These are my concerns here. Not enough cash. And the acquisitions involved the issuance of some promissory notes that require quarterly payments which will take away from net income. Probably about $300K per quarter for 12 quarters. It isn't really a lot but when you only have a little over $200K cash and the net earnings have yet to be very high, it leaves very little room for error. Also want to see the terms for the most recently announced acquisition. I am sure that there will be shares of AMCM involved and probably another promissory note. Also some weird maneuvering with regards to warrants and related party transactions.
2. Consistent with the Company's plan to expand its Broadband Service Business Unit, the Company`s wholly-owned subsidiary, AM Broadband Services, Inc. acquired all the issued and outstanding common stock of SRS Communications Corporation and EDJ Communications, Inc. on October 1, 2001. These companies provide services to the television cable and wireless industry, their services include installation and maintenance of television lines and wireless systems in the Northeastern and Southeastern parts of the United States. Both of these companies are Connecticut corporations and are collectively, herein referred to as the "Sellers". The transaction provides for the payment of $1,150,000 in cash to the Sellers in weekly installments following the close of the stock acquisition. Each installment is to equal the cash collection of the Sellers' accounts receivable existing as of October 1, 2001 continuing until the total amount of such installments equals $1,150,000. The Company also issued a $3,000,000 subordinated promissory note to the Sellers. The note bears interest at the rate of 5% per annum. The outstanding principal balance of the note and all accrued interest is payable in twelve consecutive quarterly payments, payable on the first day of each quarter, commencing on January 1, 2002. The Company also issued 9,000,000 shares of its common stock to the Sellers at closing valued at $.30 per share which was the closing price of AM Communication's stock on October 1, 2001, with an aggregate value of $2,700,000. The transaction has been accounted for under the purchase method of accounting. Accordingly, the consolidated balance sheet includes the assets and liabilities of the Sellers at December 29, 2001. The consolidated statement of operations and cash flows includes the results of the Sellers from October 1, 2001. Excess cost over fair value of net assets acquired of approximately $5,376,000, has been recorded on the December 29, 2001 balance sheet. The Company is in the process of obtaining third-party valuations of certain intangible assets and expects the valuations to be completed by year-end thus, the allocation of the purchase price is subject to refinement.
11. Related Party Transactions
During fiscal 1999 and fiscal 2000, the Company experienced a significant restructuring of its business. As part of the restructuring, the Company undertook several major organizational changes including the election of Mr. Javad Hassan as Chairman and the execution of a strategic development and manufacturing relationship with NeST associated companies, under which NeST provides a substantial portion of the Company's engineering and manufacturing requirements. Mr. Hassan is also the Chairman and primary shareholder of NeST Technologies, Inc. and NeSTronix, Inc., which are U.S. based technology service providers that provide engineering development services and turn-key manufacturing services primarily through the use of technology resources of staff and electronic manufacturing operations located in India and controlled by Mr. Hassan's brother, N. Jehangir. Collectively, these operations are referred to as NeST.
As a result of the above mentioned restructuring actions taken and other contractual agreements between the Company and NeST, Mr. Hassan and the NeST related companies control the voting of 14,391,837 shares of the Company's Common Stock presently owned by the Company's majority shareholder, hold 1,000,000 shares obtained through the exercise of stock options, hold 7,862,334 shares obtained through the exercise of warrants, and hold a stock option to purchase 4,000,000 shares of common stock at $.15 per share. The warrants were issued by the Company as payment for $1,827,197 of engineering development services performed by NeST during fiscal 1999 and fiscal 2000.
Under the terms of the NeST development agreement, the Company has the option to pay for NeST development services either in cash or by the issuance of warrants to purchase AM Common Stock. The Company elected to issue NeST warrants to purchase 4,234,018 shares of the Company's Common Stock, at an exercise price of $.01 per share, in payment of $670,000 of NeST development services for the period from November 1998 through April 3, 1999. The Company also issued warrants to purchase 3,628,316 shares of the Company's Common Stock, at an exercise price of $.01 per share, in payment of $1,157,197 of NeST development services for the period from April 4, 1999 through January 1, 2000. Since January 2, 2000, the Company has paid cash for NeST development services. As a result of improved operations, the Company expects to pay ongoing NeST development expenses in cash, but continues to have the option to issue warrants up to a limit of 10 million total shares under the NeST Agreement, including the 7,862,334 shares already issued. During the quarter and first nine months of fiscal 2002, the Company has paid $588,000 and $1.8 million respectively, for these services compared to $554,000 and $1.6 million, respectively for the comparable periods last year.
The Company has negotiated favorable rates with NeST for services performed by both the India-based and U.S.-based employees of NeST. The Company may not be able to obtain the same negotiated rates from outside third parties.
