<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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 000-21463
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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
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(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 X No
------ ------
On September 30, 1997, there were outstanding 4,624,064 shares of the
Registrant's no par value Common Stock.
Transitional Small Business Disclosure Format (check one):
Yes No X
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MURDOCK COMMUNICATIONS CORPORATION
FORM 10-QSB
September 30, 1997
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Balance Sheets as of September 30, 1997
and December 31, 1996 (Unaudited)....... 3
Statements of Operations for the Three
Months Ended September 30, 1997 and
September 30, 1996 and the Nine Months
Ended September 30, 1997 and September
30, 1996 (Unaudited)..................... 4
Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and
September 30, 1996 (Unaudited)........... 5
Notes to Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 11
<CAPTION>
PART II - OTHER INFORMATION
<S> <C> <C>
Item 1. Legal Proceedings........................ 16
Item 2. Changes in Securities.................... 16
Item 3. Defaults Upon Senior Securities.......... 16
Item 4. Submission of Matters to a Vote
of Security Holders...................... 16
Item 5. Other Information........................ 16
Item 6. Exhibits and Reports on Form 8-K......... 16
Signatures............................... 18
</TABLE>
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MURDOCK COMMUNICATIONS CORPORATION
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 96,069 $1,241,897
Accounts receivable, net of allowance for doubtful accounts 1,095,019 726,282
AT&T commission receivable -- 500,000
Current portion of lease receivable, net of unearned portion 15,637 12,378
Inventory 44,754 51,091
Unsecured non-interest-bearing demand note receivable 400,000 --
Prepaid expenses 116,298 167,261
Deposit 130,000 --
---------- ----------
Total current assets 1,897,777 2,698,909
---------- ----------
PROPERTY AND EQUIPMENT:
Land and building 463,693 432,472
Telecommunications equipment 7,240,049 7,490,209
Furniture and equipment 320,019 242,168
Vehicles 27,843 27,843
---------- ----------
8,051,604 8,192,692
Accumulated depreciation (6,690,853) (6,234,203)
---------- ----------
1,360,751 1,958,489
Telecommunications equipment under capital lease, net of accumulated amortization 1,118,291 1,845,437
---------- ----------
Property and equipment, net 2,479,042 3,803,926
---------- ----------
OTHER ASSETS:
Lease receivable, less current and unearned portions 79,180 91,352
Deposits 17,151 16,509
Investment in joint venture 295,452 --
Cost of product developments 132,285 --
Cost of purchased equipment location contracts, net of accumulated amortization 632,436 626,723
Technology license from a related party, net of accumulated amortization 166,667 241,667
---------- ----------
Total other assets 1,323,171 976,251
---------- ----------
Total $5,699,990 $7,479,086
---------- ----------
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable $ 649,975 $ --
Accounts payable 1,034,164 530,482
Accrued expenses 753,929 537,962
Current portion of capital lease obligations principally with a related party 1,191,098 895,526
Current portion of long-term debt with a related party -- 133,541
Current portion of long-term debt, others 16,214 15,217
---------- ----------
Total current liabilities 3,645,380 2,112,728
LONG-TERM LIABILITIES:
Capital lease obligations principally with a related party, less current portion 2,154,974 2,608,952
Long-term debt with a related party -- 1,206,117
Long-term debt, others, less current portion 262,190 278,358
Deferred income 58,804 73,875
---------- ----------
Total liabilities 6,121,348 6,280,030
---------- ----------
REDEEMABLE SECURITIES:
10% Series A Redeemable Preferred Stock, no par or stated value
Authorized: 45,000 shares
Issued and outstanding: None at September 30, 1997; 200 shares at
December 31, 1996 -- 24,480
---------- ----------
SHAREHOLDERS' EQUITY (DEFICIT):
8% Series A Convertible Preferred Stock, $100 par value
Authorized: 50,000 shares
Issued and outstanding: 9,500 shares at September 30, 1997; None at
December 31, 1996, net of issuance costs 894,112 --
Common stock, no par or stated value
Authorized: 20,000,000 shares
Issued and outstanding: 4,624,064 shares at September 30, 1997; 4,152,494 at
December 31, 1996 12,165,708 10,820,898
Common stock warrants
Authorized - 920,000 detachable warrants
Issued and outstanding: 880,000 warrants at September 30, 1997; 883,089 at
December 31, 1996 8,400 13,336
Additional paid-in capital 234,000 224,000
Accumulated deficit (13,723,578) (9,883,658)
---------- ----------
Total shareholders' equity (deficit) (421,358) 1,174,576
---------- ----------
Total $5,699,990 $7,479,086
---------- ----------
</TABLE>
See notes to financial statements.
3
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MURDOCK COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1996 September 30, 1997 September 30, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
REVENUES:
Call processing revenues $1,763,716 $1,826,795 $5,105,265 $4,876,727
AT&T commissions -- -- -- 1,000,000
Sales and rental of equipment 140,305 53,154 418,861 70,373
Recognition of gains deferred from equipment sales
with a related party 13,261 37,504 40,488 109,905
Other income, primarily service 6,947 24,985 48,910 54,713
----------- ----------- ----------- -----------
Total revenues 1,924,229 1,942,438 5,613,524 6,111,718
----------- ----------- ----------- -----------
COST OF SALES:
Call processing 1,361,575 1,476,521 4,065,212 3,678,191
Equipment inventory and rentals 103,260 15,799 306,753 24,190
----------- ----------- ----------- -----------
Total cost of sales 1,464,835 1,492,320 4,371,965 3,702,381
----------- ----------- ----------- -----------
GROSS OPERATING PROFIT 459,394 450,118 1,241,559 2,409,337
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE (998,447) (723,019) (2,617,075) (1,949,298)
DEPRECIATION AND AMORTIZATION EXPENSE (574,078) (460,503) (1,623,796) (1,513,031)
SHARE OF LOSS FROM JOINT VENTURE (109,342) -- (309,478) --
----------- ----------- ----------- -----------
OPERATING LOSS (1,222,473) (733,404) (3,308,790) (1,052,992)
INTEREST EXPENSE (175,878) (452,830) (525,558) (1,058,993)
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (1,398,351) (1,186,234) (3,834,348) (2,111,985)
INCOME TAXES (676) (877) (5,402) (8,112)
----------- ----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM (1,399,027) (1,187,111) (3,839,750) (2,120,097)
EXTRAORDINARY ITEM - GAIN FROM RELATED
PARTY RESTRUCTURING -- -- -- 1,084,314
----------- ----------- ----------- -----------
NET LOSS $(1,399,027) $(1,187,111) $(3,839,750) $(1,035,783)
----------- ----------- ----------- -----------
PRO FORMA NET LOSS $(1,399,027) $(1,173,111) $(3,839,750) $(1,003,783)
----------- ----------- ----------- -----------
PRO FORMA NET LOSS PER COMMON SHARE
Loss before extraordinary item $(0.30) $(0.54) $(0.88) $(0.96)
Extraordinary item -- -- -- 0.50
----------- ----------- ----------- -----------
Net loss $(0.30) $(0.54) $(0.88) $(0.46)
----------- ----------- ----------- -----------
PRO FORMA WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 4,624,064 2,172,858 4,362,081 2,172,858
----------- ----------- ----------- -----------
</TABLE>
See notes to financial statements.
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MURDOCK COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1997 September 30, 1996
------------------- --------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(3,839,750) $(1,035,783)
Adjustments to reconcile net loss
to net cash flows from operating activities:
Extraordinary gain on related party restructuring -- (1,084,314)
Depreciation and amortization 1,698,796 1,588,031
Noncash interest expense 51,275 114,545
Noncash compensation expense 60,000 --
Recognition of deferred income (40,488) (109,905)
Share of loss from joint venture 309,478 --
Changes in operating assets and liabilities:
Receivables 141,673 (432,416)
Inventory 6,337 (637)
Prepaid expenses 963 (262,359)
Outstanding checks in excess of cash balances -- 364,322
Accounts payable 503,682 69,800
Accrued expenses 215,967 263,061
Deferred income 25,417 50,410
----------- -----------
Net cash flows from operating activities (866,650) (475,245)
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (220,512) (488,479)
Proceeds from sales of property and equipment -- 9,212
Purchase of equipment leased to others under direct financing lease -- (108,614)
Payments for equipment location contracts (427,933) --
Loan to ATN Communications, Inc. (400,000) --
Investment in joint venture (255,383) --
Software development costs (138,013) --
Deposits (150,642) --
Proceeds from repayment of deposit 20,000 --
----------- -----------
Net cash flows from investing activities (1,572,483) (587,881)
----------- -----------
FINANCING ACTIVITIES:
Borrowings on notes payable 799,975 1,890,000
Payments on notes payable (150,000) (925,000)
Borrowings on capital lease obligations principally with a related party 108,293 489,088
Payments on capital lease obligations principally with a related party (288,787) (274,151)
Borrowings of long-term debt with related parties -- 179,450
Payments on long-term debt with a related party (34,571) (330,000)
Payments on long-term debt, others (15,171) (10,374)
Payment of underwriter and offering expenses (55,888) (114,894)
Proceeds from exercise of common stock warrants 5,600 --
Proceeds from sale of 8% Series A Convertible Preferred Stock 950,000 --
Dividends on 10% Series A Redeemable Preferred Stock (1,666) --
Repurchase of 10% Series A Redeemable Preferred Stock
and detachable common stock warrants (24,480) --
----------- -----------
Net cash flows from financing activities 1,293,305 904,119
----------- -----------
NET DECREASE IN CASH (1,145,828) (159,007)
CASH AT BEGINNING OF PERIOD 1,241,897 159,007
----------- -----------
CASH AT END OF PERIOD $ 96,069 $ --
----------- -----------
SUPPLEMENTAL DISCLOSURES:
Noncash contribution of property to joint venture $ 349,547 $ --
Conversion of related party notes payable to common stock 1,334,274 --
Cash paid during the period for interest 350,390 767,482
Cash paid during the period for income taxes 5,402 8,112
</TABLE>
See notes to financial statements
5
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MURDOCK COMMUNICATIONS CORPORATION
NOTES TO 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, results of operations and cash flows 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 31, 1996, included in the Company's Annual Report on Form 10-KSB
(Commission File No. 000-21463) as filed with the Securities and Exchange
Commission on March 31, 1997.
