<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 June 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 _________
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 X No
----- -----
On July 31, 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
----- -----
<PAGE> 2
MURDOCK COMMUNICATIONS CORPORATION
FORM 10-QSB
June 30, 1997
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. Balance Sheets as of June 30, 1997 and December 31, 1996
(Unaudited)..................................................... 3
Statements of Operations for the Three Months Ended June 30,
1997 and June 30, 1996 and the Six Months Ended June 30, 1997
and June 30, 1996 (Unaudited)................................... 4
Statements of Cash Flows for the Six Months Ended June 30, 1997
and June 30, 1996 (Unaudited)................................... 5
Notes to Financial Statements (Unaudited)....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 10
PART II - OTHER INFORMATION
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............................................... 17
Item 6. Exhibits and Reports on Form 8-K................................ 17
Signatures...................................................... 18
</TABLE>
2
<PAGE> 3
MURDOCK COMMUNICATIONS CORPORATION
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ - $ 1,241,897
Accounts receivable, net of allowance for doubtful accounts 1,108,899 726,282
AT&T commission receivable - 500,000
Current portion of lease receivable, net of unearned portion 14,465 12,378
Inventory 93,884 51,091
Prepaid expenses 198,419 167,261
Deposit 150,000 -
----------------- -----------------
Total current assets 1,565,667 2,698,909
----------------- -----------------
PROPERTY AND EQUIPMENT:
Land and building 463,693 432,472
Telecommunications equipment 7,142,643 7,490,209
Furniture and equipment 294,355 242,168
Vehicles 27,843 27,843
----------------- -----------------
7,928,534 8,192,692
Accumulated depreciation and amortization (6,530,911) (6,234,203)
----------------- -----------------
1,397,623 1,958,489
Telecommunications equipment under capital lease, net of 1,360,673 1,845,437
accumulated amortization
----------------- -----------------
Property and equipment, net 2,758,296 3,803,926
----------------- -----------------
OTHER ASSETS:
Lease receivable, less current and unearned portions 83,557 91,352
Deposits 17,151 16,509
Investment in joint venture 403,456 -
Software development costs 87,733 -
Cost of purchased equipment location contracts, net of 658,785 626,723
accumulated amortization
Technology license from a related party, net of accumulated 191,667 241,667
amortization
----------------- -----------------
Total other assets 1,442,349 976,251
----------------- -----------------
Total $ 5,766,312 $ 7,479,086
================= =================
LIABILITIES, REDEEMABLE SECURITIES AND COMMON SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 450,000 $ -
Outstanding checks in excess of cash balances 115,575 -
Accounts payable 819,257 530,482
Accrued expenses 695,518 537,962
Current portion of capital lease obligations principally 1,261,058 895,526
with a related party
Current portion of long-term debt with related parties - 133,541
Current portion of long-term debt, others 15,875 15,217
----------------- -----------------
Total current liabilities 3,357,283 2,112,728
LONG-TERM LIABILITIES:
Capital lease obligations principally with a related party, 1,992,558 2,608,952
less current portion
Long-term debt with a related party - 1,206,117
Long-term debt, others, less current portion 270,252 278,358
Deferred income 62,661 73,875
----------------- -----------------
Total liabilities 5,682,754 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 June 30, 1997;
200 at on December 31, 1996 - 24,480
----------------- -----------------
COMMON SHAREHOLDERS' EQUITY:
Common stock, no par or stated value
Authorized: 20,000,000 shares
Issued and outstanding: 4,624,064 shares at June 30, 1997;
4,152,494 shares at December 31, 1996 12,165,708 10,820,898
Common stock warrants
Authorized - 920,000 detachable warrants
Issued and outstanding: 880,000 8,400 13,336
Additional paid-in capital 234,000 224,000
Accumulated deficit (12,324,550) (9,883,658)
----------------- -----------------
Total common shareholders' equity 83,558 1,174,576
----------------- -----------------
Total $ 5,766,312 $ 7,479,086
================= =================
</TABLE>
See notes to financial statements
-3-
<PAGE> 4
MURDOCK COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Call processing revenues $ 1,779,853 $ 1,610,034 $ 3,341,549 $ 3,049,932
AT&T commissions - 1,000,000 - 1,000,000
Sales and rental of equipment 184,052 1,684 278,556 17,219
Recognition of gains deferred from equipment
sales with a related party 13,503 36,627 27,227 72,401
Other income 17,145 11,998 41,963 29,728
--------------- --------------- --------------- ---------------
Total revenues 1,994,553 2,660,343 3,689,295 4,169,280
--------------- --------------- --------------- ---------------
COST OF SALES:
Call processing 1,408,846 1,212,614 2,703,637 2,201,670
Equipment inventory and rentals 125,036 421 203,493 8,391
--------------- --------------- --------------- ---------------
Total cost of sales 1,533,882 1,213,035 2,907,130 2,210,061
--------------- --------------- --------------- ---------------
GROSS OPERATING PROFIT 460,671 1,447,308 782,165 1,959,219
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE (847,507) (636,134) (1,618,628) (1,226,279)
DEPRECIATION AND AMORTIZATION EXPENSE (544,337) (526,264) (1,049,718) (1,052,528)
SHARE OF LOSS FROM JOINT VENTURE (116,921) - (200,136) -
--------------- --------------- --------------- ---------------
OPERATING INCOME (LOSS) (1,048,094) 284,910 (2,086,317) (319,588)
INTEREST EXPENSE (165,636) (381,102) (349,680) (606,163)
--------------- --------------- --------------- ---------------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (1,213,730) (96,192) (2,435,997) (925,751)
INCOME TAXES - (2,807) (4,726) (7,235)
--------------- --------------- --------------- ---------------
LOSS BEFORE EXTRAORDINARY ITEM (1,213,730) (98,999) (2,440,723) (932,986)
EXTRAORDINARY ITEM - GAIN FROM RELATED
PARTY RESTRUCTURING - 1,084,314 - 1,084,314
--------------- --------------- --------------- ---------------
NET INCOME (LOSS) $ (1,213,730) $ 985,315 $ (2,440,723) $ 151,328
=============== =============== =============== ===============
PRO FORMA NET INCOME (LOSS) $ (1,213,730) $ 997,889 $ (2,440,723) $ 170,670
=============== =============== =============== ===============
PRO FORMA NET INCOME (LOSS) PER COMMON SHARE
Loss before extraordinary item $ (0.28) $ (0.04) $ (0.58) $ (0.37)
Extraordinary item - 0.40 - 0.44
--------------- --------------- --------------- ---------------
Net income (loss) $ (0.28) $ 0.36 $ (0.58) $ 0.07
=============== =============== =============== ===============
PRO FORMA WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 4,309,684 2,487,349 4,231,089 2,487,349
=============== =============== =============== ===============
</TABLE>
See notes to financial statements
4
<PAGE> 5
MURDOCK COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(2,440,723) $ 151,328
