8. Calculation of Interest. Interest payable on the Notes
shall be calculated on the basis of a year of 360 days consisting of twelve
30-day months. If the date for any payment of principal is extended (whether by
operation of this Agreement, any provision of law or otherwise), interest shall
be payable for such extended time at the rates provided herein. Whenever any
payment hereunder shall be stated to be due on a day other than a Business Day,
such payment shall be due on the next succeeding Business Day.
Section 1.9. Usury. In no event shall the amount of interest due or
payable on any Note, when aggregated with all amounts payable by the Issuer
under any of the Transaction Documents that are deemed or construed to be
interest, exceed the maximum rate of interest allowed by Applicable Law and, in
the event any such payment is made by the Issuer or received by a Purchaser,
then such excess sum shall be credited as a payment of principal. It is the
express intent of the parties hereto that the Issuer not pay, and the Purchasers
not receive, directly or indirectly, in any manner whatsoever, interest in
excess of that which may be lawfully paid by the Issuer under Applicable Law.
Section 1.10. Ranking of Notes. The Notes shall constitute senior
unsecured obligations of the Issuer ranking pari passu will all other senior
unsecured indebtedness of the Issuer and senior to all subordinated indebtedness
of the Issuer.
ARTICLE 4.
CONDITIONS PRECEDENT TO PURCHASE OF THE
NOTES AND THE WARRANTS
The obligations of the Purchasers under this Agreement are subject to
the satisfaction of each of the following conditions on the Closing Date:
Section 1.11. Documentation. Each Purchaser shall have received, on or
prior to the Closing Date, the following:
(1) a duly executed counterpart of this Agreement;
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<PAGE> 12
(2) a Note in the principal amount equal to the amount set
forth opposite the name of such Purchaser on Schedule 1 hereto;
(3) a duly executed Warrant Certificate evidencing warrants to
purchase the number of shares of Common Stock set forth opposite the
name of such Purchaser on Schedule 1 hereto;
(4) a duly executed Registration Rights Agreement; and
(5) an opinion of counsel in form and substance reasonable
satisfactory to the Purchasers and their counsel and covering such
matters as the Purchasers shall reasonably request.
Section 1.12. Resolutions, etc. The Purchasers shall have received:
(1) a certificate, dated the Closing Date, of the Secretary or
an assistant secretary of each of the Issuer and the Guarantors as to
(i) resolutions of its board of directors, then in full force and
effect authorizing the execution, delivery and performance of
Transaction Documents, and (ii) the incumbency and signatures of those
of its officers authorized to act with respect to the Transaction
Documents to which it is party;
(2) certified copies of the certificate or articles of
incorporation and bylaws of each of the Issuer and the Guarantors;
(3) a so-called "good standing" certificate with respect to
each of the Issuer and the Guarantors from the appropriate governmental
authority governmental authority or regulatory body of the state of its
incorporation;
(4) evidence of qualification of each of the Issuer and the
Guarantors to do business in each other jurisdiction in which the
failure to so qualify could result in a Material Adverse Effect; and
(5) such other documents (certified if requested) as the
Purchasers may request with respect to this Agreement, the Notes, any
other Transaction Document and the transactions contemplated hereby and
thereby.
Section 1.13. No Injunction, etc. No action, proceeding, investigation,
regulation or legislation shall have been instituted, threatened or proposed
before any court, governmental authority or regulatory or legislative body to
enjoin, restrain or prohibit, or to obtain substantial damages in respect of,
this Agreement or the consummation of the transactions contemplated hereby.
Section 1.14. No Default, Etc. No Default or Event of Default shall
exist.
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<PAGE> 13
Section 1.15. Representations Accurate. All representations and
warranties made by the Issuer and the Guarantors herein or in any other
Transaction Document shall be true and correct in all material respects with the
same effect as though such representations and warranties had been made on and
as of the Closing Date other than any such representation or warranty made as of
a specified date which shall be true and correct in all material respects as of
such specified date.
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES
Each of the Issuer and the Guarantors hereby represents and warrants to
the Purchasers that the following statements are true and correct:
Section 1.16. Corporate Existence. Each of the Issuer and the
Guarantors is a corporation duly organized, validly existing and in good
standing under the laws of the state of its incorporation and has all requisite
corporate power and authority to conduct its business and to own its properties.
Each of the Issuer and the Guarantors has all requisite corporate power and
authority to execute and deliver and to perform all of its obligations under the
Transaction Documents. Each of the Issuer and the Guarantors is duly qualified
and in good standing as a foreign corporation authorized to do business in each
jurisdiction in which the nature of its activities or the character of the
properties it owns or leases makes such qualification necessary and where the
failure to be so qualified could have a Material Adverse Effect.
Section 1.17. Authorization; No Conflict. The execution, delivery and
performance by the Issuer and the Guarantors of the Transaction Documents are
within their respective corporate powers, have been duly authorized by all
necessary corporate action, and do not violate any provision of any Applicable
Law, the articles of incorporation or bylaws of the Issuer and the Guarantors or
any material agreement, indenture or instrument to which the Issuer is a party
or by which the Issuer, any Guarantor, or any of their respective properties is
bound.
Section 1.18. Approvals. No consent, authorization or approval of, and
no notice to or filing with, any governmental authority or regulatory body is
required in connection with the execution, delivery, performance, validity or
enforcement of any Transaction Document which has not been obtained or made as
of the date hereof.
Section 1.19. Binding Obligations. This Agreement constitutes a legal,
valid and binding obligation of the Issuer and the Guarantors, enforceable
against the Issuer and the Guarantors in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of creditors' rights
generally and by general equitable principles (whether enforcement is sought by
proceedings in equity or at law). Each of the other Transaction Documents
constitutes a legal, valid and binding obligation of the Issuer, enforceable
against the Issuer in accordance with its terms, except as such enforceability
-8-
<PAGE> 14
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights generally and by
general equitable principles (whether enforcement is sought by proceedings in
equity or at law).
Section 1.20. Federal Reserve Regulations. None of the proceeds of the
Notes and Warrant Certificates will be used, directly or indirectly, for the
purpose of purchasing or carrying any "margin security" or "margin stock" or for
the purpose of reducing or retiring any debt that originally was incurred to
purchase or carry a "margin security" or "margin stock" or for any other purpose
that might constitute this transaction a "purpose credit" within the meaning of
the regulations of the Board of Governors of the Federal Reserve System.
Section 1.21. Offering of Notes and Warrants. Neither the Issuer nor,
to the best knowledge of the Issuer, anyone acting on its behalf has offered the
Notes, the Warrant Certificates or any similar securities for sale to, or
solicited any offer to buy any of the same from, or otherwise approached or
negotiated in respect thereof with, any Person other than the Purchasers.
Neither the Issuer nor, to the best knowledge of the Issuer, anyone acting on
its behalf, has taken or will take any action which would subject the issuance
or sale of the Notes and the Warrant Certificates to Section 5 of the Securities
Act of 1933, as amended from time to time, or the registration or qualification
provisions of the blue sky laws of any state.
Section 1.22. Financial Information. All balance sheets, all statements
of operations, stockholders' equity and cash flows, and all other financial
information of the Issuer and its Subsidiaries which have been furnished by or
on behalf of the Issuer and its Subsidiaries to the Purchasers for the purposes
of or in connection with this Agreement or any transaction contemplated hereby,
have been prepared in accordance with GAAP consistently applied throughout the
periods involved and present fairly in all material respects the matters
reflected therein subject, in the case of unaudited statements, to changes
resulting from normal year-end audit adjustments and to the absence of
footnotes. As of the date hereof, neither the Issuer nor any of its Subsidiaries
has material contingent liabilities or material liabilities for taxes, long-term
leases or unusual forward or long-term commitments which are not reflected in
said financial statements.
Section 1.23. Solvency. After giving effect to the issuance of the
Notes and to the consummation of the other transactions contemplated by this
Agreement and the other Transaction Documents to occur on the Closing Date, each
of the Issuer and the Guarantors is solvent.
Section 1.24. Material Adverse Change. Since December 31, 1998, there
has been no material adverse change in the condition (financial or otherwise),
operations, performance, business, properties or prospects of the Issuer and its
Subsidiaries, taken as a whole.
Section 1.25. Absence of Default. Except as disclosed in the Issuer's
most recent annual report filed on Form 10KSB or the Issuer's most recent
quarterly report filed on Form 10QSB in each case with the Securities and
Exchange Commission, neither the Issuer nor any of its Subsidiaries is in
default in the payment of (or in the performance of any obligation applicable
to) any material
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<PAGE> 15
indebtedness, or is in default under any regulation of any governmental
authority governmental authority or regulatory body or court decree or order, or
in default under any requirement of law which could result in a Material Adverse
Effect.
Section 1.26. Litigation, Legislation, etc. Except as disclosed in the
Issuer's most recent annual report filed on Form 10KSB or the Issuer's most
recent quarterly report filed on Form 10QSB in each case with the Securities and
Exchange Commission, there is no pending or, to the knowledge of the Issuer,
threatened litigation, arbitration or governmental investigation, proceeding or
inquiry which, if adversely determined, could result in a Material Adverse
Effect; and none of the proceedings set forth in said Form 10KSB or Form 10QSB
seeks to amend, modify or enjoin the transactions contemplated hereby or is
likely to be adversely determined. There is no legislation, governmental
regulation or judicial decision known to the Issuer that could result in a
Material Adverse Effect.
Section 1.27. Government Regulation. Neither the Issuer nor any of its
subsidiaries is an "investment company" within the meaning of the Investment
Holding Company Act of 1940, as amended, or a "holding company," or a
"subsidiary company" of a "holding company," or an "affiliate" of a "holding
company" or of a "subsidiary company" of a "holding company," within the meaning
of the Public Utility Holding Company Act of 1935, as amended, or subject to
regulation under the Federal Power Act, the Interstate Commerce Act or any other
federal or state law limiting the Issuers' ability to issue the Notes or of any
Guarantor to otherwise incur its obligations under this Agreement or to execute,
deliver or perform the Transaction Documents to which it is party.
Section 5.1. Taxes. Each of the Issuer and its present or past
Subsidiaries has filed all tax returns and reports required by law to have been
filed by it and has paid all taxes and charges thereby shown to be owing, except
any such taxes or charges which are being diligently contested in good faith by
appropriate proceedings and for which adequate reserves in accordance with GAAP
shall have been set aside on its books, except where the failure to file any
such tax return or report or to pay any such taxes or charges could not result
in a Material Adverse Effect.
Section 1.28. ERISA. The Issuer and its Subsidiaries (i) are not party
to any employee benefit plan subject to part 3 of Title I of ERISA and (ii) are
in compliance in all material respects with ERISA. The consummation of the
transactions provided for in this Agreement and compliance by the Issuer and the
Guarantors with the provisions of the Transaction Documents will not involve any
prohibited transaction within the meaning of ERISA.
Section 5.2. Labor Controversies. There are no labor controversies
pending or, to the best knowledge of the Issuer, threatened, relating to the
Issuer or any of its Subsidiaries.
Section 5.3. Ownership and Condition of Properties. Each of the Issuer
and its Subsidiaries has good title to all of its material properties and assets
of any nature whatsoever, free and clear of all liens except as permitted
pursuant to Section 6.9. All of the assets and properties owned by, leased to or
used by the Issuer or any of its Subsidiaries material to the conduct of their
business are in adequate operating condition and repair, ordinary wear and tear
excepted, and are free and clear
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of known defects except for defects which do not substantially interfere with
the use thereof in the conduct of normal operations.
Section 5.4. Intellectual Property. Each of the Issuer and its
Subsidiaries owns or uses pursuant to valid licenses all intellectual property,
and has obtained assignments of all licenses and other rights, as the Issuer
considers necessary for or as are otherwise material to the conduct of the
business of the Issuer and its Subsidiaries as now conducted without,
individually or in the aggregate, any infringement upon rights of other Persons
which could result in a Material Adverse Effect.
Section 1.29. Accuracy of Information. All factual information
heretofore or contemporaneously furnished by or on behalf of the Issuer or any
of its Subsidiaries to any Purchaser for purposes of or in connection with this
Agreement or any transaction contemplated hereby is true and accurate in every
material respect on the date as of which such information is dated or certified
and as of the date of execution and delivery of this Agreement and such
information is not incomplete by omitting to state any material fact necessary
to make such information not misleading. Neither this Agreement nor any document
or statement furnished to any of the Purchasers by or on behalf of the Issuer or
any of its Subsidiaries contain any untrue statement of a material fact or omits
to state any material fact necessary in order to make the statements contained
herein or therein not materially misleading.
Section 1.30. Certain Indebtedness. Except as disclosed in the Issuer's
most recent annual report filed on Form 10KSB or the Issuer's most recent
quarterly report filed on Form 10QSB in each case with the Securities and
Exchange Commission and on Schedule 5.19 hereto, as of the Closing Date the
Issuer and its Subsidiaries do not have any obligations in respect of
indebtedness which (a) is for borrowed money (other than drawings under lines of
credit in the ordinary course of business and in an aggregate amount outstanding
not exceeding the maximum committed amounts of such lines of credit as of May
31, 1999 and disclosed on Schedule 5.19 hereto), or (b) is not incurred in the
ordinary course of the business of Issuer or any of its Subsidiaries in a manner
and to the extent consistent with past practice, or (c) is material to the
financial condition, operations, businesses, properties or prospects of the
Issuer or any of its Subsidiaries.
Section 1.31. No Burdensome Agreements. Neither the Issuer nor any of
its Subsidiaries is a party to or has assumed any indenture, loan or credit
agreement or any lease or other agreement or instrument, or is subject to any
charter or other corporate restriction, in any case that could result in a
Material Adverse Effect.
Section 1.32. Consents. The Issuer and its Subsidiaries have all
material permits and governmental consents and approvals necessary under all
requirements of law in connection with the transactions contemplated hereby and
in connection with the ongoing business and operations of the Issuer and its
Subsidiaries, except for permits, consents and approvals the failure to so have
could not result in a Material Adverse Effect.
Section 1.33. Subsidiaries. The Issuer has no Subsidiaries other than
the Guarantors.
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Section 5.5. Trade Relations. There exists no actual or, to the best of
the Issuer's knowledge, threatened termination, cancellation or limitation of,
or any modification or change in, the business relationship of the Issuer or any
of its Subsidiaries with any of its customers or group of customers, except for
such terminations, cancellations, limitations, modifications or changes which
could not result in a Material Adverse Effect.
Section 1.34. Capitalization of Issuer. The authorized capital stock of
the Issuer consists of 40,000,000 shares of Common Stock, no par value,
10,329,867 shares of which are issued and outstanding as of the date hereof, and
50,000 shares of the Issuer's 8% Series A Convertible Preferred Stock, $100
stated value per share, 18,920 shares of which are issued and outstanding as of
the date hereof. All outstanding shares of capital stock of the Issuer are duly
authorized, validly issued, fully paid and nonassessable, and were not issued in
violation of any preemptive rights. Except for (x) warrants to purchase
5,929,198 shares of the Issuer's Common Stock, (y) options to purchase 1,617,558
shares of Common Stock, and (z) the Issuer's 8% Series A Convertible Preferred
Stock which are convertible into 1,681,799 shares of the Issuer's Common Stock,
no issued, no authorized but unissued and no treasury shares of capital stock of
the Issuer are subject to any preemptive right, option, warrant, right of
conversion or purchase or similar right issued or granted by the Issuer or, to
the knowledge of the Issuer, by any of its shareholders. There are no agreements
or understandings with respect to the voting, sale or transfer of any shares of
capital stock of the Issuer to which the Issuer or any of its Subsidiaries is a
party.
ARTICLE 6.
COVENANTS
So long as the Notes shall remain outstanding each of the Issuer and
the Guarantors shall comply with each of the following:
Section 1.35. Preservation of Corporate Existence. The Issuer will, and
will cause each of its Subsidiaries to, do or cause to be done all things
necessary to (a) preserve and maintain its corporate existence and all material
rights and franchises and (b) qualify and remain qualified to conduct business
in each jurisdiction where the nature of its business or the ownership or lease
of its property requires such qualification and where failure to be so qualified
could have a Material Adverse Effect.
Section 1.36. Compliance with Laws. The Issuer will, and will cause
each of its Subsidiaries to, comply with all Applicable Laws, noncompliance with
which could have a Material Adverse Effect.
Section 1.37. Records and Accounts. The Issuer will, and will cause
each of its Subsidiaries to, keep true records and books of account in which
entries will be made in accordance with GAAP.
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Section 1.38. Maintenance of Properties. The Issuer will, and will
cause each of its Subsidiaries to, cause all of its properties used or useful in
the conduct of its business to be maintained and kept in good condition, repair
and working order and cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Issuer may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times.
Section 1.39. Use of Proceeds. The Issuer will use proceeds from the
sale of the Notes and the Warrant Certificates for general corporate purposes,
and the Issuer shall not use any part of such proceeds to purchase or carry, or
to reduce or retire or refinance any credit incurred to purchase or carry, any
margin stock (within the meaning of Regulations T, U or X of the Board of
Governors of the Federal Reserve System) or to extend credit to others for the
purpose of purchasing or carrying any such margin stock.
Section 1.40. Employee Plans. The Issuer will, and will cause each of
its Subsidiaries to, at all times comply in all material respects with the
provisions of ERISA and the Internal Revenue Code which are applicable to any
employee benefit plans to which it is a party.
Section 1.41. Subordination of Insider Indebtedness; Agreement to Grant
Liens. If the Issuer shall fail for any reason to pay the entire outstanding
principal amount of the Notes, together with accrued and unpaid interest
thereon, on the Maturity Date, the Issuer will not later than thirty (30) days
following the Maturity Date (i) cause all Affiliates, officers, directors and
key employees holding indebtedness of the Issuer or any of its Subsidiaries to
subordinate such indebtedness to the prior payment in full in cash of the Notes
on terms and conditions satisfactory to the Required Purchasers, and (ii) grant
to the Purchasers liens on all real and personal property of the Issuer and its
Subsidiaries (other than any such property that is the subject of an agreement
prohibiting the granting of any such lien) as security for the obligations of
the Issuer and the Guarantors under the Notes and the other Transaction
Documents.
Section 1.42. Indebtedness. The Issuer will not, and will not permit
any of its Subsidiaries to, create, incur, assume or suffer to exist or
otherwise become or be liable in respect of any indebtedness for borrowed money
or evidenced by a note, bond, debenture or similar instrument, other than (i)
indebtedness evidenced by the Notes, (ii) indebtedness for borrowed money or
evidenced by a note, bond, debenture or similar instrument of the Issuer or any
of its Subsidiaries outstanding on the Closing Date or drawn under lines of
credit in the ordinary course of business and in an aggregate amount outstanding
not exceeding the maximum committed amounts of such lines of credit as of May
31, 1999 and disclosed in the Issuer's most recent annual report filed on Form
10KSB or the Issuer's most recent quarterly report filed on Form 10QSB with the
Securities and Exchange Commission or on Schedule 5.19 hereto, (iii)
indebtedness of the Issuer or any of its Subsidiaries owing to the Issuer or any
of the Guarantors and incurred in the ordinary course of business, and (iv)
indebtedness incurred by the Issuer after the date hereof the proceeds of which
are
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used immediately upon incurrence to repay, on a dollar-for-dollar basis, the
outstanding principal of and accrued and unpaid interest on the Notes.
