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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] Annual Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2000.
[ ] 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
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(Exact name of registrant as specified in its charter)
Iowa 42-1339746
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5539 Crane Lane NE, Cedar Rapids, Iowa 52402
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 319-393-8999
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Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class which registered
NA NA
-- --
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, No Par Value
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(Title of class)
Redeemable Common Stock Purchase Warrants
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(Title of class)
Check whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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
-- --
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
this Form 10-K. [ ]
The aggregate market value of the common stock held by nonaffiliates of the
registrant as of March 1, 2001 was $537,945. Shares of common stock held by any
executive officer or director of the registrant and any person who beneficially
owns 10% or more of the outstanding common stock have been excluded from this
computation because such persons may be deemed to be affiliates. This
determination of affiliate status is not a conclusive determination for other
purposes.
On March 1, 2001, there were outstanding 12,514,967 shares of the
registrant's no par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
2
PART I
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ITEM 1. BUSINESS
GENERAL
Murdock Communications Corporation ("MCC" or the "Company") currently
operates as a holding company with the Company's principal assets being the
Priority International Communications, Inc. ("PIC") business segment and its
investment in Actel Integrated Communications, Inc. ("Actel"). PIC is now
largely a reseller of call processing services. 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-user services in the Southeastern United States.
Actel filed for bankruptcy under Chapter 11 on April 11, 2001. As a result, the
Company has recorded an impairment charge of $1.6 million in 2000, due to the
uncertainty of ultimate recovery of its investment in Actel. The Company is
uncertain whether its investment in Actel will have any value following Actel's
bankruptcy. ATN Communications Incorporated ("ATN"), a wholly owned subsidiary
of PIC, has discontinued its operations. Unless otherwise indicated, references
in this report to "PIC" include the historical operations of ATN.
As of the date of this report, the Company has a large amount of past due
debt and has also experienced operating and cash flow difficulties at the PIC
business segment.
As a result of the Company's adverse financial position, the Company
developed a revised operating plan in 2000. This plan included the "Debt
Restructuring Plan" described below and the sale of certain business segments
and other assets. These transactions resulted in significant improvement in the
Company's financial condition.
In addition, the management of PIC developed a new business plan during
2000 to stabilize the PIC business. As a result of this revised business plan,
PIC began in the second half of 2000 to distribute excess cash flow to the
Company. However, PIC has not had excess cash flow for distribution to the
Company in recent months as a result of declining revenues, higher cost of sales
and the loss of a number of its customers. As a result, the Company is
uncertain regarding PIC's ability to make cash distributions to the Company in
future periods.
3
The Company's current strategic direction is to continue to negotiate with
its creditors to restructure indebtedness and to attempt to obtain financing to
fund operations. If the Company is successful in completing further
improvements to its financial condition, the Company may seek other strategic
alternatives, including attempting to use the Company's public shell as a merger
vehicle. Due to the Company's large amount of past due debt, the Company will
need to continue its restructuring efforts in 2001. The Company believes that
possible sources of funds in 2001 to enable the Company to continue its
operations consist of cash distributions from its PIC business unit and advances
from MCC Investment Company, LLC, a company owned by two of the Company's
significant shareholders. No assurance can be given that the Company will be
able to obtain adequate funds from any of these possible sources in 2001. If
the Company is unable to restructure its past due debt or to obtain adequate
funds for its operational needs, or if the holders of the Company's past due
debt seek to enforce their rights, the Company would not be able to continue
operating as a going concern. See "- Recent Developments" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" below.
Business segment information is contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and in Note 17 to the
Consolidated Financial Statements.
MCC was incorporated as an Iowa corporation in 1989.
RECENT DEVELOPMENTS
MCC'S PAST DUE DEBT. As of March 1, 2001, the Company was past due in the
payment of approximately $10.1 million of principal and interest payments. The
Company was also past due with its trade vendors in the payment of approximately
$536,000 as of February 28, 2001. If the Company is unable to raise the
necessary funds to repay its past due debt or to arrange for extensions or
conversions of such debt, its creditors may sue the Company to demand payment of
the amounts past due. Any action by the Company's creditors to demand repayment
of past due indebtedness is likely to prevent the Company from continuing as a
going concern. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The Company's past due debt includes approximately $9.4 million of notes
and accrued interest which have been pledged by the holders of the notes to a
bank as collateral for loans made by the bank to such holders. This bank was
liquidated by the Federal Deposit Insurance Corporation ("FDIC") during 2000.
The Company was notified in December 2000 that the FDIC sold substantially all
the
4
loans and related collateral to a financial institution. In March 2001, the
Company received a demand letter from this financial institution with respect to
past due notes in the aggregate principal amount of $575,000 originally issued
to two former executive officers of the Company. If the financial institution
seeks to enforce its rights under the pledged notes, the Company currently would
not be able to repay these notes. As a result, any such action by the financial
institution is likely to prevent the Company from continuing as a going concern.
The FDIC has notified the Company that it believes an additional $770,000
is outstanding representing various notes payable. Another party has also
asserted that he is entitled to $500,000 allegedly outstanding under a note
payable. Management believes that no funds were received by the Company with
respect to these notes and that it has other defenses. The amount of past due
debt as ofFebruary 28, 2001 does not include these amounts. No assurance can be
given as to the ultimate outcome of this matter.
INVESTMENT IN ACTEL. During 1998, the Company reached an agreement to
invest in Actel. 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-user
services in the Southeastern United States. The Company invested $3.0 million
in Actel during 1998 and 1999. During the third quarter of 1999, the $3.0
million investment was converted into 4,371,428 shares of Actel's Series A
Convertible Preferred Stock (the "Actel Shares"). During the second quarter of
2000, the Company sold or exchanged 2,213,198 Actel Shares pursuant to the Debt
Restructuring Plan (see "Debt Restructuring Plan" below). Following these
transactions, the Company held 2,158,230 Actel Shares. On April 11, 2001, Actel
filed for bankruptcy under Chapter 11. As a result, the Company has recorded an
impairment charge of $1.6 million in 2000, due to the uncertainty of ultimate
recovery of its investment in Actel. The Company is uncertain whether its
investment in Actel will have any value following Actel's bankruptcy.
DEBT RESTRUCTURING PLAN. 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 Actel Shares for cash and extinguishment of debt as
discussed below.
The Debt Restructuring Plan consisted of (i) a private offering (the "Actel
Share Offering") by the Company of Actel Shares 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").
5
During the second quarter of 2000, the Company sold 1,149,614 Actel Shares
for gross proceeds of $4.9 million in the Actel Share Offering, resulting in a
gain of approximately $3.7 million. Proceeds were partially used to (i) 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"),
(ii) reduce a total of $2.2 million of the amounts owed to MCC Investment
Company, LLC ("MCCIC"), an affiliate of Berthel 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, (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 1,063,584 Actel
Shares with a fair value of approximately $4.6 million 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. A net gain of approximately $3.3 million was realized on transfer of
the Actel Shares. 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 (the "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 1998 with the remaining balance of these
promissory notes being converted in the Unit Offering.
SALE OF INCOMEX. In 1998, the Company purchased Incomex, Inc. ("Incomex").
Incomex contracted with Mexican resort hotels to provide billing and collection
services for calls to the United States from Mexico.
Effective June 30, 2000 the Company sold all the shares of Incomex to three
of the former shareholders of Incomex, for (a) the transfer to the Company by
the purchasers of 250,000 shares of 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.
6
SALE OF CERTAIN ASSETS OF MURDOCK TECHNOLOGY SERVICES. MTS was formed as a
division of the Company in 1998 to provide database profit management services
and other value added services to the hospitality telecommunications management
market. MTS's principal product, the MCC Telemanager , is a proprietary software
and hardware product created to help manage telecommunication installations and
services in the hospitality market. MTS accounted for approximately 15.7% of
the Company's revenues for the year ended December 31, 1999. In February 2000,
the Company entered into a Rental Agreement with TeleManager.net providing for
the operation of the Company's Telemanager system by TeleManager.net in exchange
for monthly rental payments to the Company. The Company also entered into a
memorandum of understanding to negotiate a sale of certain assets of MTS to
TeleManager.net. The MCC Telemanager(TM) was the primary service provided by the
MTS business unit. On December 20, 2000, the Company sold certain assets which
were subject to the Rental Agreement to Telemanager.net for (a) cash at closing
of $104,500 and (b) the termination of employment agreements with the two
principal owners of Telemanager.net who are former executives of the Company.
The parties also executed mutual releases relating to certain potential
liabilities between the Company and the former officers. As a result, the
Company recorded a gain of $55,000 in the fourth quarter of 2000.
BAD DEBT AND UNIVERSAL SERVICE FUND FEES. During 1999, PIC recorded bad
debt in excess of historical amounts of approximately $5.6 million primarily
relating to collection issues for one type of call processing service provided
by its subsidiary ATN to a principal customer. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
As a result of this collection issue, PIC switched to another billing and
collection firm in November 1999. The prior billing and collection firm alleged
that PIC had breached its contract and that it had a lien on the collections
from calls processed by the new billing and collection firm. At December 31,
1999, the Company recorded an allowance for 100% of all receivables from both
billing and collection firms due to the uncertainty regarding their collection.
On January 25, 2001, the Company reached a settlement agreement with the
prior billing and collection firm and the new billing and collection firm.
Under this settlement: (a) PIC and ATN are relieved from any further liability
allegedly owed to either billing and collection firm, (b) PIC agreed to pay
nominal consideration and to relinquish its claims to funds held by the new
billing and collection firm, (c) PIC and ATN released any potential claims that
they had against the prior billing and collection firm, including claims ATN may
have for the alleged failure by the prior billing and collection firm to assess
USF
7
contribution charges (see discussion below) on certain traffic, as well as any
claims that ATN may have against the prior billing and collection firm for its
role in the excessive bad debt charges, and (d) PIC and ATN released any
potential claims that they had against the new billing and collection firm.
In December 1999, the Company recorded a $1.7 million liability for amounts
allegedly due by ATN to the Universal Service Administrative Company ("USAC")
for universal service fund ("USF") fees. During the first two months of 2001,
ATN received credit memos from USAC which reflect a balance due USAC of
$806,000. Accordingly, ATN recorded a $894,000 credit in the fourth quarter of
2000. The Company can make no assurances that ATN will not be liable for
additional USF fees. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
STANDSTILL AGREEMENT. The Company historically obtained lease and other
financing services from Berthel. In December 1999, Berthel entered into a
Standstill Agreement with the Company. Under the Standstill Agreement, Berthel
indicated its intention to form a creditors committee to represent the interests
of Berthel and other creditors of the Company. The Company agreed to provide
the creditors committee with access to information regarding the Company and its
business and to advise the creditors committee in advance regarding certain
significant corporate developments. The creditors committee may also demand
that the Company take certain actions with respect to the Company's assets and
business. The members of the creditors committee agreed to forebear from taking
actions to collect past due debt owed by the Company in the absence of the
unanimous approval of the creditors committee. As of March 1, 2001, the Company
and Berthel are the only parties to the Standstill Agreement and Berthel is the
only member of the creditors committee.
OPTIONS TO ACQUIRE ACNET. The Company has an option to acquire
Intercarrier Transport Corporation, the holder of 99% of the outstanding shares
of AcNet S.A. de C.V. of Mexico ("AcNet Mexico") which expires on August 31,
2001. The Company's option to acquire AcNet USA, Inc. ("AcNet USA") expired on
December 31, 1999. The options provide for an aggregate purchase price of
2,325,000 shares of the Company's Common Stock, $200,000 in closing costs and an
additional $550,000 to pay off certain debt and accounts payable. In light of
the Company's liquidity issues and other issues involving the AcNet entities,
the Company is not pursuing its options to acquire the AcNet entities. As of
December 31, 2000, the Company had recorded an investment of $4.7 million in
the AcNet entities, including loans, interest and acquisition costs. As a
result of the Company's decision not to pursue an acquisition of the AcNet
entities and due to cash flow difficulties being experienced by the AcNet
entities, the Company
8
recorded write-downs of $3.7 million in 1999 and $990,000 in 2000, which is all
of the Company's investment in the AcNet entities, due to the uncertainty of
ultimate recovery of its investment. The Company commenced legal action against
the AcNet entities in April 2000 to collect its advances and interest. However,
AcNet USA filed for bankruptcy on March 29, 2001, and the Company has been
informed that AcNet Mexico is currently in receivership.
THE COMPANY'S PRINCIPAL BUSINESS UNIT
In 1997, the Company purchased PIC and PIC Resources Corp., including its
wholly owned subsidiary ATN. Currently, all of the Company's telecommunication
services are provided by PIC. PIC offers telecommunications services
principally to aggregators of operator service traffic and to a limited number
of payphone operators. ATN has discontinued its operations.
Prior to 2000, PIC and ATN operated in concert to provide marketing,
service delivery and customer support for owners and aggregators of
telecommunications services. PIC and ATN provided both live operator services
and automated call processing services. The operator center, located in Mobile,
Alabama, featured 50 live operator stations and automated call platforms. PIC
and ATN also offered credit card billing services, automated collection and
messaging delivery services, voice mail services and telecommunications
consulting.
During 1999, PIC experienced significant operating and cash flow
difficulties. The management of PIC developed a new business plan during 2000
to stabilize the PIC business. As a result of this revised business plan, PIC
is now largely a reseller of call processing services and has accordingly
eliminated its live operator center. PIC began in the second half of 2000 to
distribute excess cash flow to the Company as a result of these changes.
However, PIC has not had excess cash flow for distribution to the Company in
recent months as a result of declining revenues, higher cost of sales and the
loss of a number of its customers. As a result, the Company is uncertain
regarding PIC's ability to make cash distributions to the Company in future
periods. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
COMPETITION
Competition in the telecommunications industry is intense. PIC competes
with numerous other providers of alternative operator services and call
processing services. PIC's customers, which include telephone owners and
aggregators, are extremely attentive to the competitive environment and the
competitive efforts of alternative operator service providers to acquire new
customers. The Company
9
believes that competition in its markets is based principally on price. PIC may
face competition from companies with greater financial, technical, marketing and
other resources than the Company. There can be no assurance that PIC will be
able to compete successfully in its markets.
SIGNIFICANT CUSTOMERS
During 2000, the Company derived approximately 33% and 29% of its revenue
from two PIC customers. PIC is currently in mediation regarding a dispute with
one of these customers and is conducting negotiations with the other customer.
As a result, there is substantial uncertainty regarding PIC's ability to
continue to do business with these two customers. The loss of either of these
customers would have a material adverse effect on the Company. The Company also
derived approximately 12% of its revenue during 2000 from a third PIC customer.
See "Legal Proceedings" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SALES AND MARKETING
The Company's sales efforts historically were conducted largely by its
internal sales force. PIC had one member of its sales staff who was laid off
prior to December 31, 2000. PIC's Chief Executive Officer currently services
its existing customers. PIC does not devote any resources to obtaining new
customers.
INTELLECTUAL PROPERTY
The Company does not currently have any material patent or trademark
registrations. The Company principally relies on trade secrets and proprietary
know-how in the operation of its business.
REGULATION
As a result of PIC's revised business plan limiting PIC's services largely
to reselling call processing services, the management of PIC does not believe
that it is currently subject to any significant federal or state
telecommunications regulation. However, no assurance can be given that the
Company's business is not currently or will not in the future become subject to
significant regulation. Federal or state regulatory authorities may claim that
the Company has failed to comply with applicable laws or regulations. Fines or
other penalties also may be imposed for such violations.
10
EMPLOYEES
As of December 31, 2000, MCC had seven full-time employees and no part-time
employees, including five full-time employees at PIC, and two full-time
employees at its corporate headquarters. The Company believes its relationships
with its employees are good. None of the Company's employees is subject to a
collective bargaining agreement.
ITEM 2. PROPERTIES
The Company's corporate offices are located in Cedar Rapids, Iowa. The
following table sets forth the principal properties of the Company as of
December 31, 2000.
OWNED
OR
LOCATION BUSINESS SEGMENT LEASED EXPIRATION DATE SQUARE FEET
- ------------------ ---------------- ------ ---------------- -----------
Cedar Rapids, Iowa Corporate Office Leased Monthly (1) 3,120
Mobile, Alabama. . PIC Leased Monthly (1) 1,500
(1) The leases are on a monthly basis until terminated by either party.
ITEM 3. LEGAL PROCEEDINGS
A lawsuit was filed in Superior Court of the State of California on October
20, 1999 claiming conspiracy to defraud, fraud and deceit, and conversion
against several defendants, including ATN, in connection with an Internal
Operator Services Agreement between the plaintiffs and defendant Paramount
International Telecommunications, Inc. ("Paramount"). The Internal Operator
Services Agreement sets out that Paramount will provide (among other things)
calling services and billing and collection of the charges through local
exchange carriers, and Paramount would deduct agreed upon fees for its services
and remit the balance to the plaintiffs. Paramount allegedly contracted out
operator and billing services with ATN from May 1998 until present. In addition
to other claims against Paramount, the plaintiffs complain that Paramount and
ATN conspired to falsify call charge reports being sent to the plaintiffs by
underreporting the amount of charges billed to the end user and keeping the
monies generated therefrom, thereby damaging the plaintiffs for no less than
approximately $280,000. The plaintiffs also seek punitive damages in an
unspecified amount. ATN filed its response on January 4, 2000. This action was
dismissed on February 1, 2001.
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On April 26, 2000, PIC filed an action in state court in Travis County,
Texas, against OAN Services, Inc. ("OAN") and Billing Concepts, Inc. ("BCI"),
claiming breach of contract and tortious interference by BCI 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 and ATN was inaccurate
and misleading, thus constituting tortious interference by BCI. PIC sought 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. On January 25, 2001, PIC reached a settlement agreement with the BCI and
OAN. Under this settlement: (a) PIC and ATN are relieved from any further
liability allegedly owed to BCI or OAN, (b) PIC agreed to pay nominal
consideration and to relinquish its claims to funds held by OAN, (c) PIC and ATN
released any potential claims that they had against BCI, including claims ATN
may have for the alleged failure by BCI to assess USF contribution charges (see
discussion below) on certain traffic, as well as any claims that ATN may have
against BCI for its role in the excessive bad debt charges, and (d) PIC and ATN
released any potential claims that they had against OAN.
On December 19, 2000, ATN filed an action in Texas state court against
Telephone Service Bureau, LLC ("TSB") and Network Operator Services, Inc.
("NOS"), claiming breach of contract by TSB in connection with an Operator
Services Agreement between ATN and TSB. Specifically, ATN claimed that TSB
breached the Operator Service Agreement by refusing to pay ATN for accrued and
unaccrued bad debt "true-ups", which ATN estimates exceeds $2.9 million. As a
result of the "bad debt" impact on ATN's financial condition, ATN was forced to
discontinue business in late 1999, and PIC thereafter continued providing TSB
access to a switch and related operator services. Because of the known history
of the call traffic at issue, PIC requested that this particular traffic be
handled elsewhere, and is now being processed by NOS. ATN's application for
writ of attachment seeks attachment of advances made by PIC and NOS to TSB as a
result of TSB traffic now being processed NOS (NOS was named in the suit solely
to bind it to the requested writ of attachment). ATN also requested injunctive
relief restraining and enjoining TSB from taking any actions which would cause
the call traffic to be re-routed or diverted and ordering PIC and NOS to deposit
that portion of the PIC and NOS advances constituting TSB's gross margin into
the registry of the court pending trial. The state court entered a temporary
restraining order on
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December 19, 2000 (effective through January 2, 2001), directing that TSB
refrain from re-routing any traffic away from PIC or NOS. The temporary
restraining order was later extended through January 16, 2001.
On January 2, 2001, TSB filed a special appearance and removed the case to
U.S. District Court. TSB simultaneously filed a motion to dismiss, claiming
that the case should be dismissed for lack of personal jurisdiction, or,
alternatively, improper venue. It was not until the filing of TSB's motion to
dismiss that ATN became aware of related suits filed on November 8, 2000, in the
Chancery Court for Knox County, Tennessee, styled Telephone Service Bureau vs.
ATN Communications, Inc. and Priority International Communications, Inc. (the
subject matter of which is also the Operator Services Agreement) and on January
2, 2001, in the Chancery Court for Knox County, Tennessee, styled Call
Management Systems, Inc. vs. ATN Communications, Inc. and Priority International
Communications, Inc. ATN has removed these cases to federal court in Tennessee.
TSB also filed a motion with the U.S. District Court in Texas to dissolve
the temporary restraining order on January 2, 2001. The District Court denied
TSB's motion to dissolve on January 5, 2001, and ordered the injunction hearing
be set for January 16, 2001. On January 9, 2001, ATN filed a motion to remand
the matter back to state court. NOS simultaneously filed a motion to dismiss.
Responses to TSB's motion to dismiss and NOS's January 9 motion have been filed
by ATN. On January 13, 2001, the parties reached a standstill agreement to
remain in effect pending a mediation to take place. The courts in Texas and
Tennessee have stayed all proceedings until a date not more than fourteen days
after completion of the mediation. PIC is currently in mediation regarding this
dispute. No assurances can be given at this time as to the outcome of this
matter.
In the normal course of business, the Company also may be involved in
various legal proceedings from time to time. Except as set forth above, the
Company does not believe it is currently involved in any claim or action the
ultimate disposition of which would have a material adverse effect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2000.
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
HISTORICAL TRADING INFORMATION AND DIVIDEND POLICY
The Common Stock trades on the Over the Counter Bulletin Board under the
symbol "MURC" and the Company's Redeemable Common Stock Purchase Warrants
("Warrants") trade on the Over the Counter Bulletin Board under the symbol
"MURCW." The following table sets forth the high and low bid quotations for the
Common Stock and Warrants as reported on the Over the Counter Bulletin Board.
