MURDOCK COMMUNICATIONS CORP, 10KSB, 2000-03-30

MURDOCK COMMUNICATIONS CORP
10KSB, 2000-03-30
TELEGRAPH & OTHER MESSAGE COMMUNICATIONS

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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

(Mark One)

[x] Annual Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999.

[ ] Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___ to ____.

Commission file number 000-21463

Murdock Communications Corporation
---------------------------------------
(Exact name of small business issuer as specified in its charter)

Iowa 42-1337746
---- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

1112 29th Avenue S.W., Cedar Rapids, Iowa 52404
----------------------------------------- -----
(Address of principal executive offices) (Zip Code)

Issuer's telephone number, including area code: 319-362-7283
--------------

Securities registered pursuant to Section 12(b) of the Exchange Act:

Name of each exchange on
Title of each class which registered
NA NA
-- --

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common Stock, No Par Value
------------------------------------
(Title of class)

Redeemable Common Stock Purchase Warrants
-----------------------------------------
(Title of class)

<PAGE>
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---

Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained herein, and will not be contained, to the best of issuer's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to the Form 10-KSB.
[ ]

State the issuer's revenues for its most recent fiscal year. $35,747,000.

The aggregate market value of the common stock held by nonaffiliates of the
issuer as of March 1, 2000 was $6,244,574. Shares of common stock held by any
executive officer or director of the issuer and any person who beneficially owns
10% or more of the outstanding common stock have been excluded from this
computation because such persons may be deemed to be affiliates. This
determination of affiliate status is not a conclusive determination for other
purposes.

On March 1, 2000, there were outstanding 10,576,012 shares of the issuer's
no par value common stock.

Transitional Small Business Disclosure Format (check one): Yes No X
--- ---

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2000 Annual Meeting of the
Shareholders of the issuer are incorporated by reference into Part III of this
report.

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<PAGE>
PART I
------

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

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 and outsourced operator
services for the telecommunications industry. Through a series of acquisitions
and new product developments, the Company transformed itself during 1998 from 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. The Company
currently operates through two principal business units:

- - Priority International Communications, Inc. and ATN Communications, Inc.
(collectively, "PIC/ATN") are wholly owned subsidiaries of the Company
which provide operator services, call processing and related valued added
services; and

- - Incomex, Inc. ("Incomex") is a wholly owned subsidiary of the Company
which provides billing and collection services for calls to the United
States from resort hotels in Mexico.

The Company has also made investments in:

- - Actel Integrated Communications, Inc. ("Actel"), a provider of local
exchange communications services as a facility-based carrier based in
Mobile, Alabama;

- - AcNet S.A. de C.V. ("AcNet Mexico"), a provider of internet services,
network services and data communications to businesses, governments and
consumers in Mexico; and

- - AcNet USA, Inc. ("AcNet USA"), a provider of internet services and data
communications to businesses and consumers also featuring a private
network that links over 400 schools, universities and administrative
offices in Texas and Mexico.

As of the date of this report, the Company has a large amount of past due
debt and has also experienced significant operating and cash flow difficulties
at its

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largest business unit, PIC/ATN. The Company also entered into a non-binding
letter of intent in February 2000, to negotiate a merger transaction with
Floragraph LLC ("Floragraph"), which owns Flower.com, an online floral web site
that services hotels and other institutions with its pre-paid "FlowerCard"
franchise. If completed, the merger with Floragraph would position the combined
company as an Internet provider of flowers, gifts and other e-commerce
merchandise.

In connection with the proposed merger with Floragraph and to address the
Company's severe debt and liquidity issues, the Company is reviewing strategic
alternatives to restructure its business and reduce its overall debt. The
Company is considering a number of alternatives which may include private
offerings of debt or equity financing, extensions or conversions of existing
debt and/or the sale of significant parts of the Company's assets. The Company
would use any proceeds from these initiatives to reduce the Company's debt and
to generate funds for its business after its planned merger with Floragraph. As
of the date of this report, the Company has not completed any transactions in
connection with its restructuring efforts, except for an agreement to rent, and
a nonbinding memorandum of understanding to negotiate the sale of, certain
assets relating to the Company's Murdock Technology Services division ("MTS").
No assurances can be given that the Company will be successful in its
restructuring efforts. See "- Recent Developments" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" below.

MCC was incorporated as an Iowa corporation in 1989.

RECENT DEVELOPMENTS

PROPOSED MERGER WITH FLORAGRAPH LLC. The Company entered into a
non-binding letter of intent to merge (the "Merger") with Floragraph, which owns
Flower.com, an online floral web site that services hotels and other
institutions with its pre-paid "FlowerCard" franchise. If completed, the merger
with Floragraph would position the combined company as an Internet provider of
flowers, gifts and other e-commerce merchandise and would leverage the Company's
relationships in the hotel and telecommunications industries. The Merger is
subject to the satisfaction of a number of conditions, including the completion
of due diligence, the execution of definitive agreements, the receipt of
necessary regulatory approvals, approval by the Company's shareholders and other
closing conditions. Because there are significant conditions remaining to be
satisfied with respect to the Merger, no assurance can be given that the Merger
will be consummated or, if consummated, that the terms of the Merger will be as
presently contemplated.

MCC'S PAST DUE DEBT. As of March 1, 2000, the Company was past due in the
payment of approximately $17.8 million of principal and interest payments,

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including $1.4 million in lease and debt financing to Berthel Fisher & Company
and its subsidiaries and their affiliated leasing partnerships (collectively,
"Berthel"). The Company was also past due with its trade vendors in the payment
of approximately $1.3 million as of March 1, 2000. If the Company is unable to
raise the necessary funds to repay its past due debt or to arrange for
extensions or conversions of such debt, its creditors may sue the Company to
demand payment of the amounts past due. Any action by the Company's creditors
to demand repayment of past due indebtedness is likely to prevent the Company
from continuing as a going concern. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

The Company's past due debt includes approximately $7.6 million of notes
which have been pledged by the holders of the notes to a bank as collateral for
loans made by the bank to such holders. The Company has been informed that this
bank is in serious financial difficulty and is currently being liquidated by the
Federal Deposit Insurance Corporation ("FDIC"). If the FDIC seeks to enforce
its rights under the pledged notes, the Company currently would not be able to
repay these notes. As a result, any such action by the FDIC is likely to
prevent the Company from continuing as a going concern.

The FDIC has notified the Company that it believes an additional $1.1
million is outstanding representing various notes payable. Management believes
that no funds were received by the Company with respect to these notes and that
it has other defenses. The amount of past due debt as of March 1, 2000 does not
include this amount. No assurance can be given as to the ultimate outcome of
this matter.

The amount of past due debt as of March 1, 2000, includes the Company's
$2.0 million bridge loan from New Valley Corporation ("New Valley"). The
Company had been past due on this loan effective July 21, 1999. On December 17,
1999, the Company amended its agreement with New Valley to extend the term of
its $2.0 million bridge loan. Under the amendment, the principal amount of the
bridge loan is due in six monthly installments beginning on January 17, 2000,
together with accrued interest. The first five installments are $200,000 and
the final installment on June 17, 2000 is $1,000,000. New Valley also waived
all prior defaults by the Company and the interest rate under the note was reset
to 12% per annum (14% per annum upon a default) from the original date of the
bridge loan. The bridge loan is secured by a collateral pledge in the stock of
the Company's subsidiaries, and a security interest in the unencumbered assets
of the Company and its subsidiaries. As of March 20, 2000, the Company was past
due on the January, February and March payments under the Note with New Valley.
However, on March 29, 2000, New Valley waived this default. The effect of this
waiver is not reflected in any of the past due debt disclosures because such
disclosures are as of March 1, 2000 or March 20, 2000.

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BAD DEBT AND UNIVERSAL SERVICE FUND FEES. During 1999, PIC/ATN recorded
bad debt in excess of historical amounts of approximately $5.6 million relating
to collection issues for one type of call processing service provided by PIC/ATN
to its largest customer. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

As a result of this collection issue, PIC/ATN switched to another billing
and collection firm in November 1999. The prior billing and collection firm has
alleged that PIC/ATN had breached its contract and has placed a lien on the
collections from calls processed by the replacement billing and collection firm.
At December 31, 1999, the Company recorded an allowance for 100% of all
receivables from both billing and collection firms due to the uncertainty
regarding their collection. PIC/ATN may be liable for additional amounts beyond
the allowance recorded. The Company expects that PIC/ATN will refuse to pay any
additional amounts to the former billing and collection firm and believes that
the matter will likely be resolved through litigation. No liability, if any,
has been recorded in the consolidated financial statements with respect to this
matter. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

In December 1999, the Company recorded a $1.7 million liability for amounts
allegedly due by PIC/ATN to the Universal Service Administrative Company for a
universal service fund fee. See "Business - Regulation" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

STANDSTILL AGREEMENT. The Company obtains lease and other financing
services from Berthel. As of March 1, 2000, MCC owed a total of approximately
$6.3 million under such lease and debt financing arrangements, including
approximately $1.4 million which is past due. In December 1999, Berthel entered
into a Standstill Agreement with the Company. Under the Standstill Agreement,
Berthel indicated its intention to form a creditors committee to represent the
interests of Berthel and other creditors of the Company. The Company agreed to
provide the creditors committee with access to information regarding the Company
and its business and to advise the creditors committee in advance regarding
certain significant corporate developments. The creditors committee may also
demand that the Company take certain actions with respect to the Company's
assets and business. The members of the creditors committee agreed to forebear
from taking actions to collect past due debt owed by the Company in the absence
of the unanimous approval of the creditors committee. As of March 20, 2000, the
Company and Berthel are the only parties to the Standstill Agreement and a
creditors committee has not been formed.

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OPTIONS TO ACQUIRE ACNET. The Company has an option to acquire
Intercarrier Transport Corporation, the holder of 99% of the outstanding shares
of AcNet Mexico which expires on August 31, 2001. The Company's option to
acquire AcNet USA expired on December 31, 1999. The options provide for an
aggregate purchase price of 2,325,000 shares of the Company's common stock,
$200,000 in closing costs and an additional $550,000 to pay off certain debt and
accounts payable. In light of the proposed merger transaction between the
Company and Floragraph, the Company is currently not pursuing its options to
acquire the AcNet entities. However, the Company believes that a future
transaction with the AcNet entities remains a possible alternative for the
Company. As of December 31, 1999, the Company had invested $4.7 million in the
AcNet entities, including loans, interest and acquisition costs. As a result of
the Company's decision not to currently pursue an acquisition of the AcNet
entities and due to cash flow difficulties being experienced by the AcNet
entities, the Company recorded a $3.7 million asset write-down in 1999 due to
the uncertainty of ultimate recovery of its investment. The Company is
currently negotiating with the AcNet entities regarding the status of the
Company's investments and the proposed acquisition of the AcNet entities,
although no assurance can be given as to the outcome of this matter.

MURDOCK TECHNOLOGY SERVICES. MTS was formed as a division of the Company
in 1998 to provide database profit management services and other value added
services to the hospitality telecommunications management market. MTS's
principal product, the MCC Telemanager(TM), is a proprietary software and
hardware product created to help manage telecommunication installations and
services in the hospitality market. MTS accounted for approximately 11.4% of
the Company's revenues for the year ended December 31, 1999. In February 2000,
the Company entered into a Rental Agreement with TeleManager.net providing for
the operation of the Company's Telemanager system by TeleManager.net in exchange
for monthly rental payments to the Company. The Company also entered into a
memorandum of understanding to negotiate a sale of certain assets of MTS to
TeleManager.net. TeleManager.net is owned by Colin P. Halford, a current
director and a former executive officer of the Company, and Bill Wharton, a
former executive officer of the Company.

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THE COMPANY'S PRINCIPAL BUSINESS UNITS

PIC/ATN OPERATOR SERVICES. PIC/ATN offers telecommunications services to
payphone operators, consumer service providers, hotels, aggregators of operator
service traffic and other institutions in the United States and Mexico. PIC and
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 100,000
completed calls and 600,000 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, 1999, PIC/ATN
provided telecommunications services to and maintained site contracts with
approximately 99 customers throughout the United States, compared to 207
customers at December 31, 1998. Each customer may represent from one to 2,000
telephone numbers that are processed by PIC/ATN. The total size of PIC/ATN's
database decreased from approximately 17,000 telephone numbers at December 31,
1998 to approximately 16,000 telephone numbers at December 31, 1999.

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, 1999, Incomex provided telecommunications services
to more than 85 hotel and motel resort properties representing approximately
13,250 rooms, compared to approximately 95 hotel and motel resort properties
representing approximately 15,000 rooms at December 31, 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.

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 payphone markets in Mexico. The Company's 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" payphones,

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hotel and other telephone systems by using special codes such as 10-ATT, 10-10
or 1-800 phone numbers. The Company believes that competition in its markets is
based principally on price, quality, reliability and customer service. Each of
the Company's business units may face competition from companies with greater
financial, technical, marketing and other resources than the Company. There can
be no assurance that the Company will be able to compete successfully in its
markets.

SIGNIFICANT CUSTOMERS

During 1998, the Company derived approximately 12% and 24% of its revenues
from two customers for PIC/ATN's call processing services. During the year
ended December 31, 1999, the Company experienced a significant increase in bad
debt relating to the Company's largest customer and recorded bad debt of $5.6
million in excess of historical amounts relating to this customer. The Company
derived approximately 39.0% of its revenues from this customer in 1999. In
January 2000, the customer and the Company terminated the service provided by
the Company for a significant portion of the customer's business relating to the
call traffic associated with the bad debt. The Company's second largest
customer in 1998 terminated its relationship with the Company effective June
1999. The Company derived approximately 14.8% of its revenue from this customer
in 1999. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

SALES AND MARKETING

The Company's sales efforts are conducted largely by its internal sales
force.

PIC/ATN. PIC/ATN has an internal sales staff which consisted of one person
as of December 31, 1999.

INCOMEX. Incomex has an internal sales staff which consisted of three
persons as of December 31, 1999. Incomex's internal sales force is supplemented
by five external sales agents.

INTELLECTUAL PROPERTY

The Company does not currently have any material patent or trademark
registrations. The Company principally relies on trade secrets and proprietary
know-how in the operation of its business.

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REGULATION

OVERVIEW. The Company's 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. The Company holds various federal and state regulatory
authorizations.

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. The Company does not believe
that the Telecommunications Act has had a significant effect on the Company's
operations.

The Company also makes informational filings with the FCC with respect to
all tariffs charged for automated call processing and long distance 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 December 31,
1999, the FCC had not commented on or challenged the Company's tariffs.

In December 1999, PIC/ATN received notice of past due amounts owed to the
Universal Service Administrative Company ("USAC") for a universal service fund
("USF") fee. A carrier of interstate/intrastate calls is required to pay a USF
fee based on a percentage of total call revenue. The USF fee is applicable to
all calls carried after January 1, 1997. The notice was the first time that
management became aware of any liability to this agency. Management believed
that the billing and collection firm referred to above was charging the
end-users the USF fee and remitting amounts owed to the USAC in a similar method
as with federal and state taxes. A demand letter was sent on behalf of PIC/ATN
to the billing and collection firm for payment. The billing and collection firm
responded that it has collected and remitted the USF fees to PIC/ATN.
Management continues to believe that the billing and collection firm has not
remitted these amounts, but as the carrier, PIC/ATN is legally responsible to
pay the USF fee.

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Notwithstanding management's belief that the prior billing and collection
firm was contractually required to collect and remit the USF fees to USAC, in
December 1999, the Company recorded a $1,700,000 liability for USF fees from
1997 through 1999 which represents the period of time the liability is the
responsibility of PIC/ATN. PIC/ATN currently is trying to resolve the issue and
gain temporary relief from the 15-day payment demand made by USAC which expired
on March 16, 2000 for approximately $810,000 of the fees. PIC/ATN may also be
liable for penalties including $110,000 for any single violation of nonpayment
of USF fees up to a maximum of $1.1 million for any continuing violation. No
liability for penalties, if any, has been recorded in the consolidated financial
statements. In addition, the FCC may revoke a carrier's operating authority for
failure to pay such fees.

STATE REGULATION. The Company is also subject to various state laws and
regulations. Most public utilities commissions subject alternative operator and
call processing service providers such as the Company 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, the Company also is 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). The Company also is
required to update or amend its tariffs when it adjusts its rates or adds new
products, and is subject to various reporting and record-keeping requirements.
Accordingly, each time the Company changes its tariffs with respect to
intrastate services, it 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 the Company's compliance with applicable laws or
regulations.

EMPLOYEES

As of December 31, 1999, MCC had 87 full-time employees and 48 part-time
employees, including 62 full-time employees and 48 part time employees at
PIC/ATN, eight full-time employees at Incomex, 12 full-time employees at MTS and
five full-time employees at its corporate headquarters. The Company believes

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its relationships with its employees are good. None of the Company's employees
is subject to a collective bargaining agreement.

