SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission File Number 000-21463
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Murdock Communications Corporation
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(Exact Name of Issuer as Specified in Its Charter)
Iowa 42-1339746
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5539 Crane Lane N.E., Cedar Rapids, Iowa 52402
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(Address of principal executive offices)
Registrant's telephone number, including area code: 319-393-8999
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
On September 30, 2000, there were outstanding 12,269,964 shares of the
Registrant's no par value Common Stock.
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MURDOCK COMMUNICATIONS CORPORATION
FORM 10-Q
September 30, 2000
INDEX
PART I - FINANCIAL INFORMATION
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Page
<S> <C> <C>
Item 1. Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999. . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three
Months Ended September 30, 2000 and 1999 and for the
Nine Months Ended September 30, 2000 and 1999. . . . . . 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999 . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . 18
Item 3. Quantitative and Qualitative Disclosures About Market
Risk . . . . . . . . . . . . . . . . . . . . . . . . . . 28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 29
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . 29
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . 29
Item 4. Submission of Matters to a Vote of Security Holders. . . 29
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . 29
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 29
Signatures . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>
2
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PART I FINANCIAL INFORMATION
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and December 31, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
-------------------- -------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 555 $ 76
Accounts receivable, less allowance for doubtful accounts:
2000 - $1,028; 1999 - $3,127 . . . . . . . . . . . . . . . . . . . . . . 503 892
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 500
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . 221 251
-------------------- -------------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 1,279 1,719
-------------------- -------------------
PROPERTY AND EQUIPMENT
Land and building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,446
Telecommunications equipment . . . . . . . . . . . . . . . . . . . . . . . 1,393 8,991
Furniture and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . 282 791
-------------------- -------------------
1,675 11,228
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . (1,451) (8,679)
-------------------- -------------------
PROPERTY AND EQUIPMENT, NET. . . . . . . . . . . . . . . . . . . . . 224 2,549
-------------------- -------------------
OTHER ASSETS
Goodwill - net of accumulated amortization: 2000 - $1,705; 1999 - $1,351. 1,283 3,750
Cost of purchased site contracts, net of accumulated amortization: 2000 -
$832; 1999 - $736. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 48
Other intangible assets, net of accumulated amortization: 2000 - $145;
1999 - $619. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327 197
Investments, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,405 4,277
Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . . . . 11 12
Net assets of discontinued operations. . . . . . . . . . . . . . . . . . . - 1,648
-------------------- -------------------
TOTAL OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . 4,037 9,932
-------------------- -------------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,540 $ 14,200
==================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
3
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MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
September 30, 2000 and December 31, 1999
(Dollars in thousands except per share data)
(Unaudited)
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<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
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LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Outstanding checks in excess of available balances . . . . . . . . . . . . . . . . . $ - $ 86
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,616 13,708
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,077 2,018
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,417 1,894
Accrued universal service fund fees. . . . . . . . . . . . . . . . . . . . . . . . . 1,700 1,700
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 492 1,034
Current portion of capital lease obligations principally with a related party. . . . - 1,553
Current portion of long-term debt with related parties . . . . . . . . . . . . . . . - 647
Current portion of long-term debt, others. . . . . . . . . . . . . . . . . . . . . . 220 288
-------------------- -------------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 15,522 22,928
LONG-TERM LIABILITIES
Capital lease obligations principally with a related party, less current portion . . 2 2,148
Long-term debt with related parties, less current portion. . . . . . . . . . . . . . 4,414 2,122
Long-term debt, others, less current portion . . . . . . . . . . . . . . . . . . . . 521 744
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 22
-------------------- -------------------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,462 27,964
-------------------- -------------------
SHAREHOLDERS' EQUITY (DEFICIENCY)
8% Series A Convertible Preferred Stock, $100 stated value:
authorized 1,000,000 shares; issued and outstanding: 2000 - 0 shares and 1999 -
18,920 shares ($1,892 liquidation value) . . . . . . . . . . . . . . . . . . . . . - 1,868
Common stock, no par or stated value: authorized - 40,000,000 shares;
issued: 2000 - 12,519,964 shares; 1999 - 10,576,012 shares . . . . . . . . . . . . 22,299 20,259
Common stock warrants: issued and outstanding: 2000 - 11,046,771; 1999 -
5,866,591. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,106 635
Treasury stock at cost: issued 2000 - 250,000 shares; 1999 - none. . . . . . . . . . (94) -
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 134
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38,367) (36,660)
-------------------- -------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) . . . . . . . . . . . . . . . . . . . (14,922) (13,764)
-------------------- -------------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,540 $ 14,200
==================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
4
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MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended and Nine Months Ended September 30, 2000 and 1999
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Call processing. . . . . . . . . . . . . . . . . . . . . . . $ 2,061 $ 5,697 $ 6,449 $ 17,977
Other revenues . . . . . . . . . . . . . . . . . . . . . . . 27 636 91 2,452
------------- ------------- ------------- -------------
TOTAL REVENUES . . . . . . . . . . . . . . . . . . . . 2,088 6,333 6,540 20,429
COSTS OF SALES
Call processing. . . . . . . . . . . . . . . . . . . . . . . 1,551 4,034 5,027 13,317
Other cost of sales. . . . . . . . . . . . . . . . . . . . . - 317 15 1,251
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . - 726 - 1,497
------------- ------------- ------------- -------------
TOTAL COST OF SALES. . . . . . . . . . . . . . . . . . 1,551 5,077 5,042 16,065
------------- ------------- ------------- -------------
GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . 537 1,256 1,498 4,364
OPERATING EXPENSES
Selling, general and administrative expenses . . . . . . . . 687 1,278 2,269 4,287
Depreciation and amortization expense. . . . . . . . . . . . 221 455 731 1,424
Impairment of property and equipment and intangible assets . 141 - 2,712 -
AcNet bad debt and acquisition expenses. . . . . . . . . . . - - 489 -
------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES . . . . . . . . . . . . . . . 1,049 1,733 6,201 5,711
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . (512) (477) (4,703) (1,347)
NON-OPERATING INCOME (EXPENSE)
Interest expense, net. . . . . . . . . . . . . . . . . . . . (981) (912) (2,605) (2,335)
Other income . . . . . . . . . . . . . . . . . . . . . . . . 86 217 7,249 223
------------- ------------- ------------- -------------
TOTAL NON-OPERATING INCOME (EXPENSE) . . . . . . . . . (895) (695) 4,644 (2,112)
------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAX EXPENSE . . . . . . . . . . . . . . . . (1,407) (1,172) (59) (3,459)
Income tax expense . . . . . . . . . . . . . . . . . . . . . - (196) (4) 363
------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . . . (1,407) (1,368) (63) (3,096)
DISCONTINUED OPERATIONS
Income (loss) from operations. . . . . . . . . . . . . . . . - (236) (1,175) 713
Loss on disposition. . . . . . . . . . . . . . . . . . . . . - - (332) -
------------- ------------- ------------- -------------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,407) (1,604) (1,570) (2,383)
DIVIDENDS AND ACCRETION ON 8% SERIES A CONVERTIBLE
PREFERRED STOCK. . . . . . . . . . . . . . . . . . . . . . . (46) (45) (138) (148)
------------- ------------- ------------- -------------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . $ (1,453) $ (1,649) $ (1,708) $ (2,531)
============= ============= ============= =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Loss from continuing operations . . . . . . . . . . . . . . . $ (0.14) $ (0.14) $ (0.02) $ (0.33)