Such transactions reflect interdealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
Common Stock Warrants
------------ --------
Quarter High Low High Low
- ----------- ----- ----- ----- -----
FISCAL 1999
First . . . $4.63 $2.75 $0.38 $0.06
Second. . . 4.13 2.75 0.63 0.19
Third . . . 3.88 2.69 0.60 0.24
Fourth. . . 3.25 1.75 0.88 0.10
FISCAL 2000
First . . . 2.63 0.88 0.69 0.15
Second. . . 1.63 0.31 0.19 0.13
Third . . . 0.69 0.25 0.13 0.13
Fourth. . . 0.52 0.09 0.06 0.02
At March 1, 2001, there were approximately 140 holders of record of Common
Stock.
The Company has not paid any cash dividends on the Common Stock in the last
two years. Certain of the Company's current financing agreements contain
restrictions on the payment of dividends. The Company intends to retain any
earnings for use to repay its past due debt and in the operation of its business
and, therefore, does not anticipate paying any cash dividends in the foreseeable
future.
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RECENT SALES OF UNREGISTERED SECURITIES
Effective March 22, 2000, the Company issued warrants to purchase 150,000
shares of the Company's common stock to two former officers of the Company in
connection with the termination of their employment agreements. The warrants
were issued at an exercise price of $1.00 per share with an expiration date of
March 22, 2003. The warrants were issued in a private placement exempt from the
registration requirements of the Securities Act of 1933, amended (the "Act"),
pursuant to Section 4(2) of the Act.
During the second quarter of 2000, the Company transferred 1,063,584 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 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 were issued in a private placement
exempt from the registration requirements of the Act pursuant to Section 4(2) of
the Act and Regulation D promulgated under the Act.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth selected consolidated financial data in respect of
the Company's continuing operations. The selected financial information set
forth in the table below is not necessarily indicative of the results of future
operations of the Company and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements, related notes and independent auditors'
report, contained herein. The statement of operations data for the five years
ended December 31, 2000 and the related balance sheet data have been derived
from the audited consolidated financial statements of the Company. These
financial statements were prepared on a going concern basis.
15
2000(a) 1999(b) 1998(c) 1997(d) 1996(e)
--------- --------- -------- -------- --------
(In thousands, except per share data)
Statement of Operations Data:
Revenues. . . . . . . . . . . . . . . . . . . . . . . $ 8,437 $ 27,463 $26,067 $ 8,417 $ 8,165
Gross profit. . . . . . . . . . . . . . . . . . . . . 2,912 1,467 8,025 2,144 2,925
Loss from continuing operations . . . . . . . . . . . (3,517) (16,441) (883) (7,900) (3,572)
Loss before extraordinary item. . . . . . . . . . . . (5,024) (18,398) (174) (7,900) (3,572)
Net loss attributable to common shareholders. . . . . (4,427) (18,592) (349) (7,900) (2,488)
Basic and diluted net loss
per common share
Loss from continuing operations . . . . . . . . . $ (0.34) $ (1.60) $ (0.19) $ (1.89) $ (1.41)
Income (loss) from discontinued operations. . . . (0.14) (0.19) 0.13 - -
Extraordinary gain. . . . . . . . . . . . . . . . 0.07 - - - 0.43
Net loss. . . . . . . . . . . . . . . . . . . . . $ (0.41) $ (1.79) $ (0.06) $ (1.89) $ (0.98)
Balance Sheet Data: (at end of year)
Total assets. . . . . . . . . . . . . . . . . . . . . $ 1,108 $ 14,200 $20,909 $ 9,386 $ 7,479
Notes payable . . . . . . . . . . . . . . . . . . . . 8,783 13,708 6,788 1,715 -
Long-term debt. . . . . . . . . . . . . . . . . . . . 5,103 7,502 7,860 8,352 5,138
Total liabilities . . . . . . . . . . . . . . . . . . 18,861 27,964 17,763 13,868 6,280
Redeemable preferred stock. . . . . . . . . . . . . . - 1,868 1,837 1,544 -
Shareholder's equity (deficiency) . . . . . . . . . . (17,753) (13,764) 4,077 (4,482) 1,175
(a) Includes: a $3.9 million charge for impairment of assets; a $990,000 charge for the write-down of
the Company's investment in the AcNet entities; a $1.6 million charge for impairment of investment in
Actel; a $894,000 credit for USF fees; a gain of $7.0 million recorded in connection with a Debt
Restructuring Plan; and a $722,000 extraordinary gain on extinguishment of debt.
(b) Includes: $5.6 million of bad debt in excess of historical amounts primarily relating to
collection issues for one type of call processing service provided by PIC to a principal customer; a $1.7
million charge for USF fees; a $3.3 million charge for impairment of assets; and a $3.7 million charge
for the write-down of the Company's investment in the AcNet entities.
(c) Includes a gain of $453,000 relating to the termination of the Company's agreement with AT&T.
(d) Includes: a $1.0 million charge on the write-off of all the assets of a joint venture and a $1.4
million charge on the impairment write-down of assets related to the PIC acquisition.
(e) Includes an extraordinary gain on debt restructuring of $1.1 million.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
MCC currently operates as a holding company with the Company's principal
assets being the PIC business segment and its investment in Actel. PIC is now
largely a reseller of call processing services. 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-user services in the Southeastern United States.
From its inception in 1989 through 1994, the Company's primary source of
revenue was generated by providing operator services to the hospitality industry
as an automated call processing and long distance services provider. Due to
declining call volumes, caused in part by the use of proprietary calling cards
and other dial-around activities (such as 1-800-CALL ATT), the Company entered
into a contract with AT&T in October 1994 to route operator services traffic to
AT&T through the Lodging Partnership program. Under the Lodging Partnership,
AT&T processed the calls, carried call traffic and billed the end user. In
return, AT&T paid MCC commissions on the calls dialed.
In light of the declining call volumes and narrow profit margins
experienced by the Company under the Lodging Partnership with AT&T, the Company
and AT&T agreed to terminate the Lodging Partnership arrangement effective
October 15, 1998. AT&T agreed to purchase all of the customer contracts under
the Lodging Partnership and to directly manage the existing customers under the
contracts. As a result, the Company recorded a one-time gain in the fourth
quarter of 1998 of $453,000. Revenues to the Company from the AT&T agreement
ended in the fourth quarter of 1998.
Through a series of acquisitions and new product developments, the Company
transformed itself during 1998 from a reseller of AT&T network services to U.S.
hotels to a provider of operator services and call processing to North American
pay phones, hotels and institutions, database profit management services and
telecommunications billing and collection services for the hospitality industry
and outsourced operator services for the telecommunications industry.
As of the date of this report, the Company has a large amount of past due
debt and has also experienced significant operating and cash flow difficulties
at the PIC business unit.
17
The Company has been developing a revised operating plan to stabilize the
PIC business. As a result of this revised operating plan, PIC is now largely a
reseller of call processing services and has accordingly eliminated its live
operator center. PIC began to distribute excess cash flow to the Company in the
second half of 2000 as a result of these changes. However, PIC has not had
excess cash flow for distribution to the Company in recent months as a result of
declining revenues, higher cost of sales and the loss of a number of its
customers. As a result, the Company is uncertain regarding PIC's ability to
make cash distributions to the Company in future periods. ATN, a wholly owned
subsidiary of PIC, has discontinued its operations. Unless otherwise indicated,
references in this report to "PIC" include the historical operations of ATN.
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 and to attempt to obtain financing to
fund operations. If the Company is successful in completing further
improvements to its financial condition, the Company may seek other strategic
alternatives, including attempting to use the Company's public shell as a merger
vehicle. Due to the Company's large amount of past due debt, the Company will
need to continue its restructuring efforts in 2001. The Company believes that
possible sources of funds in 2001 to enable the Company to continue its
operations consist of cash distributions from its PIC business unit and advances
from MCCIC. No assurance can be given that the Company will be able to obtain
adequate funds from any of these possible sources in 2001. If the Company is
unable to restructure its past due debt or to obtain adequate funds for its
operational needs, or if the holders of the Company's past due debt seek to
enforce their rights, the Company would not be able to continue operating as a
going concern. See Note 1 in Notes to Consolidated Financial Statements and
"Liquidity and Capital Resources."
18
RESULTS OF OPERATIONS
The following table sets forth statements of operations items and the
percentages that such items bear to revenues:
Years ended
December 31,
--------------------
2000 1999 1998
----- ----- -----
Revenues. . . . . . . . . . . . . . . . . . 100% 100% 100%
Cost of sales . . . . . . . . . . . . . . . 65% 95% 69%
Selling, general, and administrative. . . . 33% 19% 23%
Depreciation and amortization . . . . . . . 12% 7% 6%
Impairment of assets. . . . . . . . . . . . 65% 12% --
AcNet bad debt and acquisition expenses . . 12% 13% --
Total operating expenses. . . . . . . . . . 121% 51% 29%
Operating income (loss) . . . . . . . . . . (86)% (46)% 2%
Gain on AT&T contract buyout. . . . . . . . -- -- 2%
Interest expense. . . . . . . . . . . . . . 42% 13% 8%
Other income. . . . . . . . . . . . . . . . 86% 1% --
Loss from continuing operations . . . . . . (42)% (60)% (4)%
Loss on disposition . . . . . . . . . . . . (4)% -- --
Income (loss) from discontinued operations. (14)% (7)% 3%
Extraordinary items . . . . . . . . . . . . 9% -- --
Net loss. . . . . . . . . . . . . . . . . . (51)% (67)% (1)%
COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999
REVENUES - Consolidated revenues declined $19.1 million, or 69.3%, to $8.4
- --------
million for the year ended December 31, 2000 from $27.5 million for the year
ended December 31, 1999. Revenues from PIC declined $15.0 million to $8.2
million for the year ended December 31, 2000 from $23.2 million for the year
ended December 31, 1999 primarily due to the loss of all or a significant
portion of business with two principal customers as discussed in the next two
paragraphs below and due to a change in revenue recognition (see Note 1 in Notes
to Consolidated Financial Statements), partially offset by gains in new
business.
Effective the third quarter of 1999, a principal customer for
long-distance services originating from Mexico terminated its relationship with
PIC. Total revenues relative to the customer were $5.3 million for the year
ended December 31, 1999.
During 1999, PIC's operator service business unit derived revenues from a
principal customer that totaled $14.0 million or 51% of total revenues of the
Company. PIC terminated a significant portion of the service provided to this
customer in January 2000 due to the significant bad debt expenses being
19
experienced related to such calls and the customer subsequently removed more
traffic during 2000. Total revenues relative to this customer were $2.4 million
or 29% of total revenues of the Company for the year ended December 31, 2000.
PIC is currently in mediation regarding a dispute with this customer. As a
result of this dispute, there is substantial uncertainty regarding PIC's ability
to continue to do business with this customer. See "Legal Proceedings."
PIC's revenues from another significant customer totaled $2.8 million, or
33% of the total revenues of the Company, for the year ended December 31, 2000.
PIC is currently conducting negotiations with this customer. As a result of
these negotiations, there is substantial uncertainty regarding PIC's ability to
continue to do business with this customer.
The change in revenue recognition resulted in a decline in other revenues
of approximately $2.6 million and will continue to result in lower revenues for
the Company.
Revenues from MTS declined $4.1 million to $191,000 for the year ended
December 31, 2000 from $4.3 million for the year ended December 31,1999. In
February 2000, the Company entered into a Rental Agreement with Telemanager.net
providing for the operation of the Company's Telemanger system, the division's
principal product, by Telemanager.net in exchange for monthly rental payments to
the Company. On December 20, 2000, the Company sold certain assets which were
subject to the Rental Agreement to Telemanager.net. Telemanager.net is owned by
former executives of the Company. Accordingly, this business unit will not
provide any significant revenues, margins or operating losses in future periods.
COST OF SALES - Consolidated cost of sales declined $20.5 million, or 78.7%, to
- --------------
$5.5 million for the year ended December 31, 2000 from $26.0 million for year
ended December 31, 1999. Consolidated cost of sales, as a percentage of
revenues, was 65.5% for the year ended December 31, 2000 compared to 94.7% for
the year ended December 31, 1999. The decline in consolidated cost of sales is
primarily attributable to a loss of all or a significant portion of business
with two principal PIC customers (see discussion above), the decline in MTS
revenue related to the Rental Agreement with Telemanager.net (see discussion
above), and due to significant bad debt expense and USF fees recorded during the
year ended December 31, 1999.
The Company did not record bad debt expense during 2000 due to a change in
revenue recognition (See Note 1 in Notes to Consolidated Financial Statements).
During 1999, PIC recorded bad debt expense in excess of historical amounts
totaling approximately $5.6 million primarily relating to collection issues for
one type of call processing service provided by PIC to a principal customer.
20
In December 1999, ATN received notice from USAC that 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 1999, it recorded a liability of
$1.7 million. Subsequent to the year ended December 31, 2000, ATN received
credit memos from USAC which reflect a balance due USAC of $806,000.
Accordingly, ATN recorded a $894,000 credit in the fourth quarter of 2000. The
Company can make no assurances that ATN will not be liable for additional USF
fees.
On January 24, 2001, the Company reached a settlement agreement with a
prior billing and collection firm. The settlement includes ATN releasing any
potential claims it has against the billing and collection firm related to its
failure to assess USF charges as well as any claims for its role in the
excessive bad debt charges recorded in 1999. PIC and ATN were relieved in this
settlement from any further liability allegedly owed for additional bad debt
expense (see Note 2 in Notes to Consolidated Financial Statements and "Legal
Proceedings").
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Consolidated selling, general and
- --------------------------------------------
administrative expense decreased $2.5 million, or 48.6%, to $2.8 million for the
year ended December 31, 2000 from $5.3 million for the year ended December 31,
1999. The decline in expenses is primarily related to the substantial
elimination of MTS expenses related to the Rental Agreement with Telemanager.net
(See discussion above), and lower compensation and travel expense at PIC and
Corporate, partially offset by higher legal fees and consulting expenses.
Selling, general and administrative expense, as a percentage of revenues, was
32.6% for the year ended December 31, 2000 compared to 19.4% for the year ended
December 31, 1999.
DEPRECIATION AND AMORTIZATION EXPENSE- Consolidated depreciation and
- ----------------------------------------
amortization expense declined $963,000, or 50.5%, to $935,000 for the year ended
December 31, 2000 from $1.9 million for the year ended December 31, 1999. The
decline is due to impairments recorded in 1999 and 2000. This lower level of
expense is expected to continue in future periods.
IMPAIRMENT OF 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 devised a revised operating plan during 2000 to stabilize
the PIC business, PIC continues to operate in a rapidly changing competitive
environment
21
which creates uncertainty regarding the fair value of PIC assets. Accordingly,
for the year ended December 31, 2000, the Company recorded an impairment
write-down of goodwill related to PIC of approximately $3.3 million and a
write-down of other assets, primarily telecommunications equipment, of $598,000.
All impairments were determined based on the estimated fair value of such
assets.
On April 11, 2001, Actel filed for bankruptcy under Chapter 11. As a
result, the Company has recorded an impairment charge of $1.6 million in 2000,
due to the uncertainty of ultimate recovery of its investment in Actel. The
Company is uncertain whether its investment in Actel will have any value
following Actel's bankruptcy.
ACNET BAD DEBT AND ACQUISITION EXPENSE - As of December 31, 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 $990,000 in 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. However, AcNet USA filed
for bankruptcy on March 29, 2001, and the Company has been informed that AcNet
Mexico is currently in receivership.
INTEREST EXPENSE - Consolidated interest expense, including amortization of debt
- ----------------
discount, was $3.5 million for the years ended December 31, 2000 and 1999.
Interest expense savings were achieved due to the completion of the Debt
Restructuring Plan initiated in the second quarter of 2000 (See Note 8 in Notes
to Consolidated Financial Statements) in which the Company restructured a
significant portion of its past due principal debt and accrued interest.
Offsetting the lower interest achieved during the second half of the year as a
result of the Debt Restructuring Plan was the amortization of 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 in "Liquidity and
Capital Resources"), and an increase in interest rates on past due debt in the
first half of 2000 and higher levels of debt during 2000 compared to 1999
primarily related to investments in Actel and the AcNet entities.
OTHER INCOME - Consolidated other income increased $7.0 million to $7.3 million
- -------------
for the year ended December 31, 2000 from $314,000 for the year ended December
31, 1999. The increase was primarily due to a pre-tax gain of
22
$7.0 million recorded in connection with the Debt Restructuring Plan completed
in the second quarter of 2000 (see Note 8 to Notes to Financial Statements) and
a pre-tax gain of $214,000 recorded in connection with the sale of two buildings
in Cedar Rapids, Iowa and Mobile, Alabama.
INCOME FROM DISCONTINUED OPERATIONS OF INCOMEX - Effective June 30, 2000 the
- --------------------------------------------------
Company sold all the shares of Incomex, Inc., a wholly owned subsidiary, to
three of the former shareholders of Incomex, for (a) transfer to the Company by
the purchasers of 250,000 shares of the Company's Common Stock originally issued
by the Company pursuant to the Company's acquisition of Incomex, (b)
cancellation and forgiveness of all amounts outstanding under promissory notes
in the aggregate principal amount of $684,919, and related accrued interest,
originally issued by the Company to the shareholders of Incomex, and (c) the
cancellation of all employment compensation and employment contracts between the
Company and the purchasers. The parties also executed mutual releases relating
to liabilities between the Company and Incomex and claims that the Company may
have against the former shareholders of Incomex. Incomex is primarily engaged
in the business of providing billing and collection services to the hospitality
industry from Mexico to the United States.
The accompanying statements of operations have been reclassified so that
the results for the subsidiary's operations are classified as discontinued
operations for all periods presented. The assets and liabilities of the
discontinued operations have been reclassified in the 1999 balance sheet as "net
assets of discontinued operations". The statements of cash flows and related
notes to the consolidated financial statements have also been reclassified to
conform to the discontinued operations presentation.
LOSS ON DISPOSITION - As a result of the sale of Incomex described above, the
- ---------------------
Company recorded a loss on disposition of $332,000 in the second quarter of
2000.
EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF DEBT - In connection with the
- -------------------------------------------------------
Debt Restructuring Plan the Company began in the second quarter of 2000, the
Company reached a Comprise Settlement Agreement and Mutual Release with the FDIC
on October 19, 2000 to pay $300,000 in settlement of two notes payable with a
financial institution with combined principal of $900,000. As a result, the
Company recorded a $722,000 Extraordinary Gain on Extinguishment of Debt,
including interest, in the fourth quarter of 2000.
23
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES - Consolidated revenues increased $1.4 million, or 5.4%, to $27.5
- --------
million for the year ended December 31, 1999 from $26.1 million for the year
ended December 31, 1998. Revenues from PIC increased $2.4 million to $23.2
million for the year ended December 31, 1999 from $20.8 million for the year
ended December 31, 1998 due to increases in the consumer alternative dialing
revenues, partially offset by a decline in revenues from a principal customer as
discussed below.
During 1998, PIC's operator services business unit began providing services
to a principal customer for long distance services originating from Mexico.
During 1998, the Company provided full service in connection with the customer's
calls including billing and collections and accordingly recognized as revenues
the value of such billed services. The results were that 1998 revenues from
this customer totaled $4.2 million or 16% of the total revenues of the Company.
In the first quarter of 1999, the Company modified its relationship with the
customer whereby calls were processed and billing records were delivered to the
customer for submission to the customer's billing service. The Company received
fees for its services that were recognized as revenues rather than the billed
value of the calls. Accordingly, the revenues associated with this customer
included in the results for the year ended December 31, 1999 represents a
blending of full service revenues, representing the period from January 1
through February 4, 1999, and fee revenues from February 5 through June 30,
1999. Total revenues relative to the customer for the year ended December 31,
1999 were $5.3 million or 19% of the total revenues of the Company for the year.
Effective June 1999, this customer terminated its relationship with PIC.
During 1998, PIC's operator service business unit derived revenues from a
principal customer that totaled $8.4 million or 32% of total revenues of the
Company, compared with $14.0 million or 51% in 1999. PIC 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 MTS declined $1.0 million to $4.3 million for the year ended
December 31, 1999 from $5.3 million for the year ended December 31, 1998 due to
the termination of the Lodging Partnership Program with AT&T in October 1998.
Call processing revenues generated by MTS through its Lodging Partnership
Program decreased from $2.1 million for the year ended December 31, 1998 to none
for the year ended December 31, 1999. MTS's revenue for the year ended December
31, 1999 consisted of revenues from its Telemanager services and equipment
sales.
24
COST OF SALES - Consolidated cost of sales increased $8.0 million, or 44.1%, to
- --------------
$26.0 million for the year ended December 31, 1999 from $18.0 million for the
year ended December 31, 1998. Consolidated cost of sales, as a percentage of
revenues, was 94.7% for the year ended December 31, 1999 compared to 69.2% for
the year ended December 31, 1998. The increase in cost of sales is primarily
attributable to the PIC segment which experienced higher cost of sales as a
percentage of revenues due to a $5.6 million of bad debt in excess of historical
amounts as discussed below for the year ended December 31, 1999.
During 1999, PIC recorded bad debt in excess of historical amounts totaling
approximately $5.6 million primarily relating to collection issues for one type
of call processing service provided by PIC to a principal customer. Also, in
December 1999, the Company recorded a $1.7 million liability for USF fees from
1997 through 1999 which represents the period of time the liability is the
responsibility of ATN.