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 1996 pro forma net loss per common share is
based on the weighted average number of common shares outstanding during the
periods presented and the shares issued upon the conversion of the 10% Series A
Redeemable Preferred Stock and related Common Stock warrants and of certain
shareholder notes.
Software Development Costs
Software development costs for products and significant product enhancements
incurred subsequent to the establishment of their technological feasibility and
prior to their general release to customers are capitalized. The ultimate
recovery of the costs is dependent on the Company's ability to successfully
complete the products or enhancements under development and to achieve a level
of market acceptance which will generate revenues and profits in amounts
sufficient to permit such recovery. The Company evaluates the recoverability
of capitalized software development costs by project on a periodic basis.
Software development costs incurred and capitalized for products and
significant product enhancements for the nine months ended September 30, 1997
were $138,013. The Company began amortizing the software development costs
during the third quarter of 1997 when the product was released to customers.
Capitalized software development costs are amortized using the straight-line
method over five years.
Debt
In June 1997, the Company borrowed $250,000 under a $250,000 revolving credit
facility with a financial institution due in December 1997. Interest on the
outstanding balance of the revolving credit facility is payable monthly at 2.0%
over the prime rate. Also in June 1997, the Company borrowed $200,000 under a
$400,000 revolving credit facility with a financial institution due in March
1998. During the three months ended September 30, 1997 the Company borrowed an
additional $200,000 under the $400,000 revolving credit facility. Interest on
the outstanding balance accrues monthly at 2.0% over the prime rate. The
Company also has a $225,000 revolving credit facility with a financial
institution due on November 21, 1997. The outstanding balance on the $225,000
revolving credit facility accrues interest at 12% and the interest is due at the
maturity of the revolving credit facility. There were no borrowings outstanding
at September 30, 1997 under the $225,000 revolving credit facility.
On September 30, 1997 the Company modified its lease agreements with Berthel
Fisher & Company, Inc. and subsidiaries and their affiliated leasing
partnerships ("Berthel"). Under the modification agreement the
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lease payments due in July 1997 and August 1997 were deferred and capitalized as
part of the modified lease agreement. The aggregate monthly payment due Berthel
under the modified lease agreements increased from $131,000 to $136,000.
Income Taxes
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $4.5 million to use to offset
future taxable income. These net operating losses will expire, if unused, from
December 31, 2008 through 2011. For the nine months ended September 30, 1997,
the Company had a pretax loss of $3.8 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
approximately $5,400 for the nine months ended September 30, 1997. This
relates primarily to certain state income taxes.
Equity
In June 1997, Berthel converted note obligations with a face value of $1.7
million and a carrying value of approximately $1.3 million into 465,265 shares
of the Company's Common Stock. Additionally, the Company agreed to issue up to
187,067 "adjustment shares" to Berthel to the extent that the average closing
bid price of the Common Stock is less than $4.00 per share during certain 30-day
periods commencing June 5, 1997. The original note conversion agreement also
required that the Company register the shares by November 1, 1997. On November
14, 1997, the Company and Berthel entered into an amended agreement which
provides for the issuance by the Company to Berthel of 187,067 adjustment
shares, allows the Company to register the shares after November 1, 1997 and
requires that the Company pay Berthel $417.33 per day until a registration
statement with respect to the shares is effective.
On July 2, 1997, the Company amended its Articles of Incorporation to increase
the number of authorized shares of the Company's Common Stock from 7,500,000 to
20,000,000, eliminate the previously issued 10% Series A Redeemable Preferred
Stock and authorize 1,000,000 shares of a new class of "blank check" preferred
stock.
On August 1, 1997, the Company amended its Articles of Incorporation to
authorize 50,000 shares of Series A Convertible Preferred Stock (the
"Convertible Preferred"). The Convertible Preferred has a liquidation
preference of $100 per share, accrues dividends at 8% of the liquidation
preference annually and dividends are payable quarterly at the Company's option
in cash or in Common Stock. The Convertible Preferred has no voting rights.
The Convertible Preferred may also be converted into Common Stock, at the
holder's option, commencing one year after issuance, at the conversion rate of
$2.50 per share of Common Stock and is automatically converted into Common Stock
three years after issuance. The Company has reserved 2,000,000 shares of Common
Stock in connection with the authorization of the Convertible Preferred.
The Company's operating and investing activities used approximately $2.4 million
of cash during the nine months ended September 30, 1997. The Company does not
believe that its existing capital and anticipated funds from operations will be
sufficient to meet its anticipated cash needs for the next twelve months for
working capital, capital expenditures (including $2.5 million that the Company
estimates will be required to implement TeleManager which is a software system
to monitor telecommunications at a hotel) and payment of the short-term
acquisition note of $840,000 discussed under the subsequent event below. Also,
at September 30, 1997, the Company had total common shareholders' deficit of
approximately $(0.4) million. The current listing criteria for the Nasdaq
SmallCap Market requires shareholders' equity of at least $1.0 million, although
Nasdaq has required that the Company achieve shareholders' equity of at least
$2.0 million in view of the Company's noncompliance with the Nasdaq listing
criteria as of June 30, 1997. On September 30, 1997, Nasdaq issued a notice of
delisting to the Company, but has stayed the delisting pending the Company's
appeal. A hearing with respect to the Company's appeal has been scheduled for
November 21, 1997. The Company is currently offering up to $5.0 million of the
Convertible Preferred in a private placement offering and to obtain $2.5 million
in debt financing. Pursuant to the private placement offering, the Company
received aggregate gross cash proceeds of $950,000 on September 30, 1997 and
aggregate gross cash proceeds of $575,000 on November 3, 1997. However, no
assurance can be given that the Company will be able to raise adequate funds
from this offering to meet the Company's cash needs or to increase the Company's
equity to meet the Nasdaq listing criteria.
Insufficient funds may require the Company to delay, scale back or eliminate
some or all of its market development plans or otherwise may have a material
adverse effect on the Company. In addition, the Company's Common Stock and
Common Stock Purchase Warrants may be delisted from Nasdaq following the
hearing on November 21, 1997. As a consequence of any such delisting, holders
of
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Common Stock would likely find it more difficult to dispose of, or to obtain
accurate quotations as to the price of, the Common Stock and the Common Stock
Purchase Warrants.
Deposit
On January 7, 1997, the Company paid a $0.2 million refundable security deposit
for a technology license, related to international faxing over the Internet, to
WorldQuest Network Services, Inc., a company managed by a member of the
Company's Board of Directors. The right to execute the agreement expired March
31, 1997. Until refund of the deposit, the deposit will accrue interest at
12%. As of September 30, 1997 the Company has received repayment of $20,000 on
the deposit.
Investment in Joint Venture
On January 31, 1997, the Company entered into a joint venture agreement with an
unrelated third party to form a limited liability company, Guide*Star, LLC
(formerly called Link*Star, LLC). The Company has contributed contractual
rights relating to interactive voice response ("IVR") platforms and other
assets with a carrying value of $0.5 million in exchange for a 50% ownership
interest and a preferential distribution of $0.5 million. The other party
contributed $0.2 million in cash in exchange for a 50% ownership interest. The
joint venture provides consumer telecommunications services related to the
IVR platforms.
Under the agreement, cash shall be distributed first to the Company, in an
amount equal to 95% of the net distributable cash until the preferential
distribution is repaid and the remainder shall be distributed in accordance
with the ownership interests.
At any time during the 90-day period immediately following the second, third
and fourth anniversaries of the execution of the agreement, either party may
purchase the other entity's ownership interest. The purchase price shall be
the greater of $4.5 million plus the other entity's capital account or the
balance of the other entity's capital account plus five times the sum of the
joint venture's income before income taxes for the most recently completed
fiscal year.
The assets contributed to the joint venture included the Company's rights
pursuant to an Audiotext Services Agreement, dated December 13, 1996
(the "ICI Agreement"), between the Company and Interactive Communications, Inc.
