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 March 31, 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
----------------------
Murdock Communications Corporation
----------------------------------
(Exact Name of Issuer as Specified in Its Charter)
Iowa 42-1337746
-------------------------------- ---------------------------------
(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 March 31, 2000, there were outstanding 10,625,046 shares of the Registrant's
no par value Common Stock.
<PAGE>
MURDOCK COMMUNICATIONS CORPORATION
FORM 10-Q
March 31, 2000
INDEX
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999. . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 2000 and 1999 . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999 . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 21
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . 21
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . 21
Item 4. Submission of Matters to a Vote of Security Holders. . . . 21
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 21
Signatures . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and December 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
------------------- -------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 74 $ 76
Accounts receivable, less allowance for doubtful accounts:
2000 - $3,722; 1999 - $3,372 . . . . . . . . . . . . . . . . . . . . . . 1,332 982
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 500
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . 371 312
------------------- -------------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . $ 2,277 $ 1,870
------------------- -------------------
PROPERTY AND EQUIPMENT
Land and building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,451 $ 1,446
Telecommunications equipment . . . . . . . . . . . . . . . . . . . . . . . 9,059 9,059
Furniture and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . 848 839
------------------- -------------------
$ 11,348 $ 11,223
------------------- -------------------
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . (8,849) (8,734)
------------------- -------------------
PROPERTY AND EQUIPMENT, NET . . . . . . . . . . . . . . . . . . . . . $ 2,509 $ 2,610
------------------- -------------------
OTHER ASSETS
Goodwill - net of accumulated amortization: 2000 - $118 ; 1999 - $1,351 . $ 3,642 $ 5,002
Cost of purchased site contracts, net of accumulated amortization: 2000 -
$744; 1999 - $736 . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 48
Other intangible assets, net of accumulated amortization: 2000 - $652 ;
1999 - $619. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 197
Investments, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,352 4,277
Prepaid commissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,527 1,633
Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . . . . 47 12
------------------- -------------------
TOTAL OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,757 $ 11,169
------------------- -------------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,543 $ 15,649
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
March 31, 2000 and December 31, 1999
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
------------------- -------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Outstanding checks in excess of available balances. . . . . . . . . . . . . . . . $ 76 $ 104
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,837 14,443
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,576 2,270
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,945 2,010
Accrued universal service fund fees . . . . . . . . . . . . . . . . . . . . . . . 1,700 1,700
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 643 1,112
Current portion of capital lease obligations principally with a related party . . 1,821 1,553
Current portion of long-term debt with related parties. . . . . . . . . . . . . . 749 647
Current portion of long-term debt, others . . . . . . . . . . . . . . . . . . . . 704 371
------------------- -------------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,051 $ 24,210
LONG-TERM LIABILITIES
Capital lease obligations principally with a related party, less current portion. $ 1,879 $ 2,148
Long-term debt with related parties, less current portion . . . . . . . . . . . . 2,042 2,122
Long-term debt, others, less current portion. . . . . . . . . . . . . . . . . . . 496 911
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 22
------------------- -------------------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,479 $ 29,413
------------------- -------------------
SHAREHOLDERS' EQUITY (DEFICIENCY)
8% Series A Convertible Preferred Stock, $100 stated value:
authorized 1,000,000 shares; issued and outstanding: 2000 and 1999 -
18,920 shares ($1,892 liquidation value). . . . . . . . . . . . . . . . . . . . 1,877 1,868
Common stock, no par or stated value: authorized - 40,000,000 shares; issued
and outstanding: 2000 - 10,625,046; 1999 - 10,576,012 shares . . . . . . . . . 20,331 20,259
Common stock warrants: Issued and outstanding: 2000 - 5,847,650; 1999 -
5,866,591 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 633 635
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 134
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38,912) (36,660)
------------------- -------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY). . . . . . . . . . . . . . . . . . . $ (15,936) $ (13,764)
------------------- -------------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,543 $ 15,649
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2000 and 1999
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
REVENUES
Call processing. . . . . . . . . . . . . . . . . . . $ 4,265 $ 9,940