Section 1.43. Liens. The Issuer will not, and will not permit any of
its Subsidiaries to, create, incur, assume or suffer to exist any lien upon any
of its property, revenues or assets, whether now owned or hereafter acquired,
except:
(1) liens for taxes, assessments or other governmental
charges or levies not at the time delinquent or thereafter payable with
penalty or being contested in good faith by appropriate proceedings and
for which adequate reserves in accordance with GAAP shall have been set
aside on its books;
(2) liens of carriers, warehousemen, mechanics, and
materialmen incurred in the ordinary course of business for sums not
overdue or being contested in good faith by appropriate proceedings and
for which adequate reserves shall have been set aside on its books;
(3) liens (other than liens arising under ERISA or Section
412(n) of the Internal Revenue Code) incurred in the ordinary course of
business in connection with workmen's compensation, unemployment
insurance or other forms of governmental insurance or benefits, or to
secure performance of tenders, statutory obligations, leases and
contracts (other than for borrowed money) entered into in the ordinary
course of business or to secure obligations on surety or appeal bonds;
(4) judgment liens with respect to judgments to the extent
such judgments do not constitute an Event of Default;
(5) liens which arise by operation of law under Article 2
of the Uniform Commercial Code in favor of unpaid sellers of goods, or
liens in items or any accompanying documents or proceeds of either
arising by operation of law under Article 4 of the Uniform Commercial
Code in favor of a collecting bank;
(6) easements (including, without limitation, reciprocal
easement agreements and utility agreements), rights-of-way, covenants,
consents, reservations, encroachments, variations and other
restrictions, charges or encumbrances (whether or not recorded)
affecting the use of property, which do not materially detract from the
value of such property or impair the use thereof;
(7) leases and subleases granted to others in the ordinary
course of business not interfering in any material respect with any
business of the Issuer or any of its Subsidiaries;
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(8) rights of set-off of a customary nature or bankers'
liens with respect to amounts on deposit, whether arising by operation
of law or by contract, in connection with arrangements entered into
with banks in the ordinary course of business; and
(9) liens existing on the Closing Date.
Section 1.44. Restricted Payments, etc. Except for dividends payable in
Common Stock on the Issuer's Series A Preferred Stock, the Issuer will not, and
will not permit any of its Subsidiaries to, declare, pay or make any dividend or
distribution (in cash, property or obligations) on any shares of any class of
its Stock or on any warrants, options or other rights in respect of any class of
its Stock. The Issuer will not, and will not permit any of its Subsidiaries to,
apply any of its funds, property or assets to the purchase, redemption, sinking
fund or other retirement of any shares of any class of Stock of the Issuer or
any of its Subsidiaries, or make any deposit for any of the foregoing.
Section 1.45. Consolidation, Merger, Subsidiaries, etc. The Issuer will
not, and will not permit any of its Subsidiaries to, liquidate or dissolve,
consolidate with, or merge into or with, any Person, or purchase or otherwise
acquire all or substantially all of the assets of any Person (or of any
operating division or unit thereof), except that any Subsidiary may liquidate or
dissolve voluntarily into, and may merge with and into, the Issuer (so long as
the Issuer is the surviving corporation). The Issuer will not, and will not
permit any of its Subsidiaries to, create any Subsidiary or transfer any assets
to any Subsidiary other than a Subsidiary that is or becomes a party to this
Agreement as a Guarantor immediately upon creation or immediately before such
transfer of assets, as the case may be.
Section 1.46. Asset Dispositions, etc. The Issuer will not, and will
not permit any of its Subsidiaries to, sell, transfer, lease or otherwise
dispose of, or grant options, warrants or other rights with respect to, any of
its assets (including accounts receivable and Stock of Subsidiaries) to any
Person, unless such disposition is made in the ordinary course of business and
consists of inventories or such disposition constitutes a disposition of
obsolete or retired assets not used in the business of the Issuer and its
Subsidiaries.
Section 1.47. Transactions with Affiliates. The Issuer will not, and
will not permit any of its Subsidiaries to, enter into, or cause, suffer or
permit to exist any transaction, arrangement or contract with any of its
Affiliates which is on terms which are less favorable than are obtainable from
any Person which is not one of its Affiliates.
Section 1.48. Inconsistent Agreements. The Issuer will not, and will
not permit any of its Subsidiaries to, enter into any material agreement
containing any provision which would be violated or breached in any material
respect by any Note or by the performance by the Issuer or any Guarantor under
any Transaction Document.
ARTICLE 7.
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GUARANTY
Section 1.49. The Guaranty. Each of the Guarantors hereby absolutely,
unconditionally and irrevocably guarantees to the Holders, and their successors,
endorsees, transferees and assigns, the prompt payment (whether at stated
maturity, by acceleration or otherwise) and performance of (a) the Notes,
including (i) all principal of and interest (including any interest which
accrues after the commencement of any case, proceeding or other action relating
to the bankruptcy, insolvency or reorganization of the Issuer, whether or not
such interest constitutes an allowable claim) on any Note issued pursuant to
this Agreement and (ii) all other amounts payable and all obligations to be
performed by the Issuer under this Agreement or any other Transaction Document
and (b) any renewals or extensions of any of the foregoing (collectively, the
"Guaranteed Obligations"). Each of the Guarantors agrees that this is a guaranty
of payment and performance and not of collection, and that its obligations
hereunder shall be primary, absolute and unconditional, irrespective of, and
unaffected by:
(1) the genuineness, validity, regularity, enforceability or
any future amendment of, or change in, the Notes, this Agreement or any
other Transaction Document or any other agreement, document or
instrument to which the Issuer is or may become a party;
(2) the absence of any action to enforce the Notes, this
Agreement or any other Transaction Document or the waiver or consent by
the Holders with respect to any of the provisions of any Transaction
Document; or
(3) any other action or circumstance which might otherwise
constitute a legal or equitable discharge or defense of a surety or
guarantor (other than payment in full);
it being agreed by each of the Guarantors that its obligations hereunder shall
not be discharged until the payment and performance, in full, of the Guaranteed
Obligations. Each of the Guarantors shall be regarded, and shall be in the same
position, as principal debtor with respect to the Guaranteed Obligations. Each
of the Guarantors expressly waives all rights it may now or in the future have
under any statute, or at common law, or at law or in equity, or otherwise, to
compel any Holder to proceed in respect of the Guaranteed Obligations against
the Issuer or any other Person before proceeding against, or as a condition to
proceeding against, the Guarantors. Each of the Guarantors further expressly
waives and agrees not to assert or take advantage of any defense based upon the
failure of any Holder to commence an action in respect of the Guaranteed
Obligations against the Issuer or any other Person. Each of the Guarantors
agrees that any notice or directive given at any time to any Holder which is
inconsistent with the waivers in the preceding two sentences shall be null and
void and may be ignored by such Holder, and, in addition, may not be pleaded or
introduced as evidence in any litigation relating to the obligations of the
Guarantors under this Article 7 for the reason that such pleading or
introduction would be at variance with the written terms hereof. The foregoing
waivers are of the essence of the transaction contemplated by the Transaction
Documents
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and, but for this provisions of this Article 7 and such waivers, the Purchasers
and each subsequent Holder would decline to purchase the Notes.
Section 7.6. Demand by the Holders. In addition to the terms of the
guaranty set forth in Section 7.1, and in no manner imposing any limitation on
such terms, if the outstanding principal amount of the Guaranteed Obligations
shall become due and payable, whether on the Maturity Date, by acceleration or
otherwise, then the Guarantors shall pay to the Holders of the Guaranteed
Obligations the entire outstanding Guaranteed Obligations due and owing to such
Holders. Payment by the Guarantors shall be credited and applied upon the
Guaranteed Obligations and shall be made in immediately available funds to an
account designated by each Holder or at the address set forth herein for the
giving of notice to each Holder or at any other address that may be specified in
writing from time to time by such Holder.
Section 1.50. Enforcement of Guaranty. In no event shall any Holder
have any obligation (although each is entitled, at its option) to proceed
against the Issuer or any other Person or any real or personal property pledged
to secure the Guaranteed Obligations before proceeding against the Guarantors,
and any Holder may proceed, prior or subsequent to, or simultaneously with, the
enforcement of any Holder's rights hereunder, to exercise any right or remedy
which it may have against the Issuer or any such other Person or against any
property, real or personal, as a result of any lien it may have as security for
all or any portion of the Guaranteed Obligations.
Section 1.51. Waivers. In addition to the waivers contained in Section
7.1, each of the Guarantors waives, and agrees that it shall not at any time
insist upon, plead or in any manner whatever claim or take the benefit or
advantage of, any appraisal, valuation, stay, extension, marshaling of assets or
redemption laws, or exemption, whether now or at any time hereafter in force,
which may delay, prevent or otherwise affect the performance by it of its
obligations under, or the enforcement by the Holders of, the provisions of this
Article 7. Each of the Guarantors further hereby waives diligence, presentment
and demand (whether for non-payment or protest or of acceptance, maturity,
extension of time, change in nature or form of the Guaranteed Obligations,
acceptance of security, release of security, composition or agreement arrived at
as to the amount of, or the terms of, the Guaranteed Obligations, notice of
adverse change in the Issuer's or any other Guarantor's financial condition or
any other fact which might materially increase the risk to the Guarantors) with
respect to any of the Guaranteed Obligations and all other demands whatsoever
and, to the extent permitted by Applicable Law, waives the benefit of all
provisions of law which are or might be in conflict with the terms of this
Article 7. Each of the Guarantors represents, warrants and agrees that its
obligations under this Article 7 are not and shall not be subject to any
counterclaims, offsets or defenses of any kind, whether now existing or arising
in the future, against the Holders, the Issuer, the other Guarantors or any
other guarantor of the Guaranteed Obligations.
Section 1.52. Benefits of Guaranty. The provisions of this Article 7
are for the benefit of the Holders and their respective successors, transferees,
endorsees and assigns, and nothing herein contained shall impair, as among the
Issuer and the Holders, the obligations of the Issuer under the Notes and the
Transaction Documents. In the event all or any part of the Guaranteed
Obligations are
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transferred, endorsed or assigned by any Holder to any Person, any reference to
the "Holder" herein shall be deemed to refer equally to such Person.
Section 7.7. Modification of Notes, etc. If the Holders shall at any
time or from time to time, with or without the consent of, or notice to, the
Guarantors:
(1) change or extend the manner, place or terms of payment of,
or renew or alter all or any portion of, the Guaranteed Obligations;
(2) take any action under or in respect of the Transaction
Documents in the exercise of any remedy, power or privilege contained
therein or available to it at law, equity or otherwise, or waive or
refrain from exercising any such remedies, powers or privileges;
(3) amend or modify, in any manner whatsoever, the Transaction
Documents;
(4) extend or waive the time for any of the Guarantors, the
Issuer or other Person's performance of, or compliance with, any term,
covenant or agreement on its part to be performed or observed under the
Transaction Documents, or waive such performance or compliance or
consent to a failure of, or departure from, such performance or
compliance;
(5) take and hold security or collateral for the payment of
the Guaranteed Obligations or sell, exchange, release, dispose of, or
otherwise deal with, any property pledged, mortgaged or conveyed, or in
which the Holders may have been granted a lien, to secure any
indebtedness of the Issuer, any other Guarantor or any other guarantor
of any of the Guaranteed Obligations, to the Holders;
(6) release anyone who may be liable in any manner for the
payment of any amounts owed by the Issuer, any other Guarantor or any
other guarantor of any of the Guaranteed Obligations, to any Holder;
(7) modify or terminate the terms of any intercreditor or
subordination agreement pursuant to which claims of other creditors of
any Issuer, any other Guarantor or any other guarantor of any of the
Guaranteed Obligations, are subordinated to the claims of any Holder;
or
(8) apply any sums by whomever paid or however realized to any
amounts owing by the Issuer, any other Guarantor or any other guarantor
of the Guaranteed Obligations, to any Holder in such manner as any
Holder shall determine in its discretion;
then neither any Holder shall incur any liability to the Guarantors as a result
thereof, and no such action shall impair or release the obligations of the
Guarantors under this Article 7.
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Section 7.8. Reinstatement. The provisions of this Article 7 shall
remain in full force and effect and continue to be effective in the event any
petition is filed by or against any Guarantor or the Issuer for liquidation or
reorganization, in the event any Guarantor or the Issuer becomes insolvent or
makes an assignment for the benefit of creditors or in the event a receiver or
trustee is appointed for all or any significant part of the assets of any the
Guarantor or the Issuer, and shall continue to be effective or be reinstated, as
the case may be, if at any time payment and performance of the Guaranteed
Obligations or any part thereof is, pursuant to Applicable Law, rescinded or
reduced in amount, or must otherwise be restored or returned by any Holder,
whether as a "voidable preference", "fraudulent conveyance" or otherwise, all as
though such payment or performance had not been made. In the event that any
payment of the Guaranteed Obligations, or any part thereof, is rescinded,
reduced, restored or returned, the Guaranteed Obligations or part thereof so
rescinded, restored or returned shall be reinstated, and the Guaranteed
Obligations shall be deemed reduced only by such amount paid and not so
rescinded, reduced, restored or returned.
Section 7.9. Waiver of Subrogation, etc. Upon the making by any
Guarantor of any payment hereunder in respect of the Guaranteed Obligations,
such Guarantor shall be subrogated to the rights of the Holders against the
Issuer with respect to such payment; provided that such Guarantor shall not
enforce any right to receive any payment by way of subrogation, reimbursement,
contribution or setoff resulting from such payment until all of the Guaranteed
Obligations have been paid in full and this Agreement has been terminated. If
any amount shall be paid to the Guarantors on account of such subrogation,
reimbursement, contribution or setoff rights, such amount shall be held in trust
for the benefit of the Holders and shall forthwith be paid to the Holders to be
credited and applied upon the Guaranteed Obligations, whether matured or
unmatured, in accordance with the terms of the Notes and this Agreement. The
preceding subordination is intended by the Guarantors and the Holders to be for
the benefit of the Issuer and its assets.
Section 1.53. Contribution Rights. In the event any Guarantor (a
"Funding Guarantor") shall make any payment under this Article 7 or shall suffer
any loss as a result of any realization upon any of its assets pursuant to any
Transaction Document, each other Guarantor (each, a "Contributing Guarantor")
shall contribute to such Funding Guarantor an amount equal to such Contributing
Guarantor's "Pro Rata Share" of such payment made, or loss suffered, by such
Funding Guarantor. For the purposes hereof, each Contributing Guarantor's Pro
Rata Share with respect to any such payment or loss by a Funding Guarantor shall
be determined as of the date on which such payment or loss was made or suffered
by reference to the ratio of (i) such Contributing Guarantor's maximum
obligation hereunder as provided in Section 7.12 hereof (such Guarantor's
"Maximum Obligation") as of such date (without giving effect to any right to
receive, or obligation to make, any contribution hereunder) to (ii) the
aggregate Maximum Obligations of all Guarantors (including such Funding
Guarantor) as of such date (without giving effect to any right to receive, or
obligation to make, any contribution hereunder). Nothing in this Section 7.9
shall affect each Guarantor's several liability for the entire amount of the
Guaranteed Obligations (up to such Guarantor's Maximum Obligation). Each
Guarantor covenants and agrees that its right to receive any contribution
hereunder from a Contributing Guarantor shall be subordinate and junior in right
of payment to all the Guaranteed Obligations and all of such Contributing
Guarantor's obligations in respect thereof.
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Section 1.54. Election of Remedies, Etc. Any election of remedies which
results in the denial or impairment of the right of any Holder to seek a
deficiency judgment against the Issuer shall not impair the Guarantors'
obligations to pay the full amount of the Guaranteed Obligations. In the event
any Holder shall bid at any foreclosure or trustee's sale or at any private sale
permitted by law or the Transaction Documents, such Holder may bid all or less
than the amount of the Guaranteed Obligations and the amount of such bid need
not be paid by such Holder but shall be credited against the Guaranteed
Obligations. The amount of the successful bid at any such sale, whether any
Holder or any other party is the successful bidder, shall be conclusively deemed
to be the fair market value of the collateral and the difference between such
bid amount and the remaining balance of the Guaranteed Obligations shall be
conclusively deemed to be the amount of the Guaranteed Obligations guaranteed
under the provisions of this Article 7, notwithstanding that any present or
future law or court decision or ruling may have the effect of reducing the
amount of any deficiency claim to which any Holder might otherwise be entitled
but for such bidding at any such sale.
Section 1.55. Continuing Guaranty. Each of the Guarantors agrees that
the provisions of this Article 7 are a continuing guaranty and shall remain in
full force and effect until the payment and performance in full of the
Guaranteed Obligations.
Section 1.56. Limitation on Guaranty Obligations. Anything in this
Article 7 to the contrary notwithstanding, it is the intent of the Guarantors
and Purchasers that each Guarantor's maximum obligations hereunder (the "Maximum
Guaranty Liability") shall not be in excess of:
(i) in a case or proceeding commenced by or against such Guarantor
under the Bankruptcy Code of 1978, U.S.C. ss. 101 et seq., as
amended (the "Bankruptcy Code"), the maximum amount which
would not otherwise cause the obligations of such Guarantor
under this Article 7 to be avoidable or unenforceable against
such Guarantor under (A) Section 548 of the Bankruptcy Code or
(B) any state fraudulent transfer or fraudulent conveyance act
or statute applied in such case or proceeding by virtue of
Section 544 of the Bankruptcy Code; or
(ii) in a case or proceeding commenced by or against such Guarantor
under any law, statute or regulation other than the Bankruptcy
Code relating to dissolution, liquidation, conservatorship,
bankruptcy, moratorium, readjustment of debt, compromise,
rearrangement, receivership, insolvency, reorganization or
similar debtor relief from time to time in effect affecting
the rights of creditors generally (collectively, "Other Debtor
Relief Laws") the maximum amount which would not otherwise
cause the obligations of the Guarantor under this Article 7 to
be avoidable or unenforceable against the Guarantor under such
Other Debtor Relief Laws, including, without limitation, any
state fraudulent transfer or fraudulent conveyance act or
statute applied in any such case or proceeding.
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<PAGE> 26
To the end set forth in this Section 7.12, but only to the extent that the
obligations of a Guarantor under Article 7 would otherwise be subject to
avoidance under any provision of substantive law relating to the avoidance or
unenforceability of obligations of the such Guarantor under this Article 7 (any
such provision, an "Avoidance Provision"), if such Guarantor is not deemed to
have received valuable consideration, fair value or reasonably equivalent value
for such obligations, or if the obligations of such Guarantor under this Article
7 would render such Guarantor insolvent, or leave such Guarantor with an
unreasonably small capital to conduct its business, or cause such Guarantor to
have incurred debts (or to have intended to have incurred debts) beyond its
ability to pay such debts as they mature, in each case as of the time any of the
obligations of such Guarantor are deemed to have been incurred under such
Avoidance Provision, then the obligations of such Guarantor hereunder shall be
reduced to that amount which, after giving effect thereto, would not cause the
obligations of such Guarantor under this Article 7, as so reduced, to be subject
to avoidance under such Avoidance Provision. This Section 7.12 is intended
solely to preserve the rights of the Purchasers to the maximum extent that would
not cause the obligations of the Guarantors under this Article 7 to be subject
to avoidance under any Avoidance Provision, and neither the Guarantors nor any
other person or entity shall have any right or claim under this Section 7.12 as
against any Purchaser that would not otherwise be available under an Avoidance
Provision.
ARTICLE 8.
EVENTS OF DEFAULT
Section 1.57. Events of Default. Each of the following shall constitute
an Event of Default:
(a) failure of the Issuer to pay when due any principal of or
interest on any of the Notes; or
(b) failure of the Issuer or any Guarantor (i) to perform or
observe any covenant or provision set forth in Article 6 hereof, or
(ii) to perform or observe any other term, covenant or agreement
contained in this Agreement or any other Transaction Document which
remains unremedied for 30 days after written notice thereof to the
Issuer by any Purchaser; or
(c) any representation or warranty made by the Issuer or any
Guarantor herein or in any other Transaction Document is false or
misleading in any material respect on the date as of which made; or
(d) failure of the Issuer or any Guarantor to pay its debts
generally as they come due, or the filing by the Issuer or any
Guarantor of a petition or action for relief under any bankruptcy,
reorganization, insolvency or moratorium law; or
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<PAGE> 27
(e) the filing of an involuntary petition under any bankruptcy
statute against the Issuer or any Guarantor, or the appointment of a
custodian, receiver, trustee, assignee for the benefit of creditors (or
other similar official) to take possession, custody, or control of the
properties of the Issuer or any Guarantor, unless such petition or
appointment is set aside or withdrawn or ceases to be in effect within
sixty (60) days from the date of said filing or appointment, or an
order for relief shall be entered in any such involuntary petition.