("ICI"). The ICI Agreement is effective from January 1, 1997 until January 1,
2000, with an option to renew for successive periods of twelve months.
Pursuant to the ICI Agreement, ICI provides up to 38 IVR hardware platforms to
the joint venture in exchange for a $1,000 per platform monthly fee. The IVR
Agreement requires that the monthly fee be paid for not less than 30 platforms
regardless of how many platforms are actually in use. The ICI Agreement may be
terminated by either party for cause upon not less than 30 days notice. The
Company delivered a termination notice on October 8, 1997. Despite the
assignment of the ICI Agreement to the joint venture, the Company is
potentially liable for all obligations under the ICI Agreement. Neither the
joint venture nor the Company has made any payments to ICI under the ICI
Agreement since April 1997, and approximately $247,000 has been accrued under
the ICI Agreement as of September 30, 1997.
Contingencies
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 received by
the Company for providing telecommunications services to the hotels managed by
Larken, Inc., a related party. The Demand alleges that all revenues received
by the Company for providing telecommunications services to the Larken, Inc.
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 $1.3 million
and $1.5 million for the years ended December 31, 1996 and 1995, respectively,
in connection with such telecommunications services. 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, Inc. 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, Inc. and its 50% owner (a minority
shareholder), have acknowledged that the VAC matter is covered by an
indemnification agreement and the minority shareholder's guarantee, and that
such
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indemnification agreement with Larken, Inc. will cover any losses, costs or
expenses incurred by the Company in connection with this threatened claim.
Pursuant to the indemnification agreement, Larken, Inc. has assumed the defense
of the VAC claims. VAC's attorney sent a second threatening letter, but has
not yet filed a lawsuit. Nonetheless, such a lawsuit could be filed at any
time. Pursuant to the indemnification agreement, Larken, Inc. will 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, Inc. 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, Inc. and the
attorneys retained by Larken, Inc. on the Company's behalf pursuant to the
indemnification agreement. The Company has not made an independent
investigation of the minority shareholder's financial position or net worth,
although the minority shareholder has previously represented to the Company
that he is an accredited investor as defined in Regulation D under the
Securities Exchange Act, 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, Inc. or the minority shareholder will have sufficient assets to
meet their respective obligations in the event that the Company incurs
liability pursuant to this matter. No provision for any loss that may result
upon the resolution of this matter has been made in the financial statements.
Subsequent Event -- PIC Acquisition
On October 31, 1997, the Company completed its previously announced acquisition
(the "PIC Acquisition") of two affiliated companies, Priority International
Communications, Inc. ("PIC") and PIC Resources Corp. ("PICR"). PIC sells long
distance operator services to pay phones, hotels, hospitals, universities,
condominiums and other institutions. PICR, operating through ATN
Communications Inc. ("ATN"), is a provider of long distance operator services.
Pursuant to the Stock Purchase Agreement, dated as of August 22, 1997, as
amended (the "PIC Agreement"), among MCC Acquisition Corp., a wholly owned
subsidiary of the Company ("MCC Sub"), PIC and certain shareholders of PIC, MCC
Sub acquired all of the outstanding capital stock of PIC in exchange for a cash
payment at closing of $500,000 and the issuance by MCC Sub to certain of the PIC
shareholders of a promissory note in the principal amount of $840,000 due March
1, 1998 (the "Short-Term Note") and promissory notes with an aggregate principal
amount of $1,910,000 due April 30, 1999 (the "Long-Term Notes" and, collectively
with the Short-Term Note, the "PIC Notes"). Pursuant to the Stock Purchase
Agreement, dated as of August 22, 1997, as amended (the "PICR Agreement"), among
MCC Sub, PICR, ATN and the shareholders of PICR, MCC Sub acquired all of the
outstanding capital stock of PICR in exchange for a cash payment at closing of
$30,000 and the issuance by the Company of an aggregate of 300,000 shares of
Common Stock. In connection with the PIC Acquisition, the Company also loaned,
prior to September 30, 1997, $400,000 to ATN for capital expenditures, loaned
subsequent to September 30, 1997, $800,000 to refinance certain notes held by
officers of PICR and agreed to provide at least $1,050,000 in cash or Common
Stock to finance future acquisitions or growth by PIC and PICR.
The PICR Agreement provides that the Company will issue additional shares of
Common Stock to the extent that the combined earnings before interest, taxes,
depreciation and amortization ("EBITA") of PIC and PICR for either of the first
two full twelve month periods after closing exceeds $1,000,000. Shares of
Common Stock with a fair market value of $1.25 will be issued for each dollar
of EBITA over $1,000,000 during either of the twelve month periods. The
Company granted piggyback registration rights to the PICR shareholders with
respect to any secondary offerings of Common Stock made within three years
after the closing of the PIC Acquisition.
MCC Sub's obligations under the PIC Notes have been guaranteed by the Company
and are subject to a security interest in the shares of PIC stock and PICR
stock acquired by MCC Sub pursuant to the PIC Acquisition. In the event that
MCC Sub defaults with respect to the repayment of the Short-Term Note, the
holders of the PIC Notes will have the right to rescind the PIC Acquisition by
surrendering the shares of Common Stock issued in the PIC Acquisition and the
PIC Notes to MCC Sub in exchange for the return of all of the shares of PIC
stock and PICR stock. In addition, if the PIC Acquisition is rescinded, the
shareholders of PIC and PICR would retain the $530,000 cash payments made at
closing and the $400,000 advanced to ATN. If the Company completes any primary
offering of its equity securities during the term of the PIC Notes (other than
pursuant to employee options or outstanding warrants), the Company must
9
<PAGE> 10
apply at least 67% of the net proceeds of such offering in excess of $500,000
to repay the Short-Term Note and then 50% of the net proceeds received after
March 1, 1998 to repay the Long-Term Notes.
The Company financed the PIC Acquisition by using part of the proceeds of the
offering of shares of Convertible Preferred, and the issuance of the Short-Term
Note, the Long-Term Notes and the shares of Common Stock to the shareholders of
PIC and PICR.
Reclassification
Certain amounts in the September 30, 1996 financial statements have been
reclassified to conform to the September 30, 1997 financial statement
presentation.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following is a discussion and analysis of the Company's financial
condition, results of operations, liquidity and capital resources. The
discussion and analysis should be read in conjunction with the Company's
financial statements and notes thereto included elsewhere within.
Results of Operations
Three Months Ended September 30, 1997 and 1996
The following table sets forth statements of operations items and the
percentages that such items bear to revenues:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------
1997 1996
--------- --------
<S> <C> <C>
Revenues 100% 100%
Cost of sales 76% 77%
Selling, general and
administrative 52% 37%
Depreciation and amortization 30% 24%
----- -----
Total operating expenses 158% 138%
Share of loss from joint
venture 6% 0%
----- -----
Operating loss (64)% (38)%
Interest expense (9)% (23)%
----- -----
Net loss (73)% (61)%
===== =====
</TABLE>
REVENUES. Total revenues remained constant at $1.9 million for the three months
ended September 30, 1997 and 1996. Call processing revenues remained constant
at $1.8 million for the three months ended September 30, 1997 and 1996. Calling
commissions from AT&T remained constant at $0.8 million for the three months
ended September 30, 1997 and 1996. The Company provided service to
approximately 123,000 hotel and motel rooms at September 30, 1997 and
approximately 105,000 at September 30, 1996, an increase of 18,000 hotel and
motel rooms or 17%. Calling commissions from AT&T remained constant as the
increase in the number of rooms was offset by a decline in the average number of
calls per room. Monthly bonuses from AT&T remained constant at $0.5 million for
the three months ended September 30, 1997 and 1996. OSP revenues remained
constant at $0.3 million for the three months ended September 30, 1997 and 1996.
One-plus revenues remained constant at $0.2 million for the three months ended
September 30, 1997 and 1996.
Equipment sales and rentals generated a net profit of $37,000 for the three
months ended September 30, 1997 and 1996.
COST OF SALES. Cost of sales for call processing decreased to $1.4 million for
the three months ended September 30, 1997, from $1.5 million for the three
months ended September 30, 1996, a decrease of $0.1 million or 7%. Commissions
paid to hotels and motels decreased $0.1 million to $1.1 million for the three
11
<PAGE> 12
months ended September 30, 1997 from $1.2 million for the three months ended
September 30, 1996. Commissions paid to hotels and motels as a percentage of
recurring revenue decreased to 61% for the three months ended September 30,
1997 from 65% for the three months ended September 30, 1996. Costs of
transmission associated with providing OSP and one-plus services remained
constant at $0.3 million for the three months ended September 30, 1997 and
1996.
GROSS OPERATING PROFIT. Gross operating profit remained constant at $0.5
million for the three months ended September 30, 1997 and 1996.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense, increased to $1.0 million for the three months ended September 30,
1997, from $0.7 million for the three months ended September 30, 1996 an
increase of $0.3 million or 43%. This increase is due primarily to the
addition of 13 full-time employees, increases in professional fees, and
increases in travel and other selling expenses associated with increased sales
efforts.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to $0.6
million for the three months ended September 30, 1997 from $0.5 million for the
three months ended September 30, 1996, an increase of $0.1 million or 17%. The
increase was due to an increase in property and equipment and purchased
equipment location contracts.