ITEM 2. DESCRIPTION OF PROPERTY

MCC maintains its principal business offices in Cedar Rapids, Iowa, where
it owns and occupies approximately 8,000 square feet of combined office and
warehouse space, subject to a first mortgage held by Venture Investments, an
unrelated third party. In February 2000, the Company listed this property for
sale and the Company intends to move its corporate staff to a smaller facility
during the second quarter of 2000. The Company expects the staff of
TeleManager.net to move by March 31, 2000.

The Company also has a Harris Model 2020 switching center in Mobile,
Alabama, where it has purchased an office building with 33,000 square feet,
subject to a first mortgage held by Compass Bank, of which 19,800 square feet is
currently occupied by Actel.

The following sets forth certain information with respect to the
significant facilities leased by the Company through PIC/ATN and Incomex.
<TABLE>
<CAPTION>

CURRENT
APPROX. MONTHLY
LOCATION SQUARE FOOTAGE RENT LESSOR LEASE TERMINATION
- ---------------------------- -------------- -------- ---------- -----------------
<S> <C> <C> <C> <C>
Austin, Texas. . . . . . . . 2,100 $ 3,240 Kucera May 31, 2000

Huntington Beach, California 850 $ 1,223 MUAA, Inc. August 1, 2000

</TABLE>

ITEM 3. LEGAL PROCEEDINGS

A lawsuit was filed in Superior Court of the State of California on October
20, 1999 claiming conspiracy to defraud, fraud and deceit, and conversion
against several defendants, including ATN Communications, Inc. ("ATN"), in
connection with an Internal Operator Services Agreement between the plaintiffs
and defendant Paramount International Telecommunications, Inc. ("Paramount").
The Internal Operator Services Agreement sets out that Paramount will provide
(among other things) calling services and billing and collection of the charges
through local exchange carriers, and Paramount would deduct agreed upon fees for
its services and remit the balance to the plaintiffs. Paramount allegedly
contracted out operator and billing services with ATN from May 1998 until
present. In addition to other claims against Paramount, the plaintiffs complain
that Paramount and ATN conspired to falsify call charge reports being sent to
the plaintiffs by underreporting the amount of charges billed to the end user
and keeping the

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monies generated therefrom, thereby damaging the plaintiffs for no less than
approximately $280,000. The plaintiffs also seek punitive damages in an
unspecified amount. ATN filed its response on January 4, 2000. ATN disputes
this claim and intends to vigorously defend its position, although no assurances
can be given as to the outcome of this matter.

In the normal course of business, the Company also may be involved in
various legal proceedings from time to time. Except as set forth above, the
Company does not believe it is currently involved in any claim or action the
ultimate disposition of which would have a material adverse effect on the
Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.

PART II
-------

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

HISTORICAL TRADING INFORMATION AND DIVIDEND POLICY

The Common Stock trades on the Over the Counter Bulletin Board under the
symbol "MURC" and the Company's Redeemable Common Stock Purchase Warrants
("Warrants") trade on the Over the Counter Bulletin Board under the symbol
"MURCW." The following table sets forth the high and low bid quotations for the
Common Stock and Warrants as reported on the Over the Counter Bulletin Board.
Such transactions reflect 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 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
Second. . . 4.13 2.75 0.63 0.19
Third . . . 3.88 2.88 0.60 0.24
Fourth. . . 3.25 1.38 0.88 0.10
</TABLE>

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At March 1, 2000, there were approximately 149 holders of record of Common
Stock.

The Company has not paid any cash dividends on the Common Stock in the last
three years. Certain of the Company's current financing agreements contain
restrictions on the payment of dividends. The Company intends to retain any
earnings for use to repay its past due debt and in the operation of its business
and, therefore, does not anticipate paying any cash dividends in the foreseeable
future.

RECENT SALES OF UNREGISTERED SECURITIES

During 1999, 197,872 warrants were converted to 135,379 shares of the
Company's Common Stock in various cashless exercises. 193,872 of these warrants
were held by individuals who also held notes payable from the Company. 83,872
of these warrants were converted into the same number of shares of Common Stock
and reduced such notes payable by $116,000 and accrued interest by $31,000. The
remaining warrants were converted to 51,507 shares of Common Stock. The shares
of Common Stock were issued in private placements exempt from the registration
requirements of the Securities Act pursuant to section 4(2) of the Securities
Act.

In October 1999, 1,300 warrants were exercised to purchase 2,688 shares of
the Company's common stock at an exercise price of $3.14 per common share
resulting in total proceeds to the Company of $8,448. The shares of common
stock were issued in a private placement exempt from the registration
requirements of the Securities Act pursuant to section 4(2) of the Securities
Act.

During the second quarter of 1999 the Company issued notes payable to
related parties totaling $1,975,000. In December 1999, these notes were amended
to bear interest at 14% from the original date of issuance. The principal and
accrued interest on these notes became due on November 30, 1999 and the notes
bear interest at the default rate of 18% from such date. In connection with the
amendment of the notes in December 1999, warrants to purchase 395,000 shares of
the Company's common stock were issued in relation to the notes at exercise
prices ranging from $3.75 to $4.13. The warrants expire at varying times during
December 2003. Also, during the second quarter, the Company issued a note
payable to a related party in the amount of $500,000. This note bears interest
at 14% and is due with accrued interest on May 19, 2001. In December 1999, a
warrant to purchase 100,000 shares of the Company's common stock was issued in
relation to this note at an exercise price of $3.50 per share. This warrant
expires December 6, 2003. The warrants were issued in private placements exempt
from the registration requirements of the Securities Act pursuant to section
4(2) of the Securities Act.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

MCC is a provider of 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.

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From its inception in 1989 through 1994, the Company's primary source of
revenue was generated by providing operator services to the hospitality industry
as an automated call processing and long distance 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), the Company 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 the Company under the Lodging Partnership with AT&T, the Company
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, the Company recorded a one-time gain in the fourth
quarter of 1998 of $453,000. Revenues to the Company from the AT&T agreement
ended in the fourth quarter of 1998. The Company currently conducts its
business through two principal business units: (i) PIC/ATN, which provides
operator services and related valued added services, and (ii) Incomex, which
provides billing and collection services for calls to the United States from
resort hotels in Mexico. In February 2000, the Company entered into a Rental
Agreement with TeleManager.net providing for the operation of the Company's
Telemanager system by TeleManager.net in exchange for monthly rental payments to
the Company. The Company also entered into a memorandum of understanding to
negotiate a sale of certain assets of the Company's MTS division to
TeleManager.net.

As of the date of this report, the Company has a large amount of past due
debt and has also experienced significant operating and cash flow difficulties
at its largest business unit, PIC/ATN. The Company also entered into a
non-binding letter of intent in February 2000, to negotiate a merger transaction
with Floragraph, which owns Flower.com, an online floral web site that services
hotels and other institutions with its pre-paid "FlowerCard" franchise. If
completed, the merger with Floragraph would position the combined company as an
Internet provider of flowers, gifts and other e-commerce merchandise.

No assurances can be given that the Company will be successful in its
restructuring efforts. The ability of the Company to successfully complete its
restructuring efforts will have a material effect on the Company's results of
operations and financial condition in 2000. Any inability of the Company to
repay or restructure its past due debt would likely prevent the Company from
continuing as a going concern.

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RESULTS OF OPERATIONS

The following table sets forth statements of operations items and the
percentages that such items bear to revenues:
<TABLE>
<CAPTION>

Years ended December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues 100 % 100 %
Cost of sales 89 % 67 %
Selling, general, and administrative 21 % 22 %
Depreciation and amortization 7 % 5 %
Impairment of property and equipment and intangible assets 16 % --
AcNet bad debt and acquisition expenses 10 % --
Total operating expenses 54 % 27 %
Operating income (loss) (43)% 6 %
Gain on AT&T contract buyout -- 1 %
Interest expense 10 % 7 %
Other income 2 % --
Net (loss) (51)% --
</TABLE>

The information for the year ended December 31, 1998 in the preceding
table includes statement of operations data for Incomex after the consummation
of the Incomex acquisition on February 13, 1998.

COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998

REVENUES - Consolidated revenues increased $1.7 million, or 5.2%, to $35.7
--------
million for the year ended December 31, 1999 from $34.0 for the year ended
December 31, 1998. Revenues from PIC/ATN increased $2.3 million to $23.1
million for the year ended December 31, 1999 from $20.8 million for the year
ended December 31, 1998 due to increases in the consumer alternative dialing
revenues, partially offset by a decline in revenues from a principal customer as
discussed below.

During 1998, PIC/ATN's operator services business unit began providing
services to a principal customer for long distance services originating from
Mexico. During 1998, the Company provided full service in connection with the
customer's calls including billing and collections and accordingly recognized as
revenues the value of such billed services. The results were that 1998 revenues
from this customer totaled $4.2 million or 12.0% of the total revenues of the
Company. In the first quarter of 1999, the Company modified its relationship
with the customer whereby calls were processed and billing records were
delivered to the customer for submission to the customer's billing service. The
Company received fees for its services that were recognized as revenues rather
than the

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billed value of the calls. Accordingly, the revenues associated with this
customer included in the results for the year ended December 31, 1999
represents a blending of full service revenues, representing the period from
January 1 through February 4, 1999, and fee revenues from February 5 through
June 30, 1999. Total revenues relative to the customer for the year ended
December 31, 1999 were $5.3 million or 14.8% of the total revenues of the
Company for the year. Effective June 1999, this customer terminated its
relationship with PIC/ATN. Accordingly, this relationship is not expected to
produce further revenues and margins for the Company. The Company's gross
profit related to this customer in 1999 was $159,000.

During 1998, PIC/ATN's operator service business unit derived revenues from
its largest customer that totaled $8.4 million or 24% of total revenues of the
Company, compared with $14.0 million or 39% in 1999. PIC/ATN terminated a
significant portion of the service provided to this customer in January 2000 due
to the significant bad debt expenses being experienced related to such calls.
Accordingly, this relationship is expected to produce significantly lower
revenues for the Company.

Revenues from Incomex increased $0.6 million to $8.5 million for the year
ended December 31, 1999 from $7.9 million for the year ended December 31,1998.
The increase was primarily due to an increase during 1999 in the number of rooms
under contract with Mexican resort hotels and a shift toward Mexican resort
hotels with greater call traffic to the United States, partially offset by a
decline in revenue per call.

Revenues from MTS declined $1.2 million to $4.1 million for the year ended
December 31, 1999 from $5.3 million for the year ended December 31, 1998 due to
the termination of the Lodging Partnership Program with AT&T in October 1998.
Call processing revenues generated by MTS through its Lodging Partnership
Program decreased from $2.1 million for the year ended December 31, 1998 to none
for the year ended December 31, 1999. MTS's revenue for the year ended December
31, 1999 consisted of revenues from its Telemanager services and equipment
sales. In February 2000, the Company entered into a Rental Agreement with
Telemanager.net providing for the operation of the Company's Telemanager system
by Telemanager.net in exchange for monthly rental payments to the Company. The
Company also entered into a Memorandum of Understanding to negotiate a sale of
certain assets of MTS to Telemanager.net. Accordingly, this business unit is
expected to provide significantly lower revenues, margins and operating losses
for the Company. The Company's operating loss for this business unit in 1999
was $1.6 million.

COST OF SALES - Consolidated cost of sales increased $9.2 million, or
---------------
40.4%, to $32.0 million for the year ended December 31, 1999 from $22.8 million
for the year ended December 31, 1998. Consolidated cost of sales, as a
percentage of revenues, was 89.5% for the year ended December 31, 1999 compared
to 67.0%

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for the year ended December 31, 1998. The increase in cost of sales is
primarily attributable to the PIC/ATN segment which experienced higher cost of
sales as a percentage of revenues due to a $5.6 million of bad debt in excess of
historical amounts as discussed below for the year ended December 31, 1999.

During 1999, PIC/ATN recorded bad debt in excess of historical amounts
totaling approximately $5.6 million relating to collection issues for one type
of call processing service provided by PIC/ATN to its largest customer .
PIC/ATN uses an independent billing and collection firm, which advances funds to
PIC/ATN, for calls handled by PIC/ATN, before collecting from the end-user by
billing through a Regional Bell Operating Company or other local telephone
company. This billing and collection firm reconciles amounts ultimately
collected from the end-user with the initial advances made and remits the
additional amount collected, or reduces advances for any deficiency, to PIC/ATN
in future periods. This process can take 12-18 months to complete. PIC/ATN
uses its historical experience to estimate the ultimate collections to be
received. During 1999, PIC/ATN experienced an amount of reductions in these
payments significantly in excess of PIC/ATN's and industry historical
experience.

Due to the high level of these uncollectable amounts, PIC/ATN switched to
another billing and collection firm in November 1999. The prior billing and
collection firm has alleged that PIC/ATN had breached its contract and placed a
lien on the collections from calls processed by the replacement billing and
collection firm. At December 31, 1999, the Company recorded an allowance for
100% of all receivables from both billing and collection firms due to the
uncertainty regarding their collection. PIC/ATN may be liable for additional
amounts beyond the allowance recorded. Management believes that the
uncollectable amounts are so far in excess of any reasonable level that either
the billing and collection firm or the Regional Bell Operating Company through
which most of the calls were billed is likely erroneously determining the
uncollectable amounts. The Company expects that PIC/ATN will refuse to pay any
additional amounts to the former billing and collection firm and the matter will
likely be resolved through litigation. No liability, if any, has been recorded
in the consolidated financial statements with respect to this matter.

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PIC/ATN to the billing and collection firm for payment. The billing and
collection firm responded that it has collected and remitted the USF fees to
PIC/ATN. Management continues to believe that the billing and collection firm
has not remitted these amounts, but as the carrier, PIC/ATN is legally
responsible to pay the USF fee.

Notwithstanding management's belief that the prior billing and collection
firm was contractually required to collect and remit the USF fees to USAC, in
December 1999, the Company recorded a $1.7 million liability for USF fees from
1997 through 1999 which represents the period of time the liability is the
responsibility of PIC/ATN. PIC/ATN currently is trying to gain temporary relief
from the 15-day payment demand made by USAC which expired on March 16, 2000 for
approximately $810,000 of the fees. PIC/ATN may also be liable for penalties
including $110,000 for any single violation of nonpayment of USF fees up to a
maximum of $1.1 million for any continuing violation. No liability for
penalties, if any, has been recorded in the consolidated financial statements.
In addition, the FCC may revoke PIC/ATN's operating authority for failure to pay
such fees.

Excluding the impact of the $5.6 million of bad debt in excess of
historical amounts and universal service fees, consolidated cost of sales, as a
percentage of revenues, was 69% for the year ended December 31, 1999 compared to
67% for the year ended December 31, 1998. The increase in consolidated cost of
sales as a percentage of revenue is primarily attributable to higher costs at
Incomex for commissions and bad debt and lower revenues per call in the current
year.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Consolidated selling,
-----------------------------------------------
general and administrative expense decreased $54,000, or 0.7%, to $7.4 million
for the year ended December 31, 1999 from $7.5 million for the year ended
December 31, 1998. Selling, general and administrative expense, as a percentage
of revenues, was 20.7% for the year ended December 31, 1999 compared to 22.0%
for the year ended December 31, 1998.

DEPRECIATION AND AMORTIZATION EXPENSE - Consolidated depreciation and
----------------------------------------
amortization increased $509,000, or 27.5%, to $2.4 million for the year ended
December 31, 1999 from $1.9 million for the year ended December 31, 1998. The
increase is primarily the result of additional goodwill of $7.2 million recorded
in the fourth quarter of 1998 for the settlements of the earn-outs in connection
with the Company's acquisition of PIC and Incomex, which is being amortized over
the remaining life of the original goodwill. This will decline in future
periods due to the impairments recorded in 1999 (see the discussion below).

IMPAIRMENT OF PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS - The Company
------------------------------------------------------------
periodically reviews long-lived assets and intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of

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these assets may not be recoverable. While revenues have increased for Incomex
and PIC/ATN since acquisition by the Company, the rapidly changing competitive
environments in which the Company operates, the significant bad debts
experienced, the loss of PIC/ATN's two major customers, the declining revenues
per call, and the impact of cash flow constraints on attracting new customers
with prepaid commissions have prevented the Company from significantly
increasing operating profits from levels that existed prior to the acquisition.
Accordingly, in 1999, the Company recorded an impairment write-down for goodwill
of approximately $2.4 million related to Incomex, of approximately $3.0 million
related to PIC/ATN and of approximately $0.3 million related to other assets,
primarily telecommunications equipment, based on the expected fair value of such
assets.

