<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
/ / EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission File Number 000-21463
------------------
MURDOCK COMMUNICATIONS CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Iowa 42-1337746
------------------------------ ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1112 29th Avenue S.W., Cedar Rapids, Iowa 52404
-----------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: 319-362-6900
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X*
--- ----
*The Registrant became subject to the filing requirements of sections 13 or
15(d) of the Securities Exchange Act of 1934 on October 21, 1996.
On October 25, 1996, there were outstanding 3,925,351 shares of the
Registrant's no par value common stock.
<PAGE> 2
MURDOCK COMMUNICATIONS CORPORATION
FORM 10-QSB
SEPTEMBER 30, 1996
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Balance Sheet as of September 30, 1996 and December 31, 1995
(Unaudited)...................................................... 3
Statements of Income for the Three Months and Nine Months Ended
September 30, 1996 and September 30, 1995 (Unaudited)............ 4
Statements of Cash Flows for the Nine Months Ended September 30,
1996 and September 30, 1995 (Unaudited).......................... 5
Notes to Financial Statements (Unaudited)........................ 6
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations............................................ 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 19
Item 2. Changes in Securities............................................. 19
Item 3. Defaults Upon Senior Securities................................... 20
Item 4. Submission of Matters to a Vote of Security Holders............... 20
Item 5. Other Information................................................. 21
Item 6. Exhibits and Reports on Form 8-K.................................. 21
Signatures........................................................ 22
</TABLE>
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
MURDOCK COMMUNICATIONS CORPORATION
Balance Sheets
<TABLE>
<CAPTION>
September 30, 1996 * December 31, 1995 *
------------------ -----------------
(Amounts in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ - $ 159
Accounts receivable, less allowance for doubtful accounts 729 547
AT&T commission receivable 1,000 750
Inventory 51 51
Prepaid expenses 335 73
-------- ----------
Total current assets 2,115 1,580
-------- ----------
PROPERTY AND EQUIPMENT:
Land and building 429 429
Telecommunications equipment 1,506 1,156
Furniture and equipment 216 209
Vehicles 28 29
-------- ----------
2,179 1,823
Accumulated depreciation and amortization (1,086) (870)
-------- ----------
1,093 953
Telecommunications equipment under capital lease, net of accumulated 2,593 3,632
amortization -------- ----------
Property and equipment, net 3,686 4,585
-------- ----------
OTHER ASSETS:
Leased equipment deposits 13 6
Cost of purchased equipment location contracts, net of accumulated 356 991
amortization
Technology license from a related party, net of accumulated amortization 263 342
Direct financing lease receivable, less unearned income 106 -
Other 114 -
-------- ----------
Total other assets 852 1,339
-------- ----------
Total $ 6,653 $ 7,504
======== ==========
LIABILITIES, REDEEMABLE SECURITIES AND COMMON SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable, including $750,000 to a related party $ 2,190 $ 1,225
Outstanding checks in excess of cash balances 364 -
Accounts payable 847 777
Accrued expenses 892 629
Current portion of capital lease obligations principally with a related party 1,674 1,353
Current portion of long-term debt with related parties 35 315
Current portion of long-term debt, others 15 14
-------- ----------
Total current liabilities 6,017 4,313
LONG-TERM LIABILITIES:
Capital lease obligations principally with a related party, less current 4,072 4,129
portion
Long-term debt with related parties, less current portion 1,085 956
Long-term debt, others, less current portion 282 294
Deferred income 185 245
Deferred gain related to a related party restructuring - 1,800
-------- ----------
Total liabilities 11,641 11,737
-------- ----------
REDEEMABLE SECURITIES:
10% Series A Redeemable Preferred Stock, no par or stated value
Authorized 45,000 shares
Issued and outstanding: 22,650 2,292 2,001
Common stock put warrants 14,706 warrants held by a related party 162 162
-------- ----------
Total redeemable securities 2,454 2,163
-------- ----------
COMMON SHAREHOLDERS' DEFICIT:
Common stock, no par or stated value
Authorized 7,500,000 shares
Issued and outstanding 1,168,986 shares 194 194
Common stock warrants
Authorized 45,000 detachable warrants
Issued and outstanding: 22,650 639 559
Additional paid-in-capital 124 124
Accumulated deficit (8,399) (7,273)
-------- ----------
Total common shareholders' deficit (7,442) (6,396)
-------- ----------
Total $ 6,653 $ 7,504
======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
*The balance sheet as of September 30, 1996 is unaudited. The balance
sheet as of December 31,1995, is derived from audited financial statements.