Other revenues . . . . . . . . . . . . . . . . . . . 38 847
------------ ------------
TOTAL REVENUES . . . . . . . . . . . . . . . . . 4,303 10,787
COSTS OF SALES
Call processing. . . . . . . . . . . . . . . . . . . 2,969 6,978
Other cost of sales. . . . . . . . . . . . . . . . . 20 423
International bad debt expense . . . . . . . . . . . - 141
------------ ------------
TOTAL COST OF SALES. . . . . . . . . . . . . . . 2,989 7,542
------------ ------------
GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . 1,314 3,245
OPERATING EXPENSES
Selling, general and administrative expenses . . . . 1,136 1,796
Depreciation and amortization expense. . . . . . . . 289 582
Impairment of goodwill . . . . . . . . . . . . . . . 1,214 -
------------ ------------
TOTAL OPERATING EXPENSES . . . . . . . . . . . . 2,639 2,378
------------ ------------
INCOME (LOSS) FROM OPERATIONS. . . . . . . . . . . . . (1,325) 867
NON-OPERATING INCOME (EXPENSE)
Interest expense, net. . . . . . . . . . . . . . . . (1,018) (747)
Other income . . . . . . . . . . . . . . . . . . . . 141 1
------------ ------------
TOTAL NON-OPERATING EXPENSE. . . . . . . . . . . (877) (746)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE. . . . . . . . (2,202) 121
Income tax expense . . . . . . . . . . . . . . . . . (4) (37)
------------ ------------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . (2,206) 84
DIVIDENDS AND ACCRETION ON 8% SERIES A CONVERTIBLE
PREFERRED STOCK. . . . . . . . . . . . . . . . . . . (46) (49)
------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS. $ (2,252) $ 35
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE. . . . . . $ (0.21) $ -
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING . . . . . . 10,576,551 10,329,867
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2000 and 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,206) $ 84
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH FLOWS FROM OPERATING ACTIVITIES
Depreciation and amortization, including amortization of technology license. . . . . 289 582
Impairment of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,214 -
Noncash interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 124
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (350) (1,534)
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (59) (369)
Prepaid commissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 (105)
Outstanding checks in excess of bank balance . . . . . . . . . . . . . . . . . . . (28) -
Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 114
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306 960
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 474 (688)
Deferred income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11) (1)
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES. . . . . . . . . . . . . . . . . . . . . $ (214) $ (833)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . $ (14) $ (84)
Cash paid for investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (110) (1,547)
-------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES. . . . . . . . . . . . . . . . . . . . . $ (124) $(1,631)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations, primarily to a related party. . . . . . . . . $ (1) $ (72)
Borrowings on notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 556 1,650
Borrowings on long-term debt, others . . . . . . . . . . . . . . . . . . . . . . . . - 141
Payments on notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (137) (138)
Payments on long-term debt with related parties. . . . . . . . . . . . . . . . . . . (37) (493)
Payments on long-term debt, others . . . . . . . . . . . . . . . . . . . . . . . . . (45) (106)
Payments on offering costs and origination fees. . . . . . . . . . . . . . . . . . . - (20)
-------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES. . . . . . . . . . . . . . . . . . . . . $ 336 962
-------- --------
NET (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2) $ (1502)
CASH AT BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 1,722
-------- --------
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 74 $ 220
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for interest, principally to a related party . . . . . . $ 80 $ 359
Cash paid during the period for income taxes . . . . . . . . . . . . . . . . . . . . - 29
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
MURDOCK COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 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 generally accepted accounting principles for interim financial reporting
and the regulations of the Securities and Exchange Commission for quarterly
reporting. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial
information. The foregoing unaudited interim consolidated financial statements
reflect all adjustments which, in the opinion of management, are necessary to
reflect a fair presentation of the financial position, the results of operations
and cash flows of the Company and its subsidiaries for the interim periods
presented. All adjustments, in the opinion of management, are of a normal and
recurring nature. Operating results for the three months ended March 31, 2000
are not necessarily indicative of the results that may be expected for the full
year ended December 31, 2000. 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 $38.9 million, and current liabilities exceed current assets by $23.8
million at March 31, 2000. The Company also is past due in the payment of
approximately $18.1 million of indebtedness as of March 31, 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. 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 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 matters
discussed under "Forward-Looking Statements" in this report.
