<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): October 31, 1997
MURDOCK COMMUNICATIONS CORPORATION
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(Exact name of registrant as specified in its charter)
Iowa
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(State or other jurisdiction or incorporation)
000-21463 42-1337746
- ---------------------------- --------------------------------
(Commission File (I.R.S. Employer I.D. Number)
Number)
1112 29th Avenue S.W.
Cedar Rapids, Iowa 52404
- ---------------------------------------- -----------
(Address of Principal Executive Offices) (Zip Code)
319-362-6900
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(Registrant's telephone number; including area code)
<PAGE> 2
Item 7 of the Current Report on Form 8-K of Murdock Communications
Corporation dated October 31, 1997, filed with the Securities and Exchange
Commission on November 7, 1997, is hereby amended in its entirety as follows to
reflect the information required by such item.
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business acquired.
Combined Financial Statements of Priority International
Communications, Inc. and PIC Resources Corporation (begins at
page 5).
Financial Statements of ATN Communications, Inc.
(begins at page 19).
(b) Pro forma financial information.
Pro Forma Financial Information of Murdock
Communications Corporation (begins at page 26).
(c) Exhibits
*2.1--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.
*2.2--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.
*2.3--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.
2
<PAGE> 3
*2.4--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.
*2.5--Short-Term Note dated October 31, 1997 issued by MCC
Acquisition Corp. to Bonner B. Hardegree, trustee for
the benefit of Wayne Wright and Bonner B. Hardegree.
*2.6--Form of Long-Term Note.
99.1--Unaudited Pro Forma Balance Sheet as of September
30, 1997.
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*Previously filed.
3
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Murdock Communications Corporation has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
MURDOCK COMMUNICATIONS
CORPORATION
Date: January 14, 1998
BY /s/ Thomas E. Chaplin
------------------------------------
Thomas E. Chaplin, Chief
Executive Officer
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PRIORITY INTERNATIONAL COMMUNICATIONS, INC. AND PIC
RESOURCES CORPORATION
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT 6
COMBINED FINANCIAL STATEMENTS:
Combined Balance Sheet as of September 30, 1997 7
Combined Statements of Operations for the nine months ended September 30, 1997
and year ended December 31, 1996 8
Combined Statements of Shareholders' Equity (Deficit) for the nine months ended
September 30, 1997 and year ended December 31, 1996 9
Combined Statements of Cash Flows for the nine months ended September 30,
1997 and year ended December 31, 1996 11
Notes to Combined Financial Statements 12
</TABLE>
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<PAGE> 6
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Priority International Communications, Inc. and PIC Resources Corporation
We have audited the accompanying combined balance sheet of Priority
International Communications, Inc. and PIC Resources Corporation, both of which
are under common ownership and common management, as of September 30, 1997, and
the related combined statements of operations, shareholders' equity (deficit)
and cash flows for the nine month period ended September 30, 1997 and the year
ended December 31, 1996. These financial statements are the responsibility of
the Companies' management. Our responsibility is to express an opinion on
these combined 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 combined financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
combined financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined financial position of Priority International
Communications, Inc. and PIC Resources Corporation as of September 30, 1997,
and the results of their combined operations and their combined cash flows for
the nine month period ended September 30, 1997 and the year ended December 31,
1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the combined financial statements, on May 29, 1997,
management of Priority International Communications, Inc. formed PIC Resources
Corporation and on May 31, 1997 purchased certain assets from United Network,
Inc. and 80% of the outstanding common stock of ATN Communications, Inc. from
United Network, Inc. Accordingly, the combined financial statements applicable
to the period after May 29, 1997 include the accounts of Priority International
Communications, Inc. and PIC Resources Corporation.
/s/ Deloitte & Touche LLP
December 29, 1997
Cedar Rapids, Iowa
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<PAGE> 7
PRIORITY INTERNATIONAL COMMUNICATIONS, INC.
AND PIC RESOURCES CORPORATION
COMBINED BALANCE SHEET
September 30, 1997
- --------------------------------------------------------------------------------
ASSETS (Note 3)
CURRENT ASSETS:
Cash and cash equivalents $ 20,367
Accounts receivable 477,130
Other current assets 38,297
----------
Total current assets 535,794
----------
PROPERTY AND EQUIPMENT:
Telecommunications equipment 1,267,612
Furniture and equipment 182,694
----------
Total 1,450,306
Accumulated depreciation (220,265)
----------
Property and equipment, net 1,230,041
----------
OTHER ASSETS:
Purchased equipment location contracts, net of
accumulated amortization of $163,115 257,351
Goodwill, net of accumulated amortization of $10,340 144,757
Other assets 41,874
----------
Total other assets 443,982
----------
TOTAL $2,209,817
==========
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
CURRENT LIABILITIES:
Outstanding checks in excess of bank balance $ 147,305
Accounts payable 75,520
Accrued commissions 413,927
Other accrued expenses 237,997
Current portion of long-term debt (Note 3) 893,554
----------
Total current liabilities 1,768,303
----------
LONG-TERM LIABILITIES:
Long-term debt, less current portion (Note 3) 727,180
----------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' (DEFICIT):
Priority International Communications, Inc.:
7% Series A Convertible Preferred Stock, no par
or stated value (Note 4);
Authorized - 500,000 shares;
Issued and outstanding: 10,185 shares 152,775
Common stock, $.01 par value;
Authorized - 1,000,000 shares;
Issued and outstanding: 189,659 shares 1,897
PIC Resources Corporation -
Common stock, $.01 par value;
Authorized - 1,000,000 shares;
Issued and outstanding: 1,000 shares 10
Additional paid-in capital 677,400
Accumulated deficit (1,117,748)
----------
Total shareholders' (deficit) (285,666)
----------
TOTAL $2,209,817
==========
See notes to combined financial statements.
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<PAGE> 8
PRIORITY INTERNATIONAL COMMUNICATIONS, INC.
