<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
--------------------
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 September 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 No X
--- ---
<PAGE> 2
MURDOCK COMMUNICATIONS CORPORATION
FORM 10-QSB
September 30, 1998
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Page
Item 1. Consolidated Balance Sheet as of September 30, 1998 and December
31, 1997 (Unaudited)............................................. 3
Consolidated Income Statement for the Three Months Ended
September 30, 1998 and 1997 and for the Nine Months Ended
September 30, 1998 and 1997 (Unaudited).......................... 5
Consolidated Statement of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 (Unaudited).......................... 6
Notes to Consolidated Financial Statements (Unaudited)........... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................ 19
Item 2. Changes in Securities............................................ 19
Item 3. Defaults Upon Senior Securities.................................. 19
Item 4. Submission of Matters to a Vote of Security Holders.............. 19
Item 5. Other Information................................................ 19
Item 6. Exhibits and Reports on Form 8-K................................. 19
Signatures....................................................... 21
</TABLE>
2
<PAGE> 3
PART I FINANCIAL INFORMATION
MURDOCK COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash & Cash Items $ 872,446 $ 316,286
Marketable Securities 27,830 -
Accounts and Notes Receivable
Trade Receivable 1,929,951 736,007
Related Party Receivable 610,500 351,602
Employee Receivable 24,098 -
Other Receivable 94,891 77,181
AT&T Receivable 18,426 105,200
Allowances for Doubtful Accounts and Notes Receivable (713,145) (394,373)
Prepaid Expenses 142,518 26,821
Other Current Assets 417,794 327,463
----------- -----------
TOTAL CURRENT ASSETS 3,425,309 1,546,187
INVESTMENTS AND INDEBTEDNESS OF OTHERS
Indebtedness of Non-Related Parties - Not Current - 152,040
----------- -----------
TOTAL INVESTMENTS AND INDEBTEDNESS OF OTHERS - 152,040
FIXED ASSETS
Property, Plant and Equipment - Owned 10,316,931 9,513,138
Property, Plant and Equipment - Leased 3,942,530 3,674,206
Accumulated Depreciation and Amortization - Owned (7,829,406) (7,400,983)
Accumulated Depreciation and Amortization - Leased (3,381,725) (3,209,405)
----------- -----------
TOTAL FIXED ASSETS 3,048,330 2,576,956
INTANGIBLE ASSETS
Goodwill - Net of Accumulated Amortization 5,741,110 4,133,648
Intangible Assets - Other 3,460,726 2,212,443
Accumulated Depreciation and Amortization - Other (1,869,436) (1,612,985)
----------- -----------
TOTAL INTANGIBLE ASSETS 7,332,400 4,733,106
OTHER ASSETS
Other Assets 303,295 207,000
----------- -----------
TOTAL OTHER ASSETS 303,295 207,000
----------- -----------
TOTAL ASSETS $14,109,334 $ 9,215,289
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
MURDOCK COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
<TABLE>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts and Notes Payable
Bank Payable $ 683,342 $ 1,020,440
Notes Payable 1,486,000 -
Trade Payable 1,700,890 1,657,118
Related Party Payable 1,770,644 1,013,827
Other Payable 30,000 -
Current Portion of Long-Term Indebtedness 1,306,435 983,964
Other Current Liabilities 2,006,660 1,453,335
------------ -----------
TOTAL CURRENT LIABILITIES 8,983,971 6,128,684
LONG-TERM LIABILITIES
Bonds, Mortgages and Other Long-Term Debt 2,403,822 1,441,608
Bonds, Mortgages and Other Long-Term Debt to Related Parties 814,084 -
Indebtedness to Related Parties - Not Current - Capital Leases 4,014,486 4,521,525
Indebtedness to Related Parties - Not Current - PIC LT Note - 1,112,414
Other Liabilities 299,929 380,913
Deferred Income 15,665 112,135
------------ -----------
TOTAL LONG-TERM LIABILITIES 7,547,986 7,568,595
------------ -----------
TOTAL LIABILITIES 16,531,957 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 September 30, 1998 and
16,250 at December 31, 1997 1,829,210 1,544,146
Common Stock
No Par Value
Authorized Shares: 20,000,000
Issued and Outstanding: 5,429,867 at September 30, 1998
and 4,458,439 at December 31, 1997 12,830,963 11,343,308
Other Additional Capital 577,611 449,400
Current Earnings 286,900 -
Retained Earnings (17,947,307) (17,818,844)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (2,422,623) (4,481,990)
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 14,109,334 $ 9,215,289
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
MURDOCK COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT 30, 1998 SEPT 30, 1997 SEPT 30, 1998 SEPT 30, 1997
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
NET SALES AND GROSS REVENUES
Other Revenues - Call Processing $9,329,704 $ 1,731,833 $23,714,736 $ 4,954,334
Net Sales of Tangible Items 117,253 138,012 407,557 411,616
Income From Rentals 35,766 34,177 147,602 161,177
Revenues From Services 216,052 21,858 600,706 51,568
------------------------- --------------------------