Income (loss) from discontinued operations. . . . . . . . . . - (0.02) (0.14) 0.09
------------- ------------- ------------- -------------
$ (0.14) $ (0.16) $ (0.16) $ (0.24)
============= ============= ============= =============
BASIC AND DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING . . . . . . . . . . . . . . . . . . . . . 10,495,843 10,425,797 10,399,871 10,362,864
============= ============= ============= =============
</TABLE>
5
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MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2000 and 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,570) $(2,383)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH FLOWS FROM OPERATING
ACTIVITIES
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 731 1,424
Impairment of property and equipment and intangible assets. . . . . . 2,775 -
Impairment of investment. . . . . . . . . . . . . . . . . . . . . . . 676 -
Noncash interest and dividends. . . . . . . . . . . . . . . . . . . . (353) -
Noncash interest expense. . . . . . . . . . . . . . . . . . . . . . . 609 411
Gain on sale of property and equipment. . . . . . . . . . . . . . . . (214) (5)
Gain on Debt Restructuring Plan . . . . . . . . . . . . . . . . . . . (6,766) -
(Income) loss from discontinued operations. . . . . . . . . . . . . . 1,175 (1,083)
Loss on disposition of discontinued operations. . . . . . . . . . . . 332 -
Changes in operating assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352 (534)
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . 103 (438)
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . (124) 151
Outstanding checks in excess of bank balances . . . . . . . . . . . (86) -
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . (81) 576
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 27 (139)
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . - (5)
Other noncurrent liabilities. . . . . . . . . . . . . . . . . . . . (19) -
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES OF CONTINUING OPERATIONS (2,433) (2,025)
NET CASH FLOWS FROM DISCONTINUED OPERATIONS . . . . . . . . . . . - (29)
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES. . . . . . . . . . . . . (2,433) (2,054)
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of Actel preferred stock . . . . . . . . . . . . . 4,948 -
Purchases of property and equipment . . . . . . . . . . . . . . . . . (7) (668)
Proceeds from sale of property and equipment. . . . . . . . . . . . . 233 13
Payments for site contracts . . . . . . . . . . . . . . . . . . . . . - (13)
Cash paid for investments . . . . . . . . . . . . . . . . . . . . . . - (5,438)
Cash paid for note receivable . . . . . . . . . . . . . . . . . . . . - (1,000)
Cash advanced to joint venture. . . . . . . . . . . . . . . . . . . . - (39)
Cash received on note receivable. . . . . . . . . . . . . . . . . . . - 500
-------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES. . . . . . . . . . . . . 5,174 (6,645)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on capital lease obligations, primarily to a related party . (323) (340)
Borrowings on notes payable . . . . . . . . . . . . . . . . . . . . . 556 8,773
Borrowings on long-term debt, others. . . . . . . . . . . . . . . . . - 943
Payments on notes payable . . . . . . . . . . . . . . . . . . . . . . (2,174) (522)
Payments on long-term debt with related parties . . . . . . . . . . . (291) (670)
Payments on long-term debt, others. . . . . . . . . . . . . . . . . . (30) (769)
Proceeds from issuance of common stock. . . . . . . . . . . . . . . . - 35
Payments on offering costs and origination fees . . . . . . . . . . . - (218)
-------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES. . . . . . . . . . . . . (2,262) 7,232
-------- --------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . 479 (1,467)
CASH AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . 76 1,722
-------- --------
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . $ 555 $ 255
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for interest. . . . . . . . . . . . . . . $ 443 $ 652
Cash paid during the period for income taxes. . . . . . . . . . . . . 6 32
</TABLE>
6
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SUPPLEMENTAL DISCLOSURES OF OPERATING, INVESTING AND FINANCING ACTIVITES:
2000:
The Company recorded an increase to the carrying value of the 8% Convertible
Preferred Stock and a charge to accumulated deficit of $24,000 representing the
current period accretion to its convertible price.
During the period, 18,941 common stock warrants were exercised by individuals to
common stock increasing common stock by $34,000 in a cashless exercise.
The Company issued stock dividends of $114,000 representing 241,128 shares of
common stock recorded as an increase to common stock and a decrease in accrued
dividends.
The Company recorded a $94,000 charge representing treasury stock received in
the cashless sale of the Incomex subsidiary, representing 250,000 shares.
During the period the Company issued 5,199,121 common stock warrants and
recorded a $471,000 increase to common stock warrants and deferred financing
costs.
The Company sold 729,910 shares of Actel Preferred Stock in a noncash
transaction reducing the cost basis of the investment by $729,910 in exchange
for cancellation of indebtedness.
The net assets of the Company decreased by $1,648,000 related to the sale of the
Incomex subsidiary in a noncash transaction.
The Company sold two buildings resulting in the offsetting of certain assets and
liabilities including a reduction of the $500,000 note receivable from Actel,
decreases in the principal balance of two notes payable totaling $1,002,000,
decreasing accounts payable by $860,000, decreasing accumulated depreciation by
$251,000, decreasing other assets by $91,000, decreasing the cost basis of land
and fixed assets by $1,446,000, and a decrease in other receivables of $37,000,
resulting in a gain of $214,000 net of selling expenses.
The Company recorded noncash interest expense of $285,000 in connection with the
Debt Restructuring Plan related to the subordinated debt with Berthel and
$213,000 related to the writeoff of deferred financing costs in the third
quarter on debt instruments that have been repaid or converted.
The Company recorded a gain of $6,766,000 related to the Debt Restructuring
Plan, resulting in noncash adjustments to various accounts. Approximately
$4,600,000 of new notes payable were issued in connection with the transaction
in exchange for the cancellation of approximately $9,200,000 of outstanding
indebtedness.
During the third quarter, the Company recorded a $111,000 receivable and
dividends payable to two former directors related to previous advances on
preferred stock dividends.
The Company converted preferred stock to common stock during the third quarter
in the amount of $1,892,000 representing 18,920 shares of preferred stock and
1,683,880 shares of common stock.
1999:
The Company recorded an increase to the carrying value of the 8% series A
convertible preferred stock and a charge to accumulated deficit of $23,454
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 $124,332 for cumulative dividends earned by the holders of the 8%
series A convertible preferred stock.
The Company issued stock dividends of $171,664 which had been recognized in
current and prior years through charges to retained earnings and increases in
accrued expenses representing 65,975 shares of common stock.
The Company recorded $204,000 of deferred loan costs in connection with debt
financing of $7,975,000 and related issuance of common stock warrants to
purchase 1,200,000 shares of the Company's common stock. Such costs are being
amortized to non-cash interest expense.
See accompanying notes to consolidated financial statements.
7
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MURDOCK COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
1. SIGNIFICANT ACCOUNTING POLICIES
---------------------------------
BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been
prepared by Murdock Communications Corporation (the "Company") in accordance
with accounting principles generally accepted in the United States for interim
financial reporting and the regulations of the Securities and Exchange
Commission for quarterly reporting. Accordingly, they do not include all
information and footnotes required by generally accepted accounting principles
for complete financial information. The foregoing unaudited interim
consolidated financial statements reflect all adjustments which, in the opinion
of management, are necessary to reflect a fair presentation of the financial
position, the results of the operations and cash flows of the Company and its
subsidiaries for the interim periods presented. All adjustments, in the opinion
of management, are of a normal and recurring nature. Operating results for the
nine months ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the full year ended December 31, 2000. The
accompanying statements of operations have been reclassified from the
disposition for the Incomex subsidiary (see Note 6) so that the results for the
subsidiary's operations are classified as discontinued operations for all
periods presented. The assets and liabilities of the discontinued operations
have been reclassified in the 1999 balance sheet as "net assets of discontinued
operations." The statements of cash flows and related notes to the consolidated
financial statements have also been reclassified to conform to the discontinued
operations presentation. The consolidated balance sheet information as of
December 31, 1999 was derived from the Company's audited financial statements.
