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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission File Number 000-21463
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Murdock Communications Corporation
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(Exact Name of 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 June 30, 1998, there were outstanding 5,429,867 shares of the Registrant's no
par value Common Stock.
Transitional Small Business Disclosure Format (check one):
Yes _X_ No__
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MURDOCK COMMUNICATIONS CORPORATION
FORM 10-QSB
June 30, 1998
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page
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Item 1. Consolidated Balance Sheet as of June 30, 1998 and December 31, 1997
(Unaudited).......................................................... 3
Consolidated Income Statement for the Three Months Ended June 30,
1998 and 1997 and for the Six Months Ended June 30, 1998 and 1997
(Unaudited).......................................................... 5
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 1998 and 1997 (Unaudited)................................... 6
Notes to Consolidated Financial Statements (Unaudited)............... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 20
Item 2. Changes in Securities................................................ 20
Item 3. Defaults Upon Senior Securities...................................... 21
Item 4. Submission of Matters to a Vote of Security Holders.................. 21
Item 5. Other Information.................................................... 21
Item 6. Exhibits and Reports on Form 8-K..................................... 21
Signatures........................................................... 23
</TABLE>
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MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash & Cash Items $ 1,093,518 $ 316,286
Accounts and Notes Receivable
Trade Receivable 2,215,871 736,007
Related Party Receivable 312,869 351,602
Employee Receivable 11,998 --
Other Receivable 44,888 77,181
AT&T Receivable 6,983 105,200
Allowances for Doubtful Accounts and Notes Receivable (422,084) (394,373)
Prepaid Expenses 151,735 26,821
Other Current Assets 310,141 327,463
------------ ------------
TOTAL CURRENT ASSETS 3,725,919 1,546,187
INVESTMENTS AND INDEBTEDNESS OF OTHERS
Indebtedness of Non-Related Parties - Not Current 139,190 152,040
------------ ------------
TOTAL INVESTMENTS AND INDEBTEDNESS OF OTHERS 139,190 152,040
FIXED ASSETS
Property, Plant and Equipment - Owned 9,552,557 9,513,138
Property, Plant and Equipment - Leased 4,002,999 3,674,206
Accumulated Depreciation and Amortization - Owned (7,682,235) (7,400,983)
Accumulated Depreciation and Amortization - Leased (3,349,229) (3,209,405)
------------ ------------
TOTAL FIXED ASSETS 2,524,092 2,576,956
INTANGIBLE ASSETS
Goodwill - Net of Accumulated Amortization 5,738,304 4,133,648
Intangible Assets - Other 3,270,946 2,212,443
Accumulated Depreciation and Amortization - Other (1,825,455) (1,612,985)
------------ ------------
TOTAL INTANGIBLE ASSETS 7,183,795 4,733,106
OTHER ASSETS
Other Assets 341,818 207,000
------------ ------------
TOTAL OTHER ASSETS 341,818 207,000
------------ ------------
TOTAL ASSETS $ 13,914,814 $ 9,215,289
============ ============
</TABLE>
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MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEET (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
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<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts and Notes Payable
Bank Payable $ 400,000 $ 1,020,440
Notes Payable 1,486,000 --
Trade Payable 1,960,215 1,657,118
Related Party Payable 1,743,548 1,013,827
Other Payable 30,000 --
Current Portion of Long-Term Indebtedness 1,376,756 983,964
Other Current Liabilities 1,707,851 1,453,335
------------ ------------
TOTAL CURRENT LIABILITIES 8,704,370 6,128,684
LONG-TERM LIABILITIES
Bonds, Mortgages and Other Long-Term Debt 2,196,523 1,441,608
Bonds, Mortgages and Other Long-Term Debt to Related Parties 813,744 --
Indebtedness to Related Parties - Not Current - Capital Leases 4,089,755 4,521,525
Indebtedness to Related Parties - Not Current - PIC LT Note -- 1,112,414
Other Liabilities 591,221 380,913
Deferred Income 86,996 112,135
------------ ------------
TOTAL LONG-TERM LIABILITIES 7,778,239 7,568,595
------------ ------------
TOTAL LIABILITIES 16,482,609 13,697,279
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred Stock - Non-Mandatory Redemption
8% Series A Convertible, $100 Stated Value
Authorized Shares: 50,000
Issued and Outstanding: 18,920 at June 30, 1998
and 16,250 at December 31, 1997 1,821,311 1,544,146
Common Stock
No Par Value
Authorized Shares: 20,000,000
Issued and Outstanding: 5,429,867 at June 30, 1998
and 4,458,439 at December 31, 1997 12,832,817 11,343,308
Other Additional Capital 540,853 449,400
Current Earnings 138,481 --
Retained Earnings (17,901,257) (17,818,844)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (2,567,795) (4,481,990)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 13,914,814 $ 9,215,289
============ ============
</TABLE>
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MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED INCOME STATEMENT
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------------------------- ----------------------------
<S> <C> <C> <C> <C>
NET SALES AND GROSS REVENUES
Other Revenues - Call Processing $ 9,021,895 $ 1,711,099 $ 14,385,032 $ 3,222,501
Net Sales of Tangible Items 194,369 181,674 290,304 273,604
Income From Rentals 67,258 71,131 111,836 127,000
Revenues From Services 199,574 22,168 384,654 29,710
------------ ------------ ------------ ------------
TOTAL NET SALES AND GROSS REVENUES 9,483,096 1,986,072 15,171,826 3,652,815
COSTS APPLICABLE TO SALES AND REVENUES
Costs From Other Revenues - Call Processing 5,674,984 1,392,299 9,163,051 2,641,525
Costs of Tangible Items Sold 158,205 125,035 234,834 203,492
Costs From Rentals 8,594 -- 14,954 --
Cost of Services 13,684 23,173 40,503 68,738
------------ ------------ ------------ ------------
TOTAL COSTS APPLICABLE TO SALES AND REVENUES 5,855,467 1,540,507 9,453,342 2,913,755
------------ ------------ ------------ ------------
GROSS OPERATING PROFIT 3,627,629 445,565 5,718,484 739,060
OPERATING EXPENSES
Selling, General and Administrative Expenses 2,067,416 847,508 3,677,003 1,618,629
Other General Expenses - Depreciation and Amortization 454,697 544,337 912,763 1,049,718
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 2,522,113 1,391,845 4,589,766 2,668,347
------------ ------------ ------------ ------------
NET OPERATING PROFIT (LOSS) 1,105,516 (946,280) 1,128,718 (1,929,287)
NON-OPERATING INCOME AND EXPENSES
Miscellaneous Other Income 19,467 13,502 60,776 27,226
Interest and Amortization of Debt Discount and Expense (511,598) (164,033) (923,276) (333,801)
Miscellaneous Income Deductions (2,864) -- (9,082) --
------------ ------------ ------------ ------------
TOTAL NON-OPERATING INCOME AND EXPENSES (494,995) (150,531) (871,582) (306,575)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE 610,521 (1,096,811) 257,136 (2,235,862)
INCOME TAX EXPENSE -- -- (5,821) (4,726)
EQUITY IN LOSS OF UNCONSOLIDATED
SUBSIDIARY (49,928) (116,921) (112,834) (200,135)
------------ ------------ ------------ ------------
NET INCOME (LOSS) 560,593 (1,213,732) 138,481 (2,440,723)
DIVIDENDS AND ACCRETION ON 8% SERIES A
CONVERTIBLE PREFERRED STOCK (41,797) -- (82,413) --
------------ ------------ ------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ 518,796 $ (1,213,732) $ 56,068 $ (2,440,723)
============ ============ ============ ============
BASIC NET INCOME (LOSS) PER COMMON SHARE $ 0.10 $ (0.28) $ 0.01 $ (0.58)
============ ============ ============ ============
BASIC WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 5,046,822 4,309,684 4,884,643 4,231,089
============ ============ ============ ============
FULLY DILUTED NET INCOME (LOSS) PER COMMON SHARE $ 0.07 $ (0.28) $ 0.01 $ (0.58)
============ ============ ============ ============
FULLY DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 8,121,206 4,309,684 5,630,207 4,231,089
============ ============ ============ ============
</TABLE>
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MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
---------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) $ 138,481 $(2,440,723)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH FLOWS
FROM OPERATING ACTIVITIES