Excluding the impact of the $5.6 million of bad debt in excess of
historical amounts and the $1.7 million liability for USF fees, consolidated
cost of sales, as a percentage of revenues, was 68.1% for the year ended
December 31, 1999 compared to 69.2% for the year ended December 31, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Consolidated selling, general and
- --------------------------------------------
administrative expense decreased $609,000, or 10.2%, to $5.4 million for the
year ended December 31, 1999 from $6.0 million for the year ended December 31,
1998. Selling, general and administrative expense, as a percentage of revenues,
was 19.4% for the year ended December 31, 1999 compared to 22.9% for the year
ended December 31, 1998. The reduction in expenses were primarily due to
lowering expenses at PIC and MTS, partially offset by higher corporate overhead
expenses.
DEPRECIATION AND AMORTIZATION EXPENSE - Consolidated depreciation and
- ----------------------------------------
amortization increased $213,000 or 12.7%, to $1.9 million for the year ended
December 31, 1999 from $1.7 million for the year ended December 31, 1998. The
increase is primarily the result of additional goodwill of $3.6 million recorded
in the fourth quarter of 1998 for the settlements of the earn-outs in connection
with the Company's acquisition of PIC, which is being amortized over the
remaining life of the original goodwill.
IMPAIRMENT OF 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. Due
to the rapidly changing competitive environments in which the Company operates,
25
the significant bad debts experienced, the loss of PIC's two major customers and
the declining revenues per call have prevented the Company from significantly
increasing operating profits from levels that existed prior to the acquisition,
in 1999, the Company recorded an impairment write-down for goodwill of
approximately $3.0 million related to PIC and of approximately $0.3 million
related to other assets, primarily telecommunications equipment, based on the
expected fair value of such assets.
ACNET BAD DEBT AND ACQUISITION EXPENSE - As of December 31, 1999, the Company
- -----------------------------------------
had an investment of $4.7 million consisting of $3.7 million of loans, $265,000
of interest and $747,000 of costs incurred either related to the proposed
acquisition of the AcNet entities or paid on behalf of the AcNet entities. In
light of the Company's liquidity issues and other issues involving the AcNet
entities, the Company is not pursuing its options to acquire the AcNet entities.
As a result and due to cash flow difficulties experienced by the AcNet entities,
the Company recorded a $3.7 million asset write-down in 1999 due to the
uncertainty regarding the ultimate recovery of the investment and notes (see
Note 6 in Notes to Consolidated Financial Statements).
GAIN ON AT&T CONTRACT BUYOUT - The Company's agreement with AT&T was amended
- --------------------------------
during 1998 to terminate as of October 15, 1998. Under the amendment, AT&T will
directly manage the existing customers under the contracts and AT&T assumed
liability for all commissions owed to the existing customers for the period
March 1, 1998 to October 15, 1998. As a result, the Company recorded a one-time
gain in the fourth quarter of 1998 of $453,000 representing the commissions
assumed by AT&T less the write-off of owned equipment at the existing customers
properties.
INTEREST EXPENSE - Consolidated interest expense, including amortization of debt
- ----------------
discount, increased $1.4 million, or 70.0%, to $3.5 million for the year ended
December 31, 1999 from $2.1 million for the year ended December 31, 1998. The
increase was primarily due to additional debt incurred related to the
investments in Actel and the AcNet entities, the costs associated with the
earn-out settlement with respect to the acquisition of PIC, the Company's lower
operating profit and general working capital purposes, and to an increase in the
interest rates on the past due debt.
OTHER INCOME - Consolidated other income increased $328,000 to $314,000 for the
- -------------
year ended December 31, 1999 from a loss of $14,000 for the year ended December
31, 1998. During the year ended December 31, 1999 the Company recorded $245,000
as other income for dividends accrued on its investment in Actel.
26
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 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 1,419,614 Actel Shares in a private placement for approximately
$4.9 million and b) transferred 1,063,584 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 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 1998 with the
remaining balance of these promissory notes being converted in the Unit
Offering.
As part of the Debt Restructuring Plan, the Company issued three promissory
notes on June 22, 2000 to Berthel for an aggregate amount of $209,428. The
notes are due June 21, 2001 and accrue interest at the rate of 12% annually. In
addition, the Company amended: (1) the terms of the Revolving Promissory Note
with MCCIC on June 22, 2000 to a period of one year with payment of principal
and all accrued interest due on June 21, 2001 and (2) the terms of the Note and
Warrant Purchase Agreement with MCCIC on June 22, 2000 with payment of principal
and unpaid interest due on June 22, 2001.
Proceeds from the sale of the Actel Shares were used to reduce amounts owed
to MCCIC under the New Valley Loan and the Revolving Promissory Note of $2.2
million, reduce past due note and lease payables to Berthel of $1.0 million, pay
placement fees and other offering expenses of $444,000 and pay $479,000 to
27
certain noteholders upon conversion in the Unit Offering a partial payment of
amounts owed to such noteholders. The remaining proceeds of $779,000 were used
for working capital purposes.
At December 31, 2000, the Company's current liabilities of $14.0 million
exceeded current assets of $906,000 resulting in a working capital deficit of
$13.1 million. During the year ended December 31, 2000, the Company used $2.9
million in cash for operating activities, and received $7.1 million in investing
activities. The Company received proceeds from new debt financing of $656,000
and made payments on debt of $4.9 million for net cash flows used in financing
activities of $4.3 million. These activities resulted in an increase in
available cash of $81,000 for the year ended December 31, 2000. Accounts
receivable declined by $310,000 primarily due to the lower revenue volume at
PIC. Note receivable declined by $500,000 due to the collection of the note
during 2000. Total current liabilities declined by $8.9 million due to the Debt
Restructuring Plan initiated during 2000, partially offset by higher accrued
interest levels.
The Company's debt and capital lease obligations as of December 31, 2000,
including the current portion thereof, totaled $13.9 million compared to $21.2
million at December 31, 1999. The Company's current debt and capital lease
obligations as of December 31, 2000 totaled $9.0 million compared to $16.2
million at December 31, 1999.
As of December 31, 2000, the Company was past due in the payment of
approximately $9.9 million in principal and accrued interest payments. The
Company was also past due with its trade vendors in the payment of approximately
$505,000 as of December 31, 2000.
During 2000, the Company borrowed a total of $506,000 from MCCIC under the
Revolving Promissory Note. The borrowings were originally due on demand and
bear interest at 12%. On April 6, 2000, the entire interest of the New Valley
Loan was purchased by MCCIC. As of December 31, 2000, the Company had $588,000
principal outstanding under all loans from MCCIC.
The Company's capital expenditures for property, plant and equipment were
$672,000 during 1999. The Company did not make any capital expenditures for
property, plant and equipment during 2000. The Company does not anticipate
incurring any material capital expenditures during 2001.
The Company's past due debt at December 31, 2000 includes approximately
$9.2 million of notes and accrued interest which have been pledged by the
holders of the notes to a bank as collateral for loans made by the bank to such
holders. This bank was liquidated by the FDIC during 2000. The Company was
notified in December 2000 that the FDIC sold significantly all the loans and
related collateral
28
to a financial institution. If the financial institution seeks to enforce its
rights under the pledged notes, the Company currently would not be able to repay
these notes. As a result, any such action by the financial institution is
likely to prevent the Company from continuing as a going concern.
The Company's existing capital and potential funds from operations will not
be sufficient to meet its anticipated cash needs for working capital and debt
obligations for the next twelve months. The Company estimates that it will need
at least $17 million for the next twelve months to fund working capital
requirements and repay indebtedness that is either past due or will become due
in that period, including accrued interest, past due amounts with trade vendors
and USF fees payable. The Company believes that possible sources of funds in
2001 to enable the Company to continue its operations consist of cash
distributions from its PIC business unit and advances from MCCIC. The Company
also continues to engage in discussions with creditors to restructure
indebtedness. 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. No assurance can be given that the
Company will be able to raise adequate funds 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.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The recognition of gains
or losses resulting from changes in the values of derivatives is based on the
use of each derivative instrument and whether it qualifies for hedge accounting.
The Company adopted SFAS No. 133 on January 1, 2001. The adoption of SFAS No.
133 did not have a material effect on the Company's results of operations or
financial condition.
29
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 funds 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 possibility that the Company's creditors may take legal action for the
repayment of past due indebtedness and the ability of the Company to
continue as a going concern if any such action is taken;
- - the Company's ability to restructure its past due debt;
- - the Company's ability to realize potential value from its PIC operating
unit and its Actel investment and the ability of PIC to distribute cash to
the Company in future periods;
- - the possibility of additional impairment write downs of assets;
- - the Company's ability to respond to competition in its markets;
- - the outcome of pending litigation;
- - changes in, or failure to comply with, governmental regulation, including
telecommunications regulations;
- - the effect of the alleged liability of ATN for up to $0.8 million of USF
fees and the possibility that ATN may be liable for additional USF fees;
- - general economic conditions in the Company's markets;
- - the risk that the Company's analyses of these risks could be incorrect
and/or the strategies developed to address them could be unsuccessful; and
30
- - various other factors discussed in this Annual Report on Form 10-K.
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 7A. DISCLOSURES ABOUT MARKET RISK
The Company does not have any foreign currency exchange risk or commodity
price risk. All of the Company's debt, including past due debt with carrying
value of $7.5 million, was at a fixed interest rate at December 31, 2000 and
1999 and, therefore, the Company is not impacted by changes in interest rates
related to the debt. The interest rates range from 12% to 18%. The Company had
outstanding fixed rate long-term debt obligations with carrying values of $4.9
million and $2.9 million at December 31, 2000 and 1999, respectively. The fair
value of this debt was zero and $2.5 million at December 31, 2000 and 1999,
respectively. The potential loss in fair value on such fixed-rate debt
obligation from a hypothetical 10% increase in market interest rates would not
be material to the overall fair value of the debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, notes thereto and
related financial information are filed under this item beginning on page F-1 of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
31
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following sets forth certain information with respect to the directors
and executive officers of the Company as of December 31, 2000.
DIRECTORS
DIRECTOR
NAME, AGE, PRINCIPAL OCCUPATION FOR PAST FIVE YEARS AND DIRECTORSHIPS AGE SINCE
--- --------
GUY O. MURDOCK 45 1989
Mr. Murdock is a private investor. He served as Chairman of the Board of the Company from
1989 to January 2000, as Chief Executive Officer of the Company from 1989 to April 1997
and as President of the Company from 1989 to July 1996.
WAYNE WRIGHT 55 1997
Mr. Wright has served as President of Priority International Communications, Inc. (a
wholly-owned subsidiary of the Company since October 1997) since March 1997 and
as Chairman of the Board of Priority International Communications, Inc. from 1996 to 1997.
Mr. Wright served as an officer of U.S. Ameriphone (an aggregator of hospitality
and pay phone businesses) from 1993 to 1996.
DAVID KIRKPATRICK 61 2000
Mr. Kirkpatrick has been a private investor since 1992. Mr. Kirkpatrick served as a
consultant to a law firm from 1991 to 1992 and as a partner of Peat Marwick (an accounting
firm) from 1962 to 1991, most recently as Managing Partner of the Houston office.
EUGENE I. DAVIS 46 2000
Mr. Davis has served as Chairman of the Board and Chief Executive Officer of the Company
since May 2000 and served as Interim Chairman of the Board and Interim Chief Executive Officer
of the Company from January 2000 through May 2000. He has served as Chairman of the
Board and Chief Executive Officer of Pirinate Consulting Group, LLC (a privately held consulting
firm) since 1999 and as Chief Executive Officer of SmarTalk Teleservices, Inc. (a prepaid calling
card provider) since 1999. Mr. Davis served as Chief Operating Officer of Total-Tel USA
Communications, Inc. (a telecommunications provider) from 1998 to 1999. Mr. Davis served
as President of Emerson Radio Corp. (a consumer electronics products distributor) from 1994 to
1997 and served as Vice Chairman of the Board until 1997 and as a director from 1992 to 1997.
32
EXECUTIVE OFFICER
The following table sets forth the name, age, current position and
principal occupation and employment during the past five years of the executive
officer of the Company who is not a director:
NAME AGE CURRENT POSITION Other Positions
------------------------
Paul C. Tunink 42 Vice President, Chief Vice President, Chief Financial Officer and
Financial Officer and Treasurer of Stuart Entertainment, Inc. (a
Secretary since November manufacturer of gaming supplies) from
1998. April 1995 to October 1998. Divisional
Vice President-Finance of Younkers Inc. (a
retailer) from April 1992 to April 1995.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC initial reports of
beneficial ownership and reports of changes in beneficial ownership of the
Company's equity securities. The rules promulgated by the SEC under Section
16(a) of the Exchange Act require those persons to furnish the Company with
copies of all reports filed with the SEC pursuant to Section 16(a). Based
solely upon a review of such forms actually furnished to the Company and written
representations of certain of the Company's directors and executive officers,
all directors, executive officers and 10% shareholders have filed with the SEC
on a timely basis all reports required to be filed under Section 16(a) of the
Exchange Act during 2000, except that Mr. Davis filed a Form 3 report in
February 2000 to report his appointment as an officer and a director of the
Company in January 2000 and Mr. Kirkpatrick filed a Form 3 report in February
2000 to report his appointment as a director of the Company in January 2000.
ITEM 11. EXECUTIVE COMPENSATION.
CASH AND OTHER COMPENSATION. The table which follows sets forth certain
information concerning compensation paid to, earned by or awarded to Eugene I.
Davis, the Company's Chairman of the Board and Chief Executive Officer during
fiscal 2000, and Paul C. Tunink, the Company's Vice President, Chief Financial
Officer and Secretary during fiscal 2000 (collectively, the "named executive
officers") during the years indicated below. No other executive officers of the
Company received salary and bonus in excess of $100,000 during the fiscal year
ended December 31, 2000.
33
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
OPTIONS (#) COMPENSATION ($)
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ----------- ----------------
- ------------------------------------- ---- ---------- ----------
Eugene I. Davis 2000 - - - 181,109 (2)
Chairman of the Board and 1999 - - - -
Chief Executive Officer (1) 1998 - - - -
Paul C. Tunink 2000 128,000 45,000 (4) - -
Vice President, Chief 1999 128,000 - - 31,261 (5)
Financial Officer and Secretary (3) 1998 14,769 - 75,000 -
_______________
(1) Mr. Davis has served as Chairman of the Board and Chief Executive Officer of the Company
since May 2000 and served as Interim Chairman of the Board and Interim Chief Executive Officer
from January 2000 through May 2000. Mr. Davis' services are contracted through Pirinate Consulting
Group, LLC.
(2) Represents amounts paid to Pirinate Consulting Group, LLC, an entity controlled by Mr. Davis,
during fiscal 2000.
(3) Mr. Tunink has been a Vice President of the Company since November 1998.
(4) Represents payments of $15,000 made on each of February 15, 2000, March 15, 2000 and May 15,
2000 to Mr. Tunink under a retention bonus agreement.
(5) Represents amounts paid by the Company for Mr. Tunink's moving expenses.
OPTIONS GRANTED DURING 2000. There were no stock options granted to the
named executive officers of the Company during the year ended December 31, 2000.
FISCAL YEAR-END OPTION VALUES. The following table provides certain
information regarding the unexercised options held by the named executive
officers at December 31, 2000. No named executive officer exercised any options
during the year ended December 31, 2000.
AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END (1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------- ----------- ------------- ----------- -------------
Eugene I. Davis - - - -
Paul C. Tunink 75,000 - - -
_______________
(1) Based on the reported closing bid price of $0.0938 per share of Common
Stock on the OTC Bulletin Board on December 29, 2000.
34
EMPLOYMENT AND CONSULTING AGREEMENTS
On November 16, 1998, the Company entered into an Employment Agreement with
Paul C. Tunink. The Employment Agreement had an initial term through November
30, 1999 and renews automatically from year to year thereafter, unless
terminated by either party, and provides a base salary of not less than
$128,000. In addition, Mr. Tunink is eligible to participate in the Company's
bonus plan and other executive compensation plans. The Employment Agreement
contains a provision restricting competition with the Company for a period of
one year following termination of employment. Mr. Tunink's Employment Agreement
provides that if his employment is terminated by the Company for any reason
other than cause, including: (a) termination of employment by the Company or
its successor; (b) reduction in salary; (c) the relocation of Mr. Tunink's
workplace from the Cedar Rapids, Iowa area; (d) the Company's failure in any
material respect to perform any provision of the Employment Agreement; or (e)
Mr. Tunink's continued travel on the Company's behalf in excess of 50% for any
continuous period of sixty days, Mr. Tunink will be entitled to receive
severance payments totaling $128,000 for one year and continuation of health
insurance coverage for one year.
On January 10, 2000, the Company entered into a letter agreement with
Pirinate Consulting Group, LLC ("Pirinate"), an entity controlled by Eugene I.
Davis, for the personal services of Mr. Davis as the Company's Interim Chairman
of the Board and Interim Chief Executive Officer. Pirinate receives $15,000 a
month, plus out-of-pocket expenses, for these services. The initial term of
this agreement was three months. Thereafter, either party may terminate this
agreement, with or without cause, effective upon sixty days prior written
notice. The parties agreed in May 2000 that Mr. Davis would serve as Chairman
of the Board and Chief Executive Officer of the Company.
Compensation of Directors
The Company pays Mr. Kirkpatrick a monthly retainer equal to the greater of
(a) $1,000 or (b) $1,000 for each meeting of the Board of Directors attended.
In addition, in January 2000 the Company issued options to Mr. Kirkpatrick to
purchase up to 20,000 shares of Common Stock, 10,000 of which were fully vested
at the time of issuance and 10,000 of which vested on January 1, 2001, with an
exercise price of $2.25 per share. Through its letter agreement with Pirinate,
the Company pays Pirinate $15,000 per month for making Mr. Davis available to
serve as the Company's Chairman of the Board and Chief Executive Officer.
Messrs. Murdock and Wright do not receive any compensation for serving on the
Company's Board of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of January 15, 2001 regarding
the beneficial ownership of shares of Common Stock by (a) each person who is
known to the Company to be the beneficial owner of more that 5% of the Common
Stock, (b) each director, director nominee and named executive officer (as
defined above) and (c) all directors and executive officers as a group.
35
Beneficial ownership of Common Stock has been determined for this purpose
in accordance with Rules 13d-3 and 13d-5 of the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934 (the "Exchange
Act"), which provide, among other things, that a person is deemed to be the
beneficial owner of Common Stock if such person, directly or indirectly, has or
shares voting power or investment power with respect to the Common Stock or has
the right to acquire such ownership within sixty days after January 15, 2001.
SHARES BENEFICIALLY PERCENT OF
NAME OF BENEFICIAL OWNER OWNED (1) CLASS
- ------------------------------------- -------------------- ----------
Eugene I. Davis - *
David Kirkpatrick (2) 20,000 *
Guy O. Murdock (3) 1,668,081 13.1
Wayne Wright (4) 2,640,067 21.0
Paul C. Tunink (5) 75,000 *
Berthel Fisher & Company, Inc. (6) 8,443,959 44.0
Larry A. Cahill (7) 7,223,892 38.5
All directors and executive officers
as a group (5 persons) (8) 4,403,148 34.1
___________________
* Less than 1%.
(1) This table is based upon information supplied by directors, executive
officers and principal shareholders. Unless otherwise indicated in footnotes to
this table, each of the shareholders named in this table has sole voting and
investment power with respect to the shares shown as beneficially owned.
(2) Consists of 20,000 shares subject to exercise of options.
(3) Includes 215,000 shares subject to exercise of warrants.
(4) Includes 2,310,067 shares owned by a trust of which Mr. Wright is
trustee, 80,000 shares subject to exercise of warrants and 250,000 shares held
by Mr. Wright's spouse.
(5) Consists of 75,000 shares subject to exercise of options.
(6) Includes (i) 2,965,154 shares of Common Stock beneficially owned by
certain affiliates of Berthel for which Berthel shares voting and investment
power, including 334,731 shares subject to exercise of warrants and 962,959
shares subject to conversion of Convertible Notes (based upon $2,917,765 of
principal and interest outstanding under such notes as of January 15, 2001,
divided by the conversion rate of $3.03 per share); (ii) 75,000 shares subject
to exercise of warrants, (iii) 91,112 shares subject to conversion of
Convertible Notes (based upon $276,069 of principal and interest outstanding
under such notes as of January 15, 2001, divided by the conversion rate of $3.03
per share), and (iv) 5,199,121 shares subject to the exercise of warrants held
by MCC Investment Company, LLC ("MCCIC"), a company owned by Berthel and Larry
A. Cahill. Reflects information reported in a Schedule 13D filed with the SEC
by Berthel on January 16, 1997, as amended on June 6, 1997, January 8, 1998, May
1, 1998, June 22, 1998, August 6, 1998 and January 15, 1999, as well as certain
other information provided to the Company. The address of Berthel is 701 Tama
Street, P.O. Box 609, Marion, Iowa 52302-0609.
36
(7) Includes 650,000 shares subject to exercise of warrants and 389,006
shares subject to conversion of Convertible Notes (based upon $1,178,689 of
principal and interest outstanding under such notes as of January 15, 2001,
divided by the conversion rate of $3.03 per share). Also includes 5,199,121
shares subject to the exercise of warrants held by MCCIC, a company owned by
Berthel and Mr. Cahill. Mr. Cahill's address is 3330 Southgate Court S.W., Cedar
Rapids, Iowa 52404.
(8) Includes 95,000 shares subject to exercise of options and 295,000 shares
subject to exercise of warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company obtains lease and other financing services from Berthel Fisher
& Company, Inc. and its subsidiaries and their affiliated leasing partnerships
("Berthel"). Berthel is the beneficial owner of approximately 44.0% of the
Common Stock as of January 15, 2001. As of March 1, 2001, the Company owed
Berthel a total of approximately $3.9 million under certain lease and debt
financing arrangements and the Company owed MCCIC a total of approximately
$635,000 under certain debt financing arrangements. 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 interest of Berthel and other creditors of the Company. The
Company agreed to provide the creditors committee with access to information
regarding the Company and its business and to advise the creditors committee in
advance regarding certain significant corporate developments. The creditors
committee may also demand that the Company take certain actions with respect to
the Company's assets and business. The members of the creditors committee
agreed to forebear from taking actions to collect past due debt owed by the
Company in the absence of the unanimous approval of the creditors committee. As
of March 1, 2001, the Company and Berthel are the only parties to the Standstill
Agreement and Berthel is the only member of the creditors committee.