For further information, refer to the financial statements and footnotes thereto
for the year ended December 31, 1999, included in the Company's Annual Report on
Form 10-KSB (Commission File # 000-21463) as filed with the Securities and
Exchange Commission on March 30, 2000.
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 $38.4 million, and current liabilities exceed current assets by $14.2
million at September 30, 2000. The Company also is past due in the payment of
approximately $10.5 million of principal and accrued interest as of September
30, 2000. The Company's past due debt includes approximately $8.9 million of
notes payable and accrued interest to insiders 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 holders obtained the funds to loan to the Company by borrowing
from such bank. 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 or if the FDIC transfers the pledged notes to a transferee
that may seek to enforce the 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. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset
8
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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 sustain operations are
discussed in Note 1 in the Company's Annual Report on Form 10-KSB (Commission
File #000-21463) for the year ended December 31, 1999 as filed with the
Securities and Exchange Commission on March 30, 2000. See also the other
matters discussed under Note 2 and Note 6 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations" and "- Forward-Looking Statements."
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
the accounts of Priority International Communications, Inc. ("PIC") and ATN
Communications, Incorporated ("ATN"), its wholly owned subsidiary (PIC and ATN
collectively, "PIC/ATN"). Significant intercompany accounts and transactions
have been eliminated in consolidation.
REVENUE RECOGNITION
Beginning in February 2000 when PIC/ATN entered into new billing service
nonrecourse funding agreements with two independent billing and collection
firms, the Company began accounting for revenue on a net revenue basis as the
calls are placed. Prior to February 2000, revenues were derived from processing
long-distance telephone calls reflecting gross charges for these calls which
were recognized as revenues by the Company as the calls were placed. At the
same time, amounts were 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.
RECLASSIFICATIONS
Certain amounts in the 2000 unaudited interim consolidated financial statements
and certain amounts in the 1999 audited consolidated financial statements have
been reclassified to conform to the current year's presentation.
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 these assets may not be recoverable. Although the Company is
developing a revised operating plan to stabilize the PIC business, PIC continues
to operate in a rapidly changing competitive environment which creates
uncertainty regarding the fair value of certain PIC or ATN assets. Accordingly,
in the third quarter of 2000, the Company recorded a write-down of other assets,
primarily telecommunications equipment, of $141,000. For the nine months ended
September 30, 2000, the Company recorded an impairment write-down of goodwill
related to PIC/ATN of approximately $2.1 million and a write-down of other
assets, primarily telecommunications equipment, of $598,000. All impairments
were determined based on the estimated fair value of such assets.
9
<PAGE>
2. NOTES PAYABLE AND LONG-TERM DEBT
------------------------------------
As of September 30, 2000, the Company was past due in the payment of $10.5
million of principal and accrued interest payments on notes payable and
long-term debt.
During the second quarter of 2000, the Company undertook a plan (the "Debt
Restructuring Plan") designed to restructure a significant portion of the
Company's past due debt. In connection with the Debt Restructuring Plan, the
Company recorded a pre-tax gain of $6.8 million as a result of the sale of
shares of Actel's Series A Convertible Preferred Stock for cash and
extinguishment of debt as discussed below.
The Debt Restructuring Plan consisted of (i) a private offering (the "Actel
Share Offering") by the Company of shares of Series A Convertible Preferred
Stock (the "Actel Shares") of Actel Integrated Communications, Inc. ("Actel")
for cash, and (ii) a private offering (the "Unit Offering") by the Company to
certain holders of outstanding indebtedness of the Company of units consisting
of Actel Shares and convertible notes of the Company (the "Convertible Notes").
During the second quarter of 2000, the Company sold 788,950 Actel Shares for
gross proceeds of $4.9 million in the Actel Share Offering. Proceeds were
partially used to (i) reduce a total of $2.2 million of the amounts owed to MCC
Investment Company, LLC ("MCCIC"), an affiliate of Berthel Fisher & Company,
Inc. and another significant shareholder of the Company, under the Company's
bridge loan originally obtained from New Valley Corporation (the "New Valley
Loan") and the Company's Revolving Promissory Note from MCCIC, (ii) reduce $1.0
million of past due notes and lease payables to Berthel Fisher & Company, Inc.
and its subsidiaries and their affiliated leasing partnerships ("Berthel"),
(iii) pay placement fees and other offering expenses of $444,000, and (iv) pay
$479,000 to certain note holders upon conversion in the Unit Offering in partial
payment of amounts owed to such note holders. The remaining proceeds were used
for general working capital.
During the second quarter of 2000, the Company transferred 729,910 Actel Shares
and issued Convertible Notes in an aggregate principal amount of $4.6 million in
the Unit Offering in exchange for the cancellation of outstanding indebtedness
in the amount of $9.2 million. The Convertible Notes accrue interest at the
rate of 12% annually, with principal and accrued interest due on May 29, 2003,
and are convertible into shares of the Company's no par value common stock at a
conversion price of $3.03 per share (330 shares for each $1,000 due under the
Convertible Notes). The Convertible Notes are unsecured obligations of the
Company. The Company paid $479,000 in satisfaction of 25% of the outstanding
principal and interest to holders of promissory notes originally issued by the
Company in April and May of 1998 with the remaining balance of these promissory
notes being converted in the Unit Offering.
As part of the Debt Restructuring Plan, the Company issued three promissory
notes on June 22, 2000 to Berthel for an aggregate principal amount of $209,428.
The notes accrue interest at the rate of 12% annually with principal and accrued
interest due on June 21, 2001. In addition, the Company amended: (1) the terms
of the Revolving Promissory Note with MCCIC on June 22, 2000 to a period of one
year with payment of principal and all accrued interest due on June 21,
10
<PAGE>
2001 and (2) the terms of the Note and Warrant Purchase Agreement with MCCIC on
June 22, 2000 with payment of principal and unpaid interest due on June 22,
2001. As of September 30, 2000, the Company had $488,000 principal outstanding
under all loans from MCCIC.
The Company sold its buildings in Cedar Rapids, Iowa and Mobile, Alabama during
the second quarter resulting in payment of outstanding indebtedness of $1.0
million and a pre-tax gain of $214,000.
The Company sold 100% of the stock of Incomex, Inc. ("Incomex") to three of the
former shareholders of Incomex with an effective closing date of June 30, 2000.
Included in this transaction was the cancellation and forgiveness of all amounts
outstanding under promissory notes in the aggregate principal amount of
$686,919, and related accrued interest, originally issued by the Company to the
shareholders of Incomex in connection with an earn out adjustment for the
Company's acquisition of Incomex and the transfer to the Company by the
purchasers of 250,000 shares of the Company's common stock (see Note 6).
3. INCOME TAX EXPENSE
--------------------
The Company's (provision) benefit for income taxes consisted of the following
for the nine months ended September 30, 2000 and 1999 (amounts expressed in
thousands):
<TABLE>
<CAPTION>
2000 1999
------ -----
<S> <C> <C>
Current:
Federal $ - $ 266
State . (4) 97
</TABLE>
The 1999 tax benefits primarily resulted from the tax provision recorded for the
income from the discontinued Incomex subsidiary.