Depreciation and Amortization 911,013 1,099,716
Noncash Interest Expense 78,484 43,106
Noncash Consulting Expense -- 43,333
Recognition of Deferred Income (25,139) (27,227)
Share of Loss from Joint Venture 112,834 200,136
Changes in Operating Assets and Liabilities
Receivables (1,192,650) 123,091
Other Current Assets (45,167) 8,624
Other Noncurrent Assets 132,948 --
Accounts Payable (76,861) 288,776
Accrued Expenses 125,998 157,556
Deferred Income -- 16,013
-------------------------------
NET CASH FLOWS FROM OPERATING ACTIVITIES 159,941 (487,599)
INVESTING ACTIVITIES
Purchases of Property and Equipment (317,296) (97,442)
Sale of Property and Equipment 900 --
Payments for Site Acquisition -- (288,255)
Investment in Joint Venture -- (254,045)
Software Development Costs -- (87,733)
Deposits -- (150,642)
Cash Paid in Conjunction with Acquisitions (30,669) --
Cash from Acquired Company (1,535) --
-------------------------------
NET CASH FLOWS FROM INVESTING ACTIVITIES (348,600) (878,117)
FINANCING ACTIVITIES
Borrowings on Notes Payable 1,560,123 600,000
Borrowings on Capital Leases, Primarily with Related Parties 807,842 25,169
Borrowings from Notes Payable with Related Parties 539,238 --
Payments on Notes Payable and Long Term Debt
Primarily with Related Parties (2,055,644) (480,804)
Proceeds From Issuance of 8% Series A Convertible Preferred Stock 267,000 --
Dividends On 8% Series A Redeemable Preferred Stock (42,560) --
Proceeds From Exercise of Common Stock Warrants -- 5,600
Repurchase of 10% Series A Redeemable Preferred Stock
and Detachable Common Stock Warrants -- (26,146)
Payments on Offering Costs (110,108) --
-------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 965,891 123,819
-------------------------------
NET INCREASE (DECREASE) IN CASH 777,232 (1,241,897)
CASH AT BEGINNING OF PERIOD 316,286 1,241,897
-------------------------------
CASH AT END OF PERIOD $ 1,093,518 $ --
===============================
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 844,792 320,091
Cash Paid During the Period for Income Taxes 5,821 4,726
</TABLE>
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SUPPLEMENTAL DISCLOSURE OF SIX MONTHS ENDED JUNE 30, 1998 NONCASH OPERATING,
INVESTING AND FINANCING ACTIVITIES:
The Company recorded the following increases as a result of its acquisition of
Incomex:
Accounts receivable $ 178,731
Notes receivable - current 18,223
Other current assets 5,819
Notes receivable - non-current 1,172,452
Other non-current assets 93,853
Property, plant and equipment 51,815
Accumulated depreciation (19,584)
Accounts payable (115,483)
Accrued expenses (516,007)
Notes payable (1,347,005)
Equity 478,719
------------
Cash acquired with acquisition (1,534)
============
The Company recorded deferred lease costs of $14,000 in connection with the
issuance of warrants to purchase 350,000 shares of the Company's common stock to
Berthel Fisher Leasing Company, Inc.
The Company recorded deferred loan costs of $20,000 in connection with the
issuance of warrants to purchase 500,000 shares of the Company's common stock to
bearers of notes payable issued as of March 31, 1998.
The Company recorded deferred loan costs of $60,640 in connection with the
issuance of warrants to purchase 1,516,000 shares of the Company's common stock
to bearers of notes payable issued as of June 30, 1998.
The Company recorded an increase to the carrying value of the 8% Series A
Convertible Preferred Stock and a charge to accumulated deficit of $15,393
representing the six months to date accretion to its conversion price.
The Company recorded an accrued expense and a charge to accumulated deficit of
$67,020 for the cumulative dividends earned by the holders of the 8% Series A
Convertible Preferred Stock.
The Company recorded an increase in accrued expense and MCC TeleManager(TM)
equipment under the capital lease for $35,000 representing sales taxes on the
lease payments.
7
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MURDOCK COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Unaudited Financial Statements
The accompanying unaudited interim consolidated financial statements have been
prepared by Murdock Communications Corporation (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 consolidated financial
statements reflect all adjustments which, in the opinion of management, are
necessary to reflect a fair presentation of the financial position, the results
of the operations and cash flows of the Company and its subsidiaries for the
interim periods presented. All adjustments, in the opinion of management, are of
a normal and recurring nature. For further information, refer to the financial
statements and footnotes thereto for the year ended December 31, 1997, included
in the Company's Annual Report on Form 10-KSB (Commission File #000-21463) as
filed with the Securities and Exchange Commission on April 10, 1998.
Reclassifications
Certain amounts in the 1997 unaudited interim consolidated financial statements
have been reclassified to conform to the current year's presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the
accounts of Priority International Communications, Inc. ("PIC") and PIC
Resources Corp. ("PIC-R"), wholly-owned subsidiaries acquired by the Company
effective October 31, 1997, and the accounts of Incomex, Inc. ("Incomex"), a
wholly-owned subsidiary acquired by the Company effective January 31, 1998.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
PIC and PIC-R Acquisition
Effective May 21, 1998, the Company and the former shareholders of PIC and PIC-R
entered into an agreement to amend the terms of the original Stock Purchase
Agreements with respect to the Company's acquisitions of PIC and PIC-R. Pursuant
to the original Stock Purchase Agreements, the former PIC and PIC-R shareholders
received certain special default rights to rescind the acquisitions of PIC and
PIC-R. The May 21, 1998 amendment terminated the special default rights.
Pursuant to the amendment, the Company also issued 571,428 shares of the
Company's common stock as a prepayment of $1,000,000 of principal installments
in reverse order of their maturities of the amounts owed under the long-term
note originally issued by the Company pursuant to the PIC acquisition. The
principal balance of the long-term note as of June 30, 1998 was $498,894.40. In
addition to the earn-out rights agreed to in the original PIC-R agreement, the
amendment also provides that if at the end of the 24 month period beginning
November 1, 1997, PIC and PIC-R combined have EBITDA (earnings before interest,
taxes, depreciation, and
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amortization) of at least $2,000,000, the former shareholders of PIC-R will
earn 25,000 shares of the Company's common stock for each $250,000 of EBITDA
over $2,000,000 up to $4,000,000 and 50,000 shares of the Company's common stock
for each $250,000 of EBITDA over $4,000,000. If EBITDA for the 24 month period
beginning November 1, 1997 and ending October 31, 1999 is not more than
$4,000,000, the amendment allows the former PIC-R shareholders to elect to
re-set period for the determination of the earn-out rights to 24 month period
beginning April 1, 1998 and ending March 31, 2000. Goodwill of $167,165
associated with the amended terms of the agreement is being amortized over the
remaining life of the original goodwill which is nine years and five months.
Incomex Base Currency
All contracts Incomex has entered into with their customers are denominated in
United States dollars.
Intangible Assets
Consolidated goodwill, net of accumulated amortization, increased $1.6 million,
or 39%, to $5.7 million as of June 30, 1998 from $4.1 million as of December 31,
1997. Goodwill, attributable to the Incomex acquisition and exclusive of any
contingent consideration, is $0.9 million. Goodwill, attributable to the Incomex
acquisition contingent consideration, is $0.7 million. Other intangible assets,
net of accumulated amortization, increased $0.8 million, or 133%, to $1.4
million as of June 30, 1998 from $0.6 million as of December 31, 1997. Incomex
has entered into prepaid commission agreements with its customers resulting in
aggregate prepayments of $0.9 million as of June 30, 1998.
Preferred Stock Issues
On February 26, 1998, the Company agreed to issue 2,170 shares of 8% Series A
Convertible Preferred Stock to an affiliate of Berthel Fisher & Company, Inc., a
related party, in exchange for the prepayment of $180,000 of commissions and the
payment of $37,000 of commissions currently owed. This transaction was completed
and the shares were issued on June 19, 1998.