ACNET BAD DEBT AND ACQUISITION EXPENSE - As of December 31, 1999, the
-------------------------------------------
Company had an investment of $4.7 million consisting of $3.7 million of loans,
$265,000 of interest and $747,000 of costs incurred either related to the
proposed acquisition of the AcNet entities or paid on behalf of the AcNet
entities. In light of the proposed merger with Floragraph, the Company is
currently not pursuing the options to acquire the AcNet entities. As a result
and due to cash flow difficulties being experienced by the AcNet entities, the
Company recorded a $3.7 million asset write-down in 1999 due to the uncertainty
regarding the ultimate recovery of the investment and notes (see Note 5 in Notes
to Consolidated Financial Statements.)

GAIN ON AT&T CONTRACT BUYOUT - The Company'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, the Company recorded a
one-time gain in the fourth quarter of 1998 of $453,000 representing the
commissions assumed by AT&T less the write-off of owned equipment at the
existing customers properties.

INTEREST EXPENSE - Consolidated interest expense, including amortization of
----------------
debt discount, increased $1.3 million, or 52.1%, to $3.7 million for the year
ended December 31, 1999 from $2.4 million for the year ended December 31, 1998.
The increase was primarily due to additional debt incurred related to the
investments in Actel and the AcNet entities, the costs associated with the
earn-out settlements with respect to the acquisitions of PIC/ATN and Incomex,
the Company's lower operating profit and general working capital purposes, and
to an increase in the interest rates on the past due debt. As a result, higher
interest expense is expected in future periods.

OTHER INCOME - Consolidated other income increased $650,000 to $659,000 for
------------
the year ended December 31, 1999 from $9,000 for the year ended December 31,
1998. The increase was primarily due to Incomex recording $341,000 as other

20
<PAGE>

income in 1999 as part of a settlement award based on an arbitrator's ruling on
the proceedings Incomex had commenced against Eilco. During the year ended
December 31, 1999 the Company recorded $245,000 as other income for dividends
accrued on its investment in Actel.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1999, the Company's current liabilities of $24.2 million
exceeded current assets of $1.9 million resulting in a working capital deficit
of $22.3 million. During 1999, the Company used $948,000 in cash for operating
activities, and used $7.7 million in investing activities. The Company received
proceeds from new debt financing of $9.5 million and repaid borrowings on notes
payable and made payments on capital lease obligations of $2.5 million. These
activities resulted in a decrease in available cash of $1.6 million for the 12
months ended December 31, 1999.

The Company's debt and capital lease obligations as of December 31, 1999,
including the current portion thereof, totaled $22.2 million compared to $15.3
million at December 31, 1998. The Company's current debt and lease obligations
as of December 31, 1999 totaled $17.0 million compared to $9.3 million at
December 31, 1998.

Although in January 2000 PIC/ATN terminated the service provided for the
call traffic associated with the billing and collection issue for its largest
customer, no assurance can be given that PIC/ATN will not continue to experience
similar billing and collection issues in future periods. Any continuation of
this issue could have a material adverse effect on the Company's cash flows and
financial condition. PIC/ATN's cash flows in 2000 may also be adversely
affected by the lien placed by PIC/ATN's former billing and collection firm on
collections from calls processed by a subsequent billing and collection firm.
The Company has also recorded a $1,700,000 liability for USF fees from 1997
through 1999, and has received a payment demand for the first $810,000 of these
fees with a deadline which expired on March 16, 2000.

The Company's principal sources of capital to date have been public and
private offerings of debt and equity securities and lease and debt financing
arrangements with Berthel to purchase telecommunications equipment. As of
December 31, 1999, the Company has not made the majority of the June through
December 1999 payments to Berthel totaling $1,022,000. Berthel only has the
right to demand that the Company cure this violation, but has not made such a
demand as of March 20, 2000.

21
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Subsequent to year end and through March 20, 2000, the Company had borrowed
a total of $306,000 with an affiliate of Berthel. The borrowings are due on
demand and bear interest at 12%. Warrants will also be issued equal to 200% of
the amount of the loan. The exercise price of such warrants will be the bid
price of the Company's stock at the close of business on the day the funds were
received by the Company.

As of March 1, 2000, the Company was past due in the payment of
approximately $17.8 million of principal and interest payments, including $1.4
million in lease and debt financing to Berthel. The Company was also past due
with its trade vendors in the payment of approximately $1.3 million as of March
1, 2000. The amount of past due debt as of March 1, 2000, does include the
Company's $2.0 million bridge loan from New Valley. The Company had been past
due on this loan effective July 21, 1999. On December 17, 1999, the Company
amended its agreement with New Valley to extend the term of its $2.0 million
bridge loan. Under the amendment, the principal amount of the bridge loan is
due in six monthly installments beginning on January 17, 2000, together with
accrued interest. The first five installments are $200,000 and the final
installment on June 17, 2000 is $1,000,000. New Valley also waived all prior
defaults by the Company and the interest rate under the note was reset to 12%
per annum (14% per annum upon a default) from the original date of the bridge
loan. The bridge loan is secured by a collateral pledge in the stock of the
Company's subsidiaries, and a security interest in the unencumbered assets of
the Company and its subsidiaries. As of March 20, 2000, the Company was past
due on the January, February and March payments under the Note with New Valley.
However, on March 29, 2000, New Valley waived this default. The effect of this
waiver is not reflected in any of the past due debt disclosures because such
disclosures are as of March 1, 2000 or March 20, 2000.

The Company's existing capital and anticipated funds from operations will
not be sufficient to meet its anticipated cash needs for working capital and
debt obligations for 2000. The Company estimates that it will need at least $25
million during 2000 to repay indebtedness that is either past due or will become
due in 2000, including accrued interest, past due amounts with trade vendors and
USF fees payable. In addition to cash flows from operations, if any, the
Company believes that the possible sources to fund its cash requirements include

22
<PAGE>
raising debt or equity financings, extending or converting existing debt and/or
the sale of significant parts of the Company's assets. The Company has engaged
in discussions with potential investors regarding proposed debt or equity
financings. The Company has entered into an advisory agreement with an
investment bank which is an affiliate of Berthel. However, no assurance can be
given that the Company will be able to raise adequate funds through such
financings or generate sufficient cash flows to meet the Company's cash needs.
If the Company is unable to raise the necessary funds to repay its past due
debt, its creditors may seek their legal remedies. Any action by the Company's
creditors to demand repayment of past due indebtedness is likely to have a
material adverse effect on the Company's future performance, financial condition
and ability to continue as a going concern. The incurrence of any material
liability that could result from the resolution of the various contingent
liabilities discussed previously is likely to have a similar result. See
"Forward-Looking Statements" below.

FORWARD-LOOKING STATEMENTS

This report contains statements, including statements of management's
belief or expectation, which may be forward-looking within the meaning of
applicable securities laws. Such statements are subject to known and unknown
risks and uncertainties that could cause actual future results and developments
to differ materially from those currently projected. Such risks and
uncertainties include, among others, the following:

- - the Company's access to adequate debt or equity capital to meet the
Company's operating and financial needs and to repay its past due debt,
and the Company's ability to continue as a going concern if it is
unable to access adequate financing;

- - the Company's ability to complete its proposed merger transaction with
Floragraph and the terms of such transaction if completed;

- - the Company's ability to restructure its operations and to realize
potential value from its operating units and investments;

23
<PAGE>
- - the effects of the bad debt issues relating to PIC/ATN on the Company's
results of operations and financial condition in future periods;

- - the Company's ability to negotiate an arrangement regarding its investment
in and options to acquire the AcNet entities;

- - the possibility of additional impairment write downs of assets, including,
without limitation, of goodwill relating to the PIC/ATN or Incomex
acquisitions;

- - the Company's ability to respond to competition in its markets;

- - the Company's ability to sell its corporate headquarters facility during
the second quarter of 2000;

- - the outcome of pending litigation;

- - changes in, or failure to comply with, governmental regulation, including
telecommunications regulations;

- - the effect of the alleged liability of PIC/ATN for up to $1.7 million of
USF fees;

- - general economic conditions in the Company's markets;

- - the risk that the Company's analyses of these risks could be incorrect
and/or the strategies developed to address them could be unsuccessful; and

- - various other factors discussed in this Annual Report on Form 10-KSB.

The Company will not update the forward-looking information to reflect
actual results or changes in the factors affecting the forward-looking
information.

The forward-looking information referred to above includes any matters
preceded by the words "anticipates," "believes," "intends," "plans," "expects"
and similar expressions as they relate to the Company and include, but are not
limited to:

- - expectations regarding the Company's financial condition and liquidity, as
well as future cash flows;

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- - expectations regarding sales growth, sales mix, gross margins and related
matters with respect to operating results; and

- - expectations regarding alternatives to restructure the Company's business
and reduce its overall debt.

ITEM 7. FINANCIAL STATEMENTS

The consolidated financial statements of the Company and notes thereto are
filed under this item beginning on page F-1 of this report.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III
--------

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Information regarding the executive officers and directors of the Company
is incorporated herein by reference to the discussions under "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement for the 2000 Annual Meeting of Shareholders which will
be filed on or before May 1, 2000.

ITEM 10. EXECUTIVE COMPENSATION

Incorporated herein by reference to the discussion under "Executive
Compensation" in the Company's Proxy Statement for the 2000 Annual Meeting of
Shareholders which will be filed on or before May 1, 2000.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated herein by reference to the discussion under "Security
Ownership" in the Company's Proxy Statement for the 2000 Annual Meeting of
Shareholders which will be filed on or before May 1, 2000.

25
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated herein by reference to the discussions under "Executive
Compensation--Employment Agreements" and "Certain Relationships and Related
Transactions" in the Company's Proxy Statement for the 2000 Annual Meeting of
Shareholders which will be filed on or before May 1, 2000.

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

a. Exhibits:
--------
<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 Common Stock Purchase Warrant
Agreement between the Company and Firstar Trust
Company. (1)

4.2 Form of Redeemable Warrant. (1)

4.3 First Amendment to Common Stock Purchase
Warrant Agreement, dated as of September 30, 1999,
between the Company and Firstar Trust Company.

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)

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)

26
<PAGE>

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)

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)

27
<PAGE>

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 Agreement, dated as of May 21, 1998, among the
Company, MCC Acquisition Corp., Priority
International Communications, Inc., PIC Resources
Corp., Wayne Wright, Bonner Hardegree and ATN
Communications, Inc. (9)

10.15 Earn-Out Settlement Agreement, dated as of
December 7, 1998, among the Company, MCC
Acquisition Corp., Priority International
Communications, Inc., PIC Resources Corp., Wayne
Wright, Bonner Hardegree and ATN
Communications, Inc. (7)

10.16 Stock Purchase Agreement, dated as of February 13,
1998, among MCC Acquisition Corp., Incomex, Inc.
and the Shareholders of Incomex, Inc. (10)

10.17 Earn-Out Settlement Agreement, dated as of
December 1, 1998, among the Company, MCC
Acquisition Corp., Incomex, Inc. and the
Shareholders of Incomex, Inc. (7)

10.18 Murdock Communications Corporation 1993 Stock
Option Plan. (1) (11)

10.19 Murdock Communications Corporation 1997 Stock
Option Plan, as amended. (7) (11)

10.20 Amended and Restated Employment Agreement,
dated as of October 1, 1998, by and between the
Company and Guy O. Murdock. (7) (11)

10.21 Employment Agreement, dated as of January 1,
1999, by and between the Company and Colin P.
Halford. (7) (11)

10.22 Amended and Restated Employment Agreement,
dated as of October 1, 1998, by and between the
Company and Thomas E. Chaplin. (7) (11)

10.23 Employment Agreement, dated as of January 1,
1999, by and between the Company and Bill R.
Wharton. (7) (11)

28
<PAGE>

10.24 Employment Agreement, dated as of November 1,
1998, by and among the Company, Priority
International Communications, Inc., PIC Resources
Corp. and Bonner B. Hardegree. (7) (11)

10.25 Employment Agreement, dated as of November 16,
1998, by and between the Company and Paul C.
Tunink. (7) (11)

10.26 Form of Lease Agreement. (12)

10.27 Note and Security Agreement, Note #079-21846-00,
dated as of October 28, 1997, by and among PIC
Resources Corp., ATN Communications, Inc.,
Priority International Communications, Inc. and
Berthel Fisher & Company Leasing, Inc. (12)

10.28 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. (12)

10.29 Stock Purchase Warrant dated June 21, 1999 from
the Company to New Valley Corporation. (12)

10.30 Fixed Rate Senior Note dated June 21, 1999 from the
Company to New Valley Corporation. (12)

10.31 Registration Rights Agreement, dated as of June 21,
1999, between the Company and New Valley
Corporation. (12)

10.32 Option to Merge Agreement, dated as of June 9,
1999, among MCC Acquisition Corp., the
shareholders of Intercarrier Transport Corporation,
and Intercarrier Transport Corporation. (13)

10.33 Option to Merge Agreement, dated June 9, 1999,
among MCC Acquisition Corp., the shareholders of
AcNet USA, Inc. and AcNet USA, Inc. (13)

10.34 Amendment to Investment Agreement, dated as of
June 21, 1999, among ACTEL Integrated
Communications, Inc., the Company, John Beck and
Richard Courtney. (13)

29
<PAGE>

10.35 Waiver and First Amendment to Note and Warrant
Purchase Agreement, dated as of December 17,
1999, among the Company, Priority International
Communications, Inc., ATN Communications, Inc.,
Incomex, Inc., MCC Acquisition Corp. and New
Valley Corporation.

21 Subsidiaries.

24 Power of Attorney (included as part of the signature
page hereof).

27 Financial Data Schedule.

<FN>

(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.

(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) Management contract or compensatory plan or arrangement.

(12) Filed as exhibit to the Company's registration statement on Form SB-2
(File No. 333-78399) and incorporated herein by reference.

(13) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1999 (File No. 000-21463) and incorporated herein
by reference.

(b) Reports on Form 8-K.
</TABLE>

The Company did not file any reports on Form 8-K for the three months ended
December 31, 1999.

30
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

MURDOCK COMMUNICATIONS CORPORATION

By /s/ Eugene Davis
------------------------------------------
Eugene Davis
Acting Chief Executive Officer

Date: March 30, 2000

Each person whose signature appears below hereby appoints Eugene Davis and
Paul C. Tunink, and each of them individually, his true and lawful
attorney-in-fact, with power to act with or without the other and with full
power of substitution and resubstitution, in any and all capacities, to sign any
or all amendments to the Form 10-KSB and file the same with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitutes, may lawfully cause
to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

/s/ Eugene Davis Acting Chief Executive March 30, 2000
- ---------------------
Eugene Davis Officer and Director
(Principal Executive Officer)

/s/ Paul C. Tunink Vice President and Chief March 30, 2000
- ---------------------
Paul C. Tunink Financial Officer (Principal
Financial Officer and
Principal Accounting Officer)

31
<PAGE>
Director March 30, 2000
- ---------------------
Steven R. Ehlert

/s/ Thomas E. Chaplin Director March 30, 2000
- ---------------------
Thomas E. Chaplin

/s/ Colin P. Halford Director March 30, 2000
- ---------------------
Colin P. Halford

/s/ David Kirkpatrick Director March 30, 2000
- ---------------------
David Kirkpatrick

/s/ Guy O. Murdock Director March 30, 2000
- ---------------------
Guy O. Murdock

/s/ Wayne Wright Director March 30, 2000
- ---------------------
Wayne Wright
</TABLE>

<PAGE>
MURDOCK COMMUNICATIONS CORPORATION
Consolidated Financial Statements for the
Years Ended December 31, 1999 and 1998 and
Independent Auditors' Report

<PAGE>

MURDOCK COMMUNICATIONS CORPORATION

TABLE OF CONTENTS
<TABLE>
<CAPTION>

PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . . . . . . F-1

CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated Balance Sheets. . . . . . . . . . . . . . . . . F-2

Consolidated Statements of Operations. . . . . . . . . . . . F-3

Consolidated Statements of Shareholders' Equity (Deficiency) F-4

Consolidated Statements of Cash Flows. . . . . . . . . . . . F-5

Notes to Consolidated Financial Statements . . . . . . . . . F-8
</TABLE>

<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders 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,
1999 and 1998, and the related consolidated statements of operations,
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, 1999 and 1998, 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, negative working capital, and shareholders' deficiency 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.

