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 June 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 June 30, 2000, there were outstanding 10,476,347 shares of the Registrant's
no par value Common Stock.
<PAGE>
MURDOCK COMMUNICATIONS CORPORATION
FORM 10-Q
June 30, 2000
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
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Page
<S> <C> <C>
Item 1. Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999. . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three
Months Ended June 30, 2000 and 1999 and for the Six
Months Ended June 30, 2000 and 1999. . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 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. . . . . . . . . . . . 19
Item 3. Quantitative and Qualitative Disclosures About Market
Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 30
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . 30
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . 31
Item 4. Submission of Matters to a Vote of Security Holders. . . . 31
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . 32
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 32
Signatures . . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
2
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PART I FINANCIAL INFORMATION
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------------- -------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 613 $ 76
Accounts receivable, less allowance for doubtful accounts:
2000 - $3,255; 1999 - $3,127. . . . . . . . . . . . . . . . . . . . . . . 670 892
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 500
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . 279 251
------------------- -------------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . 1,562 1,719
------------------- -------------------
PROPERTY AND EQUIPMENT
Land and building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,446
Telecommunications equipment . . . . . . . . . . . . . . . . . . . . . . . 8,991 8,991
Furniture and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . 626 791
------------------- -------------------
9,617 11,228
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . (9,079) (8,679)
------------------- -------------------
PROPERTY AND EQUIPMENT, NET . . . . . . . . . . . . . . . . . . . . . . 538 2,549
------------------- -------------------
OTHER ASSETS
Goodwill - net of accumulated amortization: 2000 - $1,588; 1999 - $1,351. 1,400 3,750
Cost of purchased site contracts, net of accumulated amortization: 2000 -
$821; 1999 - $736 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 48
Other intangible assets, net of accumulated amortization: 2000 - $712 ;
1999 - $619 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 576 197
Investments, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,405 4,277
Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . . . . 169 12
Net assets of discontinued operations. . . . . . . . . . . . . . . . . . . - 1,648
------------------- -------------------
TOTAL OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,573 9,932
------------------- -------------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,551 $ 14,200
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
3
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MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
June 30, 2000 and December 31, 1999
(Dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
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<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Outstanding checks in excess of available balances. . . . . . . . . . . . . . . . $ - $ 86
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,201 13,708
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,220 2,018
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,823 1,894
Accrued universal service fund fees . . . . . . . . . . . . . . . . . . . . . . . 1,700 1,700
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 482 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 . . . . . . . . . . . . . . . . . . . . - 288
------------------- -------------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 15,426 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 . . . . . . . . . . . . 4,111 2,122
Long-term debt, others, less current portion. . . . . . . . . . . . . . . . . . . 521 744
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 22
------------------- -------------------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,067 27,964
------------------- -------------------
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) . . . . . . . . . . . . . . . . . . . . 1,882 1,868
Common stock, no par or stated value: authorized - 40,000,000 shares; issued:
2000 - 10,726,347 shares; 1999 - 10,576,012 shares . . . . . . . . . . . . . . . 20,369 20,259
Common stock warrants: Issued and outstanding: 2000 - 11,046,771; 1999 -
5,866,591. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,106 635