Debt
As of February 27, 1998, the Company entered into an agreement with Berthel
Fisher Leasing Company, a related party, to provide $700,000 of lease financing.
The financing bears interest at 14%. In connection with the lease financing,
warrants to purchase 350,000 shares of the Company's common stock were issued at
an exercise price of $1.4375 per share. The warrants, if unexercised, expire on
March 31, 2001. As of March 25, 1998, Berthel had funded $358,000 of the lease
financing. As of June 30, 1998, Berthel funded the remaining $342,000 of the
lease financing.
As of June 30, 1998, the Company has received proceeds of $1,486,000 from the
issuance of promissory notes, $225,000 of which has been provided by related
parties. The notes bear interest at 14% and the accrued interest and principal
are due on March 31, 1999. In connection with the financing, warrants to
purchase 1,486,000 shares of the Company's common stock were issued at an
exercise price of $1.75 per share. The warrants expire if unexercised, on March
31,
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2001. The Company has assigned a fair value of $59,440 to the warrants that has
been capitalized as deferred loan costs.
Guide Star Joint Venture
Condensed financial information for the Company's investment in the Guide Star
joint venture as of the six months ended June 30, 1998 is as follows:
Total assets $ --
Total liabilities 439,023
Total revenues 2,816
Net loss 112,834
All assets of the joint venture had been written down to their estimated net
realizable values at December 31, 1997, as the Company decided to cease the
joint venture's operations during the fourth quarter of 1997. In July 1998, the
joint venture entered into a written agreement with Matrix Media, the other
owner of the joint venture, providing for the sale of the joint venture's
remaining assets to Matrix Media. Subject to Matrix Media obtaining financing,
the Company anticipates the completion of this transaction during the third
quarter of 1998.
Income Tax Expense
No income tax expense was recorded for the three months ended June 30, 1998 due
to utilization of previously unrecognized net operating loss carryforwards. At
December 31, 1997, the Company has net operating loss carryforwards for federal
income tax purposes of approximately $11 million to use to offset future taxable
income. These net operating losses will expire, if unused, from December 31,
2002 through 2012.
Certain restrictions under the Tax Reform Act of 1986, caused by a change in
ownership resulting from sales of common stock, limit the annual utilization of
net operating loss carryforwards. The initial public offering of the Company's
common stock resulted in such a change in ownership. The Company estimates that
the post-change taxable income that may be offset with the pre-change net
operating loss carryforward will be limited to approximately $600,000 per year.
The annual limitation may be increased for any built-in gains recognized within
five years of the date of the ownership change.
Contingencies and Legal Proceedings
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. ("WorldQuest"). The right to execute the
agreement expired March 31, 1997. In both August and September of 1997,
WorldQuest repaid $10,000 of the Company's security deposit. On October 10,
1997, the Company filed a suit in Dallas County, Texas against WorldQuest and B.
Michael Adler (Owner and CEO of WorldQuest) seeking repayment of the amounts due
to the Company. The Company filed a Motion for Summary Judgment on April 15,
1998. On May 13, 1998, WorldQuest filed a Counterclaim alleging that the Company
charged usurious amounts of interest on the outstanding balance of the security
deposit. On May 22, 1998, a Dallas County, Texas District Court granted the
Company's Motion for Summary Judgment in its entirety. On June 10, 1998, the
Court signed an Interlocutory Judgment awarding the Company repayment of
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the remaining $130,000 security deposit, pre-judgment interest through May 28,
1998 in the amount of $24,560.52 and $49.32 a day thereafter through the date of
the final judgment, post judgment interest at 12% per annum, and attorney's
fees. On July 1, 1998, the Company and WorldQuest entered into a Settlement
Agreement and Release in Full providing that WorldQuest will pay the Company
$163,900.58 (outstanding deposit of $130,000, plus interest of $24,560.52
through May 28, 1998, $1,627.56 in interest from May 29, 1998 through June 30,
1998, plus legal expenses of $7,712.50). The Agreement included interest at a
rate of 12% per annum on the outstanding balance as of July 1, 1998. Under the
settlement agreement, WorldQuest will be required to make the payments in seven
installments consisting of a payment of $25,000 on or before July 10, 1998, five
payments of $10,000 each on or before the 15th each month beginning August 15,
1998 and ending December 15, 1998 and a final payment on January 15, 1999 of the
remaining balance. The first payment of $25,000 was received on July 13, 1998.
On July 6, 1998, WorldQuest filed to dismiss its Counterclaim with prejudice.
On February 4, 1998, McFarland Grossman & Co. filed a suit in Harris County,
Texas against PIC, the Company's wholly-owned subsidiary, seeking $162,500
representing alleged commissions or fees due in connection with the purchase of
PIC by the Company. A hearing on the plaintiff's summary judgment motion in this
case has been scheduled for August 24, 1998. Although the Company believes that
this lawsuit is without merit and intends to defend vigorously against it, there
can be no assurance as to the outcome of the matter. No loss has been recorded
in the consolidated financial statements with respect to this matter.
On July 20, 1998, Operator Communications, Inc., successor by merger to Oncor
Communications, Inc. ("Oncor"), filed a lawsuit in the District Court of Dallas
County, Texas against the Company, Incomex, and an unrelated third party. Oncor
alleges that the defendants improperly terminated a long distance service
agreement with Oncor. This case is at a preliminary stage and it is not possible
to assess fully the merits of the plaintiff's claims. The Company intends to
defend the claims against it and Incomex vigorously. The Company has accrued
$123,000 as a reserve in connection with this matter under the rules established
in FAS5.
The Company's wholly-owned subsidiary, PIC, is involved in an adversary
proceeding filed in connection with two jointly administered Chapter 11
proceedings in the United States Bankruptcy Court for the Southern District of
Florida. On May 13, 1997, a joint motion of the Chapter 11 Trustees was filed
for an order to show cause why certain individuals and entities, including PIC,
should not be held in civil contempt of court; for relief under Rule 70 of the
Federal Rules of Civil Procedure and Rule 7070 of the Federal Rules of
Bankruptcy Procedure; and for the entry of an order of criminal referral for
criminal conduct of certain individuals and entities, including Priority
International Communications, Inc. Factually, it is alleged that the Bankruptcy
Court entered an injunction on April 1, 1996 which included a prohibition
against any dissipation of the assets of Tel-Span Communications, Inc.
("Tel-Span"); that on May 1, 1996, PIC entered into a new Operator Services
Agreement with Tel-Span purporting to release PIC from its contractual
obligation to use Tel-Span as its exclusive operator service provider; that on
October 4, 1996, while the parties to the proceeding awaited the Court's ruling
on ownership of certain assets of Tel-Span, PIC participated in a secret meeting
in New Orleans at which an agreement was reached to begin migration of business
which violated the Bankruptcy Court's injunction; and, finally, that PIC
violated the Court's injunction since it aided and abetted a party bound by such
order. In response, PIC has defended by asserting that it had no notice of any
injunction entered into by the Bankruptcy Court as required by Rule 65(d) of the
Federal Rules of Civil Procedure if such an order is to be enforced against a
non-party such as
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PIC; that the injunction entered by the Bankruptcy Court did not clearly
prohibit the conduct of PIC in migrating its own business; and in any event as a
non-party, PIC's conduct was motivated by legitimate business concerns and did
not constitute an aiding and abetting of a party's violation of the injunction.