/s/ Deloitte & Touche LLP

Cedar Rapids, Iowa
March 20, 2000

F-1
<PAGE>
MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------
<TABLE>
<CAPTION>

ASSETS (Notes 6, 7 and 18) 1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76 $ 1,722
Accounts receivable, less allowances for doubtful
accounts: 1999 - $3,372; 1998 - $655 (Note 2). . . . . . . . . . . . . . . . 982 1,752
Note receivable (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 -
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . 312 281
--------- ---------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . 1,870 3,755
--------- ---------
PROPERTY AND EQUIPMENT:
Land and building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,446 1,172
Telecommunications equipment . . . . . . . . . . . . . . . . . . . . . . . . . 8,938 9,013
Furniture and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 839 748
--------- ---------
11,223 10,933
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,734) (8,097)
--------- ---------
2,489 2,836
Telecommunications equipment under capital lease,
net of accumulated amortization: 1999 - 3,352;
1998 - $3,326. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 182
--------- ---------
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . 2,610 3,018
--------- ---------
OTHER ASSETS:
Goodwill, net of accumulated amortization:
1999 - $2,004; 1998 - $697 (Notes 1, 3 and 4) . . . . . . . . . . . . . . . 5,002 11,644
Cost of purchased site contracts, net of accumulated amortization:
1999 - $736; 1998 - $670. . . . . . . . . . . . . . . . . . . . . . . . . . 48 174
Other intangible assets, net of accumulated amortization:
1999 - $619; 1998 - $348 . . . . . . . . . . . . . . . . . . . . . . . . . . 197 659
Investments, at cost (Note 5). . . . . . . . . . . . . . . . . . . . . . . . . 4,277 1,500
Prepaid commissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,633 1,704
Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 224
--------- ---------
Total other assets. . . . . . . . . . . . . . . . . . . . . . . . . . 11,169 15,905
--------- ---------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,649 $ 22,678
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Outstanding checks in excess of available balances . . . . . . . . . . . . . $ 104 $ -
Notes payable (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,443 7,401
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,270 1,206
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,010 314
Accrued universal service fund fees (Note 2) . . . . . . . . . . . . . . . . 1,700 -
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,112 1,745
Current portion of capital lease obligations
principally with a related party (Note 12) . . . . . . . . . . . . . . . . 1,553 869
Current portion of long-term debt with related parties (Note 7). . . . . . . 647 828
Current portion of long-term debt, others (Note 7) . . . . . . . . . . . . . 371 199
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 24,210 12,562

LONG-TERM LIABILITIES:
Capital lease obligations principally with a related party,
less current portion (Note 12) . . . . . . . . . . . . . . . . . . . . . . 2,148 3,133
Long-term debt with related parties, less current portion (Note 7) . . . . . 2,122 2,105
Long-term debt, others, less current portion (Note 7). . . . . . . . . . . . 911 725
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 76
--------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 29,413 18,601
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 2 and 12)

SHAREHOLDERS' EQUITY (DEFICIENCY) (Note 1):
8% Series A Convertible Preferred Stock, $100 stated value (Note 8):
Authorized - 1,000,000 shares
Issued and outstanding: 18,920 shares ($1,892 liquidation value) . . . . . . 1,868 1,837
Common stock, no par or stated value (Note 10):
Authorized - 40,000,000 shares (20,000,000 shares in 1998)
Issued and outstanding: 1999 - 10,576,012 shares; 1998 - 10,329,867 shares. 20,259 19,835
Common stock warrants (Note 9):
Issued and outstanding: 1999 - 5,866,591; 1998 - 4,420,763. . . . . . . . . 635 439
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 134 134
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36,660) (18,168)
--------- ---------
Total shareholders' equity (deficiency). . . . . . . . . . . . . . . (13,764) 4,077
--------- ---------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,649 $ 22,678
========= =========
</TABLE>

See notes to consolidated financial statements.

F-2
<PAGE>
MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998 (DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

1999 1998
<S> <C> <C>
REVENUES:
Call processing . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,708 $ 32,387
Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,039 1,601
------------ -----------
Total revenues . . . . . . . . . . . . . . . . . . . . . . 35,747 33,988
------------ -----------

COST OF SALES:
Call processing . . . . . . . . . . . . . . . . . . . . . . . . . . 18,971 18,538
Other cost of sales . . . . . . . . . . . . . . . . . . . . . . . . 1,657 516
Bad debt expense and universal service fund fees (Note 2) . . . . . 11,358 3,711
------------ -----------
Total cost of sales. . . . . . . . . . . . . . . . . . . . 31,986 22,765
------------ -----------

GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,761 11,223
------------ -----------

OPERATING EXPENSES:
Selling, general and administrative expense . . . . . . . . . . . . 7,414 7,468
Depreciation and amortization expense . . . . . . . . . . . . . . . 2,358 1,849
Impairment of property and equipment and intangible assets (Note 1) 5,652 -
AcNet bad debt and acquisition expenses (Note 5). . . . . . . . . . 3,703 -
------------ -----------
Total operating expenses . . . . . . . . . . . . . . . . . 19,127 9,317
------------ -----------

INCOME (LOSS) FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . (15,366) 1,906
------------ -----------

NONOPERATING INCOME (EXPENSE):
Gain on AT&T contract buyout (Note 17). . . . . . . . . . . . . . . - 453
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . (3,691) (2,426)
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 659 9
------------ -----------
Total nonoperating expense . . . . . . . . . . . . . . . . (3,032) (1,964)
------------ -----------
LOSS BEFORE INCOME TAX EXPENSE AND JOINT VENTURE LOSS . . . . . . . . (18,398) (58)

Loss from joint venture . . . . . . . . . . . . . . . . . . . . . . . - 42
Income tax expense (Note 11). . . . . . . . . . . . . . . . . . . . . - 74
------------ -----------
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,398) (174)

Dividends and accretion on 8% Series A Convertible Preferred Stock. . (194) (175)
------------ -----------

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS. . . . . . . . . . . . . $ (18,592) $ (349)
============ ===========

BASIC AND DILUTED NET LOSS PER COMMON SHARE . . . . . . . . . . . . . $ (1.79) $ (.06)
============ ===========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING. . . . . . . . . . . . . . 10,392,940 5,422,783
============ ===========

See notes to consolidated financial statements.
</TABLE>

F-3
<PAGE>

MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1999 AND 1998 (DOLLAR AND SHARE DATA IN THOUSANDS)
- --------------------------------------------------------------------------------
<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, 1998. . . . . . . . . . . 16 $ 1,544 4,458 $ 11,343 2,149 $ 316

Issuance of 8% Series A Convertible
Preferred Stock, net of issuance costs
of $5. . . . . . . . . . . . . . . . . . . . 3 262 - - - -
Issuance of common stock and warrants
in connection with the acquisition of
Incomex (Note 4) . . . . . . . . . . . . . . - - 1,900 2,494 156 30
Exercise of warrants by a related
party. . . . . . . . . . . . . . . . . . . . - - 1,100 1,753 (1,100) (322)
Issuance of warrants in connection with
debt financing with a related party. . . . . - - - - 350 165
Issuance of warrants in connection with
debt financing (Note 6). . . . . . . . . . . - - - - 2,700 221
Issuance of warrants in lieu of director
and consulting fees. . . . . . . . . . . . . - - - - 45 5
Issuance of warrants in lieu of agent
fees to a related party (Note 6) . . . . . . - - - - 121 24
Issuance of common stock in connection
with the acquisition of PIC (Note 3) . . . . - - 2,872 4,245 - -
Accretion to conversion price of 8%
Series A Convertible Preferred Stock . . . . - 31 - - - -
Accrued dividends on 8% Series A
Convertible Preferred Stock. . . . . . . . . - - - - - -
Net loss for 1998. . . . . . . . . . . . . . . - - - - - -
--------------- ------------- --------- ---------- ---------- ----------

BALANCES AT DECEMBER 31, 1998. . . . . . . . . . 19 $ 1,837 10,330 $ 19,835 4,421 $ 439
=============== ============= ========= ========== ========== ==========

Issuance of warrants in connection with
debt financing with related parties (Note 6
and 7) . . . . . . . . . . . . . . . . . . . - - - - 1,195 223
Issuance of warrants in connection with
debt financing with lender (Note 6). . . . . - - - - 500 80
Conversion of notes payable, accrued
interest and related common stock
warrants into common stock . . . . . . . . . - - 84 150 (84) (3)
Conversion of common stock warrants
into common stock. . . . . . . . . . . . . . - - 54 13 (115) (4)
Common stock issued. . . . . . . . . . . . . . - - 2 3 - -
Common stock options exercised by
individuals. . . . . . . . . . . . . . . . . - - 19 37 - -
Accretion to conversion price of 8%
Series A Convertible Preferred Stock . . . . - 31 - - - -
Accrued dividends on 8% Series A
Convertible Preferred Stock paid in
common stock . . . . . . . . . . . . . . . . - - 87 221 - -
Warrants expired . . . . . . . . . . . . . . . - - - - (50) (100)
Net loss for 1999. . . . . . . . . . . . . . . - - - - - -
--------------- ------------- --------- ---------- ---------- ----------
BALANCES AT DECEMBER 31, 1999. . . . . . . . . . 19 $ 1,868 10,576 $ 20,259 5,867 $ 635
=============== ============= ========= ========== ========== ==========

See notes to consolidated financial statements.
SHARE-
ADDITIONAL HOLDERS'
PAID-IN ACCUMULATED EQUITY
CAPITAL DEFICIT (DEFICIENCY)
<S> <C> <C> <C>
BALANCES AT JANUARY 1, 1998. . . . . . . . . . . $ 134 $ (17,819) $ (4,482)

Issuance of 8% Series A Convertible
Preferred Stock, net of issuance costs
of $5. . . . . . . . . . . . . . . . . . . . - - 262
Issuance of common stock and warrants
in connection with the acquisition of
Incomex (Note 4) . . . . . . . . . . . . . . - - 2,524
Exercise of warrants by a related
party. . . . . . . . . . . . . . . . . . . . - - 1,431
Issuance of warrants in connection with
debt financing with a related party. . . . . - - 165
Issuance of warrants in connection with
debt financing (Note 6). . . . . . . . . . . - - 221
Issuance of warrants in lieu of director
and consulting fees. . . . . . . . . . . . . - - 5
Issuance of warrants in lieu of agent
fees to a related party (Note 6) . . . . . . - - 24
Issuance of common stock in connection
with the acquisition of PIC (Note 3) . . . . - - 4,245
Accretion to conversion price of 8%
Series A Convertible Preferred Stock . . . . - (31) -
Accrued dividends on 8% Series A
Convertible Preferred Stock. . . . . . . . . - (144) (144)
Net loss for 1998. . . . . . . . . . . . . . . - (174) (174)
------------ ------------ -------------
BALANCES AT DECEMBER 31, 1998. . . . . . . . . . $ 134 $ (18,168) $ 4,077
============ ============ =============
Issuance of warrants in connection with
debt financing with related parties (Note 6
and 7) . . . . . . . . . . . . . . . . . . . - - 223
Issuance of warrants in connection with
debt financing with lender (Note 6). . . . . - - 80
Conversion of notes payable, accrued
interest and related common stock
warrants into common stock . . . . . . . . . - - 147
Conversion of common stock warrants
into common stock. . . . . . . . . . . . . . - - 9
Common stock issued. . . . . . . . . . . . . . - - 3
Common stock options exercised by
individuals. . . . . . . . . . . . . . . . . - - 37
Accretion to conversion price of 8%
Series A Convertible Preferred Stock . . . . - (31) -
Accrued dividends on 8% Series A
Convertible Preferred Stock paid in
common stock . . . . . . . . . . . . . . . . - (163) 58
Warrants expired . . . . . . . . . . . . . . . - 100 -
Net loss for 1999. . . . . . . . . . . . . . . - (18,398) (18,398)
------------ ------------ -------------
BALANCES AT DECEMBER 31, 1999. . . . . . . . . . $ 134 $ (36,660) $ (13,764)
============ ============ =============

See notes to consolidated financial statements.

</TABLE>

F-4
<PAGE>

MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998 (DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>

1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (18,398) $ (174)
Adjustments to reconcile net loss to net cash flows from operating activities:
Impairment of property and equipment and intangible assets. . . . . . . . . . . . . 5,652 -
AcNet bad debt and acquisition expense write down . . . . . . . . . . . . . . . . . 3,703 -
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,358 1,849
Gain on sale of fixed assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) -
Noncash interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 723 272
Noncash commission expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 71
Loss from joint venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 42
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 779 (728)
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31) (60)
Prepaid commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 (730)
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 261
Outstanding checks in excess of available balances. . . . . . . . . . . . . . . . 104 (247)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,064 (718)
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,158 (541)
Accrued universal service fund fees . . . . . . . . . . . . . . . . . . . . . . . 1,700 -
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) (37)
------------ -----------
Net cash flows from operating activities . . . . . . . . . . . . . . . . . . (948) (740)
------------ -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . (706) (766)
Cash paid for acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (130)
Payments for site contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10) (3)
Cash paid for investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,480) (1,500)
Cash advanced to joint venture. . . . . . . . . . . . . . . . . . . . . . . . . . . . (46) (362)
Cash acquired with acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . - 16
Proceeds from sale of fixed assets. . . . . . . . . . . . . . . . . . . . . . . . . . 13 -
Issuance of note receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,000) -
Payments received on note receivable. . . . . . . . . . . . . . . . . . . . . . . . . 500 -
------------ -----------
Net cash flows from investing activities . . . . . . . . . . . . . . . . . . (7,729) (2,745)
------------ -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations, primarily to a related party . . . . . . . . . (301) (265)
Proceeds from capital lease obligations with a related party. . . . . . . . . . . . . - 710
Borrowings on notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,992 5,406
Borrowings of long-term debt with related parties . . . . . . . . . . . . . . . . . . 500 -
Payments on notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (835) (1,656)
Payments on long-term debt with related parties . . . . . . . . . . . . . . . . . . . (705) (719)
Borrowings on long-term debt, others. . . . . . . . . . . . . . . . . . . . . . . . . 1,029 -
Payments on long-term debt, others. . . . . . . . . . . . . . . . . . . . . . . . . . (671) (152)
Proceeds from issuance of common stock and warrants . . . . . . . . . . . . . . . . . 3 1,430
Payment of dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18) -
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . 37 -
Proceeds from issuance of 8% Series A Convertible Preferred Stock . . . . . . . . . . - 50
Payments for offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (145)
------------ -----------
Net cash flows from financing activities . . . . . . . . . . . . . . . . . . 7,031 4,659
------------ -----------

NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,646) 1,174

CASH AT BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,722 548
------------ -----------

CASH AT END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76 $ 1,722
============ ===========

SUPPLEMENTAL DISCLOSURE:
Cash paid during the year for interest, principally to a related party $ 824 $ 2,183
Cash paid during the year for income taxes 4 24

See notes to consolidated financial statements.
</TABLE>

F-5
<PAGE>

MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998 (CONTINUED)
- ---------------------------------------------------------

SUPPLEMENTAL DISCLOSURES OF 1999 NONCASH OPERATING, INVESTING AND FINANCING
ACTIVITIES:

During 1999, 199,172 common stock warrants were exercised by individuals. Of
these, 83,872 were converted to the same number of common shares and reduced
notes payable by $116,000 and accrued interest by $31,000. Of the remaining
115,300 warrants, 114,000 warrants were converted into 51,507 shares of common
stock in a cashless exercise. 1,300 warrants were converted into 2,668 shares
of common stock for $8,475, which had not been received prior to year end.
These warrants had a carrying value of $7,921.

The Company recorded an increase to the carrying value of the 8% series A
convertible preferred stock and a charge to accumulated deficit of $31,353
representing the current year's accretion to its conversion price.

The Company recorded an increase to accrued expense and a charge to accumulated
deficit of $162,559 for cumulative dividends earned by the holders of the 8%
series A convertible preferred stock.

The Company issued stock dividends of $220,836 which had been recognized in
current and prior years through charges to retained earnings and increases in
accrued expenses representing 87,708 shares of common stock.

The Company recorded $303,000 of deferred loan costs in connection with debt
financing of $7,975,000 and related issuance of common stock warrants to
purchase 1,695,000 shares of the Company's common stock. Such costs are being
amortized to non-cash interest expense.

The Company recorded a decrease in common stock warrants of $100,000 due to the
expiration of 50,000 warrants previously recorded at their fair value to a
financial institution.

See notes to consolidated financial statements.

F-6
<PAGE>
MURDOCK COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998 (CONCLUDED)
- ---------------------------------------------------------

SUPPLEMENTAL DISCLOSURES OF 1998 NONCASH OPERATING, INVESTING AND FINANCING
ACTIVITIES:

The Company recorded the following increases as a result of its acquisition of
Incomex (dollars in thousands):
<TABLE>
<CAPTION>

<S> <C>
Accounts receivable. . . . . . . . . . . . . . . . $ 179
Other current assets . . . . . . . . . . . . . . . 111
Telecommunications equipment . . . . . . . . . . . 3
Furniture and equipment. . . . . . . . . . . . . . 53
Accumulated depreciation . . . . . . . . . . . . . (14)
Goodwill . . . . . . . . . . . . . . . . . . . . . 921
Commission advances. . . . . . . . . . . . . . . . 974
Other assets . . . . . . . . . . . . . . . . . . . 10
Notes payable. . . . . . . . . . . . . . . . . . . (822)
Outstanding checks in excess of available balances (16)
Accounts payable . . . . . . . . . . . . . . . . . (134)
Accrued expenses . . . . . . . . . . . . . . . . . (827)
Common stock . . . . . . . . . . . . . . . . . . . (422)
------
Cash acquired with acquisition . . . . . . . . . . $ 16
======
</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-7
<PAGE>
MURDOCK COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------

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 in 1997 and 1998,
the Company transformed itself from a long distance reseller of AT&T network
services to U.S. hotels to being a communications service provider in North
America.