7
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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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, the
accounts of Priority International Communications, Inc. and ATN Communications,
Incorporated ("PIC/ATN"), and the accounts of Incomex, Inc. ("Incomex"), its
wholly owned subsidiaries. Significant intercompany accounts and transactions
have been eliminated in consolidation.
IMPAIRMENT OF 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. In the first quarter of
2000, the Company recorded an additional write-down of the remaining goodwill
relating to Incomex of $1.2 million due to the loss of a major customer in
February 2000, and additional information obtained regarding the fair value of
Incomex as the Company pursues a potential sale of Incomex. The major customer
comprised approximately 8% of total consolidated revenues in 1999.
2. LETTER OF INTENT TO MERGE
-----------------------------
In February 2000, the Company entered into a nonbinding letter of intent to
merge with Floragraph LLC, which owns Flower.com, an online floral Web site.
Under the terms of the letter of intent, the parties were to negotiate in good
faith to complete a definitive agreement prior to March 31, 2000, with closing
as soon as practicable, and in any event, prior to June 30, 2000. Although a
definitive agreement has not been reached, the Company and Floragraph are
currently negotiating an extension to the letter of intent. 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.
3. NOTES PAYABLE AND LONG-TERM DEBT
------------------------------------
As of March 31, 2000, the Company was past due in the payment of $18.1 million
of principal and interest payments on notes payable and long-term debt and
capital leases, including $1.5 million to Berthel Fisher & Company, Inc. and its
subsidiaries and their affiliated leasing partnerships (collectively "Berthel").
8
<PAGE>
During the first quarter of 2000, the Company borrowed a total of $406,000 from
MCC Investment Company, LLC ("MCCIC"), a company owned by Berthel and another
significant shareholder of the Company. 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 prices of the
Company's common stock at the close of business on the day the funds were
received by the Company.
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. 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 January, February and
March 2000, payments have been made by MCCIC on behalf of the Company. As of
March 31, 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 these defaults. On April 6, 2000, the entire interest of New Valley in
this loan was purchased by MCCIC. Warrants will be issued to MCCIC equal to
200% of the amount of the loan. The exercise price of such warrants will be the
bid prices of the Company's common stock at the close of business on each day
MCCIC purchased an interest in the loan.
4. INCOME TAX EXPENSE
--------------------
The Company's provision for income taxes consisted of the following as of March
31, 2000 and 1999 (amounts expressed in thousands):
<TABLE>
<CAPTION>
2000 1999
----- -----
<S> <C> <C>
Current:
Federal - -
State . $ 4 $ 37
</TABLE>
At March 31, 2000, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $20 million to use to offset future taxable
income. These net operating losses will expire, if unused, from December 31,
2008 through 2019.
5. INVESTMENTS
-----------
During 1998, the Company reached an agreement to invest in Actel Integrated
Communications, Inc. ("Actel"). As of March 31, 2000, the Company had invested
$3,000,000, incurred investment related costs of $31,829 and recorded accrued
dividends of $320,286, as discussed below. Effective June 21, 1999, the Company
and Actel entered into an agreement to amend the terms of
9
<PAGE>
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. As of March 31, 2000, $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 advanced $4,703,000 compared with $4,785,000 (consisting of
approximately $3,692,000 of advances, $346,000 of interest and $747,000 of costs
incurred either related to the acquisition or paid on behalf of the AcNet
entities) at March 31, 2000.
In light of the proposed merger with Floragraph LLC, 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. The Company commenced legal action in April 2000 to collect
its advances.
The AcNet entities provide internet services and network services to businesses,
governments and consumers, primarily in Mexico and Texas.
6. 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.