Adjustments to reconcile net income (loss)
to net cash flows from operating activities:
Extraordinary gain on related party restructuring - (1,084,314)
Depreciation and amortization 1,099,716 1,158,968
Noncash interest expense 43,106 54,136
Noncash compensation expense 43,333 -
Recognition of deferred income (27,227) (72,401)
Share of loss from joint venture 200,136 -
Changes in operating assets and liabilities:
Receivables 123,091 (611,660)
Inventory (42,793) (56,236)
Prepaid expenses (64,158) (69,907)
Outstanding checks in excess of cash balance 115,575 389,663
Accounts payable 288,776 (50,388)
Accrued expenses 157,556 403,164
Deferred income 16,013 36,165
----------- ----------
Net cash flows from operating activities (487,599) 248,518
----------- ----------
INVESTING ACTIVITIES:
Purchases of property and equipment (97,442) (121,491)
Purchase of equipment leased to others under direct financing - (108,614)
Payments for site acquisition costs (288,255) -
Investment in joint venture (254,045) -
Software development costs (87,733)
Deposits (150,642) (3,542)
----------- ----------
Net cash flows from investing activities (878,117) (233,647)
----------- ----------
FINANCING ACTIVITIES:
Borrowings on note payable 600,000 700,000
Payments on notes payable (150,000) (925,000)
Borrowings on capital lease obligations 25,169 405,799
Payments on capital lease obligations (288,787) (177,995)
Borrowings of long-term debt with related parties - 135,160
Payments on long-term debt, with related parties (34,571) (280,000)
Payments on long-term debt, others (7,446) (6,842)
Payment of underwriter and offering expenses - (25,000)
Proceeds from excercise of common stock warrants 5,600 -
Repurchase of 10% Series A Redeemable Preferred Stock
and detachable common stock warrants (26,146) -
----------- ----------
Net cash flows from financing activities 123,819 (173,878)
----------- ----------
NET DECREASE IN CASH (1,241,897) (159,007)
CASH AT BEGINNING OF PERIOD 1,241,897 159,007
----------- ----------
CASH AT END OF PERIOD $ - $ -
=========== ==========
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 320,091 82,413
Cash paid during the period for income taxes 4,726 7,235
</TABLE>
See notes to financial statements
5
<PAGE> 6
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 # 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 six months ended June 30, 1997 were
$87,733. The Company will begin amortizing the software development costs in
the third quarter of 1997 when the product is 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. Interest on the outstanding balance accrues monthly at 2.0% over the
prime rate.
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 six months ended June 30, 1997, the
Company had a pretax loss of $2.4 million. A valuation allowance for the
entire balance of deferred tax assets has been recorded because of uncertainty
over their future realization.
6
<PAGE> 7
The Company has recorded current income tax expense in the amount of
approximately $4,700 for the six months ended June 30, 1997. This relates
primarily to certain state income taxes.
Initial Public Offering
On October 21, 1996, the Company completed an initial public offering of the
Company's Common Stock and Common Stock warrants. The Company sold 800,000
units, comprised of two shares of Common Stock and one warrant to purchase
Common Stock, at $10.01 per unit. The Company received proceeds as follows:
<TABLE>
<S> <C>
Sale of 800,000 units $8,008,000
Offering expenses 1,481,629
----------
Net proceeds to the Company $6,526,371
==========
</TABLE>
Equity
On April 16, 1997, the Board of Directors approved the award of 10,000
non-qualified stock options with an exercise price of $4.16 and immediate
vesting for Directors whose terms ended on May 31, 1997. The Board of
Directors also approved the award of 15,000 non-qualified stock options
with an exercise price of $3.25 and immediate vesting for Directors beginning
their one-year term on June 1, 1997. The Company recognized $10,000 of
compensation expense related to the award of these options during the three
months ended June 30, 1997.
In June 1997 Berthel, Fisher & Company, Inc. and certain of its affiliates
("Berthel"), converted note obligations with a face value of $1.7 million and a
carrying value of approximately $1.3 million into 465,625 shares of the
Company's Common Stock. Additionally, the Company has agreed to issue up to
187,067 in "adjustment shares" to Berthel should the lowest average closing
trading price of the shares for any 30-day period during the 90 days after the
shares become registered fall below $4.00 per share. The Company is required
to register the shares by November 1, 1997. These "adjustment shares" would be
issued on a prorata basis with the maximum being issued if the aforementioned
average closing price decreases to $2.50 per share.
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 stated value of
$100, accrues dividends at 8% annually and is payable quarterly 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, 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 $1.4
million of cash during the six months ended June 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 working capital and capital
expenditures. At June 30, 1997, the Company had total common shareholders'
equity of approximately $0.1 million. The current listing criteria for the
Nasdaq SmallCap Market requires shareholders' equity of at lease $1.0 million.
The Company intends to offer up to $5.0 million of Convertible Preferred in a
private placement during the third quarter of 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, if the Company is unable to meet the Nasdaq listing
standards, the Common Stock of the Company could be subject to delisting. As
a consequence of such delisting, holders of Common Stock would likely find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, the Common Stock.
7
<PAGE> 8
Deposit
On January 7, 1997, the Company paid a $150,000 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%. The Company has requested that the deposit be refunded in the third
quarter of 1997.
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 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 will provide
consumer telecommunications services related to the IVR platforms.
Under the agreement, cash shall be distributed first, in an amount equal to 95%
of the net distributable cash to the Company 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.
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 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
8
<PAGE> 9
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.
Letter of Intent
On June 11, 1997, the Company entered into a nonbinding letter of intent to
acquire Priority International Communications ("PIC") and PIC Resources
Corporation ("PIC-R"), both based in Austin Texas (the "PIC Acquisition").
PIC-R is the majority owner of ATN Communications, Inc., a Mobile, Alabama
based carrier company providing long distance services and live operator
services to the hospitality, public payphone and private payphone industries.