AND PIC RESOURCES CORPORATION
COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
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<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
REVENUES:
Call processing revenues $4,897,257 $3,471,712
Other income 53,400 72,545
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Total revenues 4,950,657 3,544,257
CALL PROCESSING EXPENSE 3,665,417 2,576,112
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GROSS OPERATING PROFIT 1,285,240 968,145
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,220,401 909,732
DEPRECIATION AND AMORTIZATION EXPENSE 223,288 153,076
INTEREST EXPENSE 75,134 99,841
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NET LOSS $ (233,583) $ (194,504)
=========== ===========
</TABLE>
See notes to combined financial statements.
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PRIORITY INTERNATIONAL COMMUNICATIONS, INC.
AND PIC RESOURCES CORPORATION
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
(CONTINUED)
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<TABLE>
<CAPTION>
COMMON STOCK SHARE-
---------------------- ADDITIONAL HOLDERS'
Priority International PREFERRED PAID-IN ACCUMULATED EQUITY
Communications, Inc. STOCK CAPITAL DEFICIT (DEFICIT)
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1995 $ 1,449 $ 65,201 $ (681,195) $ (614,545)
Issuance of 10,185 shares of Series A
Convertible Preferred stock $ 152,775 152,775
Accrued dividends on 7% Series A
Convertible Preferred Stock (6,931) (6,931)
Net loss for 1996 (194,504) (194,504)
----------- ------------ ---------- ----------- ------------
BALANCES AT DECEMBER 31, 1996 $ 1,449 $ 152,775 $ 65,201 $ (882,630) $ (663,205)
=========== ============ ========== =========== ============
</TABLE>
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<PAGE> 10
PRIORITY INTERNATIONAL COMMUNICATIONS, INC.
AND PIC RESOURCES CORPORATION
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED
DECEMBER 31, 1996 (CONCLUDED)
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<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------
PIC Resources Priority International PREFERRED
Corporation Communications, Inc. STOCK
<S> <C> <C> <C>
BALANCES AT DECEMBER 31, 1996 $ 1,449 $ 152,775
Issuance of 1000 shares of common stock $ 10
Accrued dividends on 7% Series A
Convertible Preferred Stock
Note payable converted to common stock
(44,777 shares) 448
Net loss for 1997
----------- ------------ ------------
BALANCES AT SEPTEMBER 30, 1997 $ 10 $ 1,897 $ 152,775
=========== ============ ============
<CAPTION>
SHARE-
ADDITIONAL HOLDERS'
PAID-IN ACCUMULATED EQUITY
CAPITAL DEFICIT (DEFICIT)
<S> <C> <C> <C>
BALANCES AT DECEMBER 31, 1996 $ 65,201 $ (882,630) $ (663,205)
Issuance of 1000 shares of common stock 990 1,000
Accrued dividends on 7% Series A
Convertible Preferred Stock (1,535) (1,535)
Note payable converted to common stock
(44,777 shares) 611,209 611,657
Net loss for 1997 (233,583) (233,583)
----------- ------------ ------------
BALANCES AT SEPTEMBER 30, 1997 $ 677,400 $ (1,117,748) $ (285,666)
=========== ============ ============
</TABLE>
See notes to combined financial statements.
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<PAGE> 11
PRIORITY INTERNATIONAL COMMUNICATIONS, INC.
AND PIC RESOURCES CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
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<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (233,583) $ (194,504)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 223,288 153,076
Changes in operating assets and liabilities:
Accounts receivable ( 60,893) 91,070
Other assets 40,052 (27,286)
Outstanding checks in excess of bank balance 147,305 -
Accounts payable (381,053) (32,860)
Other accrued expenses 422,329 14,197
------------ -----------
Net cash flows from operating activities 157,445 3,693
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (44,940) (15,515)
Payments for purchased equipment location
contracts - (105,806)
Purchase of a business (Note 1) (700,000) -
------------ -----------
Net cash flows from investing activities (744,940) (121,321)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 791,173 361,265
Payments on long-term debt (155,593) (421,642)
Proceeds from issuance of 7% Series A Convertible Preferred Stock - 152,775
Dividends paid on 7% Series A Convertible Preferred Stock (1,535) (6,931)
Borrowings of line of credit - 118,925
Payments on line of credit - (97,000)
Organizational costs incurred (27,183) -
Proceeds from issuance of common stock 1,000 -
------------ -----------
Net cash flows from financing activities 607,862 107,392
------------ -----------
NET INCREASE IN CASH 20,367 (10,236)
CASH AT BEGINNING OF PERIOD - 10,236
------------ -----------
CASH AT END OF PERIOD $ 20,367 $ -
============ ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for interest $ 56,944 $ 58,585
Note payable converted to common stock 611,657 -
Issuance of note payable for business acquired 500,000 -
</TABLE>
See notes to combined financial statements.
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<PAGE> 12
PRIORITY INTERNATIONAL COMMUNICATIONS, INC.
AND PIC RESOURCES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
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1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Priority International Communications, Inc.
("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 September 30,
1997, PIC maintains equipment location contracts with approximately 257
hotels and services 3,698 payphones throughout the United States.
On December 31, 1995, PIC acquired substantially all of the assets of U.S.
Amerifone, Inc., U.S. American Payphone Management, Inc. and U.S. Amerilease
Corporation (collectively, the "Ameri-Companies") and assumed all of the
liabilities and debt of the Ameri-Companies for 87,570 shares of common
stock and a $681,195 7% convertible note payable (conversion rate of $13.66
per share). As PIC and the Ameri-Companies were under common management and
common ownership prior and subsequent to the transaction, assets acquired
and liabilities assumed as a result of the purchase were recorded at
carry-over basis and the convertible note payable was recorded as a
shareholder distribution.