Section 1.58. Remedies on Default. (a) Upon the occurrence and during
the continuation of an Event of Default (other than an Event of Default
described in clause (d) or (e) of Section 8.1 hereof), the Requisite Purchasers
may declare all amounts payable by the Issuer under the Notes to be forthwith
due and payable and the same shall thereupon become immediately due and payable
without demand, presentment, protest or further notice of any kind, all of which
are hereby expressly waived.
(b) Upon the occurrence of any Event of Default set forth in
clause (d) or (e) of Section 8.1 hereof, without any notice to the Issuer or any
other act by the Requisite Purchasers, all amounts payable by the Issuer under
the Notes shall be immediately due and payable, without presentment, demand,
protest or notice of any kind, all of which are hereby expressly waived by the
Issuer.
(c) No remedy herein conferred or reserved is intended to be
exclusive of any other available remedy or remedies, but each and every such
remedy shall be cumulative and shall be in addition to every other remedy given
under the Transaction Documents or now or hereafter existing at law or in
equity. No delay or omission to exercise any right or power accruing upon any
Default or Event of Default shall impair any such right or power or shall be
construed to be a waiver thereof, but any such right or power may be exercised
from time to time and as often as may be deemed expedient. In order to exercise
any remedy reserved to the Purchasers in the Transaction Documents, it shall not
be necessary to give any notice, other than such notice as may be expressly
required.
ARTICLE 9.
REGISTRATION; EXCHANGE;
SUBSTITUTION OF NOTES AND WARRANT CERTIFICATES
Section 9.1. Registration of Notes and Warrant Certificates. The Issuer
shall keep at its principal executive office a register for the registration of
transfers of Notes and Warrant Certificates. The name and address of each
Purchaser, each transfer thereof and the name and address of each transferee of
one or more Notes or Warrant Certificates shall be registered in such register.
Prior to due presentment for registration of transfer, the Person in whose name
any Note or Warrant Certificate shall be registered shall be deemed and treated
as the owner and holder thereof for all purposes hereof, and the Issuer shall
not be affected by any notice or knowledge to the contrary. The
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<PAGE> 28
Issuer shall give to any Purchaser, promptly upon request therefor, a complete
and correct copy of the names and addresses of all Purchasers.
Section 9.2. Transfer and Exchange of Notes and Warrant Certificates.
Subject to the provisions of Section 2.6 and Section 4 of the Warrant
Certificates, upon surrender of any Note or Warrant Certificate at the principal
executive office of the Issuer for registration of transfer or exchange (and in
the case of a surrender for registration of transfer, duly endorsed or
accompanied by a written instrument of transfer duly executed by the registered
holder or its attorney duly authorized in writing and accompanied by the address
for notices of each transferee of such Note or Warrant Certificate, or part
thereof), the Issuer shall execute and deliver, at its expense, one or more (as
requested by the registered holder thereof) new Notes or Warrant Certificates,
as applicable, in exchange therefor. Any such replacement Notes shall be in an
aggregate principal amount of the surrendered Note and any such replacement
Warrant Certificates shall be for the purchase of an aggregate amount of shares
of Common Stock equal to the amount of shares issuable upon exercise of the
surrendered Warrant Certificate. Each such new Note shall be payable to and each
such new Warrant Certificate shall be issued in the name of such Person or
Persons as such registered holder shall request and shall be substantially in
the form of Exhibit A and Exhibit B, respectively. Each such new Note shall be
dated and bear interest from the date to which interest shall have been paid on
the surrendered Note or dated the date of the surrendered Note if no interest
shall have been paid thereon. Notes shall not be transferred in denominations of
less than $100,000. Transfers hereunder shall be made by the Issuer to the
extent permitted by Applicable Law.
Section 9.3. Replacement of Notes and Warrant Certificates. Upon
receipt by the Issuer of notice from any Purchaser of the loss, theft,
destruction or mutilation of any Note held by such Purchaser and (a) in the case
of loss, theft or destruction, of security reasonably satisfactory to the
Issuer, or (b) in the case of mutilation, upon surrender and cancellation
thereof, the Issuer, at its own expense, shall execute and deliver, in lieu
thereof, a new Note, dated and bearing interest from the date to which interest
shall have been paid on such lost, stolen, destroyed or mutilated Note or dated
the date of such lost, stolen, destroyed or mutilated Note if no interest shall
have been paid thereon. Upon receipt by the Issuer of notice from any Purchaser
of the loss, theft, destruction or mutilation of any Warrant Certificate held by
such Purchaser and (a) in the case of loss, theft or destruction, of security
reasonably satisfactory to the Issuer, or (b) in the case of mutilation, upon
surrender and cancellation thereof, the Issuer, at its own expense, shall
execute and deliver, in lieu thereof, a new Warrant Certificate.
ARTICLE 10.
MISCELLANEOUS
Section 1.59. Notices. All notices, requests and other communications
to any party hereunder shall be in writing (including telecopier) and shall be
effective (a) if given by mail, when
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<PAGE> 29
deposited in the United States mail, first-class postage prepaid, or (b) if
given by telecopier, when so telecopied. Notices hereunder shall be mailed or
telecopied as follows:
If to the Issuer:
Murdock Communications Corporation
1112 29th Avenue, S.W.
Cedar Rapids, Iowa 52404
Attn: Paul Tunink
Telecopy No.: (319) 363-7008
Telephone No.: (319) 362-6900
If to the Purchasers:
at the respective addresses of the Purchasers
set forth on Schedule 1 hereto.
Section 1.60. No Waiver. No delay or failure on the part of the
Purchasers in the exercise of any right, power or privilege granted under any
Transaction Document or available at law or in equity, shall impair any such
right, power or privilege or be construed as a waiver of any Event of Default or
any acquiescence therein. No single or partial exercise of any such right, power
or privilege shall preclude the further exercise of such right, power or
privilege. No waiver shall be valid against any Purchaser unless made in writing
and signed by the Requisite Purchasers, and then only to the extent expressly
specified therein.
Section 1.61. Amendments, Etc. Any provision of any Transaction
Document may be amended or waived, if such amendment or waiver is in writing and
is signed by the Issuer and the Requisite Purchasers; provided that, without the
approval in writing of each Purchaser affected thereby, no amendment or waiver
may be effective:
(a) to amend or modify the principal of any Note held by such
Purchaser, or the amount of principal payments required, or the rate of
interest payable, on such Note;
(b) to postpone any date fixed for any payment of principal
of, or interest on, any Note or to extend the term of such Note;
(c) to amend or modify the definition of "Requisite
Purchasers", or the provisions of this Section 10.3 hereof;
Any amendment or modification effected in accordance with this Section 10.3
hereof shall apply equally to, and shall be binding upon, all Purchasers.
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<PAGE> 30
Section 1.62. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided, that the Issuer may not assign or
otherwise transfer any of its rights or obligations under this Agreement or the
Notes to any Person without the prior written consent of the Requisite
Purchasers.
Section 1.63. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF IOWA (WITHOUT REGARD TO
THE PRINCIPLES THEREOF REGARDING CONFLICTS OF LAWS).
Section 1.64. Survival of Representations and Warranties. All
representations and warranties contained herein shall survive the execution and
delivery of this Agreement.
Section 1.65. Severability. If any part of any provision contained in
this Agreement shall be invalid or unenforceable under applicable law, said part
shall be ineffective to the extent of such invalidity only, without in any way
affecting the remaining parts of said provision or the remaining provisions.
Section 1.66. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original and all
of which, taken together, shall constitute one and the same instrument.
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<PAGE> 31
Section 1.67. Entire Agreement. This Agreement, the Notes, the Warrant
Certificates and the other Transaction Documents, together with any exhibits and
schedules attached hereto and thereto, constitute the entire understanding of
the parties with respect to the subject matter hereof and thereof, and any other
prior or contemporaneous agreements, whether written or oral, with respect
hereto or thereto are expressly superseded hereby.
Section 10.10. Costs and Expenses. The Issuer agrees to pay all
reasonable out-of-pocket expenses of the Purchasers (including reasonable fees
and expenses of counsel to the Purchasers) in connection with the negotiation,
preparation, execution and delivery of this Agreement and the other Transaction
Documents. The Issuer also agrees to pay and hold the Purchasers harmless from
any stamp, documentary, intangibles, transfer or similar taxes or charges, and
all recording or filing fees with respect to any of the Transaction Documents or
any payments to be made thereunder, and to reimburse the Purchasers upon demand
for all reasonable out-of-pocket expenses (including reasonable attorneys fees
and expenses) incurred by the Purchasers in enforcing any of the Transaction
Documents or in connection with any restructuring or "work-out" of any of the
obligations of the Issuer or the Guarantors under the Transaction Documents.
Section 10.11. Consent to Jurisdiction. EACH PARTY TO THIS AGREEMENT
HEREBY IRREVOCABLY SUBMITS TO JURISDICTION OF ANY NEW YORK STATE OR FEDERAL
COURT SITTING IN NEW YORK COUNTY (BOROUGH OF MANHATTAN), NEW YORK, IN ANY ACTION
OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER
TRANSACTION DOCUMENT, AND EACH HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN
RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW
YORK STATE OR FEDERAL COURT. EACH OF THE PARTIES TO THIS AGREEMENT AGREES THAT
SUCH CONSENT TO JURISDICTION SHALL NOT PRECLUDE THE BRINGING OF ANY ACTION OR
PROCEEDING IN ANY OTHER JURISDICTION. EACH PARTY TO THIS AGREEMENT HEREBY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE
OF ANY INCONVENIENT FORUM (FORUM NONCONVEINENS) TO THE MAINTENANCE OF ANY ACTION
OR PROCEEDING IN ANY NEW YORK STATE OR FEDERAL COURT SITTING IN NEW YORK COUNTY
(BOROUGH OF MANHATTAN), NEW YORK, ARISING OUT OF OR RELATING TO THIS AGREEMENT
OR ANY OTHER TRANSACTION DOCUMENT.
[Signatures on Following Pages]
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<PAGE> 32
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their authorized officers all as of the day and year first above
written.
ISSUER:
MURDOCK COMMUNICATIONS CORPORATION
By: /s/ Thomas E. Chaplin
---------------------------------------
Name: Thomas E. Chaplin
Title: Chief Executive Officer
GUARANTORS:
PRIORITY INTERNATIONAL COMMUNICATIONS, INC.
By: /s/ Thomas E. Chaplin
---------------------------------------
Name: Thomas E. Chaplin
Title: Chairman
ATN COMMUNICATIONS, INC.
By: /s/ Thomas E. Chaplin
---------------------------------------
Name: Thomas E. Chaplin
Title: Chairman
INCOMEX, INC.
By: /s/ Thomas E. Chaplin
---------------------------------------
Name: Thomas E. Chaplin
Title: Chairman
MCC ACQUISITION CORP.
[SIGNATURE PAGE TO NOTE AND WARRANT PURCHASE AGREEMENT]
<PAGE> 33
By: /s/ Thomas E. Chaplin
---------------------------------------
Name: Thomas E. Chaplin
Title: Chief Executive Officer
PURCHASERS:
NEW VALLEY CORPORATION
By:
-------------------------------------
Name:
Title:
[SIGNATURE PAGE TO NOTE AND WARRANT PURCHASE AGREEMENT]
<PAGE> 34
Schedule 1
Principal Amount of Note and
Name and Address Number of Shares Issuable Upon
of Purchaser: Exercise of Warrant Certificate Purchased
New Valley Corporation Note Amount: $2,000,000
c/o Jonathan Intrater Warrants: 250,000 shares (subject
Ladenburg, Thalmann & Co. to adjustment)
590 Madison Avenue
New York, New York 10022
Telecopy: (212) 409-2169
Telephone: (212) 409-2128
<PAGE> 35
EXHIBIT A
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED
UNTIL (I) A REGISTRATION STATEMENT UNDER THE ACT OR SUCH APPLICABLE SECURITIES
LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (II) IN THE OPINION OF
COUNSEL REASONABLY ACCEPTABLE TO THE ISSUER REGISTRATION UNDER SUCH ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH
PROPOSED TRANSFER.
MURDOCK COMMUNICATIONS CORPORATION
FIXED RATE SENIOR NOTE DUE JULY 21, 1999
$ June , 1999 No.
------------- --- ----
Murdock Communications Corporation, an Iowa corporation (the "Issuer"),
for value received, promises and agrees to pay to the order of
______________________, or its registered assigns permitted pursuant to the
terms of the Note and Warrant Purchase Agreement described below (the "Holder"),
at such place as the Holder has designated under Schedule 1 to the Note
Agreement referenced below (or such other place as the Holder may designate from
time to time as provided in said Note and Warrant Purchase Agreement) the
principal sum of ______________ AND 00/100 DOLLARS ($____________), in lawful
money of the United States of America and in immediately available funds, and to
pay interest on the unpaid principal amount hereof at such office, in like money
and funds, for the period commencing on the date of this Note, until paid in
full, at a fixed rate of twelve percent (12.0%) per annum. Notwithstanding the
immediately preceding sentence, if the Issuer shall fail to pay on the due date
therefor, whether on the Maturity Date, by acceleration or otherwise, any
principal owing under this Note, then, in lieu of the interest rate otherwise
applicable, interest shall accrue on such unpaid principal from the due date to
but excluding the date on which such principal is paid in full (i) for the
period commencing on the due date and ending thirty (30) days thereafter, at a
rate per annum equal to fourteen percent (14%), (ii) for the period commencing
on the thirty-first (31st) day following the due date and ending sixty (60) days
thereafter, at a rate per annum equal to sixteen percent (16%), and (iii) for
the period commencing on the sixty-first (61st) day following the due date to
but excluding the date on which such principal is paid in full, at a rate per
annum equal to eighteen percent (18%), but in no event, however, to exceed the
maximum rate permitted by Applicable Law (interest accruing pursuant to this
sentence, the "Default Rate").
A-1
<PAGE> 36
Interest on this Note shall be payable (i) upon any prepayment of this
Note to the date of prepayment on the amount prepaid, and (ii) at maturity of
this Note, whether on the Maturity Date, by acceleration or otherwise; provided,
however, that interest calculated at the Default Rate shall be due and payable
upon demand by the Holder.
Upon the occurrence of a Financing Event, the outstanding principal
amount of this Note shall be due and payable to the extent provided under
Section 2.5 of the Note Agreement referenced herein.
The Issuer may prepay this Note in whole or in part at any time,
provided that (i) the Issuer provides at least one (1) days' prior written
notice to the Holder of such proposed prepayment, and (ii) such prepayment is
accompanied by all accrued and unpaid interest on the amount prepaid to the date
of prepayment.
This Note is issued pursuant to that certain Note and Warrant Purchase
Agreement dated as of June 21, 1999, by and among the Issuer, its Subsidiaries
as guarantors, and the Purchasers named therein (such Note and Warrant Purchase
Agreement, together with all amendments or modifications thereto, the "Note
Agreement"). Capitalized terms used but not otherwise defined in this Note shall
have the respective meanings given them in the Note Agreement. The Note
Agreement additionally provides for the acceleration of the maturity of this
Note upon the occurrence of certain events and for prepayment hereof. Reference
is made to the Note Agreement for all pertinent purposes.
Except for notices which are specifically required by the Note
Agreement, the Issuer and any and all co-makers, endorsers, guarantors and
sureties severally waive notice (including but not limited to notice of intent
to accelerate and notice of acceleration, notice of protest and notice of
dishonor), demand, presentment for payment, protest, diligence in collecting and
the filing of suit for the purpose of fixing liability, and consent that the
time of payment hereof may be extended and re-extended from time to time without
notice to any of them.
This Note is a registered Note and, subject to compliance with the
terms of the Note Agreement, is transferable on the Note Register of the Issuer
designated in the Note Agreement upon notice to the Issuer accompanied by a
written instrument of transfer reasonably satisfactory to the Issuer duly
executed by, or on behalf of, the registered payee hereof and such other
information required by the Note Agreement. Subject to the provisions of the
Note Agreement, the Issuer may treat the person whose name appears in the Note
Register as the owner hereof for the purpose of receiving payment as herein
provided.
This Note is an unsecured senior obligation of the Issuer, ranking pari
passu with all other senior unsecured obligations of the Issuer, and is entitled
to the benefits afforded by the Note Agreement and the other Transaction
Documents.
A-2
<PAGE> 37
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE
LAWS OF THE STATE OF IOWA (WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES
THEREOF).
MURDOCK COMMUNICATIONS CORPORATION
By:
Name:
Title:
A-3
<PAGE> 38
EXHIBIT B
THIS STOCK PURCHASE WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAW AND MAY NOT
BE TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT UNDER THE ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD
THERETO, OR (II) IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE ISSUER,
REGISTRATION UNDER SUCH ACT OR SUCH APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER.
STOCK PURCHASE WARRANT
This Stock Purchase Warrant is issued as of this 21th day of June 1999
by MURDOCK COMMUNICATIONS CORPORATION, an Iowa corporation (the "Issuer"), to
__________________________, (the "Purchaser"; the Purchaser or any registered
assignee or transferee hereof, a "Holder").
AGREEMENT:
1. Issuance of Warrants; Term.
(a) For good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Issuer hereby grants to Holder
the right to purchase ________ shares of the Issuer's Common Stock, no par value
per share (the "Common Stock").
(b) The shares of Common Stock issuable upon exercise of this
Warrant Certificate are hereinafter referred to as the "Warrant Shares." This
Warrant Certificate shall be exercisable at any time and from time to time prior
to June 21, 2009.
2. Exercise Price. The exercise price per Warrant Share for which
all or any of the Warrant Shares may be purchased pursuant to the terms of this
Warrant Certificate shall be $3.50, and shall be subject to adjustment from time
to time in accordance with Section 5 (as the same may be so adjusted from time
to time, the "Exercise Price").
3. Exercise. (a) This Warrant Certificate may be exercised by the
Holder as to all or any increment or increments of one thousand (1000) Warrant
Shares (or the balance of the Warrant
B-1
<PAGE> 39
Shares if less than such number), upon delivery of written notice of intent to
exercise to the Issuer at the following address: Murdock Communications
Corporation, 1112 29th Avenue, S.W., Cedar Rapids, Iowa 52404, Attention: Chief
Financial Officer (or such other address as the Issuer shall designate in a
written notice to the Holder), together with this Warrant Certificate and
payment to the Issuer of the aggregate Exercise Price of the Warrant Shares so
purchased. The Exercise Price shall be payable by certified or bank check, by
wire transfer of immediately available funds, or as otherwise specified by the
Issuer. Upon exercise of this Warrant Certificate as aforesaid, the Issuer shall
as promptly as practicable execute and deliver to the Holder a certificate or
certificates for the total number of whole Warrant Shares for which this Warrant
Certificate is being exercised in such names and denominations as are requested
by such Holder. If this Warrant Certificate shall be exercised with respect to
less than all of the Warrant Shares, the Holder shall be entitled to receive a
new Warrant Certificate covering the number of Warrant Shares in respect of
which this Warrant Certificate shall not have been exercised, which new Warrant
Certificate shall in all other respects be identical to this Warrant
Certificate. The Issuer covenants and agrees that it will pay when due any and
all state and federal issue taxes which may be payable in respect of the
issuance of this Warrant Certificate or the issuance of any Warrant Shares upon
exercise of this Warrant Certificate.