Revenues of PIC and PIC-R were approximately $5.3 million for the twelve months
ended March 31, 1997 and total assets of PIC and PIC-R were $1.8 million at
March 31, 1997. No assurance can be given that the Company will be able to
reach a mutually acceptable definitive agreement with PIC and PIC-R, or that
the acquisition will be completed, or, if the acquisition is completed, that
the Company will be able to successfully integrate the operations of PIC and
PIC-R with the Company's operations.
Reclassification
Certain amounts in the June 30, 1996 financial statements have been
reclassified to conform to the June 30, 1997 financial statement presentation.
9
<PAGE> 10
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 Ending June 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
June 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues 100% 100%
Cost of sales 78% 45%
Selling, general and administrative 42% 24%
Depreciation and amortization 27% 20%
--------- ---------
Total operating expenses 147% 89%
Share of loss from joint venture 6% 0%
--------- ---------
Operating income (loss) (53)% 11%
Interest expense (8)% (14)%
Income taxes 0% 0%
Extraordinary gain 0% 40%
--------- ---------
Net income (loss) (61)% 37%
========= =========
</TABLE>
REVENUES. Total revenues decreased to $2.0 million for the three months ended
June 30, 1997 from $2.7 million for the three months ended June 30, 1996, a
decrease of $0.7 million, or 26%. Call processing revenues increased to $1.8
million for the three months ended June 30, 1997 from $1.6 million for the
three months ended June 30, 1996, representing an increase of $0.2 million, or
13%. This increase was primarily caused by the increase in revenues derived
from the Lodging Partnership program with AT&T. Calling commissions from AT&T
increased to $0.9 million for the three months ended June 30, 1997 from $0.7
million for the three months ended June 30, 1996, an increase of $0.2 million
or 29%. This increase was caused primarily by an increase in the number of
rooms enrolled in the Lodging Partnership program and an increase in
commissions paid per call. Monthly bonuses from AT&T increased to $0.4 million
for the three months ended June 30, 1997 from $0.3 million for the three months
ended June 30, 1996. OSP revenues decreased to $0.3 million for the three
months ended June 30, 1997, from $0.4 million for the three months ended June
30, 1996, representing a decrease of $0.1 million 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 remained
constant at $0.2 million for the three months ended June 30, 1997 and 1996. In
June 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 122,000 hotel and motel rooms as of
June 30, 1997, as compared to 109,000 hotel and motel rooms as of March 31,
1997.
Equipment sales and rentals generated a net profit of $59,000 for the three
months ended June 30, 1997, and a net profit of $1,000 for the three months
ended June 30, 1996, for an increase of $58,000.
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<PAGE> 11
COST OF SALES. Cost of sales for call processing increased to $1.4 million for
the three months ended June 30, 1997, from $1.2 million for the three months
ended June 30, 1996, an increase of $0.2 million or 17%. 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
program. Commissions paid to hotels and motels increased to $1.2 million for
the three months ended June 30, 1997, from $1.0 million for the three months
ended June 30, 1996. The increase in commissions paid to hotels and motels is
due to the increase in commissions received under the Lodging Partnership
program with AT&T. Commissions paid to hotels and motels as a percentage of
recurring revenue increased to 67% for the three months ended June 30, 1997
from 63% for the three months ended June 30, 1996. Costs of transmission
associated with providing OSP and one-plus services decreased to $0.2 million
for the three months ended June 30, 1997, from $0.3 million for the three
months ended June 30, 1996, for a decrease of $0.1 million or 33%.
GROSS OPERATING PROFIT. Gross operating profit decreased to $0.5 million for
the three months ended June 30, 1997, from $1.4 million for the three months
ended June 30, 1996, representing a decrease of $0.9 million or 64%. This
decrease was primarily due to the 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. No such bonuses were available to
the Company for the three months ended June 30, 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses, increased to $0.8 million for the three months ended June 30, 1997,
from $0.6 million for the three months ended June 30, 1996 an increase of $0.2
million or 33%. This increase is due primarily to normal increases in salary
and the addition of 6 full time employees, increases in professional fees, and
increases in travel and other selling expenses associated with increased sales.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization remained constant
at $0.5 million for the three months ended June 30, 1997 and 1996.
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 June 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 June 30, 1997, from $0.4 million for the three months ended June
30, 1996, a decrease of $0.2 million or 50%. 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.
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.
11
<PAGE> 12
Six Months Ending June 30, 1997 and 1996
The following table sets forth statements of operations items and the
percentages that such items bear to revenues:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues 100% 100%
Cost of sales 79% 52%
Selling, general and administrative expenses 44% 29%
Depreciation and amortization 28% 25%
-------- --------
Total operating expenses 151% 106%
Share of loss from joint venture 5% 0%
-------- --------
Operating loss (56)% (6)%
Interest expense (9)% (16)%
Income taxes 0% 0%
Extraordinary gain 0% 26%
-------- --------
Net income (loss) (66)% 4%
======== ========
</TABLE>
REVENUES. Total revenue decreased to $3.7 million for the six months ended
June 30, 1997 from $4.2 million for the six months ended June 30, 1996, a
decrease of $0.5 million, or 12%. Call processing revenues increased from $3.0
million for the six months ended June 30, 1996 to $3.3 million for the six
months ended June 30, 1997, representing an increase of $0.3 million or 10%.
This increase was primarily caused by an increase in the number of hotels
served under the Lodging Partnership with AT&T. Calling commissions from AT&T
increased to $1.8 million for the six months ended June 30, 1997 from $1.4
million for the six months ended June 30, 1996, an increase of $0.4 million or
29%. During the six months ended June 30, 1997, the Company received calling
commissions on a per call basis under the Lodging Partnership. Monthly bonuses
from AT&T increased from $0.6 million for the six months ended June 30, 1996 to
$0.7 million for the six months ended June 30, 1997, representing an increase
of $0.1 million or 17%. This increase was primarily caused by an increase in
the number of rooms enrolled in the Lodging Partnership program with AT&T. OSP
revenues decreased to $0.5 million for the six months ended June 30, 1997 from
$0.7 million for the six months ended June 30, 1996, representing a decrease of
$0.2 million, or 29%. This decrease was primarily caused by the decrease in
calls carried by the Company as it converted customers into the Lodging
Partnership program with AT&T. One-plus revenues remained constant at $0.3
million for the six months ended June 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 122,000 hotel and motel rooms as of
June 30, 1997, as compared to 105,000 hotel and motel rooms as of June 30,
1996.