PIC Resources Corporation ("PIC-R") was established May 29, 1997, solely to
acquire the operations of ATN Communications, Inc. ("ATN") and related
switching equipment. On May 31, 1997, PIC-R purchased certain assets of
United Network, Inc. ("UNI"), primarily switching equipment, and 80% of the
common stock of ATN from UNI for a purchase price of $1,250,000, payable in
$700,000 of cash and the issuance of a 7% promissory note for $500,000, due
December 31, 1997. The ATN acquisition was accounted for as a purchase
transaction. Accordingly, the combined financial statements include the
operations of PIC-R for the period from May 29, 1997 (date of inception) to
September 30, 1997. The purchase price has been allocated to assets acquired
and liabilities assumed based on their fair value at the date of
acquisition. The fair value of assets acquired and liabilities assumed is
summarized as follows:
Current assets $ 292,727
Property and equipment 1,173,414
Goodwill and other intangibles 167,773
Current liabilities assumed (433,914)
----------
Purchase price $1,200,000
==========
PIC-R, operating through 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.
PRINCIPLES OF COMBINATION - The 1997 combined financial statements include
the accounts of PIC and PIC-R (collectively referred to herein as the
"Companies"). Significant transactions among the Companies have been
eliminated. The Companies are under common management and have common
ownership.
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<PAGE> 13
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, useful lives of
property and equipment and impairment of long-lived assets.
CERTAIN RISK CONCENTRATIONS - Approximately 50% of PIC's revenues are
generated in Texas, 20% in California and 10% in each of the Southern,
Mid-Atlantic and Central Mid-West state regions. PIC-R's revenues are
largely concentrated in the southeastern United States.
REVENUE RECOGNITION - After a hotel location agreement is signed, the
Companies install equipment at the hotel site to provide the services called
for under the equipment location agreement. A portion of the Companies'
revenues is derived from processing credit card long-distance telephone
calls made by the patrons of the hotels under the Companies' contracts with
the hotel. The gross charges for these calls are recognized as revenues by
the Companies 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, an estimate of
uncollectible accounts and commissions to be paid to the individual hotels
based on the Companies' prior experience for these items. Additionally,
after a private payphone contract is signed, PIC instructs the payphone
owner to program the payphone to dial a designated "800" number for access
to PIC's carrier. As with the hotels, the gross charges for these calls are
recognized as revenues by PIC 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, an
estimate of uncollectible accounts and commissions to be paid to the
individual owner based on PIC's prior experience for these items.
CASH EQUIVALENTS - The Companies consider all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount for financial
instruments included among cash and cash equivalents, accounts receivable
and accounts payable approximates their fair value based on the short
maturity of those instruments. The carrying amount of debt approximates
their estimated fair value based on the credit, interest rate and prepayment
risk involved and the term of the obligations.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is computed on these assets by the straight-line method over
their estimated useful life of three to five years.
The Companies periodically review long-lived assets and certain identifiable
intangibles held and used by the Companies for impairment whenever events or
changes in circumstances indicate that the carrying amount of these assets
may not be recoverable.
INTANGIBLES - The cost of obtaining equipment location contracts is
amortized over the term of the related contracts of three to five years,
using the straight-line method. Goodwill associated with the
acquisition of ATN is amortized over five years using the straight-line
method.
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<PAGE> 14
INCOME TAXES - 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 period and the
change during the period in deferred tax assets and liabilities.
MINORITY INTEREST - Due to the shareholders' deficit of ATN for all periods
presented, no amount is recorded attributable to the 20% minority interest
in ATN.
2. PURCHASE OF CONTRACTS OF M-TECH COMMUNICATIONS, INC.
On August 29, 1996, PIC purchased from M-Tech Communications, Inc.
("M-Tech") for a cash price of $95,000 certain long distance operator
service contracts and related rights with regard to the providing of
operator assisted long distance telephone services. PIC assumed no
liabilities of M-Tech as a result of this purchase.
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<PAGE> 15
3. LONG-TERM DEBT
Long-term debt at September 30, 1997 consisted of the following:
<TABLE>
<S> <C>
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 PIC shareholders. $ 70,820
Note payable to financial institution bearing interest at 10.25%, due
December 11, 1997, collateralized by substantially all assets of
PIC not otherwise encumbered and personally guaranteed by
certain PIC shareholders. 37,747
Note payable to M-Tech Communications, Inc. bearing interest at
9.0%, due December 9, 1997, collateralized by certain contracts
and contract rights of PIC. 2,408
Note payable to financial institution bearing interest at 11.25%, due
May 3, 1999 through December 2, 1999, collateralized by certain
equipment and note and lease assignments of PIC and personally
guaranteed by certain PIC shareholders. 27,285
Note payable to J.C. and S.C. Symington Trusts bearing interest at 7.0%,
due December 4, 1997. 16,006
Note payable to Amnex bearing interest at 8.5%, due March 30, 1997,
collateralized by a security interest in all billable call records processed
by Amnex on behalf of PIC. 57,377
Uncollateralized, non-interest bearing demand notes payable to related parties. 795,232
Line of credit with a financial institution with an available
amount of $120,000, bearing interest at 10.0%, due October 9, 1997,
collateralized by substantially all assets of PIC and personally guaranteed
by certain PIC shareholders. 113,859
Note payable to UNI bearing interest at 7.0%, due December 31, 1997. 500,000
----------
Total long-term debt 1,620,734
Less current portion 893,554
----------
Long-term debt due after one year $ 727,180
==========
</TABLE>
Due to the refinancing discussed in Note 7, $704,415 of current debt is
classified as long-term.
Maturities of long-term debt for each of the five years subsequent to Sepetember
30, 1997 are as follows:
1998 $ 893,554
1999 155,044
2000 153,646
2001 177,007
2002 204,450
Thereafter 37,033
--------------
Total $ 1,620,734
==============
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<PAGE> 16
PIC has an irrevocable standby letter of credit with Liberty National Bank
for $10,000, collateralized by a $10,000 certificate of deposit.
4. SHAREHOLDERS' EQUITY
During the year ended December 31, 1996 PIC issued 10,185 shares of
preferred stock for $15 per share. The preferred stock provides for
cumulative annual dividends of 7% payable quarterly. The preferred stock is
convertible into one share of common stock at anytime at the option of the
holder. Commencing the earlier of (a) 24 months after issuance, or (b) the
commencement of a public offering for the common stock pursuant to a
registration statement filed with the Securities and Exchange Commission,
PIC may redeem the preferred stock at a redemption price of $16.80
per share, plus accumulated unpaid dividends. In the event of liquidation
dissolution or winding up of PIC, the holders of the preferred stock shall
be entitled to receive payment of $15 per share plus any unpaid dividends
before any distributions shall be made on the common stock.