In relation to this matter, a claim has also been made against ATN
Communications, Inc., a wholly-owned subsidiary of the Company ("ATN"), and
certain employees of ATN. Evidentiary hearings were held and written summations
and closing briefs were filed by all parties with the Bankruptcy Court on or
before September 19, 1997. The Bankruptcy Court has not rendered a judgment in
relation to the above matter. The proceeding does not specify a dollar amount of
damages. Although the Company believes that this lawsuit is without merit and
intends to defend vigorously against it, in the event of an adverse
determination, there can be no assurance that this litigation will not have a
material adverse effect on the Company. No loss has been recorded in the
consolidated financial statements with respect to this matter.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following is a discussion of the Company's financial condition, results of
operations and capital resources. The discussion and analysis should be read in
conjunction with the Company's unaudited consolidated financial statements and
notes thereto included elsewhere within.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
The following table sets forth income statement items and the percentages that
such items bear to revenues:
<TABLE>
<CAPTION>
For the Three Months Ended
-------------------------------------------------
June 30, 1998 June 30, 1997
---------------------- -----------------------
<S> <C> <C>
Net sales and gross revenues 100% 100%
Costs applicable to sales and revenues 62 78
Selling, general and administrative expenses 22 43
Other general expenses - depreciation and amortization 5 27
--- ---
Net operating profit (loss) 11 (48)
Miscellaneous other income -- 1
Interest and amortization of debt discount and expense (5) (8)
--- ---
Income (loss) before income tax expense 6 (55)
Equity in loss of unconsolidated subsidiary -- (6)
--- ---
Income (loss) from continuing operations 6 (61)
</TABLE>
The information for the three months ended June 30, 1998 in the preceding table
include the accounts of the Company, the accounts of PIC and PIC-R, wholly-owned
subsidiaries acquired by the Company effective October 31, 1997, and the
accounts of Incomex, a wholly-owned subsidiary acquired by the Company effective
January 31, 1998. Significant intercompany accounts and transactions have been
eliminated in consolidation.
NET SALES AND GROSS REVENUES - Consolidated revenues increased $7.5 million, or
375%, to $9.5 million for the three months ended June 30, 1998 from $2.0 million
for the three months ended June 30, 1997. Revenues during the three months ended
June 30, 1998 consisted of $1.7 million attributable to the Murdock Unit, $4.9
million attributable to PIC and PIC-R, and $2.9 million attributable to Incomex.
Call processing revenues generated from the Murdock Unit through its Lodging
Partnership program decreased $0.4 million, or 24%, to $1.3 million for the
three months ended June 30, 1998 from $1.7 million for the three months ended
June 30, 1997. This is the result of declining room counts contracted under the
Lodging Partnership program and decreased call counts per room from the previous
year. Revenues from services generated by the Murdock Unit increased $0.18
million, or 900%, to $0.2 million for the three months ended
13
<PAGE> 14
June 30, 1998 from $0.02 million for the three months ended June 30, 1997.
Revenues generated by the MCC TeleManager(TM), which was introduced to the
market in September 1997, were $0.2 million for the three months ended June 30,
1998.
COSTS APPLICABLE TO SALES AND REVENUES - Consolidated cost of sales increased
$4.3 million, or 287%, to $5.8 million for the three months ended June 30, 1998
from $1.5 million for the three months ended June 30, 1997. Cost of sales during
the three months ended June 30, 1998 consisted of $1.2 million attributable to
the Murdock Unit, $3.1 million attributable to PIC and PIC-R and $1.5 million
attributable to Incomex. Costs associated with call processing revenues for the
Murdock Unit decreased $0.4 million, or 29%, to $1.0 million for the three
months ended June 30, 1998 from $1.4 million for the three months ended June 30,
1997.
GROSS OPERATING PROFIT - Consolidated gross operating profit increased $3.2
million, or 640%, to $3.7 million for the three months ended June 30, 1998 from
$0.5 million for the three months ended June 30, 1997. Gross operating profit
during the three months ended June 30, 1998 consisted of $0.5 million
attributable to the Murdock Unit, $1.8 million attributable to PIC and PIC-R and
$1.4 million attributable to Incomex.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Consolidated selling, general and
administrative expenses increased $1.2 million, or 150%, to $2.0 million for the
three months ended June 30, 1998 from $0.8 million for the three months ended
June 30, 1997. Selling, general and administrative expenses during the three
months ended June 30, 1998 consisted of $1.0 million attributable to the Murdock
Unit and Corporate, $0.6 million attributable to PIC and PIC-R and $0.4 million
attributable to Incomex. The Murdock Unit and Corporate selling, general and
administrative expenses increased $0.2 million, or 25%, to $1.0 million for the
three months ended June 30, 1998 from $0.8 million for the three months ended
June 30, 1997. The increase was primarily due to increases in compensation.
OTHER GENERAL EXPENSES - DEPRECIATION AND AMORTIZATION - Consolidated
depreciation and amortization expenses decreased $0.1 million, or 20%, to $0.4
million for the three months ended June 30, 1998 from $0.5 million for the three
months ended June 30, 1997. Depreciation and amortization expenses during the
three months ended June 30, 1998 consisted of $0.3 million attributable to the
Murdock Unit and Corporate, and $0.1 million attributable to PIC and PIC-R. The
Murdock Unit experienced a $0.3 million reduction in depreciation due to the
write-off of impaired assets during the fourth quarter ended December 31, 1997.
The completion of the PIC and PIC-R acquisition in October 1997 resulted in
additional goodwill and acquisition cost amortization of $0.1 million to the
Murdock Unit for the three months ended June 30, 1998. The completion of the
Incomex acquisition in February 1998 resulted in goodwill and acquisition cost
amortization of $0.03 million to the Murdock Unit for the three months ended
June 30, 1998.
INTEREST AND AMORTIZATION OF DEBT DISCOUNT AND EXPENSE - Consolidated interest
and amortization of debt discount and expense increased $0.3 million, or 150%,
to $0.5 million for the three months ended June 30, 1998 from $0.2 million for
the three months ended June 30, 1997. Interest and amortization of debt discount
and expense during the three months ended June 30, 1998 consisted of $0.3
million attributable to the Murdock Unit and Corporate, $0.1 million
attributable to PIC and PIC-R and $0.1 million attributable to Incomex. Interest
expense incurred by the Murdock Unit and Corporate increased $0.2 million, or
200%, to $0.3
14
<PAGE> 15
million for the three months ended June 30, 1998 from $0.1 million for the three
months ended June 30, 1997. In connection with the acquisition of PIC by the
Company in October 1997, the Company issued a long-term note totaling $1.9
million to the former PIC shareholders. This note was recorded at its discounted
net present value using a 14% interest rate. $1.0 million of the long-term note
was prepaid pursuant to an amendment to the PIC and PIC-R acquisition agreement
completed on May 21, 1998. The resulting amortization of debt discount was $0.05
million for the three months ended June 30, 1998. In February 1998, the Company
entered into a lease agreement with Berthel Fisher Leasing Company, a related
party, providing lease financing for MCC TeleManager(TM) equipment. The
resulting interest expense for this arrangement was $0.02 million for the three
months ended June 30, 1998. As of June 30, 1998, the Company has received
proceeds of $1.5 million in notes payable, $0.2 of which has been provided by
related parties. The notes bear interest at 14% and the accrued interest and
principal are due on March 31, 1999. Interest expense recognized in connection
with all debt financing was $0.08 million for the three months ended June 30,
1998. In connection with the MCC TeleManager(TM) equipment lease, the
refinancing of capital leases, the $0.5 million of debt financing in March 1998,
the $1.5 million of debt financing in April 1998, common stock warrants to
purchase 3.2 million common shares were issued to Berthel Fisher Leasing Co.,
its affiliates, affiliates of the Company, and third party investors. The
related valuation of these warrants is being amortized over the life of the
financing instrument resulting in interest expense of $0.06 million for the
three months ended June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
The following table sets forth income statement items and the percentages that
such items bear to revenues:
<TABLE>
<CAPTION>
For the Six Months Ended
-------------------------------------------------
June 30, 1998 June 30, 1997
---------------------- -----------------------
<S> <C> <C>
Net sales and gross revenues 100% 100%
Costs applicable to sales and revenues 62 80
Selling, general and administrative expenses 24 44
Other general expenses - depreciation and amortization 6 29
--- ---
Net operating profit (loss) 8 (53)
Miscellaneous other income -- 1
Interest and amortization of debt discount and expense (6) (9)
--- ---
Income (loss) before income tax expense 2 (61)
Equity in loss of unconsolidated subsidiary (1) (6)
--- ---
Income (loss) from continuing operations 1 (67)
</TABLE>
The information for the six months ended June 30, 1998 in the preceding table
include the accounts of the Company, the accounts of PIC and PIC-R, wholly-owned
subsidiaries acquired by the Company effective October 31, 1997, and the
accounts of Incomex, a wholly-owned
15
<PAGE> 16
subsidiary acquired by the Company effective January 31, 1998. Significant
intercompany accounts and transactions have been eliminated in consolidation.