Equipment sales and rentals generated a net profit of $75,000 for the six
months ended June 30, 1997 and a net profit of $6,000 for the six months ended
June 30, 1996, for an increase of $69,000.
COST OF SALES. Cost of sales for call processing increased to $2.7 million
for the six months ended June 30, 1997, from $2.2 million for the six months
ended June 30, 1996, an increase of $0.5 million or 23%. 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 $2.2 million for the six months
ended June 30, 1997, from $1.6 million for the six months ended June 30,
12
<PAGE> 13
1996, representing an increase of $0.6 million or 38%. Commissions as
a percent of revenues increased to 67% for the six months ended June 30, 1997,
from 53% for the six months ended June 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 $0.5 million for the six months ended June 30, 1997, from
$0.6 million for the six months ended June 30, 1996, for a decrease of $0.1
million or 17%.
GROSS OPERATING PROFIT. Gross operating profit decreased to $0.8 million for
the six months ended June 30, 1997, from $2.0 million for the six months ended
June 30, 1996, representing a decrease of $1.2 million or 60%. 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 six months ended June 30, 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased to $1.6 million for the six months ended June 30, 1997, from
$1.2 million for the six months ended June 30, 1996, an increase of $0.4
million or 33%. This increase is due primarily to normal increases in salary
and the addition of 6 full-time employees, increases in professional fees and
increases in travel and other selling expenses associated with increased sales.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization remained
constant at $1 million for the six months ended June 30, 1997 and 1996.
SHARE OF NET LOSS FROM JOINT VENTURE. The Company's share of the net loss of
Guide*Star, LLC, was $0.2 million for the six months ended June 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 $0.6 million for the six
months ended June 30, 1996 to $0.3 million for the six months ended June 30,
1997, representing a decrease of $0.4 million or 57%. 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 June 30, 1997, the Company's current liabilities of $3.4 million exceeded
current assets of $1.6 million, resulting in a working capital deficit of $1.8
million. During the six months ended June 30, 1997, the Company used $0.5
million in cash for operating activities, used $0.9 million in cash for
investing activities and generated $0.1 million in cash from financing
activities. Of the cash used for
13
<PAGE> 14
investing activities, $0.3 million was used for site 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 new
debt and capital lease obligations of $0.6 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 June 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.
On August 1, 1997, the Company amended its Articles of Incorporation to
authorize the issuance of 50,000 shares of Series A Convertible Preferred Stock
(the "Convertible Preferred") with a stated value of $100 per share. The
Convertible Preferred accrues dividends at 8% per annum and is payable
quarterly in cash or Common Stock at the Company's option. The Convertible
Preferred is convertible into shares of Common Stock at a conversion rate of
$2.50 per common share. The Convertible Preferred is automatically converted
into common shares, three years after its issuance. The Company intends to
offer up to $5.0 million of Convertible Preferred in a private placement during
the third quarter of 1997. However, no assurance can be given that the Company
will be able to raise adequate funds from this financing to meet the Company's
cash needs.
The Company does not believe that its existing capital and anticipated
funds from operations will be sufficient to meet its anticipated cash needs 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,
if the proposed PIC Acquisition is consummated, the Company may require up to
$3.3 million within 18 months after the closing of such acquisition to fund the
acquisition. The Company currently intends to fund its working capital needs
and the PIC Acquisition through the private placement offering of up to $5.0
million of Convertible Preferred in the third quarter of 1997 and to fund the
implementation of the TeleManager system through a debt financing in 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. 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 complete its planned private placement of Convertible
Preferred or to otherwise increase the Company's equity to achieve compliance
with the listing criteria of the Nasdaq SmallCap Market, the Common Stock could
be subject to delisting from the Nasdaq SmallCap Market.
14
<PAGE> 15
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.
As of June 30, 1997, the Company is not a party to any material
pending legal proceedings.
Item 2. Changes in Securities.
There have been no changes in the status of the securities of the
Company during the first quarter of 1997. 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. The Common Stock was issued to Berthel in reliance
on the exemption from registration provided by sections 4(2) and/or
3(a)(9) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities.
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
ANNUAL MEETING OF SHAREHOLDERS. The Company's Annual Meeting of
Shareholders (the "Annual Meeting") was held on May 28, 1997 for the
purpose of electing six directors for the ensuing year and ratifying
the appointment of Deloitte & Touche LLP as the firm of independent
auditors of the Corporation for the fiscal year ending December 31,
1997.
Election of Directors. Set forth below is information regarding the
3,258,464 shares of the Company's Common Stock (78% of the total number
of shares of Common Stock entitled to vote at the Annual Meeting) voted
for the election of directors at the Annual Meeting.
Director-nominee: Guy O. Murdock
Votes FOR: 3,249,964
Votes WITHHELD: 8,500
Director-nominee: Thomas E. Chaplin
Votes FOR: 3,249,964
Votes WITHHELD: 8,500
Director-nominee: Colin P. Halford
Votes FOR: 3,249,964
Votes WITHHELD: 8,500
Director-nominee: John C. Poss
Votes FOR: 3,249,964
Votes WITHHELD: 8,500
Director-nominee: Steven R. Ehlert
Votes FOR: 3,249,964
Votes WITHHELD: 8,500
Director-nominee: Larry A. Erickson
Votes FOR: 3,249,964
Votes WITHHELD: 8,500
Ratification of Auditors. Set forth below is information regarding
the 3,258,464 shares of the Company's Common Stock (78% of the total
number of shares of Common Stock entitled
16
<PAGE> 17
to vote at the Annual Meeting) voted with respect to the ratification
of Deloitte & Touche LLP as the Corporation's auditors for fiscal
1997:
Votes FOR: 3,250,164
Votes AGAINST: 4,000
Votes ABSTAINED: 4,300
SPECIAL MEETING OF SHAREHOLDERS. The Company held a Special
Meeting of Shareholders (the "Special Meeting") on June 24, 1997 for
the purpose of considering the approval of a proposed amendment to the
Company's Restated Articles of Incorporation which (a) increases the
total number of authorized shares of Common Stock from 7,500,000 to
20,000,000, (b) eliminates the Company's 10% Series A Preferred Stock
and (c) creates a new class of serial preferred stock and authorizes
the issuance of up to 1,000,000 shares of serial preferred stock. Set
forth below is information regarding the 2,484,093 shares of the
Company's Common Stock (60% of the total number of shares of Common
Stock entitled to vote at the Annual Meeting) voted with respect to
the approval of the proposed amendment to the Company's Restated
Articles of Incorporation:
Votes FOR: 2,408,648
Votes AGAINST: 52,766
Votes ABSTAINED: 22,679
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 Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1997 (file No.