As mentioned in Note 1, in accordance with the purchase agreement between
PIC and the Ameri-Companies, a 7% convertible note payable (the "Note") was
issued to the majority shareholder for $681,195. The Note provided that
during the term of the Note, at the option of the holder, the remaining
unpaid principal, plus accrued interest, could be converted into shares of
PIC common stock. Upon conversion, the holder would receive one share of
PIC common stock for every $13.66 in value of the Note plus accrued
interest. Effective May 31, 1997, the remaining balance of the Note of
$611,657 was converted into 44,777 shares of PIC common stock.
5. INCOME TAXES
There was no provision for income taxes in the nine months ended September
30, 1997 or the year ended December 31, 1996 due to current period losses
and net operating losses incurred in prior years. A valuation allowance for
the entire balance of deferred tax assets has been recorded because of
uncertainty over their future realization. Deferred tax assets consists
primarily of net operating loss carryforwards and to a lesser extent book
versus tax depreciation differences. At September 30, 1997, the Companies
have net operating loss carryforwards of approximately $330,000 to use to
offset future taxable income. These net operating losses will expire, if
unused, in 2011 and 2012.
6. COMMITMENTS AND CONTINGENCIES
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 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 an injunction on April 1, 1996
which included a prohibition against any dissipation of the assets of
Tel-Span Communications, Inc. ("Tel-Span"); that on May 1, 1996, PIC entered
into a new Operator Services Agreement with Tel-Span purporting to release
PIC from its contractual obligation to use Tel-Span as its exclusive
operator service provider; that on October 4, 1996, while the parties to the
proceeding awaited the Court's ruling on ownership of certain assets of
Tel-Span, PIC participated in a secret meeting in New Orleans at which an
agreement was reached to begin migration of business which violated the
Bankruptcy Court's injunction; and, finally, that PIC violated the Court's
injunction since it aided and abetted a party bound by such order. In
response, PIC has defended by asserting that it had no
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<PAGE> 17
notice of any injunction entered into by the Bankruptcy Court as required by
Rule 65(d) of the Federal Rules of Civil Procedure if such an order is to be
enforced against a non-party such as PIC; that the injunction entered by the
Bankruptcy Court did not clearly prohibit the conduct of PIC in migrating its
own business; and in any event as a non-party, PIC's conduct was motivated by
legitimate business concerns and did not constitute an aiding and abetting of
a party's violation of the injunction. In relation to this matter, a claim
has also been made against ATN Communications, Inc. ("ATN") and certain
employees of ATN. Evidentiary hearings were held and written summations and
closing briefs were filed by all parties with the Bankruptcy Court on or
before September 19, 1997. The Bankruptcy Court has not rendered a judgment
in relation to the above matter. The proceeding does not specify a dollar
amount of damages. Although the Companies believe that this lawsuit is
without merit and intends to defend vigorously against it, in the event of
an adverse determination, there can be no assurance that this litigation
will not have a material adverse effect on the Companies. No loss, if any,
has been recorded in the financial statements with respect to this matter.
PIC is a defendant in a lawsuit filed by Southwest Intelecom, Inc.,
d/b/a Intelecom, Inc. ("Intelecom") which is seeking recovery of
approximately $28,000, together with reasonable and necessary attorney's
fees based upon PIC's alleged failure to pay commissions owing to Intelecom
for long-distance operator services provided to locations in Mexico and the
United States. PIC has filed a written answer, generally denying all of the
allegations set forth in Intelecom's original petition. PIC intends to file
a counterclaim against Intelecom for a sum in excess of the sums claimed by
Intelecom against PIC, based upon breach of an agreement whereby Intelecom
was to have provided operator service traffic originating in Mexico to a
switch owned or controlled by PIC. By failing to provide such operator
service traffic originating in Mexico, Intelecom caused PIC to lose set-up
costs in excess of $24,000, plus its business opportunity and profit. This
case is set for a non-jury trial on March 9, 1998. In the opinion of
management, the ultimate disposition of this case will not have a material
adverse effect on the Companies' financial condition, results of operations,
or cash flows.
The Companies have certain other contingent liabilities with respect to
litigation, claims and contractual agreements arising in the ordinary course
of business. In the opinion of management, such contingent liabilities are
not expected to have a material adverse effect on the financial condition,
results of operations, or cash flows of the Companies.
The Companies lease office space, automobiles and other facilities and
equipment on short-term leases. At September 30, 1997, future minimum
rental payments on lease obligations, primarily for facilities in which the
Companies' operations are located, are as follows:
OPERATING
LEASES
Years ending September 30:
1998 $ 201,152
1999 203,878
2000 184,681
2001 161,857
2002 110,720
------------
Minimum rental payments $ 862,288
============
Rent expense under operating leases for the nine months ended September
30, 1997 and the year ended December 31, 1996 was $53,532 and $54,209,
respectively.
- 17 -
<PAGE> 18
On March 1, 1997, PIC entered into a three-year employment agreement with
the Vice-President / Chief Financial Officer ("VP/CFO"). Pursuant to these
agreements, the VP/CFO will receive a base salary of $109,775 and an annual
bonus at the discretion of the Board of Directors. The agreement contains a
provision restricting competition with PIC for the greater of the term of
the contract a party has with PIC or three years following termination of
employment.
7. SUBSEQUENT EVENTS
On October 28, 1997, PIC-R entered into a Note and Security Agreement with
Berthel Fisher & Company Leasing, Inc. whereby PIC-R borrowed $1,000,000 at
14.5% to be repaid in monthly installments of $23,528, due November 1, 2002.