Treasury stock at cost: 2000 - 250,000 shares; 1999 - none. . . . . . . . . . . . (94) -
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 134
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36,913) (36,660)
------------------- -------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) . . . . . . . . . . . . . . . . . . . (13,516) (13,764)
------------------- -------------------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,551 $ 14,200
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended and Six Months Ended June 30, 2000 and 1999
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES
Call processing . . . . . . . . . . . . . . . $ 1,989 $ 5,280 $ 4,388 $ 12,280
Other revenues. . . . . . . . . . . . . . . . 21 969 59 1,816
--------------- --------------- --------------- ---------------
TOTAL REVENUES . . . . . . . . . . . . . . 2,010 6,249 4,447 14,096
COSTS OF SALES
Call processing . . . . . . . . . . . . . . . 1,863 3,666 3,476 9,283
Other cost of sales . . . . . . . . . . . . . (5) 511 15 934
Bad debt expense. . . . . . . . . . . . . . . - 771 - 771
--------------- --------------- --------------- ---------------
TOTAL COST OF SALES. . . . . . . . . . . . 1,858 4,948 3,491 10,988
GROSS PROFIT . . . . . . . . . . . . . . . . . . 152 1,301 956 3,108
OPERATING EXPENSES
Selling, general and administrative expenses. 1,131 1,584 1,901 3,009
Depreciation and amortization expense . . . . 263 615 508 1,192
Impairment of property and equipment
and intangible assets. . . . . . . . . . . . 2,248 - 2,248 -
AcNet bad debt and acquisition expenses . . . 489 - 489 -
--------------- --------------- --------------- ---------------
TOTAL OPERATING EXPENSES . . . . . . . . . 4,131 2,199 5,146 4,201
LOSS FROM OPERATIONS . . . . . . . . . . . . . . (3,979) (898) (4,190) (1,093)
NON-OPERATING INCOME (EXPENSE)
Interest expense, net . . . . . . . . . . . . (603) (746) (1,621) (1,423)
Other income. . . . . . . . . . . . . . . . . 7,018 6 7,159 7
--------------- --------------- --------------- ---------------
TOTAL NON-OPERATING INCOME (EXPENSE) . . . 6,415 (740) 5,538 (1,416)
--------------- --------------- --------------- ---------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE. . . . . 2,436 (1,638) 1,348 (2,509)
INCOME TAX (EXPENSE) BENEFIT. . . . . . . . . - 287 (4) 647
--------------- --------------- --------------- ---------------
INCOME (LOSS) FROM CONTINUING OPERATIONS . . . . 2,436 (1,351) 1,344 (1,862)
DISCONTINUED OPERATIONS
Income (loss) from operations . . . . . . . . (61) 488 (1,175) 1,083
Loss on disposition . . . . . . . . . . . . . (332) - (332) -
--------------- --------------- --------------- ---------------
NET INCOME (LOSS). . . . . . . . . . . . . . . . 2,043 (863) (163) (779)
DIVIDENDS AND ACCRETION ON 8% SERIES A
CONVERTIBLE PREFERRED STOCK. . . . . . . . . . . (46) (54) (92) (103)
--------------- --------------- --------------- ---------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
SHAREHOLDERS . . . . . . . . . . . . . . . . . . $ 1,997 $ (917) $ (255) $ (882)
=============== =============== =============== ===============
BASIC NET INCOME (LOSS) PER COMMON SHARE
Income (loss) from continuing operations. . . $ 0.24 $ (0.14) $ 0.12 $ 0.19
Income (loss) from discontinued operations. . (0.04) 0.05 (0.15) 0.10
--------------- --------------- --------------- ---------------
Net income (loss). . . . . . . . . . . . . $ 0.20 $ (0.09) $ (0.03) $ (0.09)
=============== =============== =============== ===============
BASIC WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING. . . . . . . . . . . . . . . . . . . 10,201,228 10,331,873 10,350,797 10,330,502
=============== =============== =============== ===============
DILUTED NET INCOME (LOSS) PER COMMON SHARE
Income (loss) from continuing operations. . . $ 0.20 $ (0.14) $ 0.11 $ (0.19)
Income (loss) from discontinued operations. . (0.03) 0.05 (0.13) 0.10
--------------- --------------- --------------- ---------------
Net income (loss). . . . . . . . . . . . . $ 0.17 $ (0.09) $ (0.02) $ (0.09)
=============== =============== =============== ===============
DILUTED WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING. . . . . . . . . . . . . . . . . . . 11,883,004 10,331,873 12,032,573 10,330,502
=============== =============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2000 and 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (163) $ (779)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH FLOWS FROM OPERATING
ACTIVITIES OF CONTINUING OPERATIONS
(Income) loss from discontinued operations . . . . . . . . . . . . . . . 1,175 (1,083)
Loss on disposition of discontinued operations . . . . . . . . . . . . . 332 -
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . 504 969
Impairment of property and equipment and intangible assets . . . . . . . 2,570 -
Impairment of investment . . . . . . . . . . . . . . . . . . . . . . . . 676 -
Noncash interest expense . . . . . . . . . . . . . . . . . . . . . . . . 285 233
Gain on sale of property and equipment . . . . . . . . . . . . . . . . . (214) (5)