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 a placement agreement including a monthly retainer and placement fees.
The Company paid to Berthel total fees of $536,000 during 2000. If further
strategic transactions are completed, the Company will owe a success fee to
Berthel, depending on the price of the strategic transactions.
The Company undertook the Debt Restructuring Plan (See Note 8 to Notes to
Consolidated Financial Statements) in 2000 which included restructuring certain
debt and accrued interest with Berthel and Larry A. Cahill. Mr. Cahill
beneficially owns approximately 38.5% of the Common Stock as of January 15,
2001. Pursuant to the Debt Restructuring Plan, the Company transferred 695,058
Actel Shares and issued Convertible Notes in an aggregate principal amount of
$3.0 million to Berthel in the Unit Offering in exchange for the cancellation of
outstanding indebtedness in the amount of $5.9 million. The Company also
transferred 273,768 Actel Shares and issued Convertible Notes in the aggregate
principal amount of $1.1 million to Mr. Cahill in the Unit Offering in exchange
for the cancellation of outstanding indebtedness in the amount of
37
$2.2 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 Common Stock at a conversion price of $3.03 per share
(330 shares for each $1,000 due under the Convertible Notes). The Company paid
Berthel $1.0 million in lease and interest payments on certain past due balances
and paid MCCIC $2.2 million with proceeds from the Debt Restructuring Plan.
The Company borrowed an aggregate of $506,000 from MCCIC, a company owned
by Berthel and Mr. Cahill, in 2000 under a Revolving Promissory Note. The
Revolving Promissory Note, which bears interest at 12% per year, was amended on
June 22, 2000 to provide that all remaining principal and accrued interest are
due on June 21, 2001. MCCIC paid the January, February and March payments of
$200,000 each on behalf of the Company under the Company's bridge loan (the "New
Valley Loan") with New Valley Corporation ("New Valley"). On April 6, 2000,
MCCIC purchased the remaining interest of New Valley in the New Valley Loan.
The New Valley Loan, which bears interest at 12% per year, was amended on June
22, 2000 to provide that all remaining principal and interest are due on June
21, 2001. Effective May 29, 2001, the Company issued warrants to purchase an
aggregate of 5,199,121 shares of Common Stock at a weighted 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.
The Company provided telecommunications services to certain hotels managed
by Larken, Inc., a company controlled by Larry A. Cahill. The Company generated
revenues of $115,000 in 2000 pursuant to its contracts with Larken, Inc. and
accrued commissions of $180,000 payable to Larken, Inc. pursuant to such
contracts. The agreement was terminated effective May 1, 2000.
In January 2000, the Company entered into a letter agreement with Pirinate
which provided that the Company would pay Pirinate $15,000 a month in exchange
for up to six days per month of personal services from Eugene I. Davis. Under
the letter agreement, Mr. Davis serves as Interim Chairman of the Board and
Interim Chief Executive Officer of the Company. The letter agreement's term is
for a minimum of three months, and thereafter either party may terminate the
letter agreement, with or without cause, effective upon 60 days written notice.
The letter agreement also provides that the Company, upon approval by Mr.
Tunink, the Company's Chief Financial Officer, will pay Mr. Davis'
out-of-pocket, travel and other major expenses related to his services to the
Company. The parties agreed in May 2000 that Mr. Davis would serve as Chairman
of the Board and Chief Executive Officer of the Company. The Company paid
$181,109 under this agreement in 2000.
On December 24, 2000, the Company signed a consulting services letter
agreement with Prentice Services LTD ("Prentice"), an entity controlled by Wayne
Wright, a member of the Company's Board of Directors. The agreement provides
that Mr. Wright will serve as President of Priority International
Communications, Inc. ("PIC"), a subsidiary of the Company, and will provide
consulting services to PIC, as
38
directed by the Company's Chief Executive Officer. Prentice receives $15,000 a
month, plus out-of-pocket expenses, for these services. Also, at the sole
discretion of the Company's Board of Directors, Prentice may receive additional
success fees and bonuses. Either party may terminate this agreement, with or
without cause, effective upon six months prior written notice. The Company paid
$15,000 under this agreement in 2000.
Guy O. Murdock, a director of the Company, received unauthorized cash
advances on preferred stock dividends in the amount of $70,000 in 1999. Under
the terms of the preferred stock, the Company, at its discretion, may pay such
dividends in cash or in shares of its Common Stock. The Company has elected to
pay all such dividends in shares of Common Stock. The Company has requested
reimbursement from Mr. Murdock for the cash advances made to him, and upon such
reimbursement will issue 25,555 shares of Common Stock to Mr. Murdock in full
payment of the accrued stock dividends the Company has declared on its preferred
stock. The Company has also requested substantiation or reimbursement from Mr.
Murdock for approximately $66,000 for certain undocumented travel and
entertainment expenses and advances.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements - See Index to Financial Statements on page F-1 of
- -- ---------------------
this Report.
2. Financial Statement Schedules - See Index to Financial Statements on page
- -- -----------------------------
F-1 of this Report. All other schedules are omitted since they are not
required, are inapplicable, or the required information is included in the
financial statements or notes thereto.
3. Exhibits:
- -- --------
EXHIBIT NUMBER DOCUMENT DESCRIPTION
- -------------- -------------------------------------------------------------------------------
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)
39
3.4 Amended and Restated By-Laws of the Company. (3)
4.1 Form of Common Stock Purchase Warrant Agreement between the Company
and Firstar Trust Company. (1)
4.2 Form of Redeemable Warrant. (1)
4.3 First Amendment to Common Stock Purchase Warrant Agreement, dated as
of September 30, 1999, between the Company and Firstar Trust Company.
4.4 Second Amendment to Common Stock Purchase Warrant Agreement, dated
as of April 14, 2000, between the Company and Firstar Bank, N.A.
4.5 Third Amendment to Common Stock Purchase Warrant Agreement, dated as
of October 9, 2000, between the Company and Firstar Bank, N.A.
10.1 Murdock Communications Corporation 1993 Stock Option Plan. (1) (5)
10.2 Murdock Communications Corporation 1997 Stock Option Plan, as amended. (4) (5)
10.3 Amended and Restated Employment Agreement, dated as of October 1, 1998,
by and between the Company and Guy O. Murdock. (4) (5)
10.4 Employment Agreement, dated as of January 1, 1999, by and between the
Company and Colin P. Halford. (4) (5)
10.5 Amended and Restated Employment Agreement, dated as of October 1, 1998,
by and between the Company and Thomas E. Chaplin. (4) (5)
10.6 Employment Agreement, dated as of January 1, 1999, by and between the
Company and Bill R. Wharton. (4) (5)
10.7 Employment Agreement, dated as of November 1, 1998, by and among the
Company, Priority International Communications, Inc., PIC Resources Corp.
and Bonner B. Hardegree. (4) (5)
40
10.8 Employment Agreement, dated as of November 16, 1998, by and between the
Company and Paul C. Tunink. (4) (5)
10.9 Form of Lease Agreement. (6)
10.10 Note and Security Agreement, Note #079-21846-00, dated as of October 28,
1997, by and among PIC Resources Corp., ATN Communications, Inc.,
Priority International Communications, Inc. and Berthel Fisher & Company
Leasing, Inc. (6)
10.11 Note and Warrant Purchase Agreement, dated as of June 21, 1999, by and
among the Company, Priority International Communications, Inc., Incomex,
Inc., MCC Acquisition Corp., and New Valley Corporation. (6)
10.12 Stock Purchase Warrant dated June 21, 1999 from the Company to New
Valley Corporation. (6)
10.13 Fixed Rate Senior Note dated June 21, 1999 from the Company to New
Valley Corporation. (6)
10.14 Registration Rights Agreement, dated as of June 21, 1999, between the
Company and New Valley Corporation. (6)
10.15 Option to Merge Agreement, dated as of June 9, 1999, among MCC
Acquisition Corp., the shareholders of Intercarrier Transport Corporation, and
Intercarrier Transport Corporation. (7)
10.16 Option to Merge Agreement, dated June 9, 1999, among MCC Acquisition
Corp., the shareholders of AcNet USA, Inc. and AcNet USA, Inc. (7)
10.17 Amendment to Investment Agreement, dated as of June 21, 1999, among
ACTEL Integrated Communications, Inc., the Company, John Beck and
Richard Courtney. (7)
10.18 Waiver and First Amendment to Note and Warrant Purchase Agreement,
dated as of December 17, 1999, among the Company, Priority International
Communications, Inc., ATN Communications, Inc., Incomex, Inc., MCC
Acquisition Corp. and New Valley Corporation. (8)
41
10.19 Billing Services and Advance Funding Agreement, dated as of February 4,
2000, between Priority International Communications, Inc. and NCIC
Communications, Inc. (9)
10.20 Stockholders Agreement, dated as of April __, 2000, among Actel Integrated
Communications, Inc., the Company and the other stockholders of Actel
Integrated Communications, Inc. (10)
10.21 First Amendment to Stockholders Agreement and Consent to Permitted
Transferees, dated as of June 13, 2000, among Actel Integrated
Communications, Inc., the Company and the other stockholders of Actel
Integrated Communications, Inc. (10)
10.22 Placement Agreement, dated as of January __, 2000, between the Company
and Berthel Fisher & Company Financial Services, Inc. (10)
10.23 Form of Convertible Note of the Company due May 29, 2003 (10)
10.24 Billing and Advance Funding Agreement, dated as of February 2, 2000,
between Priority International Communications, Inc. and Paramount
International Telecommunications, Inc. (10)
10.25 Purchase Agreement, dated as of June 23, 2000, among the Company, MCC
Acquisition Corp., John Rance, Michael Upshaw, Fernando Ficachi and the
other former shareholders of Incomex, Inc. (11)
10.26 Addendum to Employment Agreement for Paul C. Tunink (5)
10.27 Letter Agreement, dated December 24, 2000, between the Company and
Prentice Services Ltd.
10.28 Operator Services Subscriber Agreement, dated as of June 22, 2000, between
NCIC Operator Services and Priority International Communications, Inc.
10.29 Agreement to Terminate Written Employment Agreement, dated
December 20, 2000, between the Company and Colin Halford (5)
42
10.30 Agreement to Terminate Written Employment Agreement, dated
December 20, 2000, between the Company and William Wharton (5)
21 Subsidiaries.
24 Power of Attorney (included as part of the signature page hereof).
(1) Filed as an exhibit to the Company's Registration Statement on Form SB-2 (File No.
333-05422C) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1997 (File No. 000-21463) and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter
ended March 31, 1997 (File No. 000-21463) and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998 (File No. 000-21463) and incorporated herein by reference.
(5) Management contract or compensatory plan or arrangement.
(6) Filed as exhibit to the Company's registration statement on Form SB-2 (File No.
333-78399) and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1999 (File No. 000-21463) and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999 (File No. 000-21463) and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000 (File No. 000-21463) and incorporated herein by reference.
43
(10) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000 (File No. 000-21463) and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Current Report on Form 8-K (File No. 000-21463)
filed with the Securities and Exchange Commission on August 30, 2000 and incorporated herein by
reference.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K for the three months ended December 31,
2000.
(c) Exhibits.
The response to this portion of Item 14 is submitted as a separate section of this report.
(d) Financial statement schedules.
The response to this portion of Item 14 is submitted as a separate section of this report.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MURDOCK COMMUNICATIONS CORPORATION
By /s/ Eugene Davis
-----------------------
Eugene Davis
Chief Executive Officer
Date: April 17, 2001
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Eugene Davis and
Paul C. Tunink, and each of them individually, his true and lawful
attorney-in-fact, with power to act with or without the other and with full
power of substitution and resubstitution, in any and all capacities, to sign any
or all amendments to the Form 10-K and file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes, may lawfully cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Eugene Davis Chief Executive Officer and April 17, 2001
- --------------------- Director (Principal Executive
Eugene Davis Officer)
45
/s/ Paul C. Tunink Vice President and Chief April 17, 2001
- --------------------- Financial Officer (Principal
Paul C. Tunink Financial Officer and
Principal Accounting Officer)
/s/ David Kirkpatrick Director April 17, 2001
- ---------------------
David Kirkpatrick
Director
- ---------------------
Guy O. Murdock
/s/ Wayne Wright Director April 17, 2001
- ---------------------
Wayne Wright
46
MURDOCK COMMUNICATIONS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity (Deficiency) F-6
Consolidated Statements of Cash Flows F-9
Notes to Consolidated Financial Statements F-13
SCHEDULE - Valuation and Qualifying Accounts F-43
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Murdock Communications Corporation
Cedar Rapids, Iowa
We have audited the accompanying consolidated balance sheets of Murdock
Communications Corporation and subsidiaries (the "Company") as of December 31,
2000 and 1999, and the related consolidated statements of operations,
shareholders' equity (deficiency) and cash flows for each of the three years in
the period ended December 31, 2000. Our audits also included the financial
statement schedule listed in the Index. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Murdock Communications Corporation
and subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects the
information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company's recurring losses from
operations, negative working capital, and shareholders' deficiency raise
substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
Cedar Rapids, Iowa
April 11, 2001
F-2
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------
ASSETS (Notes 7 and 8) 2000 1999
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 157 $ 76
Accounts receivable, less allowances for doubtful
accounts: 2000 - $225; 1999 - $3,127. . . . . . . . . . . . . . . 582 892
Note receivable (Note 6) . . . . . . . . . . . . . . . . . . . . . . - 500
Prepaid expenses and other current assets. . . . . . . . . . . . . . 167 251
--------- ---------
Total current assets. . . . . . . . . . . . . . . . . . . . 906 1,719
--------- ---------
PROPERTY AND EQUIPMENT:
Land and building. . . . . . . . . . . . . . . . . . . . . . . . . . - 1,446
Telecommunications equipment . . . . . . . . . . . . . . . . . . . . 919 8,991
Furniture and equipment. . . . . . . . . . . . . . . . . . . . . . . 180 791
--------- ---------
1,099 11,228
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . (956) (8,679)
--------- ---------
Property and equipment, net . . . . . . . . . . . . . . . . 143 2,549
--------- ---------
OTHER ASSETS:
Goodwill, net of accumulated amortization:
2000 - $1,909; 1999 - $1,396 (Notes 1, 3 and 4). . . . . . . . . . - 3,750
Cost of purchased site contracts, net of accumulated
amortization: 2000 - $62; 1999 - $14. . . . . . . . . . . . . . . - 48
Other intangible assets, net of accumulated amortization:
2000 - $1,230; 1999 - $619 . . . . . . . . . . . . . . . . . . . . 58 197
Investments, at cost (Note 6). . . . . . . . . . . . . . . . . . . . - 4,277
Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . 1 12
Net assets of discontinued operations. . . . . . . . . . . . . . . . - 1,648
--------- ---------
Total other assets. . . . . . . . . . . . . . . . . . . . . 59 9,932
--------- ---------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,108 $ 14,200
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Outstanding checks in excess of available balances . . . . . . . . $ - $ 86
Notes payable (Note 7) . . . . . . . . . . . . . . . . . . . . . . 8,783 13,708
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 725 2,018
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . 2,854 1,894
Accrued universal service fund fees (Note 2) . . . . . . . . . . . 806 1,700
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . 590 1,034
Current portion of capital lease obligations
principally with a related party . . . . . . . . . . . . . . . . 1 1,553
Current portion of long-term debt with related parties (Note 8). . 220 647
Current portion of long-term debt, others (Note 8) . . . . . . . . - 288
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . 13,979 22,928
LONG-TERM LIABILITIES:
Capital lease obligations principally with a related party,
less current portion . . . . . . . . . . . . . . . . . . . . . . - 2,148
Long-term debt with related parties, less current portion (Note 8) 4,361 2,122
Long-term debt, others, less current portion (Note 8). . . . . . . 521 744
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 22
--------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . . . . 18,861 27,964
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 2 and 13)
SHAREHOLDERS' EQUITY (DEFICIENCY) (Note 1):
8% Series A Convertible Preferred Stock, $100 stated
value (Note 9):
Authorized - 1,000,000 shares
Issued and outstanding: 2000 - 0 shares; 1999 - 18,920
shares ($1,891 liquidation value). . . . . . . . . . . . . . . . - 1,868
Common stock, no par or stated value (Note 11):
Authorized - 40,000,000 shares
Issued and outstanding: 2000 - 12,514,967 shares;
1999 - 10,576,012 shares . . . . . . . . . . . . . . . . . . . . 22,287 20,259
Common stock warrants (Note 10):
Issued and outstanding: 2000 - 10,695,712; 1999 - 5,866,591 . . . 1,007 635
Treasury stock at cost: 2000 - 250,000 shares; 1999 - none . . . . . (94) -
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 134 134
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . (41,087) (36,660)
--------- ---------
Total shareholders' deficiency . . . . . . . . . . . . . . (17,753) (13,764)
--------- ---------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,108 $ 14,200
========= =========
See notes to consolidated financial statements.
F-3
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------------
2000 1999 1998
CONTINUING OPERATIONS:
REVENUES:
Call processing . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,327 $ 24,424 $24,466
Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . 110 3,039 1,601
-------- --------- --------
Total revenues . . . . . . . . . . . . . . . . . . . . . 8,437 27,463 26,067
-------- --------- --------
COST OF SALES:
Call processing . . . . . . . . . . . . . . . . . . . . . . . . . 6,410 14,850 14,229
Other cost of sales . . . . . . . . . . . . . . . . . . . . . . . 9 1,657 492
Bad debt expense and universal service fund fees (Note 2) . . . . (894) 9,489 3,321
-------- --------- --------
Total cost of sales. . . . . . . . . . . . . . . . . . . 5,525 25,996 18,042
-------- --------- --------
GROSS PROFIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,912 1,467 8,025
-------- --------- --------
OPERATING EXPENSES:
Selling, general and administrative expense . . . . . . . . . . . 2,750 5,348 5,957
Depreciation and amortization expense . . . . . . . . . . . . . . 935 1,888 1,675
Impairment of assets (Notes 1 and 6). . . . . . . . . . . . . . . 5,510 3,292 -
AcNet bad debt and acquisition expenses (Note 6). . . . . . . . . 990 3,703 -
-------- --------- --------
Total operating expenses . . . . . . . . . . . . . . . . 10,185 14,231 7,632
-------- --------- --------
INCOME (LOSS) FROM OPERATIONS . . . . . . . . . . . . . . . . . . . (7,273) (12,764) 393
-------- --------- --------
NONOPERATING INCOME (EXPENSE):
Gain on AT&T contract buyout (Note 18). . . . . . . . . . . . . . - - 453
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . (3,540) (3,519) (2,070)
Other income (expense) (Note 8) . . . . . . . . . . . . . . . . . 7,287 314 (14)
-------- --------- --------
Total nonoperating income (expense). . . . . . . . . . . 3,747 (3,205) (1,631)
-------- --------- --------
LOSS BEFORE INCOME TAXES AND JOINT VENTURE LOSS . . . . . . . . . . (3,526) (15,969) (1,238)
Loss from joint venture . . . . . . . . . . . . . . . . . . . . . . - - (42)
Income tax (expense) benefit (Note 12). . . . . . . . . . . . . . . 9 (472) 397
-------- --------- --------
LOSS FROM CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . (3,517) (16,441) (883)
-------- --------- --------
DISCONTINUED OPERATIONS (Note 5):
Income (loss) from operations . . . . . . . . . . . . . . . . . . (1,175) (1,957) 709
Loss on disposition . . . . . . . . . . . . . . . . . . . . . . . (332) - -
-------- --------- --------
Total discontinued operations. . . . . . . . . . . . . . (1,507) (1,957) 709
-------- --------- --------
LOSS BEFORE EXTRAORDINARY ITEM. . . . . . . . . . . . . . . . . . . (5,024) (18,398) (174)
EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF
DEBT (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . 722 - -
-------- --------- --------
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,302) (18,398) (174)
Dividends and accretion on 8% Series A Convertible Preferred Stock. (125) (194) (175)
-------- --------- --------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS. . . . . . . . . . . . $(4,427) $(18,592) $ (349)
======== ========= ========
F-4
MURDOCK COMMUNICATIONS CORPORATION
- ------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA) (CONCLUDED)
- ----------------------------------------------------------
2000 1999 1998
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Loss from continuing operations . . . . . . . . . . $ (0.34) $ (1.60) $ (0.19)
Income (loss) from discontinued operations. . . . . (0.14) (0.19) 0.13
------------ ------------ -----------
Loss before extraordinary item. . . . . . . . . . . (0.48) (1.79) (0.06)
Extraordinary item - gain on extinguishment of debt 0.07 - -
------------ ------------ -----------
Net loss. . . . . . . . . . . . . . . . . . . . . . $ (0.41) $ (1.79) $ (0.06)
============ ============ ===========
BASIC AND DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING . . . . . . . . . . . . . . . . 10,869,511 10,392,940 5,422,783
============ ============ ===========
See notes to consolidated financial statements.