3
<PAGE> 4
MURDOCK COMMUNICATIONS CORPORATION
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
-------------- ------------- ------------- -------------
(amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C>
REVENUES:
Call processing revenues $ 1,367 $ 1,620 $ 3,807 $ 5,680
AT&T commissions 438 - 2,038 500
Sales of equipment inventory 98 82 155 347
Recognition of gains deferred from equipment
sales with a related party 38 68 110 220
Other income 2 - 2 58
---------- ---------- ---------- ----------
Total revenues 1,943 1,770 6,112 6,805
---------- ---------- ---------- ----------
COST OF SALES:
Call processing 1,452 1,076 3,603 3,945
Equipment inventory 16 68 27 236
---------- ---------- ---------- ----------
Total cost of sales 1,468 1,144 3,630 4,181
---------- ---------- ---------- ----------
GROSS OPERATING PROFIT 475 626 2,482 2,624
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 723 590 1,947 1,759
DEPRECIATION AND AMORTIZATION EXPENSE 461 590 1,513 1,728
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (709) (554) (978) (863)
INTEREST EXPENSE:
Interest on capital leases, principally to a
related party 179 238 576 631
Other interest expense 299 35 558 255
---------- ---------- ---------- ----------
Total interest expense 478 273 1,134 886
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (1,187) (827) (2,112) (1,749)
INCOME TAXES - - 8 -
---------- ---------- ---------- ----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (1,187) (827) (2,120) (1,749)
EXTRAORDINARY GAIN ON RELATED PARTY
RESTRUCTURING - - 1,084 -
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (1,187) $ (827) $ (1,036) $ (1,749)
---------- ---------- ---------- ----------
PRO FORMA NET INCOME (LOSS) $ (1,173) $ (820) $ (1,003) $ (1,725)
---------- ---------- ---------- ----------
PRO FORMA NET INCOME (LOSS) PER
COMMON AND COMMON EQUIVALENT SHARE
Income before extraordinary item $ (0.54) $ (0.38) $ (0.96) $ (0.79)
Extraordinary item - - 0.50 -
---------- ---------- ---------- ----------
Net income (loss) $ (0.54) $ (0.38) $ (0.46) $ (0.79)
PRO FORMA COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 2,172,858 2,172,858 2,172,858 2,172,858
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
MURDOCK COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss): $ (1,036) $ (1,749)
Adjustments to reconcile net income (loss)
to net cash flows from operating activities:
Extraordinary gain on related party restructuring (1,084) -
Depreciation and amortization 1,513 1,728
Noncash interest expense 190 119
Write-off of deferred lease restructuring costs - -
Write-off of deposits - -
Recognition of deferred income (110) (220)
Changes in operating assets and liabilities, excluding
the effects of an acquisition:
Receivables (432) 1,427
Inventory (1) 14
Prepaid expenses (262) 11
Outstanding checks in excess of cash balances 364 -
Accounts payable 70 (148)
Accrued expenses 263 455
Deferred income 50 17
-------- --------
Net cash flows from operating activities (475) 1,654
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment (488) (259)
Proceeds from sales of property and equipment 9 -
Purchase of equipment leased to
others under direct finance lease (109) -
Cash acquired with acquisition - 2
-------- --------
Net cash flows from investing activities (588) (257)
-------- --------
FINANCING ACTIVITIES:
Payments on capital lease obligations (274) (721)
Proceeds from capital lease obligations 489 240
Borrowings on notes payable 1,890 475
Payments on notes payable (925) -
Borrowings of long-term debt with related parties 179 -
Payments on long-term debt with related parties (330) (1,315)
Payments on long-term debt, others (10) (9)
Payment of underwriter and offering expenses (115) -
Dividends paid on 10% Series A Redeemable Preferred Stock - (129)
Repurchase of 10% Series A Redeemable Preferred Stock - (92)
and detachable common stock warrants - -
-------- --------
Net cash flows from financing activities 904 (1,551)
-------- --------
NET INCREASE (DECREASE) IN CASH (159) (154)
CASH AT BEGINNING OF PERIOD 159 157
-------- --------
CASH AT END OF PERIOD $ - $ 3
======== ========
SUPPLEMENTAL DISCLOSURE
Cash paid during the period for interest $ 944 $ 767
Cash paid during the period for income taxes $ 8 $ 0
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
MURDOCK COMMUNICATIONS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Unaudited Financial Statements
The accompanying unaudited interim financial statements have been prepared
by the Company in accordance with generally accepted accounting principles for
interim financial reporting and the regulations of the Securities and Exchange
Commission for quarterly reporting. Accordingly, they do not include all
information and footnotes required by generally accepted accounting principles
for complete financial information. The accompanying unaudited interim
financial statements reflect all adjustments which, in the opinion of
management, are necessary to reflect a fair presentation of the financial
position and results of operation of Murdock Communications Corporation for the
interim periods presented. All adjustments, in the opinion of management, are
of a normal and recurring nature. For further information, refer to the
financial statements and footnotes thereto for the year ended December, 1995,
and the six months ended June 30, 1996, included in the Company's Registration
Statement on Form SB-2, Registration No. 333-05422C, filed with the Securities
and Exchange Commission on October 16, 1996.