Gain on Debt Restructuring Plan, net of plan expenses. . . . . . . . . . (6,766) -
Noncash interest and dividends . . . . . . . . . . . . . . . . . . . . . (315) -
Changes in operating assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 (286)
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . (66) (381)
Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . . (126) 132
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 527
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . (553) (990)
Other noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . (15) -
Deferred income - (4)
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES OF CONTINUING OPERATIONS . . (2,429) (1,667)
NET CASH FLOWS FROM DISCONTINUED OPERATIONS . . . . . . . . . . . . . - 162
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES. . . . . . . . . . . . . . . (2,429) (1,505)
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of Actel preferred stock. . . . . . . . . . . . . . . 4,948 -
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . (7) (271)
Proceeds from sale of property and equipment . . . . . . . . . . . . . . 233 13
Payments for site contracts. . . . . . . . . . . . . . . . . . . . . . . - (13)
Cash paid for investments. . . . . . . . . . . . . . . . . . . . . . . . (8) (4,285)
Cash paid for note receivable. . . . . . . . . . . . . . . . . . . . . . - (1,000)
Cash advanced to joint venture . . . . . . . . . . . . . . . . . . . . . - (25)
-------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES. . . . . . . . . . . . . . . 5,166 (5,581)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on capital lease obligations, primarily to a related party. . . (323) (144)
Borrowings on notes payable. . . . . . . . . . . . . . . . . . . . . . . 556 7,369
Borrowings on long-term debt, others . . . . . . . . . . . . . . . . . . - 143
Payments on notes payable. . . . . . . . . . . . . . . . . . . . . . . . (2,128) (898)
Payments on long-term debt with related parties. . . . . . . . . . . . . (275) (530)
Payments on long-term debt, others . . . . . . . . . . . . . . . . . . . (30) (230)
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . - 18
Payments on offering costs and origination fees. . . . . . . . . . . . . - (160)
-------- --------
NET CASH FLOW FROM FINANCING ACTIVITIES . . . . . . . . . . . . . . . (2,200) 5,568
-------- --------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . . 537 (1,518)
CASH AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . 76 1,722
-------- --------
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 613 $ 204
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for interest, principally to a related party $ - $ 364
Cash paid during the period for income taxes . . . . . . . . . . . . . . 850 29
</TABLE>
6
<PAGE>
SUPPLEMENTAL DISCLOSURES OF OPERATING, INVESTING AND FINANCING ACTIVITIES:
The Company recorded an increase to the carrying value of the 8% Convertible
preferred stock and a charge to accumulated deficit of $14,000 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 $76,000 representing 131,391 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 converted 729,910 shares of Actel Preferred Stock investment in a
noncash transaction reducing the cost basis of the investment by $729,910.
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 assets and
liabilities including a reduction of the $500,000 note receivable from Actel,
decreases in the principal balance of two notes payable of $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 $315,000 of interest and dividend income from AcNet and
Actel, respectively, during the period that was not paid in cash.
The Company recorded impairments of property and equipment and intangible assets
including a $2,113,000 impairment of goodwill related to PIC/ATN, and $457,000
of other asset impairments.
The Company recorded noncash interest expense of $285,000 in connection with the
Debt Restructuring Plan related to the subordinated debt with Berthel.
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.
See accompanying notes to consolidated financial statements.
7
<PAGE>
MURDOCK COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 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 accounting principles generally accepted
in the United States 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 six months ended June 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 of the Incomex subsidiary (see Note 7) 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 $36.9 million, and current liabilities exceed current assets by $13.9
million at June 30, 2000. The Company also is past due in the payment of
approximately $10.1 million of indebtedness as of June 30, 2000. The Company's
past due debt includes approximately $7.5 million of notes payable 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 amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
8
<PAGE>
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, Note 3, Note 7 and "Forward-Looking Statements"
and Part II, Item 5 in this report.