F-5
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (DOLLAR AND SHARE DATA IN THOUSANDS)
- -------------------------------------------------------------------------------------------
8% SERIES A
CONVERTIBLE COMMON STOCK
PREFERRED STOCK COMMON STOCK WARRANTS
--------------- ------------ ------------------
NUMBER NUMBER NUMBER ADDITIONAL ACCUMU-
OF OF OF PAID-IN LATED
SHARES ISSUED SHARES ISSUED WARRANTS ISSUED CAPITAL DEFICIT
BALANCES AT JANUARY 1, 1998 . . . . . . . 16 $ 1,544 4,458 $11,343 2,149 $ 316 $ 134 $(17,819)
Issuance of 8% Series A Convertible
Preferred Stock, net of issuance costs
of $5 . . . . . . . . . . . . . . . . . 3 262 - - - - - -
Issuance of common stock and warrants
in connection with the acquisition of
Incomex (Note 4). . . . . . . . . . . . - - 1,900 2,494 156 30 - -
Exercise of warrants by a related
party . . . . . . . . . . . . . . . . . - - 1,100 1,753 (1,100) (322) - -
Issuance of warrants in connection with
debt financing with a related party . . - - - - 350 165 - -
Issuance of warrants in connection with
debt financing (Note 7) . . . . . . . . - - - - 2,700 221 - -
Issuance of warrants in lieu of director
and consulting fees . . . . . . . . . . - - - - 45 5 - -
Issuance of warrants in lieu of agent
fees to a related party (Note 7). . . . - - - - 121 24 - -
Issuance of common stock in connection
with the acquisition of PIC (Note 3). . - - 2,872 4,245 - - - -
Accretion to conversion price of 8%
Series A Convertible Preferred Stock. . - 31 - - - - - (31)
Accrued dividends on 8% Series A
Convertible Preferred Stock . . . . . . - - - - - - - (144)
Net loss for 1998 . . . . . . . . . . . . - - - - - - - (174)
------ ------- ------ ------- --------- -------- ---------- ---------
BALANCES AT DECEMBER 31, 1998 . . . . . . 19 $ 1,837 10,330 $19,835 4,421 $ 439 $ 134 $(18,168)
====== ======= ====== ======= ========= ======== ========== =========
SHARE-
HOLDERS'
EQUITY
(DEFICIENCY)
BALANCES AT JANUARY 1, 1998 . . . . . . . $ (4,482)
Issuance of 8% Series A Convertible
Preferred Stock, net of issuance costs
of $5 . . . . . . . . . . . . . . . . . 262
Issuance of common stock and warrants
in connection with the acquisition of
Incomex (Note 4). . . . . . . . . . . . 2,524
Exercise of warrants by a related
party . . . . . . . . . . . . . . . . . 1,431
Issuance of warrants in connection with
debt financing with a related party . . 165
Issuance of warrants in connection with
debt financing (Note 7) . . . . . . . . 221
Issuance of warrants in lieu of director
and consulting fees . . . . . . . . . . 5
Issuance of warrants in lieu of agent
fees to a related party (Note 7). . . . 24
Issuance of common stock in connection
with the acquisition of PIC (Note 3). . 4,245
Accretion to conversion price of 8%
Series A Convertible Preferred Stock. . -
Accrued dividends on 8% Series A
Convertible Preferred Stock . . . . . . (144)
Net loss for 1998 . . . . . . . . . . . . (174)
-------------
BALANCES AT DECEMBER 31, 1998 . . . . . . $ 4,077
=============
See notes to consolidated financial statements. (Continued)
F-6
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (DOLLAR AND SHARE DATA IN THOUSANDS)
- -------------------------------------------------------------------------------------------
8% SERIES A
CONVERTIBLE COMMON STOCK
PREFERRED STOCK COMMON STOCK WARRANTS
--------------- ------------ ------------------
NUMBER NUMBER NUMBER ADDITIONAL ACCUMU-
OF OF OF PAID-IN LATED
SHARES ISSUED SHARES ISSUED WARRANTS ISSUED CAPITAL DEFICIT
BALANCES AT JANUARY 1, 1999. . . . . . . 19 $ 1,837 10,330 $19,835 4,421 $ 439 $ 134 $(18,168)
Issuance of warrants in connection with
debt financing with related parties
(Notes 7 and 8). . . . . . . . . . . . - - - - 1,195 223 - -
Issuance of warrants in connection with
debt financing with lender (Note 7). . - - - - 500 80 - -
Conversion of notes payable, accrued
interest and related common stock
warrants into common stock . . . . . . - - 84 150 (84) (3) - -
Conversion of common stock warrants
into common stock. . . . . . . . . . . - - 54 13 (115) (4) - -
Common stock issued. . . . . . . . . . . - - 2 3 - - - -
Common stock options exercised by
individuals. . . . . . . . . . . . . . - - 19 37 - - - -
Accretion to conversion price of 8%
Series A Convertible Preferred Stock . - 31 - - - - - (31)
Accrued dividends on 8% Series A
Convertible Preferred Stock paid in
common stock . . . . . . . . . . . . . - - 87 221 - - - (163)
Warrants expired . . . . . . . . . . . . - - - - (50) (100) - 100
Net loss for 1999. . . . . . . . . . . . - - - - - - - (18,398)
------- ------- ------ ------- --------- -------- ---------- ---------
BALANCES AT DECEMBER 31, 1999. . . . . . 19 $ 1,868 10,576 $20,259 5,867 $ 635 $ 134 $(36,660)
======= ======= ====== ======= ========= ======== ========== =========
SHARE-
HOLDERS'
EQUITY
(DEFICIENCY)
BALANCES AT JANUARY 1, 1999. . . . . . . $ 4,077
Issuance of warrants in connection with
debt financing with related parties
(Notes 7 and 8). . . . . . . . . . . . 223
Issuance of warrants in connection with
debt financing with lender (Note 7). . 80
Conversion of notes payable, accrued
interest and related common stock
warrants into common stock . . . . . . 147
Conversion of common stock warrants
into common stock. . . . . . . . . . . 9
Common stock issued. . . . . . . . . . . 3
Common stock options exercised by
individuals. . . . . . . . . . . . . . 37
Accretion to conversion price of 8%
Series A Convertible Preferred Stock . -
Accrued dividends on 8% Series A
Convertible Preferred Stock paid in
common stock . . . . . . . . . . . . . 58
Warrants expired . . . . . . . . . . . . -
Net loss for 1999. . . . . . . . . . . . (18.398
-------------
BALANCES AT DECEMBER 31, 1999. . . . . . $ (13,764)
=============
See notes to consolidated financial statements. (Continued)
F-7
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (DOLLAR AND SHARE DATA IN THOUSANDS)
- -------------------------------------------------------------------------------------------
8% SERIES A
CONVERTIBLE
PREFERRED COMMON STOCK
STOCK COMMON STOCK WARRANTS
--------------------------- -------------------------- --------------------
NUMBER NUMBER NUMBER
OF OF OF
SHARES ISSUED SHARES ISSUED WARRANTS ISSUED
BALANCES AT JANUARY 1, 2000. . . . . . . . . . . . 19 $ 1,868 10,576 $ 20,259 5,867 $ 635
Issuance of warrants in connection with
termination of employment agreements . . . . . - - - - 150 -
Issuance of warrants in connection with
debt financing with lender (Note 7). . . . . . - - - - 5,199 472
Cancellation of warrants . . . . . . . . . . . . - - - - (495) (99)
Conversion of common stock warrants
into common stock. . . . . . . . . . . . . . . - - 19 35 (25) (1)
Accretion to conversion price of 8%
Series A Convertible Preferred Stock . . . . . - 23 - - - -
Conversion of preferred stock into common stock. (19) (1,891) 1,684 1,891 - -
Accrued dividends on 8% Series A
Convertible Preferred Stock paid in
common stock . . . . . . . . . . . . . . . . . - - 236 102 - -
Treasury stock acquired -Incomex sale. . . . . . - - - - - -
Net loss for 2000. . . . . . . . . . . . . . . . - - - - - -
------------ -------------- -------- --------------- --------- --------
BALANCES AT DECEMBER 31, 2000. . . . . . . . . . . - $ - 12,515 $ 22,287 10,696 $ 1,007
============ ============== ======== =============== ========= ========
TREASURY STOCK
---------------- ADDI-
NUMBER TIONAL ACCU- SHARE-
OF PAID-IN MULATED HOLDERS'
SHARES ISSUED CAPITAL DEFICIT (DEFICIENCY)
BALANCES AT JANUARY 1, 2000. . . . . . . . . . . . - $ - $ 134 $(36,660) $ (13,764)
Issuance of warrants in connection with
termination of employment agreements . . . . . - - - - -
Issuance of warrants in connection with
debt financing with lender (Note 7). . . . . . - - - - 472
Cancellation of warrants . . . . . . . . . . . . - - - - (99)
Conversion of common stock warrants
into common stock. . . . . . . . . . . . . . . - - - - 34
Accretion to conversion price of 8%
Series A Convertible Preferred Stock . . . . . - - - (23) -
Conversion of preferred stock into common stock. - - - - -
Accrued dividends on 8% Series A
Convertible Preferred Stock paid in
common stock . . . . . . . . . . . . . . . . . - - - (102) -
Treasury stock acquired -Incomex sale. . . . . . 250 (94) - - (94)
Net loss for 2000. . . . . . . . . . . . . . . . - - - (4,302) (4,302)
------ -------- -------- --------- -------------
BALANCES AT DECEMBER 31, 2000. . . . . . . . . . . 250 $ (94) $ 134 $(41,087) $ (17,753)
====== ======== ======== ========= =============
See notes to consolidated financial statements.
F-8
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . $(4,302) $(18,398) $ (174)
Adjustments to reconcile net loss to net cash flows
from operating activities of continuing operations:
Impairment of assets . . . . . . . . . . . . . . . . 5,510 3,293 -
AcNet bad debt and acquisition expenses. . . . . . . 990 3,703 -
Depreciation and amortization. . . . . . . . . . . . 935 1,888 1,675
Gain on sale of property and equipment . . . . . . . (269) (6) -
Noncash interest expense . . . . . . . . . . . . . . 512 723 272
Gain on debt restructuring plan. . . . . . . . . . . (6,946) - -
(Income) loss on discontinued operations . . . . . . 1,175 1,957 (709)
Loss on disposition of discontinued operations . . . 332 - -
Extraordinary gain on extinguishment of debt . . . . (722) - -
Noncash commission expense . . . . . . . . . . . . . - - 71
Loss from joint venture. . . . . . . . . . . . . . . - - 42
Changes in operating assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . 310 1,091 (862)
Other current assets . . . . . . . . . . . . . . . 195 (185) 52
Other noncurrent assets. . . . . . . . . . . . . . 11 182 251
Outstanding checks in excess of available balances (86) 104 (247)
Accounts payable and accrued expenses. . . . . . . 248 2,094 (513)
Accrued universal service fund fees. . . . . . . . (894) 1,700 -
Other liabilities. . . . . . . . . . . . . . . . . (22) (7) (37)
-------- --------- --------
Net cash flows from operating activities of
continuing operations. . . . . . . . . . . (3,023) (1,861) (179)
Net cash flows from discontinued operations . 175 522 (894)
-------- --------- --------
Net cash flows from operating activities. . . (2,848) (1,339) (1,073)
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment. . . . . . . . . . - (671) (632)
Cash paid for acquisitions . . . . . . . . . . . . . . - - (130)
Payments for site contracts. . . . . . . . . . . . . . - (10) (3)
Proceeds from sale of investments. . . . . . . . . . . 4,948 - -
Cash paid for investments. . . . . . . . . . . . . . . - (6,480) (1,500)
Cash advanced to joint venture . . . . . . . . . . . . - (46) (362)
Cash acquired with acquisitions. . . . . . . . . . . . - - 16
Proceeds from sale of property and equipment . . . . . 1,639 13 -
Issuance of note receivable. . . . . . . . . . . . . . - (1,000) -
Payments received on note receivable . . . . . . . . . 500 500 -
-------- --------- --------
Net cash flows from investing activities. . . 7,087 (7,694) (2,611)
-------- --------- --------
(Continued)
F-9
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------
2000 1999 1998
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations with a related party . . . . . . (472) (301) (265)
Proceeds from capital lease obligations with a related party . . . . . - - 710
Borrowings on notes payable. . . . . . . . . . . . . . . . . . . . . . 656 7,992 5,406
Borrowings of long-term debt with related parties. . . . . . . . . . . - 500 -
Payments on notes payable. . . . . . . . . . . . . . . . . . . . . . . (2,789) (479) (1,457)
Payments on long-term debt with related parties. . . . . . . . . . . . (468) (705) (719)
Borrowings on long-term debt, others . . . . . . . . . . . . . . . . . - 1,029 -
Payments on long-term debt, others . . . . . . . . . . . . . . . . . . (1,085) (671) (152)
Proceeds from issuance of common stock and warrants. . . . . . . . . . - 3 1,430
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . - (18) -
Proceeds from exercise of stock options. . . . . . . . . . . . . . . . - 37 -
Proceeds from issuance of 8% Series A Convertible Preferred Stock. . . - - 50
Payments for offering costs. . . . . . . . . . . . . . . . . . . . . . - - (145)
-------- -------- --------
Net cash flows from financing activities. . . . . . . . . . . (4,158) 7,387 4,858
-------- -------- --------
NET INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . . . . . . . 81 (1,646) 1,174
CASH AT BEGINNING OF YEAR. . . . . . . . . . . . . . . . . . . . . . . . 76 1,722 548
-------- -------- --------
CASH AT END OF YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 157 $ 76 $ 1,722
======== ======== ========
SUPPLEMENTAL DISCLOSURE:
Cash paid during the year for interest, principally to a related party $ 985 $ 824 $ 2,183
Cash paid during the year for income taxes . . . . . . . . . . . . . . 6 4 24
See notes to consolidated financial statements.
F-10
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- ---------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF 2000 NONCASH OPERATING, INVESTING AND FINANCING
ACTIVITIES:
The Company recorded an increase to the carrying value of the Company's 8%
Series A Convertible Preferred Stock and a charge to accumulated deficit of
$23,000 representing the current period accretion to its conversion price of
$1,891,000. These shares were converted into 1,683,880 shares of common stock.
During the year, 18,941 common stock warrants were exercised by individuals,
increasing common stock by $35,000 in a cashless exercise through the exchange
of debt.
The Company issued stock dividends of $102,000 representing 236,129 shares of
common stock recorded as an increase to common stock and a decrease in accrued
dividends.
The Company recorded $94,000 representing treasury stock received in the
cashless sale of the Incomex subsidiary, representing 250,000 shares of common
stock.
During the year the Company issued 5,199,121 common stock warrants and recorded
a $472,000 increase to common stock warrants and deferred financing costs.
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 transferred 1,063,584 shares of Actel Preferred Stock, reducing the
cost basis of the investment by $729,910, and $4,600,000 of new notes payable
were issued in connection the transaction in exchange for the cancellation of
approximately $9,200,000 of outstanding indebtedness related to the Debt
Refinancing Plan.
In December of 2000, the Company cancelled warrants with a recorded value of
$99,000.
SUPPLEMENTAL DISCLOSURES OF 1999 NONCASH OPERATING, INVESTING AND FINANCING
ACTIVITIES:
During 1999, 199,172 common stock warrants were exercised by individuals. Of
these, 83,872 were converted to the same number of common shares and reduced
notes payable by $116,000 and accrued interest by $31,000. Of the remaining
115,300 warrants, 114,000 warrants were converted into 51,507 shares of common
stock in a cashless exercise. 1,300 warrants were converted into 2,668 shares
of common stock for $8,475, which had not been received prior to year end.
These warrants had a carrying value of $7,921.
The Company recorded an increase to the carrying value of the 8% Series A
Convertible Preferred Stock and a charge to accumulated deficit of $31,353
representing the current year's accretion to its conversion price.
The Company recorded an increase to accrued expense and a charge to accumulated
deficit of $162,559 for cumulative dividends earned by the holders of the 8%
Series A Convertible Preferred Stock.
The Company issued stock dividends of $220,836 which had been recognized in
current and prior years through charges to retained earnings and increases in
accrued expenses representing 87,708 shares of common stock.
(Continued)
F-11
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONCLUDED)
- ----------------------------------------------------------------
The Company recorded $303,000 of deferred loan costs in connection with debt
financing of $7,975,000 and related issuance of common stock warrants to
purchase 1,695,000 shares of the Company's common stock. Such costs are being
amortized to non-cash interest expense.
The Company recorded a decrease in common stock warrants of $100,000 due to the
expiration of 50,000 warrants previously recorded at their fair value to a
financial institution.
SUPPLEMENTAL DISCLOSURES OF 1998 NONCASH OPERATING, INVESTING AND FINANCING
ACTIVITIES:
The Company recorded a note payable of $25,000 in exchange for accrued
consulting fees.
The Company recorded a note payable of $5,000 in exchange for accrued director
fees.
The Company recorded an increase to the carrying value of the 8% Series A
Convertible Preferred Stock and a charge to accumulated deficit of $31,191
representing the current year's accretion to its conversion price.
The Company recorded an increase in accrued expense and a charge to accumulated
deficit of $143,322 for the cumulative dividends earned by the holders of the 8%
Series A Convertible Preferred Stock.
The Company recorded prepaid commissions of $180,000 and accrued expenses of
$37,000 in connection with the issuance of 2,170 shares of 8% Series A
Convertible Preferred Stock.
The Company recorded long-term debt, others and land and building of $525,000 in
connection with the purchase of ATN's building.
The Company recorded goodwill of $3,916,889, accounts payable of $135,000,
accrued expenses of $153,059, common stock of $4,244,731 and decreased long-term
debt by $527,389 and issued 571,428 shares of common stock in connection with
the PIC earnout as discussed in Note 3.
See notes to consolidated financial statements.
F-12
MURDOCK COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- ---------------------------------------------------
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Murdock Communications Corporation (individually, or
collectively with its wholly-owned subsidiaries discussed below, referred to
herein as the "Company") has been engaged in recent years in the business of
providing operator services and call processing to North American payphones,
hotels and institutions, database profit management services and
telecommunications billing and collection services for the hospitality industry
and outsourced operator services for the telecommunications industry. The
Company operated its business under three business units prior to the sales
discussed below.
Through a series of acquisitions and new product development in 1997 and 1998,
the Company transformed itself from a long distance reseller of AT&T network
services to U.S. hotels to being a communications service provider in North
America.
MTS - Murdock Technology Services ("MTS"), formerly the operating unit of
Murdock Communications Corporation, was the unit responsible for marketing of
AT&T operator services. In light of the declining volume and narrow margin of
the AT&T business, and the Company's refocused business strategy, the Company
reached an agreement with AT&T to terminate their marketing agreement effective
October 15, 1998 (see Note 18).
The MTS division was created in 1998 to meet the needs of the hospitality
telecommunications management market by providing database profit management
services and other value added telecommunication services. The division's main
product, the Telemanager, was a proprietary software and hardware product,
created to help manage telecommunication installations and services in the
hospitality market.
In February 2000, the Company entered into a Rental Agreement with
Telemanager.net providing for the operation of MCC Telemanager by
Telemanager.net in exchange for monthly rental payments to the Company. On
December 20, 2000, the Company sold certain assets which were subject to the
Rental Agreement to Telemanager.net (see Note 17). Telemanger.net is owned by
former executives of the Company.
Incomex - On February 13, 1998, the Company purchased Incomex, Inc. ("Incomex"),
the Company's second business unit (see Note 4). Incomex was primarily engaged
in the business of providing billing and collection services to the hospitality
industry from Mexico to the United States.
The Company sold 100% of the stock of Incomex to three of the former
shareholders of Incomex with an effective closing date of June 30, 2000 (see
Note 5).
PIC - On October 31, 1997, the Company purchased Priority International
Communications, Inc. ("PIC"). PIC was primarily engaged in the business of
providing long-distance telecommunications services to patrons of hotels, public
and private payphone owners and aggregators of operator service traffic with
which PIC had contracts to provide such services. Services included, but were
not limited to, credit card billing services, live operator services, automated
collection and messaging delivery services, voice mail services and
telecommunications consulting.
Also, on October 31, 1997, the Company purchased PIC Resources Corp. ("PIC-R").
PIC-R, operating through its wholly-owned subsidiary ATN Communications,
Incorporated ("ATN"), was merged into PIC in January 1999. ATN was primarily
engaged in the business of providing carrier services for long-distance
telecommunications companies throughout the United States. ATN handled incoming
operator assisted calls
F-13
with their operators on location. Unless otherwise indicated, references in
this report to "PIC" include the historical operations of ATN.
As a result of the unit's operational difficulties, management developed a new
business plan during 2000 to stabilize the PIC business. As a result of this
revised business plan, PIC became a reseller of call processing services and
eliminated its live operator center.
BASIS OF PRESENTATION - The accompanying consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has an accumulated deficit of $41.1 million and current liabilities
exceed current assets by $13.1 million at December 31, 2000. The Company also
is past due in the payment of approximately $10.1 million in principal and
accrued interest payable as of February 28, 2001. The Company's past due debt
includes approximately $9.4 million of notes and accrued interest which are
believed to be pledged by the holders of the notes to a bank as collateral for
loans made by the bank to such holders. This bank was liquidated by the Federal
Deposit Insurance Corporation ("FDIC") during 2000. The Company was notified in
December 2000 that the FDIC sold significantly all the loans and related
collateral to a financial institution. The financial institution has issued a
demand letter to the Company for approximately $575,000 of principal plus
accrued interest of the notes. If the financial institution seeks to enforce
its rights under the pledged notes, the Company currently would not be able to
repay these notes. These factors, among others, indicate that the Company may
be unable to continue as a going concern for a reasonable period of time.
Management's plans to sustain operations are discussed below.
The consolidated 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 and to obtain additional financing and
refinancing as may be required. Management's plans to accomplish these
objectives include, but are not limited to, the following:
- - The Company's current strategic direction is to continue to negotiate with
its creditors to restructure indebtedness and obtain financing to fund
operations. If the Company is successful in completing improvements to its
financial condition, the Company may seek other strategic alternatives,
including attempting to use the Company's public shell as a merger vehicle. If
the Company is unsuccessful in this strategy, the Company may not be able to
continue operating as a going concern.