The borrowing is collateralized by all telecommunications equipment owned
by PIC-R. The proceeds from this financing were used to repay $300,000 in
uncollateralized non-interest bearing demand notes payable to related
parties, $500,000 to repay the note payable to UNI (see Note 1) and $200,000
for working capital. The repayment of the Note has been guaranteed by PIC.
Should PIC-R fail to make payments on a timely basis or the Companies
default on their obligations under the Note and Security Agreement, a
significant shareholder of PIC-R has agreed to assume the Note.
Effective October 31, 1997, Murdock Communications Corporation ("MCC")
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 (the "Short-Term Note") and promissory notes with an aggregate
principal amount of $1,910,000 due April 30, 1999 (the "Long-Term Notes"
and, collectively with the Short-Term Note, the "PIC Notes"). Concurrently,
MCC 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 MCC of an aggregate
of 300,000 shares of common stock. In connection with the PIC acquisition,
MCC also loaned $400,000 to PIC-R for capital expenditures.
The PIC-R agreement provides that MCC will 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 an assigned value of $1.25 will be issued for
each dollar of EBITDA over $1,000,000 during either of the twelve month
periods. MCC 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.
MCC's obligations under the PIC notes have been guaranteed by MCC and are
subject to a security interest in the shares of PIC stock and PIC-R stock
acquired by MCC pursuant to the PIC acquisition. In the event that MCC
defaults with respect to the repayment of the Short-Term Note, the holders
of the PIC notes will have the right to rescind the PIC acquisition by
surrendering the shares of common stock issued in the PIC acquisition and
the PIC notes to MCC in exchange for the return of all of the shares of PIC
and PIC-R stock. In addition, if the PIC acquisition is 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.
* * * * *
- 18 -
<PAGE> 19
ATN COMMUNICATIONS, INC.
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 20
FINANCIAL STATEMENTS:
Statements of Operations for the five month period
ended May 31, 1997 and for the year ended December 31, 1996 21
Statements of Cash Flows for the five month period
ended May 31, 1997 and for the year ended December 31, 1996 22
Notes to Financial Statements 23
- 19 -
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
ATN Communications, Inc.
We have audited the accompanying statements of operations and of cash flows of
ATN Communications, Inc. for the five month period ended May 31, 1997 and the
year ended December 31, 1996. 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 financial statements present fairly, in all material
respects, the results of operations and cash flows of ATN Communications, Inc.
for the five month period ended May 31, 1997 and the year ended December 31,
1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Cedar Rapids, Iowa
December 29, 1997
- 20 -
<PAGE> 21
ATN COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
FIVE MONTHS ENDED MAY 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
REVENUES:
Call processing revenues $ 2,102,287 $ 1,953,908
Other income 95,536 16,139
----------------- ---------------
Total revenues 2,197,823 1,970,047
CALL PROCESSING EXPENSES 1,735,531 1,688,097
----------------- ---------------
GROSS OPERATING PROFIT 462,292 281,950
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 382,175 573,194
DEPRECIATION AND AMORTIZATION EXPENSE 137,779 327,739
INTEREST EXPENSE 21,156 13,810
----------------- ---------------
NET LOSS $ (78,818) $ (632,793)
================= ===============
</TABLE>
See notes to financial statements.
- 21 -
<PAGE> 22
ATN COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FIVE MONTHS ENDED MAY 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (78,818) $ (632,793)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 137,779 327,739
Common stock grant of 20% to management - 35,000
Changes in operating assets and liabilities:
Receivables 40,019 (183,398)
Other assets 205 8,469
Accounts payable 175,100 118,053
Accrued expenses (234,672) 341,637
--------- ---------
Net cash flows from operating activities 39,613 14,707
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (39,613) (14,707)
--------- ---------
NET INCREASE IN CASH - -
CASH AT BEGINNING OF PERIOD - -
--------- ---------
CASH AT END OF PERIOD $ - $ -
========= =========
SUPPLEMENTAL DISCLOSURE -
Cash paid during the period for interest $ 21,156 $ 13,810
========= =========
</TABLE>
See notes to financial statements.
- 22 -
<PAGE> 23
ATN COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FIVE MONTHS ENDED MAY 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
- -------------------------------------------------------------------------------
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY - ATN Communications, Inc. ("ATN") and United Network,
Inc. ("UNI") are members of a consolidated group. The accompanying
financial statements include the operations of ATN and certain assets of
UNI (primarily switching equipment used in ATN's operations). ATN and
certain assets of UNI (collectively the "Company") were acquired by PIC
Resources Corporation on May 31, 1997 (see Note 5).
DESCRIPTION OF BUSINESS - The Company is primarily engaged in the business
of providing carrier services for long-distance telecommunications
companies and handles incoming operator assisted calls with its operators
on location primarily in the southeastern United States. Additionally, the
Company provides unbundled services to the long-distance provider, such
as customer billing and collections, call validation, operator charges,
network and bad debt costs.
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 estimated.
INCOME TAXES - The operations of the Company are included in a consolidated
income tax return. The income tax provisions reflected in the statements
of operations are calculated as if the Company files separate tax returns.
Due to operating losses by the Company for all periods presented and
uncertainty as to their future realization, no provision for income taxes
has been recorded.
REVENUE RECOGNITION - The gross charges for 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, an estimate for
uncollectible accounts and commissions to be paid based on the Company's
prior experience for these items.
CASH EQUIVALENTS - The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is computed on these assets by the straight-line method over
their estimated useful life of three to five years.
The Company periodically reviews its long-lived assets used by the Company
for impairment whenever events or changes in circumstances indicate that
the carrying amount of these assets may not be recoverable.
- 23 -
<PAGE> 24
2. OPERATING LEASES
Rent expense under operating leases for the five months ended May 31, 1997
and the year ended December 31, 1996 was $44,950 and $98,750, respectively.
3. RELATED PARTY TRANSACTIONS
Other income includes $81,200 of commissions earned from UNI for the five
months ended May 31, 1997.
Call processing expenses include $620,000 and $211,500 of commissions paid
to Priority International Communications, Inc. (see Note 5) for the five
months ended May 31, 1997 and the year ended December 31, 1996,
respectively.