Pro Forma Per Share Information
Due to the conversion of the 10% Series A Redeemable Preferred Stock and
related Common Stock warrants and of certain shareholder notes upon closing of
the Company's initial public offering, historical per share information is not
considered relevant. The Company's pro forma net loss per common and common
equivalent share is based on the weighted average number of shares of common
and common equivalent shares, using the treasury stock method and an offering
price of $5.00 per share, outstanding during the periods presented and the
shares issuable upon the conversion of the 10% Series A Redeemable Preferred
Stock and related Common Stock warrants and of certain shareholder notes.
Equivalent shares in the form of stock options and other warrants are excluded
from the calculations during loss periods since they are antidilutive.
Retroactive restatement has been made in the financial statements to all share
and per share data for a 15.4456 for 1 stock split.
6
<PAGE> 7
Debt
As previously reported, the Company entered into a bridge financing
arrangement with its underwriter for up to $650,000 of 12% subordinated notes.
The notes were issued in tranches of $400,000, and $250,000. The first tranche
of notes of $400,000 was automatically converted into the Units, each
consisting of two shares of common stock and one common stock purchase warrant
("Units") at a conversion ratio equal to 50% of the initial public offering
price effective upon completion of the initial public offering ("the
Offering"). The second tranche of notes was issued with warrants to purchase
the number of Units equal to the principal amount of the notes divided by 60%
of the initial public offering price. In July 1996, the Company borrowed
$400,000 under this arrangement. The Company will record additional interest
expense over the term of the note in the amount of $80,000 based upon the 10%
greater discount of the first tranche over the discount reflected in the
exercise price of the warrants issued in the second tranche of the bridge
financing. In August 1995, the Company borrowed the remaining $250,000 under
the second tranche of bridge financing and issued a warrant for 41,667 units at
an exercise price of $6.00 per unit.
In September 1996, the Company borrowed $140,000 under a $150,000 revolving
credit facility with a financial institution due in October 1996.
In September 1996, the Company borrowed $350,000 under a promissory note issued
by a financial institution, with the interest payable at 1.5% over the prime
rate and with all principal and accrued interest due on demand or, if no demand
is made, in March 1997.
Income Taxes
At December 31, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $2 million to use to offset future
taxable income. For the nine months ending September 30, 1996, the Company had
a pretax loss of $1 million. A valuation allowance for the entire balance of
deferred tax assets has been recorded because of uncertainty over their future
realization.
The Company has recorded current income tax expense in the amount of $8,000.
This relates primarily to certain state income taxes.
Contingencies
As previously disclosed, the Company received a notice and demand dated
September 20, 1996 (the "Demand") from the trustee for the Value-Added
Communications Litigation Trust, as successor-in-interest to the bankruptcy
estate of Value-Added Communications, Inc. (collectively, "VAC"), relating to
revenues
7
<PAGE> 8
received by the Company for providing telecommunications services to
the hotels managed by Larken. The Demand alleges that all revenues received by
the Company for providing telecommunications services to the Larken managed
hotels constitute avoidable transfers under the federal Bankruptcy Code and
demands payment to VAC of all such amounts. The amount of revenues subject to
the Demand is not specified. The Company generated revenues of $591,725 for
the fiscal year ended December 31, 1995 in connection with such
telecommunications services, and paid an aggregate of $432,689 to Mr. Cahill
during 1995 and the first six months of 1996 for commissions accrued during
1995 in connection with such revenues. The Company believes that the Demand is
without merit, that it has meritorious defenses to VAC's allegations as set
forth in the Demand and that a loss with respect to this matter is not
probable, primarily because the Company's agreements to provide
telecommunications services to Larken were made by the Company in good faith,
for value and without knowledge as to the alleged avoidable nature of such
agreements. In addition, Larken and Mr. Cahill have acknowledged that the VAC
matter is covered by the Larken indemnification agreement and Mr. Cahill's
guarantee, and that such indemnification agreement with Larken will cover any
losses, costs or expenses incurred by the Company in connections with this
threatened claim. Pursuant to the indemnification agreement, Larken has
assumed the defense of the VAC claims. VAC's attorney sent a second
threatening letter, but has not filed a lawsuit. Nonetheless, such a lawsuit
could be filed at any time. Pursuant to the indemnification agreement, Larken
is obligated to defend any such lawsuit and indemnify the Company for any
costs, damages or expenses relating to the lawsuit, including attorney's fees.
The indemnification agreement requires Larken to keep the Company informed
regarding the status of the litigation, if any. The Company intends to
actively monitor this matter, and any litigation that might be commenced, to be
sure that the Company's interests are being adequately represented by Larken
and the attorneys retained by Larken on the Company's behalf pursuant to the
indemnification agreement. The Company has not made an independent
investigation of Mr. Cahill's financial position or net worth, although Mr.