000-21463) filed by the Company with the Securities and
Exchange Commission on May 15, 1997.)
10.1 Note Exchange Agreement, dated as of June 5, 1997, by and
among the Company, Berthel Fisher & Company Leasing, Inc.,
Berthel Fisher & Company and T.J. Berthel Investment, L.P.
10.2 Employment Agreement, dated as of April 5, 1997, by and
between the Company and Thomas E. Chaplin
27 Financial Data Schedule
Reports on Form 8-K: None in the second 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 12th day of August, 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
EXHIBIT 10.1
NOTE EXCHANGE AGREEMENT
THIS AGREEMENT, dated as of June 5, 1997, is by and among MURDOCK
COMMUNICATIONS CORPORATION, an Iowa corporation (the "Company"), BERTHEL FISHER
& COMPANY LEASING, INC. ("BFCL"), BERTHEL FISHER & COMPANY ("BFC") and T.J.
BERTHEL INVESTMENT, L.P. ("TJB") (BFCL, BFC and TJB are collectively referred
to as the "Investors").
RECITALS
A. BFCL is the holder of a $750,000 term note issued by the Company dated
January 31, 1997, and each of BFC and TJB is the holder of a $500,000
promissory note issued by the Company dated December 31, 1996 (together, the
"Notes").
B. The Company desires to purchase, and BFCL, BFC and TJB desire to sell
the Notes in exchange for shares of the Company's common stock (the "Shares").
AGREEMENTS
In consideration of the recitals and the mutual agreements set forth
below, the parties agree:
1. Purchase of Notes.
(a) Purchase of Notes. The Company agrees to purchase from BFCL BFC
and TJB, and each such Investor agrees to sell to the Company, the Notes in
exchange for, in the aggregate, 465,625 Shares.
(b) Issuance of Stock; Surrender of Notes. Upon receipt of the Notes,
marked "paid in full," the Company agrees to issue the Shares to the Investors,
allocated as set forth on Exhibit A.
(c) Adjustment Shares. If the "Adjustment Price" (as defined below)
is less than $4.00, additional Shares (the "Adjustment Shares") will be issued
to the Investors within ten business days after the end of the 90-day period
beginning on the effective date of the Company's registration statement
covering the Shares (the "Effective Date"). "Adjustment Price" means the
lowest average closing bid price of the Shares during any period of 30
consecutive days during the period beginning on the date of this Agreement and
ending 90 days after the Effective Date. If the Adjustment Price is $4.00 or
greater, no Adjustment Shares will be issued. The maximum number of Adjustment
Shares that may be issued is 187,067 Shares.
<PAGE> 2
(i) Adjustment Shares Issued to BFCL. The Adjustment shares to be
issued BFCL shall be the lesser of (1) 129,375 or (2) (862,500/Adjustment
Price) less 215,625.
(ii) Adjustment Shares Issued to BFC. The Adjustment Shares to be
issued BFC shall be the lesser of (1) 28,846 or (2) (500,000/Adjustment Price)
less 125,000.
(iii) Adjustment Shares Issued to TJB. The Adjustment Shares to be
issued TJB shall be the lesser of (1) 28,846 or (2) (500,000/Adjustment Price)
less 125,000.
2. Representations and Warranties of the Company. In order to induce the
Investors to enter into and perform their obligations under this Agreement, the
Company makes the following representations and warranties:
(a) Existence and Rights. The Company is a corporation duly
organized and validly existing under the laws of the State of Iowa. The
Company has the corporate power and authority to enter into and perform this
Agreement. The execution and performance of this Agreement by the Company
have been duly authorized.
(b) The Shares. The Shares issuable to the Investors under this
Agreement have been duly authorized and, when issued in accordance with the
terms of this Agreement, will be duly and validly issued, fully paid and
nonassessable.
3. Representations and Warranties of the Investors. In order to induce
the Company to enter into and perform its obligations under this Agreement,
each Investor severally and individually makes the following representations
and warranties:
(a) Existence and Rights. Such Investor is a limited partnership or
corporation, as applicable, duly organized and validly existing under the laws
of its jurisdiction of organization. Such Investor has the requisite power and
authority to enter into and perform this Agreement. The execution and
performance of this Agreement by such Investor have been duly authorized.
(b) Ownership. The Note to be sold to the Company by such Investor is
owned beneficially and of record by the Investor and will be transferred to the
Company by the Investor free and clear of any lien, charge, encumbrance,
security interest, pledge or other restriction.
(c) Accredited Investor. Except for TJB, the Investor is an
"accredited investor" as such term is defined in Rule 501(a) promulgated under
the
2
<PAGE> 3
Securities Act of 1933, as amended (the "Securities Act"). Each Investor is
an entity which has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of an investment
in the Company and able to bear the substantial economic risks of such an
investment. The Investor has relied on consultations with the Investor's
legal, financial and tax advisers with respect to this Agreement, and its
investment in the Company, and has reviewed the information set forth in the
Company's prospectus dated October 21, 1996 and all reports filed by the
Company under the Securities Exchange Act of 1934 with the Securities and
Exchange Commission (the "SEC"), receipt of which are hereby acknowledged. The
Investor has not relied upon any statements or representations of the Company
with respect to its investment in the Company, except as specifically set forth
in this Agreement. The Shares will not be sold or transferred by the Investor
in violation of the Securities Act or any state or other jurisdiction's
securities laws. The Investor is aware that the Shares have not been registered
under the Securities Act or any state or other jurisdiction's securities laws,
that they must be held indefinitely unless subsequently registered or an
exemption from such registration is available. The Investor is aware that any
exemption from the registration requirements of the Securities Act pursuant to
Rule 144 promulgated thereunder is not presently available. The Investor
confirms that the Company has made available to the Investor the opportunity to
ask questions of its officers and to acquire such additional information about
the business and financial condition of the Company as the Investor has
requested, which additional information, if so requested, has been
satisfactorily received.
4. Registration.
(a) Shelf Registration. The Company will file a shelf registration
statement with the SEC covering the resale by the Investors of up to 652,692
Shares no later than July 10, 1997. The Company will use its best efforts to
cause such shelf registration statement to be effective no later than November
1, 1997. In connection with such registration, the Investors undertake to
provide all such information and materials and to take all such actions as may
be required in order to permit the Company to comply with all applicable
requirements of the SEC and to obtain acceleration of the effective date of the
registration statement. Sections 4(b) through 4(d) will apply only if the
Company fails to register the Shares (on or prior to November 1, 1997) pursuant
to this section 4(a) and the Investors still hold any Shares.