- - The Company plans to continue to operate as a holding Company with the
Company's principal assets being PIC and the investment in Actel Integrated
Communications, Inc. ("Actel"). However, the Company is currently uncertain
regarding PIC's ability to make cash contributions to the Company in future
periods. Also, on April 11, 2001, Actel filed for Chapter 11 bankruptcy
protection. Therefore, the Company is uncertain regarding any ultimate recovery
of these investments.
- - During 2000, the Company retained an investment banker to assist the
Company regarding the identification and investigation of strategic alternatives
available to the Company.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and the accounts of its wholly-owned subsidiaries, PIC
and Incomex (prior to its sale). Significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
significantly from those estimates.
F-14
CERTAIN RISK CONCENTRATIONS - The Company derived considerable portions of its
revenues from significant customers during 2000, 1999 and 1998. The table below
indicates the percentage of Company's total revenue derived from these customers
during those years.
CUSTOMER 2000 1999 1998
A. . . . 29 % 51 % 32 %
B. . . . - 19 % 16 %
C. . . . 33 % 8 % 2 %
D. . . . 12 % - -
Also, substantially all of the Company's leasing arrangements have been with
Berthel Fisher & Company and its subsidiaries, and their affiliated leasing
partnerships ("Berthel"). Berthel owned 13.9%, 14.4% and 14.8% of the Company's
outstanding common stock at December 31, 2000, 1999 and 1998, respectively.
OFF BALANCE SHEET CREDIT RISK - The Company is a party to various agreements
with off balance sheet credit risk as part of its normal course of business.
The Company receives funds from independent billing and collection firms or
other third parties, which advances funds before collecting from the end-user by
billing through a Regional Bell Operating Company or other local telephone
company. Amounts not ultimately collected from the end-user may be deducted
from future advance payments. These agreements involve elements of credit risk
which are not recognized in the Company's consolidated balance sheet.
REVENUE RECOGNITION - Beginning in February 2000 PIC became solely a reseller of
call processing services. The Company began accounting for revenue on a net
commission 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.
Revenues derived in 1998 from the AT&T commission agreement related to calls
were recognized as revenues as the calls were placed. Additional bonuses,
primarily for reaching the number of contracted rooms or calls specified in the
agreement, were recognized when the specified criteria had been met.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. For
financial reporting purposes, depreciation and amortization are computed on
these assets using the straight-line method over their estimated useful lives
ranging from 1 to 28 years. For income tax purposes, accelerated methods are
used. Amortization of telecommunications equipment under capital leases is
included with depreciation expense.
The Company has accounted for its telecommunications equipment leases as capital
leases under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 13. Accordingly, the cost of the leased assets and the related
obligations under the lease agreements have been recorded at the inception of
the lease.
GOODWILL - Goodwill was amortized on the straight-line method over 10 years
prior to the impairment write-downs discussed in Note 1, Impairment of Property
and Equipment and Intangible Assets.
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. The PIC business operates in a rapidly
changing competitive environment which creates uncertainty regarding the fair
value of certain assets. For the years ended December 31, 2000 and 1999, the
Company recorded impairment write-downs of goodwill related to PIC of
approximately $3.3 million and $3.0 million, respectively, and write-downs of
other assets, primarily telecommunications equipment at PIC and MTS, of
approximately $600,000 and $317,000, respectively. All impairments were
determined based on the estimated fair value of such assets.
F-15
COST OF PURCHASED SITE CONTRACTS - The cost of obtaining site contracts was
amortized over the term of the related contracts, generally one to three years,
using the straight-line method.
OTHER INTANGIBLE ASSETS - Other intangible assets relate to deferred financing,
deferred lease and loan restructuring costs. Deferred financing, lease and loan
restructuring costs incurred, net of amortization, in connection with new loans
and modifications of existing lease and loan agreements of $58,000 and $197,000
at December 31, 2000 and 1999, respectively, have been deferred and are being
amortized over the new or restructured lease and loan agreement terms using the
effective interest method.
INVESTMENTS - The Company owns convertible preferred stock which is not readily
marketable. This investment is accounted for at cost. This investment
experienced a decline in value that is other than temporary in 2000 due to Actel
filing for bankruptcy in April 2001 and the Company recorded an impairment loss
of $1.6 million. (See Note 6.)
INCOME TAXES - The Company files a consolidated federal and certain consolidated
state income tax returns with its subsidiaries. Some states do not allow the
filing of a consolidated state tax return, and therefore, certain subsidiaries
file a separate state income tax return. Deferred income taxes are provided for
the tax consequences in future years of temporary differences between the tax
basis of assets and liabilities and their financial reporting amounts, based on
enacted tax laws and tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. Income tax expense is the tax payable for the year and the
change during the period in deferred tax assets and liabilities.
ACCRETION ON PREFERRED STOCK - Up to September 30, 2000, the date of conversion
(see Note 9), the Company accreted the carrying value of the 8% Series A
Convertible Preferred Stock (net of offering costs incurred) to the conversion
price by the effective interest method.
CUMULATIVE DIVIDENDS ON PREFERRED STOCK - Up to September 30, 2000, the date of
conversion (see Note 9), cumulative dividends on the Company's 8% Series A
Convertible Preferred Stock were recorded as a charge to accumulated deficit as
the dividends were earned by the holders and an accrued liability was recorded.
STOCK-BASED COMPENSATION - The Company measures stock-based compensation cost
with employees as the excess of the fair value of the Company's common stock at
date of grant over the amount the employee must pay for the stock. The Company
measures stock-based compensation with other than employees as the fair value of
the goods or services received or the fair value of the equity instrument
issued, whichever is more reliably measurable.
NET LOSS PER COMMON SHARE - Basic net loss per common share is based on the
weighted average number of shares of common stock outstanding during the year.
Diluted net loss per common share is the same as basic net loss per share due to
the antidilutive effect on net loss per share of any assumed conversion of
convertible securities or exercise of options and warrants.
F-16
Potential common shares excluded from the per share computation because they
were antidilutive are as follows:
YEARS ENDED DECEMBER 31,
------------------------
2000 1999 1998
Convertible preferred stock - 1,681,776 1,681,776
Options . . . . . . . . . . - 355,918 146,502
Warrants. . . . . . . . . . - 1,189,000 950,937
-------- --------- ---------
Total . . . . . . . . . . . - 3,226,694 2,779,215
======== ========= =========
The exercise prices on all outstanding options and warrants exceed the market
price of the Company's common stock at December 31, 2000.
RECLASSIFICATIONS - Certain amounts in the 1999 and 1998 consolidated financial
statements have been reclassified to conform with the 2000 presentation.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The recognition of gains or losses resulting from
changes in the values of derivatives is based on the use of each derivative
instrument and whether it qualifies for hedge accounting. The Company adopted
SFAS No. 133 on January 1, 2001. The adoption of SFAS No. 133 did not have a
material effect on the Company's results of operations or financial condition.
2. BAD DEBT EXPENSE AND UNIVERSAL SERVICE FUND FEES
During 1999, PIC recorded bad debt charges primarily relating to collection
issues for one type of call processing service provided by PIC to its largest
customer totaling approximately $5.6 million in excess of historical amounts.
PIC used an independent billing and collection firm, which advanced funds to
PIC, for calls handled by PIC, before collecting from the end-user by billing
through a Regional Bell Operating Company or other local telephone company.
This billing and collection firm reconciled amounts ultimately collected from
the end-user with the initial advances made and remitted the additional amount
collected or reduced advances, for any deficiency, to PIC in future periods.
This process took 12 - 18 months to complete. PIC used its historical
experience to estimate the ultimate collections to be received. During 1999,
PIC experienced an amount of reductions in these payments significantly in
excess of PIC's and industry historical experience.
Due to the high level of these uncollectable amounts, PIC contracted with
another billing and collection firm in November 1999. The prior billing and
collection firm alleged that PIC had breached its contract and placed a lien on
the collections from calls processed by the new billing and collection firm. At
December 31, 1999, the Company recorded an allowance for 100% of all receivables
from both billing and collection firms due to the uncertainty regarding their
collection.
As a result of PIC's new business plan developed during 2000, PIC has contracted
with several billing and collection firms during 2000 and has eliminated its
live operator center. As a result, PIC is now largely a reseller of call
processing services and essentially receives commissions from the billing and
collections firms. Accordingly, PIC no longer records bad debt expense
separately.
On January 25, 2001, the Company reached a settlement with the prior billing and
collection firm and the new billing and collection firm. Under this settlement:
(a) PIC and ATN were relieved from any further liability allegedly owed to
either billing and collection firm, (b) PIC agreed to pay a nominal amount and
to relinquish its claims to funds held by the new billing and collection firm,
(c) PIC and ATN released any potential claims that they had against the prior
billing and collection firm, including claims that ATN may have for the alleged
failure by the prior billing and collection firm to assess USF contribution
charges (see discussion below) on certain traffic, as well as any claims that
ATN may have against the prior billing and collection agency for its role in the
excessive bad debt charges recorded in 1999, and (d) PIC and ATN released any
potential claims that they had against the new billing and collection firm.
F-17
In December 1999, ATN received notice from the Universal Service Administrative
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 revenue. The USF fee is applicable to all calls
carried after January 1, 1997. The notice was the first time that management
became aware of any liability to this agency.
It was management's belief that these USF fees had been charged to the end-user
and remitted to USAC by its prior 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 1999 it
recorded an estimated liability of $1.7 million. In April 2000, the management
of ATN determined that beginning in 1998 ATN had been credited with certain USF
fees by its billing and collection firm. Management believes a total of $0.9
million of such fees have been credited to ATN, with the credits offset by the
excessive bad debt charges. The Company reached a settlement agreement with the
prior billing and collection firm on January 25, 2001 which included the USF
fees (see discussion above.)
During the first two months of 2001, ATN received credit memos from USAC which
reflect a balance due to USAC of $806,000. Accordingly, ATN recorded a $894,000
credit for universal service fund fees in the fourth quarter of 2000 based on
the new information from USAC. The Company can make no assurances that ATN will
not be liable for additional USF fees.
3. ACQUISITION OF PIC AND PIC-R
Effective October 31, 1997, the Company purchased all of the outstanding capital
stock of PIC and PIC-R in exchange for a cash payment at closing, the issuance
of debt and the issuance of an aggregate of 300,000 shares of common stock of
the Company. The Stock Purchase Agreements also provided for certain recession
and earn-out rights. The acquisitions were recorded under the purchase method
for financial reporting purposes. Goodwill of approximately $4.2 million was
associated with the acquisitions (see Note 1 for impairment).
Effective May 21, 1998, the Company and the former shareholders of PIC and PIC-R
entered into an agreement to amend the terms of the original Stock Purchase
Agreements with respect to the Company's acquisition of PIC and PIC-R. Pursuant
to the Stock Purchase Agreements, the former PIC and PIC-R shareholders received
certain special default rights to rescind the acquisitions of PIC and PIC-R.
The May 21, 1998 amendment terminated the special default rights. Pursuant to
the amendment, the Company also issued 571,428 shares of common stock as a
prepayment of $1.0 million of promissory notes due in installments through April
30, 1999 (the "Long-Term Notes").
Effective December 7, 1998, the Company and the former shareholders of PIC and
PIC-R entered into an Earn-Out Settlement Agreement. This Agreement terminated
the May 21, 1998 Agreement. Pursuant to the Earn-Out Settlement Agreement, in
full and final settlement of the earn-out rights for the former shareholders of
PIC and PIC-R, the Company issued 2,300,000 shares of common stock; issued a
$300,000 note payable in 24 monthly installments commencing January 7, 1999;
assumed $135,000 of costs associated with the defense and settlement of a suit
related to brokerage fees in connection with the PIC acquisition; and agreed to
pay in full the total outstanding balances on the Long-Term Notes issued to the
principle shareholders. The principal balance on the Long-Term Notes as of
December 31, 1998 was $338,138. Goodwill of $3.9 million was associated with
the amended terms of the agreement (see Note 1 for impairment).
4. ACQUISITION OF INCOMEX
On February 13, 1998, the Company entered into an agreement to purchase all of
the outstanding shares of common stock of Incomex, in exchange for 400,000
shares of common stock of the Company, valued at $422,500. The agreement also
provided for the Company to pay the selling shareholders an aggregate amount
equal to 60% of the income before income taxes of Incomex, as defined, during
the period from February 1, 1998 through July 31, 1998. The Company had also
agreed to issue common stock of the Company equal to an aggregate quarterly
average market value of $1.50 for each dollar of income before taxes of Incomex,
as defined, earned in excess of $400,000 during the two 12 month periods
beginning August, 1998. The Incomex acquisition had been recorded under the
purchase method. Goodwill of $901,219 was associated with the acquisition.
F-18
Effective December 7, 1998, the Company and the former shareholders of Incomex
entered into an Earn-Out Settlement Agreement. This agreement amended certain
provisions of the purchase agreement to provide full and final settlement of the
earn-out rights for the former shareholders of Incomex. Under the terms of the
Earn-Out Settlement Agreement, the Company issued 1,500,000 shares of common
stock; issued $744,915 in notes payable maturing in one year at an annual rate
of 14% and which included a 1% origination fee; issued 155,384 warrants
associated with the notes payable entitling the holder to purchase the Company's
common stock at an exercise price of $3.25 which expire, if unexercised, on
December 31, 2003; issued $340,000 in notes payable due no later than April 1,
1999 and recorded cash obligations of $117,479. Goodwill of $3.3 million was
associated with the amended terms of the agreement.
See Note 5 for sale of Incomex.
5. DISCONTINUED OPERATIONS
Effective June 30, 2000 the Company sold all the shares of Incomex 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 was 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 Incomex'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 for the
years ended December 31, 2000, 1999 and 1998 (amounts expressed in thousands):
2000 1999 1998
Revenues . . . . . . . . . . . . . . . . . $ 2,987 $ 8,284 $ 7,921
Expenses . . . . . . . . . . . . . . . . . (4,162) (10,713) (6,740)
Taxes. . . . . . . . . . . . . . . . . . . - 472 (472)
-------- --------- --------
Income (loss) from discontinued operations $(1,175) $ (1,957) $ 709
======== ========= ========
F-19
A summary of the net assets of the discontinued operations are as follows
(amounts expressed in thousands):
DECEMBER 31,
1999
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 available balances. . . . . 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
=============
6. INVESTMENTS
During 1998, the Company reached an agreement to invest in Actel. 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-user services in the Southeastern United
States. As of June 21, 1999 the Company had invested $3.0 million in Actel.
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 $3.0 million investment was
converted into 4,371,428 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 into 3 shares of Actel's common stock at any time at
the option of the Company, subject to certain restrictions. The share and
conversion information have been retroactively restated for a stock split of the
Series A Convertible Preferred Stock and common stock by Actel during 2000. In
addition, the Company loaned $1.0 million to Actel under the terms of a
promissory note dated June 23, 1999. The note was repaid during the second
quarter of 2000 and had a balance at December 31, 1999 of $500,000.
F-20
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
million in cash plus a commitment for an additional $35 million contingent upon
Actel achieving certain operational milestones.
During the second quarter of 2000, the Company undertook a Debt Restructuring
Plan which resulted in the Company selling or exchanging 2,213,198 shares of
Actel Series A Convertible Preferred Stock in private placements (see Note 8).
Following these transactions, the Company held 2,158,230 shares of Actel Series
A Convertible Preferred Stock.
During late 2000, Actel began experiencing cash flow difficulties and on April
11, 2001, Actel filed for bankruptcy protection under Chapter 11. The Company
has recorded an impairment charge of approximately $1.6 million in 2000, due to
the uncertainty of ultimate recovery of the investment.
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, 2000, the Company had
loaned $3.7 million to the AcNet entities, recorded $264,000 of net interest and
incurred $737,000 of costs 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
$990,000 in the second quarter of 2000 due to the write-off of costs associated
with the proposed acquisition and the uncertainty of ultimate recovery of the
investment. The Company commenced legal action against the AcNet entities in
April 2000 to collect its advances and interest. On March 29, 2001, AcNet USA
filed for bankruptcy protection and the Company has been informed that AcNet
Mexico is in receivership.
The AcNet entities provide internet services and network services to businesses,
governments and consumers, primarily in Mexico and Texas.
Investments at December 31, 2000 and 1999 are summarized as follows (amounts
expressed in thousands):
2000 1999
Actel Series A Convertible Preferred Stock $ 1,481 $ 3,000
Accrued dividends. . . . . . . . . . . . . 100 245
Impairment reserve for Actel . . . . . . . (1,581) -
AcNet entities loans and related costs . . 4,429 4,429
Accrued interest . . . . . . . . . . . . . 264 264
Allowance for AcNet entities . . . . . . . (4,693) (3,703)
Other. . . . . . . . . . . . . . . . . . . - 42
-------- --------
Investments. . . . . . . . . . . . . . . . $ - 4,277
======== ========
F-21
7. NOTES PAYABLE
Notes payable as of December 31, 2000 and 1999, consisted of the following:
(DOLLARS IN THOUSANDS)
----------------------
2000 1999
Past due notes payable to individuals, $200,000 of which has
been provided by related parties at December 31, 2000,
bearing interest at the default rate of 18%, due March 5, 1999.
Warrants to purchase 500,000 shares of the Company's
common stock were issued, 400,000 of which were issued to
related parties, at an exercise price of $1.44 per share which
expire, if unexercised, on March 31, 2001. A warrant to
purchase 10,000 shares of the Company's common stock was
issued to Berthel at an exercise price of $1.44 per share
which expires if unexercised, on March 31, 2001. . . . . . . . . . . . . . $ 300 $ 500
Past due notes payable to individuals, $225,000 of which has
been provided by related parties at December 31, 2000,
bearing interest at the default rate of 18%, due March 31, 1999.
Warrants to purchase 1,486,000 shares of the Company's
common stock were issued, 225,000 of which were issued
to related parties, at an exercise price of $1.75 per share
which expire, if unexercised, on March 31, 2001. Warrants
to purchase 121,100 shares of the Company's common stock
were issued to Berthel in connection with the offering with terms
substantially similar to the warrants issued in the offering.. . . . . . . 275 1,371
Past due notes payable to individuals, $5,995,000 of which has
been provided by related parties, bearing interest at the default
rate of 18%, due November 30, 1999.
Warrants to purchase 1,379,000 shares of the Company's
common stock were issued, 1,199,000 of which were issued
to related parties. The warrants were issued at exercise prices
ranging from $2.50 to $4.13 and, if unexercised, expire on
dates ranging from November 2003 to December 2003. . . . . . . . . . . . . 6,895 6,895
Past due note payable to consultant bearing interest at 14%, due
March 31, 1999. Warrants to purchase 25,000 shares
of the Company's common stock were issued at an
exercise price of $1.75 per share which expire, if
unexercised, on March 31, 2001.. . . . . . . . . . . . . . . . . . . . . . 25 25
Uncollateralized notes payable to individual, bearing interest at 14%,
due May 19, 2001. A warrant to purchase 100,000 shares
of the Company's common stock was issued. The warrant
has an exercise price of $3.50 and, if unexercised,
expires December 6, 2003.. . . . . . . . . . . . . . . . . . . . . . . . . 500 -
F-22
(DOLLARS IN THOUSANDS)
----------------------
2000 1999
Note payable to MCC Investment Company, LLC ("MCCIC")
bearing interest at 12%, due June 21, 2001. Warrants to purchase
4,289,897 shares of the Company's common stock were issued at
a weighted average exercise price of $1.99 per share which, if
unexercised, expire December 20, 2004. The note is collateralized by
the Company's shares of Actel Series A preferred stock and sustantially
all assets of the Company (see additional terms below and see Note 6). . . 388 -
Revolving promissory note payable to MCCIC bearing interest at 12%,
due June 21, 2001. Warrants to purchase 909,224 shares of
the Company's common stock were issued at a weighted average exercise
price of $1.99 per share which, if unexercised, expire December 20, 2004.
The note is collateralized by the Company's shares of
Actel Series A preferred stock and sustantially all assets of the
Company (see additional terms below and see Note 6). . . . . . . . . . . . 200 -
Notes payable to Berthel, bearing interest at 12% due June 21, 2001. . . . . 200 -
Note payable to financial institution bearing interest at
10.5% due March 30, 2000 collateralized by substantially all the
assets of MTS and an assignment of leasehold interests. Due to
a cross-collateralization agreement with the financial institution,
this note became due on March 28, 1999.. . . . . . . . . . . . . . . . . . - 500
Note payable to financial institution bearing interest at 2%
over the bank's prime rate (combined rate of 9.75% at December 31,
1999), due March 28, 1999, collateralized by substantially
all the assets of MTS and an assignment of leasehold interests.. . . . . . - 400
Convertible note payable to financial institution bearing interest
at 12% (14% upon default) due in five monthly installments of $200,000
beginning January 17, 2000 with a final payment of $1,000,000 due
June 17, 2000. Warrants to purchase 500,000 shares of the Company's
common stock were issued at an exercise price of $3.50 per share
which, if unexercised, expire June, 2009. The note was collateralized
by shares of Actel Series A preferred stock and substantially all assets
of the Company (see additional terms below). . . . . . . . . . . . . . . . - 2,000
Note payable to related party bearing interest at 12% and due
February 9, 2000. A warrant to purchase 400,000 shares of the
Company's common stock was issued at an exercise price of
$3.31 per share which, if unexercised, will expire August 2004.. . . . . . - 2,000
Note payable to related party with interest at 18%, due on demand. . . . . . - 17
----------- ---------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,783 $ 13,708
=========== =========
F-23
On June 17, 1999, the Company completed a bridge financing in the amount of $2.0
million with New Valley Corporation ("New Valley"). Pursuant to the bridge
financing, the Company issued a note in the principal amount of $2.0 million
(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. Warrants to purchase 250,000 shares of the Company's common stock
were issued in connection with the Note at an exercise price of $3.50 per share
and may be exercised at anytime through June 21, 2009. Because the Company did
not repay the Note on or prior to September 21, 1999, the warrants may be
exercised to purchase a total of 500,000 shares of the Company's common stock.