10
<PAGE>
The Company's three reportable segments are PIC/ATN, Incomex and Murdock
Technology Services ("MTS"). The Company provides long-distance
telecommunications services to hotels and payphone owners in the United States
through the PIC/ATN business unit. The services include, but are not limited
to, live operator services, credit card billing services, automated collection
and messaging delivery services, voice mail services, telecommunications
consulting services and carrier assisted call processing with 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. In February 2000, the Company entered into a Rental Agreement
with Telemanager.net providing for the operation of MCC Telemanager(TM) 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 former
executives of the Company.
The accounting policies of the reportable segments are the same as those
described above. The Company evaluates the performance of its operating units
based on income (loss) from operations. Summarized financial information
concerning the Company's reportable segments, net of intercompany eliminations,
is shown in the following table as of and for the three months ended March 31,
2000 and 1999 (amounts expressed in thousands). The "Other" column includes
corporate related items and residual activity on remaining assets of the MTS
division.
<TABLE>
<CAPTION>
PIC/ATN INCOMEX OTHER TOTAL
<S> <C> <C> <C> <C>
2000
Revenues. . . . . . . . . . . $ 2,272 $ 1,866 $ 165 $ 4,303
Income (loss) from operations 391 138 (1,854) (1,325)
Total assets. . . . . . . . . 2,822 1,978 9,743 14,543
Depreciation and amortization
expense . . . . . . . . . . 109 6 174 289
Capital expenditures. . . . . 14 - - 14
1999
Revenues. . . . . . . . . . . 6,601 2,940 1,246 10,787
Income (loss) from operations 1,027 813 (973) 867
Total assets. . . . . . . . . 5,674 3,340 15,090 24,104
Depreciation and amortization
expense . . . . . . . . . . 116 4 462 582
Capital expenditures. . . . . 16 4 64 84
</TABLE>
Financial information relating to the Company's operations by geographic area as
of and for the three months ended March 31, 2000 and 1999 was as follows
(amounts expressed in thousands):
11
<PAGE>
<TABLE>
<CAPTION>
2000 1999
------ -------
<S> <C> <C>
Revenues:
United States. . . . . . . . . . . . . . $2,437 $ 7,847
Mexico . . . . . . . . . . . . . . . . . 1,866 2,940
------ -------
Total. . . . . . . . . . . . . . . . . . $4,303 $10,787
====== =======
Long-lived assets (excluding investments):
United States. . . . . . . . . . . . . . $6,387 $15,178
Mexico . . . . . . . . . . . . . . . . . 1,527 1,704
------ -------
Total. . . . . . . . . . . . . . . . . . $7,914 $16,882
====== =======
</TABLE>
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. 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 31, 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 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
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 FDIC currently believes the
discrepancies only total $770,000. Management believes that no funds were
received by the Company with respect to any of 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.
8. SUBSEQUENT EVENTS
------------------
During the period April 1, 2000 to May 12, 2000, the Company sold 366,750 shares
of Actel's Series A Convertible Preferred Stock in a private placement for
approximately $1.8 million resulting in a pre-tax gain of $1.3 million.
Proceeds were used to pay the April and May note payments due to MCCIC under the
New Valley loan totaling $438,000, to pay placement fees and other underwriting
expenses of $189,000, to repay working capital borrowings due to MCCIC incurred
during the first quarter of 2000, and to reduce past due note and lease payables
to Berthel of $686,000. The remaining proceeds were used for working capital
purposes.
12
<PAGE>
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.
In December 1999, PIC/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 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 PIC/ATN. As
PIC/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 PIC/ATN determined
that beginning in 1998 the Company had been paid USF fees by its prior billing
and collection firm. As of May 15, 2000, a total of $1.1 million of such fees
have been remitted to PIC/ATN. The Company is continuing to investigate this
matter with its prior billing and collection firm.
The Company issued 880,000 common stock warrants in conjunction with the
Company's initial public offering during 1996. During 1999 the expiration date
of these warrants was extended from October 21, 1999 to April 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 April 17, 2000, the Company amended the
terms of these warrants again to extend the expiration date to October 21, 2000.