NET SALES AND GROSS REVENUES - Consolidated revenues increased $11.5 million, or
311%, to $15.2 million for the six months ended June 30, 1998 from $3.7 million
for the six months ended June 30, 1997. Revenues during the six months ended
June 30, 1998 consisted of $3.1 million attributable to the Murdock Unit, $7.4
million attributable to PIC and PIC-R, and $4.7 million attributable to Incomex
following its acquisition in February 1998. Call processing revenues generated
from the Murdock Unit through its Lodging Partnership program decreased $0.9
million, or 28%, to $2.3 million for the six months ended June 30, 1998 from
$3.2 million for the six months ended June 30, 1997. This decrease was the
result of declining room counts contracted under the Lodging Partnership program
and decreased call counts per room from the previous year. Revenues from
services generated by the Murdock Unit increased $0.3 million, or 300%, to $0.4
million for the six months ended June 30, 1998 from $0.1 million for the six
months ended June 30, 1997. MCC TeleManager(TM) revenues were $0.3 million for
the six months ended June 30, 1998.
COST APPLICABLE TO SALES AND REVENUES - Consolidated cost of sales increased
$6.6 million, or 228%, to $9.5 million for the six months ended June 30, 1998
from $2.9 million for the six months ended June 30, 1997. Cost of sales during
the six months ended June 30, 1998 consisted of $2.0 million attributable to the
Murdock Unit, $4.9 million attributable to PIC and PIC-R and $2.6 million
attributable to Incomex following its acquisition in February 1998. Cost
associated with call processing revenues for the Murdock Unit decreased $0.9
million, or 35%, to $1.7 million for the six months ended June 30, 1998 from
$2.6 million for the six months ended June 30, 1997.
GROSS OPERATING PROFIT - Consolidated gross operating profit increased $5.0
million, or 714%, to $5.7 million for the six months ended June 30, 1998 from
$0.7 million for the six months ended June 30, 1997. Gross operating profit
during the six months ended June 30, 1998 consisted of $1.1 million attributable
to the Murdock Unit, $2.5 million attributable to PIC and PIC-R and $2.1 million
attributable to Incomex following its acquisition in February 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Consolidated selling, general and
administrative expenses increased $2.0 million, or 125%, to $3.6 million for the
six months ended June 30, 1998 from $1.6 million for the six months ended June
30, 1997. Selling, general and administrative expenses during the six months
ended June 30, 1998 consisted of $1.8 million attributable to the Murdock Unit
and Corporate, $1.3 million attributable to PIC and PIC-R and $0.5 million
attributable to Incomex following its acquisition in February 1998. The Murdock
Unit and Corporate selling, general and administrative expenses increased $0.2
million, or 13%, to $1.8 million for the six months ended June 30, 1998 from
$1.6 million for the six months ended June 30, 1997. The increase was primarily
due to increases in compensation.
OTHER GENERAL EXPENSES - DEPRECIATION AND AMORTIZATION - Consolidated
depreciation and amortization expenses decreased $0.1 million, or 10%, to $0.9
million for the six months ended June 30, 1998 from $1.0 million for the six
months ended June 30, 1997. Depreciation and amortization expenses during the
six months ended June 30, 1998 consisted of $0.7 million attributable to the
Murdock Unit and Corporate, and $0.2 million attributable to PIC and PIC-R. The
Murdock Unit experienced a $0.6 million reduction in depreciation due to the
write-off of impaired assets during the fourth quarter ended December 31, 1997.
The completion
16
<PAGE> 17
of the PIC and PIC-R acquisition in October 1997 resulted in additional goodwill
and acquisition cost amortization of $0.2 million to the Murdock Unit for the
six months ended June 30, 1998. The completion of the Incomex acquisition in
February 1998 resulted in goodwill and acquisition cost amortization of $0.1
million to the Murdock Unit for the six months ended June 30, 1998.
INTEREST AND AMORTIZATION OF DEBT DISCOUNT AND EXPENSE - Consolidated interest
and amortization of debt discount and expense increased $0.6 million, or 200%,
to $0.9 million for the six months ended June 30, 1998 from $0.3 million for the
six months ended June 30, 1997. Interest and amortization of debt discount and
expense during the six months ended June 30, 1998 consisted of $0.6 million
attributable to the Murdock Unit and Corporate, $0.1 million attributable to PIC
and PIC-R and $0.2 million attributable to Incomex following its acquisition in
February 1998. Interest expense incurred by the Murdock Unit and Corporate
increased $0.3 million, or 75%, to $0.7 million for the six months ended June
30, 1998 from $0.4 million for the six months ended June 30, 1997. In connection
with the acquisition of PIC by the Company in October 1997, the Company issued a
long-term note totaling $1.91 million to the former PIC shareholders. This note
was recorded at its discounted net present value using a 14% interest rate. $1.0
million of the long-term note was prepaid pursuant to the amendment to the PIC
and PIC-R acquisition agreement on May 21, 1998. The resulting amortization of
debt discount was $0.1 million for the six months ended June 30, 1998. In
February 1998, the Company entered into a lease agreement with Berthel Fisher
Leasing Company, a related party, providing lease financing for all MCC
TeleManager(TM) equipment. The resulting interest expense for this arrangement
was $0.03 million for the six months ended June 30, 1998. As of March 31, 1998,
the Company had received proceeds of $0.5 million in notes payable, $0.4 million
of which had been provided by related parties. The financing bears interest at
14% and the accrued interest and principal are due on March 5, 1999. As of June
30, 1998, the Company has received proceeds of $1.5 million in notes payable,
$0.2 million of which has been provided by related parties. The notes bear
interest at 14% and the accrued interest and principal are due on March 31,
1999. Interest expense recognized in connection with all debt financing was $0.1
million for the six months ended June 30, 1998. In connection with the MCC
TeleManager(TM) equipment lease, the refinancing of capital leases, the $0.5
million of debt financing in March 1998, the $1.5 million of debt financing in
April 1998, common stock warrants to purchase 3.2 million common shares were
issued to Berthel Fisher Leasing Co., its affiliates, affiliates of the Company,
and third party investors. The related valuation of these warrants is being
amortized over the life of the financing instrument resulting in interest
expense of $0.1 million for the six months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company's current liabilities of $8.7 million exceeded
current assets of $3.7 million resulting in a working capital deficit of $5.0
million. During the six months ended June 30, 1998, the Company generated $0.2
million in cash for operating activities, and used $0.4 million in investing
activities, primarily the purchase of equipment. The Company received proceeds
from new debt financing of $2.9 million and reduced borrowings on notes payable
and made payments on capital lease obligations of $2.0 million. During the six
months ended June 30, 1998, the Company received $50,000 in proceeds from the
sale of the Company's 8% Series A Convertible Preferred Stock and paid $110,000
in offering costs (including sales commissions). The Company also exchanged
$217,000 of the Company's 8% Series A
17
<PAGE> 18
Convertible Preferred Stock for $180,000 and $37,000 of commissions owed. These
activities resulted in an increase in available cash of $0.8 million for the six
months ended June 30, 1998.
The Company's principal sources of capital to date have been public and private
offerings of debt and equity securities and lease and debt financing
arrangements with Berthel Fisher & Company, Inc. and its subsidiaries and their
affiliated leasing partnerships ("Berthel") to purchase telecommunications
equipment. The total amount of lease and debt financing with Berthel at June 30,
1998 was $7.1 million. The Company currently makes monthly lease and debt
payments of approximately $86,000, in the aggregate, pursuant to these financing
arrangements.