(b) Piggyback Rights. Whenever the Company proposes or is requested
or receives a demand to register the sale of any Shares under the Securities Act
and the registration form to be used may be used for the registration of the
sale of the Shares, the Company shall give prompt written notice to the
Investor of its intention to effect such a registration (a "Notification") and,
subject to section 4(c) below, will include in such registration all Shares
with respect to which the Company has received a written request (a "Piggyback
Request") for
3
<PAGE> 4
inclusion therein within fifteen days after the receipt by any Investor of the
Notification (a "Piggyback Registration"). No Piggyback Request shall be made
for fewer than 25,000 Shares. No Piggyback Request may be made later than two
years from the date hereof and if not so made, the Investors shall have no
right to a Piggyback Registration.
(c) Priorities. If a Piggyback Registration is an underwritten
primary registration on behalf of the Company, and the managing underwriter
advises the Company in writing that in its opinion the number of Shares
requested to be included in such registration exceeds the number which can be
sold in such offering without a material adverse effect on the offering, the
Company shall include in such registration (i) first, the Shares the Company
proposes to sell on its own behalf, (ii) second, the Shares stock to be sold by
other shareholders who have registration rights pursuant to agreements executed
prior to the date hereof, pro rata among such other shareholders (if all of
such shares may not be sold) on the basis of the number of Shares owned by such
other shareholders, (iii) third, the Shares to be sold by the Investor, and
(iv) fourth, any other Shares requested to be included in such registration. If
a Piggyback Registration is an underwritten secondary registration on behalf of
shareholders other than the Company, and the managing underwriter advises the
Company in writing that in its opinion the number of Shares requested to be
included in such registration exceeds the number which can be sold in such
offering without a material adverse effect on the offering, the Company shall
include in such registration, (i) first, the Shares requested to be included
therein by the holders requesting such registration, (ii) second, the Shares of
other stockholders who have registration rights pursuant to agreements executed
prior to the date hereof, pro rata among such other shareholders (if all of
such Shares may not be sold) on the basis of the number of shares owned by such
other shareholders, (iii) third, the Shares to be sold by the Investors, and
(iv) fourth, the other Shares requested to be included in such registration.
(d) Undertakings. Any Piggyback Request shall express the Investors'
present intent to offer the Shares to be included in the registration statement
for distribution and contain an undertaking to provide all such information and
materials and to take all such actions as may be required in order to permit
the Company to comply with all applicable requirements of the SEC and to obtain
acceleration of the effective date of the registration statement.
(e) Compliance. As long as any Investor owns Shares issued under this
Agreement, the Company agrees to file all reports required to be filed by it
under the Securities Exchange Act of 1934 and to use its best efforts to comply
with the public information provisions of Rule 144 promulgated thereunder. In
addition, the Company will register the Shares issued under this Agreement or
NASDAQ upon the Effective Date.
4
<PAGE> 5
5. Investors' Options. If the registration statement described in section
4(a) is not declared effective by the SEC on or prior to November 1, 1997, each
Investor shall have the option, exercisable prior to December 1, 1997, to put
the Shares held by it back to the Company in exchange for a promissory note
identical in all material respects to such Investor's Note described in Recital
A of this Agreement.
6. Costs and Expenses. Subject to this section 6, below, the entire cost
and expense of the registration pursuant to section 4 shall be borne by the
Company. The costs and expenses of such registration shall include, without
limitation, the fees and expenses of the Company's counsel and its independent
accountants and all other out-of-pocket costs and expenses of the Company
incident to the preparation and filing under the Securities Act of the
registration statement and all amendments and supplements thereto and the
prospectus contained therein; provided, however, that under no circumstances
shall the Company be liable or responsible for printing expenses, expenses of
distributing prospectuses and related documents, the fees and expenses of
counsel and accountants of the Investors or underwriting discounts and
commissions payable in connection with any sale of the Shares.
7. Miscellaneous. Any change or amendment to this Agreement must be in
writing and signed by the party or parties against whom such change, amendment
or waiver is sought to be enforced. This Agreement contains the entire
agreement among the parties hereto with respect to the transactions
contemplated herein. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
MURDOCK COMMUNICATIONS CORPORATION
BY /s/ David F. Schultz
-----------------------------
Its Chief Financial Officer
--------------------------
BERTHEL FISHER & COMPANY
LEASING, INC.
BY /s/ Thomas Berthel
-----------------------------
Its President
--------------------------
BERTHEL FISHER & COMPANY
BY /s/ Thomas Berthel
-----------------------------
Its President
--------------------------
5
<PAGE> 6
T.J. BERTHEL INVESTMENTS, L.P.
BY /s/ Thomas Berthel
--------------------------------
Its President and General Partner
-----------------------------
6
<PAGE> 7
EXHIBIT A
Investor Allocation
-------- ----------
Berthel Fisher & Company
Leasing, Inc. 215,625 Shares
T.J. Berthel Investments, L.P. 125,000 Shares
Berthel Fisher & Company 125,000 Shares
<PAGE> 1
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made as of April 4, 1997, by and between
MURDOCK COMMUNICATIONS CORPORATION, an Iowa corporation (the "Corporation"),
and THOMAS E. CHAPLIN (the "Employee").
RECITALS
The Corporation and the Employee acknowledge the following:
A. The Employee has valuable expertise and experience which will enable
him to provide valuable business and management services to the Corporation.
B. The Corporation desires to assure itself of the Employee's services and
the Employee desires to make his services available to the Corporation on the
terms and conditions set forth below.
AGREEMENTS
In consideration of the mutual covenants and agreements set forth in this
Agreement, the parties agree as follows:
1. Employment. The Corporation employs the Employee and the Employee
accepts employment with the Corporation on the terms and conditions set forth
in this Agreement.
2. Term. The original term of the Employee's employment hereunder shall
commence on the date of this Agreement and continue until April 4, 1999, and
renew automatically from year to year thereafter, unless terminated earlier
pursuant to paragraph 6 of this Agreement or unless written notice is given by
either party to the other at least 90 days before the end of the original term
or any renewal term that such employment shall cease as of the end of such term
(the "Employment Period").
3. Duties. The Employee will initially serve as the Corporation's Chief
Executive Officer and will perform the duties specified in the Corporation's
By-Laws and specified by the Board of Directors from time to time. The
Employee will devote his entire business time, effort, skill and attention to
such employment.