Cahill has previously represented to the Company that he is an accredited
investor as defined in Regulation D under the Securities Act of 1933, with net
worth in excess of $1 million. The outcome of this matter cannot presently be
determined and no assurance can be given that the Company will not incur
liability or expenses in connection with the allegations contained in the
Demand. Also, no assurance can be given that either Larken or Mr. Cahill will
have sufficient assets to meet their respective obligations in the event that
the Company incurs liability pursuant to this matter. No provisions for any
loss that may result upon the resolution of this matter has been made in the
financial statements.
Initial Public Offering
On October 21,1996, the Company completed an initial public offering of
the Company's common stock and common stock warrants. To date, 800,000
8
<PAGE> 9
unit comprised of two shares of common stock and one warrant to purchase common
stock have been sold. The Company has received proceeds as follows:
<TABLE>
<S> <C>
Sale of 800,000 Units $8,008,000
Estimated Expenses to Date 1,432,512
----------
Net Proceeds to Company $6,575,488
==========
</TABLE>
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following is a discussion of the Company's financial condition, results of
operations and capital resources. The discussion and analysis should be read
in conjunction with the Company's financial statements and notes thereto
included elsewhere within.
10
<PAGE> 11
RESULTS OF OPERATIONS
Three Months ending September 30, 1996 and 1995
The following table sets forth statements of operations items and the
percentages that such items bear to revenues:
<TABLE>
<CAPTION>
Three Months Ending
September 30,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenues 100% 100%
Cost of sales 76% 65%
Selling, general and administrative 37% 33%
Depreciation and amortization 24% 33%
------ ------
Total operating expenses 136% 131%
------ ------
Operating income (loss) -36% -31%
Interest expense 25% 15%
Income taxes 0% 0%
Extraordinary gain 0% 0%
------ ------
Net income (loss) -61% -47%
====== ======
</TABLE>
REVENUES. Call processing revenues decreased to $1.4 million for the three
months ended September 30, 1996 from $1.6 million for the three months ended
September 30, 1995, representing a decrease of $.2 million, or 13%. This
decrease was primarily caused by the decrease in OSP calls carried by the
Company as it converted customers into the Lodging Partnership program with
AT&T because the Company receives a commission on a per call basis under the
Lodging Partnership rather than recording the gross amount of each phone call
based on the phone call's duration. OSP revenues decreased to $300,000 for the
three months ended September 30, 1996, from $400,000 for the three months ended
September 30, 1995, representing a decrease of $100,000 or 25%. OSP revenues
decreased because the Company moved hotel and motel rooms from its OSP services
to the Lodging Partnership program with AT&T. One-plus revenues decreased to
$214,000 for the three months ended September 30, 1996 from $247,000 for the
three months ended September 30, 1995, representing a decrease of $33,000 or
13%. The decrease was attributable to a decrease in the number of hotel or
motel properties provided one-plus services, from 38 to 22, as a result of the
reduction in the number of properties owned by Larken, the hotel management
company that purchases the Company's one-plus services. The Company believes
that the movement of its hotel and motel customers from OSP services to the
Lodging Partnership will provide more consistent recurring revenues over a
longer period of time. However, the Company's experience with the new payment
criteria is
11
<PAGE> 12
limited, and no assurance can be given that the Company will be able to
successfully replace nonrecurring signing bonuses with revenues derived from
monthly bonuses based on call volume. Furthermore, the Company to date has not
been profitable during its transition from OSP services to the Lodging
Partnership and no assurance can be given that this business will become
profitable.
Calling commissions from AT&T decreased to $831,000 for the three months
ended September 30, 1996 from $934,000 for the three months ended September 30,
1995, a decrease of $103,000 or 11%. This decrease was caused primarily by a
reduction in call volume per room caused by dial around calling such as
1-800-CALL ATT. The Company does not expect to see a significant increase in
dial around traffic. Signing commissions and bonuses from AT&T increased to
$438,000 for the three months ended September 30, 1996 from $0 for the three
months ended September 30, 1995, an increase of $438,000 . This increase was
caused by the addition of monthly bonuses pursuant to the AT&T Agreement.
The Company provided services to a total of 105,000 hotel and motel rooms
as of September 30, 1996, as compared to 90,000 hotel and motel rooms as of
September 30, 1995.
Equipment sales and rentals generated a net profit of $82,000 for the
three months ended September 30, 1996, and a net profit of $14,000 for the
three months ended September 30, 1995, for an increase of $68,000 or 83%.
COST OF SALES. Cost of sales increased to $1.5 million for the three
months ended September 30, 1996, from $1.1 million for the three months ended
September 30, 1995, an increase of $400,000 or 36%. This increase was
primarily due to an increase in the cost of commissions resulting from the
Company's decision to move hotels and motels to the Lodging Partnership.