SHARE OF NET LOSS FROM JOINT VENTURE. The Company's share of the net loss of
Guide*Star, LLC, was $0.1 million for the three months ended September 30,
1997. The Company entered into the Guide*Star joint venture during the first
quarter of 1997. The loss relates to initial start-up and selling activities
of the joint venture.
INTEREST EXPENSE. Interest expense decreased to $0.2 million for the three
months ended September 30, 1997, from $0.5 million for the three months ended
September 30, 1996, a decrease of $0.3 million or 60%. The decrease is
attributable to the decrease in outstanding debt and capital lease obligations,
primarily $2.2 million in capital lease obligations repaid in October of 1996
with proceeds from the Company's initial public offering of its Common Stock
and the conversion to equity of $1.7 million of debt with a related party.
Nine Months Ended September 30, 1997 and 1996
The following table sets forth statements of operations items and the
percentages that such items bear to revenues:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1997 1996
--------- --------
<S> <C> <C>
Revenues 100% 100%
Cost of sales 78% 61%
Selling, general and
administrative expenses 46% 32%
Depreciation and amortization 29% 25%
----- -----
Total operating expenses 153% 118%
Share of loss from joint venture 6% 0%
----- -----
Operating loss (59)% (18)%
Interest expense (9)% (17)%
Income taxes 0% 0%
Extraordinary gain 0% 18%
----- -----
Net income (loss) (68)% (17)%
===== =====
</TABLE>
REVENUES. Total revenue decreased to $5.6 million for the nine months ended
September 30, 1997 from $6.1 million for the nine months ended September 30,
1996, a decrease of $0.5 million, or 8%. Call
12
<PAGE> 13
processing revenues increased from $4.9 million for the nine months ended
September 30, 1996 to $5.1 million for the nine months ended September 30,
1997, representing an increase of $0.2 million or 4%. This increase was
primarily caused by an increase in the number of hotels served under the
Lodging Partnership Program with AT&T partially off-set by a decline in the
average number of calls per room. Calling commissions from AT&T increased to
$2.4 million for the nine months ended September 30, 1997 from $2.2 million for
the nine months ended September 30, 1996, an increase of $0.2 million or 9%.
Monthly bonuses from AT&T increased from $1.1 million for the nine months ended
September 30, 1996 to $1.3 million for the nine months ended September 30,
1997, representing an increase of $0.2 million or 18%. This increase was
primarily caused by an increase in the number of rooms enrolled in the Lodging
Partnership program with AT&T partially off-set by a decline in the average
number of calls per room. OSP revenues decreased to $0.8 million for the nine
months ended September 30, 1997 from $1.0 million for the nine months ended
September 30, 1996, representing a decrease of $0.2 million, or 20%. This
decrease was primarily caused by the decrease in calls carried by the Company
as it converted customers to the Lodging Partnership program with AT&T.
One-plus revenues remained constant at $0.6 million for the nine months ended
September 30, 1997 and 1996. In June of 1996, the Company earned 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.
The Company provided services to a total of 123,000 hotel and motel rooms as of
September 30, 1997, as compared to 105,000 hotel and motel rooms as of
September 30, 1996.
Equipment sales and rentals generated a net profit of $112,000 for the nine
months ended September 30, 1997 and a net profit of $46,000 for the nine months
ended September 30, 1996 for an increase of $66,000.
COST OF SALES. Cost of sales for call processing increased to $4.1 million
for the nine months ended September 30, 1997, from $3.7 million for the nine
months ended September 30, 1996, an increase of $0.4 million or 11%. This
increase was primarily due to an increase in the cost of commissions resulting
from the Company's decision in 1996 to move hotel and motel properties to the
Lodging Partnership program with AT&T from the Company's OSP program.
Commissions paid to hotel and motel properties increased to $3.3 million for
the nine months ended September 30, 1997, from $2.8 million for the nine months
ended September 30, 1996, representing an increase of $0.5 million or 18%.
Commissions as a percent of recurring revenues increased to 64% for the nine
months ended September 30, 1997, from 58% for the nine months ended September
30, 1996. The increase in commissions paid to hotels and motels is primarily
due to an increase in commissions received under the Lodging Partnership
program with AT&T and commissions paid to certain hotel and motel properties
which were transferred to the Lodging Partnership program from the OSP program.
Commissions paid to these certain hotel and motel properties are based on
historical gross profits derived with respect to that property regardless of
whether services are provided through the Company's OSP program or the Lodging
Partnership program. The commissions paid to the certain hotel and motel
properties was approximately $0.1 million more than if these properties were
paid under a typical Lodging Partnership plan. Costs of transmission
associated with providing OSP and one-plus services decreased to $0.8 million
for the nine months ended September 30, 1997, from $0.9 million for the nine
months ended September 30, 1996, for a decrease of $0.1 million or 11%.
GROSS OPERATING PROFIT. Gross operating profit decreased to $1.2 million for
the nine months ended September 30, 1997, from $2.4 million for the nine months
ended September 30, 1996, representing a decrease of $1.2 million or 50%. This
decrease is primarily due to the single, nonrecurring guest room attainment
bonus of $1 million received during the first half of 1996 for placing more
than 100,000 rooms in the Lodging Partnership program prior to July 1, 1996.
No such bonuses were available to the Company for the nine months ended
September 30, 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased to $2.6 million for the nine months ended September 30,
1997, from $1.9 million for the nine months ended September 30, 1996, an
increase of $0.7 million or 37%. This increase is due primarily to the
addition of 13 full-time employees, increases in professional fees and
increases in travel and other selling expenses associated with increased sales
efforts.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$1.6 million for the nine months ended September 30, 1997 from $1.5 million for
the nine months ended September 30, 1996, an increase of $0.1 million or 7%.
13
<PAGE> 14
SHARE OF NET LOSS FROM JOINT VENTURE. The Company's share of the net loss of
Guide*Star, LLC, was $0.3 million for the nine months ended September 30, 1997.
The Company entered into the Guide*Star joint venture during the first quarter
of 1997. The loss relates to initial start-up and selling activities of the
joint venture.
INTEREST EXPENSE. Interest expense decreased from $1.1 million for the nine
months ended September 30, 1996 to $0.5 million for the nine months ended
September 30, 1997, representing a decrease of $0.6 million or 55%. The
decrease is attributable to the decrease in outstanding debt and capital lease
obligations, primarily $2.2 million in capital lease obligations repaid during
the fourth quarter of 1996 with proceeds from the Company's initial public
offering of its Common Stock, and the conversion to equity of $1.7 million of
debt with a related party.
.
EXTRAORDINARY GAIN. In 1996, the Company repaid certain contractual
obligations to Intellicall, Inc. resulting in an extraordinary gain on debt
restructuring of $1.1 million. This was a one-time gain resulting from a 1994
restructuring of debt from the purchase price of a group of assets purchased
from Intellicall, Inc. by the Company. The gain on the restructuring was
deferred pending the payment of all amounts due under the note issued by the
Company to Intellicall, Inc. in connection with the restructuring. All amounts
due under the note were repaid on June 28, 1996, and the resulting deferred
gain was recognized.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company's current liabilities of $3.6 million
exceeded current assets of $1.9 million, resulting in a working capital deficit
of $1.7 million. During the nine months ended September 30, 1997, the Company
used $0.9 million in cash for operating activities, used $1.6 million in cash
for investing activities and generated $1.3 million in cash from financing
activities. Of the cash used for investing activities, $0.4 million was used
for equipment location acquisition costs and $0.3 million was used to fund the
initial start-up and selling activities of the Company's investment in
Guide*Star LLC. The Company received proceeds from the issuance of new debt
and capital lease obligations of $1.9 million and made payments on debt and
lease obligations of $0.5 million.
The Company's principal sources of capital to date have been cash flows from
operations, public and private offerings of debt and equity securities and
lease and debt financing arrangements with Berthel, Fisher & Company, Inc. and
subsidiaries and their affiliated leasing partnerships ("Berthel") to purchase
telecommunications equipment. The total amount of lease financing with Berthel
at September 30, 1997 was $3.3 million. The Company currently makes monthly
lease payments of approximately $0.1 million, in the aggregate, pursuant to
these lease financing arrangements. In June 1997, Berthel converted note
obligations with a face value of $1.7 million and a carrying value to the
Company of $1.3 million into 465,625 shares of Common Stock, as previously
discussed.
The Company has a $250,000 revolving credit facility with a financial
institution due December 1, 1997. As of June 30, 1997 the Company had borrowed
$250,000 under this facility. The Company also has a $400,000 revolving credit
facility with another financial institution due March 28, 1998. As of June
30, 1997 the Company had borrowed $200,000 under this facility. During the
three months ended September 30, 1997 the Company borrowed an additional
$200,000 under the $400,000 revolving credit facility with a financial
institution. Interest on the outstanding balance accrues monthly at 2.0% over
the prime rate. The Company also has a $225,000 revolving credit facility with
a financial institution due on November 21, 1997. The outstanding balance on
the $225,000 revolving credit facility accrues interest at 12% and the interest
is due at the maturity of the revolving credit facility.