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.
13
<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
- -----------------------
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2000 AND 1999
- -----------------------------------------------------------------
REVENUES - Consolidated revenues declined $6.5 million, or 60.1%, to $4.3
million for the three months ended March 31, 2000 from $10.8 million for the
three months ended March 31, 1999. Revenues from PIC/ATN declined $4.3 million
to $2.3 million for the three months ended March 31, 2000, from $6.6 million for
the three months ended March 31, 1999 primarily due to the loss of two principal
customers 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. 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 June 30, 1999. Total revenues relative to the
customer for the three months ended March 31, 1999 were $3.4 million and for the
year ended December 31, 1999 were $5.3 million. 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.
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. Revenues from this customer declined to $0.3 million for the three
months ended March 31, 2000 from $2.0 million for the three months ended March
31, 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
14
<PAGE>
related to such calls. Accordingly, this relationship is expected to produce
significantly lower revenues for the Company.
Revenues from Incomex declined $1.0 million to $1.9 million for the three months
ended March 31, 2000, from $2.9 million for the three months ended March 31,
1999. The decline was primarily due to the loss of its largest customer in
February 2000, a decline in revenue per call and the impact of the Company's
cash flow constraints on attracting new customers and retaining existing
customers with prepaid commissions. During 1999, Incomex's business unit
derived revenues from its largest customer that totaled $2.8 million or 8% of
total revenues for the Company. Revenues from this customer declined to $0.3
million for the three months ended March 31, 2000 from $0.9 million for the
three months ended March 31, 1999. Effective February 2000, this customer
terminated its relationship with Incomex. Accordingly, this relationship is not
expected to produce further revenues and margins for the Company.
Revenues from MTS declined $0.6 million to $0.2 million for the three months
ended March 31, 2000 from $0.8 million for the three months ended March 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,
the divisions 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 $4.5 million, or 60.4%, to
$3.0 million for the three months ended March 31, 2000 from $7.5 million for
three months ended March 31, 1999. Consolidated cost of sales, as a percentage
of revenues, was 69.5% for the three months ended March 31, 2000 compared to
69.9% for the three months ended March 31, 1999. The decline in consolidated
cost of sales is primarily attributable to the loss of two principal PIC/ATN
customers and one principal Incomex customer and the decline in MTS revenue
related to the Rental Agreement with Telemanager.net (see discussion above).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Consolidated selling, general and
administrative expense decreased $729,000, or 40.6%, to $1.1 million for the
three months ended March 31, 2000 from $1.8 million for the three months ended
March 31, 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. Selling, general and administrative
expense, as a percentage of revenues, was 24.8% for the three months ended March
31, 2000 compared to 16.6% for the three months ended March 31, 1999, primarily
due to higher legal fees.
DEPRECIATION AND AMORTIZATION EXPENSE - Consolidated depreciation and
amortization expense declined $293,000, or 50.3%, to $289,000 for the three
months ended March 31, 2000 from $582,000 for the three months ended March 31,
1999. The decline is due to impairments recorded in the fourth quarter of 1999.
This decline is expected to continue due to the impairments recorded in the
fourth quarter of 1999 and first quarter of 2000 (see discussion below).
15
<PAGE>
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. In the first quarter of 2000, the Company
recorded an additional write-down of the remaining Incomex goodwill of $1.2
million due to the loss of a major customer in February 2000, and additional
information obtained regarding the fair value of Incomex as the Company pursues
a potential sale of Incomex. The major customer comprised approximately 8% of
total consolidated revenues in 1999.
INTEREST EXPENSE - Consolidated interest expense, including amortization of debt
discount, increased $271,000, or 36%, to $1,018,000 for the three months ended
March 31, 2000, from $747,000 for the three months ended March 31, 1999. The
increase was primarily due to warrants to be 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, and higher levels of debt in the
current period primarily related to investments in Actel and the AcNet entities
and the Company's lower operating profit. As a result, higher interest expense
is expected in future periods.