Rent expenses disclosed in Note 2 above primarily represent payments for
office rent made to ATN Towers, Inc., a related entity.
4. LITIGATION
ATN 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 was filed for an order to show cause why
certain individuals and entities, including ATN, 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 an injunction on April 1, 1996
which included a prohibition against any dissipation of the assets of
Tel-Span Communications, Inc. ("Tel-Span"); that on May 1, 1996, ATN
entered into a new Operator Services Agreement with Tel-Span purporting to
release ATN from its contractual obligation to use Tel-Span as its
exclusive operator service provider; that on October 4, 1996, while the
parties to the proceeding awaited the Court's ruling on ownership of
certain assets of Tel-Span, ATN participated in a secret meeting in New
Orleans at which an agreement was reached to begin migration of business
which violated the Bankruptcy Court's injunction; and, finally, that ATN
violated the Court's injunction since it aided and abetted a party bound by
such order. In response, ATN has defended by asserting that it had no
notice of any injunction entered into by the Bankruptcy Court as required
by Rule 65(d) of the Federal Rules of Civil Procedure if such an order is
to be enforced against a non-party such as ATN; that the injunction entered
by the Bankruptcy Court did not clearly prohibit the conduct of ATN in
migrating its own business; and in any event as a non-party, ATN's conduct
was motivated by legitimate business concerns and did not constitute an
aiding and abetting of a party's violation of the injunction. In relation
to this matter, a claim has also been made against certain employees of
ATN. Evidentiary hearings were held and written summations and closing
briefs were filed by all parties with the Bankruptcy Court on or before
September 19, 1997. The Bankruptcy Court has not rendered a judgment in
relation to the above matter. The proceeding does not specify a dollar
amount of damages. Although the Company believes that this lawsuit is
without merit and intends to defend vigorously against it, in the event of
an adverse determination, there can be no assurance that this litigation
will not have a material adverse effect on the Company. No loss, if any,
has been recorded in the financial statements with respect to this matter.
- 24 -
<PAGE> 25
ATN has certain other contingent liabilities with respect to litigation,
claims and contractual agreements arising in the ordinary course of
business. In the opinion of management, such contingent liabilities are
not expected to have a material adverse effect on the financial condition,
results of operations, or cash flow of the Company.
5. SUBSEQUENT EVENT
Effective May 31, 1997, PIC Resources Corporation, an affiliate of Priority
International Communications, Inc., purchased certain assets of UNI and 80%
of the common stock of ATN from UNI for a purchase price of $1,200,000,
payable in $700,000 in cash and the issuance of a $500,000 7% promissory
note due December 31, 1997.
* * * * *
- 25 -
<PAGE> 26
Pro Forma Financial Information of Murdock Communications Corporation
On October 31, 1997, Murdock Communications Corporation (the "Company" or
"MCC") completed its acquisition of two companies, Priority International
Communications, Inc. ("PIC") and PIC Resources Corp. ("PIC-R") (collectively,
the "PIC Acquisition"). PIC and PIC-R are under common management and have
common ownership. PIC sells long-distance operator services to payphones,
hotels, hospitals, universities, condominiums and other institutions. PIC-R,
operating through ATN Communications, Inc. ("ATN"), is a provider of
long-distance operator services.
Pursuant to the Stock Purchase Agreement, dated as of August 22, 1997, as
amended (the "PIC Agreement"), among MCC Acquisition Corp., a wholly owned
subsidiary of the Company ("MCC Sub"), PIC and certain shareholders of PIC, MCC
Sub acquired all of the outstanding capital stock of PIC in exchange for a cash
payment at closing of $500,000 and the issuance by MCC Sub to certain of the
PIC shareholders of a promissory note in the principal amount of $840,000 due
March 1, 1998 (the "Short-Term Note") and promissory notes with an aggregate
principal amount of $1,910,000 due April 30, 1999 (the "Long-Term Notes" and,
collectively with the Short-Term Note, the "PIC Notes"). Pursuant to the Stock
Purchase Agreement, dated as of August 22, 1997, as amended (the "PIC-R
Agreement"), among MCC Sub, PIC-R, ATN and the shareholders of PIC-R, MCC Sub
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. In connection with the PIC Acquisition, the
Company also loaned, prior to September 30, 1997, $400,000 to ATN for capital
expenditures.
The PIC-R Agreement provides that the Company will 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 an assigned value of $1.25 will 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.
MCC Sub's obligations under the PIC Notes have been guaranteed by the Company
and are subject to a security interest in the shares of PIC stock and PIC-R
stock acquired by MCC Sub pursuant to the PIC Acquisition. In the event that
MCC Sub defaults with respect to the repayment of the Short-Term Note, the
holders of the PIC Notes will have the right to rescind the PIC Acquisition by
surrendering the shares of Common Stock issued in the PIC Acquisition and the
PIC Notes to MCC Sub in exchange for the return of all the shares of PIC Stock
and PIC-R Stock. In addition, if the PIC Acquisition is rescinded, the
shareholders of PIC and PIC-R would retain the $530,000 cash payments made at
closing and the $400,000 advanced to ATN. If the Company completes any primary
offering of its equity securities during the term of the PIC Notes (other than
pursuant to employee options or outstanding warrants), the Company must apply
at least 67% of the net proceeds of such offering in excess of $500,000 to
repay the Short-Term Note and then 50% of the net proceeds received after March
1, 1998 to repay the Long-Term Notes.
The Company financed the PIC Acquisition by using part of the proceeds of the
offering of shares of Convertible Preferred Stock, and the issuance of the
Short-Term Note, the Long-Term Notes and the shares of Common Stock to the
shareholders of PIC and PIC-R.
The following pro forma financial information covers the registrant's
nine-month period ended September 30, 1997, as filed with the Securities and
Exchange Commission, utilizing MCC's interim results for the first nine months
of its year ended December 31, 1997, MCC's year ended December 31,
1996, as filed with the Securities and Exchange Commission, utilizing MCC's
results for its year ended December 31, 1996, and for the balance sheet,
MCC's interim balance sheet as of September 30, 1997, as filed with the
Securities and Exchange Commission.