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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
the accounts of Priority International Communications, Inc. and ATN
Communications, Incorporated ("PIC/ATN"), its wholly owned subsidiary.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
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/ATN business, PIC/ATN
continues to operate in a rapidly changing competitive environment which creates
uncertainty regarding the fair value of certain PIC/ATN assets. Accordingly, in
the second quarter of 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 $457,000. All
impairments were determined based on the estimated fair value of such assets.
9
<PAGE>
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 website.
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 June 30, 2000. As of June 30,
2000, the Company and Floragraph have not negotiated an extension to the letter
of intent and the Company expects to seek other strategic alternatives (see
Part II, Item 5).
10
<PAGE>
3. NOTES PAYABLE AND LONG-TERM DEBT
------------------------------------
As of June 30, 2000, the Company was past due in the payment of $10.1 million of
principal and 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 principal amount of debt and accrued interest under 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 the 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 term of the Revolving
Promissory Note with MCCIC was amended on June 22, 2000 to a period of one year
with payment of principal and all accrued interest due on June 21, 2001. As of
June 30, 2000, the Company had $453,000 outstanding under loans from MCCIC.
11
<PAGE>
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 7).
4. INCOME TAXES
-------------
The Company's (provision) benefit for income taxes consisted of the following
for the six months ended June 30, 2000 and 1999 (amounts expressed in
thousands):
<TABLE>
<CAPTION>
2000 1999
------ -----
<S> <C> <C>
Current:
Federal $ - $ 550
State . (4) 97
</TABLE>
The 1999 tax benefits primarily resulted from the tax provision recorded for the
income from the discontinued Incomex subsidiary.
At June 30, 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 June 30, 2000 the Company had invested
$3,000,000, incurred investment related costs of $29,829 and recorded accrued
dividends of $385,349, 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. As of June 30, 2000, the
note had been repaid.
12
<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 3). Following
these transactions, the Company holds 1,481,140 shares of Actel Series A
Convertible Preferred Stock at June 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 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 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 June 30, 2000, the
remaining receivable is $500,000.
The AcNet entities provide internet services and network services to businesses,
governments and consumers, primarily in Mexico and Texas.
13
<PAGE>
6. BUSINESS SEGMENT INFORMATION
------------------------------
The Company's reportable segments are structured into a decentralized
organizational structure resulting in two stand-alone business units. While
both 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.
The Company's two reportable segments are PIC/ATN 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, credit card
billing services, automated collection and messaging delivery services, voice
mail services and telecommunications consulting. 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 TelemanagerTM 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.
The MCC TelemanagerTM 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.
14
<PAGE>
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 June 30,
2000 and 1999 (amounts expressed in thousands). The "Other" column includes
corporate related items, residual activity on remaining assets of the MTS
division and intercompany eliminations.
<TABLE>
<CAPTION>
PIC/ATN OTHER TOTAL
<S> <C> <C> <C>
2000
Revenues. . . . . . . . . . . . . . . $ 1,959 $ 51 $ 2,010
Loss from operations. . . . . . . . . (2,667) (1,312) (3,979)
Total assets. . . . . . . . . . . . . 2,692 3,859 6,551
Depreciation and amortization expense 247 16 263
Capital expenditures. . . . . . . . . - - -
1999
Revenues. . . . . . . . . . . . . . . 4,968 1,281 6,249
Loss from operations. . . . . . . . . (19) (879) (898)
Total assets. . . . . . . . . . . . . 3,833 20,315 24,148
Depreciation and amortization expense 117 498 615
Capital expenditures. . . . . . . . . 145 46 191
</TABLE>
The Company operates in the United States.
Summarized financial information concerning the Company's reportable segments,
net of intercompany eliminations, is shown in the following table as of and for
the six months ended June 30, 2000 and 1999 (amounts expressed in thousands).
The "Other" column includes corporate related items, residual activity on
remaining assets of the MTS division and intercompany eliminations.