OTHER INCOME - Consolidated other income increased $140,000 to $141,000 for the
three months ended March 31, 2000, from $1,000 for the three months ended March
31, 1999. The increase was primarily due to $75,000 recorded as other income
for dividends accrued on the Company's investment in Actel.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
At March 31, 2000, the Company's current liabilities of $26.1 million exceeded
current assets of $2.3 million resulting in a working capital deficit of $23.8
million. During the three months ended March 31, 2000, the Company used
$214,000 in cash for operating activities, and used $124,000 in investing
activities. The Company received proceeds from new debt financing of $556,000
and made payments on debt of $220,000, for net cash flows from financing
activities of $336,000. These activities resulted in a decrease in available
cash of $15,000 for the three months ended March 31, 2000.
The Company's debt and capital lease obligations as of March 31, 2000, including
the current portion thereof, totaled $22.5 million compared to $22.2 million at
December 31, 1999. The Company's current debt and lease obligations as of March
31, 2000 totaled $18.1 million compared to $17.0 million at December 31, 1999.
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 a collection firm. The
Company has also recorded a $1.7 million 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 March
31, 2000, the Company has not made the majority of June 1999 through March 2000
payments to Berthel. Berthel only has the right to demand that the Company cure
this violation, but has not made such a demand as of the date of this report.
Subsequent to March 31, 2000, the Company paid $686,000 for past due lease
payments to Berthel. (See discussion below.)
As of March 31, 2000, the Company was past due in the payment of approximately
$18.1 million of lease and debt financing, including $1.5 million from Berthel.
The Company was also past due with its trade vendors in the payment of
approximately $1.9 million as of March 31, 2000.
During the first quarter of 2000, the Company borrowed a total of $406,000 from
MCCIC. 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 prices of the Company's common stock at the
close of business on the day the funds were received by the Company. On April
6, 2000, the entire interest of the New Valley loan was purchased by MCCIC.
Warrants will be issued to MCCIC equal to 200% of the amount of the loan
assumed. The
17
<PAGE>
exercise price of such warrants will be the bid price of the Company's common
stock at the close of business on each day MCCIC purchased an interest in the
New Valley loan.
In February 2000, the Company entered into a billing services advance funding
agreement with two independent billing and collection firms (the "Billing and
Collection 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 nine 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 Billing and Collection 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 Companies loaned the Company $150,000, of which $60,000 has been
repaid as of March 31, 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
shareholder of the Company.
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 for fiscal 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 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. 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. No fees had been paid to Berthel as of March 31, 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.
During the period April 1, 2000 to May 12, 2000, the Company sold 366,750 shares
of Actel's Series A Convertible Preferred Stock in a private placement for
approximately $1.8 million resulting in a pre-tax gain of $1.3 million.
Proceeds were used to pay the April and May note payments due to MCCIC under the
New Valley loan totaling $438,000, to pay placement fees and other underwriting
expenses of $189,000, to repay $264,000 of working capital borrowings due to
MCCIC incurred during the first quarter of 2000, and to reduce past due note and
lease payables to Berthel of $686,000. The remaining proceeds were used for
working capital purposes.
18
<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 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;
- 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
acquisition;
- 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 PIC/ATN for up to $1.7 million
of USF fees;
- general economic conditions in the Company's markets;
19
<PAGE>
- 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.
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 Company did not hold any significant market risk sensitive instruments
during the period covered by this report.
20
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
In March 2000, an individual who held both warrants and a note payable from the
Company converted 18,941 of such warrants into the same number of shares of
common stock and reduced notes payable by $25,000 and accrued interest by $8,146
in a cashless exercise. The shares of common stock were issued in a private
placement exempt from the registration requirements of the Securities Act of
1933, as amended (the "Act"), pursuant to section 4(2) of the Act.
Item 3. Defaults Upon Senior Securities
As of March 31, 2000, the Company was past due in the payment of approximately
$18.1 million of lease and debt financing, including $1.5 million from Berthel.