As of June 30, 1998, the Company had borrowed $400,000 under a revolving credit
facility with a financial institution due March 28, 1999. The Company has
received proceeds of $500,000 from the issuance of promissory notes, $400,000 of
which has been provided by related parties. The notes bear interest at 14% and
the accrued interest and principal are due on March 5, 1999. In connection with
the financing, warrants to purchase 500,000 shares of the Company's common stock
were issued at an exercise price of $1.4375 per share. The warrants expire if
unexercised, on March 31, 2001. The Company has assigned a fair value of $14,000
to the warrants that has been capitalized as deferred loan costs. The Company
has received proceeds of $1,486,000 from the issuance of promissory notes,
$225,000 of which has been provided by related parties. The notes bear interest
at 14% and the accrued interest and principal are due on March 31, 1999. In
connection with the financing, warrants to purchase 1,486,000 shares of the
Company's common stock were issued at an exercise price of $1.75 per share. The
warrants expire if unexercised, on March 31, 2001. The Company has assigned a
fair value of $59,440 to the warrants that has been capitalized as deferred loan
costs. The Company's anticipated debt service obligations for the remainder of
1998 under its existing credit facilities, lease and debt financing with Berthel
and the promissory notes issued by the Company pursuant to the acquisition of
PIC are approximately $1.1 million.
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 for the remainder of 1998, including
approximately $1.1 million in debt service obligations for the remainder of
1998. The Company currently estimates that it will need at least $1.1 million in
debt and equity financing in the remainder of 1998, or through cash flows from
operations, to fund its cash requirements. The Company is continuing to explore
refinancing opportunities to convert existing debt to equity or to reduce the
cost of debt and related principal payments. No assurances can be given that the
Company will be able to raise adequate funds through debt or equity financing or
generate sufficient cash flows from operations to meet the Company's cash needs.
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. See "Forward Looking Statements" below.
YEAR 2000 COMPLIANCE
The Company believes that the MCC TeleManager is Year 2000 compliant. The
Company has not commenced a review of the Year 2000 compliance of its other
internal computer systems or the Year 2000 compliance of its significant
customers. The Company currently anticipates that it will initiate a
comprehensive review in the third quarter of 1998. This review will include
surveys with third party vendors and customers to assess the Year 2000
compliance status of the computer systems of such vendors and customers and the
potential impact on the Company of
18
<PAGE> 19
non-compliance. There can be no assurance that a failure of systems of third
parties on which the Company's systems and operations rely to be Year 2000
compliant will not have a material adverse effect on the Company's business,
financial condition or operating results.
FORWARD-LOOKING STATEMENTS
This report contains statements, including statements of management's belief or
expectation, which may be forward-looking within the meaning of applicable
securities laws. Such statements are subject to certain risks and uncertainties
that could cause actual future results and developments to differ materially
from those currently projected, including the following risks and uncertainties:
(1) the Company's ability to integrate and assimilate the businesses of PIC,
PIC-R and Incomex, (2) realization of cost reductions, (3) the Company's ability
to expand into new markets, (4) customer acceptance and effectiveness of the MCC
Telemanager, (5) the Company's access to adequate debt or equity capital to meet
the Company's operating and financial needs, (6) general economic conditions in
the Company's markets, and (7) the risk that the Company's analyses of these
risks could be incorrect and/or the strategies developed to address them could
be unsuccessful. Additional factors that could cause actual results to differ
are discussed in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997 filed with the Securities and Exchange Commission.
19
<PAGE> 20
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 April and May of 1998, the Company completed an offering of
$1,486,000 aggregate principal amount of promissory notes 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
notes bear interest at 14% and the principal and accrued interest are due on
March 31, 1999. Along with the notes, the Company also issued warrants to
purchase an aggregate of 1,486,000 shares of the Company's common stock at an
exercise price of $1.75 per share. The warrants expire on March 31, 2001. The
Company paid commissions of $96,880 to its placement agent and received net
proceeds of approximately $1,386,000 in the offering. In connection with the
offering, the Company also issued to its placement agent warrants to purchase
121,100 shares of the Company's common stock with terms substantially similar to
the warrants issued to investors in the offering.
In April 1998, the Company issued a promissory note in the
principal amount of $5,000 and warrants to purchase 5,000 shares of the
Company's common stock to one of the Company's outside directors in lieu of the
payment of directors' fees and issued a promissory note in the principal amount
of $25,000 and warrants to purchase 25,000 shares of the Company's common stock
to a consultant in lieu of payment of consultant fees. These notes and warrants
have terms identical to the notes and warrants sold in the offering described in
the preceding paragraph and were issued in a private placement exempt from the
registration requirements of the Act pursuant to Rule 506 of Regulation D under
the Act.
On February 26, 1998, the Company agreed to issue 2,170 shares
of its 8% Series A Convertible Preferred Stock to Berthel in exchange for the
prepayment of $180,000 in commissions and the payment of $37,000 in commissions
currently owed. This transaction was completed and the shares were issued on
June 19, 1998. The issuance of the shares was made pursuant to the exemption
from the registration requirements of the Act provided by Section 4(2) of the
Act.
In May 1998, the Company issued 571,428 shares of common stock
to the former shareholders of PIC as a prepayment of $1,000,000 in principal due
under notes issued by the Company in October 1997 in connection with the
acquisition by the Company of PIC. The shares of common stock were issued
pursuant to the exemption from the registration requirements of the Act provided
by Section 4(2) of the Act.
(d) Not applicable.
20
<PAGE> 21
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of stockholders of the Company was held on June 30,
1998.
The matters voted upon, including the number of votes cast for, against
or withheld, as well as the number of abstentions and broker non-votes, as to
each such matter were as follows:
Proposal 1: Election of directors
For Withheld
--- --------
(a) Guy O. Murdock 4,261,376 20,749
(b) Thomas E. Chaplin 4,265,034 17,091
(c) Colin P. Halford 4,265,034 17,091
(d) John C. Poss 4,265,034 17,091
(e) Steven R. Ehlert 4,264,034 18,091
(f) Larry A. Erickson 4,265,034 17,091
(g) Wayne Wright 4,265,034 17,091
Proposal 2: Ratification of appointment of Deloitte & Touche LLP as auditors of
the Company
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
4,269,134 4,900 8,091 0
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 (2)
3.3 Second Amendment to Restated Articles of
Incorporation of the Company (2)
3.4 Amended and Restated By-Laws of the Company (3)
10.1 Agreement, dated as of May 21, 1998, among the
Company, MCC Acquisition Corp., Priority
International Communications, Inc., Priority
Resources Corp., Wayne Wright, Bonner Hardegree and
ATN Communications, Inc.
21
<PAGE> 22
27 Financial Data Schedule
(1) Filed as an exhibit to the Company's Registration Statement on Form SB-2
(File No. 333-05422C) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's report on Form 10-QSB for the quarter
ended September 30, 1997 (File No. 000-21463) and incorporated herein by
reference.
(3) Filed as an exhibit to the Company's report on Form 10-QSB for the quarter
ended March 31, 1997 (File No. 000-21463) and incorporated herein by
reference.
(b) Reports on Form 8-K: None in the second quarter of 1998.
22
<PAGE> 23
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 August, 1998.
MURDOCK COMMUNICATIONS CORPORATION
By /s/ Guy O. Murdock
-----------------------------------------
Guy O. Murdock, Chairman of the Board
By /s/ Thomas E. Chaplin
------------------------------------------
Thomas E. Chaplin, Chief Executive Officer
23
<PAGE> 1
EX-10.1
AGREEMENT
THIS AGREEMENT (the "Agreement") is entered into as of the 21st day of
May, 1998, by and among MURDOCK COMMUNICATIONS CORPORATION ("MURDOCK"), MCC
ACQUISITION CORP., a wholly owned subsidiary of MURDOCK ("MCCAC"), PRIORITY
INTERNATIONAL COMMUNICATIONS, INC., a wholly owned subsidiary of MCCAC ("PIC"),
PIC RESOURCES CORP., a wholly owned subsidiary of MCCAC ("PICR"), WAYNE WRIGHT
and BONNER HARDEGREE (together the "SHAREHOLDERS") and ATN COMMUNICATIONS, INC.,
a wholly-owned subsidiary of PICR ("ATN").