<TABLE>
<CAPTION>
PIC/ATN OTHER TOTAL
<S> <C> <C> <C>
2000
Revenues. . . . . . . . . . . . . . . $ 4,231 $ 216 $ 4,447
Loss from operations. . . . . . . . . (2,399) (1,791) (4,190)
Total assets. . . . . . . . . . . . . 2,692 3,859 6,551
Depreciation and amortization expense 439 69 508
Capital expenditures. . . . . . . . . - 7 7
1999
Revenues. . . . . . . . . . . . . . . $ 11,570 $ 2,526 $14,096
Income (loss) from operations . . . . 1,006 (2,099) (1,093)
Total assets. . . . . . . . . . . . . 3,833 20,315 24,148
Depreciation and amortization expense 233 959 1,192
Capital expenditures. . . . . . . . . 161 110 271
</TABLE>
15
<PAGE>
7. 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.
Summary operating results of the discontinued operations are as follows:
<TABLE>
<CAPTION>
THREE THREE SIX SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenues. . . . . . . . . . . . . . $ 1,121 $ 2,750 $ 2,987 $ 5,690
Operating expenses. . . . . . . . . 1,182 1,937 4,162 3,885
Taxes . . . . . . . . . . . . . . . - 325 - 722
--------------- -------------- --------------- --------------
Income (loss) from discontinued
operations. . . . . . . . . . . . $ (61) $ 488 $ (1,175) $ 1,083
=============== ============== =============== ==============
</TABLE>
16
<PAGE>
A summary of the net assets of the discontinued operations are as follows:
<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>
8. 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 June 30, 2000, the Company and Berthel are the only
parties to the Standstill Agreement and Berthel is the only member of the
Creditors Committee.
17
<PAGE>
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 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 in the financial statements with respect to this matter.
On April 26, 2000, Priority International Communications, Inc., a wholly owned
subsidiary of the Company ("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
connection with a billing and related services agreement, dated September 1,
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.
9. BAD DEBT EXPENSE AND UNIVERSAL SERVICE FUND FEES
-------------------------------------------------------
In December 1999, ATN Communication, Inc., a wholly owned subsidiary of the
Company ("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 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 paid USF fees by its former billing and collection firm.
As of June 30, 2000, management believe a total of $1.1 million of such fees
have been remitted to ATN. The Company is continuing to investigate this matter
with the billing and collection firm.
10. COMMON STOCK WARRANTS
-----------------------
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 to purchase 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.
Effective May 29, 2000, the Company issued warrants to purchase an aggregate of
5,199,121 shares of the Company's common stock at an average exercise price of
$1.99 per share to MCCIC in connection with the Company's borrowings under the
Revolving Promissory Note and the New Valley Loan. Deferred financing costs of
$472,000 were recorded for the fair values of the warrants issued and are being
amortized over the remaining life of the related debt.
18
<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 JUNE 30, 2000 AND 1999
----------------------------------------------------------------
REVENUES - Consolidated revenues declined $4.2 million, or 67.8%, to $2.0
--------
million for the three months ended June 30, 2000 from $6.2 million for the three
months ended June 30, 1999. Revenues from PIC/ATN declined $2.8 million to $1.9
million for the three months ended June 30, 2000 from $4.7 million for the three
months ended June 30, 1999 primarily due to the loss of a principal customer as
discussed below.
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 declined
approximately $2.2 million for the three months ended June 30,2000. Accordingly,
this relationship is expected to produce significantly lower revenues for the
Company.
19
<PAGE>
Revenues from MTS declined $1.2 million to $51,000 for the three months ended
June 30, 2000 from $1.3 million for the three months ended June 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 $3.1 million, or 62.4%, to
---------------
$1.9 million for the three months ended June 30, 2000 from $5.0 million for
three months ended June 30, 1999. Consolidated cost of sales, as a percentage
of revenues, was 92.4% for the three months ended June 30, 2000 compared to
79.2% for the three months ended June 30, 1999. The decline in consolidated
cost of sales is primarily attributable to the loss of a principal PIC/ATN
customer and the decline in MTS revenue related to the Rental Agreement with
Telemanager.net (see discussion above). The increase in cost of sales, as a
percentage of revenues, is primarily due to costs associated with the shutdown
of remaining operations from the MTS division.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Consolidated selling, general and
--------------------------------------------
administrative expense decreased $453,000, or 28.6%, to $1.1 million for the
three months ended June 30, 2000 from $1.6 million for the three months ended
June 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 56.3% for the three
months ended June 30, 2000 compared to 25.4% for the three months ended June 30,
1999.