4. INVESTMENTS
-----------
During 1998, the Company reached an agreement to invest in Actel Integrated
Communications, Inc. ("Actel"). As of September 30, 2000 the Company had
invested $3,000,000 and recorded accrued dividends of $423,000, 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 of 1999, 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. The note had been repaid as of
September 30, 2000.
11
<PAGE>
During the second quarter of 2000, the Company undertook a Debt Restructuring
Plan which resulted in the Company transferring 1,518,860 shares of Actel Series
A Convertible Preferred Stock in private placements (see Note 2). Following
these transactions, the Company holds 1,481,140 shares of Actel Series A
Convertible Preferred Stock at September 30, 2000, which is convertible into
2,158,233 shares of Actel's common stock, subject to certain limitations.
On April 6, 2000, Actel completed a private placement of newly created Series E
Preferred Shares. As a result of that private placement, Actel received
$40,000,000 in cash plus a commitment for an additional $35,000,000 contingent
upon Actel achieving certain operational milestones.
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 the
Southeastern United States.
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 invested $4,703,000 (consisting of approximately $3,692,000 of
advances, $438,000 of interest and $573,000 of costs incurred either related to
the acquisition or paid on behalf of the AcNet entities).
In light of the Company's liquidity issues and other issues involving the AcNet
entities, 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 asset write-downs of $3,703,000 in 1999 and
$489,000 in the second quarter of 2000 due to the uncertainty of ultimate
recovery of the investment. The Company commenced legal action against the
AcNet entities in April 2000 to collect its advances. At September 30, 2000,
the remaining receivable, net of reserve, is $500,000.
The AcNet entities provide internet services and network services to businesses,
governments and consumers, primarily in Mexico and Texas.
5. BUSINESS SEGMENT INFORMATION
------------------------------
In the prior year, the Company had two reportable segments, PIC/ATN and Murdock
Technology Services ("MTS"). 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. In February 2000, the Company entered into a Rental
Agreement with Telemanager.net providing for the operation of MCC
Telemanager(TM) by
12
<PAGE>
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. The MCC Telemanager(TM) was the
primary service provided by the MTS business unit. Telemanager.net is owned by
former executives of the Company. Currently the rental agreement with
Telemanager.net is on a month-to-month basis.
The Company's one reportable segment now is PIC/ATN. The Company provides
long-distance telecommunications services to hotels and payphone owners in the
United States through the PIC/ATN business unit. The services have included,
but were not limited to, credit card billing services, automated collection and
messaging delivery services, voice mail services and telecommunications
consulting. The Company has been developing a revised operating plan to
stabilize the PIC business. As a result of this revised operating plan, PIC is
now largely a reseller of call processing services and has accordingly
eliminated its live operator center. PIC has recently begun to generate
positive cash flow as a result of these changes. However, PIC continues to
operate in a rapidly changing competitive environment and no assurance can be
given that PIC will be able to maintain positive cash flow in future periods.
The accounting policies of the reportable segment is the same as those described
above. The Company evaluates the performance of its operating units based on
income (loss) from operations. Summarized financial information concerning the
Company's reportable segment, net of intercompany eliminations, is shown in the
following table as of and for the three months ended September 30, 2000 and 1999
(amounts expressed in thousands). The "Other" column includes corporate related
items, activity on the MTS division and intercompany eliminations.
<TABLE>
<CAPTION>
PIC/ATN OTHER TOTAL
<S> <C> <C> <C>
2000
Revenues. . . . . . . . . . . . . . . $ 2,129 $ (41) $ 2,088
Loss from operations. . . . . . . . . (351) (161) (512)
Total assets. . . . . . . . . . . . . 2,144 3,396 5,540
Depreciation and amortization expense 215 6 221
Capital expenditures. . . . . . . . . - - -
1999
Revenues. . . . . . . . . . . . . . . $ 5,444 $ 889 $ 6,333
Loss from operations. . . . . . . . . 213 (690) (477)
Total assets. . . . . . . . . . . . . 4,183 20,786 24,969
Depreciation and amortization expense 126 329 455
Capital expenditures. . . . . . . . . 389 8 397
</TABLE>
The Company operates in the United States.
13
<PAGE>
Summarized financial information concerning the Company's reportable segments,
net of intercompany eliminations, is shown in the following table as of and for
the nine months ended September 30, 2000 and 1999 (amounts expressed in
thousands). The "Other" column includes corporate related items, activity on
the MTS division and intercompany eliminations.
<TABLE>
<CAPTION>
PIC/ATN OTHER TOTAL
<S> <C> <C> <C>
2000
Revenues. . . . . . . . . . . . . . . $ 6,360 $ 180 $ 6,540
Loss from operations. . . . . . . . . (2,754) (1,949) (4,703)
Total assets. . . . . . . . . . . . . 2,144 3,396 5,540
Depreciation and amortization expense 694 37 731
Capital expenditures. . . . . . . . . 7 - 7
1999
Revenues. . . . . . . . . . . . . . . $ 16,763 $ 3,666 $20,429
Income (loss) from operations . . . . 1,220 (2,567) (1,347)
Total assets. . . . . . . . . . . . . 4,183 20,786 24,969
Depreciation and amortization expense 359 1,065 1,424
Capital expenditures. . . . . . . . . 550 144 694
</TABLE>
6. DISCONTINUED OPERATIONS
------------------------
Effective June 30, 2000 the Company sold all the shares of Incomex, Inc., a
wholly owned subsidiary to three of the former shareholders of Incomex, for (a)
the transfer to the Company by the purchasers of 250,000 shares of the Company's
common stock originally issued by the Company pursuant to the Company's
acquisition of Incomex, (b) cancellation and forgiveness of all amounts
outstanding under promissory notes in the aggregate principal amount of
$684,919, and related accrued interest, originally issued by the Company to the
shareholders of Incomex, and (c) the cancellation of all employment compensation
and employment contracts between the Company and the purchasers. The parties
also executed mutual releases relating to liabilities between the Company and
Incomex and claims that the Company may have against the former shareholders of
Incomex. Incomex is primarily engaged in the business of providing billing and
collection services to the hospitality industry from Mexico to the United
States.
The accompanying statements of operations have been reclassified so that the
results for the subsidiary's operations are classified as discontinued
operations for all periods presented. The assets and liabilities of the
discontinued operations have been reclassified in the 1999 balance sheet as "net
assets of discontinued operations". The statements of cash flows and related
notes to the consolidated financial statements have also been reclassified to
conform to the discontinued operations presentation.