The Company operated its business under three business units during 1998 and
1999. 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 (see Note 17).

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.

In February 2000, the Company entered into a Rental Agreement with
Telemanager.net providing for the operation of MCC Telemanager by
Telemanager.net in exchange for monthly rental payments to the Company. The
Company also entered into a memorandum of understanding to negotiate a sale of
certain assets of MTS to Telemanager.net. Telemanger.net is owned by former
executives of the Company.

On October 31, 1997, the Company purchased Priority International
Communications, Inc. ("PIC"). PIC is primarily engaged in the business of
providing long-distance telecommunications services to patrons of hotels, public
and private payphone owners and aggregators of operator service traffic 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, 1999, PIC maintains site
contracts with and provides services for approximately 99 customers throughout
the United States (207 customers at December 31, 1998).

Also, on October 31, 1997, the Company purchased PIC Resources Corp. ("PIC-R").
PIC-R, operating through its wholly-owned subsidiary ATN Communications
Incorporated ("ATN"), was merged into PIC in January 1999. ATN is primarily
engaged in the business of providing carrier services for long-distance
telecommunications companies throughout the United States. ATN handles incoming
operator assisted calls with their operators on location. Together, PIC and ATN
comprise the second business unit, known as "PIC/ATN".

F-8
<PAGE>
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 billing and collection services to the hospitality
industry from Mexico to the United States. At December 31, 1999, Incomex
maintains contracts with approximately 85 hotel and resort hotel properties
located in Mexico compared with approximately 95 at December 31, 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 $36.7 million, and current liabilities
exceed current assets by $22.3 million at December 31, 1999. The Company also
is past due in the payment of approximately $15.8 million of indebtedness as of
March 20, 2000. The Company's past due debt includes approximately $7.6 million
of notes which have been pledged by the holders of the notes to a bank as
collateral for loans made by the bank to such holders. The Company has been
informed that this bank is in serious financial difficulty and is currently
being liquidated by the Federal Deposit Insurance Corporation ("FDIC"). If the
FDIC seeks to enforce its rights under the pledged notes, the Company currently
would not be able to repay these notes. 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:

- - The Company has retained an investment banker to assist the Company
regarding the identification and investigation of strategic alternatives
to the Company (see Note 18). The strategic alternatives may include the
possible refinancing of the Company through new debt or equity financings,
extending or converting existing debt and the sale of all or a part of the
Company's existing business units and other assets.

- - The Company entered into a nonbinding letter of intent to merge with
Floragraph LLC, which owns Flower.com, an online floral website (see Note
18).

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Murdock Communications Corporation and the accounts of PIC/ATN and
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, impairment of long-lived assets and liability for universal service
fund fees.

CERTAIN RISK CONCENTRATIONS - The Company derived 39% and 15% in 1999 and 24%
and 12% in 1998 of its revenue from two customers of PIC/ATN. The Company
terminated a significant portion of the service provided to the Company's
largest customer in January 2000 due to the significant bad debt expense being
experienced related to such calls (see Note 2). The Company's second largest
customer terminated its relationship with the Company effective June 1999.
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 14.4% and 14.8% of the Company's outstanding common
stock at December 31, 1999 and 1998, respectively.

F-9
<PAGE>
OFF BALANCE SHEET CREDIT RISK - The Company is a party to various agreements
with off balance sheet credit risk as part of its normal course of business.
The Company receives funds from independent billing and collection firms or
other third parties, which advances funds before collecting from the end-user by
billing through a Regional Bell Operating Company or other local telephone
company. Amounts not ultimately collected from the end-user may be deducted
from future advance payments (see Note 2). These agreements involve elements of
credit risk which are not recognized in the Company's consolidated balance
sheet.

REVENUE RECOGNITION - Revenues derived from processing long-distance telephone
calls reflect gross charges for these calls which 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.

Revenues derived in 1998 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.

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 3 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.

GOODWILL - Goodwill is amortized on the straight-line method over 10 years.

IMPAIRMENTS - 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. While revenues have
increased for Incomex and PIC/ATN since acquisition by the Company, the rapidly
changing competitive environments in which the Company operates, the significant
bad debts experienced, the loss of its two major customers, the declining
revenues per call, and the impact of cash flow constraints on attracting new
customers with prepaid commissions has prevented the Company from increasing
operating profits from levels that existed prior to acquisition. Accordingly,
in 1999, the Company recorded an impairment write-down for goodwill related to
Incomex of approximately $2,360,000 and PIC/ATN of approximately $2,975,000 and
a write-down of other assets, primarily telecommunications equipment, of
approximately $317,000. All impairments were determined based on the estimated
fair value of such assets.

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 relate to deferred lease and
loan restructuring costs.

Deferred lease and loan restructuring costs incurred, net of amortization, in
connection with lease and loan modification agreements of $197,008 and $659,155
at December 31, 1999 and 1998, respectively, have been deferred and are being
amortized over the restructured lease and loan agreement terms using the
effective interest method.

F-10
<PAGE>
INVESTMENTS - The Company owns convertible preferred stock which is not readily
marketable. This investment is accounted for at cost. Should this investment
experience a decline in value that is other than temporary, the Company will
recognize a loss to reflect such decline.

PREPAID COMMISSIONS - Prepaid commissions included in other assets represent
advances to hotel customers of Incomex. Such advances are repaid as commissions
are earned by the hotels and are reviewed periodically for collectibility.

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 a 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.

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 recorded as a charge to accumulated deficit as
the dividends are earned by the holders and an accrued liability is recorded.
As of December 31, 1999 all cumulative dividends have either been paid in cash
or common stock.

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.

Potential common shares excluded from the per share computation because they
were antidilutive are as follows:
<TABLE>
<CAPTION>

YEARS ENDED DECEMBER 31,
------------------------

1999 1998
--------- ---------
<S> <C> <C>

Convertible preferred stock 1,681,776 1,681,776
Options . . . . . . . . . . 355,918 146,502
Warrants. . . . . . . . . . 1,189,000 950,937
--------- ---------
Total . . . . . . . . . . . 3,226,694 2,779,215
- ------------------------------- ========= =========
</TABLE>

RECLASSIFICATIONS - Certain amounts in the 1998 consolidated financial
statements have been reclassified to conform with the current year's
presentation.

F-11
<PAGE>
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for 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. The recognition of gains or losses resulting from
changes in the values of derivatives is based on the use of each derivative
instrument and whether it qualifies for hedge accounting. In June 1999, the
FASB issued SFAS No. 137, which deferred the effective date of adoption of SFAS
No. 133 for one year. The Company will adopt SFAS No. 133 in the first quarter
of calendar year 2001. The Company has not yet determined the effect of SFAS
No. 133 on the consolidated financial statements.

2. BAD DEBT EXPENSE AND UNIVERSAL SERVICE FUND FEES

During 1999, PIC/ATN recorded bad debt charges relating to collection issues for
one type of call processing service provided by PIC/ATN to its largest customer
totaling approximately $5.6 million in excess of historical amounts. PIC/ATN
uses an independent billing and collection firm, which advances funds to
PIC/ATN, for calls handled by PIC/ATN, before collecting from the end-user by
billing through a Regional Bell Operating Company or other local telephone
company. This billing and collection firm reconciles amounts ultimately
collected from the end-user with the initial advances made and remits the
additional amount collected or reduces advances, for any deficiency, to PIC/ATN
in future periods. This process can take 12 - 18 months to complete. PIC/ATN
uses its historical experience to estimate the ultimate collections to be
received. During 1999, PIC/ATN experienced an amount of reductions in these
payments significantly in excess of PIC/ATN's and industry historical
experience.

Due to the high level of these uncollectable amounts, PIC/ATN contracted with
another billing and collection firm in November 1999. The prior billing and
collection firm alleged that PIC/ATN had breached its contract and placed a lien
on the collections from calls processed by the replacement billing and
collection firm.

At December 31, 1999, the Company recorded an allowance for 100% of all
receivables from both billing and collection firms due to the uncertainty
regarding their collection. PIC/ATN may be liable for additional amounts beyond
the allowance recorded if the Company's most recent collection experience
continues throughout the remaining open collection period. Management believes
that the uncollectable amounts are so far in excess of any reasonable level that
either the billing and collection firm or the Regional Bell Operating Company
through which most of the calls were billed must be erroneously determining the
uncollectable amounts. The Company expects that PIC/ATN will refuse to pay any
additional amounts to the former billing and collection firm and the matter will
likely be resolved through litigation. No liability, if any, has been recorded
in the financial statements with respect to this matter.

Management believed that the billing and collection firm referred to above was
charging the end-users the USF fee and remitting amounts owed to the USAC, as
required by the contract, in a similar method as with federal and state taxes.
A demand letter was sent on behalf of PIC/ATN to the billing and collection firm
for payment. The billing and collection firm responded that it has collected
and remitted the USF fees to PIC/ATN. Management continues to believe that the
billing and collection firm has not remitted these amounts, but as the carrier,
PIC/ATN is legally responsible to pay the USF fee.

F-12
<PAGE>
Notwithstanding management's belief that the prior billing and collection firm
was contractually required to collect and remit USF fees to USAC, in December
1999, the Company recorded a $1,700,000 liability at the PIC/ATN unit for USF
fees from 1997 through 1999 which represents the period of time the liability is
the responsibility of PIC/ATN. PIC/ATN currently is trying to resolve the issue
and gain temporary relief from the 15-day payment demand made by USAC, which
expired on March 16, 2000, for approximately $810,000 of the fees. PIC/ATN may
also be liable for penalties including $110,000 for any single violation of
nonpayment of USF fees up to a maximum of $1.1 million for any continuing
violation. No liability for penalties, if any, has been recorded in the
consolidated financial statements. In addition, the FCC may revoke a carrier's
operating authority for failure to pay such fees. The amount of fees, if any,
PIC/ATN may receive from the billing and collection firm cannot be determined
and no amounts have been recognized.

3. ACQUISITION OF PIC AND PIC-R

Effective October 31, 1997, the Company purchased all of the outstanding capital
stock of PIC and PIC-R in exchange for a cash payment at closing, the issuance
of debt and the issuance of an aggregate of 300,000 shares of common stock of
the Company. The Stock Purchase Agreements also provided for certain recession
and earn-out rights. The acquisitions were recorded under the purchase method
for financial reporting purposes. Goodwill of $4,203,709 was associated with
the acquisitions (see Note 1 for impairment).

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 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 promissory notes due in installments through April
30, 1999 (the "Long-Term Notes").

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 balance on the Long-Term Notes as of
December 31, 1998 was $338,138. Goodwill of $3,916,889 was associated with the
amended terms of the agreement (see Note 1 for impairment).

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 acquisition has been recorded under the
purchase method. Goodwill of $901,219 was associated with the acquisition (see
Note 1 for impairment).

F-13
<PAGE>
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 which included 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 was
associated with the amended terms of the agreement (see Note 1 for impairment).

Pro forma results of operations (unaudited) for the Company reflecting the
Incomex acquisition for the year ended December 31, 1998, as if the acquisition
had occurred on January 1, 1998, are as follows (dollars in thousands except
share data):
<TABLE>
<CAPTION>

1998
<S> <C>
Total revenues . . . . . . . . . . . . . . . . . . . . $ 34,468
Cost of sales. . . . . . . . . . . . . . . . . . . . . 23,059
-----------
Gross profit . . . . . . . . . . . . . . . . . . . . . 11,409
Selling, general and administrative expense. . . . . . 7,596
Depreciation and amortization expense. . . . . . . . . 2,453
-----------
Income from operations . . . . . . . . . . . . . . . . 1,360
Gain on AT&T contract buyout . . . . . . . . . . . . . 453
Interest expense . . . . . . . . . . . . . . . . . . . (2,766)
-----------
Loss before income tax expense and joint venture loss. (953)
Loss from joint venture. . . . . . . . . . . . . . . . 42
Income tax expense . . . . . . . . . . . . . . . . . . 74
-----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . $ (1,069)
===========
Pro forma net loss attributable to common shareholders $ (1,243)
===========
Pro forma net loss per common share. . . . . . . . . . $ (.13)
===========
Pro forma weighted average common shares outstanding . 9,232,881
===========
</TABLE>

F-14
<PAGE>
5. INVESTMENTS

During 1998, the Company reached an agreement to invest in Actel Integrated
Communications, Inc. ("Actel"). As of December 31, 1998 the Company had
invested $694,067. As of December 31, 1999 the Company had invested $3,000,000,
incurred investment related costs of $31,829 and recorded accrued dividends of
$244,765, as discussed below. Effective June 21, 1999, the Company and Actel
entered into an agreement to amend the terms of the original Investment
Agreement with respect to the Company's investment in Actel. This agreement
amended certain provisions of the Investment Agreement including limiting the
Company's investment in Actel to $3,000,000. During the third quarter, the
$3,000,000 investment was converted into 3,000,000 shares of Actel's Series A
Convertible Preferred Stock as allowed by the Investment Agreement. Each share
of Series A Convertible Preferred Stock accrues a cumulative 10% dividend per
annum through March 10, 2002 and may be converted to 1.46 shares of Actel's
common stock at any time on or before March 10, 2002 at the option of the
Company, subject to certain restrictions. In addition, the Company loaned
$1,000,000 to Actel under the terms of a promissory note dated June 23, 1999.
As of December 31, 1999, $500,000 had been received by the Company in partial
payment of the promissory note. According to the terms of the note, the balance
remaining will continue as a loan due on demand with an interest rate of 18% per
annum for the unpaid balance.

Actel, based in Mobile, Alabama, is a facilities-based competitive local
exchange carrier of advanced voice and data communications services to small and
medium sized enterprises. Actel offers advanced end-users services in Mobile,
Alabama; New Orleans, Louisiana; and Birmingham, Alabama.

During 1998, the Company reached an initial lending/investment agreement with
AcNet S.A. de C.V. of Mexico ("AcNet Mexico"). The initial agreement was revised
in June 1999, whereby the Company entered into two agreements providing the
Company with separate options to acquire (i) Intercarrier Transport Corporation
("ITC"), the holder of approximately 99% of the outstanding shares of AcNet
Mexico, and (ii) AcNet USA, Inc. ("AcNet USA"), an affiliate of AcNet Mexico,
for an aggregate of 2,325,000 shares of the Company's common stock, $200,000 in
closing costs and an additional $550,000 to pay off certain debt and accounts
payable. The option with ITC expires August 31, 2001 and the option with AcNet
USA expired on December 31, 1999. As of December 31, 1999, the Company had
loaned $3,692,000, recorded $264,000 of interest and incurred $747,000 of costs
either related to the acquisition or paid on behalf of the AcNet entities.

In light of the proposed merger with Floragraph LLC (see Note 18), the Company
is not pursuing the options to acquire the AcNet entities. As a result and due
to cash flow difficulties being experienced by the AcNet entities, the Company
recorded a $3,703,000 asset write-down in 1999 due to the uncertainty of
ultimate recovery of the investment. However, the Company believes the options
to acquire the AcNet entities remain as an alternative.

The AcNet entities provide internet services and network services to businesses,
governments and consumers, primarily in Mexico and Texas.