On August 1, 1997, the Company amended its Articles of Incorporation to
authorize 50,000 shares of Series A Convertible Preferred Stock (the
"Convertible Preferred"). The Convertible Preferred has a liquidation
preference, subject to adjustment, of $100 per share and accrues dividends at
an annual rate of 8% of the liquidation preference. Dividends are payable
quarterly at the Company's option in cash or in Common Stock. Payments to
holders of shares of Convertible Preferred with respect to liquidation or
dividends must be made prior to any payments to holders of shares of Common
Stock. The Convertible Preferred has no voting rights except as required by
applicable law. The Convertible Preferred may also be converted into Common
Stock, at the holders' option, commencing one year after issuance at the
conversion rate of $2.50 per share of Common Stock and is automatically
converted into Common Stock three years after issuance at the conversion rate
of $2.50 per share of Common Stock. The Company has
14
<PAGE> 15
reserved 2,000,000 shares of Common Stock in connection with the authorization
of the Convertible Preferred. Pursuant to the offering of Convertible
Preferred, the Company received aggregate gross cash proceeds of $550,000 and
the exchange of indebtedness of with an aggregate principal amount of $400,000
on September 30, 1997 and aggregate gross cash proceeds of $575,000 on November
3, 1997.
The Company does not believe that its existing capital and anticipated funds
will be sufficient to meet its anticipated cash need for working capital and
capital expenditures, including approximately $2.5 million that the Company
estimates will be required over 1997 and 1998 to proceed with the scheduled
implementation of the Company's TeleManager system. In addition, the Company
will require up to $3.3 million within 18 months after the closing of the PIC
Acquisition to fund the PIC Acquisition. The Company currently intends to fund
its working capital needs and the PIC Acquisition through the private placement
offering of up $5.0 million of Convertible Preferred and to fund the
implementation of the TeleManager system through a debt financing in 1997. In
addition, at September 30, 1997, the Company had total common shareholders'
deficit of approximately $(0.4) million. The current listing criteria for the
Nasdaq SmallCap Market requires shareholders' equity of at least $1.0 million,
although Nasdaq has required that the Company achieve shareholders' equity of
at least $2.0 million in view of the Company's noncompliance with the Nasdaq
listing criteria as of June 30, 1997. On September 30, 1997, Nasdaq issued a
notice of delisting to the Company, but has stayed the delisting pending the
Company's appeal. A hearing with respect to the Company's appeal has been
scheduled for November 21, 1997.
If the Company is able to complete the private placement offering of up to $5.0
million and a debt financing of $2.5 million, the Company believes that the
proceeds of such financings, together with funds from operations, will be
sufficient to meet its cash and operating needs for the foreseeable future.
However, no assurance can be given that the Company will be able to raise
adequate funds through such financings to meet the Company's cash needs on
terms acceptable to the Company or to achieve compliance with the Nasdaq
listing criteria. Insufficient funds may require the Company to delay, scale
back or eliminate some or all of its market development plans or otherwise may
have a material adverse effect on the Company. In addition, if the Company is
unable to increase the Company's equity to achieve compliance with the listing
of the Nasdaq SmallCap Market, the Common Stock and the Common Stock Purchase
Warrants could be subject to delisting from the Nasdaq SmallCap Market.
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 statements identified as based on the Company's belief,
intention, expectation or similar expressions. 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.
15
<PAGE> 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
(a) Not applicable.
(b) Not applicable.
(c) In September 1997, the Company commenced an offering of up to
$5,000,000 of its Series A Convertible Preferred Stock (the "Convertible
Preferred") in a private placement exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Act"), pursuant to Rule 506 of
Regulation D under the Act. The Company is obligated to pay commissions of up
to 7% of the gross proceeds of the Private Offering to its placement agent. As
of September 30, 1997, the Company had sold 9,500 shares of Convertible
Preferred and had received gross cash proceeds of $550,000 and the exchange of
indebtedness in the amount of $400,000, paid commissions of $46,500 and
received net proceeds of approximately $490,000 from the issuance and sale of
shares of Convertible Preferred pursuant to the offering.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders of the Company
during the third quarter of 1997.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
3.1 Restated Articles of Incorporation of the Company (1)
3.2 First Amendment to Restated Articles of Incorporation of the
Company
3.3 Second Amendment to Restated Articles of Incorporation of the
Company
3.4 Amended and Restated By-Laws of the Company (2)
10.1 Stock Purchase Agreement, dated as of August 22,
1997, among MCC Acquisition Corp., Priority International
Communications, Inc. and certain shareholders of Priority
International Communications, Inc. (3)
10.2 First Amendment to Stock Purchase Agreement, dated as
of October 31, 1997, among MCC Acquisition Corp., Priority
International Communications, Inc. and certain shareholders of
Priority International Communications, Inc. (3)
10.3 Stock Purchase Agreement, dated as of August 22,
1997, among MCC Acquisition Corp., PIC Resources Corp., the
Shareholders of PIC Resources Corp. and ATN Communications Inc.
(3)
16
<PAGE> 17
10.4 First Amendment to Stock Purchase Agreement, dated as
of October 31, 1997, among MCC Acquisition Corp., PIC Resources
Corp., the Shareholders of PIC Resources Corp. and ATN
Communications Inc. (3)
10.5 Short-Term Note dated October 31, 1997 issued by MCC
Acquisition Corp. to Bonner B. Hardegree, trustee for the
benefit of Wayne Wright and Bonner B. Hardegree (3)
10.6 Form of Long-Term Note (3)
27 Financial Data Schedule
(1) Filed as an exhibit to the Company's Registration Statement on Form SB-2
(File No. 333-05422C) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's report on Form 10-QSB for the
quarter ended March 31, 1997 (File No. 000-21463) and incorporated herein
by reference.
(3) 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 November
7, 1997 and incorporated herein by reference.
(b) Reports on Form 8-K: None in the third quarter of 1997.
17
<PAGE> 18
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 14th day of November, 1997.
MURDOCK COMMUNICATIONS CORPORATION
BY /s/ Guy O. Murdock
------------------------------------------
Guy O. Murdock, Chairman of the
Board (Principal Executive Officer)
BY /s/ Thomas E. Chaplin
------------------------------------------
Thomas E. Chaplin, Chief Executive Officer
(Principal Accounting Officer)
18
<PAGE> 1
ARTICLES OF AMENDMENT
TO
RESTATED ARTICLES OF INCORPORATION
OF
MURDOCK COMMUNICATIONS CORPORATION
MURDOCK COMMUNICATIONS CORPORATION, a corporation organized and existing
under and by virtue of the Iowa Business Corporation Business Corporation Act
(the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation has determined that
it is advisable and in the best interests of the Corporation that the Restated
Articles of Incorporation of the Corporation be amended by deleting the current
text of Article III thereof and substituting in lieu thereof the following:
ARTICLE III
The total number of shares of stock which the Corporation has
authority to issue is 21,000,000 consisting of:
(i) 20,000,000 shares of Common Stock of no par value (the
"Common Stock"); and
(ii) 1,000,000 shares of Preferred Stock of no par value (the
"Preferred Stock").
Preferred Stock
Authority is hereby expressly granted to the Board of Directors
from time to time to issue the Preferred Stock as Preferred Stock of
one or more series and in connection with the creation of any such
series to fix by the resolution or resolutions providing for the
issue of shares thereof the designation, voting powers, preferences,
and relative, participating, optional, or other special rights of
such series, and the qualifications, limitations, or restrictions
thereof. Such authority of the Board of Directors with respect to
each such series shall include, but not be limited to, the
determination of the following:
<PAGE> 2
(a) the distinctive designation of, and the number of shares
comprising, such series, which number may be increased (except where
otherwise provided by the Board of Directors in creating such
series) or decreased (but not below the number of shares thereof
then outstanding) from time to time by like action of the Board of
Directors;
(b) the dividend rate or amount for such series, the conditions
and dates upon which such dividends shall be payable, the relation
which such dividends shall bear to the dividends payable on any
other class or classes or any other series of any class or classes
of stock, and whether such dividends shall be cumulative, and if so,
from which date or dates for such series;
(c) whether or not the shares of such series shall be subject
to redemption by the Corporation and the times, prices, and other
terms and conditions of such redemption;
(d) whether or not the shares of such series shall be subject
to the operation of a sinking fund or purchase fund to be applied to
the redemption or purchase of such shares and if such a fund be
established, the amount thereof and the terms and provisions
relative to the application thereof;
(e) whether or not the shares of such series shall be
convertible into or exchangeable for shares of any other class or
classes, or of any other series of any class or classes, of stock of
the Corporation and if provision be made for conversion or exchange,
the times, prices, rates, adjustments, and other terms and
conditions of such conversion or exchange;
(f) whether or not the shares of such series shall have voting
rights, in addition to the voting rights provided by law, and if
they are to have such additional voting rights, the extent thereof;
(g) the rights of the shares of such series in the event of any
liquidation, dissolution, or winding up of the Corporation or upon
any distribution of its assets; and
(h) any other powers, preferences, and relative, participating,
optional, or other special rights of the shares of such series, and
the qualifications, limitations, or restrictions thereof, to
2
<PAGE> 3
the full extent now or hereafter permitted by law and not
inconsistent with the provisions hereof.