14
<PAGE>
Summary operating results of the discontinued operations are as follows (amounts
expressed in thousands):
<TABLE>
<CAPTION>
THREE NINE NINE
MONTHS MONTHS MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 2000 1999
--------------- --------------- --------------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . $ 1,392 $ 2,987 $ 7,082
Expenses . . . . . . . . . . . . . . . . . 1,786 4,162 5,893
Taxes. . . . . . . . . . . . . . . . . . . (158) - 476
Income (loss) from discontinued operations $ (236) $ (1,175) $ 713
=============== =============== ==============
</TABLE>
A summary of the net assets of the discontinued operations are as follows
(amounts expressed in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1999
-------------
<S> <C>
Assets:
Accounts receivable, less allowance for doubtful accounts $ 90
Prepaid expense and other current assets. . . . . . . . . 61
-------------
Total current assets. . . . . . . . . . . . . . . . 151
-------------
Property and equipment, net . . . . . . . . . . . . . . . 61
Goodwill, net of accumulated amortization . . . . . . . . 1,252
Prepaid commissions . . . . . . . . . . . . . . . . . . . 1,633
-------------
Total noncurrent assets . . . . . . . . . . . . . . 2,946
-------------
Total assets. . . . . . . . . . . . . . . . . . . . $ 3,097
-------------
Liabilities:
Outstanding checks in excess of bank balance. . . . . . . $ 18
Notes payable . . . . . . . . . . . . . . . . . . . . . . 735
Accounts payable. . . . . . . . . . . . . . . . . . . . . 252
Accrued interest. . . . . . . . . . . . . . . . . . . . . 116
Other accrued expenses. . . . . . . . . . . . . . . . . . 78
Current portion of long-term debt, others . . . . . . . . 83
-------------
Total current liabilities . . . . . . . . . . . . . 1,282
-------------
Long-term debt, others, less current portion. . . . . . . 167
-------------
Total liabilities . . . . . . . . . . . . . . . . . 1,449
-------------
Net Assets. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,648
=============
</TABLE>
15
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
-------------------------------
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. As of
September 30, 2000, the Company and Berthel are the only parties to the
Standstill Agreement and Berthel is the only member of the Creditors Committee.
Subsequent to the year ended December 31, 1999, 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 originally indicated to the Company that an additional
$1,125,000 is outstanding representing various notes with a significant
shareholder and creditor. The FDIC notified the Company on May 10, 2000, that
the discrepancies only total $770,000. 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 that the Company's defenses are valid or that the
Company will not be liable for part or all of the amounts allegedly due under
these notes. No loss, if any, has been recorded recorded in the financial
statements with respect to this matter.
On April 26, 2000, PIC filed an action in state court in Travis County, Texas,
against OAN Services, Inc. ("OAN") and Billing Concepts, Inc. ("BCI"), claiming
breach of contract and tortious interference by OAN in 1999 between PIC and OAN,
and an Account Purchase Agreement, dated November 18, 1999 between PIC and OAN.
PIC has also alleged that BCI's conduct in transmitting notice to OAN claiming
rights in call records delivered to OAN by PIC/ATN was inaccurate and
misleading, thus constituting tortious interference by BCI. PIC seeks a
declaration from the court that it is entitled to proceeds being held by OAN in
the amount of between $650,000 and $850,000 free and clear of any claims of BCI
and OAN as well as other damages. On June 5, 2000, OAN and BCI each filed an
answer in response to PIC's claims and made certain other pre-trial motions. On
July 5, 2000, BCI filed a counterclaim against PIC and ATN alleging breach of
contract and certain related claims and seeking damages in an unspecified
amount. The Company intends to vigorously defend against BCI's claim, although
no assurances can be given as to the outcome of this matter. No loss, if any,
has been recorded in the financial statements with respect to BCI's claim.
8. BAD DEBT EXPENSE AND UNIVERSAL SERVICE FUND FEES
-------------------------------------------------------
In December 1999, ATN received notice from the Universal Service Administration
Company ("USAC") that Universal Service Fund ("USF") fees were due. A carrier
of interstate/intrastate calls is required to pay a USF fee based on a
percentage of total call revenues. This was the first time that management
became aware of any liability to this agency. It was management's belief that
16
<PAGE>
these USF fees had been charged to the end-user and remitted to USAC by its
billing and collection firm. The billing and collection firm's position was
that they had collected the USF fees and remitted them to ATN. As ATN is
legally responsible for USF fees, in December of 1999, it recorded a liability
of $1.7 million. In April 2000, the management of ATN determined that beginning
in 1998 ATN had been credited with certain USF fees by its billing and
collection firm. As of September 30, 2000, management believes a total of $1.1
million of such fees have been credited to ATN. The Company is continuing to
investigate this matter with the billing and collection firm.
9. PREFERRED STOCK
----------------
The Company's Series A Convertible Preferred Stock automatically converted into
1,683,880 shares of the Company's Common Stock on September 30, 2000, the third
anniversary of the date the first shares of Series A Convertible Preferred Stock
were originally issued.
10. SUBSEQUENT EVENTS
------------------
The Company issued 880,000 common stock warrants in conjunction with the
Company's initial public offering during 1996. The Company had amended the terms
of these warrants to extend the expiration date from October 21, 1999 to April
21, 2000 and again to October 21, 2000. The 880,000 warrants are exercisable
into 1,819,918 shares of common stock at an exercise price of $3.14 per share.
On October 13, 2000, the Company amended the terms of these warrants again to
extend the expiration date to October 21, 2001. During the 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.
Subsequent to September 30, 2000 and through November 9, 2000, the Company
borrowed an additional $100,000 from MCCIC under the Revolving Promissory Note.
The borrowings are due June 21, 2001 and bear interest at 12%.
In connection with the Debt Restructuring Plan the Company began in the second
quarter of 2000, the Company reached a Comprise Settlement Agreement and Mutual
Release with the FDIC on October 19, 2000 to pay $300,000 in settlement of two
Notes Payable with a financial institution with combined principal of $900,000.
As a result, the Company will record a $722,000 Extraordinary Gain on
Extinguishment of Debt, including interest, in the fourth quarter of 2000.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the Company's financial condition, results of
operations and capital resources. The discussion and analysis should be read in
conjunction with the Company's unaudited consolidated financial statements and
notes thereto included elsewhere within this report.
RESULTS OF OPERATIONS
-----------------------
The Company completed several financial transactions in the second quarter of
2000 which resulted in significant improvement in the Company's financial
condition. The Company's strategic direction is to continue to negotiate with
its creditors to restructure indebtedness, sell assets of the Company as
necessary and operate as a holding company with the Company's principal assets
being the PIC business segment and the investment in Actel. If the Company is
successful in completing further improvements to its financial condition, the
Company may seek other strategic alternatives. See Note 1 in Notes to
Consolidated Financial Statements and "Liquidity and Capital Resources."
The Company has been developing a revised operating plan to stabilize the PIC
business. As a result of this revised operating plan, PIC is now largely a
reseller of call processing services and has accordingly eliminated its live
operator center. PIC has recently began to generate positive cash flow as a
result of these changes. However, PIC continues to operate in a rapidly
changing competitive environment and no assurance can be given that PIC will be
able to maintain positive cash flow in future periods.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
---------------------------------------------------------------------
REVENUES - Consolidated revenues declined $4.2 million, or 67.0%, to $2.1
--------
million for the three months ended September 30, 2000 from $6.3 million for the
three months ended September 30, 1999. Revenues from PIC/ATN declined $3.3
million to $2.1 million for the three months ended September 30, 2000 from $5.4
million for the three months ended September 30, 1999 primarily due to the loss
of a significant portion of a principal customer's business as discussed below
and due to a change in revenue recognition (see Note 1 in Notes to Consolidated
Financial Statements).
During 1999, PIC/ATN's operator service business unit derived revenues from its
largest customer that totaled $14.0 million or 39% of total revenues of the
Company. 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. Revenues from this customer related to such
calls declined approximately $1.8 million for the three months ended September
30, 2000. Accordingly, this relationship is expected to produce significantly
lower revenues for the Company. The change in revenue recognition resulted in a
decline in other revenues of approximately $700,000 and will continue to result
in lower revenues for the Company.