F-15
<PAGE>
6. NOTES PAYABLE

Notes payable as of December 31, 1999 and 1998, consisted of the following:
<TABLE>
<CAPTION>

(DOLLARS IN THOUSANDS)
----------------------
1999 1998
<S> <C> <C>
Past due notes payable to individuals, $400,000 of which has
been provided by related parties, bearing interest at the default
rate of 18% (14% at December 31, 1998), due March 5, 1999.
Warrants to purchase 500,000 shares of the Company's
common stock were issued, 400,000 of which were issued to related
parties, at an exercise price of $1.75 per share which expire, if
unexercised, on March 31, 2001. 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 $ 500

Past due notes payable to individuals, $225,000 of which has
been provided by related parties, bearing interest at the default
rate of 18% (14% at December 31, 1998), 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. 1,371 1,486

Past due notes payable to individuals, $5,995,000 of which has
been provided by related parties, bearing interest at the default
rate of 18% (14% at December 31, 1998), due November 30, 1999.
Warrants to purchase 1,379,000 shares of the Company's
common stock were issued, 1,199,000 of which were issued
to related parties. The warrants were issued at exercise prices
ranging from $2.50 to $4.13 and, if unexercised, expire on
dates ranging from November 2003 to December 2003. 6,895 3,420

Past due notes payable to the former owners of Incomex bearing
interest at 14% due November 15, 1999. 735 745

Noninterest-bearing notes payable to the former owners of
Incomex due April 1, 1999. - 340

Past due 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 25

F-16
<PAGE>

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

Notes payable to leasing company bearing interest ranging
from 24.9% to 33.4% due in periods ranging from
December 1999 to April 2002. - 480

Past due note payable to financial institution bearing interest at
10.5% due March 30, 2000 collateralized by substantially all the
assets of MTS and an assignment of leasehold interests. Due to
a cross-collateralization agreement with the financial institution,
this note became due on March 28, 1999. 500 -

Past due note payable to financial institution bearing interest at 2%
over the bank's prime rate (combined rate of 9.75% at December 31,
1999 and 1998), due March 28, 1999, collateralized by substantially
all the assets of MTS and an assignment of leasehold interests. 400 400

Past due convertible note payable to financial institution bearing
interest at 12% (14% upon default) due in five monthly installments
of $200,000 beginning January 17, 2000 with a final payment of
$1,000,000 due June 17, 2000. Warrants to purchase 500,000 shares
of the Company's common stock were issued at an exercise price of $3.50
per share which, if unexercised, expire June, 2009. The note is
collateralized by 3,000,000 shares of Actel Series A preferred stock and
substantially all assets of the Company (see additional terms below). 2,000 -

Note payable to related party bearing interest at 12% and due
February 9, 2000. A warrant to purchase 400,000 shares of the
Company's common stock was issued at an exercise price of
$3.31 per share which, if unexercised, will expire August 2004.
The note subsequently became past due on February 9, 2000. 2,000 -

Note payable to related party with interest at 18%, due on demand. 17 -
---------- ---------

Total $ 14,443 $ 7,401
========== =========
</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-17

<PAGE>

<PAGE>
On June 17, 1999, the Company completed a bridge financing in the amount of
$2,000,000 with New Valley Corporation ("New Valley"). Pursuant to the bridge
financing, the Company issued a note in the principal amount of $2,000,000 (the
"Note"). This principal and all unpaid accrued interest at 12% per annum were
due July 21, 1999. The Company was past due on this note effective July 21,
1999. Effective July 22, 1999, as provided for in the terms of the note,
interest accrued on the unpaid balance at 14% per annum from July 22, 1999 until
August 20, 1999, at 16% per annum from August 21, 1999 until September 21, 1999
and at 18% per annum from September 22, 1999 until such principal is paid in
full. Warrants to purchase 250,000 shares of the Company's common stock were
issued in connection with the Note at an exercise price of $3.50 per share and
may be exercised at anytime through June 21, 2009. Because the Company did not
repay the Note on or prior to September 21, 1999, the warrants may be exercised
to purchase a total of 500,000 shares of the Company's common stock. On
December 17, 1999 the Company amended the terms of the agreement with New
Valley. The amendment reset the interest rate to 12% since inception (14% upon
default) and is due in 5 monthly payments of $200,000 beginning January 17, 2000
with a final payment of $1,000,000 on June 17, 2000. Waivers of any prior
violations were included as part of the amendment. The Note is convertible into
shares of common stock of the Company at the option of New Valley at any time up
to the maturity date, in any portion in multiples of $1,000. The number of
shares in the conversion is to be obtained by dividing the principal amount of
the Note converted by the conversion price of $3.00. As of March 20, 2000 the
Company was past due on the January, February and March payments under the Note
with New Valley.

F-18
<PAGE>
7. LONG-TERM DEBT

Long-term debt, others as of December 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>

(DOLLARS IN THOUSANDS)
----------------------
1999 1998
<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. $ 245 $ 262

Notes payable to financial institution bearing interest at 11.25%,
repaid in 1999. - 9

Note payable to financial institution. The note is collateralized by a
security interest in a contract the Company has to provide operated
assisted calls for a facility in Mexico. Monthly payments are to be
made at the greater of $10,500 or $1.05 per operated assisted call
through the facility. The note is due October, 2002 and has an
effective interest rate of 33.7%. 250 -

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. This note was repaid during 1999
through a financing at another financial institution. - 514

Note payable to financial institution to refinance an existing note on
ATN's building and upgrade the building for the purpose of leasing a
portion to Actel, due in monthly installments of $7,834, including
interest at 8.4% until October 2004, when the balance is due.
The note is collateralized by ATN's office facilities and land. 774 -

Uncollateralized note payable to financial institution due in monthly
installments of $12,353, including interest at the financial institution's
prime rate (8.5% and 8.75% at December 31, 1999 and 1998,
respectively), until January 2000, when the balance is due. 13 139
----------- ---------

Total 1,282 924
Less current portion 371 199
----------- ---------
Long-term debt, others $ 911 $ 725
=========== =========
</TABLE>

F-19
<PAGE>
Long-term debt with related parties at December 31, 1999 and 1998 consisted of
the following:
<TABLE>
<CAPTION>

(DOLLARS IN THOUSANDS)
----------------------
1999 1998
<S> <C> <C>
Uncollateralized notes payable to Berthel due January 31, 2005,
(net of discount of $299,648 and $341,010 at December 31, 1999
and 1998, respectively). Interest payable quarterly at 4%,
beginning March 31, 1995 until maturity, when the balance
is due (effective interest rate of 11.5%). $ 700 $ 659

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. 702 759

Non-interest bearing, uncollateralized note payable to the
owner of PIC (net of discount of $13,656 and $46,738 at December 31,
1999 and 1998, respectively) due in monthly installments of $12,500,
beginning January 1999 through January 2001 (effective interest rate
of 19.6%). 136 253

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. 699 840

Uncollateralized notes payable to individual, bearing interest at
14%, due May 19, 2001. A warrant to purchase 100,000 shares
of the Company's common stock was issued. The warrant
has an exercise price of $3.50 and, if unexercised, expires
December 6, 2003. 500 -

Non-interest bearing notes payable to the former owners of
PIC, 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. 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

Uncollateralized, noninterest bearing demand notes payable to
related parties. 32 84
---------- ----------

Total 2,769 2,933
Less current portion 647 828
---------- ----------
Long-term debt with related parties $ 2,122 $ 2,105
========== ==========
</TABLE>

F-20
<PAGE>
Maturities of long-term debt for each of the five years subsequent to December
31, 1999 are as follows (dollars in thousands):
<TABLE>
<CAPTION>

RELATED
OTHER PARTIES TOTAL
<S> <C> <C> <C>
2000 . . . $ 371 $ 647 $ 1,018
2001 . . . 116 922 1,038
2002 . . . 119 460 579
2003 . . . 39 39 78
2004 . . . 637 - 637
Thereafter - 701 701
-------- -------- --------
Total. . . $ 1,282 $ 2,769 $ 4,051
======== ======== ========
</TABLE>

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 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.

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 then currently owed.
This transaction was completed and the shares issued on June 19, 1998.

F-21
<PAGE>
9. COMMON STOCK WARRANTS

A summary of common stock warrant activity during the years ended December 31,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>

WEIGHTED
AVERAGE
WARRANT WARRANT
WARRANT PRICE PRICE EXPIRATION
SHARES PER SHARE PER SHARE DATE
<S> <C> <C> <C> <C>
Balance at December 31, 1997 2,149,279 $1.12-$9.75 $ 2.91 1999-2002

Warrants issued in connection with Incomex
Earn-Out settlement (Note 4) 155,384 3.25 3.25 2003
Warrants issued with note payable (Note 6) 1,486,000 1.75 1.75 2001
Warrants issued with note payable (Note 6) 500,000 1.75 1.75 2001
Warrants issued with note payable (Note 6) 684,000 2.50-3.25 3.17 2003
Warrants issued with note payable (Note 6) 5,000 1.75 1.75 2000
Warrants issued with note payable (Note 6) 25,000 1.75 1.75 2001
Warrants issued with offering agreement
(Note 6) 10,000 1.44 1.44 2001
Warrants issued with short-term notes payable 15,000 1.44 1.44 2001
Warrants issued with offering agreement
(Note 6) 121,100 1.75 1.75 2001
Warrants issued with notes payable to related
party 350,000 1.44 1.44
Warrants exercised by related party (1,100,000) 1.44 1.44
Warrants issued with consulting agreements 20,000 3.00-3.60 3.30 2003
-----------

Balance at December 31, 1998 4,420,763 1.12-9.75 2.86

Warrants issued with notes payable to related
parties (Note 6 and 7) 795,000 3.25-4.13 3.63 2003
Warrants issued with notes payable to financial
institution (Note 6) 500,000 3.50 3.50 2009
Warrants issued with notes payable to related
party (Note 6) 400,000 3.31 3.31 2004
Warrants expired (50,000) 2.88 2.88
Warrants exercised (1,300) 3.14 3.14
Warrants exercised by related party (4,000) 1.44 1.44
Warrants exercised (193,872) 1.75 1.75
-----------

Balance at December 31, 1999 5,866,591 1.12-9.75 3.05
===========
</TABLE>

The weighted average remaining life of the warrants was 3 and 2.5 years at
December 31, 1999 and 1998, respectively.

F-22
<PAGE>
Warrants outstanding and exercisable at December 31, 1999 were as follows:
<TABLE>
<CAPTION>

EXERCISE PRICE SHARES
<S> <C>
$1.12. . . . . 229,279
$1.44. . . . . 21,000
$1.75. . . . . 1,943,228
$2.50-$3.00. . 90,000
$3.01-$3.25. . 1,798,084
$3.26-$3.60. . 1,705,000
$9.75. . . . . 80,000
---------
5,866,591
=========
</TABLE>

The Company issued 880,000 common stock warrants in conjunction with the
Company's initial public offering during 1996. Each warrant is exercisable to
purchase one share of common 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. During 1999 the expiration date of these warrants was
extended from October 21, 1999 to April 21, 2000. During this extension period
the Company will not be obligated to make any further adjustments to the
exercise price of the warrants or the number of shares for which the warrants
may be exercised under the anti-dilution terms of the warrant agreement.

During 1999 193,872 warrants were exercised by certain individuals who held
notes payable from the Company in various cashless exercises. Of these
warrants, 83,872 were converted to the same number of common shares and reduced
such notes payable by $116,000 and accrued interest by $31,000. The remaining
warrants were converted to 51,500 shares of the Company's common stock.

10. STOCK OPTION PLANS

The Company adopted the 1993 Stock Option Plan (the "1993 Plan") whereby 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.

F-23
<PAGE>
A summary of stock option activity under the 1993 Plan during the years ended
December 31, 1999 and 1998, is summarized as follows:
<TABLE>
<CAPTION>

WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTION OPTION
OPTIONS OPTION PRICE PRICE OPTIONS PRICE
OUTSTANDING PER SHARE PER SHARE EXERCISABLE PER SHARE
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 223,929 $ 1.88-$4.00 $ 2.51 79,279 $ 1.88
Granted at market. . . . . 30,927 2.00
Cancelled. . . . . . . . . (1,000) 3.25
Cancelled. . . . . . . . . (13,255) 2.00
------------
Balance at December 31, 1998 240,601 1.88-4.00 2.04 163,026 1.97

Exercised. . . . . . . . . (18,500) 1.88
Exercised. . . . . . . . . (1,000) 2.25
------------

Balance at December 31, 1999 221,101 1.88-4.00 2.06 182,564 2.02
============
</TABLE>

At December 31, 1999, options for 182,564 shares were exercisable (163,026 at
December 31, 1998), an additional 31,928 shares were available for future grants
and the weighted average remaining life of the options outstanding was six
years. The Company has reserved 272,529 shares of common stock in connection
with the 1993 Plan at December 31, 1999 and 1998.

The Company has adopted the 1997 Stock Option Plan (the "1997 Stock Option
Plan"). During 1998, the Company amended the 1997 Stock Option Plan to increase
the number of shares authorized 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.

F-24
<PAGE>
A summary of stock option activity under the 1997 Stock Option Plan for the
years ended December 31, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>

WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTION OPTION
OPTIONS OPTION PRICE PRICE OPTIONS PRICE
OUTSTANDING PER SHARE PER SHARE EXERCISABLE PER SHARE
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 255,629 $ 3.13-$4.16 $ 3.28 100,000 $ 2.57
Granted at market. . . . . 400,000 2.25-3.50
Granted at market. . . . . 17,000 3.13
Granted at market. . . . . 165,000 2.81
Granted at market. . . . . 535,000 2.75
Granted at market. . . . . 4,073 2.00
Granted at market. . . . . 225,629 2.25
Cancelled. . . . . . . . . (225,629) 3.25
Cancelled. . . . . . . . . (1,745) 2.00
------------
Balance at December 31, 1998 1,374,957 2.00-4.16 2.65 893,561 2.62

Cancelled. . . . . . . . . (7,000) 3.13
Cancelled. . . . . . . . . (90,000) 2.81
Granted at market. . . . . 2,000 3.88
Granted at market. . . . . 5,500 2.56
Granted at market. . . . . 4,500 2.75
------------

Balance at December 31, 1999 1,289,957 2.00-4.16 2.64 1,106,259 2.63
============
</TABLE>

At December 31, 1999, options for 1,106,259 shares were exercisable (893,561 at
December 31, 1998), an additional 437,514 shares were available for future
grants and the weighted average remaining life of the options outstanding was
eight years. The Company has reserved 1,727,471 shares of common stock in
connection with the 1997 Stock Option Plan at December 31, 1999 and 1998.

Options outstanding and exercisable at December 31, 1999 under the 1993 and 1997
plans were as follows:
<TABLE>
<CAPTION>

OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
-------------------- -----------
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
LIFE
EXERCISE PRICE SHARES (IN YEARS) SHARES
<S> <C> <C> <C>

1.88. . . . . . . . 83,422 4 83,422
2.00-$2.25. . . . . 615,636 7 576,401
2.50-$3.00. . . . . 695,000 8 513,333
3.13-$4.16. . . . . 117,000 8 115,667
--------- ----------
1,511,058 1,288,823
========= ==========
</TABLE>

F-25
<PAGE>
No compensation expense was recorded in connection with the grant of options for
the years ended December 31, 1999 and 1998, respectively. 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 options consistent with
the method prescribed by Statement of Financial Accounting 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 for the years ended December 31, 1999 and 1998 (dollars in thousands,
except per share data):
<TABLE>
<CAPTION>

1999 1998
<S> <C> <C> <C>
Net loss attributable to common shareholders As reported $(18,592) $ (349)
Pro forma (19,207) (2,348)

Net loss per common share. . . . . . . . . . As reported $ (1.79) $ (.06)
Pro forma (1.85) (.43)
</TABLE>

The weighted average fair values at date of grant for options granted during
1999 and 1998 were estimated to be $614,923 and $1,999,363, respectively. The
Company's calculations were made using the Black-Scholes option pricing model
with the following weighted average assumptions: ten year expected life; stock
volatility of 102% in 1999 and 153% in 1998; risk-free interest rate of 6.4% in
1999 and 6% in 1998; 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 since 1996 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, 1999 and 1998 (dollars in thousands):
<TABLE>
<CAPTION>

1999 1998
<S> <C> <C>
Current:
Federal. . . . $ - $ -
State. . . . . - 74
----- -----
Total $ - $ 74
===== =====
</TABLE>

The provision for income taxes for the years ended December 31, 1999 and 1998 is
less than the amounts computed by applying the statutory federal income tax rate
of 35% to the loss before income taxes due to the following items (dollars in
thousands):
<TABLE>
<CAPTION>

1999 1998
<S> <C> <C>
Computed expected amount . . . . . . . . . . . $(6,439) $ (35)
Amortization and write-down of goodwill. . . . 2,253 295
Meals and entertainment. . . . . . . . . . . . 9 12
Officer's life insurance . . . . . . . . . . . - 6
State income taxes, net of federal tax benefit (69) 74
Change in valuation allowance. . . . . . . . . 4,246 (278)
-------- ------
Income tax provision . . . . . . . . . . . . $ - $ 74
======== ======
</TABLE>

F-26
<PAGE>
At December 31, 1999 the Company has net operating loss carryforwards for
federal income tax purposes of approximately $20 million ($13 million at
December 31, 1998) to use to offset future taxable income. These net operating
losses will expire, if unused, from December 31, 2008 through 2019.