(b) Cashless Exercise. In lieu of exercising this Warrant Certificate
pursuant to Section 3(a) above, the Holder shall have the right (the "Conversion
Right") to require the Issuer to convert any then existing rights to purchase
Common Stock pursuant to this Warrant Certificate, in whole or in part and at
any time or times into Warrant Shares, upon delivery of written notice of intent
to convert to the Issuer at its address in Section 3(a) or such other address as
the Issuer shall designate in a written notice to the Holder, together with this
Warrant Certificate. Upon exercise of the Conversion Right, the Issuer shall
deliver to the Holder (without payment by the Holder of any Exercise Price) that
number of Warrant Shares which is equal to the quotient obtained by dividing (x)
the value of the number of Warrant Shares with respect to which the Conversion
Right is being exercised (determined by subtracting the aggregate Exercise Price
for the Warrant Shares with respect to which the Conversion Right is being
exercised from a number equal to the product of (i) the Fair Market Value per
Share of Common Stock (as determined in accordance with subsection (b) of
Section 9 hereof) as at such time, multiplied by (ii) the number of Warrant
Shares with respect to which the Conversion Right is being exercised), by (y)
such Fair Market Value per Share. Any references in this Warrant Certificate to
the "exercise" of this Warrant Certificate, and the use of the term exercise
herein, shall be deemed to include (without limitation) any exercise of the
Conversion Right.
4. Covenants and Conditions. The above provisions are subject to the
following:
B-2
<PAGE> 40
4.1. Neither this Warrant Certificate nor the Warrant Shares have
been registered under the Securities Act of 1933, as amended ("Securities Act")
or any state securities laws ("Blue Sky Laws"). This Warrant Certificate has
been acquired for investment purposes and not with a view to distribution or
resale and may not be pledged, hypothecated, sold, made subject to a security
interest, or otherwise transferred without (i) an effective registration
statement under the Securities Act and such applicable Blue Sky Laws, or (ii) an
opinion of counsel, which counsel shall be reasonably satisfactory to the
Issuer, that registration is not required under the Securities Act or under any
applicable Blue Sky Laws (the Issuer hereby acknowledges that King & Spalding is
acceptable counsel). Transfer of Warrant Shares issued upon the exercise of this
Warrant Certificate shall be restricted in the same manner and to the same
extent as the Warrant Certificate and the certificates representing such Warrant
Shares shall bear substantially the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR ANY APPLICABLE STATE SECURITIES LAW AND MAY NOT BE
TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT UNDER THE ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH
REGARD THERETO, OR (II) IN THE OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO THE ISSUER, REGISTRATION UNDER SUCH ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH
SUCH PROPOSED TRANSFER.
The Holder and the Issuer agree to execute such other documents and instruments
as counsel for the Issuer reasonably deems necessary to effect the compliance of
the issuance of this Warrant Certificate and any shares of Common Stock issued
upon exercise hereof with applicable federal and state securities laws.
4.2. The Issuer covenants and agrees that all Warrant Shares which
may be issued upon exercise of this Warrant Certificate will, upon issuance and
payment therefor, be legally and validly issued and outstanding, fully paid and
nonassessable, free from all taxes, liens, charges and preemptive rights, if
any, with respect thereto or to the issuance thereof. The Issuer shall at all
times reserve and keep available for issuance upon the exercise of this Warrant
Certificate such number of authorized but unissued shares of Common Stock as
will be sufficient to permit the exercise in full of this Warrant Certificate.
5. Adjustment of Exercise Price and Number of Shares Issuable. The
Exercise Price and the number of Warrant Shares (or other securities or
property) issuable upon exercise of this Warrant Certificate shall be subject to
adjustment from time to time upon the occurrence of any of the events enumerated
in this Section 5.
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<PAGE> 41
(a) Common Stock Reorganization. If the Issuer shall subdivide its
outstanding shares of common stock (or any class thereof) into a greater number
of shares or consolidate its outstanding shares of common stock (or any class
thereof) into a smaller number of shares (any such event being called a "Common
Stock Reorganization"), then (a) the Exercise Price shall be adjusted, effective
immediately after the effective date of such Common Stock Reorganization, to a
price determined by multiplying the Exercise Price in effect immediately prior
to such effective date by a fraction, the numerator of which shall be the number
of shares of common stock outstanding on such effective date before giving
effect to such Common Stock Reorganization and the denominator of which shall be
the number of shares of common stock outstanding after giving effect to such
Common Stock Reorganization, and (b) the number of shares of Common Stock
subject to purchase upon exercise of this Warrant Certificate shall be adjusted,
effective at such time, to a number determined by multiplying the number of
shares of Common Stock subject to purchase immediately before such Common Stock
Reorganization by a fraction, the numerator of which shall be the number of
shares of common stock outstanding after giving effect to such Common Stock
Reorganization and the denominator of which shall be the number of shares of
common stock outstanding immediately before such Common Stock Reorganization.
(b) Common Stock Distribution. If the Issuer shall issue, sell or
otherwise distribute any shares of common stock, other than pursuant to a Common
Stock Reorganization (which is governed by subsection (a) hereof) (any such
event, including any event described in subsections (c) and (d) below, being
herein called a "Common Stock Distribution"), for a consideration per share less
than the Fair Market Value per Share of Common Stock on the date of such
issuance, sale or distribution, then, effective upon such Common Stock
Distribution, the Exercise Price shall be reduced, to the price determined by
dividing (A) an amount equal to the sum of (1) the number of shares of common
stock outstanding immediately prior to such Common Stock Distribution
(calculated on a fully-diluted basis) multiplied by the Exercise Price
immediately prior to such Common Stock Distribution, plus (2) the consideration,
if any, received by the Issuer upon such Common Stock Distribution by (B) the
total number of shares of common stock outstanding immediately after such Common
Stock Distribution. If any Common Stock Distribution shall require an adjustment
to the Exercise Price pursuant to the foregoing provisions of this subsection
(b), including by operation of subsection (c) or (d) below, then, effective at
the time such adjustment is made, the number of shares of Common Stock subject
to purchase upon exercise of this Warrant Certificate shall be increased to a
number determined by multiplying the number of shares of Common Stock subject to
purchase immediately before such Common Stock Distribution by a fraction, the
numerator of which shall be the number of shares of common stock outstanding
immediately after giving effect to such Common Stock Distribution and the
denominator of which shall be the sum of the number of shares outstanding
immediately before giving effect to such Common Stock Distribution (both
calculated on a fully-diluted basis) plus the number of shares of common stock
which the aggregate consideration received by the Issuer with respect to such
Common Stock Distribution would purchase at a price equal to the Exercise Price
immediately prior to such Common Stock Distribution.
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<PAGE> 42
(c) Option Securities. If the Issuer shall issue, sell, distribute
or otherwise grant in any manner any rights to subscribe for or to purchase, or
any warrants or options for the purchase of, common stock or any stock or
securities convertible into or exchangeable for common stock (such rights,
warrants or options being herein called "Option Securities" and such convertible
or exchangeable stock or securities being herein called "Convertible
Securities"), whether or not such Option Securities or the rights to convert or
exchange any such Convertible Securities in respect of such Option Securities
are immediately exercisable, and the price per share for which common stock is
issuable upon the exercise of such Option Securities or upon conversion or
exchange of such Convertible Securities in respect of such Option Securities
(determined by dividing (i) the aggregate amount, if any, received or receivable
by the Issuer as consideration for the granting of such Option Securities, plus
the minimum aggregate amount of additional consideration payable to the Issuer
upon the exercise of all such Option Securities, plus, in the case of Option
Securities to acquire Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable upon the issuance or sale of such
Convertible Securities and upon the conversion or exchange thereof, by (ii) the
total maximum number of shares of common stock issuable upon the exercise of
such Option Securities or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Option Securities)
shall be less than the Fair Market Value per Share of Common Stock immediately
prior to such issuance, sale, distribution or grant, then, for purposes of
subsection (b) above, the total maximum number of shares of common stock
issuable upon the exercise of such Option Securities or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such Option Securities shall be deemed to have been issued
as of the date of granting of such Option Securities and thereafter shall be
deemed to be outstanding and the Issuer shall be deemed to have received as
consideration therefor such price per share, determined as provided above.
Except as otherwise provided in subsection (e) below, no additional adjustment
of the Exercise Price shall be made upon the actual exercise of such Option
Securities or upon conversion or exchange of such Convertible Securities.
(d) Convertible Securities. If the Issuer shall issue, sell or
otherwise distribute any Convertible Securities, whether or not the rights to
exchange or convert thereunder are immediately exercisable, and the price per
share for which common stock is issuable upon such conversion or exchange
(determined by dividing (i) the aggregate amount received or receivable by the
Issuer as consideration for the issuance, sale or distribution of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Issuer upon the conversion or exchange
thereof, by (ii) the total maximum number of shares of common stock issuable
upon the conversion or exchange of all such Convertible Securities) shall be
less than the Fair Market Value per Share of Common Stock immediately prior to
the date of such issuance, sale or distribution, then, for purposes of
subsection (b) above, the total maximum number of shares of common stock
issuable upon conversion or exchange of all such Convertible Securities shall be
deemed to have been issued as of the date of the issuance, sale or distribution
of such Convertible Securities and thereafter shall be deemed to be outstanding
and the Issuer shall be deemed to have received as consideration therefor such
price per share, determined as provided above. Except as otherwise provided in
subsection (e) below, no additional adjustment of the Exercise Price shall be
made upon the actual conversion or exchange of such Convertible Securities.
B-5
<PAGE> 43
(e) Special Adjustments. If (i) the purchase price provided for in
any Option Securities referred to in subsection (c) above or the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subsection (c) or (d) above or the rate at
which any Convertible Securities referred to in subsection (c) or (d) above are
convertible into or exchangeable for common stock shall change at any time, or
(ii) any of such Option Securities or Convertible Securities shall have
terminated, lapsed or expired prior to exercise, exchange or conversion, the
Exercise Price then in effect shall forthwith be readjusted (effective only with
respect to any exercise of this Warrant Certificate after such readjustment) to
the Exercise Price which would then be in effect had the adjustment made upon
the issuance, sale, distribution or grant of such Option Securities or
Convertible Securities been made based upon such changed purchase price,
additional consideration or conversion rate, as the case may be (in the case of
any event referred to in clause (i) of this subsection (e)) or had such
adjustment not been made (in the case of any event referred to in clause (ii) of
this subsection (e)).
(f) Dividends Payable in Common Stock, Option Securities or
Convertible Securities. If the Issuer shall pay a dividend or make any other
distribution upon any capital stock of the Issuer payable in common stock,
Option Securities or Convertible Securities, then, for purposes of subsection
(b), (c) and (d) above, such common stock, Option Securities or Convertible
Securities shall be deemed to have been issued or sold without consideration.
(g) Consideration Received. If any shares of common stock, Option
Securities or Convertible Securities shall be issued, sold or distributed for
cash, the consideration received therefor shall be deemed to be the amount
received by the Issuer therefor. If any shares of common stock, Option
Securities or Convertible Securities shall be issued, sold or distributed for a
consideration other than cash, the amount of the consideration other than cash
received by Issuer shall be deemed to be the fair market value of such
consideration as determined by the Issuer's board of directors in its good faith
discretion . If any shares of common stock, Option Securities or Convertible
Securities shall be issued in connection with any merger in which Issuer is the
surviving corporation, the amount of consideration therefor shall be deemed to
be the fair market value of such portion of the assets and business of the
non-surviving corporation as shall be attributable to such common stock, Option
Securities or Convertible Securities, as the case may be, as determined by the
Issuer's board of directors in its good faith discretion. If any Option
Securities shall be issued in connection with the issuance and sale of other
securities of the Issuer, together comprising one integral transaction in which
no specific consideration is allocated to such Option Securities by the parties
thereto, such allocation will be made for purposes of this Warrant Certificate
by the Issuer's board of directors in its good faith discretion.
(h) Capital Reorganizations. If there shall be any consolidation,
merger or amalgamation of the Issuer with another entity or any acquisition of
common stock of the Issuer by means of a share exchange (other than a
consolidation, merger or share exchange in which the Issuer is the continuing
corporation and which does not result in any reorganization, recapitalization or
reclassification of, or change in, outstanding shares of common stock), or any
sale or conveyance of
B-6
<PAGE> 44
the property of the Issuer as an entirety or substantially as an entirety, or
any reorganization or recapitalization of the Issuer (any such event being
called a "Capital Reorganization"), then, effective upon such Capital
Reorganization, the holder of this Warrant Certificate shall no longer have the
right to purchase Common Stock, but shall have instead the right to purchase,
upon exercise of this Warrant Certificate, the kind and amount of shares of
stock and other securities and property (including cash) which the holder would
have owned or have been entitled to receive pursuant to such Capital
Reorganization if this Warrant Certificate had been exercised immediately prior
to such Capital Reorganization.
(i) Special Adjustment if Notes not Repaid Prior to September 21,
1999. If the outstanding principal amount of the Notes, together with all
accrued and unpaid interest thereon, has not been repaid in full on or prior to
September 21, 1999, the aggregate amount of Warrant Shares issuable upon
exercise of this Warrant pursuant to Section 3(a) shall be increased to equal
the product of (x) the number of shares issuable upon exercise of this Warrant
Certificate pursuant to Section 3(a) hereof immediately prior to such date,
multiplied by (y) two (2); such that absent any other adjustments required under
this Section 5 prior to such date the aggregate number of Warrant Shares
issuable pursuant to Section 3(a) hereof would be increased on such date to
500,000 shares of Common Stock. In the event the provisions of this Section 5(i)
shall apply, no adjustment shall be made in the Exercise Price as a result of
any such increase.
(j) Adjustment Rules. Any adjustments pursuant to this Section 5
shall be made successively whenever an event referred to herein shall occur,
except that, notwithstanding any other provision of this Section 5, no
adjustment shall be made to the number of shares of Common Stock to be delivered
to the holder of this Warrant Certificate (or to the Exercise Price) if such
adjustment represents less than 1% of the number of shares previously required
to be so delivered, but any lesser adjustment shall be carried forward and shall
be made at the time and together with the next subsequent adjustment which
together with any adjustments so carried forward shall amount to 1% or more of
the number of shares to be so delivered. No adjustment shall be made pursuant to
this Section 5 in respect of the issuance from time to time of shares of common
stock upon the exercise of any of the Warrant Certificates issued pursuant to
the Note Agreement or upon the exercise or conversion of any other Option
Securities or Convertible Securities issued or outstanding on the date hereof.
6. Transfer of Warrant Certificate. Subject to the provisions of
Section 4 hereof, this Warrant Certificate may be transferred, in whole or in
part, by presentation of the Warrant Certificate to the Issuer with written
instructions for such transfer. Upon such presentation for transfer, the Issuer
shall promptly execute and deliver a new Warrant Certificate or Warrant
Certificates in the form hereof in the name of the assignee or assignees and in
the denominations specified in such instructions.
7. Warrant Holder Not Shareholder. Except as otherwise provided herein,
this Warrant Certificate does not confer upon the Holder, as such, any right
whatsoever as a shareholder of the Issuer.
B-7
<PAGE> 45
8. Note and Warrant Purchase Agreement. This Warrant Certificate is
issued pursuant to that certain Note and Warrant Purchase Agreement dated as of
June 21, 1999, by and among the Issuer and the Purchasers named therein (such
Note and Warrant Purchase Agreement, together with all amendments and
modifications thereto, the "Note Agreement"). Capitalized terms used but not
otherwise defined in this Warrant Certificate shall have the respective meanings
given them in the Note Agreement. Reference is made to the Note Agreement for
all pertinent purposes, and this Warrant Certificate shall be entitled to all of
the benefits afforded to the Warrant Certificates and the holders thereof by the
Note Agreement and the other Transaction Documents.
9. Determination of Fair Market Value per Share.
(a) Subject to the provisions of subsection (b) of this Section 9, each
determination of Fair Market Value per Share shall be made in good faith by the
board of directors of the Issuer. Upon each such determination of Fair Market
Value per Share, the Issuer shall promptly give notice thereof to the Holder
setting forth in reasonable detail the calculation of such Fair Market Value per
Share (the "Issuer Determination").
(b) If the Holders shall disagree with the Issuer Determination and
shall give notice thereof to the Issuer given within thirty (30) days after the
Issuer's notice of the Issuer Determination, then the Fair Market Value per
Share shall be an amount equal to the average of the Quoted Prices for Common
Stock of the Issuer for the thirty (30) consecutive trading days commencing
forty-five (45) trading days before the date of determination. The "Quoted
Price" of Common Stock for each day means the last reported sales price of
Common Stock on such day as reported by NASDAQ or, if Common Stock is listed on
a national securities exchange, the last reported sales price of Common Stock on
such exchange (which shall be for consolidated trading if applicable to such
exchange) on such day, or if not so reported or listed, the average of the last
reported bid and asked prices of Common Stock on such day, in each case as
appropriately adjusted for any stock splits or reverse stock splits occurring
after the Closing Date.
10. Fractional Interests. The Issuer shall not be required to issue
fractional Warrant Shares on the exercise of this Warrant Certificate. If any
fraction of the Warrant Shares would be issuable on the exercise of this Warrant
Certificate (or specified portion thereof), the Issuer shall pay an amount in
cash equal to the Fair Market Value per Share on the day immediately preceding
the date this Warrant Certificate is presented for exercise, multiplied by such
fraction.
11. Governing law. THIS WARRANT CERTIFICATE SHALL BE CONSTRUED IN
ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT
REGARD TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF).
IN WITNESS WHEREOF, the parties hereto have set their hands as of the
date first above written.
B-8
<PAGE> 46
MURDOCK COMMUNICATIONS CORPORATION,
an Iowa corporation
By:
--------------------------------
Name:
Title:
EXHIBIT C
FORM OF REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT dated as of June 21, 1999 by and
among MURDOCK COMMUNICATIONS CORPORATION, an Iowa corporation, and each of the
Persons listed on Schedule 1 hereto (each a "Purchaser" and, collectively, the
"Purchasers").
WHEREAS, the Issuer and the Purchasers have entered into a Note and
Warrant Purchase Agreement, dated as of even date herewith, among the Issuer,
its Subsidiaries as guarantors, and the Purchasers (as the same may be amended,
supplemented or otherwise modified from time to time, the "Note Agreement";
capitalized terms used herein and not otherwise defined shall have the meanings
given such terms in the Note Agreement);
WHEREAS, pursuant to the Note Agreement and on the terms and subject to
the conditions set forth therein, the Issuer has agreed to issue and the
Purchasers have agreed to purchase $2,000,000 in aggregate principal amount of
the Issuer's Fixed Rate Senior Notes due July 21, 1999 (together with each
promissory note issued and delivered substitution, extension or exchange
therefor, the "Notes") and warrant certificates (together with each warrant
certificate issued and delivered in substitution or exchange therefor, the
"Warrant Certificates") evidencing the right to purchase an aggregate 250,000
shares of the Issuer's Common Stock, no par value per share (the "Common
Stock"), subject to adjustment from time to time in accordance with the terms of
the Warrant Certificates;
WHEREAS, it is a condition to the obligations of the Purchasers to
purchase the Notes and the Warrant Certificates that the Issuer and the
Purchasers execute and deliver this Agreement, and the Issuer and the Purchasers
desire to satisfy such condition;
NOW, THEREFORE, for and in consideration of the mutual premises,
covenants and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, agree as follows:
<PAGE> 47
Section 1. Definitions. In addition to the other terms defined herein,
the following terms used herein shall have the meanings herein specified (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
"Agreement" means this Registration Rights Agreement, as the same may
be amended or otherwise modified from time to time in accordance with the terms
hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended or
otherwise modified from time to time.