Commissions paid to hotels and motels increased to $1.2 million for the three
months ended September 30, 1996 from $850,000 for the three months ended
September 30, 1995, and increased as a percent of revenues to 60% from 49 % in
the corresponding prior period. Commissions paid to hotels and motels are
based on the gross profits derived with respect to that property regardless of
whether services are provided through OSP or the Lodging Partnership. Cost of
sales as a percentage of revenues increased to 75% for the three months ended
September 30, 1996, from 65% for the three months ended September 30, 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, increased to $723,000 for the three months ended
September 30, 1996, from $590,000 for the three months ended September 30,
1995, an increase of $133,000 or 22%. This increase is due primarily to normal
salary increases and the addition of four full time employees and establishing
an office and warehouse in Dallas, Texas. Selling, general and administrative
expenses include expenses incurred as the Company expands its customer base.
12
<PAGE> 13
Adding new customers to the Company's base generally requires up-front selling
expenses and equipment installation expenses which may vary significantly
depending on the customer.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased to
$461,000 for the three months ended September 30, 1996 from $590,000 for the
three months ended September 30, 1995. This was a result of a reduction in
purchase price of assets associated with the recognition of a deferred gain on
restructuring of debt which resulted in a reduction in carrying value of
$500,000 to the cost of purchased equipment location contracts. During 1995,
the Company adopted Statements of Accounting Standards No. 121 "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
Adoption of this standard resulted in the reduction in carrying amount of idle
assets in the amount of $400,000.
INTEREST EXPENSE. Interest expense increased to $478,000 for the three
months ended September 30, 1996, from $273,000 for the three months ended
September 30, 1995, an increase of $205,000 or 43%. The increase is
attributable to additional borrowings in the form of notes payable and new
lease obligations with Berthel, bridge financing arranged through the
underwriter and the corresponding discounts and fees, and additional notes from
financial institutions.
Nine Months ending September 30, 1996 and 1995
The following table sets forth statements of operations items and the
percentages that such items bear to revenues:
<TABLE>
<CAPTION>
Nine Months Ending
--------------------
September 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Revenues 100% 100%
Cost of sales 59% 61%
Selling, general and administrative 32% 26%
Depreciation and amortization 25% 25%
----- -----
Total operating expenses 116% 112%
----- -----
Operating income (loss) -16% -12%
Interest expense 19% 13%
Income taxes 0% 0%
Extraordinary gain 18% 0%
----- -----
Net income (loss) -17% -25%
===== =====
</TABLE>
REVENUES. Call processing revenues decreased to $3.8 million for the nine
months ended September
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<PAGE> 14
30, 1996 from $5.7 million for the nine months ended September 30, 1995,
representing a decrease of $1.9 million, or 33%. This decrease was primarily
caused by the decrease in OSP calls carried by the Company as it converted
customers into the Lodging Partnership program with AT&T because the Company
receives a commission on a per call basis under the Lodging Partnership rather
than recording the gross amount of the phone call based on the phone calls'
duration. OSP revenues decreased to $932,000 for the nine months ended
September 30, 1996, from $2.9 million for the nine months ended September 30,
1995, representing a decrease of $2 million or 69%. OSP revenues decreased
because the Company moved hotel and motel rooms from its OSP services to the
Lodging Partnership program with AT&T. One-plus revenues decreased to $628,000
for the nine months ended September 30, 1996 from $818,000 for the nine months
ended September 30, 1995, representing a decrease of $190,000 or 23%. The
decrease was attributable to a decrease in the number of hotel or motel
properties provided one-plus services, from 38 to 22, as a result of the
reduction in the number of properties owned by Larken, the hotel management
company that purchases the Company's one-plus services. The Company believes
that the movement of its hotel and motel customers from OSP services to the
Lodging Partnership will provide more consistent recurring revenues over a
longer period of time. However, the Company's experience with the new payment
criteria is limited, and no assurance can be given that the Company will be able
to successfully replace nonrecurring signing bonuses with revenues derived from
monthly bonuses based on call volume. Furthermore, the Company to date has not
been profitable during its transition from OSP services to the Lodging
Partnership and no assurance can be given that this business will become
profitable.
Calling commissions from AT&T increased to $2.2 million for the nine
months ended June 30, 1996 from $1.9 million for the nine months ended June 30,
1995, an increase of $300,000 or 16%. Signing commissions and bonuses from
AT&T increased to $2.0 million for the nine months ended June 30, 1996 from
$500,000 for the nine months ended June 30, 1995, an increase of $1.5 million
or 300%. This increase was caused by the addition of monthly bonuses pursuant
to the AT&T Agreement of $1.0 million and an increase in signing bonuses of
$500,000, including earning a single, nonrecurring guest room attainment bonus
of $1 million for placing more than 100,000 rooms in the Lodging Partnership
program prior to July 1, 1996. In subsequent quarters, the Company expects to
earn commissions and bonuses under the Lodging Partnership program based
primarily on the volume of calling traffic rather than on the placement of
hotel rooms in the Lodging Partnership program. The Company believes that this
change in the criteria for payment under the AT&T Agreement will even out
revenues and provide the opportunity for increased revenues for the term of a
given contract with a hotel or motel in the Lodging Partnership based on
historical occupancy percentages and guest calling patterns.