Pursuant to a Manufacturing Services Agreement between NESTRONIX, Inc. and the Company, NESTRONIX agreed to manufacture the Company's products on a turn-key basis commencing on January 2, 2000. The initial term of this Manufacturing Agreement ends on January 2, 2003 and the Manufacturing Agreement is automatically renewable for additional 18 month periods unless either party gives written notice to the contrary to the other party at least 6 months prior to the end of the then current term. The Manufacturing Agreement is also terminable by either party upon 60 days prior written notice upon the default of the other party or the bankruptcy or liquidation of the other party. Nothing in the Manufacturing Agreement precludes the Company from resuming manufacturing itself or transferring manufacturing rights to a third party. The Company retains title to and ownership of all equipment, inventory and intellectual property rights utilized in connection with the manufacture of its products. The Company and NESTRONIX, Inc. jointly agree upon a "bill of materials" price for each product manufactured pursuant to the Manufacturing Agreement. The Company pays to NESTRONIX, Inc. for each product manufactured pursuant to the Manufacturing Agreement, an amount equal to the actual cost of all materials utilized to manufacture the product, plus 0.5 times the agreed upon "bill of materials" price for the product. . During the quarter and first nine months of fiscal 2002 the Company has paid $907,000 and $2.2 million for these services compared to $536,000 and $1.8 million, respectively, for the comparable periods last year.
In June 1999, the Company entered into an agreement with its Chairman, Javad K. Hassan, whereby Mr. Hassan agreed to provide a $500,000 line of credit to the Company, with interest payable at 10%. Payment of all outstanding borrowings and interest is due by December 31, 2001. No amounts have been borrowed under this line since its inception.
On November 1, 2001, the Company entered into an Employment Agreement with its Chairman, Mr. Javad Hassan. In connection with the execution and delivery of the Employment Agreement, the previous Services Agreement, dated as of October 22, 1998, between Mr. Hassan and the Company was terminated.
Under the terms of the Employment Agreement, Mr. Hassan will serve as Chief Executive Officer and Chairman of the Board of Directors of the Company. The term of the Employment Agreement commenced on November 1, 2001 and expires on October 31, 2011. However, the term of the Employment Agreement will automatically renew for successive one year terms unless the Company or Mr. Hassan gives a contrary written notice of termination to the other at least ninety (90) days before the scheduled expiration date of the Employment Agreement.
The Employment Agreement provides for the payment of a minimum annual salary of Two Hundred Fifty Thousand Dollars ($250,000.00) to Mr. Hassan for his services. If Mr. Hassan's employment by the Company is terminated due to disability or by the Company without cause, or if Mr. Hassan resigns for good reason (as such term is defined in the Employment Agreement), the Company is obligated to make severance payments to Mr. Hassan in an amount equal to Mr. Hassan's then current salary, and to continue in effect all of Mr. Hassan's employee benefits, for a period equal to the lesser of (a) two (2) years following the date of employment termination, or (b) the remaining term of the Employment Agreement.
In addition to his base salary, Mr. Hassan is entitled to receive an annual bonus in an amount equal to 100% of his annual salary if the Company meets the annual financial performance objectives established by the Board of Directors for such year, and an annual bonus in an amount equal to 150% of his annual salary if the Company exceeds the annual financial performance objectives established by the Board of Directors for such year by at least 30%. Mr. Hassan is also entitled to participate in, or enjoy the benefit of, any other fringe benefits or prerequisites applicable to the Companys other executive officers.
The Company has entered into a Stock Purchase Rights Agreement, dated as of December 30, 2001, with its Chairman and Chief Executive Officer, Mr. Javad Hassan (the Company Stock Purchase Rights Agreement). Under the terms of the Company Stock Purchase Rights Agreement, Mr. Hassan has irrevocably agreed to purchase, and the Company has irrevocably agreed to sell, six million (6,000,000) shares of the Companys common stock, at a price of thirty-eight cents ($0.38) per share, upon the first to occur of one of the following events:
(1) the Company enters into a definitive agreement to be acquired or to sell substantially all of its assets;
(2) the one-hundred and eightieth (180th) day following the Company's completion of a subsequent public offering of shares of its common stock; and
(3) Mr. Hassan's termination as Chairman of the Company's Board of Directors and CEO.