<PAGE> 2
4. Compensation.
(a) Base Salary. The Employee shall receive a base annual salary of
$130,000, payable in regular and equal semi-monthly installments ("Base
Salary").
(b) Salary Adjustment. The Compensation Committee of the Board of
Directors (the "Compensation Committee") will review at least annually the
Employee's Base Salary to determine whether it should be increased.
(c) Incentive Bonus. During the term of this Agreement, the Employee
will be eligible to participate in an incentive compensation program to be
developed by the Compensation Committee. The terms and conditions of such
program, including the amount of any bonus payable to the Employee, and the
performance objectives to be met for a bonus to be paid, will be in the sole
discretion of the Compensation Committee.
(d) Stock Options. The Corporation and the Employee have, upon the
execution of this Agreement, executed and delivered the Stock Option Agreement
attached to this Agreement as Annex A.
5. Fringe Benefits.
(a) Group Insurance. The Employee will be eligible to participate in
the Corporation's group insurance programs on the same terms and conditions as
are available to other employees of the Corporation generally.
(b) Vacation. The Employee will be entitled to receive four weeks of
paid vacation annually. Such vacation shall be taken at such times and in such
intervals as are mutually acceptable to the Employee and the Corporation.
(c) Automobile. The Corporation will provide the Employee with full use
of an automobile (retail price not to exceed $30,000) owned or leased by the
Corporation for use in carrying out his duties for the Corporation and for use
in such personal business as he deems appropriate. The Corporation agrees to
provide adequate insurance for the automobile and occupants and to pay
maintenance costs necessary to keep the automobile in good operating condition.
(d) Generally. In addition to the benefits described above, the
Corporation will provide the Employee with the same fringe benefits as are
enjoyed by other employees of the Corporation generally.
2
<PAGE> 3
6. Termination of Employment. If the Employee's employment is terminated
by the Corporation for any reason other than Cause (as defined herein), the
Employee will be entitled to continue to receive, as his exclusive severance
benefit, his then Base Salary for a period equal to the period of
noncompetition described in section 7(b) after the date of such termination.
If the Employee's Employment is terminated by the Employee or is terminated by
the Corporation with Cause, the payments for compensation and vested rights to
fringe benefits shall be pro rated to the date of termination. "Cause" shall
mean death, disability which, in the opinion of the Board of Directors, renders
the Employee unable to perform his duties under this Agreement, fraud,
dishonesty, acts of negligence in the course of employment, misrepresentation
to the shareholders or Board of Directors, the commission of an act
constituting a felony or the Employee's failure to follow and/or perform a
specific directive of the Board of Directors.
7. Noncompetition. The parties agree that the Corporation's customer
contacts and relations are established and maintained at great expense and by
virtue of the Employee's employment with the Corporation, the Employee will
have unique and extensive exposure to and personal contact with the
Corporation's customers, and that he will be able to establish a unique
relationship with those individuals and entities that will enable him, both
during and after employment, to unfairly compete with the Corporation. The
parties further agree that the Corporation's customers and business contacts
are a small percentage of the total number of organizations, associations and
individuals who are customers or potential customers for companies offering the
same or similar services and products offered by the Corporation. Further, the
parties agree that the terms and conditions of the following restrictive
covenants are reasonable and necessary for the protection of the Corporation's
business, trade secrets and confidential information and to prevent great
damage or loss to the Corporation as a result of action taken by the Employee.
The Employee acknowledges that the noncompete restrictions and nondisclosure of
confidential information restrictions contained in this Agreement are
reasonable and the consideration provided for herein is sufficient to fully and
adequately compensate the Employee for agreeing to such restrictions.
(a) During Term of Employment. The Employee hereby covenants and agrees
that, during his employment with the Corporation, he shall not, directly or
indirectly, either individually or as an employee, officer, principal, agent,
partner, shareholder, owner, trustee, beneficiary, co-venturer, distributor or
consultant or in any other capacity, participate in, become associated with,
provide assistance to, engage in or have a financial or other interest in any
business, activity or enterprise which is competitive with the Corporation or
any successor or assign of the Corporation. The ownership of less than a 2%
interest in a corporation whose shares are traded in a recognized stock
exchange or traded in
3
<PAGE> 4
the over-the-counter market, even though that corporation may be a competitor
of the Corporation, shall not be deemed financial participation in a
competitor.
(b) Upon Termination of Employment. Employee agrees that during a
period after termination of his employment with the Corporation equal to six
months, if such termination occurs prior to October 4, 1997, a period of months
equal to his employment term if such termination occurs on or after October 4,
1997 but prior to April 4, 1998 and a period of two years if such termination
occurs on or after April 4, 1998, he will not, directly or indirectly, either
individually or as an employee, officer, agent, partner, shareholder, owner,
trustee, beneficiary, co-venturer, distributor, consultant or in any other
capacity:
(i) Canvass, solicit or accept from any person or entity who is an
"Active Customer" of the Corporation any business in competition with the
business of the Corporation or the successors or assigns of the Corporation.
"Active Customer" shall mean any account which received within the twelve
months prior to the Employee's termination of employment, any products or
services supplied by or on behalf of the Corporation and any prospective
account which was under active solicitation by the Corporation during the
final twelve months of Employee's employment with the Corporation.
(ii) Request or advise any of the Active Customers, suppliers or
other business contacts of the Corporation who currently have or have had
business relationships with the Corporation within twelve months preceding the
date of the Employee's termination of employment, to curtail or cancel any of
their business or relations with the Corporation.
(iii) Induce or attempt to induce any employee, officer, director,
sales representative, consultant or other personnel of the Corporation to
terminate his relationship or breach his agreements with the Corporation.
(iv) Participate in, become associated with, provide assistance to,
engage in or have a financial or other interest in any business, activity or
enterprise within the "Restricted Territory" which is competitive with the
business of the Corporation or any successor or assign of the Corporation;
provided, however, that the ownership of less than 2% of the stock of a
corporation whose shares are traded in a recognized stock exchange or traded in
the over-the-counter market, even though that corporation may be a competitor
of the Corporation, shall not be deemed financial participation in a
competitor. For purposes of this Agreement, the "Restricted Territory" shall
mean the Continental United States.