14
<PAGE> 15
The Company provided services to a total of 105,000 hotel and motel rooms
as of September 30, 1996, as compared to 90,000 hotel and motel rooms as of
September 30, 1995.
Equipment sales and rentals generated a net profit of $128,000 for the
nine months ended September 30, 1996, and a net profit of $111,000 for the nine
months ended September 30, 1995, for an increase of $17,000 or 15%.
COST OF SALES. Cost of sales decreased to $3.6 million for the nine
months ended September 30, 1996, from $3.9 million for the nine months ended
September 30, 1995, a decrease of $300,000 or 8%. Cost of transmission
associated with providing OSP services and 1+ services decreased to $726,000
for the nine months ended September 30, 1996, from $992,000 for the nine months
ended September 30, 1995, for a decrease of $266,000 or a decrease of 27%.
Other expenses of providing OSP services decreased to $59,000 for the nine
months ended September 30, 1996, from $221,000 for the nine months ended
September 30, 1995, for a decrease of $162,000 or a decrease of 73%. These
decreases were offset by an increase in the cost of commissions resulting from
the Company's decision to move hotels and motels to the Lodging Partnership.
Commissions paid to hotels and motels increased to $2.8 million for the nine
months ended September 30, 1996 from $2.6 million for the nine months ended
September 30, 1995, and increased as a percent of revenues to 46% from 38% in
the corresponding prior period. Commissions paid to hotels and motels are
based on the gross profits derived with respect to that property regardless of
whether services are provided through OSP or the Lodging Partnership. Cost of
sales as a percentage of revenues increased to 59% for the nine months ended
September 30, 1996, from 58% for the nine months ended September 30, 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, increased to $1.9 million for the nine months ended
September 30, 1996, from $1.8 million for the nine months ended September 30,
1995, an increase of $100,000 or 6%. This increase is due primarily to normal
salary increases and the addition of four full time employees and establishing
an office and warehouse in Dallas, Texas. Selling, general and administrative
expenses include expenses incurred as the Company expands its customer base.
Adding new customers to the Company's base generally requires up-front selling
expenses and equipment installation expenses which may vary significantly
depending on the customer.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased to
$1.5 million for the nine months ended September 30, 1996 from $1.7 for the
nine months ended September 30, 1995. This was a result of a reduction in
purchase price of assets associated with the recognition of a deferred gain on
restructuring of debt which resulted in a reduction in carrying value of
$500,000 to the cost of purchased equipment location contracts. This gain was
recognized June 29, 1996.
15
<PAGE> 16
During 1995, the Company adopted Statements of Accounting Standards No. 121
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of". Adoption of this standard resulted in the reduction in carrying
amount of idle assets in the amount of $400,000.
INTEREST EXPENSE. Interest expense increased to $1.1 million for the nine
months ended September 30, 1996, from $886,000 for the nine months ended
September 30, 1995, an increase of $214,000 or 24%. The increase is
attributable to additional borrowings in the form of notes payable and new
lease obligations with Berthel, bridge financing arranged through the
underwriter and the corresponding discounts and fees, and additional notes from
financial institutions.
EXTRAORDINARY GAIN. In 1996, the Company repaid certain obligations to
Intellicall, Inc. resulting in an extraordinary gain on debt restructuring on
$1.1 million. This was a one time gain resulting from a 1994 restructuring of
debt and the purchase price of a group of assets purchased from Intellicall,
Inc. by the Company. The gain was deferred pending payment of all amounts due
under a note issued in connection with the restructuring. This note was repaid
on June 29, 1996.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company's current liabilities of $6.0 million
exceeded current assets of $2.1 million resulting in a working capital deficit
of $3.9 million. During the nine month period ended September 30, 1996, the
Company used $475,000 in cash for operating activities, and used $588,000 in
investing activities, primarily the purchase of equipment. The Company
received proceeds from new debt and capital lease financing of $2.6 million and
repaid borrowings on notes payable and made payments on capital lease
obligations of $1.5 million, and paid underwriting expenses of $115,000,
resulting in a decrease in available cash of $159,000 for the nine months ended
September 30, 1996.