"Holder" means any holder from time to time of any Warrant Securities.
"Prospectus" means each prospectus included as part of any Registration
Statement, as amended or supplemented, including each preliminary prospectus and
all material incorporated by reference in such prospectus.
"Registration Statement" means any registration statement of the Issuer
which covers Warrant Securities pursuant to the provisions of this Agreement,
including the Prospectus and all amendments, including post-effective
amendments, and supplements to such registration statement and Prospectus and
all exhibits and all material incorporated by reference in such registration
statement.
"Securities Act" means the Securities Act of 1933, as amended or
otherwise modified from time to time.
"Shelf Registration Statement" means the Registration Statement of the
Issuer which covers all Warrant Securities to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act.
"Warrant Securities" means, collectively, the Warrant Certificates and
Warrant Shares.
"Warrant Shares" means the securities which a Holder may acquire upon
exercise or conversion of a Warrant Certificate, together with any other
securities which such Holder may acquire on account of any such Warrant Shares,
whether upon the making or paying of any dividend or other distribution on
Common Stock, upon any split-up of such Common Stock, upon a recapitalization,
merger, consolidation, share exchange, reorganization or other transaction or
series of related transactions in which shares of Common Stock are changed into
or exchanged for securities of another corporation, upon exercise of any
preemptive right (or the exercise or conversion of any security which such
Holder may acquire in connection with the exercise of any preemptive right) with
respect to any such Common Stock or otherwise.
Section 2. Shelf Registration. Promptly after the date hereof and in
any event on or before July 21, 1999, the Issuer shall cause to be filed the
Shelf Registration Statement providing for the sale
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<PAGE> 48
by the Holders of all of the Warrant Securities in accordance with terms hereof,
and the Issuer will use its best efforts to cause such Shelf Registration
Statement to be declared effective by the Securities and Exchange Commission
(the "SEC") on or before August 21, 1999. The Issuer agrees to use its best
efforts to keep the Shelf Registration Statement with respect to the Warrant
Securities continuously effective so long as any Holder holds Warrant Securities
until such time as each Holder has received an opinion of counsel to the Issuer
(which opinion and counsel shall be satisfactory to the Holders) to the effect
that each such Holder is permitted under Rule 144 to the dispose of all of its
Warrant Securities without such registration. The Issuer further agrees to amend
the Shelf Registration Statement if and as required by the rules, regulations or
instructions applicable to the registration form used by the Issuer for such
Shelf Registration Statement or by the Securities Act or any rules and
regulations thereunder; provided, however, that the Issuer shall not be deemed
to have used its best efforts to keep the Shelf Registration Statement effective
if it voluntarily takes any action that would result in selling Holders not
being able to sell Warrant Securities covered thereby, unless such action is
permitted by this Agreement or required under applicable law or the Issuer has
filed a post-effective amendment to the Shelf Registration Statement and the SEC
has not declared it effective. The registration pursuant to this Section 2 shall
be effected by the filing of a Shelf Registration Statement on Form S-1 or Form
S-3 (provided that if Form S-3 is used, the Prospectus shall contain the
information that would have been required to be included therein had Form S-1
been used) or on Form SB-2; provided, however, that if the intended method of
disposition by the Holders is to be an underwritten offering, the Issuer shall
use such form of Registration Statement as is acceptable to the underwriters.
Section 3. Piggyback Registration. If at any time or from time to time
the Issuer shall propose to file on its behalf or on behalf of any of its
security holders a registration statement under the Securities Act on Form S-1,
S-2 or S-3 (or on any other Form for the general registration of securities)
with respect to any class of equity securities (or any class of securities
convertible into or exchangeable or exercisable for such equity securities) the
Issuer shall:
a. promptly give written notice to each Holder at least
thirty (30) days before the anticipated filing date, indicating the
proposed offering price and describing the plan of distribution;
b. include in such registration (and any related
qualification under blue sky or other state securities laws or other
compliance) for the sale by the Holders and, at the request of any
Holder, in any underwriting involved therein, all the Warrant
Securities specified by any Holder or Holders (the "Specified
Warrant Securities") in a written request (the "Registration
Request") made within twenty (20) days after receipt of such written
notice from the Issuer, specifying the number or amount of Specified
Warrant Securities; and
c. use its best efforts to cause the underwriter(s) of such
proposed underwritten offering to permit the Specified Warrant
Securities to be included in the Registration
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<PAGE> 49
Statement for such offering on the same terms and conditions as any
similar securities of the Issuer included therein.
If the registration of which the Issuer gives notice is for a registered public
offering involving an underwriting, the Issuer shall so advise the Holders. In
such event, the right of any Holder to include Specified Warrant Securities in
such registration pursuant to this Section 3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Specified Warrant Securities in the underwriting to the extent provided herein.
All Holders proposing to distribute their securities through such underwriting
shall enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting. If the
underwriter(s) of such offering advise(s) the Holders of Specified Warrant
Securities in writing that marketing considerations require a limitation on the
securities to be included in any Registration Statement filed under this Section
3 to a certain number of shares in excess of those to be sold by the Issuer (the
"Available Securities"), then the Issuer shall in such case be obligated to such
Holders only with respect to the Holders' pro rata share of such number of
Available Securities based upon the percentage that the Specified Warrant
Securities represent of the aggregate number of shares of Common Stock
represented by all outstanding securities of the Issuer that have been requested
to be included in such registration and are required to be so included (without
giving effect to any similar limitation) pursuant to binding agreements with the
Issuer. The limitation on the number of Specified Warrant Securities will be
imposed pro rata (based upon the ratio of the number of shares of Specified
Warrant Securities which the underwriter(s) propose to include at the
anticipated offering price to the number of Specified Warrant Securities owned
by each Holder) among all Holders of Specified Warrant Securities.
Section 4. Registration Procedures. In connection with the obligations
of the Issuer with respect to the Shelf Registration Statement contemplated by
Section 2, and if and when the Issuer shall be required by the provisions of
Section 3 to effect the registration of Warrant Securities under the Securities
Act, the Issuer will use its best efforts to effect such registration to permit
the sale of such Warrant Securities in accordance with the intended method or
methods of disposition thereof, and pursuant thereto it will, as expeditiously
as possible:
(i) before filing a Registration Statement or Prospectus or
any amendments or supplements thereto, furnish to the Holders and
the underwriter(s), if any, copies of all such documents proposed to
be filed, which documents will be made available, on a timely basis,
for review by such Holders and underwriters; and, with respect to
any Registration Statement filed pursuant to the provisions of
Section 2, the Issuer will not file any Registration Statement or
amendment thereto or any Prospectus or any supplement thereto to
which the Holders or the underwriter(s), if any, shall reasonably
object;
(ii) prepare and file with the SEC (A) the Shelf Registration
Statement within the time period set forth in Section 2, and (B)
such amendments and post-effective amendments to any Registration
Statement, and such supplements to the Prospectus, as may be
reasonably requested by any Holder or the underwriter(s), if any, or
as may be
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<PAGE> 50
required by the Securities Act, the Exchange Act or by the rules,
regulations or instructions applicable to the registration Form
utilized by the Issuer or as may otherwise be necessary to keep such
Registration Statement effective for the applicable period; and
cause the Prospectus as so supplemented to be filed pursuant to Rule
424 (or any successor rule) under the Securities Act; and comply
with the provisions of the Securities Act with respect to the
disposition of all securities covered by such Registration Statement
during the applicable period in accordance with the intended methods
of disposition by the sellers thereof set forth in such Registration
Statement or Prospectus;
(iii) promptly notify the selling Holders and the
underwriter(s), if any, of: (A) the filing of the Prospectus, any
Prospectus supplement and of the effectiveness of the Registration
Statement and any post-effective amendment; (B) any request by the
SEC for amendments or supplements to the Registration Statement or
the Prospectus or for additional information; (C) the issuance by
the SEC of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for that
purpose; (D) the Issuer's becoming aware at any time that the
representations and warranties of the Issuer contemplated by
paragraph (xii)(A) below have ceased to be true and correct; (E) the
receipt by the Issuer of any notification with respect to the
suspension of the qualification of the Warrant Securities for sale
in any jurisdiction or the initiation, to Issuer's knowledge, or
threat of any proceeding for such purpose; and (F) the existence of
any fact which, to the knowledge of the Issuer, results in the
Registration Statement, the Prospectus or any document incorporated
therein by reference containing an untrue statement of material fact
or omitting to state a material fact required to be stated therein
or necessary to make the statements therein not misleading;
(iv) make every reasonable effort to obtain the withdrawal of
any order suspending the effectiveness of the Registration Statement
or any qualification referred to in paragraph (iii)(E) at the
earliest possible moment;
(v) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such
information as the underwriter(s) or the Holders reasonably request
to have included therein relating to the plan of distribution with
respect to such Warrant Securities, and make all required filings of
such Prospectus supplement or post-effective amendment to the
Registration Statement as soon as notified of the matters to be
incorporated therein;
(vi) furnish to each selling Holder and each underwriter, if
any, without charge, at least one signed copy of the Registration
Statement and any post-effective amendment thereto, including all
documents incorporated therein by reference;
(vii) deliver to each selling Holder and the underwriter(s),
if any, without charge, as many copies of the Registration
Statement, each Prospectus (including each preliminary prospectus)
and any amendment or supplement thereto (in each case including all
exhibits
C-5
<PAGE> 51
and documents incorporated by reference in such Registration
Statement or Prospectus) as such Persons may reasonably request;
(viii) use its best efforts to register or qualify such
Warrant Securities for offer and sale under the securities or blue
sky laws of such jurisdictions as any selling Holder or
underwriter(s) reasonably request(s) and do any and all other acts
or things reasonably necessary to enable the disposition in such
jurisdictions of the Warrant Securities covered by the Registration
Statement;
(ix) if any fact contemplated by paragraph (iii)(D) or
(iii)(F) above shall exist, promptly notify each Holder and prepare
and furnish to such Holders a supplement or post-effective amendment
to the Registration Statement or the related Prospectus or any
document incorporated therein by reference or file any other
required document so that, as thereafter delivered to the purchasers
of the Warrant Securities, neither the Registration Statement nor
the Prospectus will contain an untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading;
(x) use its best efforts to cause all Warrant Securities
covered by the Registration Statement to be listed on each
securities exchange on which securities of the same class are then
listed or admitted for trading in any inter-dealer quotation system
on which securities of the same class are then traded;
(xi) not later than the effective date of the applicable
Registration Statement, provide a CUSIP number for all Warrant
Securities covered by the Registration Statement, and provide the
applicable transfer agent with printed certificates for such Warrant
Securities in a form eligible for deposit with Depository Trust
Issuer and in such denominations and registered in such names as the
Holders or the underwriters, if any, may request at least two
Business Days prior to any sale;
(xii) enter into agreements (including underwriting
agreements) and take all other reasonable actions in order to
expedite or facilitate the disposition of such Warrant Securities
and in such connection, except as otherwise provided, whether or not
an underwriting agreement is entered into and whether or not the
registration is an underwritten registration:
(A) make such representations and warranties to the
Holders selling such Warrant Securities and, in connection
with any underwritten offering, to the underwriters, in form,
substance and scope as are customarily made by issuers to
underwriters in similar underwritten offerings;
(B) obtain opinions of counsel to the Issuer and
updates thereof addressed to each selling Holder and the
underwriters, if any, covering the matters customarily
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covered in opinions requested in similar offerings and such
other matters as may be reasonably requested by such Holders
and underwriters, if any, which counsel and opinions shall be
reasonably satisfactory (in form, scope and substance) to the
underwriters, if any, and such Holders;
(C) in connection with any underwritten offering, use
its best efforts to obtain so-called "cold comfort" letters
and updates thereof from the Issuer's independent certified
public accountants addressed to the selling Holders and the
underwriters, if any, such letters to be in customary form
and covering matters of the type customarily covered in "cold
comfort" letters to underwriters in connection with similar
underwritten offerings;
(D) if an underwriting agreement is entered into,
cause the same to set forth in full the indemnification and
contribution provisions and procedures of Section 6 (or such
other substantially similar provisions and procedures as the
underwriters shall reasonably request) with respect to all
parties to be indemnified pursuant to Section 6; and
(E) deliver such documents and certificates as may
reasonably be requested by the Holders, or the
underwriter(s), if any, to evidence compliance with this
paragraph (xii) and with any customary conditions contained
in the underwriting agreement or other agreement entered into
by the Issuer;
the foregoing to be done upon each closing under any underwriting or
similar agreement as and to the extent required thereunder and from
time to time as may reasonably be requested by any selling Holder in
connection with the disposition of Warrant Securities pursuant to
such Registration Statement, all in a manner consistent with
customary industry practice;
(xiii) upon execution and delivery of such confidentiality
agreements as the Issuer may reasonably request, provide to the
Holders, any underwriter participating in any disposition pursuant
to such Registration Statement, and any attorney or accountant
retained by such Holders or underwriter, reasonable access to all
financial and other records, pertinent corporate documents and
properties of the Issuer, and cause the Issuer's officers, directors
and employees to supply all information reasonably requested by any
such Holder, underwriter, attorney or accountant in connection with
the registration for purposes of satisfying any diligence
obligations such Persons may have, at such time or times as the
Person requesting such information shall reasonably determine;
(xiv) otherwise use its best efforts to comply with the
Securities Act, the Exchange Act, all applicable rules and
regulations of the SEC and all applicable state blue sky and other
securities laws, rules and regulations, and make generally available
to its security holders an earnings statement satisfying the
provisions of Section 11(a) of the Securities
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<PAGE> 53
Act, as soon as practicable, but in no event later than ninety (90)
days after the end of the 12 calendar month period commencing after
the effective date of the Registration Statement;
(xv) cooperate and assist in any filings required to be made
with the National Association of Securities Dealers, Inc. (the
"NASD") and in the performance of any due diligence investigation by
any underwriter (including any "qualified independent underwriter"
that is required to be retained in accordance with the rules and
regulations of the NASD); and
(xvi) prior to the filing of any document which is being
prepared for incorporation by reference into the Registration
Statement or the Prospectus, upon receipt of such confidentiality
agreements as the Issuer may reasonably request, provide copies of
such document to counsel to the selling Holders, and to the
underwriter(s), if any, and make the Issuer's representatives
available for discussion of such document.
Section 5. Registration Expenses. All expenses incident to the
Issuer's performance of or compliance with its obligations under this Agreement
(excluding underwriting discounts, selling commissions and brokerage fees) will
be paid by the Issuer, regardless of whether Warrant Securities are sold
pursuant to any Registration Statement, including, without limitation, all
registration, filing and listing fees, fees and expenses of compliance with
securities or blue sky laws, printing, messenger, telephone and delivery
expenses, fees and disbursements of counsel for the Issuer and counsel for the
selling Holders of the Warrant Securities, fees and disbursements of all
independent certified public accountants of the Issuer (including, without
limitation, in connection with any special audit or "cold comfort" letters), and
fees and expenses associated with any NASD filing required to be made in
connection with the Registration Statement, including, if applicable, the fees
and expenses of any "qualified independent underwriter" (and its counsel) that
is required to be retained in accordance with the rules and regulations of the
NASD. The Issuer will, in any event, pay its internal expenses, the expense of
any annual audit, and the fees and expenses incurred in connection with the
listing of the securities to be registered on each securities exchange on which
securities of the same class are then listed or the qualification for trading of
the securities to be registered in each inter-dealer quotation system in which
securities of the same class are then traded. Notwithstanding the foregoing
provisions of this Section 5, in connection with each Registration Statement
required hereunder, the Issuer will reimburse the Holders pursuant to such
Registration Statement for the reasonable fees and disbursements of not more
than one counsel chosen by the Holders of the Warrant Securities being sold.
Section 6. Indemnification.
(a) Indemnification by the Issuer. In the event of the
registration of any Warrant Securities under the Securities Act pursuant to the
provisions hereof, the Issuer will indemnify and hold harmless each and every
seller of Warrant Securities, its directors, officers, employees and agents,
each underwriter, broker and dealer, if any, who participates in the offering or
sale of such
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<PAGE> 54
Warrant Securities, and each other Person, if any, who controls such seller or
any such underwriter, broker or dealer within the meaning of either Section 15
of the Securities Act or Section 20 of the Exchange Act (each hereinafter
sometimes referred to as an "Indemnified Person") from and against any losses,
claims, damages, liabilities or expenses, joint or several, to which such
Indemnified Person may become subject under the Securities Act, the Exchange Act
or otherwise, insofar as such losses, claims, damages, liabilities or expenses
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained or
incorporated by reference in any Registration Statement or Prospectus or any
amendment or supplement thereto, or any document incorporated by reference
therein, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each such Indemnified
Person for any legal or other expenses reasonably incurred by such Indemnified
Person in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Issuer will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made or incorporated by reference in
the Registration Statement or Prospectus or any amendment or supplement thereto,
in reliance upon and in conformity with written information furnished to the
Issuer by such Indemnified Person stated to be specifically for use in
preparation thereof. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified Person
and shall survive the transfer of such Warrant Securities.
(b) Contribution. If the indemnification provided for in this
Section 6 is unavailable to a party that would have been an Indemnified Person
under this Section 6 in respect of any losses, claims, damages, liabilities or
expenses (or actions in respect thereof) referred to herein, then each party
that would have been an Indemnifying Person thereunder shall, in lieu of
indemnifying such Indemnified Person, contribute to the amount paid or payable
by such Indemnified Person as a result of such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Person on the one
hand and the Indemnified Person on the other in connection with the statement or
omission which resulted in such losses, claims, damages, liabilities or expenses
(or actions in respect thereof), as well as any other relevant equitable
considerations. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission of a material fact relates to information
supplied by the Indemnifying Person or the Indemnified Person and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with the investigation or defense of any
action or claim. The Issuer and each Holder agrees that it would not be just and
equitable if contribution pursuant to this Section 6 were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in this Section 6.
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Section 7. Exchange Act Registration; Rule 144 Reporting. The Issuer
covenants and agrees that until such time as the Holders no longer hold any
Warrant Securities it will:
(a) if required by law, maintain an effective registration
statement (containing such information and documents as the SEC shall specify)
with respect to the Common Stock of the Issuer under Section 12(g) of the
Exchange Act;
(b) use its best efforts to make and keep public information
available, as those terms are understood and defined in Rule 144 under the
Securities Act, at all times (even if the Issuer subsequently ceases to be
subject to such reporting requirements);
(c) use its best efforts to file with the SEC in a timely
manner all reports and documents required of the Issuer under the Securities Act
and the Exchange Act; and
(d) furnish to any Holder promptly upon request (i) a written
statement by the Issuer as to its compliance with the reporting requirements of
Rule 144, (ii) a copy of the most recent annual or quarterly report of the
Issuer, and (iii) such other reports and documents of the Issuer and other
information in the possession of or reasonably attainable by the Issuer as such
Holder may reasonably request in availing itself of any Rule or Regulation of
the SEC allowing such Holder to sell any Warrant Securities without
registration.
The Issuer represents and warrants that such registration statement or any
information, document or report filed with the SEC in connection therewith or
any information so made public shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements contained therein not misleading. The
Issuer agrees to indemnify and hold harmless (or to the extent the same is not
enforceable, make contribution to) the Holders, their partners, officers,
directors, employees and agents, each broker, dealer or underwriter (within the
meaning of the Securities Act) acting for any Holder in connection with any
offering or sale of Warrant Securities by such Holder or any Person controlling
(within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act) such Holder and any such broker, dealer or underwriter from
and against any and all losses, claims, damages, liabilities or expenses (or
actions in respect thereof) arising out of or resulting from any breach of the
foregoing representation or warranty, all on terms and conditions comparable to
those set forth in Section 6.