DEPRECIATION AND AMORTIZATION EXPENSE - Consolidated depreciation and
----------------------------------------
amortization expense declined $352,000, or 57.2%, to $263,000 for the three
months ended June 30, 2000 from $615,000 for the three months ended June 30,
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
second quarter of 2000 (see discussion below).
IMPAIRMENT OF PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS - The Company
-----------------------------------------------------------------
periodically reviews long-lived assets and intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
these assets may not be recoverable. Although the Company is developing a
revised operating plan to stabilize the PIC/ATN business, PIC/ATN continues to
operate in a rapidly changing competitive environment which creates uncertainty
regarding the fair value of PIC/ATN assets. Accordingly, in the second quarter
of 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 $457,000. All impairments were
determined based on the estimated fair value of such assets.
20
<PAGE>
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 the fourth quarter of 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 in April 2000 against the AcNet entities to collect its
advances.
INTEREST EXPENSE - Consolidated interest expense, including amortization of debt
----------------
discount, decreased $143,000, or 19.2 %, to $603,000 for the three months ended
June 30, 2000, from $746,000 for the three months ended June 30, 1999. As a
result of the Debt Restructuring Plan completed in the second quarter (see Note
3 to Notes to Financial Statements), interest expense declined in the second
quarter compared with the prior year and is expected to decline in future
periods.
OTHER INCOME - Consolidated other income increased $7.0 million to $7.0 million
-------------
for the three months ended June 30, 2000 from $6,000 for the three months ended
June 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 3 to Notes to Financial Statements), a pre-tax gain of
$214,000 recorded in connection with the sale of two buildings in Cedar Rapids,
Iowa and Mobile, Alabama and $66,000 recorded as other income for dividends
accrued on the Company's investment 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.
LOSS ON DISPOSITION - As a result of the sale of Incomex described above, the
---------------------
Company recorded a loss on disposition of $332,000 for the six months ended June
30, 2000.
21
<PAGE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------
REVENUES - Consolidated revenues declined $9.7 million, or 68.8%, to $4.4
--------
million for the six months ended June 30, 2000 from $14.1 million for the six
months ended June 30, 1999. Revenues from PIC/ATN declined $7.1 million to $4.2
million for the six months ended June 30, 2000 from $11.3 million for the six
months ended June 30, 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 six months ended June 30, 1999 was $3.6 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. 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 declined
approximately $4.2 million for the six months ended June 30, 2000. Accordingly,
this relationship is expected to produce significantly lower revenues for the
Company.
Revenues from MTS declined $2.3 million to $0.2 million for the six months ended
June 30, 2000 from $2.5 million for the six months ended June 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.
22
<PAGE>
COST OF SALES - Consolidated cost of sales declined $7.5 million, or 68.2%, to
---------------
$3.5 million for the six months ended June 30, 2000 from $11.0 million for six
months ended June 30, 1999. Consolidated cost of sales, as a percentage of
revenues, was 78.5% for the six months ended June 30, 2000 compared to 78.0% for
the six months ended June 30, 1999. The decline in consolidated cost of sales
is primarily attributable to the loss of two principal PIC/ATN customers 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 $1.1 million, or 36.8%, to $1.9 million for the
six months ended June 30, 2000 from $3.0 million for the six months ended June
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 42.8% for the six
months ended June 30, 2000 compared to 21.4% for the six months June 30, 1999.
DEPRECIATION AND AMORTIZATION EXPENSE - Consolidated depreciation and
----------------------------------------
amortization expense declined $684,000, or 57.3%, to $508,000 for the six months
ended June 30, 2000 from $1.2 million for the six months ended June 30, 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 second
quarter of 2000 (see discussion below).