RECITALS
Whereas, MURDOCK, MCCAC, PIC, PICR, the SHAREHOLDERS and ATN mutually
desire to enter into this Agreement and hereby each acknowledge the receipt of
good and valuable consideration therefor;
Whereas, a Stock Purchase Agreement dated as of August 22, 1997, as
amended as of October 29, 1997 and as of February 27, 1998 (the "PIC
Agreement"), was entered into by and among MCCAC, PIC and the SHAREHOLDERS;
Whereas, a Stock Purchase Agreement dated as of August 22, 1997, as
amended as of the 29th day of October, 1997 and as of February 27, 1998 (the
"PICR Agreement") was entered into by and between MCCAC, PICR, ATN, and the
SHAREHOLDERS;
Whereas, that certain Letter Agreement dated October 29, 1997 addressed
to the Shareholders of PICR and ATN (the "Letter Agreement") was executed and
delivered by MURDOCK in conjunction with the execution of the PIC Agreement and
the PICR Agreement;
Whereas, the parties hereto desire to make certain additional
agreements and to modify certain terms and conditions of the PIC Agreement, the
PICR Agreement and the Letter Agreement all as expressly stated herein,
NOW THEREFORE, the parties do hereby agree as follows:
1. Section 1.3 of the PIC Agreement and Section 1.4 of the PICR
Agreement, each regarding a "Special Default Right", are hereby agreed to be
void and of no further force or effect.
1
<PAGE> 2
2. From and after the date hereof and until the Revised Short Term Note
(as defined herein) and the Long-Term Notes (as defined in the PIC Agreement)
are fully paid and all obligations due and owing to the Shareholders under
Section 1.3 of the PICR Agreement (the "Earn-Out Right"), as amended hereby, are
fully performed, MURDOCK and MCCAC agree that, (i) they will take no action to
expand the number of Directors on the Board of Directors of PIC, PICR or ATN to
more than three members, (ii) they will always vote their shares or direct the
vote of shares of PIC, PICR and ATN stock for the election of both of the
SHAREHOLDERS as Directors of PIC, PICR and ATN, unless they commit acts
constituting fraud or felony to MCCAC, PIC or PICR, make material
misrepresentations to the officers or directors of MCCAC or materially disregard
their duties as Directors, (iii) they will authorize the prepayment of some or
all of the amounts owing on the Revised Short Term Note as cash reserves become
reasonably available in MCCAC, PIC, PICR or ATN, (iv) they will, following full
payment of the Revised Short Term Note, authorize the prepayment of some or all
of the amounts owing on the Long Term Notes as cash reserves become reasonably
available in MCCAC, PIC, PICR or ATN, and (v) will cause Wayne Wright to be
included in the slate of directors recommended by management of MURDOCK to be
elected to the MURDOCK Board of Directors unless he commits acts constituting
fraud or felony, makes a material misrepresentation to the officers or directors
of MURDOCK or materially disregards his duties as a director and will reimburse
Wayne Wright for his travel and other expenses reasonably incurred at MURDOCK'S
request in connection with his duties as a Director of MURDOCK. MCCAC and
MURDOCK further agree that, until the Revised Short-Term Note and the Long-Term
Notes are fully paid, they will not require, make or cause PIC to make any
principal payments on the $400,000 principal amount promissory note payable to
MURDOCK.
3. The parties hereto agree that scheduled payments due on the Long
Term Notes and the Revised Short Term Note may in the future be funded out of
PIC, PICR or ATN cash reserves if the same are reasonably available. Provided
however, that MCCAC retains, (i) responsibility and obligation for making such
payments on a timely basis, and (ii) the right to approve the making of any
expenditures provided that such approval may not be unreasonably withheld or
delayed.
4. Upon execution of this Agreement MCCAC shall tender the amount of
$500,000 ($250,000 to be provided by MURDOCK and $250,000 from PICR and ATN) as
a prepayment of amounts owed under the Short Term Note and the parties thereto
shall execute the Revised Short Term Note attached hereto as EXHIBIT A in
renewal and extension of the Short Term Note. The parties hereby agree that
after the application of the above referenced payment the principal balance of
the Revised Short Term Note is $340,000 and the Guaranty Agreement
2
<PAGE> 3
dated October 27, 1998 executed by MURDOCK to guaranty payment of the Short Term
Note is still in full force and effect to guaranty the Revised Short Term Note.
5. Upon execution of this Agreement MURDOCK shall irrevocably direct
its transfer agent to issue to Wayne Wright, Bonner Hardegree and Kathy Pratt an
aggregate of 571,428 shares of MURDOCK Common Stock as a prepayment in the
amount of $1,000,000 of amounts owed under the Long Term Notes payable to Wayne
Weight and Bonner Hardegree. MURDOCK will issue 540,000 shares to Wayne Wright,
28,571 shares to Bonner Hardegree, and 2,857 shares to Kathy Pratt. The parties
hereby agree that after the application of the above referenced payment (i) the
Guaranty Agreements dated October 27, 1998 executed by MURDOCK to guaranty
payment of such notes are still in full force and effect and continue to
guaranty the Long Term Notes, (ii) the prepayment of principal will be applied
to installments of principal in the inverse order of their maturities, and (iii)
the principal balances of such Long Term Notes are as follows:
Wayne Wright $381,29.39
Bonner Hardegree $117,599.01
6. The parties agree that the shares described in paragraph 5 shall
also be subject to the Registration Rights Agreements each dated October 29,
1997, by and between MURDOCK and Wayne Wright and MURDOCK and Bonner Hardegree.
Wayne Wright hereby represents and warrants to MCCAC and MURDOCK that he is not
receiving any consideration in exchange for the shares he has directed to be
issued to Kathy Pratt, as described in Paragraph 5. MURDOCK hereby represents to
the SHAREHOLDERS that it has complied with all applicable laws and regulations
which may govern or restrict this transaction and that it is duly authorized by
its organizational and operating documents to sell such shares to the
SHAREHOLDERS.
7. The Earn-Out Right (Section 1.3 of the PICR Agreement) shall be
amended to read as follows:
"1.3 EARN-OUT RIGHT. At the end of each of the two periods of 12
consecutive full calendar months during the 24 month period beginning November
1, 1997, the amount of EBITDA (earnings before interest, taxes, depreciation and
amortization) generated by PICR, ATN, PIC and any subsidiary of any of them
which at the election of the PICR or ATN Board of Directors is determined to be
included for purposes of this calculation (collectively the "Subsidiary") shall
be measured and, if the Subsidiary has EBITDA of at least $1,000,000 for either
such period, Murdock Common Stock with an aggregate Quarterly Average Market
Value of $1.25 for each dollar of EBITDA earned in the relevant period in excess
of $1,000,000 shall be delivered to the
3
<PAGE> 4
SHAREHOLDERS (subject to the re-set provisions set forth below) within 120 days
after November 1, 1999. In addition to the foregoing, if at the end of the 24
month period beginning November 1, 1997, the Subsidiary has EBITDA of at least
$2,000,000, the Shareholders shall earn 25,000 additional shares of MURDOCK
common stock for each $250,000 of EBITDA over $2,000,000 up to $4,000,000 and
50,000 shares of MURDOCK common stock for each $250,000 of EBITDA over
$4,000,000. The shares will be delivered to the SHAREHOLDERS within 120 days
after November 1, 1999. At their option the SHAREHOLDERS may waive their rights
to re-set the earn-out period, as described below, and instead obtain delivery
of the shares earned pursuant to the foregoing provisions within 120 days after
the end of each relevant 12-month period. Should an acquisition by a Subsidiary
occur during the 24-month period described above, the income from which, in the
opinion of MCCAC and the board of directors of the Subsidiary, should not be
included in the calculation of the Earn-Out Right hereunder, such parties shall
establish a separate "earn-out" incentive applicable to the Shareholders to
provide appropriate incentives which gives recognition to the contribution to
the Subsidiary and the Shareholders over an appropriate term. It is the
intention of the Parties to not limit or inhibit the officers and directors and
shareholders in the pursuit of business opportunities or acquisitions for the
Subsidiaries notwithstanding the time limit and terms of the Earn-Out Right and
to foster and encourage business decisions which produce benefits to MURDOCK and
MCCAC and the Subsidiaries and to provide appropriate recognition and incentive
to such undertakings. In the event that MURDOCK provides resources in cash or
securities to finance acquisitions or investments by PIC, PICR or ATN, the
parties anticipate that some or all of the expenses incurred and the income
generated by such acquisitions or investments may, by subsequent agreement of
the parties, be excluded from the calculation of EBITDA for the purposes of the
Earn-Out Right. Notwithstanding anything provided herein to the contrary, in the
event the EBITDA number for the 24 month period beginning November 1, 1997 and
ending October 31, 1999 is not more than $4,000,000, and provided the
SHAREHOLDERS have not waived their re-set rights as described above, then the
24-month period to be used for all purposes under this Earn-Out Right shall be
changed to the 24-month period beginning April 1, 1998 and ending March 31, 2000
and the 12-month periods shall likewise be adjusted (the "Re-Set Period"). If
the earn-out period is re-set, the shares of MURDOCK Common Stock which would
have been earned with respect to EBITDA during the November 1, 1997-October 31,
1999 period shall not be delivered to the Shareholders. Shares of MURDOCK Common
Stock earned during the Re-Set Period shall be delivered to the SHAREHOLDERS
within 120 days after the expiration of the respective Re-Set Period. In the
event that MCCAC, PIC, PICR or ATN desire to make certain expenditures for the
long term betterment of such company which expenses would ordinarily be included
in the calculation of EBITDA under this Earn-Out Right, the parties agree such
expenses will be excluded from such EBITDA
4
<PAGE> 5
calculations in order to encourage the making of such expenditures. The parties
hereto agree that beginning March 1, 1998, for each completed call processed by
ATN for Incomex, Inc. during such 24 month period, a $2.50 per completed call
income addition to the EBITDA total for such 24 month period shall be made,
provided that, (i) at least $3.80 per call (the "Cost Component") is retained by
ATN and all further proceeds from the call are provided to Incomex, Inc., (ii)
that the $3.80 per call amount retained by ATN covers the cost of operation for
the calls and (iii) that ATN establishes an in house resolution group to
minimize bad debt from calls origination by Incomex, Inc. from Mexico.