Section 8. Limitation on Registration Rights of Others. The Issuer
covenants and agrees that, so long as any Holder holds any Warrant Securities,
in respect of which any registration rights provided for in Section 2 or Section
3 remain in effect, the Issuer will not, directly or indirectly, grant to any
Person or agree to or otherwise become obligated in respect of (x) any
registration rights of securities of the Issuer upon the demand of any Person
without the prior written consent of the Holders, or (y) rights of registration
in the nature or substantially in the nature of those set forth in Section 2 or
Section 3, unless in the case of both clauses (x) and (y) such rights are pari
passu with to the rights of registration of the Holders pursuant to Section 2
and Section 3 on terms reasonably satisfactory to the Holders.
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Section 9. Mergers, etc. References hereunder to "Warrant
Securities" shall be deemed to include any securities which Holders are entitled
to receive in exchange for Warrant Securities pursuant to any merger,
consolidation or reorganization or recapitalization, or by any other means. If,
and as often as, there are any changes in the Warrant Securities by way of stock
split, stock dividend, combination or classification, or through merger,
consolidation, reorganization or recapitalization, or by any other means,
appropriate adjustments shall be made in the provisions hereof as may be
required, so that the rights and privileges granted hereby shall continue with
respect to the Warrant Securities as so changed.
Section 10. Notices, etc. All notices, consents, approvals,
agreements and other communications provided hereunder shall be in writing or by
telex or telecopy and shall be sufficiently given to the Purchasers, the Holders
and the Issuer if addressed or delivered to them in accordance with Section 10.1
of the Note Agreement:
Section 11. Further Agreements. Each of the parties hereto agrees to
execute all such further instruments and documents and to take all such further
action as the other parties may reasonably require in order to effectuate the
terms and purposes of this Agreement.
Section 12. Waivers and Amendments. This Agreement may not be
amended nor shall any waiver, change, modification, consent or discharge be
effected except by an instrument in writing executed by or on behalf of the
party or parties against whom enforcement of any amendment, waiver, change,
modification, consent or discharge is sought; provided, however, that any
amendment requested or waiver sought from the Holders of any provision of this
Agreement which affects the Holders generally, and any action required to be
taken by the Holders as a group pursuant to this Agreement, shall be given or
taken by the Holders of a majority in interest of the Warrant Securities, and
any such waiver or action so given or taken shall be binding on all Holders. No
failure or delay by any party in exercising any right or remedy hereunder shall
operate as a waiver thereof, and a waiver of a particular right or remedy on one
occasion shall not be deemed a waiver of any other right or remedy or a waiver
of the same right or remedy on any subsequent occasion.
Section 13. Assignment; Successors and Assigns. This Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective heirs, executors, legal representatives, successors and permitted
assigns, including, without limitation, any Holders from time to time of the
Warrant Securities. Nothing herein shall be construed as requiring the Holders
of Warrant Certificates to exercise their warrants for, or convert their Warrant
Certificates into, Warrant Shares prior to exercising the rights conferred upon
such Holders under this Agreement. Anything in this Agreement to the contrary
notwithstanding, the term "Holders" as used in this Agreement shall be deemed to
include the registered holders from time to time of the Warrant Securities.
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Section 14. Severability. If any provision of this Agreement shall
be held or deemed to be, or shall in fact be, invalid, inoperative or
unenforceable as applied to any particular case in any jurisdiction or
jurisdictions, or in all jurisdictions or in all cases, because any provision
conflicts with any constitution, statute, rule or public policy, or for any
other reason, such circumstance shall not have the effect of rendering the
provision or provisions in question, invalid, inoperative or unenforceable in
any other jurisdiction or in any other case or circumstance or of rendering any
other provision or provisions herein contained invalid, inoperative or
unenforceable to the extent that such other provisions are not themselves
actually in conflict with such constitution, statute, rule or public policy, but
this Agreement shall be reformed and construed in any such jurisdiction or case
as if such invalid, inoperative or unenforceable provision had never been
contained herein and such provision reformed so that it would be valid,
operative and enforceable to the maximum extent permitted in such jurisdiction
or in such case.
Section 15. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original and all of
which together shall constitute one and the same instrument.
Section 16. Section Headings. The headings contained in this Agreement
are for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
Section 17. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
OTHER THAN THE CONFLICTS OF LAWS PRINCIPLES THEREOF.
Section 18. Termination. This Agreement shall terminate when all
Warrant Certificates have expired unexercised in accordance with their terms. In
addition, the rights of any Holder under Sections 2 and Section 3 of this
Agreement shall terminate as to any Warrant Securities when such Warrant
Securities have been effectively registered under the Securities Act and sold
pursuant to a Registration Statement covering such Warrant Securities. The
indemnification and contribution provisions of Section 6 and shall survive any
termination of this Agreement.
Section 19. Expenses. The Issuer shall be obligated to pay to the
Holders, on demand, all reasonable costs and expenses (including, without
limitation, court costs and attorneys' fees and expenses and interest to the
extent permitted by applicable law on overdue amounts) paid or incurred in
collecting any sums due from, or enforcing any other obligations of, the Issuer.
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Section 20. Specific Performance. The Issuer recognizes that the rights
of the Holders under this Agreement are unique and, accordingly, the Holders
shall, in addition to such other remedies as may be available to any of them at
law or in equity, have the right to enforce their rights hereunder by actions
for injunctive relief and specific performance to the extent permitted by law.
The Issuer agrees that monetary damages would not be adequate compensation for
any loss incurred by reason of a breach by it of the provisions of this
Agreement and hereby agrees to waive the defense in any action for specific
performance that a remedy at law would be adequate. This Agreement is not
intended to limit or abridge any rights of the Holders which may exist apart
from this Agreement.
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<PAGE> 59
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their authorized officers all as of the day and year first above
written.
ISSUER:
MURDOCK COMMUNICATIONS CORPORATION
By:
-------------------------------------
Name:
Title:
PURCHASERS:
NEW VALLEY CORPORATION
By:
-------------------------------------
Name:
Title:
[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]
<PAGE> 1
EXHIBIT 10.30
THIS STOCK PURCHASE WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAW AND MAY NOT
BE TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT UNDER THE ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD
THERETO, OR (II) IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE ISSUER,
REGISTRATION UNDER SUCH ACT OR SUCH APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER.
STOCK PURCHASE WARRANT
This Stock Purchase Warrant is issued as of this 21th day of June 1999
by MURDOCK COMMUNICATIONS CORPORATION, an Iowa corporation (the "Issuer"), to
NEW VALLEY CORPORATION, (the "Purchaser"; the Purchaser or any registered
assignee or transferee hereof, a "Holder").
AGREEMENT:
1. Issuance of Warrants; Term.
(a) For good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Issuer hereby grants to Holder
the right to purchase 250,000 shares of the Issuer's Common Stock, no par value
per share (the "Common Stock").
(b) The shares of Common Stock issuable upon exercise of this
Warrant Certificate are hereinafter referred to as the "Warrant Shares." This
Warrant Certificate shall be exercisable at any time and from time to time prior
to June 21, 2009.
2. Exercise Price. The exercise price per Warrant Share for
which all or any of the Warrant Shares may be purchased pursuant to the terms of
this Warrant Certificate shall be $3.50, and shall be subject to adjustment from
time to time in accordance with Section 5 (as the same may be so adjusted from
time to time, the "Exercise Price").
3. Exercise. (a) This Warrant Certificate may be exercised by
the Holder as to all or any increment or increments of one thousand (1000)
Warrant Shares (or the balance of the Warrant Shares if less than such number),
upon delivery of written notice of intent to exercise to the Issuer at the
following address: Murdock Communications Corporation, 1112 29th Avenue, S.W.,
Cedar Rapids, Iowa 52404, Attention: Chief Financial Officer (or such other
address as the Issuer shall
<PAGE> 2
designate in a written notice to the Holder), together with this Warrant
Certificate and payment to the Issuer of the aggregate Exercise Price of the
Warrant Shares so purchased. The Exercise Price shall be payable by certified or
bank check, by wire transfer of immediately available funds, or as otherwise
specified by the Issuer. Upon exercise of this Warrant Certificate as aforesaid,
the Issuer shall as promptly as practicable execute and deliver to the Holder a
certificate or certificates for the total number of whole Warrant Shares for
which this Warrant Certificate is being exercised in such names and
denominations as are requested by such Holder. If this Warrant Certificate shall
be exercised with respect to less than all of the Warrant Shares, the Holder
shall be entitled to receive a new Warrant Certificate covering the number of
Warrant Shares in respect of which this Warrant Certificate shall not have been
exercised, which new Warrant Certificate shall in all other respects be
identical to this Warrant Certificate. The Issuer covenants and agrees that it
will pay when due any and all state and federal issue taxes which may be payable
in respect of the issuance of this Warrant Certificate or the issuance of any
Warrant Shares upon exercise of this Warrant Certificate.
(b) Cashless Exercise. In lieu of exercising this Warrant
Certificate pursuant to Section 3(a) above, the Holder shall have the right (the
"Conversion Right") to require the Issuer to convert any then existing rights to
purchase Common Stock pursuant to this Warrant Certificate, in whole or in part
and at any time or times into Warrant Shares, upon delivery of written notice of
intent to convert to the Issuer at its address in Section 3(a) or such other
address as the Issuer shall designate in a written notice to the Holder,
together with this Warrant Certificate. Upon exercise of the Conversion Right,
the Issuer shall deliver to the Holder (without payment by the Holder of any
Exercise Price) that number of Warrant Shares which is equal to the quotient
obtained by dividing (x) the value of the number of Warrant Shares with respect
to which the Conversion Right is being exercised (determined by subtracting the
aggregate Exercise Price for the Warrant Shares with respect to which the
Conversion Right is being exercised from a number equal to the product of (i)
the Fair Market Value per Share of Common Stock (as determined in accordance
with subsection (b) of Section 9 hereof) as at such time, multiplied by (ii) the
number of Warrant Shares with respect to which the Conversion Right is being
exercised), by (y) such Fair Market Value per Share. Any references in this
Warrant Certificate to the "exercise" of this Warrant Certificate, and the use
of the term exercise herein, shall be deemed to include (without limitation) any
exercise of the Conversion Right.
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<PAGE> 3
4. Covenants and Conditions. The above provisions are subject to
the following:
4.1. Neither this Warrant Certificate nor the Warrant Shares
have been registered under the Securities Act of 1933, as amended ("Securities
Act") or any state securities laws ("Blue Sky Laws"). This Warrant Certificate
has been acquired for investment purposes and not with a view to distribution or
resale and may not be pledged, hypothecated, sold, made subject to a security
interest, or otherwise transferred without (i) an effective registration
statement under the Securities Act and such applicable Blue Sky Laws, or (ii) an
opinion of counsel, which counsel shall be reasonably satisfactory to the
Issuer, that registration is not required under the Securities Act or under any
applicable Blue Sky Laws (the Issuer hereby acknowledges that King & Spalding is
acceptable counsel). Transfer of Warrant Shares issued upon the exercise of this
Warrant Certificate shall be restricted in the same manner and to the same
extent as the Warrant Certificate and the certificates representing such Warrant
Shares shall bear substantially the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAW
AND MAY NOT BE TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT
UNDER THE ACT OR SUCH APPLICABLE STATE SECURITIES LAWS SHALL
HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (II) IN THE
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE ISSUER,
REGISTRATION UNDER SUCH ACT OR SUCH APPLICABLE STATE
SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH
PROPOSED TRANSFER.
The Holder and the Issuer agree to execute such other documents and instruments
as counsel for the Issuer reasonably deems necessary to effect the compliance of
the issuance of this Warrant Certificate and any shares of Common Stock issued
upon exercise hereof with applicable federal and state securities laws.
4.2. The Issuer covenants and agrees that all Warrant Shares
which may be issued upon exercise of this Warrant Certificate will, upon
issuance and payment therefor, be legally and validly issued and outstanding,
fully paid and nonassessable, free from all taxes, liens, charges and preemptive
rights, if any, with respect thereto or to the issuance thereof. The Issuer
shall at all times reserve and keep available for issuance upon the exercise of
this Warrant Certificate such number of authorized but unissued shares of Common
Stock as will be sufficient to permit the exercise in full of this Warrant
Certificate.
5. Adjustment of Exercise Price and Number of Shares Issuable.
The Exercise Price and the number of Warrant Shares (or other securities or
property) issuable upon exercise of this Warrant Certificate shall be subject to
adjustment from time to time upon the occurrence of any of the events enumerated
in this Section 5.
-3-
<PAGE> 4
(a) Common Stock Reorganization. If the Issuer shall
subdivide its outstanding shares of common stock (or any class thereof) into a
greater number of shares or consolidate its outstanding shares of common stock
(or any class thereof) into a smaller number of shares (any such event being
called a "Common Stock Reorganization"), then (a) the Exercise Price shall be
adjusted, effective immediately after the effective date of such Common Stock
Reorganization, to a price determined by multiplying the Exercise Price in
effect immediately prior to such effective date by a fraction, the numerator of
which shall be the number of shares of common stock outstanding on such
effective date before giving effect to such Common Stock Reorganization and the
denominator of which shall be the number of shares of common stock outstanding
after giving effect to such Common Stock Reorganization, and (b) the number of
shares of Common Stock subject to purchase upon exercise of this Warrant
Certificate shall be adjusted, effective at such time, to a number determined by
multiplying the number of shares of Common Stock subject to purchase immediately
before such Common Stock Reorganization by a fraction, the numerator of which
shall be the number of shares of common stock outstanding after giving effect to
such Common Stock Reorganization and the denominator of which shall be the
number of shares of common stock outstanding immediately before such Common
Stock Reorganization.
(b) Common Stock Distribution. If the Issuer shall issue,
sell or otherwise distribute any shares of common stock, other than pursuant to
a Common Stock Reorganization (which is governed by subsection (a) hereof) (any
such event, including any event described in subsections (c) and (d) below,
being herein called a "Common Stock Distribution"), for a consideration per
share less than the Fair Market Value per Share of Common Stock on the date of
such issuance, sale or distribution, then, effective upon such Common Stock
Distribution, the Exercise Price shall be reduced, to the price determined by
dividing (A) an amount equal to the sum of (1) the number of shares of common
stock outstanding immediately prior to such Common Stock Distribution
(calculated on a fully-diluted basis) multiplied by the Exercise Price
immediately prior to such Common Stock Distribution, plus (2) the consideration,
if any, received by the Issuer upon such Common Stock Distribution by (B) the
total number of shares of common stock outstanding immediately after such Common
Stock Distribution. If any Common Stock Distribution shall require an adjustment
to the Exercise Price pursuant to the foregoing provisions of this subsection
(b), including by operation of subsection (c) or (d) below, then, effective at
the time such adjustment is made, the number of shares of Common Stock subject
to purchase upon exercise of this Warrant Certificate shall be increased to a
number determined by multiplying the number of shares of Common Stock subject to
purchase immediately before such Common Stock Distribution by a fraction, the
numerator of which shall be the number of shares of common stock outstanding
immediately after giving effect to such Common Stock Distribution and the
denominator of which shall be the sum of the number of shares outstanding
immediately before giving effect to such Common Stock Distribution (both
calculated on a fully-diluted basis) plus the number of shares of common stock
which the aggregate consideration received by the Issuer with respect to such
Common Stock Distribution would purchase at a price equal to the Exercise Price
immediately prior to such Common Stock Distribution.
-4-
<PAGE> 5
(c) Option Securities. If the Issuer shall issue, sell,
distribute or otherwise grant in any manner any rights to subscribe for or to
purchase, or any warrants or options for the purchase of, common stock or any
stock or securities convertible into or exchangeable for common stock (such
rights, warrants or options being herein called "Option Securities" and such
convertible or exchangeable stock or securities being herein called "Convertible
Securities"), whether or not such Option Securities or the rights to convert or
exchange any such Convertible Securities in respect of such Option Securities
are immediately exercisable, and the price per share for which common stock is
issuable upon the exercise of such Option Securities or upon conversion or
exchange of such Convertible Securities in respect of such Option Securities
(determined by dividing (i) the aggregate amount, if any, received or receivable
by the Issuer as consideration for the granting of such Option Securities, plus
the minimum aggregate amount of additional consideration payable to the Issuer
upon the exercise of all such Option Securities, plus, in the case of Option
Securities to acquire Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable upon the issuance or sale of such
Convertible Securities and upon the conversion or exchange thereof, by (ii) the
total maximum number of shares of common stock issuable upon the exercise of
such Option Securities or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Option Securities)
shall be less than the Fair Market Value per Share of Common Stock immediately
prior to such issuance, sale, distribution or grant, then, for purposes of
subsection (b) above, the total maximum number of shares of common stock
issuable upon the exercise of such Option Securities or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such Option Securities shall be deemed to have been issued
as of the date of granting of such Option Securities and thereafter shall be
deemed to be outstanding and the Issuer shall be deemed to have received as
consideration therefor such price per share, determined as provided above.
Except as otherwise provided in subsection (e) below, no additional adjustment
of the Exercise Price shall be made upon the actual exercise of such Option
Securities or upon conversion or exchange of such Convertible Securities.
(d) Convertible Securities. If the Issuer shall issue, sell
or otherwise distribute any Convertible Securities, whether or not the rights to
exchange or convert thereunder are immediately exercisable, and the price per
share for which common stock is issuable upon such conversion or exchange
(determined by dividing (i) the aggregate amount received or receivable by the
Issuer as consideration for the issuance, sale or distribution of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Issuer upon the conversion or exchange
thereof, by (ii) the total maximum number of shares of common stock issuable
upon the conversion or exchange of all such Convertible Securities) shall be
less than the Fair Market Value per Share of Common Stock immediately prior to
the date of such issuance, sale or distribution, then, for purposes of
subsection (b) above, the total maximum number of shares of common stock
issuable upon conversion or exchange of all such Convertible Securities shall be
deemed to have been issued as of the date of the issuance, sale or distribution
of such Convertible Securities and thereafter shall be deemed to be outstanding
and the Issuer shall be deemed to have received as consideration therefor such
price per share, determined as provided above. Except as otherwise provided in
subsection (e) below, no additional adjustment of the Exercise Price shall be
made upon the actual conversion or exchange of such Convertible Securities.
-5-
<PAGE> 6
(e) Special Adjustments. If (i) the purchase price provided
for in any Option Securities referred to in subsection (c) above or the
additional consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subsection (c) or (d) above or the rate at
which any Convertible Securities referred to in subsection (c) or (d) above are
convertible into or exchangeable for common stock shall change at any time, or
(ii) any of such Option Securities or Convertible Securities shall have
terminated, lapsed or expired prior to exercise, exchange or conversion, the
Exercise Price then in effect shall forthwith be readjusted (effective only with
respect to any exercise of this Warrant Certificate after such readjustment) to
the Exercise Price which would then be in effect had the adjustment made upon
the issuance, sale, distribution or grant of such Option Securities or
Convertible Securities been made based upon such changed purchase price,
additional consideration or conversion rate, as the case may be (in the case of
any event referred to in clause (i) of this subsection (e)) or had such
adjustment not been made (in the case of any event referred to in clause (ii) of
this subsection (e)).
(f) Dividends Payable in Common Stock, Option Securities or
Convertible Securities. If the Issuer shall pay a dividend or make any other
distribution upon any capital stock of the Issuer payable in common stock,
Option Securities or Convertible Securities, then, for purposes of subsection
(b), (c) and (d) above, such common stock, Option Securities or Convertible
Securities shall be deemed to have been issued or sold without consideration.