SECOND: The Articles of Amendment were approved by the shareholders of
the Corporation in accordance with section 1003 of the Iowa Business
Corporation Act at a special meeting held on June 24, 1997. The number of
outstanding shares of Common Stock on May 19, 1997, the record date for the
special meeting, and the number of votes indisputedly represented at the
special meeting is as follows:
SHARES OUT- SHARES REPRE-
OUTSTANDING SENTED AT MEETING
4,152,494 2,484,093
-------------------------------------- --------------------------------------
The total number of undisputed votes cast for the Articles of Amendment was:
VOTES VOTES
FOR AGAINST
2,408,648 52,766
-------------------------------------- --------------------------------------
THIRD: The effective date and time of this document is the date and time
of filing with the Iowa Secretary of State.
IN WITNESS WHEREOF, the Corporation has caused the Articles of Amendment
to be signed by Guy O. Murdock, its Chairman of the Board, and attested by
David F. Schultz, its Secretary, on this 2nd day of July, 1997.
MURDOCK COMMUNICATIONS CORPORATION
BY /s/ Guy O. Murdock
--------------------------------
Guy O. Murdock,
Chairman of the Board
Attest:
/s/ David F. Schultz
--------------------------------
David F. Schultz, Secretary
3
<PAGE> 1
ARTICLES OF AMENDMENT
TO
RESTATED ARTICLES OF INCORPORATION
Murdock Communications Corporation, a corporation organized and existing
under and by virtue of the Iowa Business Corporation Act (the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation has determined that
it is advisable and in the best interests of the Corporation that the Restated
Articles of Incorporation of the Corporation, as amended (the "Articles of
Incorporation"), be amended by deleting the current description of the
designation, powers, preferences and rights of the Corporation's Series A
Convertible Preferred Stock at the end of Article III of the Articles of
Incorporation and inserting the following in lieu thereof:
SERIES A CONVERTIBLE PREFERRED STOCK
1. Designation and Authorized Shares. The Corporation shall be authorized
to issue 50,000 shares of Series A Convertible Preferred Stock, no par value
(the "Series A Preferred Stock"). Certain terms used herein are defined in
Section 8.
2. Stated Value. Each share of Series A Preferred Stock shall have a
stated value of $100 (the "Stated Value").
3. Dividends.
3.1 Dividends shall accrue on each outstanding share of Series A
Preferred Stock at the annual rate of 8% of the then current Dividend Base,
compounded monthly from the Dividend Accrual Date until the earlier of (a) the
day such share of Series B Preferred Stock is converted into shares of Common
Stock pursuant to section 6 below, or (b) the date on which the liquidation
value of such share of Series B Preferred Stock is paid pursuant to section 4
below. Dividends under this Section 3.1 shall be payable in shares of Common
Stock quarterly on September 30, December 31, March 31 and June 30 of each year
(each, a "Dividend Payment Date") commencing after the Dividend Accrual Date,
except that if any such date is a Saturday, Sunday or legal holiday in the
State of Iowa then such dividend shall be payable on the next day that is not a
Saturday, Sunday or legal holiday in the State of Iowa, to holders of record as
they appear on the stock books of the Corporation or, if applicable, on the
records of the transfer agent for the Corporation on the applicable record
date. The number of shares of
<PAGE> 2
any Common Stock to be issued as a dividend under this Section 3.1 shall be
determined by dividing the amount of dividends to be so paid by the Fair Market
Value of the Common Stock as of the applicable Dividend Payment Date and such
shares of Common Stock shall be issued and distributed to the applicable
holders of Series A Preferred Stock pro rata (including fractional shares) in
accordance with the amount of dividends due to each such holder pursuant to
this Section 3.1.
3.2 The Corporation may, but shall not be required to, issue frac-
tions of shares of Common Stock upon the payment of dividends on the
Series A Preferred Stock. If any fraction of a share of Common Stock would,
except for the provisions of this Section 3.2, be issuable upon the payment of
dividends on any share of Series A Preferred Stock, the Corporation may, in
lieu of issuing such fractional share, either (a) pay in cash an amount equal
to the current value of such fraction, computed on the basis of the Fair Market
Value of the Common Stock as of the applicable Dividend Payment Date or (b)
round such fraction up to a whole share of Common Stock.
4. Liquidation Rights.
4.1 In the event of any liquidation, dissolution or winding up of the
business of the Corporation, whether voluntary or involuntary, each holder of
Series A Preferred Stock shall be entitled to receive, for each share thereof,
out of assets of the Corporation legally available therefor, a preferential
amount in cash equal to (and not more than) the sum of (A) the Stated Value,
plus (B) an amount equal to any dividends accrued pursuant to Section 3.1 that
remain unpaid. All preferential amounts to be paid to the holders of Series A
Preferred Stock in connection with such liquidation, dissolution or winding up
shall be paid before the payment or setting apart for payment of any amount
for, or the distribution of any assets of the Corporation to, the holders of
(i) any series of Preferred Stock whose terms provide that the holders of
Series A Preferred Stock should receive preferential payment with respect to
such distribution (to the extent of such preference) or (ii) Common Stock. If
in any such distribution the assets of the Corporation shall be insufficient to
pay the holders of the outstanding shares of the Series A Preferred Stock (or
the holders of any class or series of capital stock ranking on a parity with
the Series A Preferred Stock as to distributions in the event of a liquidation,
dissolution or winding up of the Corporation) the full amounts to which they
shall be entitled, such holders shall share ratably in any distribution of
assets in accordance with the sums which would be payable on such distribution
if all sums payable thereon were paid in full.
4.2 Holders of shares of Series A Preferred Stock shall not be entitled
to receive any amounts with respect to any liquidation, dissolution or winding
up of the Corporation other than the amounts provided in this Section 4.
Neither a merger nor consolidation of the Corporation into or with another
corporation nor a merger or consolidation of any other corporation into or with
the Corporation, nor a sale, transfer, mortgage, pledge or lease of all or any
part of the
2
<PAGE> 3
assets of the Corporation shall be deemed to be a liquidation, dissolution or
winding up of the Corporation for purposes of this Section 4.
5. Voting Rights. Except as otherwise required by law, the holders of
Series A Preferred Stock shall not have any voting rights.
6. Conversion.
6.1 Conversion Right.
6.1.1 Each holder of Series A Preferred Stock may at any time, and
from time to time, after the Initial Conversion Date, convert any or all of such
holder's shares of Series A Preferred Stock into fully paid and nonassessable
shares of Common Stock in an amount equal to the quotient of (i) the aggregate
Stated Value of the shares of Series A Preferred Stock which are being
converted to Common Stock plus an amount equal to the amount of all accrued and
unpaid dividends as of the date of conversion, divided by (ii) the Conversion
Price (determined as provided in Section 6.3). In order to exercise the
conversion privilege under this Section 6.1.1, the holder of any shares of
Series A Preferred Stock to be converted shall give written notice to the
Corporation at its principal office that such holder elects to convert such
shares of Series A Preferred Stock or a specified portion thereof into shares
of Common Stock as set forth in such notice.
6.1.2 At such time as the certificate or certificates representing
the Series A Preferred Stock which has been converted are surrendered to the
Corporation, the Corporation shall issue and deliver a certificate or
certificates representing the number of shares of Common Stock determined
pursuant to Section 6.1.1. In case of conversion under Section 6.1.1 of only a
part of the shares of Series A Preferred Stock represented by a certificate
surrendered to the Corporation, the Corporation shall issue and deliver a new
certificate for the number of shares of Series A Preferred Stock which have not
been converted. Until such time as the certificate or certificates
representing Series A Preferred Stock which has been converted are surrendered
to the Corporation and a certificate or certificates representing the Common
Stock into which such Series A Preferred Stock has been converted have been
issued and delivered, the certificate or certificates representing the shares
of Series A Preferred Stock which have been converted shall represent the
shares of Common Stock into which such shares of Series A Preferred Stock have
been converted. The Corporation shall pay all documentary, stamp or similar
issue or transfer tax due on the issue of shares of Common Stock issuable upon
conversion of the Series A Preferred Stock.