- 26 -
<PAGE> 27
The pro forma statements of operations reflect the results of operations as if
the acquisition was consummated as of the beginning of the year ended
December 31, 1996 and as if the acquisition was consummated as of the beginning
of the nine-month interim period ended September 30, 1997.
ATN was acquired by PIC on May 31, 1997 and was accounted for as a purchase
transaction. Accordingly, the combined financial statements of PIC and PIC-R
include the operations of PIC-R for the period from May 31, 1997 (date of
acquisition) to September 30, 1997. The operations of ATN have been included
for the five month period ended May 31, 1997 for inclusion in the pro forma
statements of operations for the nine month period ended September 30, 1997.
The pro forma balance sheet information reflects the financial
condition as if the acquisition was consummated on September 30, 1997.
The pro forma financial information presented reflects a preliminary allocation
of the purchase price under the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16.
The unaudited combined financial statements set forth below are not necessarily
indicative of either future results of operations or results that might have
been achieved if the merger had been consumated as of the dates indicated.
- 27 -
<PAGE> 28
MURDOCK COMMUNICATIONS CORPORATION
PRO-FORMA BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PIC & Pro-Forma
PIC-R MCC Adjustments Total
<S> <C> <C> <C> <C>
Current Assets:
Cash $ 20,367 $ 96,069 $ 116,436
Receivables 477,130 1,095,019 1,572,149
Other current assets 38,297 706,689 $ (400,000) {A} 344,986
----------------- ---------------- ------------ -------------
Total current assets 535,794 1,897,777 (400,000) 2,033,571
----------------- ---------------- ------------ -------------
Property and Equipment:
Land and building 463,693 463,693
Telecommunications equipment 1,267,612 7,240,049 8,507,661
Furniture and equipment 182,694 347,862 530,556
----------------- ---------------- -------------
1,450,306 8,051,604 9,501,910
Accumulated depreciation (220,265) (6,690,853) (6,911,118)
----------------- ---------------- -------------
1,230,041 1,360,751 2,590,792
Capital leases, net 1,118,291 1,118,291
----------------- ---------------- -------------
Property and equipment, net 1,230,041 2,479,042 3,709,083
----------------- ---------------- -------------
Other Assets:
Goodwill, net 144,757 3,821,055 {C} 3,965,812
Other intangible assets, net 257,351 931,388 1,188,739
Other assets 41,874 391,783 433,657
----------------- ---------------- ------------ -------------
Total other assets 443,982 1,323,171 3,821,055 5,588,208
----------------- ---------------- ------------ -------------
Total assets $ 2,209,817 $ 5,699,990 $3,421,055 $ 11,330,862
================= ================ ============ =============
Current Liabilities:
Notes payable $ 649,975 $ 1,394,746 {C} $ 2,044,721
Outstanding checks in excess of bank balances $ 147,305 555,925 {C} 703,230
Accounts payable 75,520 1,034,164 1,109,684
Accrued expenses 651,924 753,929 1,405,853
Current portion of capital lease obligations 1,191,098 1,191,098
Current portion of long-term debt 893,554 16,214 (400,000) {A} 509,768
----------------- ---------------- ------------ -------------
Total current liabilities 1,768,303 3,645,380 1,550,671 6,964,354
----------------- ---------------- ------------ -------------
Long-term Liabilities:
Capital lease obligations 2,154,974 2,154,974
Long-term debt 727,180 262,190 1,072,843 {C} 2,062,213
Preferred stock of subsidiary 152,775 (152,775) -
Deferred income 58,804 58,804
----------------- ---------------- ------------ -------------
Total liabilities 2,648,258 6,121,348 2,470,739 11,240,345
----------------- ---------------- ------------ -------------
Shareholders' Deficit:
Preferred stock 894,112 894,112
Common stock 1,907 12,165,708 509,968 {C} 12,677,583
Common stock warrants 8,400 8,400
Additional paid-in capital 677,400 234,000 (677,400) {C} 234,000
Accumulated deficit (1,117,748) (13,723,578) 1,117,748 {C} (13,723,578)
----------------- ---------------- ------------ -------------
Total shareholders' deficit (438,441) (421,358) 950,316 90,517
----------------- ---------------- ------------ -------------
Total liabilities and shareholders' deficit $ 2,209,817 $ 5,699,990 $ 3,421,055 $ 11,330,862
================= ================ ============= =============
</TABLE>
Pro Forma Adjustments:
{A} - Eliminate intercompany note receivable and note payable.
{B} - Eliminate intercompany sales and cost of sales.
{C} - To record goodwill arising from purchase accounting adjustments made
based on APB 16 and related acquisition notes payable and common stock
issued. The common stock was valued at the closing price at date of
acquisition less a 35% discount for its restricted nature.
{D} - To record interest expense on the acquisition notes.
{E} - To record amortization expense on goodwill using the straight-line method
over 10 years.