(g) Consideration Received. If any shares of common stock,
Option Securities or Convertible Securities shall be issued, sold or distributed
for cash, the consideration received therefor shall be deemed to be the amount
received by the Issuer therefor. If any shares of common stock, Option
Securities or Convertible Securities shall be issued, sold or distributed for a
consideration other than cash, the amount of the consideration other than cash
received by Issuer shall be deemed to be the fair market value of such
consideration as determined by the Issuer's board of directors in its good faith
discretion . If any shares of common stock, Option Securities or Convertible
Securities shall be issued in connection with any merger in which Issuer is the
surviving corporation, the amount of consideration therefor shall be deemed to
be the fair market value of such portion of the assets and business of the
non-surviving corporation as shall be attributable to such common stock, Option
Securities or Convertible Securities, as the case may be, as determined by the
Issuer's board of directors in its good faith discretion. If any Option
Securities shall be issued in connection with the issuance and sale of other
securities of the Issuer, together comprising one integral transaction in which
no specific consideration is allocated to such Option Securities by the parties
thereto, such allocation will be made for purposes of this Warrant Certificate
by the Issuer's board of directors in its good faith discretion.
(h) Capital Reorganizations. If there shall be any
consolidation, merger or amalgamation of the Issuer with another entity or any
acquisition of common stock of the Issuer by means of a share exchange (other
than a consolidation, merger or share exchange in which the Issuer is the
continuing corporation and which does not result in any reorganization,
recapitalization or reclassification of, or change in, outstanding shares of
common stock), or any sale or conveyance of the property of the Issuer as an
entirety or substantially as an entirety, or any reorganization or
-6-
<PAGE> 7
recapitalization of the Issuer (any such event being called a "Capital
Reorganization"), then, effective upon such Capital Reorganization, the holder
of this Warrant Certificate shall no longer have the right to purchase Common
Stock, but shall have instead the right to purchase, upon exercise of this
Warrant Certificate, the kind and amount of shares of stock and other securities
and property (including cash) which the holder would have owned or have been
entitled to receive pursuant to such Capital Reorganization if this Warrant
Certificate had been exercised immediately prior to such Capital Reorganization.
(i) Special Adjustment if Notes not Repaid Prior to September
21, 1999. If the outstanding principal amount of the Notes, together with all
accrued and unpaid interest thereon, has not been repaid in full on or prior to
September 21, 1999, the aggregate amount of Warrant Shares issuable upon
exercise of this Warrant pursuant to Section 3(a) shall be increased to equal
the product of (x) the number of shares issuable upon exercise of this Warrant
Certificate pursuant to Section 3(a) hereof immediately prior to such date,
multiplied by (y) two (2); such that absent any other adjustments required under
this Section 5 prior to such date the aggregate number of Warrant Shares
issuable pursuant to Section 3(a) hereof would be increased on such date to
500,000 shares of Common Stock. In the event the provisions of this Section 5(i)
shall apply, no adjustment shall be made in the Exercise Price as a result of
any such increase.
(j) Adjustment Rules. Any adjustments pursuant to this
Section 5 shall be made successively whenever an event referred to herein shall
occur, except that, notwithstanding any other provision of this Section 5, no
adjustment shall be made to the number of shares of Common Stock to be delivered
to the holder of this Warrant Certificate (or to the Exercise Price) if such
adjustment represents less than 1% of the number of shares previously required
to be so delivered, but any lesser adjustment shall be carried forward and shall
be made at the time and together with the next subsequent adjustment which
together with any adjustments so carried forward shall amount to 1% or more of
the number of shares to be so delivered. No adjustment shall be made pursuant to
this Section 5 in respect of the issuance from time to time of shares of common
stock upon the exercise of any of the Warrant Certificates issued pursuant to
the Note Agreement or upon the exercise or conversion of any other Option
Securities or Convertible Securities issued or outstanding on the date hereof.
6. Transfer of Warrant Certificate. Subject to the provisions of
Section 4 hereof, this Warrant Certificate may be transferred, in whole or in
part, by presentation of the Warrant Certificate to the Issuer with written
instructions for such transfer. Upon such presentation for transfer, the Issuer
shall promptly execute and deliver a new Warrant Certificate or Warrant
Certificates in the form hereof in the name of the assignee or assignees and in
the denominations specified in such instructions.
7. Warrant Holder Not Shareholder. Except as otherwise provided
herein, this Warrant Certificate does not confer upon the Holder, as such, any
right whatsoever as a shareholder of the Issuer.
-7-
<PAGE> 8
8. Note and Warrant Purchase Agreement. This Warrant Certificate
is issued pursuant to that certain Note and Warrant Purchase Agreement dated as
of June 21, 1999, by and among the Issuer and the Purchasers named therein (such
Note and Warrant Purchase Agreement, together with all amendments and
modifications thereto, the "Note Agreement"). Capitalized terms used but not
otherwise defined in this Warrant Certificate shall have the respective meanings
given them in the Note Agreement. Reference is made to the Note Agreement for
all pertinent purposes, and this Warrant Certificate shall be entitled to all of
the benefits afforded to the Warrant Certificates and the holders thereof by the
Note Agreement and the other Transaction Documents.
9. Determination of Fair Market Value per Share.
(a) Subject to the provisions of subsection (b) of this Section
9, each determination of Fair Market Value per Share shall be made in good faith
by the board of directors of the Issuer. Upon each such determination of Fair
Market Value per Share, the Issuer shall promptly give notice thereof to the
Holder setting forth in reasonable detail the calculation of such Fair Market
Value per Share (the "Issuer Determination").
(b) If the Holders shall disagree with the Issuer Determination
and shall give notice thereof to the Issuer given within thirty (30) days after
the Issuer's notice of the Issuer Determination, then the Fair Market Value per
Share shall be an amount equal to the average of the Quoted Prices for Common
Stock of the Issuer for the thirty (30) consecutive trading days commencing
forty-five (45) trading days before the date of determination. The "Quoted
Price" of Common Stock for each day means the last reported sales price of
Common Stock on such day as reported by NASDAQ or, if Common Stock is listed on
a national securities exchange, the last reported sales price of Common Stock on
such exchange (which shall be for consolidated trading if applicable to such
exchange) on such day, or if not so reported or listed, the average of the last
reported bid and asked prices of Common Stock on such day, in each case as
appropriately adjusted for any stock splits or reverse stock splits occurring
after the Closing Date.
10. Fractional Interests. The Issuer shall not be required to
issue fractional Warrant Shares on the exercise of this Warrant Certificate. If
any fraction of the Warrant Shares would be issuable on the exercise of this
Warrant Certificate (or specified portion thereof), the Issuer shall pay an
amount in cash equal to the Fair Market Value per Share on the day immediately
preceding the date this Warrant Certificate is presented for exercise,
multiplied by such fraction.
11. Governing law. THIS WARRANT CERTIFICATE SHALL BE CONSTRUED IN
ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT
REGARD TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF).
IN WITNESS WHEREOF, the parties hereto have set their hands as of
the date first above written.
-8-
<PAGE> 9
MURDOCK COMMUNICATIONS CORPORATION,
an Iowa corporation
By: /s/ Thomas E. Chaplin
---------------------------------
Name: Thomas E. Chaplin
Title: Chief Executive Officer
[SIGNATURE PAGE TO STOCK PURCHASE WARRANT]
<PAGE> 1
EXHIBIT 10.31
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED
UNTIL (I) A REGISTRATION STATEMENT UNDER THE ACT OR SUCH APPLICABLE SECURITIES
LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (II) IN THE OPINION OF
COUNSEL REASONABLY ACCEPTABLE TO THE ISSUER REGISTRATION UNDER SUCH ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH
PROPOSED TRANSFER.
MURDOCK COMMUNICATIONS CORPORATION
FIXED RATE SENIOR NOTE DUE JULY 21, 1999
$2,000,000 June 21, 1999 No. 1
Murdock Communications Corporation, an Iowa corporation (the "Issuer"),
for value received, promises and agrees to pay to the order of New Valley
Corporation, or its registered assigns permitted pursuant to the terms of the
Note and Warrant Purchase Agreement described below (the "Holder"), at such
place as the Holder has designated under Schedule 1 to the Note Agreement
referenced below (or such other place as the Holder may designate from time to
time as provided in said Note and Warrant Purchase Agreement) the principal sum
of TWO MILLION AND 00/100 DOLLARS ($2,000,000.00), in lawful money of the United
States of America and in immediately available funds, and to pay interest on the
unpaid principal amount hereof at such office, in like money and funds, for the
period commencing on the date of this Note, until paid in full, at a fixed rate
of twelve percent (12.0%) per annum. Notwithstanding the immediately preceding
sentence, if the Issuer shall fail to pay on the due date therefor, whether on
the Maturity Date, by acceleration or otherwise, any principal owing under this
Note, then, in lieu of the interest rate otherwise applicable, interest shall
accrue on such unpaid principal from the due date to but excluding the date on
which such principal is paid in full (i) for the period commencing on the due
date and ending thirty (30) days thereafter, at a rate per annum equal to
fourteen percent (14%), (ii) for the period commencing on the thirty-first
(31st) day following the due date and ending sixty (60) days thereafter, at a
rate per annum equal to sixteen percent (16%), and (iii) for the period
commencing on the sixty-first (61st) day following the due date to but excluding
the date on which such principal is paid in full, at a rate per annum equal to
eighteen percent (18%), but in no event, however, to exceed the maximum rate
permitted by Applicable Law (interest accruing pursuant to this sentence, the
"Default Rate").
Interest on this Note shall be payable (i) upon any prepayment of this
Note to the date of prepayment on the amount prepaid, and (ii) at maturity of
this Note, whether on the Maturity Date, by acceleration or otherwise; provided,
however, that interest calculated at the Default Rate shall be due and payable
upon demand by the Holder.
<PAGE> 2
Upon the occurrence of a Financing Event, the outstanding principal
amount of this Note shall be due and payable to the extent provided under
Section 2.5 of the Note Agreement referenced herein.
The Issuer may prepay this Note in whole or in part at any time,
provided that (i) the Issuer provides at least one (1) days' prior written
notice to the Holder of such proposed prepayment, and (ii) such prepayment is
accompanied by all accrued and unpaid interest on the amount prepaid to the date
of prepayment.
This Note is issued pursuant to that certain Note and Warrant Purchase
Agreement dated as of June 21, 1999, by and among the Issuer, its Subsidiaries
as guarantors, and the Purchasers named therein (such Note and Warrant Purchase
Agreement, together with all amendments or modifications thereto, the "Note
Agreement"). Capitalized terms used but not otherwise defined in this Note shall
have the respective meanings given them in the Note Agreement. The Note
Agreement additionally provides for the acceleration of the maturity of this
Note upon the occurrence of certain events and for prepayment hereof. Reference
is made to the Note Agreement for all pertinent purposes.
Except for notices which are specifically required by the Note
Agreement, the Issuer and any and all co-makers, endorsers, guarantors and
sureties severally waive notice (including but not limited to notice of intent
to accelerate and notice of acceleration, notice of protest and notice of
dishonor), demand, presentment for payment, protest, diligence in collecting and
the filing of suit for the purpose of fixing liability, and consent that the
time of payment hereof may be extended and re-extended from time to time without
notice to any of them.
This Note is a registered Note and, subject to compliance with the
terms of the Note Agreement, is transferable on the Note Register of the Issuer
designated in the Note Agreement upon notice to the Issuer accompanied by a
written instrument of transfer reasonably satisfactory to the Issuer duly
executed by, or on behalf of, the registered payee hereof and such other
information required by the Note Agreement. Subject to the provisions of the
Note Agreement, the Issuer may treat the person whose name appears in the Note
Register as the owner hereof for the purpose of receiving payment as herein
provided.
This Note is an unsecured senior obligation of the Issuer, ranking pari
passu with all other senior unsecured obligations of the Issuer, and is entitled
to the benefits afforded by the Note Agreement and the other Transaction
Documents.
-2-
<PAGE> 3
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE
LAWS OF THE STATE OF IOWA (WITHOUT REGARD TO THE CONFLICTS OF LAWS PRINCIPLES
THEREOF).
MURDOCK COMMUNICATIONS CORPORATION
By: /s/ Thomas E. Chaplin
-------------------------
Name: Thomas E. Chaplin
Title: Chief Executive Officer
[SIGNATURE PAGE TO FIXED RATE SENIOR NOTE]
<PAGE> 1
EXHIBIT 10.32
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT dated as of June 21, 1999 by and
among MURDOCK COMMUNICATIONS CORPORATION, an Iowa corporation, and each of the
Persons listed on Schedule 1 hereto (each a "Purchaser" and, collectively, the
"Purchasers").
WHEREAS, the Issuer and the Purchasers have entered into a Note and
Warrant Purchase Agreement, dated as of even date herewith, among the Issuer,
its Subsidiaries as guarantors, and the Purchasers (as the same may be amended,
supplemented or otherwise modified from time to time, the "Note Agreement";
capitalized terms used herein and not otherwise defined shall have the meanings
given such terms in the Note Agreement);
WHEREAS, pursuant to the Note Agreement and on the terms and subject to
the conditions set forth therein, the Issuer has agreed to issue and the
Purchasers have agreed to purchase $2,000,000 in aggregate principal amount of
the Issuer's Fixed Rate Senior Notes due July 21, 1999 (together with each
promissory note issued and delivered substitution, extension or exchange
therefor, the "Notes") and warrant certificates (together with each warrant
certificate issued and delivered in substitution or exchange therefor, the
"Warrant Certificates") evidencing the right to purchase an aggregate 250,000
shares of the Issuer's Common Stock, no par value per share (the "Common
Stock"), subject to adjustment from time to time in accordance with the terms of
the Warrant Certificates;
WHEREAS, it is a condition to the obligations of the Purchasers to
purchase the Notes and the Warrant Certificates that the Issuer and the
Purchasers execute and deliver this Agreement, and the Issuer and the Purchasers
desire to satisfy such condition;
NOW, THEREFORE, for and in consideration of the mutual premises,
covenants and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, agree as follows:
Section 1. Definitions. In addition to the other terms defined herein,
the following terms used herein shall have the meanings herein specified (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
"Agreement" means this Registration Rights Agreement, as the same may
be amended or otherwise modified from time to time in accordance with the terms
hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended or
otherwise modified from time to time.
"Holder" means any holder from time to time of any Warrant Securities.
"Prospectus" means each prospectus included as part of any Registration
Statement, as
<PAGE> 2
amended or supplemented, including each preliminary prospectus and all material
incorporated by reference in such prospectus.
"Registration Statement" means any registration statement of the Issuer
which covers Warrant Securities pursuant to the provisions of this Agreement,
including the Prospectus and all amendments, including post-effective
amendments, and supplements to such registration statement and Prospectus and
all exhibits and all material incorporated by reference in such registration
statement.
"Securities Act" means the Securities Act of 1933, as amended or
otherwise modified from time to time.
"Shelf Registration Statement" means the Registration Statement of the
Issuer which covers all Warrant Securities to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act.
"Warrant Securities" means, collectively, the Warrant Certificates and
Warrant Shares.
"Warrant Shares" means the securities which a Holder may acquire upon
exercise or conversion of a Warrant Certificate, together with any other
securities which such Holder may acquire on account of any such Warrant Shares,
whether upon the making or paying of any dividend or other distribution on
Common Stock, upon any split-up of such Common Stock, upon a recapitalization,
merger, consolidation, share exchange, reorganization or other transaction or
series of related transactions in which shares of Common Stock are changed into
or exchanged for securities of another corporation, upon exercise of any
preemptive right (or the exercise or conversion of any security which such
Holder may acquire in connection with the exercise of any preemptive right) with
respect to any such Common Stock or otherwise.
Section 2. Shelf Registration. Promptly after the date hereof and in
any event on or before July 21, 1999, the Issuer shall cause to be filed the
Shelf Registration Statement providing for the sale by the Holders of all of the
Warrant Securities in accordance with terms hereof, and the Issuer will use its
best efforts to cause such Shelf Registration Statement to be declared effective
by the Securities and Exchange Commission (the "SEC") on or before August 21,
1999. The Issuer agrees to use its best efforts to keep the Shelf Registration
Statement with respect to the Warrant Securities continuously effective so long
as any Holder holds Warrant Securities until such time as each Holder has
received an opinion of counsel to the Issuer (which opinion and counsel shall be
satisfactory to the Holders) to the effect that each such Holder is permitted
under Rule 144 to the dispose of all of its Warrant Securities without such
registration. The Issuer further agrees to amend the Shelf Registration
Statement if and as required by the rules, regulations or instructions
applicable to the registration form used by the Issuer for such Shelf
Registration Statement or by the Securities Act or any rules and regulations
thereunder; provided, however, that the Issuer shall not be deemed to have used
its best efforts to keep the Shelf Registration Statement effective if it
voluntarily takes any action that would result in selling Holders not being able
to sell Warrant Securities covered thereby, unless such action is permitted by
this Agreement or required under applicable law or the Issuer has
-2-
<PAGE> 3
filed a post-effective amendment to the Shelf Registration Statement and the SEC
has not declared it effective. The registration pursuant to this Section 2 shall
be effected by the filing of a Shelf Registration Statement on Form S-1 or Form
S-3 (provided that if Form S-3 is used, the Prospectus shall contain the
information that would have been required to be included therein had Form S-1
been used) or on Form SB-2; provided, however, that if the intended method of
disposition by the Holders is to be an underwritten offering, the Issuer shall
use such form of Registration Statement as is acceptable to the underwriters.
Section 3. Piggyback Registration. If at any time or from time to time
the Issuer shall propose to file on its behalf or on behalf of any of its
security holders a registration statement under the Securities Act on Form S-1,
S-2 or S-3 (or on any other Form for the general registration of securities)
with respect to any class of equity securities (or any class of securities
convertible into or exchangeable or exercisable for such equity securities) the
Issuer shall:
(i) promptly give written notice to each Holder at least
thirty (30) days before the anticipated filing date, indicating the
proposed offering price and describing the plan of distribution;
(ii) include in such registration (and any related
qualification under blue sky or other state securities laws or other
compliance) for the sale by the Holders and, at the request of any
Holder, in any underwriting involved therein, all the Warrant
Securities specified by any Holder or Holders (the "Specified Warrant
Securities") in a written request (the "Registration Request") made
within twenty (20) days after receipt of such written notice from the
Issuer, specifying the number or amount of Specified Warrant
Securities; and
(iii) use its best efforts to cause the underwriter(s) of such
proposed underwritten offering to permit the Specified Warrant
Securities to be included in the Registration Statement for such
offering on the same terms and conditions as any similar securities of
the Issuer included therein.
If the registration of which the Issuer gives notice is for a registered public
offering involving an underwriting, the Issuer shall so advise the Holders. In
such event, the right of any Holder to include Specified Warrant Securities in
such registration pursuant to this Section 3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Specified Warrant Securities in the underwriting to the extent provided herein.
All Holders proposing to distribute their securities through such underwriting
shall enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting. If the
underwriter(s) of such offering advise(s) the Holders of Specified Warrant
Securities in writing that marketing considerations require a limitation on the
securities to be included in any Registration Statement filed under this Section
3 to a certain number of shares in excess of those to be sold by the Issuer (the
"Available Securities"), then the Issuer shall in such case be obligated to such
Holders only with respect to the Holders' pro rata share of such number of
Available Securities based upon the percentage that the Specified Warrant
Securities represent of the aggregate number of shares of Common Stock
-3-
<PAGE> 4
represented by all outstanding securities of the Issuer that have been requested
to be included in such registration and are required to be so included (without
giving effect to any similar limitation) pursuant to binding agreements with the
Issuer. The limitation on the number of Specified Warrant Securities will be
imposed pro rata (based upon the ratio of the number of shares of Specified
Warrant Securities which the underwriter(s) propose to include at the
anticipated offering price to the number of Specified Warrant Securities owned
by each Holder) among all Holders of Specified Warrant Securities.