6.2 Automatic Conversion. On the Automatic Conversion Date, each
share of Series A Preferred Stock shall automatically convert into fully paid
and nonassessable shares of Common Stock in an amount equal to the quotient of
(i) the aggregate Stated Value of such share of Series A Preferred Stock plus an
3
<PAGE> 4
amount equal to the amount of all accrued and unpaid dividends as of the
Automatic Conversion Date, divided by (ii) the Conversion Price. At such time
as the certificate or certificates representing the Series A Preferred Stock
which has been converted are surrendered to the Corporation, the Corporation
shall issue and deliver a certificate or certificates representing the number
of shares of Common Stock determined pursuant to this Section 6.2. Until such
time as the certificate or certificates representing Series A Preferred Stock
which has been converted are surrendered to the Corporation and a certificate
or certificates representing the Common Stock into which such Series A
Preferred Stock has been converted have been issued and delivered, the
certificate or certificates representing the shares of Series A Preferred Stock
which have been converted shall represent the shares of Common Stock into which
such shares of Series A Preferred Stock have been converted. The Corporation
shall pay all documentary, stamp or similar issue or transfer tax due on the
issue of shares of Common Stock issuable upon conversion of the Series A
Preferred Stock.
6.3 The Conversion Price. The price for the conversion of the Series A
Preferred Stock into Common Stock (the "Conversion Price") shall be $2.50.
6.4 Fractional Interests. The Corporation may, but shall not be
required to, issue fractions of shares of Common Stock on the conversion of
Series A Preferred Stock. If any fraction of a share of Common Stock would,
except for the provisions of this Section 6.4, be issuable on the conversion of
any Series A Preferred Stock, the Corporation may, in lieu of issuing such
fractional share, either (a) pay in cash an amount equal to the current Fair
Market Value of such fraction, computed on the basis of the Conversion Price or
(b) round such fraction up to a whole share of Common Stock.
7. Other Provisions.
7.1 Reservation of Shares. The Corporation shall at all times reserve
from its authorized Common Stock a sufficient number of shares to provide for
conversion of all Series A Preferred Stock from time to time outstanding. If
the Common Stock issuable upon conversion of the Series A Preferred Stock is
listed on any national securities exchange or Nasdaq, the Corporation will
cause within 60 days of any such conversion, all shares reserved for such
conversion to be listed on such exchange or Nasdaq, subject to official notice
of issuance upon such conversion.
7.2 Notice of Certain Events. If, at any time, the Corporation shall:
7.2.1 Declare any dividend or other distribution upon its Common Stock;
4
<PAGE> 5
7.2.2 Propose any capital reorganization or any reclassification of
capital stock of the Corporation, or any consolidation or merger of the
Corporation with or into another corporation, or any conveyance of all or
substantially all the assets of the Corporation, or any voluntary dissolution
or liquidation (or if any involuntary dissolution or liquidation of the
Corporation shall be effected);
7.2.3 Propose to issue to holders of its Common Stock rights to
purchase or subscribe for capital stock or securities convertible into or
exchangeable for capital stock;
then, and in each such case, the Corporation shall cause to
be given to the holders of the Series A Preferred Stock, at least 30 days prior
to the date specified in clause (x) or (y) below, as the case may be, a notice
containing a brief description of the proposed action and stating the date on
which (x) a record is to be taken for the purpose of such dividend,
distribution or rights, or (y) such reclassification, reorganization,
consolidation, merger, conveyance, dissolution, or liquidation is to take place
and the date, if any is to be fixed, as of which the holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, or liquidation.
Such mailing shall be a condition precedent to the taking of the action
proposed to be taken by the Corporation.
7.3 Cancellation of Shares of Series A Preferred Stock. No share or
shares of Series A Preferred Stock acquired by the Corporation for any reason
shall be reissued, and all such shares shall be cancelled, retired and
eliminated from the shares of Series A Preferred Stock which the Corporation
shall be authorized to issue.
7.4 Record Holders. The Corporation and its transfer agent, if
any, for the Series A Preferred Stock may deem and treat the record holder of
any shares of Series A Preferred Stock as the sole true and lawful owner
thereof for all purposes, and neither the Corporation nor any such transfer
agent shall be affected by any notice to the contrary.
5
<PAGE> 6
8. Defined Terms.
For purposes hereof, the following terms shall have the meanings
specified below:
(a) Automatic Conversion Date" means the date that is three years after
the Original Issuance Date.
(b) "Common Stock" means the Corporation's no par value Common Stock
(c) "Dividend Accrual Date" means, with respect to any share of Series A
Preferred Stock, the date of issuance of such share of Series A Preferred
Stock.
(d) "Dividend Base" means the Stated Value per share of Series A
Preferred Stock plus any accrued and unpaid dividends under Section 3.1 on that
share of Series A Preferred Stock.
(e) "Fair Market Value" as of a particular date means an amount equal to
the average closing bid price of the Common Stock on Nasdaq (or, in the event
that the Common Stock is traded on a national securities exchange, the average
closing sales price) for the five trading days prior to such date. If the
Common Stock is not traded on Nasdaq or a national securities exchange, "Fair
Market Value" as of a particular date means the fair market value of the Common
Stock as determined by the Corporation's Board of Directors.
(f) "Initial Conversion Date" means the date that is one year after the
Original Issuance Date.
(g) "Nasdaq" means the Nasdaq Stock Market.
(h) "Original Issuance Date" means the date of issuance of the first
share of Series A Preferred Stock to be issued.
SERIES B CONVERTIBLE PREFERRED STOCK
1. Designation and Authorized Shares. The Corporation shall be authorized
to issue 50,000 shares of Series B Convertible Preferred Stock, no par value
(the "Series B Preferred Stock"). Certain terms used herein are defined in
Section 8.
2. Stated Value. Each share of Series B Preferred Stock shall have a
stated value of $100 (the "Stated Value").
3. Dividends.
6
<PAGE> 7
3.1 Dividends shall accrue on each outstanding share of Series B
Preferred Stock at the annual rate of 8% of the then current Dividend Base,
compounded monthly from the Dividend Accrual Date until the earlier of (a) the
day such share of Series B Preferred Stock is converted into shares of Common
Stock pursuant to section 6 below, or (b) the date on which the liquidation
value of such share of Series B Preferred Stock is paid pursuant to section 4
below. Dividends under this Section 3.1 shall be payable in cash when and as
declared by the Board of Directors of the Corporation and to the extent
permitted by the Iowa Business Corporation Act. Such dividends will accrue
whether or not they have been declared and whether or not there are profits,
surplus or other funds of the Corporation legally available for the payment of
dividends. To the extent not paid on September 30, December 31, March 31 and
June 30 of each year (each, a "Dividend Reference Date") commencing after the
Dividend Accrual Date, all dividends which have accrued on each share of Series
B Preferred Stock outstanding during the three-month period (or other period in
the case of the initial Dividend Reference Date") shall be accumulated and
shall remain accumulated dividends with respect to each such share of Preferred
Stock until paid. No record date shall be set for payment of any dividends or
distributions in respect of Common Stock unless and until the payment of all
dividends and distributions provided under this Section 3.1 shall have been
made to the holders of Series B Preferred Stock.
3.2 No dividends shall be paid or declared and set apart for payment on
any Series or series of the Corporation's capital stock ranking, as to
dividends, on a parity with the Series B Preferred Stock ("Parity Dividend
Stock") or junior to the Series B Preferred Stock ("Junior Dividend Stock") for
any period and no purchase, redemption or other acquisition shall be made by
the Corporation of any shares of Parity Dividend Stock or Junior Dividend Stock
unless and until full cumulative dividends have been, or contemporaneously are,
paid or declared and set apart for such payment on the Series B Preferred Stock
for all dividend payment periods terminating on or prior to the date of payment
of such dividends on the Parity Dividend Stock or Junior Dividend Stock. When
dividends are not paid in full upon the Series B Preferred Stock and the Parity
Dividend Stock, all dividends paid or declared and set aside for payment upon
shares of Series B Preferred Stock and the Parity Dividend Stock shall be paid
or declared and set aside for payment pro rata so that the amount of dividends
paid or declared and set aside for payment per share on the Series B Preferred
Stock and the Parity Dividend Stock shall in all cases bear to each other the
same ratio that accrued and unpaid dividends per share on the shares of Series
B Preferred Stock and on the shares of Parity Dividend Stock bear to each
other. Notwithstanding anything to the contrary herein, dividends may be paid
on the Series A Preferred Stock in the form of shares of Common Stock without
regard to whether dividends are paid on the Series B Preferred Stock.
4. Liquidation Rights.
7
<PAGE> 8
4.1 In the event of any liquidation, dissolution or winding up of the
business of the Corporation, whether voluntary or involuntary, each holder of
Series B Preferred Stock shall be entitled to receive, for each share thereof,
out of assets of the Corporation legally available therefor, a preferential
amount in cash equal to (and not more than) the sum of (A) the Stated Value,
plus (B) an amount equal to any dividends accrued pursuant to Section 3.1 that
remain unpaid. All preferential amounts to be paid to the holders of Series B
Preferred Stock in connection with such liquidation, dissolution or winding up
shall be paid before the payment or setting apart for payment of any amount
for, or the distribution of any assets of the Corporation to, the holders of
(i) any series of Preferred Stock whose terms provide that the holders of
Series B Preferred Stock should receive preferential payment with respect to
such distribution (to the extent of such preference) or (ii) Common Stock. If
in any such distribution the assets of the Corporation shall be insufficient to
pay the holders of the outstanding shares of the Series B Preferred Stock (or
the holders of any class or series of capital stock ranking on a parity with
the Series B Preferred Stock as to distributions in the event of a liquidation,
dissolution or winding up of the Corporation) the full amounts to which they
shall be entitled, such holders shall share ratably in any distribution of
assets in accordance with the sums which would be payable on such distribution
if all sums payable thereon were paid in full. The Series A Preferred Stock
shall rank on a parity with the Series B Preferred Stock as to distributions in
the event of a liquidation, dissolution or winding up of the Corporation
4.2 Holders of shares of Series B Preferred Stock shall not be
entitled to receive any amounts with respect to any liquidation, dissolution or
winding up of the Corporation other than the amounts provided in this Section
4. Neither a merger nor consolidation of the Corporation into or with another
corporation nor a merger or consolidation of any other corporation into or with
the Corporation, nor a sale, transfer, mortgage, pledge or lease of all or any
part of the assets of the Corporation shall be deemed to be a liquidation,
dissolution or winding up of the Corporation for purposes of this Section 4.