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, 1999 and 1998 are as follows (dollars in thousands):
<TABLE>
<CAPTION>

1999 1998
<S> <C> <C>
Deferred tax assets:
Current:
Allowance for doubtful accounts receivable. . . . . . . $ 150 $ 150
--------- --------

Noncurrent:
Intangible asset amortization and valuation allowance . 155 213
Differences in net book value of property and equipment 446 700
Capital lease adjustment. . . . . . . . . . . . . . . . 298 242
Interest and other accruals . . . . . . . . . . . . . . 523 -
Unrealized loss on investments. . . . . . . . . . . . . 1,389 -
Carryforward of net operating loss. . . . . . . . . . . 7,507 4,917
--------- --------
10,318 6,072
--------- --------
Total deferred tax assets . . . . . . . . . . . . . . . . . 10,468 6,222
Valuation allowance for deferred tax assets . . . . . . . . (10,468) (6,222)
--------- --------
Net deferred tax assets . . . . . . . . . . . . . . . . . . $ - $ -
========= ========
</TABLE>

A valuation allowance for the entire balance of deferred tax assets has been
recorded because management believes it is more likely than not that such assets
will not be realized.

F-27
<PAGE>
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 former 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, 1999, future minimum rental payments on lease
obligations are as follows (dollars in thousands):
<TABLE>
<CAPTION>

CAPITAL LEASES
-------------- OPERATING
BERTHEL OTHER TOTAL LEASES
<S> <C> <C> <C> <C>
Years ending December 31:
2000 . . . . . . . . . . . . . . . $ 2,229 $ 3 $2,232 $ 98
2001 . . . . . . . . . . . . . . . 1,232 1 1,233 33
2002 . . . . . . . . . . . . . . . 1,065 - 1,065 20
2003 . . . . . . . . . . . . . . . 177 177 14
-------- ------ ------ ---------
Minimum rental payments. . . . . . 4,703 4 4,707 $ 165
=========
Less amounts representing interest 1,006 - 1,006
-------- ------ ------
3,697 4 3,701
Less amounts due within one year . 1,550 3 1,553
-------- ------ ------
Capital lease obligations due
after one year . . . . . . . . . $ 2,147 $ 1 $2,148
======== ====== ======
</TABLE>

Rent expense under operating leases for the years ended December 31, 1999 and
1998 was $168,203 and $215,148, respectively.

As of December 31, 1999, the Company had an unpaid balance past due to Berthel
of approximately $1,021,836. Subsequent to year end, the Company has not made
certain of its January, February and March 2000 payments totaling $398,370.
Berthel only has the right to demand that the Company cure this violation, but
has not made such a demand as of March 20, 2000.

In December 1999, Berthel entered into a Standstill Agreement with the Company.
Under the Standstill Agreement, Berthel indicated its intention to form a
creditors committee to represent the interests of Berthel and other creditors of
the Company. The Company agreed to provide the creditors committee with access
to information regarding the Company and its business and to advise the
creditors committee in advance regarding certain significant corporate
developments. The creditors committee may also demand that the Company take
certain actions with respect to the Company's assets and business and restrict
the payment of dividends and other capital distributions. The creditors
committee agreed to forbear from taking actions to collect past due debt owed by
the Company in the absence of the unanimous approval of the creditors committee.
As of March 20, 2000, the Company and Berthel are the only parties to the
Standstill Agreement.

The Company has guaranteed a facility lease between Actel and a third party.
The lease expires in June 2009 and total remaining noncancellable lease payments
were $855,000 at December 31, 1999. Actel was current on its lease payments as
of December 31, 1999.

Subsequent to year end, the Company was notified by the FDIC of discrepancies
between the amount of the Company's notes payable pledged as collateral by a
note holder and the amount of notes payable recorded by the Company. The FDIC
believes that an additional $1,125,000 is outstanding representing various notes
with a significant shareholder and creditor. Some of these notes appear to have
been signed by an officer of the Company. Management believes that no funds
were received by the Company with respect to these notes and that it has other
defenses. No assurance can be given as to the ultimate outcome of this matter.
No loss, if any, has been recorded in the financial statements with respect to
this matter.

F-28
<PAGE>
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. Strategica filed its brief in the appeal on
March 2, 1999; ATN and PIC filed their reply briefs in May and June 1999; and
Strategica filed its responses in August 1999. PIC additionally filed a motion
to dismiss and for sanctions on August 18, 1999 which was denied. 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 commenced an arbitration proceeding against EILCO Leasing Services, Inc.
("Eilco"), a creditor of Incomex, to resolve a dispute regarding a loan
agreement between Incomex and Eilco. Eilco claimed that Incomex was in
violation of certain covenants of the loan agreement, including provisions
relating to certain obligations of Incomex to make payments to Eilco based on
Incomex's income from telecommunications services provided to a group of hotels
in Mexico. Incomex disputed these claims and initiated the arbitration to
resolve the dispute. An arbitration hearing with respect to this matter
commenced on April 21, 1999. On June 4, 1999, the arbitrator ruled that, after
a credit for the remaining principal balance of $341,444, Eilco owes Incomex
damages in the sum of $231,162, plus $3,161 for arbitration fees and expenses.
Subsequent to June 30, 1999, Incomex filed a petition against Eilco in
California state court for confirmation of the arbitration award and Eilco filed
a petition asserting that the arbitrator exceeded his authority in making the
arbitration award. On September 24, 1999 Incomex received a judgment confirming
the arbitration award. As of December 31, 1999, the full amount of the
arbitration award has been recorded as other income, net of a reserve for the
entire amount due from Eilco due to the uncertainty of collection.

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 alleged that the defendants improperly terminated
a long distance service agreement with Oncor and claimed damages based on
amounts which Oncor alleged to have advanced to the Company, lost profits for
the period in which the Company is alleged to have breached the contract,
attorneys' fees and for interference with contractual relations in an
unspecified amount of not less than $100,000. The Company asserted a
counterclaim for accounting, breach of contract, misrepresentation and payment
of attorneys' fees. The Company agreed with Oncor to settle this claim on
April 21, 1999. Under the settlement, the Company paid $150,000 to Oncor in
return for a release by Oncor of its claims against the Company.

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
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 settlement amount of
$100,000 was accrued by the Company as of December 31, 1998 and paid in 1999.

F-29
<PAGE>
A lawsuit was filed in Superior Court of the State of California on October 20,
1999 claiming conspiracy to defraud, fraud and deceit, and conversion against
several defendants, including ATN, in connection with an Internal Operator
Services Agreement between the plaintiffs and defendant Paramount International
Telecommunications, Inc. ("Paramount"). The Internal Operator Services
Agreement sets out that Paramount will provide (among other things) calling
services and billing and collection of the charges through local exchange
carriers, and Paramount would deduct agreed upon fees for its services and remit
the balance to the plaintiffs. Paramount allegedly contracted out operator and
billing services with ATN from May 1998 until present. In addition to other
claims against Paramount, the plaintiffs complain that Paramount and ATN
conspired to falsify call charge reports being sent to the plaintiffs by
underreporting the amount of charges billed to the end user and keeping the
monies generated therefrom, thereby damaging the plaintiffs for no less than
approximately $280,000. The plaintiffs also seek punitive damages in an
unspecified amount. ATN filed its response on January 4, 2000. ATN disputes
this claim and intends to vigorously defend its position, although no assurances
can be given as to the outcome of this matter. No loss, if any, has been
recorded in the consolidated financial statements with respect to this matter.

On October 1, 1998, the Company entered into an Amended and Restated Employment
Agreement with Thomas C. Chaplin, its former Chief Executive Officer and Guy O.
Murdock, its former 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. Subsequent to December 31, 1999,
Mr. Murdock and Mr. Chaplin resigned as officers and employees of the Company.
The Company is currently negotiating Mr. Murdock's and Mr. Chaplin's severance
packages.

On November 16, 1998 the Company entered into an Employment Agreement with Paul
C. Tunink, Chief Financial Officer. The Employment Agreement has a term through
November 30, 1999 and renews automatically from year to year thereafter, unless
terminated by either party and provides a base salary of not less than $128,000.
In addition, Mr. Tunink is eligible to participate in the Company's bonus plan
and other executive compensation plans. The Employment Agreement contains a
provision restricting competition with the Company for a period of one year
following termination of employment. Mr. Tunink's Employment Agreement provides
if his employment is terminated by the Company for any reason other than cause,
Mr. Tunink will be entitled to receive severance at an annual rate of $128,000
for one year and continuation of health insurance coverage for one year.

The Company has other employment agreements with certain key members of
management that provide for aggregate minimum annual base compensation as of
December 31, 1999 of $430,000 expiring on various dates through 2001. Under the
terms of these employment agreements, if employment is terminated by the Company
for any reason other than cause, the employees will be entitled to receive
severance at the current base compensation rate for two years.

F-30
<PAGE>
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 has also paid consulting
expenses to a former 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
$412,156 and $463,976 were generated from such agreement for the years ended
December 31, 1999 and 1998, respectively. Further, the Company had call
processing receivables from the hotels included under the agreement of $55,151
and $246,983 at December 31, 1999 and 1998, respectively. The agreement
provides for a fixed payment of $30,000 per month in commissions to be paid to
the minority shareholder.

A summary of transactions with related parties for the years ended December 31,
1999 and 1998 is as follows (dollars in thousands):
<TABLE>
<CAPTION>

1999 1998
<S> <C> <C>
Consulting expense. . . . . . . . . . . . . . . $ 58 $ 74
Interest expense on related party notes payable 1,171 290
Commissions to minority shareholder . . . . . . 360 360
Interest expense on notes payable to Berthel. . 138 134
Lease payments to Berthel . . . . . . . . . . . 507 840
Commissions and related fees to Berthel . . . . 130 142
</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,
1999 and 1998.

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 receivable, 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, 1999 and 1998 are as follows (dollars in thousands):
<TABLE>
<CAPTION>

1999 1998
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Long-term note receivable $ 1,000 $1,000 $ 806 $ 806
Long-term debt. . . . . . 4,051 3,504 3,857 3,367
</TABLE>

F-31
<PAGE>
16. BUSINESS SEGMENT INFORMATION

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 at December 31, 1999 and 1998 are
PIC/ATN, Incomex and MTS. The Company provides long-distance telecommunications
services to hotels, payphone owners, aggregators of operator service traffic and
other institutions in the United States and Mexico 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 Company entered into a Rental Agreement in February 2000 regarding
the principal product of MTS, as discussed in Note 1.

The accounting policies of the reportable segments at December 31, 1999 and 1998
are the same as those described in Note 1. The Company evaluates the
performance of its operating units based on income (loss) from operations.

Summarized financial information concerning the Company's reportable segments
(net of intercompany eliminations) is shown in the following table (dollars in
thousands). The "Other" column includes corporate related items.
<TABLE>
<CAPTION>

PIC/ATN INCOMEX MTS OTHER TOTAL
<S> <C> <C> <C> <C> <C>
1999:
Revenues. . . . . . . . . . . . . . . $ 23,150 $ 8,534 $ 4,063 $ - $ 35,747
Income (loss) from operations . . . . (6,254) (2,388) (1,642) (5,082) (15,366)
Total assets. . . . . . . . . . . . . 6,370 3,097 1,328 4,854 15,649
Depreciation and amortization expense 1,339 470 549 - 2,358
Capital expenditures. . . . . . . . . 561 35 110 - 706

1998:
Revenues. . . . . . . . . . . . . . . $ 20,804 $ 7,921 $ 5,263 $ - $ 33,988
Income (loss) from operations . . . . 2,077 1,796 (669) (1,298) 1,906
Total assets. . . . . . . . . . . . . 11,079 6,274 3,542 1,783 22,678
Depreciation and amortization expense 903 174 772 - 1,849
Capital expenditures. . . . . . . . . 800 134 357 - 1,291
</TABLE>

F-32
<PAGE>
Financial information relating to the Company's operations by geographic area
was for the years ended December 31, 1999 and 1998 as follows (dollars in
thousands):
<TABLE>
<CAPTION>

1999 1998
<S> <C> <C>
Revenues:
United States. . . . . . . . . . . . . . $27,213 $26,067
Mexico . . . . . . . . . . . . . . . . . 8,534 7,921
------- -------
Total . . . . . . . . . . . . . $35,747 $33,988
======= -------

Long-lived assets (excluding investments):
United States. . . . . . . . . . . . . . $ 7,869 $15,719
Mexico . . . . . . . . . . . . . . . . . 1,633 1,704
------- -------
Total . . . . . . . . . . . . . $ 9,502 $17,423
======= =======
</TABLE>

17. AT&T COMMISSION AGREEMENT

Under its agreement with AT&T, 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 agreement included provisions for the
refund of the bonus payments should the Company terminate the agreement or fail
to comply with the agreement. AT&T was responsible for determining if the
Company was in compliance with certain standards, as set forth in the agreement.
AT&T reserved a number of grounds to terminate the 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 1998 of $453,396.

18. SUBSEQUENT EVENTS

In January 2000, the Company retained Berthel to assist the Company regarding
the identification and investigation of strategic alternatives that might be
available to the Company, including a possible refinancing of the Company, a
possible sale of its existing operating units and other assets or possible
repositioning of the Company through a merger. The Company subsequently entered
into a nonbinding letter of intent to merge with Floragraph LLC (see discussion
below). No other strategic transactions have been negotiated to date and there
can be no assurance that any such strategic transactions will be consummated.
If any strategic transactions are completed, the Company will owe a success fee
to Berthel, depending on the price of the strategic transactions.

In February 2000, the Company entered into a nonbinding letter of intent to
merge with Floragraph LLC, which owns Flower.com, an online floral website. The
merger is subject to the satisfaction of a number of conditions, including the
completion of due diligence, the execution of definitive agreements, the receipt
of necessary regulatory approvals, approval by the Company's shareholders and
other closing conditions. Because there are significant conditions remaining to
be satisfied with respect to the merger, no assurance can be given the merger
will be consummated or, if consummated, that the terms of the merger will be as
presently contemplated. Under the terms of the agreement, the parties shall
negotiate in good faith to finalize and execute the agreement prior to March 31,
2000 with closing as soon as practicable, and in any event, prior to June 30,
2000.

F-33
<PAGE>
In February 2000, the Company entered into a billing services advance funding
agreement with two independent billing and collection firms (the "Companies").
These agreements allow for the Company to sell certain call records for
processing, billing and collection at an advance funding rate of 70% of the
gross billable call value. These amounts are remitted to the Company
approximately 9 days after submission. The Company will then receive an
additional 5% or 8% of the gross billable call value six months after
submission. Under the agreements, if the Companies experience charges for bad
debt, customer service credits and other fees in excess of a stated amount,
these additional amounts may be withheld from the 5% or 8% amounts. In
consideration for the agreement, one of the billing and collection firms loaned
the Company $150,000, of which $60,000 has been repaid as of March 20, 2000. The
term of the agreements are for 36 months and the $150,000 advance is personally
guaranteed by the President of PIC/ATN and a stockholder of the Company.

Subsequent to year end and through March 20, 2000, the Company had borrowed a
total of $306,000 with an affiliate of Berthel. The borrowings are due on
demand and bear interest at 12%. Warrants will also be issued equal to 200% of
the amount of the loan. The exercise price of such warrants will be the bid
price of the Company's stock at the close of business on the day the funds were
received by the Company.

* * * * *

F-34

FIRST AMENDMENT TO
COMMON STOCK PURCHASE WARRANT AGREEMENT

This First Amendment to Common Stock Purchase Warrant Agreement, dated
as of September 30, 1999 between MURDOCK COMMUNICATIONS CORPORATION, an Iowa
corporation (the "Company") and FIRSTAR TRUST COMPANY, as Warrant Agent (the
"Warrant Agent").

RECITALS

A. The Warrant Agent and the Company are parties to a Common Stock
Purchase Warrant Agreement dated as of October 21, 1996 (the "Agreement").

B. The Company and the Warrant Agent deem it desirable to amend
the Agreement to extend the "Warrant Expiration Date" to April 21, 2000.

C. Pursuant to Section 10 of the Agreement, the Company and the
Warrant Agent may by supplemental agreement make any changes or corrections in
the Agreement that they may deem necessary or desirable and which do not
adversely affect the interests of the holders of Warrant Certificates

AGREEMENTS

In consideration of the foregoing and the mutual covenants and
agreements contained herein and in the Agreement, and intending to be legally
bound hereby, the Warrant Agent and the Company hereby agree as follows:

1. Amendment of Section 1(b). The definition of "Warrant
----------------------------
Expiration Date" in Section 1(i) of the Agreement is hereby amended to read in
its entirety as follows:

"Warrant Expiration Date" shall mean 5 p.m. (Central Time) on April 21, 2000, or
if such date shall in the State of Wisconsin be a holiday or a day on which
banks are authorized to close, then 5 p.m. (Central Time) on the next following
day which in the State of Wisconsin is not a holiday or a day on which banks are
authorized to close. Unless exercised during the Warrant Exercise Period, the
Warrants will automatically expire. The Warrants may be called for redemption
and the expiration date herefor accelerated, on the terms and conditions set
forth in sections 4(b) and 4(c) of this Agreement. If so called for redemption,
Warrant Certificate holders shall have a period of

<PAGE>
at least 30 days after the date of the call notice within which to exercise the
Warrants. However, Warrant Certificate holders will receive the redemption
price only if such certificates are surrendered to the Corporate Office within
the redemption period (as defined below).