On December 17, 1999, the Company amended the terms of the agreement with New
Valley. The amendment reset the interest rate to 12% since inception (14% upon
default) and was due in 5 monthly payments of $200,000 beginning January 17,
2000 with a final payment of $1.0 million on June 17, 2000. Waivers of any
prior violations were included as part of the amendment. The Note was
convertible into shares of common stock of the Company at the option of New
Valley at any time up to the maturity date, in any portion in multiples of
$1,000. The number of shares in the conversion was to be obtained by dividing
the principal amount of the Note converted by the conversion price of $3.00.
The January, February and March 2000 payments under the Note were paid on behalf
of the Company by MCCIC, a company owned by Berthel and another significant
shareholder of the Company. On April 6, 2000, the entire interest of New Valley
in this loan was purchased by MCCIC. The terms of the note and warrant purchase
agreement with MCCIC, bearing interest at 12%, was amended on June 22, 2000 with
payment of all remaining principal and interest due on June 22, 2001.
During 2000, the Company also entered into a Revolving Promissory Note with
MCCIC, bearing interest at 12% with payment of all remaining principal and all
accrued interest due on June 21, 2001.
Effective May 29, 2000, the Company issued warrants to purchase an aggregate of
5,199,121 shares of the Company's common stock at a weighted 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.
The Company reached a Comprise Settlement Agreement and Mutual Release with the
FDIC on October 19, 2000 to pay $300,000 in settlement of two notes payable with
a financial institution with combined principal of $900,000. As a result, the
Company recorded a $722,000 extraordinary gain on extinguishment of debt,
including interest, in the fourth quarter of 2000.
See Note 8, Long-Term Debt, for a discussion of the Debt Restructuring Plan.
F-24
8. LONG-TERM DEBT
Long-term debt, others as of December 31, 2000 and 1999 consisted of the
following:
(DOLLARS IN
THOUSANDS)
-------------
2000 1999
Mortgage note payable to partnership due in monthly
installments of $3,299, including interest at 8.5%,
until September 15, 2000, when the balance is due.
The note was collateralized by a first mortgage on the
Company's corporate office facilities and land.. . . . . . . . . . . . . . $ - $ 245
Note payable to financial institution to refinance an existing note on
ATN's building and upgrade the building for the purpose of leasing a
portion to Actel, due in monthly installments of $7,834, including
interest at 8.4% until October 2004, when the balance is due.
The note was collateralized by ATN's office facilities and land. . . . . . - 774
Uncollateralized note payable to financial institution due in monthly
installments of $12,353, including interest at the financial institution's
prime rate (8.5% at December 31, 1999),
until January 2000, when the balance was due.. . . . . . . . . . . . . . . - 13
Uncollateralized convertible notes payable to individuals, bearing
interest at 12% due May 29, 2003 (see additional terms below). . . . . . . 521 -
----- ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 521 1,032
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 288
----- ------
Long-term debt, others . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 521 $ 744
===== ======
F-25
Long-term debt with related parties at December 31, 2000 and 1999 consisted of
the following:
(DOLLARS IN
THOUSANDS)
--------------
2000 1999
Uncollateralized notes payable to Berthel due January 31, 2005,
(net of discount of $299,648 at December 31, 1999).
Interest payable quarterly at 4%, beginning March 31, 1995
until maturity, when the balance is due (effective interest
rate of 11.5%).. . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 700
Uncollateralized note payable to Berthel, due in five monthly
installments of $9,494 including interest at 14% beginning
on March 30, 1998, then fifty-five installments of $20,130
including interest at 14% until February 28, 2003. . . . . . . . . . - 702
Non-interest bearing, uncollateralized note payable to the former
owner of PIC (net of discount of $13,656 at December 31,
1999) due in monthly installments of $12,500, beginning January 1999
through January 2001 (effective interest rate of 19.6%). . . . . . . - 136
Note payable to Berthel due in monthly installments of $23,528
beginning December 1, 1997 until November 1, 2002 when
the balance is due including interest at 14.5%, collateralized
by all telecommunications equipment owned by PIC.. . . . . . . . . . 470 699
Uncollateralilzed convertible notes payable to individuals, bearing
interest at 12% due May 29, 2003 (see additional terms below). . . . 1,190 -
Uncollateralilzed convertible notes payable to Berthel, bearing
interest at 12% due May 29, 2003 (see additional terms below). . . . 2,921 -
Uncollateralized notes payable to individual, bearing interest at 14%,
due May 19, 2001. A warrant to purchase 100,000 shares
of the Company's common stock was issued. The warrant
has an exercise price of $3.50 and, if unexercised,
expires December 6, 2003.. . . . . . . . . . . . . . . . . . . . . . - 500
Uncollateralized, noninterest bearing demand notes payable to
related parties. . . . . . . . . . . . . . . . . . . . . . . . . . . - 32
------ ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,581 2,769
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . 220 647
------ ------
Long-term debt with related parties. . . . . . . . . . . . . . . . . . $4,361 $2,122
====== ======
F-26
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 approximately $7.0 million as a result of the sale of shares
of Actel's Series A Convertible Preferred Stock for cash and cancellation 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 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 1,149,614 Actel Shares for
gross proceeds of $4.9 million in the Actel Share Offering, resulting in a gain
of approximately $3.7 million. Proceeds were partially used to (i) reduce a
total of $2.2 million of the amounts owed to MCCIC, an affiliate of Berthel and
another significant shareholder of the Company, under the Company's bridge loan
originally obtained from New Valley and the Company's Revolving Promissory Note
from MCCIC, (ii) reduce $1.0 million of past due notes and lease payables to
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 1,063,584 Actel
Shares with a fair value of approximately $4.6 million 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. A net gain of approximately $3.3 million was realized on the transfer
of the Actel Shares. 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.
The Company sold its buildings in Cedar Rapids, Iowa and Mobile, Alabama during
the second quarter of 2000 resulting in a pre-tax gain of $214,000. Proceeds
were used to pay related indebtedness of $1.0 million.
Maturities of long-term debt for each of the five years subsequent to December
31, 2000 are as follows (dollars in thousands):
RELATED
PARTIES OTHER TOTAL
2001. $ 220 $ - $ 220
2002. 250 - 250
2003. 4,111 521 4,632
-------- ------ ------
Total $ 4,581 $ 521 $5,102
======== ====== ======
Also see Note 16 with respect to the estimated fair value of long-term debt.
F-27
9. PREFERRED STOCK
On July 2, 1997, the Company amended its articles of incorporation to authorize
1,000,000 shares of a new class of "blank check" preferred stock.
On August 1, 1997, the Company authorized the issuance of up to 50,000 shares of
Series A Convertible Preferred Stock (the "Convertible Preferred"). The
Convertible Preferred had a liquidation preference, subject to adjustment, of
$100 per share and accrued cumulative dividends at an annual rate of 8% of the
liquidation preference. Dividends were payable quarterly at the Company's
option in cash or in common stock. The Convertible Preferred had no voting
rights, except as required by applicable law.
On February 26, 1998, the Company agreed to issue 2,170 shares of Convertible
Preferred to an affiliate of Berthel in exchange for the prepayment of $180,000
of commissions and the payment of $37,000 of commissions then currently owed.
This transaction was completed and the shares issued on June 19, 1998.
The Company's Convertible Preferred automatically converted into 1,683,880
shares of the Company's Common Stock on September 30, 2000, the third
anniversary of the date the first shares of Convertible Preferred were
originally issued.
F-28
10. COMMON STOCK WARRANTS
A summary of common stock warrant activity during the years ended December 31,
2000, 1999 and 1998 is as follows:
WEIGHTED
AVERAGE
WARRANT WARRANT
WARRANT PRICE PRICE EXPIRATION
SHARES PER SHARE PER SHARE DATE
Balance at January 1, 1998 . . . . . . . . . . . 2,149,279 $1.12-$9.75 $ 2.91 1999-2002
Warrants issued in connection with Incomex
Earn-Out settlement (Note 4) . . . . . . . . . 155,384 3.25 3.25 2003
Warrants issued with note payable (Note 7) . . . 1,486,000 1.75 1.75 2001
Warrants issued with note payable (Note 7) . . . 500,000 1.75 1.75 2001
Warrants issued with note payable (Note 7) . . . 684,000 2.50-3.25 3.17 2003
Warrants issued with note payable (Note 7) . . . 5,000 1.75 1.75 2000
Warrants issued with note payable (Note 7) . . . 25,000 1.75 1.75 2001
Warrants issued with offering agreement
(Note 7). . . . . . . . . . . . . . . . . . . 10,000 1.44 1.44 2001
Warrants issued with short-term notes payable. . 15,000 1.44 1.44 2001
Warrants issued with offering agreement. . . . . 121,100 1.75 1.75 2001
Warrants issued with notes payable to related
party. . . . . . . . . . . . . . . . . . . . . 350,000 1.44 1.44 2001
Warrants exercised by related party. . . . . . . (1,100,000) 1.44 1.44
Warrants issued with consulting agreements . . . 20,000 3.00-3.60 3.30 2003
-----------
Balance at December 31, 1998 . . . . . . . . . . 4,420,763 1.12-9.75 2.86
Warrants issued with notes payable to related
parties (Notes 7 and 8). . . . . . . . . . . . 795,000 3.25-4.13 3.63 2003
Warrants issued with notes payable to financial
institution (Note 7) . . . . . . . . . . . . . 500,000 3.50 3.50 2009
Warrants issued with notes payable to related
party (Note 7) . . . . . . . . . . . . . . . . 400,000 3.31 3.31 2004
Warrants expired . . . . . . . . . . . . . . . . (50,000) 2.88 2.88
Warrants exercised . . . . . . . . . . . . . . . (1,300) 3.14 3.14
Warrants exercised by related party. . . . . . . (4,000) 1.44 1.44
Warrants exercised . . . . . . . . . . . . . . . (193,872) 1.75 1.75
-----------
Balance at December 31, 1999 . . . . . . . . . . 5,866,591 1.12-9.75 3.05
Warrants issued with termination of
employment agreements. . . . . . . . . . . . . 150,000 1.00 1.00 2003
Warrants issued with notes payable to
financial institution (Note 7) . . . . . . . . 5,199,121 .94-2.44 1.99 2004
Warrants exercised . . . . . . . . . . . . . . . (25,000) 1.75 1.75
Warrants cancelled . . . . . . . . . . . . . . . (495,000) 3.50-4.13 3.88
-----------
Balance at December 31, 2000 . . . . . . . . . . 10,695,712 $1.12-$9.75 $ 2.44
===========
F-29
The weighted average remaining life of the warrants was 3.1, 3.0 and 2.5 years
at December 31, 2000, 1999 and 1998, respectively.
Warrants outstanding and exercisable at December 31, 2000 were as follows:
EXERCISE PRICE WARRANTS
$0.94 . . . . . 435,467
$1.00 . . . . . 150,000
$1.12 . . . . . 229,279
$1.25 . . . . . 200,000
$1.31 . . . . . 884,804
$1.44 . . . . . 21,000
$1.50 . . . . . 100,000
$1.75 . . . . . 1,918,228
$2.09 . . . . . 499,600
$2.19 . . . . . 40,000
$2.25 . . . . . 831,467
$2.44 . . . . . 2,207,783
$2.50-$3.00 . . 90,000
$3.01-$3.25 . . 1,798,084
$3.26-$3.60 . . 1,210,000
$9.75 . . . . . 80,000
----------
10,695,712
==========
The Company issued 880,000 common stock warrants to the public in conjunction
with the Company's initial public offering during 1996. The underwriters also
received 80,000 warrants. As a result of the anti-dilutive provision, the
exercise price for the 880,000 public warrants at December 31, 1998 was adjusted
in accordance with the agreement to $3.14. Each warrant is exercisable to
purchase 2.068 shares of common stock. As a result of the anti-dilutive
provision, the 80,000 underwriters warrants at December 31, 1998 are exercisable
to purchase 162,839 units at an exercise price of $6.146 per unit. Each unit
consists of two shares of the Company's common stock and one warrant exercisable
at $9.75 per share to purchase one share of the Company's common stock.
The Company has amended the terms of these 880,000 warrants to extend the
expiration date from October 21, 1999 to October 21, 2001. The 880,000 warrants
are exercisable into 1,819,918 shares of common stock at an exercise price of
$3.14 per share. 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.
On March 22, 2001, the Company extended the expiration date of 1,939,228
warrants from March 31, 2001 to March 31, 2002.
F-30
11. STOCK OPTION PLANS
The Company adopted the 1993 Stock Option Plan (the "1993 Plan") whereby options
may be granted to employees to purchase up to an aggregate of 272,529 shares of
the Company's common stock. The 1993 Plan is administered by the Board of
Directors, which determines to whom options will be granted. The 1993 Plan
provides for the grant of incentive stock options (as defined in Section 422 of
the Internal Revenue Code) to employees of the Company. The exercise price of
stock options granted under the 1993 Plan is established by the Compensation
Committee or the Board of Directors, but the exercise price may not be less than
the fair market value of the common stock on the date of grant of each option.
Each option shall be for a term not to exceed ten years after the date of grant,
and a participant's right to exercise an option vests at the rate of twenty
percent on the date of grant and each anniversary date until the option is fully
vested.
A summary of stock option activity under the 1993 Plan during the years ended
December 31, 2000, 1999 and 1998, is summarized as follows:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTION OPTION
OPTIONS OPTION PRICE PRICE OPTIONS PRICE
OUTSTANDING PER SHARE PER SHARE EXERCISABLE PER SHARE
Balance at January 1, 1998 . 223,929 $1.88-$2.25 $ 2.05 79,279 $ 1.88
Granted at market. . . . . 30,927 2.00
Cancelled. . . . . . . . . (1,000) 2.25
Cancelled. . . . . . . . . (13,255) 2.00
------------
Balance at December 31, 1998 240,601 1.88-2.25 2.04 163,026 1.97
Exercised. . . . . . . . . (18,500) 1.88
Exercised. . . . . . . . . (1,000) 2.25
------------
Balance at December 31, 1999 221,101 1.88-2.25 2.06 182,564 2.02
Cancelled. . . . . . . . . (20,299) 1.88
Cancelled. . . . . . . . . (15,523) 1.88
Cancelled. . . . . . . . . (5,000) 2.25
Cancelled. . . . . . . . . (8,836) 2.00
------------
Balance at December 31, 2000 171,443 1.88-2.25 2.09 171,443 2.09
============
At December 31, 2000, options for 171,443 shares were exercisable, an additional
81,586 shares were available for future grants and the weighted average
remaining life of the options outstanding was five years. The Company has
reserved 272,529 shares of common stock in connection with the 1993 Plan at
December 31, 2000, 1999 and 1998.
The Company has adopted the 1997 Stock Option Plan (the "1997 Stock Option
Plan"). During 1998, the Company amended the 1997 Stock Option Plan to increase
the number of shares authorized to 1,727,471. The 1997 Stock Option Plan is
also administered by the Compensation Committee or the Board of Directors which
determines to whom the options will be granted. The 1997 Stock Option Plan
provides for the grant of incentive stock options (as defined in Section 422 of
the Internal Revenue Code) or nonqualified stock options to executives or other
key employees of the Company. The exercise price of the stock options granted
under the 1997 Stock Option Plan is established by the Compensation Committee or
the Board of Directors, but the exercise price may not be less than the fair
market value of the common stock on the date of the grant of each option for
incentive stock options. Each option shall be for a term not to exceed ten
years after the date of grant for non-employee directors and five years for
certain shareholders. Options cannot be exercised until the vesting period, if
any, specified by the Compensation Committee or the Board of Directors has
expired.
F-31
A summary of stock option activity under the 1997 Stock Option Plan for the
years ended December 31, 2000, 1999 and 1998, is as follows:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTION OPTION
OPTIONS OPTION PRICE PRICE OPTIONS PRICE
OUTSTANDING PER SHARE PER SHARE EXERCISABLE PER SHARE
Balance at January 1, 1998 . 255,629 $3.13-$4.16 $ 3.28 100,000 $ 2.57
Granted at market. . . . . 400,000 2.25-3.50
Granted at market. . . . . 17,000 3.13
Granted at market. . . . . 165,000 2.81
Granted at market. . . . . 535,000 2.75
Granted at market. . . . . 4,073 2.00
Granted at market. . . . . 225,629 2.25
Cancelled. . . . . . . . . (225,629) 3.25
Cancelled. . . . . . . . . (1,745) 2.00
------------
Balance at December 31, 1998 1,374,957 2.00-4.16 2.65 893,561 2.62
Cancelled. . . . . . . . . (7,000) 3.13
Cancelled. . . . . . . . . (90,000) 2.81
Granted at market. . . . . 2,000 3.88
Granted at market. . . . . 5,500 2.56
Granted at market. . . . . 4,500 2.75
------------
Balance at December 31, 1999 1,289,957 2.00-4.16 2.64 1,106,259 2.63
Cancelled. . . . . . . . . (323,236) 2.25-2.75
Cancelled. . . . . . . . . (600,000) 2.25-3.50
Cancelled. . . . . . . . . (1,164) 2.00
Cancelled. . . . . . . . . (15,000) 3.13-4.16
Cancelled. . . . . . . . . (15,000) 3.13-4.16
Cancelled. . . . . . . . . (10,000) 3.13
Cancelled. . . . . . . . . (2,000) 3.88
Cancelled. . . . . . . . . (5,500) 2.56
Cancelled. . . . . . . . . (4,500) 2.75
Granted at market. . . . . 20,000 2.25
------------
Balance at December 31, 2000 333,557 2.00-2.81 2.58 323,557 2.58
============
F-32
At December 31, 2000, options for 323,557 shares were exercisable, an additional
1,393,914 shares were available for future grants and the weighted average
remaining life of the options outstanding was seven years. The Company has
reserved 1,727,471 shares of common stock in connection with the 1997 Stock
Option Plan at December 31, 2000, 1999 and 1998.
Options outstanding and exercisable at December 31, 2000 under the 1993 Plan and
the 1997 Stock Option Plan were as follows:
OPTIONS OUTSTANDING EXERCISABLE
- -------------------- -----------
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
LIFE
EXERCISE PRICE SHARES (IN YEARS) SHARES
$1.88 . . . . . . . 67,899 3 67,899
$2.00-$2.25 . . . . 227,101 6 217,101
$2.75-$2.81 . . . . 210,000 7 210,000
------- -----------
505,000 495,000
======= ===========
No compensation expense was recorded in connection with the grant of options for
the years ended December 31, 2000, 1999 and 1998, respectively. The Company
accounts for stock option grants and awards to employees using the intrinsic
value method. If compensation cost for stock option grants and awards had been
determined based on fair value at the grant dates for options consistent with
the method prescribed by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS No. 123"), the Company's net
loss and net loss per share would have been the pro forma amounts indicated
below for the years ended December 31, 2000, 1999 and 1998 (dollars in
thousands, except per share data):
2000 1999 1998
Net loss attributable to As reported $(4,427) $(18,592) $ (349)
common shareholders Pro forma (4,731) (19,207) (2,348)
Net loss per common share As reported $ (0.41) $ (1.79) $ (0.06)
Pro forma (0.44) (1.85) (0.43)
The weighted average fair values at date of grant for options granted during
2000, 1999 and 1998 were estimated to be $304,000, $615,000 and $1,999,000,
respectively. The Company's calculations were made using the Black-Scholes
option pricing model with the following weighted average assumptions: ten year
expected life; stock volatility of 221% in 2000, 102% in 1999 and 153% in 1998;
risk-free interest rate of 5.2% in 2000, 6.4% in 1999 and 6% in 1998; and no
dividends during the expected term.
F-33
12. INCOME TAXES
The provision for (benefit from) income taxes consisted of the following for the
years ended December 31, 2000, 1999 and 1998 (dollars in thousands):
2000 1999 1998
Continuing operations -
Current, state . . . . . $ (9) $ 472 $(397)
Discontinued operations -
Current, state . . . . . - (472) 472
------ ------ ------
Total expense (benefit). . $ (9) $ - $ 75
====== ====== ======
The provision for (benefit from) income taxes from continuing operations for the
years ended December 31, 2000, 1999, and 1998 is less than the amounts computed
by applying the statutory federal income tax rate of 35% to the loss before
income taxes from continuing operations due to the following items (dollars in
thousands):
2000 1999 1998
Computed expected amount. . . . . . . . . . . . $(1,234) $(5,589) $(433)
Amortization and write-down of goodwill . . . . 1,313 1,875 236
Other . . . . . . . . . . . . . . . . . . . . . - 9 18
State income taxes, net of federal tax benefit. (9) (69) 75
Change in valuation allowance . . . . . . . . . (79) 4,246 (293)
-------- -------- ------
Income tax provision (benefit). . . . . . . . $ (9) $ 472 $(397)
======== ======== ======
At December 31, 2000 the Company has net operating loss carryforwards for
federal income tax purposes of approximately $29 million to use to offset future
taxable income. These net operating losses will expire through 2020.
Certain restrictions under the Tax Reform Act of 1986, caused by a change in
ownership resulting from sales of common stock, limit the annual utilization of
net operating loss carryforwards. The initial public offering of the Company's
common stock during 1996 resulted in such a change in ownership. The Company
estimates that the post-change taxable income that may be offset with the
pre-change net operating loss carryforward of approximately $4.5 million will be
limited annually to approximately $600,000. The annual limitation may be
increased for any built-in gains recognized within five years of the date of the
ownership change.