18
<PAGE>
Revenues from MTS declined $826,000 to $64,000 for the three months ended
September 30, 2000 from $890,000 for the three months ended September 30, 1999.
In February 2000, the Company entered into a Rental Agreement with
Telemanager.net providing for the operation of the Company's Telemanager system,
the division's principal product, 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 declined $3.5 million, or 69.5%, to
---------------
$1.6 million for the three months ended September 30, 2000 from $5.1 million for
three months ended September 30, 1999. Consolidated cost of sales, as a
percentage of revenues, was 74.3% for the three months ended September 30, 2000
compared to 80.2% for the three months ended September 30, 1999. The decline in
consolidated cost of sales is primarily attributable to the loss of a
significant portion of the service provided to a principal PIC/ATN customer, the
decline in MTS revenue related to the Rental Agreement with Telemanager.net (see
discussion above) and a charge for bad debt expense of $726,000 recorded in the
prior year. During 1999, PIC/ATN recorded bad debt expense in excess of
historical amounts relating to collection issues for one type of call processing
service provided by PIC/ATN to its largest customer. The decrease in cost of
sales, as a percentage of revenues, is primarily due to the bad debt expense
recorded at PIC/ATN in the prior period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Consolidated selling, general and
--------------------------------------------
administrative expense decreased $591,000, or 46.2%, to $687,000 for the three
months ended September 30, 2000 from $1.3 million for the three months ended
September 30, 1999. The decline in expenses is primarily related to lower
compensation expense at PIC/ATN and Corporate and a reduction in expenses for
MTS related to the Rental Agreement with Telemanager.net (see discussion above),
partially offset by higher legal fees and consulting expenses. Selling, general
and administrative expense, as a percentage of revenues, was 32.9% for the three
months ended September 30, 2000 compared to 20.2% for the three months ended
September 30, 1999.
DEPRECIATION AND AMORTIZATION EXPENSE - Consolidated depreciation and
----------------------------------------
amortization expense declined $234,000, or 51.4%, to $221,000 for the three
months ended September 30, 2000 from $455,000 for the three months ended
September 30, 1999. The decline is due to impairments recorded in the fourth
quarter of 1999 and first nine months of 2000. This decline is expected to
continue in future periods.
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
these assets may not be recoverable. Although the Company is devising a revised
operating plan to stabilize the PIC business, PIC continues to operate in a
rapidly changing competitive environment which creates uncertainty regarding the
fair value of PIC or ATN assets. Accordingly, in the third quarter of 2000, the
Company recorded a write-down of other assets, primarily telecommunications
equipment, of $141,000. All impairments were determined based on the estimated
fair value of such assets.
19
<PAGE>
<PAGE>
INTEREST EXPENSE - Consolidated interest expense, including amortization of debt
----------------
discount, increased $69,000, or 7.6%, to $981,000 for the three months ended
September 30, 2000, from $912,000 for the three months ended September 30, 1999.
The increase was due to a third quarter of 2000 charge of $213,000 related to
Deferred Financing Costs on warrants, partially offset by lower interest expense
on outstanding debt as a result of the Debt Restructuring Plan (see Note 2 to
Notes to Financial Statements) completed in the second quarter of 2000. The
charge on Deferred Financing Costs relate to warrants originally issued in
connection with portions of the Company's debt that were subsequently repaid or
converted with the Company's Debt Restructuring Plan. As a result, interest
expense is expected to decline in future periods.
OTHER INCOME - Consolidated other income decreased $131,000 to $86,000 for the
-------------
three months ended September 30, 2000 from $217,000 for the three months ended
September 30, 1999. The decrease was primarily due to the Company's conversion
in September, 1999 of its investment in Actel to Series A Preferred Stock. The
Company recorded in the prior year period $168,000 of accrued dividends based on
the date of the original investment made by the Company in Actel.
INCOME FROM OPERATIONS OF DISCONTINUED OPERATIONS OF INCOMEX SUBSIDIARY -
------------------------------------------------------------------------------
Effective June 30, 2000 the Company sold all the shares of Incomex, Inc., a
wholly owned subsidiary, to three of the former shareholders of Incomex, for (a)
transfer to the Company by the purchasers of 250,000 shares of the Company's
common stock originally issued by the Company pursuant to the Company's
acquisition of Incomex, (b) cancellation and forgiveness of all amounts
outstanding under promissory notes in the aggregate principal amount of
$684,919, and related accrued interest, originally issued by the Company to the
shareholders of Incomex, and (c) the cancellation of all employment compensation
and employment contracts between the Company and the purchasers. The parties
also executed mutual releases relating to liabilities between the Company and
Incomex and claims that the Company may have against the former shareholders of
Incomex. Incomex is primarily engaged in the business of providing billing and
collection services to the hospitality industry from Mexico to the United
States.
The accompanying statements of operations have been reclassified so that the
results for the subsidiary's operations are classified as discontinued
operations for all periods presented. The assets and liabilities of the
discontinued operations have been reclassified in the 1999 balance sheet as "net
assets of discontinued operations". The statements of cash flows and related
notes to the consolidated financial statements have also been reclassified to
conform to the discontinued operations presentation.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
--------------------------------------------------------------------
REVENUES - Consolidated revenues declined $13.9 million, or 68.1%, to $6.5
--------
million for the nine months ended September 30, 2000 from $20.4 million for the
nine months ended September 30, 1999. Revenues from PIC/ATN declined $10.4
million to $6.4 million for the nine months ended September 30, 2000 from $16.8
million for the nine months ended September 30, 1999 primarily due to the loss
of two principal customers as discussed below and due to a change in revenue
recognition (see Note 1 in Notes to Consolidated Financial Statements).
20
<PAGE>
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. 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 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 the third quarter of 1999. Revenues from this
customer declined approximately $3.4 million for the nine months ended September
30, 2000. Effective the third quarter of 1999, this customer terminated its
relationship with PIC/ATN. Accordingly, this relationship is not expected to
produce further revenues and margins for the Company.
During 1999, PIC/ATN's operator service business unit derived revenues from its
largest customer that totaled $14.0 million or 39% of total revenues of the
Company. 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. Revenues from this customer related to such
calls declined approximately $5.2 million for the nine months ended September
30, 2000. Accordingly, this relationship is expected to produce significantly
lower revenues for the Company. The change in revenue recognition resulted in a
decline in other revenues of approximately $1.3 million and will continue to
result in lower revenues for the Company.
Revenues from MTS declined $3.3 million to $180,000 for the nine months ended
September 30, 2000 from $3.5 million for the nine months ended September 30,
1999. In February 2000, the Company entered into a Rental Agreement with
Telemanager.net providing for the operation of the Company's Telemanger system,
the division's principal product, 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 declined $11.1 million, or 68.6%, to
--------------
$5.0 million for the nine months ended September 30, 2000 from $16.1 million for
nine months ended September 30, 1999. Consolidated cost of sales, as a
percentage of revenues, was 77.1% for the nine months ended September 30, 2000
compared to 78.6% for the nine months ended September 30, 1999. The decline in
consolidated cost of sales is primarily attributable to the loss of two
principal PIC/ATN customers, the decline in MTS revenue related to the Rental
Agreement with Telemanager.net (see discussion above) and a charge for bad debt
expense of $1.5 million recorded in the prior year. During 1999, PIC/AN
recorded bad debt expense in excess of historical amount relating to collection
issues for one type of call processing service provided by PIC/ATN to its
largest customer.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Consolidated selling, general and
--------------------------------------------
administrative expense decreased $2.0 million, or 47.1%, to $2.3 million for the
nine months ended September 30, 2000 from $4.3 million for the nine months ended
September 30, 1999. The decline in expenses is primarily related to lower
compensation expense at PIC/ATN and Corporate and a
21
<PAGE>
reduction in expenses for MTS related to the Rental Agreement with
Telemanager.net (see discussion above), partially offset by higher legal fees
and consulting expenses. Selling, general and administrative expense, as a
percentage of revenues, was 34.7% for the nine months ended September 30, 2000
compared to 21.0% for the nine months ended September 30, 1999.