2. Amendment of Section 5(b). Section 5(b) of the Agreement is
----------------------------
hereby amended by adding a new sentence immediately following the end thereof to
read as follows:

Notwithstanding anything herein to the contrary, the Company shall not be
obligated by this Agreement to take any action to secure any registration or
approval of the Common Stock purchasable upon the exercise of the Warrants in
any state or other jurisdiction at any time after October 21, 1999 and the
Company may refuse to issue such Common Stock upon exercise of the Warrants in
the absence of an exemption in any such state or jurisdiction.

3. Amendments of Section 8. Section 8 of the Agreement is hereby
------------------------
amended by adding a new subsection (e) to the end thereof to read as follows:

(e) Notwithstanding anything herein to the contrary, the Company shall not be
obligated to make any adjustments pursuant to this Section 8 to the Purchase
Price or the number of shares of Common Stock purchasable upon the exercise of
the Warrants for any event which occurs after October 21, 1999.

Section 8(b)(iv) is hereby amended by adding the following sentence at
the end thereof:

Any such fraction which is equal to or greater than 0.50 shall be rounded
up to a whole share and any such fraction which is less than 0.50 shall be
rounded down and eliminated.

4. Full Force and Effect. All remaining provisions of the
------------------------
Agreement remain unchanged and in full force and effect.

5. Governing Law. This Amendment shall be governed by and
--------------
construed in accordance with the laws of the State of Wisconsin. Section
headings in this Amendment appear for convenience of reference only and shall
not be used in any interpretation of this Amendment.

2
<PAGE>
6. Binding Effect. This Amendment shall be binding upon and inure
--------------
to the benefit of the Company, the Warrant Agent and their respective successors
and assigns, and the Registered Holders from time to time of Warrant
Certificates or any of them. Nothing in this Amendment shall be construed to
confer any right, remedy or claim upon any other person.
7. Counterparts. This Amendment may be executed in counterparts,
------------
which taken together shall constitute a single document.

IN WITNESS WHEREOF, the Warrant Agent and the Company have caused this
Amendment to be executed as of the date first written above by their respective
officers thereunto duly authorized.

MURDOCK COMMUNICATIONS
CORPORATION

BY
------------------------------
Thomas E. Chaplin
Chief Executive Officer

FIRSTAR TRUST COMPANY

BY
------------------------------
Authorized Officer

WAIVER AND FIRST AMENDMENT TO NOTE AND WARRANT PURCHASE AGREEMENT
-----------------------------------------------------------------

THIS WAIVER AND FIRST AMENDMENT TO NOTE AND WARRANT PURCHASE AGREEMENT (the
"Amendment"), dated as of December 17, 1999, among MURDOCK COMMUNICATIONS
CORPORATION, as the Issuer, PRIORITY INTERNATIONAL COMMUNICATIONS, INC., ATN
COMMUNICATIONS, INC., INCOMEX, INC. and MCC ACQUISITION CORP., as Guarantors,
and NEW VALLEY CORPORATION, as purchaser.

W I T N E S S E T H:
- - - - - - - - - -

RECITALS:

A. The Issuer, the Guarantors and the Purchaser have entered into a
certain Note and Warrant Purchase Agreement, dated as of June 21, 1999 (the
"Note Purchase Agreement").

B. The Issuer, the Guarantors and the Purchaser have entered into a
certain Security Agreement, dated as of August 21, 1999 (the "Security
Agreement"; capitalized terms used herein and not otherwise defined shall have
the meanings ascribed to such terms in the Note Purchase Agreement or the
Security Agreement).

B. The Issuer, the Guarantors and the Purchaser desire to amend the
Note Purchase Agreement to make various changes thereto, and the Purchaser has
agreed to so amend the Note Purchase Agreement on the terms and condition set
forth herein.

NOW, THEREFORE, the parties hereto agree as follows:

SECTION 1. Amendment to Section 2.4. Section 2.4 of the Note Purchase
------------------------
Agreement is hereby amended by replacing such Section in its entirety with the
following:

Section 2.4. 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
seventeenth (17th) day of each month (each, a "Monthly Payment Date") as set
forth below:

Monthly Payment Date Monthly Principal Payment
---------------------- ---------------------------

January 17, 2000 $200,000

<PAGE>

February 17, 2000 $200,000
March 17, 2000 $200,000
April 17, 2000 $200,000
May 17, 2000 $200,000
June 17, 2000 $1,000,000

(b) Upon the occurrence of a Financing Transaction, 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 2. Amendment to Section 3.2. Section 3.2 of the Note Purchase
------------------------
Agreement is hereby amended by replacing such Section in its entirety with the
following:

Section 3.2. Default Rate of Interest. If the Issuer shall fail to pay
------------------------
on the due date therefor, whether on the Monthly Payment Date, by acceleration
or otherwise, any principal owing under the Notes, 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
at a rate per annum equal to fourteen percent (14%) (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 3. Amendment to Article 3 of the Note Purchase Agreement.
Article 3 of the Note Purchase Agreement is hereby amended by inserting the
following new Section 3.6:

Section 3.6. Conversion of Notes. The Notes are convertible into
---------------------
shares of Common Stock of the Issuer at the option of the Purchaser pursuant to
the terms and conditions of this Section 3.6.

2
<PAGE>
Section 3.6.1. Right to Convert.
------------------

Subject to and upon compliance with the provisions of this Section 3.6, the
Purchaser shall have the right, at his option, at any time before the close of
business on the last Business Day prior to the Maturity Date, to convert the
outstanding principal amount of any such Note, or any portion of such principal
amount which is $1,000 or an integral multiple thereof, into that number of
fully paid and non-assessable shares of Common Stock (as such shares shall then
be constituted) obtained by dividing the principal amount of the Note or portion
thereof surrendered for conversion by the Conversion Price in effect at such
time, by surrender of the Note so to be converted in whole or in part in the
manner provided in Section 3.6.2. the Purchaser is not entitled to any rights of
a Purchaser of Common Stock until the Purchaser has converted his Notes to
Common Stock, and only to the extent such Notes are deemed to have been
converted to Common Stock under this Section 3.6.

Section 3.6.2. Exercise of Conversion Privilege; Issuance of Common
-------------------------------------------------------
Stock on Conversion.
- ---------------------

In order to exercise the conversion privilege with respect to any Note, the
Purchaser shall surrender such Note, duly endorsed, to the Issuer, and shall
give written notice of conversion to the Issuer that the Purchaser elects to
convert such Note or the portion thereof specified in said notice. Such notice
shall also state the name or names (with address or addresses) in which the
certificate or certificates for shares of Common Stock which shall be issuable
on such conversion shall be issued. Each such Note surrendered for conversion
shall, unless the shares issuable on conversion are to be issued in the same
name as the registration of such Note, be duly endorsed by, or be accompanied by
instruments of transfer in form satisfactory to the Issuer duly executed by, the
Purchaser or his duly authorized attorney.

As promptly as practicable after satisfaction of the requirements for
conversion set forth above, subject to compliance with any restrictions on
transfer if shares issuable on conversion are to be issued in a name other than
that of the Purchaser (as if such transfer were a transfer of the Note or Notes
(or portion thereof) so converted), the Issuer shall issue and shall deliver to
such Purchaser a certificate or certificates for the number of full shares of
Common Stock issuable upon the conversion of such Note or portion thereof in
accordance with the provisions of this Section 3.6 and a check or cash in
respect of any fractional interest in respect of a share of Common Stock arising
upon such conversion, as provided in Section 3.6.3. In case any Note of a
denomination greater than $1,000 shall be surrendered for partial conversion,
the Issuer shall execute and deliver to the Purchaser of the Note so
surrendered, without charge to him, a new Note or Notes in authorized
denominations in an aggregate principal amount equal to the unconverted portion
of the surrendered Note.

3
<PAGE>
Each conversion shall be deemed to have been effected as to any such Note
(or portion thereof) on the date on which the requirements set forth above in
this Section 3.6.2. have been satisfied as to such Note (or portion thereof),
and the Person in whose name any certificate or certificates for shares of
Common Stock shall be issuable upon such conversion shall be deemed to have
become on said date the Purchaser of record of the shares represented thereby;
provided, however, that any such surrender on any date when the stock transfer
books of the Issuer shall be closed shall constitute the Person in whose name
the certificates are to be issued as the record Purchaser thereof for all
purposes on the next succeeding day on which such stock transfer books are open,
but such conversion shall be at the Conversion Price in effect on the date upon
which such Note shall be surrendered.

Section 3.6.3. Cash Payments in Lieu of Fractional Shares.
------------------------------------------------

No fractional share of Common Stock or scrip representing fractional shares
shall be issued upon conversion of Notes. If more than one Note shall be
surrendered for conversion at one time by the same Purchaser, the number of full
shares which shall be issuable upon conversion shall be computed on the basis of
the aggregate principal amount of the Notes (or specified portions thereof to
the extent permitted hereby) so surrendered. If any fractional share of stock
would be issuable upon the conversion of any Note or Notes, the Issuer shall
make an adjustment and payment therefor in cash at the current market value
thereof to the Purchaser of Notes. The current market value of a share of
Common Stock shall be the Closing Price on the last Trading Day prior to the day
on which the Notes (or specified portions thereof) are deemed to have been
converted.

Section 3.6.4. Conversion Price.
-----------------

Subject to adjustment as provided in this Section 3.6, the conversion price
shall be $3.00 (herein called the "Conversion Price").

Section 3.6.5. Effect on Reclassification, Consolidation, Merger or
-------------------------------------------------------
Sale.
- ----

In the event of (i) any reclassification or change of outstanding
shares of Common Stock (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of subdivision
or combination), (ii) any consolidation, merger or combination of the Issuer
with another corporation or entity as a result of which holders of shares of
Common Stock shall be entitled to receive securities or other property
(including cash) with respect to or in exchange for such shares or (iii) any
sale or conveyance of the property of the Issuer as, or substantially as, an
entirety to any other corporation or entity as a result of which holders of
shares of Common Stock shall be entitled to receive securities or other property
(including cash) with respect to or in exchange for such shares, then the Issuer
or the successor or purchasing corporation or entity, as the case may be, shall
enter into a supplemental agreement providing that the

4
<PAGE>
Notes shall be convertible into the kind and amount of securities or other
property (including cash) receivable upon such reclassification, exchange,
consolidation, merger, combination, sale or conveyance by a holder of a number
of shares issuable upon conversion of the Notes immediately prior to such
reclassification, exchange, consolidation, merger, combination, sale or
conveyance. Such supplemental agreement shall provide for adjustments which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in this Section 3.6. The above provision of this Section 3.6.5 shall
similarly apply to successive reclassifications, exchanges, consolidations,
mergers, combinations, sales or conveyances.

Section 3.6.6. Registration Rights.
--------------------

All shares of Common Stock issued upon conversion of the Notes shall be
treated as Warrant Shares for purposes of the Registration Rights Agreement.

SECTION 4. Amendment to Section 8.2(a). Section 8.2(a) of the Note
------------------------------
Purchase Agreement is hereby amended by replacing such Section in its entirety
with the following:

Section 8.2. 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 any or 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.

SECTION 5. Amendment to Exhibit A. Exhibit A to the Note Purchase
------------------------- ----------
Agreement is hereby amended by replacing such Exhibit A with the Exhibit A-1
attached hereto.

SECTION 6. Waiver. The Purchaser hereby waives any and all Defaults or
------
Events of Default existing as of the date hereof arising pursuant to Section 2.4
of the Note Purchase Agreement or arising with respect to any transaction or
event disclosed in any filing made by the Issuer with the Securities and
Exchange Commission on or before the date hereof. After giving effect to the
Waivers set forth herein, the Issuer hereby represents and warrants to Purchaser
that all Representations and Warranties set forth in Article 5 of the Note
Purchase Agreement are true and correct as if made on the date hereof, other
than with respect to any event or transaction disclosed in any filing made by
the Issuer with the Securities and Exchange Commission, and acknowledges that
the Issuer is in compliance with all of the terms and conditions of the Note
Purchase Agreement. In reliance on such representation and warranty and
acknowledgement, the Purchaser hereby acknowledges that, as of the date hereof,
no other Default or Event of Default exists.

SECTION 7. Continuing Effectiveness of Note Purchase Agreement. The
-----------------------------------------------------
Note Purchase Agreement and each of the other Transaction Documents shall remain
in full force and

5
<PAGE>
effect in accordance with their respective terms, except as expressly amended or
modified by this Amendment.

SECTION 8. Cost and Expenses. The Issuer agrees to pay all
-------------------
out-of-pocket expenses of the Purchaser for the negotiation, preparation,
execution and delivery of this Amendment (including fees and expenses of counsel
to the Purchaser).

SECTION 9. Effectiveness. This Amendment shall become effective upon
-------------
the prior or concurrent receipt by the Purchaser of a copy of this Amendment,
duly executed by each of the Issuer and the Purchaser, a copy of the
Participation Agreement, duly executed by the Purchaser and MCC Investment
Company, LLC and payment to the Purchaser of all amounts required to be paid as
of the date hereof pursuant to the terms of the Participation Agreement, a duly
executed Amended and Restated Fixed Rate Senior Note Due June 17, 2000, and
payment of all accrued and unpaid fees and expenses reimbursable to New Valley
pursuant to the terms of the Participation Agreement, including but not limited
to fees and expenses of King & Spalding in the amount of $44,195.05 paid
pursuant to the wire instructions set forth on Schedule 1 hereto.

SECTION 10. Headings. The various headings of this Amendment are
--------
inserted for convenience only and shall not affect the meaning or interpretation
of this Amendment or any provision hereof.

SECTION 11. Counterparts. This Amendment may be executed by the
------------
parties hereto in several counterparts, each of which shall be deemed to be an
original and all of which shall constitute together but one and the same
agreement. This Amendment shall become effective when counterparts hereof
executed on behalf of the Issuer and the Purchaser (or notice thereof
satisfactory to the Purchaser) shall have been received by the Purchaser and
notice thereof shall have been given by the Purchaser to the Issuer.

SECTION 12. Governing Law. THIS AMENDMENT SHALL BE DEEMED TO BE A
--------------
CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF IOWA.

SECTION 13. Successors and Assigns. This Amendment shall be binding
------------------------
upon and shall inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that the Issuer may not assign or
transfer its rights or obligations hereunder or under the Note Purchase
Agreement except in accordance with the terms of the Note Purchase Agreement.

6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.

ISSUER:

MURDOCK COMMUNICATION CORPORATION

By/s/ Paul Tunink
--------------------------------
Name: Paul Tunink
Title: Vice President and CFO

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

(SIGNATURE PAGE TO NOTE AND WARRANT PURCHASE AGREEMENT)

7
<PAGE>

MCC ACQUISITION CORP.

By/s/ Thomas E. Chaplin
--------------------------------
Name: Thomas E. Chaplin
Title: Chairman

PURCHASER:

NEW VALLEY CORPORATION

By/s/ Richard J. Lampen
--------------------------------
Name: Richard J. Lampen
Title: Executive Vice President

(SIGNATURE PAGE TO NOTE AND WARRANT PURCHASE AGREEMENT)

Exhibit 21

Subsidiaries of Murdock Communications Corporation

As of December 31, 1999, the subsidiaries of Murdock Communications
Corporation were as follows:
<TABLE>
<CAPTION>

Name Jurisdiction of Incorporation or Organization
- ------------------------------------------- ---------------------------------------------
<S> <C>
MCC Acquisition Corp. Iowa
Priority International Communications Inc. Texas
ATN Communications Incorporated Delaware
INCOMEX, Inc. California
Guide*Star, L.L.C. (1) Iowa

____________________________
<FN>
(1) Murdock Communications Corporation has a 50% ownership interest in this
limited liability company.
</TABLE>

<ARTICLE> 5
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 76
<SECURITIES> 0
<RECEIVABLES> 4,354
<ALLOWANCES> 3,372
<INVENTORY> 0
<CURRENT-ASSETS> 1,870
<PP&E> 14,696
<DEPRECIATION> 12,086
<TOTAL-ASSETS> 15,649
<CURRENT-LIABILITIES> 24,210
<BONDS> 0
0
1,868
<COMMON> 20,259
<OTHER-SE> (35,891)
<TOTAL-LIABILITY-AND-EQUITY> 15,649
<SALES> 1,722
<TOTAL-REVENUES> 35,747
<CGS> 1,455
<TOTAL-COSTS> 31,986
<OTHER-EXPENSES> 19,127
<LOSS-PROVISION> 11,358
<INTEREST-EXPENSE> 3,691
<INCOME-PRETAX> (18,398)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,398)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,398)
<EPS-BASIC> (1.79)
<EPS-DILUTED> (1.79)

</TABLE>