F-34
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 2000 and 1999 are as follows (dollars in thousands):
2000 1999
Deferred tax assets:
Current:
Allowance for doubtful accounts receivable. . . . . . . $ 79 $ 150
--------- ---------
Noncurrent:
Intangible asset amortization and valuation allowance . - 155
Differences in net book value of property and equipment 66 446
Capital lease adjustment. . . . . . . . . . . . . . . . - 298
Interest and other accruals . . . . . . . . . . . . . . 795 523
Unrealized loss on investments. . . . . . . . . . . . . - 1,389
Carryforward of net operating loss. . . . . . . . . . . 10,058 7,507
--------- ---------
10,919 10,318
--------- ---------
Total deferred tax assets . . . . . . . . . . . . . . . . . 10,998 10,468
Valuation allowance for deferred tax assets . . . . . . . . (10,998) (10,468)
--------- ---------
Net deferred tax assets . . . . . . . . . . . . . . . . . . $ - $ -
========= =========
A valuation allowance for the entire balance of deferred tax assets has been
recorded because management believes it is more likely than not that such assets
will not be realized.
13. COMMITMENTS AND CONTINGENCIES
Rent expense under operating leases for the years ended December 31, 2000, 1999
and 1998 was $141,000, $168,000 and $215,000, respectively. At December 31,
2000, future minimum rental payments on lease obligations are as follows
(dollars in thousands):
OPERATING
LEASES
Years ending December 31:
2001. . . . . . . . . . $ 31
2002. . . . . . . . . . 28
2003. . . . . . . . . . 28
2004. . . . . . . . . . 23
2005. . . . . . . . . . 11
----------
Minimum rental payments $ 121
==========
The Company has guaranteed a facility lease between Actel and a third party.
The lease expires in June 2009 and total remaining noncancellable lease payments
were $765,000 at December 31, 2000. Actel was current on its lease payments as
of December 31, 2000. However, on April 11, 2001 Actel filed for Chapter 11
bankruptcy protection.
F-35
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 total only $770,000. Another party has
asserted that he is entitled to $500,000 allegedly outstanding under a note
payable. Management believes that no funds were received by the Company with
respect to these notes and that it has other defenses. No assurance can be
given that the Company's defenses are valid or that the Company will not be
liable for any part or all of the amounts allegedly due under these notes. No
loss, if any, has been recorded in the consolidated financial statements with
respect to this matter.
On April 26, 2000, PIC filed an action in state court in Travis County, Texas,
against OAN Services, Inc. ("OAN") and Billing Concepts, Inc. ('BCI"), claiming
breach of contract and tortious interference by BCI 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
alleged that BCI's conduct in transmitting notice to OAN claiming rights in call
records delivered to OAN by PIC was inaccurate and misleading, thus constituting
tortious interference by BCI. PIC sought 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. On January 25, 2001, the
Company reached a settlement agreement with BCI and OAN. Under this settlement:
(a) PIC and ATN are relieved from any further liability allegedly owed to BCI or
OAN, (b) PIC agreed to pay nominal consideration and to relinquish its claims to
funds held by OAN, (c) PIC and ATN released any potential claims that they had
against BCI, including claims ATN may have for the alleged failure by BCI to
assess USF contribution charges on certain traffic, as well as any claims that
ATN may have against BCI for its role in the excessive bad debt charges, and (d)
PIC and ATN released any potential claims that they had against OAN.
The Company's wholly-owned subsidiary, PIC, is involved in an adversary
proceeding filed in connection with two jointly administered Chapter 11
proceedings in the United States Bankruptcy Court for the Southern District of
Florida. On May 13, 1997, a joint motion of the Chapter 11 Trustees and
Strategica Capital Corporation ("Strategica") was filed for an order to show
cause why certain individuals and entities, including PIC, should not be held in
civil contempt of court; for relief under Rule 70 of the Federal Rules of Civil
Procedure and Rule 7070 of the Federal Rules of Bankruptcy Procedure; and for
the entry of an order of criminal referral for criminal conduct of certain
individuals and entities, including PIC. The proceeding does not specify a
dollar amount of damages. The contempt motion was denied by the Bankruptcy
Court on November 4, 1998. Strategica filed a motion for rehearing on November
16, 1998, which was denied by the Bankruptcy Court on December 2, 1998.
Strategica filed a notice of appeal of the adverse ruling on December 11, 1998.
PIC filed a motion for attorneys' fees and costs on November 24, 1998, and a
hearing was conducted by the Bankruptcy Court on January 28, 1999 with respect
to PIC's motion. Strategica's appeal and PIC's motion for attorneys' fees and
costs are both currently pending. Strategica filed its brief in the appeal on
March 2, 1999; ATN and PIC filed their reply briefs in May and June 1999; and
Strategica filed its responses in August 1999. The District Court affirmed the
Bankruptcy Court's ruling on March 8, 2000, but denied PIC's motion to dismiss
and for sanctions. This affirmation of the Bankruptcy Court's decision was
followed by an appeal to the Eleventh Circuit Court of Appeals. On February 26,
2001, the Court of Appeals affirmed the Bankruptcy Court's denial of
Strategica's contempt motion. Strategica filed a petition for rehearing on
March 19, 2001. No assurance can be given as to the ultimate outcome of this
matter. No loss, if any, has been recorded in the consolidated financial
statements with respect to this matter.
F-36
A lawsuit was filed in Superior Court of the State of California on October 20,
1999 claiming conspiracy to defraud, fraud and deceit, and conversion against
several defendants, including ATN, in connection with an Internal Operator
Services Agreement between the plaintiffs and defendant Paramount International
Telecommunications, Inc. ("Paramount"). The Internal Operator Services
Agreement sets out that Paramount will provide (among other things) calling
services and billing and collection of the charges through local exchange
carriers, and Paramount would deduct agreed upon fees for its services and remit
the balance to the plaintiffs. Paramount allegedly contracted out operator and
billing services with ATN from May 1998 until present. In addition to other
claims against Paramount, the plaintiffs complain that Paramount and ATN
conspired to falsify call charge reports being sent to the plaintiffs by
underreporting the amount of charges billed to the end user and keeping the
monies generated therefrom, thereby damaging the plaintiffs for no less than
approximately $280,000. The plaintiffs also seek punitive damages in an
unspecified amount. ATN filed its response on January 4, 2000. This action was
dismissed on February 1, 2001.
On December 19, 2000, ATN filed an action in Texas state court against Telephone
Service Bureau, LLC ("TSB") and Network Operator Services, Inc. ("NOS"),
claiming breach of contract by TSB in connection with an Operator Services
Agreement between ATN and TSB. Specifically, ATN claimed that TSB breached the
Operator Service Agreement by refusing to pay ATN for accrued and unaccrued bad
debt "true-ups", which ATN estimates exceeds $2.9 million. As a result of the
"bad debt" impact on ATN's financial condition, ATN was forced to discontinue
business in late 1999, and PIC thereafter continued providing TSB access to a
switch and related operator services. Because of the known history of the call
traffic at issue, PIC requested that this particular traffic be handled
elsewhere, and is now being processed by NOS. ATN's application for writ of
attachment seeks attachment of advances made by PIC and NOS to TSB as a result
of TSB traffic now being processed by NOS (NOS was named in the suit solely to
bind it to the requested writ of attachment. ATN also requested injunctive
relief restraining and enjoining TSB from taking any actions which would cause
the call traffic to be re-routed or diverted and ordering PIC and NOS to deposit
that portion of the PIC and NOS advances constituting TSB's gross margin into
the registry of the court pending trial. The state court entered a temporary
restraining order on December 19, 2000 (effective through January 2, 2001),
directing that TSB refrain from re-routing any traffic away from PIC or NOS.
The temporary restraining order was later extended through January 16, 2001.
On January 2, 2001, TSB filed a special appearance and removed the case to U.S.
District Court. TSB simultaneously filed a motion to dismiss, claiming that the
case should be dismissed for lack of personal jurisdiction, or, alternatively,
improper venue. It was not until the filing of TSB's motion to dismiss that ATN
became aware of related suits filed on November 8, 2000, in the Chancery Court
for Knox County, Tennessee, styled Telephone Service Bureau vs. ATN
Communications, Inc. and Priority International Communications, Inc. (the
subject matter of which is also the Operator Services Agreement) and on January
2, 2001, in the Chancery Court for Knox County, Tennessee, styled Call
Management Systems, Inc. vs. ATN Communications, Inc. and Priority International
Communications, Inc. ATN has removed these cases to federal court in Tennessee.
TSB also filed a motion with the U.S. District Court in Texas to dissolve the
temporary restraining order on January 2, 2001. This District Court denied
TSB's motion to dissolve on January 5, 2001, and ordered the injunction hearing
be set for January 16, 2001. On January 9, 2001, ATN filed a motion to remand
the matter back to state court. NOS simultaneously filed a motion to dismiss.
Responses to TSB's motion to dismiss and NOS's January 9, 2001 motion have been
filed by ATN. On January 13, 2001, the parties reached a standstill agreement
to remain in effect pending a mediation to take place. The courts in Texas and
Tennessee have stayed all proceedings until a date not more than fourteen days
after completion of the mediation. PIC is currently in mediation regarding this
dispute. No assurance can be given at this time as to the outcome of this
matter.
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On November 16, 1998 the Company entered into an Employment Agreement with Paul
C. Tunink, Chief Financial Officer. The Employment Agreement had a term through
November 30, 1999 and renews automatically from year to year thereafter, unless
terminated by either party, and provides a base salary of not less than
$128,000. In addition, Mr. Tunink is eligible to participate in the Company's
bonus plan and other executive compensation plans. The Employment Agreement
contains a provision restricting competition with the Company for a period of
one year following termination of employment. Mr. Tunink's Employment Agreement
provides if his employment is terminated by the Company for any reason other
than cause, Mr. Tunink will be entitled to receive severance at an annual rate
of $128,000 for one year and continuation of health insurance coverage for one
year.
The Company has divested certain of its businesses during 2000. As a result of
such divestitures, there may be lawsuits, claims or proceedings instituted or
asserted against the Company related to the period that the businesses were owed
by the Company.
14. RELATED PARTY TRANSACTIONS
The Company conducts a significant amount of business with Berthel and other
affiliated entities. Berthel provided lease and other financing services,
including investment banking, to the Company.
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 February 28, 2001, the Company and Berthel are the
only parties to the Standstill Agreement and Berthel is the only member of the
creditors committee.
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 a monthly retainer and placement fees. The
Company paid to Berthel total fees of $536,000 during 2000. If any further
strategic transactions are completed, the Company will owe a success fee to
Berthel, depending on the price of the strategic transactions.
The Company borrowed money during 2000 from MCCIC, a company owned by Berthel
and another significant shareholder of the Company (see Note 8).
The Company also undertook the Debt Restructuring Plan in 2000 which included
restructuring certain debt and accrued interest with related parties (see Note
8).
On July 1, 1994, the Company entered into an agreement with a minority
shareholder to provide telecommunication services to hotels owned and managed by
Larken, Inc., a company 50% owned by a minority shareholder. Revenues of
$109,000, $412,000 and $464,000 were generated from such agreement for the
years ended December 31, 2000, 1999 and 1998, respectively. Further, the
Company had call processing receivables from the hotels included under the
agreement of $0, $55,000 and $247,000 at December 31, 2000, 1999 and 1998,
respectively. The agreement provided for a fixed payment of $30,000 per month
in commissions to be paid to the minority shareholder. This agreement was
terminated effective May 1, 2000.
F-38
The Company has also paid consulting expenses to a former member of the
Company's Board of Directors and had loans with related parties (see Note 7).
In January 2000, the Company entered into a letter agreement with Pirinate which
provided that the Company would pay Pirinate $15,000 a month in exchange for up
to six days per month of personal services from Eugene I. Davis. Under the
letter agreement, Mr. Davis serves as Interim Chairman of the Board and Interim
Chief Executive Officer of the Company. The letter agreement's term is for a
minimum of three months, and thereafter either party may terminate the letter
agreement, with or without cause, effective upon 60 days written notice. The
letter agreement also provides that the Company, upon approval by Mr. Tunink,
the Company's Chief Financial Officer, will pay Mr. Davis' out-of-pocket, travel
and other major expenses related to his services to the Company. The parties
agreed in May 2000 that Mr. Davis would serve as Chairman of the Board and Chief
Executive Officer of the Company.
On December 24, 2000, the Company signed a consulting services letter agreement
with Prentice Services LTD ("Prentice"), an entity controlled by Wayne Wright, a
member of the Company's Board of Directors. The agreement provides that Mr.
Wright will serve as President of PIC and will provide consulting services to
PIC, as directed by the Company's Chief Executive Officer. Prentice receives
$15,000 a month, plus out-of-pocket expenses, for these services. Also, at the
sole discretion of the Company's Board of Directors, Prentice may receive
additional success fees and bonuses. Either party may terminate this agreement,
with or without cause, effective upon six months prior written notice. The
Company paid $15,000 under this agreement in 2000. Mr. Wright owned 19.10% of
the Company's outstanding common stock at December 31, 2000.
A summary of transactions with related parties for the years ended December 31,
2000, 1999 and 1998 is as follows (dollars in thousands):
2000 1999 1998
Consulting expense - Prentice. . . . . . . . . . $ 15 $ - $ -
Consulting expense - former directors. . . . . . - 58 74
Consulting expense - Pirinate. . . . . . . . . . 181 - -
Interest expense on related party notes payable. 1,620 1,171 290
Interest expense on notes payable to Berthel . . 243 138 134
Interest expense on notes payable to MCCIC . . . 36 - -
Commissions to minority shareholder. . . . . . . 180 360 360
Commissions and related fees to Berthel. . . . . - 130 142
Investment banking and placement fees to Berthel 536 - -
Lease payments to Berthel. . . . . . . . . . . . 840 507 840
F-39
15. PROFIT SHARING PLAN
The Company has a profit sharing plan under Section 401(k) of the Internal
Revenue Code. Employees are eligible to participate in the plan after
completing three months of service. There were no contributions required and no
discretionary contributions made to the plan for the years ended December 31,
2000, 1999 and 1998.
Effective November 15, 2000, the Company terminated the plan due to low
participation and high administrative expenses.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value amounts disclosed below are based on estimates prepared by the
Company utilizing valuation methods appropriate in the circumstances.
Accounting principles generally accepted in the United States of America do not
require disclosure for lease contracts. The carrying amount for financial
instruments included among cash, receivables, notes receivable, notes payable,
and other short-term payables approximates their fair value because of the short
maturity of those instruments. The estimated fair value of other significant
financial instruments are based principally on discounted future cash flows at
rates commensurate with the credit and interest rate risk involved and the
timing of when the instruments were entered into.
The estimated fair values of the Company's other significant financial
instruments at December 31, 2000 and 1999 are as follows (dollars in thousands):
2000 1999
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
Long-term note receivable $ - $ - $ 1,000 $1,000
Long-term debt. . . . . . 4,882 - 2,866 2,450
17. BUSINESS SEGMENT INFORMATION
Previously the Company had three reportable segments. During 2000 the Company
sold its Incomex segment which is reported in the financial statements as a
discontinued operation (see Note 5). Also 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 MCC Telemanager(TM) was the primary service provided by the
MTS segment. On December 20, 2000, the Company sold certain assets which were
subject to the rental agreement to Telemanager.net. As a result of these
transactions, the MTS segment is no longer significant.
Accordingly, the Company's one reportable segment during 2000 was PIC. The
Company provides long-distance telecommunications services to hotels and
payphone owners in the United States through the PIC business unit. The
services have included, but were not limited to, credit card billing services,
automated collection and messaging delivery services, voice mail services and
telecommunications consulting. During 2000, PIC developed a revised operating
plan to stabilize the PIC business. As a result of this revised operating plan,
PIC became a reseller of call processing services and eliminated its live
operator center.
F-40
The accounting policies of the reportable segments are the same as those
described in Note 1. The Company evaluates the performance of its segments
based on income (loss) from operations. Summarized financial information
concerning the Company's reportable segments, net of intercompany eliminations,
is shown in the following table (dollars in thousands). The "Other" column
includes corporate related items and MTS for 2000.
PIC MTS OTHER TOTAL
2000:
Revenues. . . . . . . . . . . . . . . $ 8,246 $ - $ 191 $ 8,437
Loss from operations. . . . . . . . . (3,846) - (3,427) (7,273)
Total assets. . . . . . . . . . . . . 720 - 388 1,108
Depreciation and amortization expense 920 - 15 935
Capital expenditures. . . . . . . . . - - - -
1999:
Revenues. . . . . . . . . . . . . . . $23,150 $ 4,313 $ - $ 27,463
Loss from operations. . . . . . . . . (6,418) (1,642) (4,704) (12,764)
Total assets. . . . . . . . . . . . . 6,370 1,328 6,502 14,200
Depreciation and amortization expense 1,339 549 - 1,888
Capital expenditures. . . . . . . . . 561 110 - 671
1998:
Revenues. . . . . . . . . . . . . . . $20,804 $ 5,263 $ - $ 26,067
Income (loss) from operations . . . . 1,509 (793) (323) 393
Total assets. . . . . . . . . . . . . 11,079 3,542 1,783 16,404
Depreciation and amortization expense 903 772 - 1,675
Capital expenditures. . . . . . . . . 275 357 - 632
The Company operates in the United States.
18. AT&T COMMISSION AGREEMENT
Under its agreement with AT&T, the Company received monthly commissions based on
the number of calls made, bonuses of up to $400,000 based on the number of calls
processed during the year and monthly compliance incentive bonuses based on the
number of calls processed each month. The agreement included provisions for the
refund of the bonus payments should the Company terminate the agreement or fail
to comply with the agreement. AT&T was responsible for determining if the
Company was in compliance with certain standards, as set forth in the agreement.
AT&T reserved a number of grounds to terminate the agreement prior to its
expiration, with or without cause.
During 1998, the Company and AT&T agreed to terminate the agreement with an
effective date of October 15, 1998. The Company based this decision on the
declining volume and narrow margins of the AT&T business, and on the Company's
refocused business strategy. AT&T agreed to pay certain hotel commissions
otherwise payable by the Company and, as a result, the Company recorded a
one-time gain in the fourth quarter of 1998 of $453,396.
F-41
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2000 and 1999 (dollars in thousands except per share data).
These quarterly results have been reclassified from those previously reported in
form 10-Q's filed with the Securities and Exchange Commission so the results of
operations for Incomex that was sold effective June 30, 2000, are classified as
discontinued operations for all periods presented.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
2000
- ---------------------------------------------------
Revenues. . . . . . . . . . . . . . . . . . . . . . $ 2,437 $ 2,010 $ 2,093 $ 1,897 $ 8,437
Gross profit. . . . . . . . . . . . . . . . . . . . 804 152 542 1,414 2,912
Income (loss) from continuing operations. . . . . . (1,092) 2,436 (1,407) (3,454) (3,517)
Income (loss) before extraordinary item . . . . . . (2,206) 2,043 (1,407) (3,454) (5,024)
Net income (loss) . . . . . . . . . . . . . . . . . (2,206) 2,043 (1,407) (2,732) (4,302)
Basic and diluted earnings (loss) per common share
Income (loss) before extraordinary item . . . . . $ (0.21) $ 0.19 $ (0.14) $ (0.28) $ (0.48)
Net (income) loss . . . . . . . . . . . . . . . . (0.21) 0.19 (0.14) (0.22) (0.41)
The second quarter includes a $2.6 million charge for impairment of assets, a
$490,000 charge for the write-down of the Company's Investment in the AcNet
entities, and a $7.0 million gain recorded in connection with the Company's Debt
Restructuring Plan. The fourth quarter includes a $1.2 million charge for
impairment of property and equipment and intangible assets, a $500,000 charge
for the write-down of the Company's investment in the AcNet entities, a $893,000
credit for USF fees, an impairment charge of $1.6 million for the write-down of
the Company's investment in Actel, and a $722,000 extraordinary gain on the
extinguishment of debt.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
1999
- ---------------------------------------------------
Revenues. . . . . . . . . . . . . . . . . . . . . . $ 7,847 $ 6,249 $ 6,333 $ 7,034 $ 27,463
Gross profit (loss) . . . . . . . . . . . . . . . . 1,807 1,301 1,256 (2,897) 1,467
Loss from continuing operations . . . . . . . . . . (511) (1,351) (1,234) (13,345) (16,441)
Net income (loss) . . . . . . . . . . . . . . . . . 84 (863) (1,604) (16,015) (18,398)
Basic and diluted earnings (loss) per common share
Net income (loss) . . . . . . . . . . . . . . . . $ - $ (0.09) $ (0.16) $ (1.53) $ (1.79)
The fourth quarter includes a $1.7 million charge for USF fees, a $3.3 million
charge for impairment of assets, a $3.7 million charge for the write-down of the
Company's investment in the AcNet entities and $4.1 million of bad debt expense
in excess of historical amounts primarily relating to collection issues for one
type of call processing service.
Per share information is calculated for each quarterly and annual period using
average outstanding shares for the period. Therefore, the sum of the quarterly
per share amounts will not necessarily equal the annual per share amounts
presented.
* * * * *
F-42
SCHEDULE II
MURDOCK COMMUNICATIONS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2000, 1999, 1998
Balance at Net Charges Balance at
Beginning to Costs End of
Description of Year and Expenses Deductions (1) Year
- ---------------------------------------------- ----------- ------------ -------------- -----------
Year ended December 31, 2000
Allowance for doubtful accounts. . . . . . . $ 3,127 98 3,000 $ 225
Year ended December 31, 1999
Allowance for doubtful accounts. . . . . . . $ 654 7,789 5,316 $ 3,127
Year ended December 31, 1998
Allowance for doubtful accounts. . . . . . . $ 377 3,321 3,044 $ 654
Note (1) Uncollectible receivable written off
F-43