DEPRECIATION AND AMORTIZATION EXPENSE - Consolidated depreciation and
----------------------------------------
amortization expense declined $693,000, or 48.7%, to $731,000 for the nine
months ended September 30, 2000 from $1.4 million for the nine months ended
September 30, 1999. The decline is due to impairments recorded in the fourth
quarter of 1999 and first nine months of 2000. This decline is expected to
continue in future periods.
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
these assets may not be recoverable. Although the Company is devising a revised
operating plan to stabilize the PIC business, PIC continues to operate in a
rapidly changing competitive environment which creates uncertainty regarding the
fair value of PIC or ATN assets. Accordingly, for the nine months ended
September 30, 2000, the Company recorded an impairment write-down of goodwill
related to PIC/ATN of approximately $2.1 million and a write-down of other
assets, primarily telecommunications equipment, of $598,000. All impairments
were determined based on the estimated fair value of such assets.
ACNET BAD DEBT AND ACQUISITION EXPENSE - As of June 30, 2000, the Company had a
---------------------------------------
gross investment of $4.7 million related to its proposed acquisition of the
AcNet entities. In light of the Company's liquidity issues and other issues
involving the AcNet entities, 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 asset write-downs of
$3.7 million in 1999 and $489,000 for the nine months ended September 30, 2000
due to the uncertainty of ultimate recovery of the investment. The Company
commenced legal action against the AcNet entities in April 2000 to collect its
advances.
INTEREST EXPENSE - Consolidated interest expense, including amortization of debt
----------------
discount, increased $270,000, or 11.6%, to $2.6 million for the nine months
ended September 30, 2000, from $2.3 million for the nine months ended September
30, 1999. The increase was primarily due to warrants issued to an affiliate of
Berthel for loans or advances made to the Company, or on the Company's behalf,
dating to January 2000 (see discussion below in Liquidity and Capital
Resources), an increase in interest rates on past due debt, higher levels of
debt in the current period primarily related to investments in Actel and the
AcNet entities, a charge of $213,000 related to Deferred Financing Costs on
warrants in the third quarter of 2000 and the Company's lower operating profit.
As a result of the Debt Restructuring Plan completed in the second quarter of
2000 (see Note 2 to Notes to Consolidated Financial Statements), interest
expense, excluding the charge on Deferred Financing Costs, declined in the
second and third quarters compared with the prior year and the decline is
expected to continue in future periods.
22
<PAGE>
OTHER INCOME - Consolidated other income increased $7.0 million to $7.2 million
-------------
for the nine months ended September 30, 2000 from $223,000 for the nine months
ended September 30, 1999. The increase was primarily due to a pre-tax gain of
$6.8 million recorded in connection with the Debt Restructuring Plan completed
in the second quarter of 2000 (see Note 2 to Notes to Consolidated Financial
Statements) and a pre-tax gain of $214,000 recorded in connection with the sale
of two buildings in Cedar Rapids, Iowa and Mobile, Alabama.
INCOME FROM OPERATIONS OF DISCONTINUED OPERATIONS OF INCOMEX SUBSIDIARY -
------------------------------------------------------------------------------
Effective June 30, 2000 the Company sold all the shares of Incomex, Inc., a
wholly owned subsidiary, to three of the former shareholders of Incomex, for (a)
transfer to the Company by the purchasers of 250,000 shares of the Company's
common stock originally issued by the Company pursuant to the Company's
acquisition of Incomex, (b) cancellation and forgiveness of all amounts
outstanding under promissory notes in the aggregate principal amount of
$684,919, and related accrued interest, originally issued by the Company to the
shareholders of Incomex, and (c) the cancellation of all employment compensation
and employment contracts between the Company and the purchasers. The parties
also executed mutual releases relating to liabilities between the Company and
Incomex and claims that the Company may have against the former shareholders of
Incomex. Incomex is primarily engaged in the business of providing billing and
collection services to the hospitality industry from Mexico to the United
States.
The accompanying statements of operations have been reclassified so that the
results for the subsidiary's operations are classified as discontinued
operations for all periods presented. The assets and liabilities of the
discontinued operations have been reclassified in the 1999 balance sheet as "net
assets of discontinued operations". The statements of cash flows and related
notes to the consolidated financial statements have also been reclassified to
conform to the discontinued operations presentation.
LOSS ON DISPOSITION- As a result of the sale of Incomex described above, the
---------------------
Company recorded a loss on disposition of $332,000 in the second quarter of
2000.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
----------------------------------
The Company completed several financial transactions in the second quarter of
2000 which resulted in significant improvement in the Company's financial
condition. These transactions included the following: 1) the sale of 100% of
the stock of Incomex to three of the former shareholders of Incomex. The terms
of the purchase agreement included (a) the transfer to the Company by the
purchasers of 250,000 shares of the Company's no par value common stock
originally issued by the Company pursuant to the Company's acquisition of
Incomex, (b) cancellation and forgiveness of all amounts outstanding under
promissory notes in the aggregate principal amount of $684,919 originally issued
by the Company to the shareholders of Incomex, and (c) the cancellation of all
employment compensation and employment contracts between the Company and the
purchasers; 2) the sale of buildings in Cedar Rapids, Iowa and Mobile, Alabama
and resulting payment on the related mortgage financing; and 3) the Debt
Restructuring Plan in which the Company a) sold 788,950 shares of the Actel
Series A Convertible Preferred Stock in a private placement for approximately
$4.9 million and b) transferred 729,910 shares of Actel's Series A Convertible
Preferred Stock and issued convertible notes of the Company (the "Convertible
Notes") in an aggregate principal amount of $4.6 million in the Unit Offering in
exchange for the cancellation of outstanding indebtedness in the amount of $9.2
million. The Convertible Notes accrue interest at the rate of 12% annually, with
principal and accrued interest due on May 29, 2003, and are convertible into
shares of the Company's no par value common stock at a conversion price of $3.03
per share (330 shares for each $1,000 due under the Convertible Notes). The
Convertible Notes are unsecured obligations of the Company. The Company paid
$479,000 in satisfaction of 25% of the outstanding principal and interest to
holders of promissory notes originally issued by the Company in April and May of
1998 with the remaining balance of these promissory notes being converted in the
Unit Offering.
As part of the Debt Restructuring Plan, the Company issued three promissory
notes on June 22, 2000 to Berthel for an aggregate amount of $209,428. The
notes are due June 21, 2001 and accrue interest at the rate of 12% annually. In
addition, the Company amended: (1) the terms of the Revolving Promissory Note
with MCCIC on June 22,2000 to a period of one year with payment of principal and
all accrued interest due on June 21, 2001 and (2) the terms of the Note and
Warrant Purchase Agreement with MCCIC on June 22, 2000 with payment of principal
and unpaid interest due on June 22, 2001.