IMPAIRMENT OF PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS - The Company
-----------------------------------------------------------------
periodically reviews long-lived assets and intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
these assets may not be recoverable. Although the Company is developing a
revised operating plan to stabilize the PIC/ATN business, PIC/ATN continues to
operate in a rapidly changing competitive environment which creates uncertainty
regarding the fair value of PIC/ATN assets. Accordingly, in the second quarter
of 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 $457,000. 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 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.
23
<PAGE>
INTEREST EXPENSE - Consolidated interest expense, including amortization of debt
----------------
discount, increased $200,000, or 13.9%, to $1.6 million for the six months ended
June 30, 2000, from $1.4 million for the six months ended June 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, 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 of the Debt Restructuring
Plan completed in the second quarter (see Note 3 to Notes to Financial
Statements), interest expense declined in the second quarter compared with the
prior year and is expected to decline in future periods.
OTHER INCOME - Consolidated other income increased $7.2 million to $7.2 million
-------------
for the six months ended June 30, 2000 from $7,000 for the six months ended June
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 3 to Notes to Financial Statements), a pre-tax gain of
$214,000 recorded in connection with the sale of two buildings in Cedar Rapids,
Iowa and Mobile, Alabama and $141,000 recorded as other income for dividends
accrued on the Company's investment 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.
LOSS ON DISPOSITION - As a result of the sale of Incomex described above, the
---------------------
Company recorded a loss on disposition of $332,000.
24
<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 term of the Revolving Promissory Note with MCCIC was amended on
June 22, 2000 to a period of one year with payment of principal and all accrued
interest due June 21, 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 will be
used for working capital purposes.
At June 30, 2000, the Company's current liabilities of $15.4 million exceeded
current assets of $1.6 million resulting in a working capital deficit of $13.8
million. During the six months ended June 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 $(2.2) million. These activities resulted in an increase in
available cash of $537,000 for the six months ended June 30, 2000.
25
<PAGE>
The Company's debt and capital lease obligations as of June 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 lease obligations as of June
30, 2000 totaled $10.2 million compared to $16.2 million at December 31, 1999.
Although in January 2000 ATN 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 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. ATN's cash flows in 2000 may also be adversely affected by
the lien placed by ATN's former billing and collection firm on collections from
calls processed by a subsequent billing and collection firm. The Company has
also recorded a $1.7 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 June 30, 2000, ATN has received invoices
for USF fees of $1.5 million.
As of June 30, 2000, the Company was past due in the payment of approximately
$10.1 million of lease and debt financing. The Company was also past due with
its trade vendors in the payment of approximately $775,000 as of June 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. The Company owes MCCIC $453,000 at June
30, 2000.
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, which has been repaid as of
June 30, 2000.
The Company's existing capital and anticipated funds from operations will not be
sufficient to meet its anticipated cash needs for working capital and debt
obligations for 2000. The Company estimates that it will need at least $12.1
million for the last six months of 2000 to fund working capital requirements and
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
26
<PAGE>
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 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. The
Company paid to Berthel placement and offering expenses of $444,0000 during the
six month period ended June 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.
27
<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/ATN;
- 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.
28
<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 DISCLUSURES ABOUT MARKET RISK.
The Company did not hold any significant market risk sensitive instruments
during the period covered by this report.
29
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On April 26, 2000, Priority International Communications, Inc., a wholly owned
subsidiary of the Company ("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
connection with a billing and related services agreement, dated September 1,
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.