The Company was also past due with its trade vendors in the payment of
approximately $1.9 million as of March 31, 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 matters were submitted to a vote of security holders of the Company during
the first quarter of 2000.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
<TABLE>
<CAPTION>
<C> <S>
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 Billing Services and Advance Funding Agreement, dated as of February 4, 2000,
between Priority International Communications, Inc. and NCIC Communications, Inc.
27 Financial Data Schedule
</TABLE>
________________________
(1) Filed as an exhibit to the Company's Registration Statement on Form SB-2
(File No. 333-05422C) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's report on Form 10-QSB for the
quarter ended September 30, 1997 (File No. 000-21463) and incorporated
herein by reference.
21
<PAGE>
(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: none were filed for quarter ended March 31, 2000
22
<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: May 15, 2000 By /s/ Eugene Davis
------------------
Eugene Davis
Acting Chief Executive Officer
Date: May 15, 2000 By /s/ Paul C.Tunink
-------------------
Paul C. Tunink
Vice President and Chief Financial Officer
23
BILLING SERVICES AND ADVANCE FUNDING AGREEMENT
This BILLING SERVICES AND ADVANCE FUNDING AGREEMENT (the "Agreement") is
entered into by and between, PRIORITY INTERNATIONAL COMMUNICATIONS, INC., a
Texas corporation ("PIC") and NCIC COMMUNICATIONS, INC., a Texas corporation
("NCIC") on this 4th day of February 2000.
RECITALS
A. NCIC as a long distance telephone service company has tariffs,
facilities and relationships whereby long distance calls may be properly billed
and collected.
B. PIC has network, switching and call management systems that enable
PIC to carry long distance calls on behalf of its customers, agents and clients.
C. PIC desires to submit certain call records to NCIC for proper
processing, billing and collections and NCIC desires to accept such records
under the terms and conditions set out herein.
AGREEMENTS
In consideration of the mutual covenants and agreements herein contained
and for other good and valuable consideration, the parties hereto do hereby
agree as follows:
1. From time to time PIC shall submit to NCIC certain Interstate and
Interstate long distance all records in accordance with the terms and conditions
that NCIC shall from time to time impose. Records submitted to NCIC will not be
submitted to any other party.
2. NCIC shall purchase such records as meets its processing criteria
with recourse under the following terms and conditions:
a. Records accepted by NCIC shall be purchased at 78% of gross
billed value. With regard to records purchased, NCIC shall be obligated to
advance fund 70% of the gross billed value approximately seven (7) working days
following submission. This schedule presumes a batch cut off occurring on each
Monday with the first installment due approximately seven (7) business days
later. The balance of the purchase price shall be due and payable six months
after submissions by PIC.
b. Records rejected by the billing system or by NCIC's billing
services company will be deducted from the gross billed value of records
submitted.
<PAGE>
c. NCIC shall maintain records of charges for bad debt, customer
service credits and LEC adjustments and credits for records submitted. Should
the aggregate of these charges exceed 10% of the gross billed records, NCIC may
offset any excess against amounts owed in connection with the second 8%
Installment(s) due to PIC.
3. The term of this Agreement shall be for months beginning with the
date of execution and continuing thereafter for the specified term of months.
At any time, NCIC may decline to accept further records from PIC. Failure to
accept records, however, does not relieve NCIC from other obligations set forth
herein. Either party may terminate this Agreement at any time by giving thirty
(30) days written notice to the other party of their intention to do so.
4. Upon execution, this Agreement shall be binding and enforceable on
the parties. Each party acknowledges that the signatories of this Agreement are
duly authorized to enter into such agreement and according each parties
substantially relied in this regard.
5. This Agreement shall be interpreted, enforced and adjudicated
according to the laws of the State of Texas and venue for disputes shall be in
County, Texas.
IN WITNESS WHEREOF, the Parties have this day agreed and hereto
affixed their respective signatures as evidence thereof.
PRIORITY INTERNATIONAL
COMMUNICATIONS, INC.
BY
--------------------------------
Wayne Wright, President
NCIC
BY
--------------------------------
Bill Pope, President
2
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