Notwithstanding anything to the contrary herein, the Cost Component retained by
ATN shall be subject to adjustment up or down if ATN'S actual cost per completed
call is more or less, respectively, than $3.80. The shares which may be earned
under the Earn-Out Right shall be delivered to the SHAREHOLDERS in the
proportion of 90% thereof to Wayne Wright and 10% thereof to Bonner Hardegree
and shall be subject to the Registration Rights Agreements each dated October
29, 1997, by and between MURDOCK and Wayne Wright and MURDOCK and Bonner
Hardegree. MURDOCK hereby agrees and represents to the SHAREHOLDERS that in
conjunction with the issuance of such shares, it has complied or will comply
with all applicable laws and regulations which may govern or restrict the
issuance of such shares and that it is or until be duly authorized by its
organizational and operating documents to issue such shares to the
SHAREHOLDERS."
8. The parties agree that (i) all of the obligations of MURDOCK under
the Letter Agreement are hereby terminated, (ii) in the event that the parties
reach agreement for MURDOCK to provide stock or cash to PICR, PIC or ATN to
facilitate acquisitions or growth, such agreement will contain a cost of capital
charge to the recipient to be reasonably agreed upon by the parties, and (iii)
provided there is no continuing payment default under either the Revised
Short-Term Note or the Long-Term Notes, cash flow generated by PIC, PICR and ATN
will be use to repay the approximately $110,000 advanced by MURDOCK since
November 1, 1997.
9. Except as expressly provided herein, all terms and conditions of the
PIC Agreement, the PICR Agreement, and the Long Term Notes, remain in full force
and effect.
10. This Agreement shall be construed and enforced in accordance with
the laws of the State of Iowa without regard to conflicts of law principles. The
parties have participated jointly in the negotiation and drafting of this
Agreement. In the event an ambiguity or question of intent or interpretation
arises, this Agreement shall be construed as if drafted jointly by the parties
and no presumption or burden of proof shall arise favoring or disfavoring any
party by virtue of the authorship of any provisions of this Agreement.
5
<PAGE> 6
11. This Agreement may be amended or modified in whole or in part, only
by a duly authorized agreement in writing executed in the same manner as this
Agreement and which makes reference to this Agreement.
IN WITNESS WHEREOF the pages have hereunto caused this Agreement to be
duly executed as of the date first above written.
MCC ACQUISITION CORP.
By: /s/ Tom Chaplin
--------------------------------------
Tom Chaplin, Chief Executive Officer
MURDOCK COMMUNICATIONS
CORPORATION
By: /s/ Tom Chaplin
--------------------------------------
Tom Chaplin, Chief Executive Officer
PRIORITY INTERNATIONAL
COMMUNICATIONS, INC.
By: /s/ Wayne Wright
--------------------------------------
Wayne Wright, President
PIC RESOURCES CORP.
By: /s/ Wayne Wright
--------------------------------------
Wayne Wright, President
6
<PAGE> 7
SHAREHOLDERS:
/s/ Wayne Wright
------------------------------------------
WAYNE WRIGHT
/s/ Bonner Hardegree
------------------------------------------
BONNER HARDEGREE
ATN COMMUNICATIONS, INC.
By: /s/ Wayne Wright
--------------------------------------
Wayne Wright, Chief Executive Officer
7
<PAGE> 8
REVISED PROMISSORY NOTE
(SHORT-TERM NOTE)
$340,000.00 May 21, 1998
Cedar Rapids, Iowa
FOR VALUE RECEIVED, the undersigned, MCC ACQUISITION CORP. (the
"Company"), promises to pay to the order of BONNER B. HARDEGEE, Trustee for the
benefit of WAYNE WRIGHT and BONNER B. HARDEGEE (the "Holder"), the principal sum
of Three Hundred Forty Thousand Dollars ($340,000.00), payable in full on
December 1, 1998.
Prior to maturity, the unpaid principal balance of this Note shall bear
interest, payable on the first day of each month beginning July 1, 1998 at the
annual rate of twelve percent (12.0%). The unpaid balance of principal of this
Note shall bear interest after the due date until paid at the rate of eighteen
percent (18.0%) per annum.
This Note is issued in renewal, extension and replacement of the
original "Short-Term Note" dated October 31, 1997, as renewed and extended by
that certain AMENDED AND RESTATED PROMISSORY NOTE (SHORT-TERM NOTE) dated
February 27, 1998, which "Short-Term Note" was defined in and issued pursuant to
the Stock Purchase Agreement dated August 22, 1997, as amended by a First
Amendment dated October 31, 1997, and as further amended by a Second Amendment
dated February 27, 1998 (the "Purchase Agreement"), to which the Company and the
Holder are parties. This Note is secured by a Collateral Pledge and Security
Agreement dated October 29, 1997 executed by the Company and the Holder.
If Murdock Communications Corporation ("Murdock") completes any primary
offering of its equity securities (excluding any exercise of employee stock
options and exercise of outstanding warrants) at any time after the date hereof
and prior to June 30, 1999, the Company must apply an amount equal to at least
sixty-seven percent (67.0%) of the net proceeds of any such offering in excess
of $500,000.00 to prepay this Note. The Company shall make such prepayments
within five (5) business days after the receipt by Murdock of the proceeds from
the offering.
This Note may be prepaid by the Company at any time, in whole or in
part, without premium or penalty. The company shall be liable for all of the
Holder's collection expenses, including but not limited to reasonable attorneys'
fees and court costs.
1
<PAGE> 9
Until this Note has been paid in full, neither the Company, Priority
International Communications, Inc., ATN Communications, Inc. nor PIC Resources
Corp. will loan, contribute, distribute by dividend or advance any money to
Murdock.
The undersigned agrees to waive all notice of default, intent to
accelerate, acceleration, presentment and notice of dishonor.
MCC ACQUISITION CORP.
By: /s/ Tom Chaplin
-------------------------------
Tom Chaplin, Chief Executive Officer
2
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,093,518
<SECURITIES> 0
<RECEIVABLES> 2,592,609
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<CURRENT-ASSETS> 3,725,919
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12,832,817
0
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<TOTAL-LIABILITY-AND-EQUITY> 13,914,814
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