On November 30, 2001, Mr. Javad Hassan entered into an amendment to his Voting Trust and Share Price Participation Agreement with the Alvin Hoffman, Revocable Trust U/A/D 2/28/96 pursuant to which Mr. Hassan will no longer share in the appreciation of AMs stock price from the proceeds of any sale by the Trust. Simultaneously, Mr. Hassan entered into a Stock Purchase Rights Agreement with the Alvin Hoffman, Revocable Trust U/A/D 2/28/96 (the Hoffman Stock Purchase Rights Agreement). Under the terms of the Hoffman Stock Purchase Rights Agreement, Mr. Hassan has irrevocably agreed to purchase, and the Alvin Hoffman, Revocable Trust U/A/D 2/28/96 has irrevocably agreed to sell, seven million one-hundred ninety-five thousand nine-hundred nineteen (7,195,919) shares of the Companys common stock, at a price of ten cents ($0.10) per share, upon the first to occur of one of the following events:
(1) the Company enters into a definitive agreement to be acquired;
(2) the one-hundred and eightieth (180th) day following the Companys completion of a subsequent public offering of shares of its Class A common stock; and
(3) the death of Alvin Hoffman; and
(4) Mr. Hassan's termination as Chairman of the Companys Board of Directors.
In accordance with the provisons of FASB Statement 123 "Accounting for Stock Based Compensation" and FIN 44 "Accounting for Certain Transactions Involving Stock Compensation" an interpretation of APB Opinion No. 25". The Company recorded $34,000 of compensation expense during the third quarter.
On December 31, 2001, the Company entered into a loan agreement with its Chairman and CEO, Javad K. Hassan. Under this agreement, the Company may loan the Chairman and CEO up to $2,000,000 for the sole purpose of assisting him in exercising his stock purchase rights. There have been no loans made under this agreement to date.
12. Equity Transactions
During the third quarter, the Company issued 9,000,000 shares of common stock as part of the acquisition cost for SRS Communications Corporation and EDJ Communications, Inc. consummated on October 1, 2001. Also during the quarter the 19,825 shares of Convertible Preferred Stock was converted into 3,965,000 shares of common stock at an exercise price of $0.50 per share.
13. Subsequent Events
Subsequent to the end of the third quarter of fiscal 2002, the Company's Board of Directors authorized the Company's investment banker to raise up to $2,000,000 in additional equity financing for the Company. The additional equity will be raised through a private placement of restricted shares of the Company's Series A Preferred Stock, which will bear a 10% annual cumulative dividend, at a price of $27.00 per share. Each share of the Series A Preferred Stock can be converted into 100 shares of the Company's Common Stock, subject to standard anti-dilution provisions. Purchasers of each share of the Company's Series A Preferred Stock in this offering will also be entitled to receive a warrant to purchase up to 25 shares of the Company's Common Stock, at a price of $0.27 per share. These warrants vest immediately and are exercisable for six years from the date of purchase. The shares of the Series A Preferred Stock being sold in this offering will be sold only to accredited investors, including, without limitation certain members of the Company's Board of Directors. On January 29, 2002 the Company's Chairman and CEO purchased $1,000,000 of the shares to be sold in this offering. It anticipated that the remaining funding in this offering will be completed on or before April 1, 2002.
Subsequent to the end of the third quarter of fiscal 2002, the Company's wholly-owned subsidiary, AM Broadband Services, Inc., acquired twenty percent (20%) of the outstanding capital stock of AMC Services, Inc., a recently formed Delaware corporation. The remaining eighty percent (80%) of the outstanding capital stock of AMC Services, Inc. is owned by Michael N. Johnson, who was not previously affiliated with the Company or any affiliate of the Company. Mr. Johnson has over 30 years of experience providing construction services to the cable television and broadband communications industry.
The stock was issued to the Company in return for the Company's agreement to extend a $1 million working capital loan to AMC Services, Inc. Amounts outstanding under the loan bear interest at the rate of five percent (5%) per annum. All outstanding principal and accrued interest on the loan is payable upon demand of the Company. However, absent the occurrence of an event of default, no such demand for repayment may be made prior to March 31, 2002. Repayment of all amounts outstanding under the loan is secured by a first priority security interest on all of the assets of AMC Services, Inc. Michael N. Johnson has also personally guaranteed the repayment of all amounts outstanding under the loan and his guaranty is secured by a pledge to the Company of all of the outstanding shares of the capital stock of AMC Services, Inc. owned by Mr. Johnson.
AMC Services, Inc. is engaged in the business of providing construction services to the cable television and broadband communications industry. The Company is currently in the process of completing due diligence with respect to the future business prospects of AMC Services, Inc. If the results of such due diligence are satisfactory to the Company, the Company may elect to have AM Broadband Services, Inc. purchase all of the remaining outstanding capital stock of AMC Services, Inc. from Michael N. Johnson. The terms of any such purchase would be subject to negotiation between the parties and the execution of definitive purchase documents. There can be no assurances that the Company will elect to proceed with such purchase transaction or that the parties will be able to reach an agreement on the definitive terms of the documentation for any such transaction.
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