4
<PAGE> 5
8. Confidential Information. The parties agree that the Corporation's
Customers, business connections, customer lists, procedures, operations,
techniques, trade secrets, proprietary information and other aspects of its
business (the "Confidential Information") are established at great expense and
protected as Confidential Information and provide the Corporation with a
substantial competitive advantage in conducting its business. The parties
further agree that by virtue of the Employee's employment with the Corporation,
he will have access to, and be entrusted with, secret, confidential and
proprietary information, and that the Corporation would suffer great loss and
injury if the Employee would disclose this information or use it to compete
with the Corporation. Therefore, the Employee agrees that during the term of
his employment, and (a) until such time as the Confidential Information becomes
generally available to the public through no fault of the Employee, (b) until
such time as the Confidential Information no longer provides benefit to the
Corporation or (c) for a period of two years after the expiration of the
Employment Period, whichever occurs sooner, the Employee will not, directly or
indirectly, either individually or as an employee, officer, agent, partner,
shareholder, owner, trustee, beneficiary, co-venturer, distributor, consultant
or in any other capacity, use or disclose, or cause to be used or disclosed,
any Confidential Information acquired by the Employee during his employment
with the Corporation whether owned by the Corporation prior to or discovered
and developed by the Corporation subsequent to the Employee's employment, and
regardless of the fact that the Employee may have participated in the discovery
and the development of that information.
9. Relationship with Suppliers. The parties agree that the profitability
and goodwill of the Corporation depends on continued, amicable relations with
its suppliers and the Employee agrees, during his employment with the
Corporation and for two years thereafter, he will not cause, request or advise
any suppliers of the Corporation to curtail or cancel their business with the
Corporation.
10. Common Law of Torts and Trade Secrets. The parties agree that nothing
in this Agreement shall be construed to limit or negate the common law of torts
or trade secrets where it provides the Corporation with broader protection than
that provided herein.
11. Inventions and Improvements. The Employee agrees that every
improvement, invention, process, technique, apparatus, method, manufacturing
system, computer program, design or other creation that the Employee may
invent, discover, conceive or originate by himself or in conjunction with any
other person that relates in any respect to the business of the Corporation
now or hereafter carried on by it shall be the exclusive property of the
Corporation. The Employee understands and agrees that in partial consideration
5
<PAGE> 6
of his employment for the compensation herein stated, all such developments,
inventions, improvements, products, processes, apparatuses, methods, designs
and other creations shall be the exclusive property of the Corporation. If the
Employee shall fail to make or refuse to make an assignment to the Corporation
of any development, invention, improvement, process, apparatus, technique,
method, computer program, design or other creation heretofore referred to, the
Corporation shall have the authority, and this Agreement shall operate to give
the Corporation authority to execute, seal and deliver, as the act of the
Employee, any license, any license agreement, contract, assignment or other
instrument in writing that may be necessary or proper to convey to the
Corporation the entire right, title and interest in and to said invention or
development heretofore referred to. The Employee hereby agrees to hold the
Corporation and its assigns harmless by reason of the Corporation's acts
pursuant to this paragraph. The Employee further agrees that, during the term
of this Agreement and at any time thereafter whenever reasonably necessary for
the protection of the Corporation, he shall cooperate with and be compensated
by the Corporation and its counsel in the prosecution and/or defense of any
litigation at the cost of the Corporation which may arise in connection with
the inventions or other creations referred to above, without any liability or
cost to the Employee.
12. Specific Performance. The parties acknowledge and agree that breach
of this Agreement by the Employee would cause irreparable damage to the
Corporation and that monetary damages alone would not provide the Corporation
with an adequate remedy for breach of this Agreement. Therefore, if any
controversy arises concerning the rights or obligations of the Employee under
this Agreement, such rights or obligations shall be specifically enforced by an
injunction order issued by a court of competent jurisdiction. Such remedy,
however, shall be cumulative and nonexclusive and shall be in addition to any
other remedy to which the parties may be entitled.
13. Sale, Consolidation or Merger. In the event of a consolidation or
merger of the Corporation with or into another corporation or entity, or the
sale of substantially all of the operating assets of the Corporation to another
corporation, entity or individual, the successor-in-interest shall be deemed to
have assumed all liabilities of the Corporation under this Agreement.
14. Waiver. The failure of either party to insist, in any one or more
instances, upon performance of the terms or conditions of this Agreement shall
not be construed as a waiver or a relinquishment of any right granted hereunder
or of the future performance of any such term, covenant or condition.
15. Severability. In the event that any provision shall be held to be
invalid or unenforceable for any reason whatsoever, it is agreed such
invalidity or unenforceability shall not affect any other provision of this
Agreement and the
6
<PAGE> 7
remaining covenants, restrictions and provisions hereof shall remain in full
force and effect and any court of competent jurisdiction may so modify the
objectionable provision as to make it valid, reasonable and enforceable.
Furthermore, the parties specifically acknowledge the covenants and agreements
contained in sections 7 and 8 hereof are separate agreements.
16. Amendment. This Agreement may only be amended by an agreement in
writing signed by all of the parties hereto.
17. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Iowa.
18. Benefit. This Agreement shall be binding upon and inure to the
benefit of and shall be enforceable by and against the Corporation, its
successors and assigns, and the Employee, his heirs, beneficiaries and legal
representatives. It is agreed that the rights and obligations of the Employee
may not be delegated or assigned except as specifically set forth in this
Agreement.
MURDOCK COMMUNICATIONS CORPORATION
BY /s/ Guy O. Murdock
------------------------------
Guy O. Murdock, Chairman
/s/ Thomas E. Chaplin
------------------------------
Thomas E. Chaplin
7
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,108,899
<ALLOWANCES> 0
<INVENTORY> 93,884
<CURRENT-ASSETS> 1,565,667
<PP&E> 7,928,534
<DEPRECIATION> 6,530,911
<TOTAL-ASSETS> 5,766,312
<CURRENT-LIABILITIES> 3,357,283
<BONDS> 270,252
0
0
<COMMON> 12,165,708
<OTHER-SE> 242,400
<TOTAL-LIABILITY-AND-EQUITY> 5,766,312
<SALES> 3,620,105
<TOTAL-REVENUES> 3,689,295
<CGS> 2,907,130
<TOTAL-COSTS> 2,907,130
<OTHER-EXPENSES> 2,868,482
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 349,680
<INCOME-PRETAX> (2,435,997)
<INCOME-TAX> 4,726
<INCOME-CONTINUING> (2,440,723)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,440,723)
<EPS-PRIMARY> (.58)
<EPS-DILUTED> (.58)
</TABLE>