Proceeds from the sale of the Actel shares were used to reduce amounts owed to
MCCIC under the New Valley Loan and the Revolving Promissory Note of $2.2
million, reduce past due note and lease payables to Berthel of $1.0 million, pay
placement fees and other offering expenses of $444,000 and pay $479,000 to
certain noteholders upon conversion in the unit offering a partial payment of
amounts owed to such noteholders. The remaining proceeds of $779,000 are being
used for working capital purposes.
At September 30, 2000, the Company's current liabilities of $15.5 million
exceeded current assets of $1.3 million resulting in a working capital deficit
of $14.2 million. During the nine months ended September 30, 2000, the Company
used $2.4 million in cash for operating activities, and received $5.2 million in
investing activities. The Company received proceeds from new debt financing of
$556,000 and made payments on debt of $2.8 million, for net cash flows from
financing activities of $2.3 million. These activities resulted in an increase
in available cash of $479,000 for the nine months ended September 30, 2000.
24
<PAGE>
The Company's debt and capital lease obligations as of September 30, 2000,
including the current portion thereof, totaled $14.8 million compared to $21.2
million at December 31, 1999. The Company's current debt and capital lease
obligations as of September 30, 2000 totaled $9.8 million compared to $16.2
million at December 31, 1999.
The Company has been developing a revised operating plan to stabilize the PIC
business. As a result of this revised operating plan, PIC is now largely a
reseller of call processing services and has accordingly eliminated its live
operator center. PIC has recently began to generate positive cash flow as a
result of these changes. However, PIC continues to operate in a rapidly
changing competitive environment and no assurance can be given that PIC will be
able to maintain positive cash flow in future periods. Although in January 2000
PIC terminated the service that provided for the call traffic associated with
the billing and collection issue for its largest customer, no assurance can be
given that PIC 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's cash
flows in 2000 and 2001 may also be adversely affected by the lien placed by
PIC's former billing and collection firm on collections from calls processed by
a subsequent billing and collection firm. ATN, a wholly owned subsidiary of PIC
also recorded a $1.7 million liability for USF fees from 1997 through 1999, and
has received payment demand for the first $810,000 of these fees with a deadline
which expired on March 16, 2000. As of September 30, 2000, ATN has received
invoices for USF fees of $1.7 million.
As of September 30, 2000, the Company accrued was past due in the payment of
approximately $10.5 million in principal and accrued interest payments. The
Company was also past due with its trade vendors in the payment of approximately
$658,000 as of September 30, 2000.
During the first quarter of 2000, the Company borrowed a total of $406,000 from
MCCIC under the Revolving Promissory Note. The borrowings were originally due
on demand and bear interest at 12%. On April 6, 2000, the entire interest of the
New Valley Loan was purchased by MCCIC. As of September 30, 2000, the Company
had $488,000 principal outstanding under all loans from MCCIC.
In February 2000, the Company entered into a billing services advance funding
agreement with an independent billing and collection firm (the "Billing and
Collection Company"). This agreement allows 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 nine days after submission. The Company will then receive
an additional 8% of the gross billable call value six months after submission.
Under the agreement, if the Billing and Collection Company experiences charges
for bad debt, customer service credits and other fees in excess of a stated
amount, these additional amounts may be withheld from the 8% amounts. In
consideration for the agreement, the Billing and Collection Company loaned the
Company $150,000, which has been repaid as of September 30, 2000.
25
<PAGE>
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 the next twelve months. The Company estimates that it will need
at least $18.0 million for the next twelve months to fund working capital
requirements and repay indebtedness that is either past due or will become due
in that period, 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
raising debt or equity financings, extending or converting existing debt and/or
the sale of significant parts of the Company's assets. The Company continues to
engage in discussions with creditors to restructure indebtedness and with
potential investors regarding proposed debt financings. 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.
The Company owed various fees to Berthel under the Placement Agreement including
underwriting and placement fees. The Company paid to Berthel placement and
offering expenses of $475,000 during the nine month period ended September 30,
2000. 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.
26
<PAGE>
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 restructure its operations and to realize
potential value from its operating units and investments;
- 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 collect amounts advanced to AcNet entities
through the Company's pending lawsuit or to negotiate an arrangement
regarding its investment in the AcNet entities;
- the possibility of additional impairment write-downs of assets,
including, without limitation, of goodwill relating to the PIC/ATN;
- the Company's ability to stabilize the operations of PIC and to
maintain positive cash flow from PIC;
- the Company's ability to respond to competition in its markets;
- the outcome of pending litigation;
- changes in, or failure to comply with, governmental regulations,
including telecommunications regulations;
- the effect of the alleged liability of ATN for USF fees and the
ultimate amount of such liability;
- 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 Quarterly Report on Form 10-Q
and the Company's annual report on Form 10-KSB.
27
<PAGE>
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;
- 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Company's notes payable and
long-term debt that are sensitive to changes in interest rates. The table
presents the principal amounts and related weighted average interest rates by
expected maturity dates as of September 30, 2000 (amounts expressed in
thousands).
<TABLE>
<CAPTION>
Fixed Rate
Expected Notes Payable and Average
Maturity Date Long-Term Debt Interest Rate
------------- ------------------ --------------
<S> <C> <C>
2000. . . . . $ 8,395 17.20%
2001. . . . . 1,224 14.46%
2002. . . . . 522 14.50%
2003. . . . . 4,632 12.00%
------------------
Total . . . $ 14,773
==================
Fair Value. $ 14,773
==================
</TABLE>
28
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
As of September 30, 2000, the Company was past due in payment of
approximately $10.5 million of principal and accrued interest. The Company was
also past due with its trade vendors in the payment of approximately $658,000 as
of September 30, 2000. For additional information, see the notes to the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders of the Company during
the third quarter of 2000.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
3.1 Restated Articles of Incorporation of the Company (1)
3.2 First Amendment to Restated Articles of Incorporation of the
Company (2)
3.3 Second Amendment to Restated Articles of Incorporation of the
Company (2)
3.4 Amended and Restated By-Laws of the Company (3)
10.1 Purchase Agreement, dated as of June 23, 2000, among Murdock
Communications Corporation, MCC Acquisition Corp., John
Rance, Michael Upshaw, Fernando Ficachi and the other former
shareholders of Incomex, Inc. (incorporated, by reference to
the Company's Current Report on Form 8-K filed on August 30,
2000).
27 Financial Data Schedule
___________
(1) Filed as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 333-05422C) and incorporated herein by
reference.
(2) Filed as an exhibit to the Company's report on Form 10-QSB for
the quarter ended September 30, 1997 (File No. 000-21463) and
incorporated herein by reference.
(3) Filed as an exhibit to the Company's report on Form 10-QSB for
the quarter ended March 31, 1997 (File No. 000-21463) and
incorporated herein by reference.
(b) Reports on Form 8-K: The Company filed a current report on Form
8-K on August 30, 2000, disclosing the sale of Incomex, Inc.
pursuant to Item 2 of Form 8-K.
29
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
MURDOCK COMMUNICATIONS CORPORATION
Date: November 13, 2000 By /s/ Eugene Davis
----------------------------------
Eugene Davis
Chief Executive Officer
Date: November 13, 2000 By /s/ Paul C.Tunink
----------------------------------
Paul C. Tunink
Vice President and Chief Financial
Officer
30