The Company's principal sources of capital to date have been cash flow
from its operations, private offerings of debt and equity securities and lease
financing arrangements with Berthel, Fisher & Co. ("Berthel") to purchase
telecommunications equipment. The total amount of lease financing with Berthel
at September 30, 1996 was $5.7 million. The Company currently makes monthly
lease payments of approximately $144,000 in the aggregate and anticipates that
it will be obligated to make monthly lease payments to Berthel of approximately
$83,000 in the aggregate after the offering, pursuant to these lease financing
arrangements. Berthel also holds demand notes issued by the Company totaling
$750,000, collateralized by $1,750,000 of bonus payments to be received by the
Company under the AT&T Agreement. Berthel agreed, effective upon the
completion of the Company's Offering and the buy out of certain leases with
Berthel affiliates, to convert these demand notes into a 48 month term note,
16
<PAGE> 17
collateralized by certain equipment and contracts owned by the Company with a
value of $750,000 as determined by Berthel, and to release the $1,750,000 of
bonus payments as collateral for this obligation.
The Company has also borrowed $250,000 under a revolving credit facility
with Firstar Bank Iowa ("Firstar") ending December 1, 1996 and $140,000 under a
$150,000 revolving credit facility with Firstar ending October 17, 1996.
Although the Company currently does not have any borrowing capacity under the
Firstar credit facility ending on December 1, 1996, the Company plans to use
$250,000 of the proceeds of the Offering to repay indebtedness under this
facility. The Company borrowed $350,000 from a financial institution under a
promissory note, with interest payable at 1.5% over the applicable prime rate,
and with the principal and all accred but unpaid interest payable on demand or,
if no demand is made, on March 5, 1997. The Company used part of the proceeds
of this note to acquire certain of the assets of PowerTel of Delaware, Inc.
In July 1996, the Company completed the offer and sale of $400,000
aggregate principal amount of 12% Convertible Promissory Notes ("Convertible
Bridge Notes") as a private placement. The Convertible Bridge Notes were
automatically be converted into 80,000 Units effective upon the completion of
the Offering. The Company paid commissions of $24,000 to two placement agents
in connection with the offering of the Convertible Bridge Notes, and the
Company received net proceeds of approximately $372,000.
In August 1996, the Company sold a 12% promissory note in the principal
amount of $250,000 along with the associated warrant to purchase 41,667 Units
(the "Bridge Warrant"). The Bridge Warrant is exercisable at any time until
its expiration on August 5, 1998. The exercise price of the Bridge Warrant is
$6.00 per Unit.
On October 21, 1996, the Company completed the Offering. To date, 800,000
units each consisting of two shares of common stock and one warrant to purchase
common stock have been sold, and the Company has received net proceeds of
$6,575,488.
The Company believes that the net proceeds from the offering, together
with existing capital and anticipated funds from operations, will be sufficient
to meet its anticipated cash needs for working capital and capital expenditures
for the foreseeable future.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements and is subject to
certain risks and uncertainties that could cause actual future results and
developments to differ materially from those currently projected. Such
statements include
17
<PAGE> 18
statements identified as based on the Company's belief or expectation. Such
risks and uncertainties include, but are not limited to, general economic
conditions in the geographical areas and markets that the Company is
targeting for its services, the availability of adequate equipment to meet the
Company's marketing plans and customer demand, the successful development,
testing and deployment of new technology, access to sufficient debt or equity
capital to meet the Company's operating and financial needs, and the quality and
price of similar or comparable communications services offered by the Company's
competitors.
18
<PAGE> 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not a party to any material pending legal proceedings.
Item 2. Changes in Securities.
The Company made the following sales of unregistered securities
during the three month period ended September 30, 1996.
In July 1996, the Company solicited from each holder of the
Company's 10% Series A Preferred Stock (the "Preferred Stock")
irrevocable offers for the Company to exchange, effective as of the date
of the closing of the offering, shares of the Company's Common Stock for
all of such holder's shares of Preferred Stock and the warrants issued to
such holder in connection therewith. The number of shares of Common
Stock that a holder of Preferred Stock will be entitled to receive is
equal to (a) the number of shares of Preferred Stock held by such holder
multiplied by (b) (i) the applicable redemption price of the Preferred
Stock on the date of the closing of the offering divided by (ii) 35% of
the price per unit of the units (the "Units") offered in the offering
made pursuant to this Registration Statement (the "Public Offering").
The Company will not receive any proceeds with respect to this exchange
offer, and will not pay any fee or commission with respect to the
solicitation of offers to exchange. The Company is conducting the
exchange offer as an offering exempt from registration under the
Securities Act of 1933, as amended (the "Act"), pursuant to section 3
(a) (9) of the Act. As of the date of the Registration Statement, the
Company has received offers to exchange from the holders of all of the
outstanding shares of Preferred Stock.