Section 4. Registration Procedures. In connection with the obligations
of the Issuer with respect to the Shelf Registration Statement contemplated by
Section 2, and if and when the Issuer shall be required by the provisions of
Section 3 to effect the registration of Warrant Securities under the Securities
Act, the Issuer will use its best efforts to effect such registration to permit
the sale of such Warrant Securities in accordance with the intended method or
methods of disposition thereof, and pursuant thereto it will, as expeditiously
as possible:
(i) before filing a Registration Statement or Prospectus or
any amendments or supplements thereto, furnish to the Holders and the
underwriter(s), if any, copies of all such documents proposed to be
filed, which documents will be made available, on a timely basis, for
review by such Holders and underwriters; and, with respect to any
Registration Statement filed pursuant to the provisions of Section 2,
the Issuer will not file any Registration Statement or amendment
thereto or any Prospectus or any supplement thereto to which the
Holders or the underwriter(s), if any, shall reasonably object;
(ii) prepare and file with the SEC (A) the Shelf Registration
Statement within the time period set forth in Section 2, and (B) such
amendments and post-effective amendments to any Registration Statement,
and such supplements to the Prospectus, as may be reasonably requested
by any Holder or the underwriter(s), if any, or as may be required by
the Securities Act, the Exchange Act or by the rules, regulations or
instructions applicable to the registration Form utilized by the Issuer
or as may otherwise be necessary to keep such Registration Statement
effective for the applicable period; and cause the Prospectus as so
supplemented to be filed pursuant to Rule 424 (or any successor rule)
under the Securities Act; and comply with the provisions of the
Securities Act with respect to the disposition of all securities
covered by such Registration Statement during the applicable period in
accordance with the intended methods of disposition by the sellers
thereof set forth in such Registration Statement or Prospectus;
(iii) promptly notify the selling Holders and the
underwriter(s), if any, of: (A) the filing of the Prospectus, any
Prospectus supplement and of the effectiveness of the Registration
Statement and any post-effective amendment; (B) any request by the SEC
for amendments or supplements to the Registration Statement or the
Prospectus or for additional information; (C) the issuance by the SEC
of any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose; (D)
the Issuer's becoming aware at any time that the representations and
warranties of the Issuer
-4-
<PAGE> 5
contemplated by paragraph (xii)(A) below have ceased to be true and
correct; (E) the receipt by the Issuer of any notification with respect
to the suspension of the qualification of the Warrant Securities for
sale in any jurisdiction or the initiation or, to Issuer's knowledge,
threat of any proceeding for such purpose; and (F) the existence of any
fact which, to the knowledge of the Issuer, results in the Registration
Statement, the Prospectus or any document incorporated therein by
reference containing an untrue statement of material fact or omitting
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading;
(iv) make every reasonable effort to obtain the withdrawal of
any order suspending the effectiveness of the Registration Statement or
any qualification referred to in paragraph (iii)(E) at the earliest
possible moment;
(v) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information
as the underwriter(s) or the Holders reasonably request to have
included therein relating to the plan of distribution with respect to
such Warrant Securities, and make all required filings of such
Prospectus supplement or post-effective amendment to the Registration
Statement as soon as notified of the matters to be incorporated
therein;
(vi) furnish to each selling Holder and each underwriter, if
any, without charge, at least one signed copy of the Registration
Statement and any post-effective amendment thereto, including all
documents incorporated therein by reference;
(vii) deliver to each selling Holder and the underwriter(s),
if any, without charge, as many copies of the Registration Statement,
each Prospectus (including each preliminary prospectus) and any
amendment or supplement thereto (in each case including all exhibits
and documents incorporated by reference in such Registration Statement
or Prospectus) as such Persons may reasonably request;
(viii) use its best efforts to register or qualify such
Warrant Securities for offer and sale under the securities or blue sky
laws of such jurisdictions as any selling Holder or underwriter(s)
reasonably request(s) and do any and all other acts or things
reasonably necessary to enable the disposition in such jurisdictions of
the Warrant Securities covered by the Registration Statement;
(ix) if any fact contemplated by paragraph (iii)(D) or
(iii)(F) above shall exist, promptly notify each Holder and prepare and
furnish to such Holders a supplement or post-effective amendment to the
Registration Statement or the related Prospectus or any document
incorporated therein by reference or file any other required document
so that, as thereafter delivered to the purchasers of the Warrant
Securities, neither the Registration Statement nor the Prospectus will
contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements
-5-
<PAGE> 6
therein not misleading;
(x) use its best efforts to cause all Warrant Securities
covered by the Registration Statement to be listed on each securities
exchange on which securities of the same class are then listed or
admitted for trading in any inter-dealer quotation system on which
securities of the same class are then traded;
(xi) not later than the effective date of the applicable
Registration Statement, provide a CUSIP number for all Warrant
Securities covered by the Registration Statement, and provide the
applicable transfer agent with printed certificates for such Warrant
Securities in a form eligible for deposit with Depository Trust Issuer
and in such denominations and registered in such names as the Holders
or the underwriters, if any, may request at least two Business Days
prior to any sale;
(xii) enter into agreements (including underwriting
agreements) and take all other reasonable actions in order to expedite
or facilitate the disposition of such Warrant Securities and in such
connection, except as otherwise provided, whether or not an
underwriting agreement is entered into and whether or not the
registration is an underwritten registration:
(A) make such representations and warranties to the
Holders selling such Warrant Securities and, in connection
with any underwritten offering, to the underwriters, in form,
substance and scope as are customarily made by issuers to
underwriters in similar underwritten offerings;
(B) obtain opinions of counsel to the Issuer and
updates thereof addressed to each selling Holder and the
underwriters, if any, covering the matters customarily covered
in opinions requested in similar offerings and such other
matters as may be reasonably requested by such Holders and
underwriters, if any, which counsel and opinions shall be
reasonably satisfactory (in form, scope and substance) to the
underwriters, if any, and such Holders;
(C) in connection with any underwritten offering, use
its best efforts to obtain so-called "cold comfort" letters
and updates thereof from the Issuer's independent certified
public accountants addressed to the selling Holders and the
underwriters, if any, such letters to be in customary form and
covering matters of the type customarily covered in "cold
comfort" letters to underwriters in connection with similar
underwritten offerings;
(D) if an underwriting agreement is entered into,
cause the same to set forth in full the indemnification and
contribution provisions and procedures of Section 6 (or such
other substantially similar provisions and procedures as the
underwriters shall reasonably request) with respect to all
parties to be indemnified pursuant to Section 6; and
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(E) deliver such documents and certificates as may
reasonably be requested by the Holders, or the underwriter(s),
if any, to evidence compliance with this paragraph (xii) and
with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Issuer;
the foregoing to be done upon each closing under any underwriting or
similar agreement as and to the extent required thereunder and from
time to time as may reasonably be requested by any selling Holder in
connection with the disposition of Warrant Securities pursuant to such
Registration Statement, all in a manner consistent with customary
industry practice;
(xiii) upon execution and delivery of such confidentiality
agreements as the Issuer may reasonably request, provide to the
Holders, any underwriter participating in any disposition pursuant to
such Registration Statement, and any attorney or accountant retained by
such Holders or underwriter, reasonable access to all financial and
other records, pertinent corporate documents and properties of the
Issuer, and cause the Issuer's officers, directors and employees to
supply all information reasonably requested by any such Holder,
underwriter, attorney or accountant in connection with the registration
for purposes of satisfying any diligence obligations such Persons may
have, at such time or times as the Person requesting such information
shall reasonably determine;
(xiv) otherwise use its best efforts to comply with the
Securities Act, the Exchange Act, all applicable rules and regulations
of the SEC and all applicable state blue sky and other securities laws,
rules and regulations, and make generally available to its security
holders an earnings statement satisfying the provisions of Section
11(a) of the Securities Act, as soon as practicable, but in no event
later than ninety (90) days after the end of the 12 calendar month
period commencing after the effective date of the Registration
Statement;
(xv) cooperate and assist in any filings required to be made
with the National Association of Securities Dealers, Inc. (the "NASD")
and in the performance of any due diligence investigation by any
underwriter (including any "qualified independent underwriter" that is
required to be retained in accordance with the rules and regulations of
the NASD); and
(xvi) prior to the filing of any document which is being
prepared for incorporation by reference into the Registration Statement
or the Prospectus, upon receipt of such confidentiality agreements as
the Issuer may reasonably request, provide copies of such document to
counsel to the selling Holders, and to the underwriter(s), if any, and
make the Issuer's representatives available for discussion of such
document.
Section 5. Registration Expenses. All expenses incident to the Issuer's
performance of or compliance with its obligations under this Agreement
(excluding underwriting discounts, selling commissions and brokerage fees) will
be paid by the Issuer, regardless of whether Warrant Securities are sold
pursuant to any Registration Statement, including, without limitation, all
registration, filing
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and listing fees, fees and expenses of compliance with securities or blue sky
laws, printing, messenger, telephone and delivery expenses, fees and
disbursements of counsel for the Issuer and counsel for the selling Holders of
the Warrant Securities, fees and disbursements of all independent certified
public accountants of the Issuer (including, without limitation, in connection
with any special audit or "cold comfort" letters), and fees and expenses
associated with any NASD filing required to be made in connection with the
Registration Statement, including, if applicable, the fees and expenses of any
"qualified independent underwriter" (and its counsel) that is required to be
retained in accordance with the rules and regulations of the NASD. The Issuer
will, in any event, pay its internal expenses, the expense of any annual audit,
and the fees and expenses incurred in connection with the listing of the
securities to be registered on each securities exchange on which securities of
the same class are then listed or the qualification for trading of the
securities to be registered in each inter-dealer quotation system in which
securities of the same class are then traded. Notwithstanding the foregoing
provisions of this Section 5, in connection with each Registration Statement
required hereunder, the Issuer will reimburse the Holders pursuant to such
Registration Statement for the reasonable fees and disbursements of not more
than one counsel chosen by the Holders of the Warrant Securities being sold.
Section 6. Indemnification.
(a) Indemnification by the Issuer. In the event of the
registration of any Warrant Securities under the Securities Act pursuant to the
provisions hereof, the Issuer will indemnify and hold harmless each and every
seller of Warrant Securities, its directors, officers, employees and agents,
each underwriter, broker and dealer, if any, who participates in the offering or
sale of such Warrant Securities, and each other Person, if any, who controls
such seller or any such underwriter, broker or dealer within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act (each
hereinafter sometimes referred to as an "Indemnified Person") from and against
any losses, claims, damages, liabilities or expenses, joint or several, to which
such Indemnified Person may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained or
incorporated by reference in any Registration Statement or Prospectus or any
amendment or supplement thereto, or any document incorporated by reference
therein, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each such Indemnified
Person for any legal or other expenses reasonably incurred by such Indemnified
Person in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Issuer will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made or incorporated by reference in
the Registration Statement or Prospectus or any amendment or supplement thereto,
in reliance upon and in conformity with written information furnished to the
Issuer by such Indemnified Person stated to be specifically for use in
preparation thereof. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified Person
and shall survive the transfer of such Warrant Securities.
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<PAGE> 9
(b) Contribution. If the indemnification provided for in this
Section 6 is unavailable to a party that would have been an Indemnified Person
under this Section 6 in respect of any losses, claims, damages, liabilities or
expenses (or actions in respect thereof) referred to herein, then each party
that would have been an Indemnifying Person thereunder shall, in lieu of
indemnifying such Indemnified Person, contribute to the amount paid or payable
by such Indemnified Person as a result of such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Person on the one
hand and the Indemnified Person on the other in connection with the statement or
omission which resulted in such losses, claims, damages, liabilities or expenses
(or actions in respect thereof), as well as any other relevant equitable
considerations. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission of a material fact relates to information
supplied by the Indemnifying Person or the Indemnified Person and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with the investigation or defense of any
action or claim. The Issuer and each Holder agrees that it would not be just and
equitable if contribution pursuant to this Section 6 were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in this Section 6.
Section 7. Exchange Act Registration; Rule 144 Reporting. The Issuer
covenants and agrees that until such time as the Holders no longer hold any
Warrant Securities it will:
(a) if required by law, maintain an effective registration
statement (containing such information and documents as the SEC shall specify)
with respect to the Common Stock of the Issuer under Section 12(g) of the
Exchange Act;
(b) use its best efforts to make and keep public information
available, as those terms are understood and defined in Rule 144 under the
Securities Act, at all times (even if the Issuer subsequently ceases to be
subject to such reporting requirements);
(c) use its best efforts to file with the SEC in a timely
manner all reports and documents required of the Issuer under the Securities Act
and the Exchange Act; and
(d) furnish to any Holder promptly upon request (i) a written
statement by the Issuer as to its compliance with the reporting requirements of
Rule 144, (ii) a copy of the most recent annual or quarterly report of the
Issuer, and (iii) such other reports and documents of the Issuer and other
information in the possession of or reasonably attainable by the Issuer as such
Holder may reasonably request in availing itself of any Rule or Regulation of
the SEC allowing such Holder to sell any Warrant Securities without
registration.
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<PAGE> 10
The Issuer represents and warrants that such registration statement or any
information, document or report filed with the SEC in connection therewith or
any information so made public shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements contained therein not misleading. The
Issuer agrees to indemnify and hold harmless (or to the extent the same is not
enforceable, make contribution to) the Holders, their partners, officers,
directors, employees and agents, each broker, dealer or underwriter (within the
meaning of the Securities Act) acting for any Holder in connection with any
offering or sale of Warrant Securities by such Holder or any Person controlling
(within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act) such Holder and any such broker, dealer or underwriter from
and against any and all losses, claims, damages, liabilities or expenses (or
actions in respect thereof) arising out of or resulting from any breach of the
foregoing representation or warranty, all on terms and conditions comparable to
those set forth in Section 6.
Section 8. Limitation on Registration Rights of Others. The Issuer
covenants and agrees that, so long as any Holder holds any Warrant Securities,
in respect of which any registration rights provided for in Section 2 or Section
3 remain in effect, the Issuer will not, directly or indirectly, grant to any
Person or agree to or otherwise become obligated in respect of (x) any
registration rights of securities of the Issuer upon the demand of any Person
without the prior written consent of the Holders, or (y) rights of registration
in the nature or substantially in the nature of those set forth in Section 2 or
Section 3, unless in the case of both clauses (x) and (y) such rights are pari
passu with to the rights of registration of the Holders pursuant to Section 2
and Section 3 on terms reasonably satisfactory to the Holders.
Section 9. Mergers, etc. References hereunder to "Warrant Securities"
shall be deemed to include any securities which Holders are entitled to receive
in exchange for Warrant Securities pursuant to any merger, consolidation or
reorganization or recapitalization, or by any other means. If, and as often as,
there are any changes in the Warrant Securities by way of stock split, stock
dividend, combination or classification, or through merger, consolidation,
reorganization or recapitalization, or by any other means, appropriate
adjustments shall be made in the provisions hereof as may be required, so that
the rights and privileges granted hereby shall continue with respect to the
Warrant Securities as so changed.
Section 10. Notices, etc. All notices, consents, approvals, agreements
and other communications provided hereunder shall be in writing or by telex or
telecopy and shall be sufficiently given to the Purchasers, the Holders and the
Issuer if addressed or delivered to them in accordance with Section 10.1 of the
Note Agreement:
Section 11. Further Agreements. Each of the parties hereto agrees to
execute all such further instruments and documents and to take all such further
action as the other parties may reasonably require in order to effectuate the
terms and purposes of this Agreement.
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<PAGE> 11
Section 12. Waivers and Amendments. This Agreement may not be amended
nor shall any waiver, change, modification, consent or discharge be effected
except by an instrument in writing executed by or on behalf of the party or
parties against whom enforcement of any amendment, waiver, change, modification,
consent or discharge is sought; provided, however, that any amendment requested
or waiver sought from the Holders of any provision of this Agreement which
affects the Holders generally, and any action required to be taken by the
Holders as a group pursuant to this Agreement, shall be given or taken by the
Holders of a majority in interest of the Warrant Securities, and any such waiver
or action so given or taken shall be binding on all Holders. No failure or delay
by any party in exercising any right or remedy hereunder shall operate as a
waiver thereof, and a waiver of a particular right or remedy on one occasion
shall not be deemed a waiver of any other right or remedy or a waiver of the
same right or remedy on any subsequent occasion.
Section 13. Assignment; Successors and Assigns. This Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective heirs, executors, legal representatives, successors and permitted
assigns, including, without limitation, any Holders from time to time of the
Warrant Securities. Nothing herein shall be construed as requiring the Holders
of Warrant Certificates to exercise their warrants for, or convert their Warrant
Certificates into, Warrant Shares prior to exercising the rights conferred upon
such Holders under this Agreement. Anything in this Agreement to the contrary
notwithstanding, the term "Holders" as used in this Agreement shall be deemed to
include the registered holders from time to time of the Warrant Securities.
Section 14. Severability. If any provision of this Agreement shall be
held or deemed to be, or shall in fact be, invalid, inoperative or unenforceable
as applied to any particular case in any jurisdiction or jurisdictions, or in
all jurisdictions or in all cases, because any provision conflicts with any
constitution, statute, rule or public policy, or for any other reason, such
circumstance shall not have the effect of rendering the provision or provisions
in question, invalid, inoperative or unenforceable in any other jurisdiction or
in any other case or circumstance or of rendering any other provision or
provisions herein contained invalid, inoperative or unenforceable to the extent
that such other provisions are not themselves actually in conflict with such
constitution, statute, rule or public policy, but this Agreement shall be
reformed and construed in any such jurisdiction or case as if such invalid,
inoperative or unenforceable provision had never been contained herein and such
provision reformed so that it would be valid, operative and enforceable to the
maximum extent permitted in such jurisdiction or in such case.
Section 15. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original and all of
which together shall constitute one and the same instrument.
Section 16. Section Headings. The headings contained in this Agreement
are for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
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Section 17. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
OTHER THAN THE CONFLICTS OF LAWS PRINCIPLES THEREOF.
Section 18. Termination. This Agreement shall terminate when all
Warrant Certificates have expired unexercised in accordance with their terms. In
addition, the rights of any Holder under Sections 2 and Section 3 of this
Agreement shall terminate as to any Warrant Securities when such Warrant
Securities have been effectively registered under the Securities Act and sold
pursuant to a Registration Statement covering such Warrant Securities. The
indemnification and contribution provisions of Section 6 and shall survive any
termination of this Agreement.
Section 19. Expenses. The Issuer shall be obligated to pay to the
Holders, on demand, all reasonable costs and expenses (including, without
limitation, court costs and attorneys' fees and expenses and interest to the
extent permitted by applicable law on overdue amounts) paid or incurred in
collecting any sums due from, or enforcing any other obligations of, the Issuer.
Section 20. Specific Performance. The Issuer recognizes that the rights
of the Holders under this Agreement are unique and, accordingly, the Holders
shall, in addition to such other remedies as may be available to any of them at
law or in equity, have the right to enforce their rights hereunder by actions
for injunctive relief and specific performance to the extent permitted by law.
The Issuer agrees that monetary damages would not be adequate compensation for
any loss incurred by reason of a breach by it of the provisions of this
Agreement and hereby agrees to waive the defense in any action for specific
performance that a remedy at law would be adequate. This Agreement is not
intended to limit or abridge any rights of the Holders which may exist apart
from this Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their authorized officers all as of the day and year first above
written.
ISSUER:
MURDOCK COMMUNICATIONS
CORPORATION
By: /s/ Thomas E. Chaplin
-------------------------------------
Name: Thomas E. Chaplin
Title: Chief Executive Officer
PURCHASERS:
NEW VALLEY CORPORATION
By:
-------------------------------------
Name:
Title:
[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-78399 of Murdock Communications Corporation (the "Company") of our report
dated March 22, 1999 (which expresses an unqualified opinion and includes an
explanatory paragraph relating to substantial doubt about the Company's ability
to continue as a going concern), appearing in the Prospectus, which is a part of
this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
Cedar Rapids, Iowa
June 28, 1999