5. Voting Rights. Except as otherwise required by law, the holders of
Series B Preferred Stock shall not have any voting rights.
6. Conversion.
6.1 Conversion Right.
6.1.1 Each holder of Series B Preferred Stock may at any time, and
from time to time, after the Initial Conversion Date, convert any or all of such
holder's shares of Series B Preferred Stock into fully paid and nonassessable
shares of Common Stock in an amount equal to the quotient of (i) the aggregate
Stated Value of the shares of Series B Preferred Stock which are being
converted to Common Stock plus an amount equal to the amount of all
8
<PAGE> 9
accrued and unpaid dividends as of the date of conversion, divided by (ii) the
Conversion Price (determined as provided in Section 6.3). In order to exercise
the conversion privilege under this Section 6.1.1, the holder of any shares of
Series B Preferred Stock to be converted shall give written notice to the
Corporation at its principal office that such holder elects to convert such
shares of Series B Preferred Stock or a specified portion thereof into shares
of Common Stock as set forth in such notice.
6.1.2 At such time as the certificate or certificates representing
the Series B Preferred Stock which has been converted are surrendered to the
Corporation, the Corporation shall issue and deliver a certificate or
certificates representing the number of shares of Common Stock determined
pursuant to Section 6.1.1. In case of conversion under Section 6.1.1 of only a
part of the shares of Series B Preferred Stock represented by a certificate
surrendered to the Corporation, the Corporation shall issue and deliver a new
certificate for the number of shares of Series B Preferred Stock which have not
been converted. Until such time as the certificate or certificates
representing Series B Preferred Stock which has been converted are surrendered
to the Corporation and a certificate or certificates representing the Common
Stock into which such Series B Preferred Stock has been converted have been
issued and delivered, the certificate or certificates representing the shares
of Series B Preferred Stock which have been converted shall represent the
shares of Common Stock into which such shares of Series B Preferred Stock have
been converted. The Corporation shall pay all documentary, stamp or similar
issue or transfer tax due on the issue of shares of Common Stock issuable upon
conversion of the Series B Preferred Stock.
6.2 Automatic Conversion. On the Automatic Conversion Date, each
share of Series B Preferred Stock shall automatically convert into fully paid
and nonassessable shares of Common Stock in an amount equal to the quotient of
(i) the aggregate Stated Value of such share of Series B Preferred Stock plus an
amount equal to the amount of all accrued and unpaid dividends as of the
Automatic Conversion Date, divided by (ii) the Conversion Price. At such time
as the certificate or certificates representing the Series B Preferred Stock
which has been converted are surrendered to the Corporation, the Corporation
shall issue and deliver a certificate or certificates representing the number
of shares of Common Stock determined pursuant to this Section 6.2. Until such
time as the certificate or certificates representing Series B Preferred Stock
which has been converted are surrendered to the Corporation and a certificate
or certificates representing the Common Stock into which such Series B
Preferred Stock has been converted have been issued and delivered, the
certificate or certificates representing the shares of Series B Preferred Stock
which have been converted shall represent the shares of Common Stock into which
such shares of Series B Preferred Stock have been converted. The Corporation
shall pay all documentary, stamp or similar issue or transfer tax due on the
issue of shares of Common Stock issuable upon conversion of the Series B
Preferred Stock.
9
<PAGE> 10
6.3 The Conversion Price. The price for the conversion of the Series
B Preferred Stock into Common Stock (the "Conversion Price") shall be $2.50.
6.4 Fractional Interests. The Corporation may, but shall not be
required to, issue fractions of shares of Common Stock on the conversion of
Series B Preferred Stock. If any fraction of a share of Common Stock would,
except for the provisions of this Section 6.4, be issuable on the conversion of
any Series B Preferred Stock, the Corporation may, in lieu of issuing such
fractional share, either (a) pay in cash an amount equal to the current Fair
Market Value of such fraction, computed on the basis of the Conversion Price or
(b) round such fraction up to a whole share of Common Stock.
7. Other Provisions.
7.1 Reservation of Shares. The Corporation shall at all times reserve
from its authorized Common Stock a sufficient number of shares to provide for
conversion of all Series B Preferred Stock from time to time outstanding. If
the Common Stock issuable upon conversion of the Series B Preferred Stock is
listed on any national securities exchange or Nasdaq, the Corporation will
cause within 60 days of any such conversion, all shares reserved for such
conversion to be listed on such exchange or Nasdaq, subject to official notice
of issuance upon such conversion.
7.2 Notice of Certain Events. If, at any time, the Corporation shall:
7.2.1 Declare any dividend or other distribution upon its Common
Stock;
7.2.2 Propose any capital reorganization or any reclassification
of capital stock of the Corporation, or any consolidation or merger of the
Corporation with or into another corporation, or any conveyance of all or
substantially all the assets of the Corporation, or any voluntary dissolution
or liquidation (or if any involuntary dissolution or liquidation of the
Corporation shall be effected);
7.2.3 Propose to issue to holders of its Common Stock rights to
purchase or subscribe for capital stock or securities convertible into or
exchangeable for capital stock;
then, and in each such case, the Corporation shall cause to
be given to the holders of the Series B Preferred Stock, at least 30 days
prior to the date specified in clause (x) or (y) below, as the case may be, a
notice containing a brief description of the proposed action and stating the
date on which (x) a record is to be taken for the purpose of such dividend,
distribution or rights, or (y) such
10
<PAGE> 11
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, or liquidation is to take place and the date, if any is to be
fixed, as of which the holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
conveyance, dissolution, or liquidation. Such mailing shall be a condition
precedent to the taking of the action proposed to be taken by the Corporation.
7.3 Cancellation of Shares of Series B Preferred Stock. No share or
shares of Series B Preferred Stock acquired by the Corporation for any reason
shall be reissued, and all such shares shall be cancelled, retired and
eliminated from the shares of Series B Preferred Stock which the Corporation
shall be authorized to issue.
7.4 Record Holders. The Corporation and its transfer agent, if any,
for the Series B Preferred Stock may deem and treat the record holder of any
shares of Series B Preferred Stock as the sole true and lawful owner thereof
for all purposes, and neither the Corporation nor any such transfer agent shall
be affected by any notice to the contrary.
8. Defined Terms.
For purposes hereof, the following terms shall have the meanings
specified below:
(a) Automatic Conversion Date" means the date that is three years after
the Original Issuance Date.
(b) "Common Stock" means the Corporation's no par value Common Stock
(c) "Dividend Accrual Date" means, with respect to any share of Series B
Preferred Stock, the date of issuance of such share of Series B Preferred
Stock.
(d) "Dividend Base" means the Stated Value per share of Series B
Preferred Stock plus any accrued and unpaid dividends under Section 3.1 on that
share of Series B Preferred Stock.
(e) "Fair Market Value" as of a particular date means an amount equal to
the average closing bid price of the Common Stock on Nasdaq (or, in the event
that the Common Stock is traded on a national securities exchange, the average
closing sales price) for the five trading days prior to such date. If the
Common Stock is not traded on Nasdaq or a national securities exchange, "Fair
Market Value" as of a particular date means the fair market value of the Common
Stock as determined by the Corporation's Board of Directors.
11
<PAGE> 12
(f) "Initial Conversion Date" means the date that is one year after the
Original Issuance Date.
(g) "Nasdaq" means the Nasdaq Stock Market.
(h) "Original Issuance Date" means the date of issuance of the first
share of Series B Preferred Stock to be issued.
SECOND: The Articles of Amendment were approved by the Board of Directors
of the Corporation by unanimous written consent dated August 1, 1997, without
shareholder action pursuant to authority granted to the Board by the Articles
of Incorporation in accordance with section 602 of the Iowa Business
Corporation Act.
THIRD: The effective time and date of this document is the date and time
of filing with the Secretary of State of the State of Iowa.
IN WITNESS WHEREOF, the Corporation caused the Articles of Amendment to be
signed by Thomas E. Chaplin, its Chief Executive Officer, this 31st day of
July, 1997.
MURDOCK COMMUNICATIONS CORPORATION
BY /s/ Thomas E. Chaplin
--------------------------------
Thomas E. Chaplin,
Chief Executive Officer
12
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
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