In July 1996, the Company completed the first tranche of a bridge
financing as a private placement exempt from the registration
requirements of the Act pursuant to Rule 506 of Regulation D under the
Act. The first tranche of the bridge financing consisted of $400,000
aggregate principal amount of 12% convertible promissory notes (the
"Conversion Bridge Notes"). The Convertible Bridge Notes will
automatically be converted into Units of $5.00 per Unit effective upon
the completion of the Public Offering. The Convertible Bridge Notes were
sold to 11 purchasers. Each purchaser has certified to the Company that
he or she is an "accredited investor" within the meaning of Rule 501 (a)
of Regulation D under the Act. The Company paid commissions of $24,000
to two placement agents in connection with the offering of the Convertible
Bridge Notes, and the Company received net proceeds of approximately
$372,000.
19
<PAGE> 20
In August 1996, the Company completed the second tranche of the
bridge financing as a private placement exempt from the registration
requirements of the Act pursuant to Rule 506 of Regulation D under the
Act. The second tranche of the bridge financing consisted of the sale of
a 13% promissory note in the principal amount of $250,000 to one
purchaser along with an associated warrant to purchase 41,667 Units (the
"Bridge Warrant"). The Bridge Warrant is exercisable at any time after
the completion of this offering until its expiration on August 5, 1998.
The exercise price of the Bridge Warrant is $6.00 per Unit. The
purchaser has certified to the Company that he is an "accredited
investor" within the meaning of Rule 501 (a) of Regulation D under the
Act. The Company paid commissions of $15,000 to two placement agents in
connection with the offering of the Note and the Bridge Warrant, and the
Company received net proceeds of approximately $232,000.
Item 3. Defaults Upon Senior Securities.
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
A special meeting (the "Special Meeting") of the shareholders of the
Company was held on July 29, 1996. The holders of the Company's no par value
common stock and the Company's no par value preferred stock (collectively, the
"Voting Stock") voted as a single class at the Special Meeting, and 82,584
shares of Voting Stock, or 83% of the 98,334 shares of Voting Stock outstanding
were represented in person or by proxy at the Special Meeting, constituting a
quorum. The three proposals submitted by the Company at the Special Meeting
and the results of the voting on such proposals are as follows:
The first proposal provided for the approval of Amended and Restated
Articles of Incorporation of the Company, amending the Articles of
Incorporation to (i) change the name of the Company to "Murdock Communications
Corporation," (ii) increase the total number of authorized shares of common
stock from 200,000 to 7,500,000 and (iii) provide for the indemnification of
the Company's directors and officers by the Company to the fullest extent
allowed by the laws of the State of Iowa. This proposal was adopted with
80,984 shares voted for the proposal, 100 shares voted against and 1,500 shares
abstaining.
The second proposal provided for the amendment of the Company's 1993 Stock
Option Plan to increase the aggregate number of shares of common stock which
may be sold thereunder from 12,250 to 5% of the outstanding shares of Common
Stock, on a fully diluted basis, after the completion of an initial public
offering of the Company's securities. This proposal was adopted with 81,084
20
<PAGE> 21
shares voted for the proposal, 200 shares voted against the proposal and 1,300
shares abstaining.
The third proposal provided for the approval of an incentive equity plan
to provide performance-based grants of common stock, or warrants or options to
purchase shares of common stock, to the executive officers of the Company or to
other key employees of the Company as may be designated by the Compensation
Committee of the Company's Board of Directors, and providing that the maximum
aggregate number of shares of common stock which may be granted under this Plan
will be 5% of the outstanding shares of common stock, on a fully diluted basis,
after the completion of the initial public offering of the Company's
securities. This proposal was adopted with 80,884 shares voted for the
proposal, 400 shares voted against the proposal and 1,300 shares abstaining.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits:
3.1 Restated Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement on
Form SB-2 (Registration No. 333-05422C) filed by the Company with the
Securities and Exchange Commission on August 13, 1996.)
3.2 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 of the Company's Registration Statement on
Form SB-2 (Registration No. 333-05422C) filed by the Company with the
Securities and Exchange Commission on August 13, 1996.)
27 Financial Data Schedule
Reports on Form 8-K: None
21
<PAGE> 22
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Dated this 9th day of December, 1996.
MURDOCK COMMUNICATIONS CORPORATION
BY Guy O. Murdock
----------------------------------
Guy O. Murdock, Chief Executive
Officer
BY David F. Schultz
-----------------------------------
David F. Schultz, Chief Financial
Officer and Secretary
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited interim financial statements of Murdock Communications Corporation for
the nine months ended September 30, 1996 and is qualified in its entirety by
reference to such financial statements and the accompanying footnotes.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,729
<ALLOWANCES> 0
<INVENTORY> 51
<CURRENT-ASSETS> 2,115
<PP&E> 12,649
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2,292
0
<COMMON> 194
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<TOTAL-LIABILITY-AND-EQUITY> 6,653
<SALES> 6,110
<TOTAL-REVENUES> 6,112
<CGS> 3,630
<TOTAL-COSTS> 7,090
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<INTEREST-EXPENSE> 1,134
<INCOME-PRETAX> (2,112)
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<NET-INCOME> (1,036)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.46)
</TABLE>