Item 2. Changes in Securities and Use of Proceeds
Effective May 29, 2000, the Company issued warrants to purchase an aggregate of
909,224 shares of the Company's common stock to MCCIC in connection with the
Company's borrowings under the Revolving Promissory Note. The Company issued
(i) warrants to purchase 88,420 shares of common stock at an exercise price of
$2.4375 per share with an expiration date of December 20, 2004; (ii) warrants to
purchase 72,000 shares of common stock at an exercise price of $2.0937 per share
with an expiration date of January 20, 2005; (iii) warrants to purchase 40,000
shares of common stock at an exercise price of $2.1875 per share with an
expiration date of February 1, 2005; (iv) warrants to purchase 200,000 shares of
common stock at an exercise price of $2.25 per share with an expiration date of
February 10, 2005; (v) warrants to purchase 200,000 shares of common stock at an
exercise price of $2.25 per share with an expiration date of February 18, 2005;
(vi) warrants to purchase 100,000 shares of common stock at an exercise price of
$1.50 per share with an expiration date of March 3, 2005; (vii) warrants to
purchase 200,000 shares of common stock at an exercise price of $1.25 per share
with an expiration date of March 30, 2005; and (viii) warrants to purchase 8,804
shares of common stock at an exercise price of $1.3125 per share with an
expiration date of April 5, 2005. The warrants 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.
Effective May 29, 2000, the Company also issued warrants to purchase an
aggregate of 4,289,897 shares of the Company's common stock to MCCIC in
connection with the MCCIC participation in the New Valley Loan. The Company
issued (i) warrants to purchase 2,119,363 shares of common stock at an exercise
price of $2.4375 per share with an expiration date of December 20, 2004; (ii)
warrants to purchase 427,600 shares of common stock at an exercise price of
$2.0937 per share with an expiration date of January 20, 2005; (iii) warrants to
purchase 431,467 shares of common
30
<PAGE>
stock at an exercise price of $2.25 per share with an expiration date of
February 18, 2005; (iv) warrants to purchase 435,467 shares of common stock at
an exercise price of $0.9375 per share with an expiration date of March 17,
2005; and (v) warrants to purchase 876,000 shares of common stock at an exercise
price of $1.3125 per share with an expiration date of April 6, 2005. The
warrants were issued in a private placement exempt from the registration
requirements of the Act pursuant to Section 4(2) of the Act.
Item 3. Defaults Upon Senior Securities
As of June 30, 2000, the Company was past due in payment of approximately $10.1
million of lease and debt financing. The Company was also past due with its
trade vendors in the payment of approximately $775,000 as of June 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
The annual meeting of stockholders of the Company was held on May 23, 2000.
The matters voted upon, including the number of votes cast for, against or
withheld, as well as the number of abstentions and broker non-votes, as to each
such matter were as follows:
Proposal 1: Election of directors
<TABLE>
<CAPTION>
For Withheld
--------- --------
<C> <S> <C> <C>
(a) Guy O. Murdock. . 7,853,346 121,127
(b) Eugene Davis. . . 7,902,455 72,018
(c) David Kirkpatrick 7,901,455 73,018
(d) Wayne Wright. . . 7,910,455 64,018
</TABLE>
Proposal 2: Ratification of appointment of Deloitte & Touche LLP as auditors of
the Company
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
--------- ------- ------- ----------------
<S> <C> <C> <C>
7,944,945 17,458 12,070 0
</TABLE>
31
<PAGE>
Item 5. Other Information
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.
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 Stockholders Agreement, dated as of April __, 2000, among Actel
Integrated Communications, Inc., the Company and the other
shareholders of Actel Integrated Communications, Inc.
10.2 First Amendment to Stockholders Agreement and Consent to Permitted
Transferees by Series E Holders, dated as of June 13, 2000, among
Actel Integrated Communications, Inc., the Company and the other
shareholders of Actel Integrated Communications, Inc.
10.3 Placement Agreement, dated as of January __, 2000, between the
Company and Berthel Fisher & Company Financial Services, Inc.
10.4 Form of Convertible Note of the Company due May 29, 2003.
10.5 Billing and Advance Funding Agreement, dated as of February 2,
2000, between Priority International Communications, Inc. and
Paramount International Telecommunications, Inc.
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.
(a) Reports on Form 8-K: none were filed for quarter ended June 30, 2000
32
<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: August 22, 2000 By /s/ Eugene Davis
------------------
Eugene Davis
Chief Executive Officer
Date: August 22, 2000 By /s/ Paul C.Tunink
-------------------
Paul C. Tunink
Vice President and
Chief Financial Officer
33