- 28 -
<PAGE> 29
MURDOCK COMMUNICATIONS CORPORATION
PRO-FORMA STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PIC & ATN
PIC-R Communications MCC
<S> <C> <C> <C>
Call processing revenues $ 4,897,257 $ 2,102,287 $ 5,105,265
Sales and rentals 418,861
Other income 53,400 95,536 89,398
------------ ------------ --------------
Total revenues 4,950,657 2,197,823 5,613,524
------------ ------------ --------------
Cost of sales - calls (3,665,417) (1,735,531) (4,065,212)
Cost of sales - equipment (306,753)
------------ ------------ --------------
Total cost of sales (3,665,417) (1,735,531) (4,371,965)
------------ ------------ --------------
Gross operating profit 1,285,240 462,292 1,241,559
Selling, general and administrative (1,220,401) (382,175) (2,617,075)
Depreciation and amortization (223,288) (137,779) (1,623,796)
Share of loss from joint venture (309,478)
------------ ------------ --------------
Total operating costs (1,443,689) (519,954) (4,550,349)
------------ ------------ --------------
Operating loss (158,449) (57,662) (3,308,790)
Interest expense (75,134) (21,156) (525,558)
------------ ------------ --------------
Loss before income taxes (233,583) (78,818) (3,834,348)
Income taxes (5,402)
------------ ------------ --------------
Net loss $ (233,583) $ (78,818) $ (3,839,750)
============ ============= ==================
Net loss per common share $ (0.88)
==================
Weighted average common stock outstanding 4,362,081
==================
<CAPTION>
Pro Forma
Adjustments Total
<S> <C> <C> <C>
Call processing revenues $ (620,000) {B} $ 11,484,809
Sales and rentals 418,861
Other income 238,334
------------ -------------
Total revenues (620,000) 12,142,004
------------ -------------
Cost of sales - calls 620,000 {B} (8,846,160)
Cost of sales - equipment (306,753)
------------ -------------
Total cost of sales 620,000 (9,152,913)
------------ -------------
Gross operating profit 2,989,091
Selling, general and administrative (4,219,651)
Depreciation and amortization (287,000) {E} (2,271,863)
Share of loss from joint venture (309,478)
------------ -------------
Total operating costs (287,000) (6,800,992)
------------ -------------
Operating loss (287,000) (3,811,901)
Interest expense (227,400) {D} (849,248)
------------ -------------
Loss before income taxes (514,400) (4,661,149)
Income taxes (5,402)
------------ -------------
Net loss $ (514,400) $ (4,666,551)
============ =============
Net loss per common share $ (1.00)
=============
Weighted average common stock outstanding 300,000 {C} 4,662,081
============ =============
</TABLE>
Pro Forma Adjustments:
{A} - Eliminate intercompany note receivable and note payable.
{B} - Eliminate intercompany sales and cost of sales.
{C} - To record goodwill arising from purchase accounting adjustments made
based on APB 16 and related acquisition notes payable and common stock
issued. The common stock was valued at the closing price at date of
acquisition less a 35% discount for its restricted nature.
{D} - To record interest expense on the acquisition notes.
{E} - To record amortization expense on goodwill using the straight-line method
over 10 years.
- 29 -
<PAGE> 30
MURDOCK COMMUNICATIONS CORPORATION
PRO-FORMA STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PIC & ATN
PIC-R Communications MCC
<S> <C> <C> <C>
Call processing revenues $ 3,471,712 $ 1,953,908 $ 6,248,317
Commissions revenue 1,000,000
Sales and rentals 483,937
Other income 72,545 16,139 432,348
-------------- --------------- ------------------
Total revenues 3,544,257 1,970,047 8,164,602
-------------- --------------- ------------------
Cost of sales - calls (2,576,112) (1,688,097) (4,813,177)
Cost of sales - equipment (426,215)
------------------
Total cost of sales (2,576,112) (1,688,097) (5,239,392)
-------------- --------------- ------------------
Gross operating profit 968,145 281,950 2,925,210
-------------- --------------- ------------------
Selling, general and administrative (909,732) (573,194) (2,756,586)
Depreciation and amortization (153,076) (327,739) (2,284,258)
-------------- --------------- ------------------
Total operating costs (1,062,808) (900,933) (5,040,844)
-------------- --------------- ------------------
Operating loss (94,663) (618,983) (2,115,634)
Interest expense (99,841) (13,810) (1,448,207)
-------------- --------------- ------------------
Loss before income taxes and
extraordinary item (194,504) (632,793) (3,563,841)
Income taxes (8,112)
-------------- --------------- ------------------
Loss before extraordinary item (194,504) (632,793) (3,571,953)
Extraordinary Item - gain on
related party restructuring 1,084,314
Net loss $ (194,504) $ (632,793) $ (2,487,639)
============== =============== ==================
Pro forma net loss $ (194,504) $ (632,793) $ (2,457,016)
============== =============== ==================
Pro Forma Net Loss Per Common Share:
Loss before extraordinary item $ (1.41)
Extraordinary item 0.43
------------------
Net loss $ (0.98)
==================
Pro forma weighted average common stock outstanding 2,508,329
==================
<CAPTION>
Pro Forma
Adjustments Total
<S> <C> <C> <C>
Call processing revenues $ (211,500) {B} $ 11,462,437
Commissions revenue 1,000,000
Sales and rentals 483,937
Other income 521,032
Total revenues (211,500) 13,467,406
------------ ------------------
Cost of sales - calls 211,500 {B} (8,865,886)
Cost of sales - equipment (426,215)
Total cost of sales 211,500 (9,292,101)
------------ ------------------
Gross operating profit 4,175,305
------------ ------------------
Selling, general and administrative (4,239,512)
Depreciation and amortization (382,000) {E} (3,147,073)
------------ ------------------
Total operating costs (382,000) (7,386,585)
------------ ------------------
Operating loss (382,000) (3,211,280)
Interest expense (303,200) {D} (1,865,058)
------------ ------------------
Loss before income taxes and
extraordinary item (685,200) (5,076,338)
Income taxes (8,112)
------------ ------------------
Loss before extraordinary item (685,200) (5,084,450)
Extraordinary Item - gain on
related party restructuring 1,084,314
-------------- ------------------
Net loss $ (685,200) $ (4,000,136)
============== ==================
Pro forma net loss $ (685,200) $ (3,969,513)
============== ==================
Pro Forma Net Loss Per Common Share:
Loss before extraordinary item $ (1.80)
Extraordinary item 0.39
-----------------
Net loss $ (1.41)
=================
Pro forma weighted average common stock outstanding 300,000 {C} 2,808,329
============== =================
</TABLE>
Pro Forma Adjustments:
{A} - Eliminate intercompany note receivable and note payable.
{B} - Eliminate intercompany sales and cost of sales.
{C} - To record goodwill arising from purchase accounting adjustments made
based on APB 16 and related acquisition notes payable and common stock
issued.
{D} - To record interest expense on the acquisition notes.
{E} - To record amortization expense on goodwill using the straight-line method
over 10 years.
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