TOTAL NET SALES AND GROSS REVENUES 9,698,775 1,925,880 24,870,601 5,578,695
COSTS APPLICABLE TO SALES AND REVENUES
Costs From Other Revenues - Call Processing 6,517,282 1,311,265 15,680,333 3,952,790
Costs of Tangible Items Sold 91,273 104,229 326,107 307,721
Costs From Rentals 7,621 - 22,575 -
Cost of Services 17,846 47,724 58,349 116,462
------------------------- --------------------------
TOTAL COSTS APPLICABLE TO SALES AND REVENUES 6,634,022 1,463,218 16,087,364 4,376,973
------------------------- --------------------------
GROSS OPERATING PROFIT 3,064,753 462,662 8,783,237 1,201,722
OPERATING EXPENSES
Selling, General and Administrative Expenses 1,925,368 1,011,392 5,602,371 2,630,021
Provision for Doubtful Accounts and Notes - 3,611 - 3,611
Other General Expenses - Depreciation and Amortization 439,748 574,078 1,352,511 1,623,796
------------------------- --------------------------
TOTAL OPERATING EXPENSES 2,365,116 1,589,081 6,954,882 4,257,428
------------------------- --------------------------
NET OPERATING PROFIT (LOSS) 699,637 (1,126,419) 1,828,355 (3,055,706)
NON-OPERATING INCOME AND EXPENSES
Miscellaneous Other Income 19,754 13,262 80,530 40,488
Interest and Amortization of Debt Discount and Expense (545,991) (175,851) (1,469,267) (509,652)
Miscellaneous Income Deductions - - (9,082) -
------------------------- --------------------------
TOTAL NON-OPERATING INCOME AND EXPENSES (526,237) (162,589) (1,397,819) (469,164)
------------------------- --------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE 173,400 (1,289,008) 430,536 (3,524,870)
INCOME TAX EXPENSE (18,643) (676) (24,464) (5,402)
EQUITY IN LOSS OF UNCONSOLIDATED SUBSIDIARY (6,338) (109,343) (119,172) (309,478)
------------------------- --------------------------
NET INCOME (LOSS) 148,419 (1,399,027) 286,900 (3,839,750)
DIVIDENDS AND ACCRETION ON 8% SERIES A CONVERTIBLE
PREFERRED STOCK (46,050) - (128,463) -
------------------------- --------------------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 102,369 $(1,399,027) $ 158,437 $(3,839,750)
========================= ==========================
BASIC NET INCOME (LOSS) PER COMMON SHARE $ 0.02 $ (0.30) $ 0.03 $ (0.88)
========================= ==========================
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,429,867 4,624,064 5,068,381 4,362,081
========================= ==========================
FULLY DILUTED NET INCOME (LOSS) PER COMMON SHARE $ 0.01 $ (0.30) $ 0.03 $ (0.88)
========================= ==========================
FULLY DILUTED WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 7,632,592 4,624,064 6,257,897 4,362,081
========================= ==========================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
MURDOCK COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
FOR NINE MONTHS ENDED
-------------------------------
SEPT 30, 1998 SEPT 30, 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) $ 286,900 $(3,839,750)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH FLOWS FROM
OPERATING ACTIVITIES
Depreciation and Amortization 1,315,350 1,698,796
Noncash Interest Expense 168,625 51,275
Noncash Consulting Expense - 60,000
Recognition of Deferred Income (96,470) (40,488)
Share of Loss from Joint Venture 119,172 309,478
Changes in Operating Assets and Liabilities
Receivables (1,234,471) 141,673
Other Current Assets (748,258) 7,300
Other Noncurrent Assets 68,541 -
Accounts Payable (339,882) 503,682
Accrued Expenses 407,746 215,967
Deferred Income - 25,417
---------- ----------
NET CASH FLOWS FROM OPERATING ACTIVITIES (52,747) (866,650)
INVESTING ACTIVITIES
Purchases of Property and Equipment (1,119,244) (220,512)
Sale of Property and Equipment 98,940 -
Payments for Site Acquisition - (427,933)
Investment in Joint Venture (78,780) (255,383)
Software Development Costs - (138,013)
Deposits - (130,642)
Cash Paid in Conjunction with Acquisitions (30,669) (400,000)
Cash from Acquired Company (1,535) -
---------- ----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (1,131,288) (1,572,483)
FINANCING ACTIVITIES
Borrowings on Notes Payable 2,085,123 799,975
Borrowings on Capital Leases, Primarily with Related Parties 809,184 108,293
Borrowings from Notes Payable with Related Parties 1,696,064 -
Payments on Notes Payable and Long Term Debt
Primarily with Related Parties (2,949,717) (488,529)
Proceeds From Issuance of 8% Series A Convertible Preferred Stock 267,000 950,000
Dividends On 8% Series A Redeemable Preferred Stock (53,651) (1,666)
Proceeds From Exercise of Common Stock Warrants - 5,600
Repurchase of 10% Series A Redeemable Preferred Stock
and Detachable Common Stock Warrants - (24,480)
Payments on Offering Costs (113,808) (55,888)
---------- ----------
NET CASH FLOW FROM FINANCING ACTIVITIES 1,740,195 1,293,305
NET INCREASE (DECREASE) IN CASH 556,160 (1,145,828)
CASH AT BEGINNING OF PERIOD 316,286 1,241,897
CASH AT END OF PERIOD $ 872,446 $ 96,069
========== ==========
SUPPLEMENTAL DISCLOSURES
Noncash Contribution of Property to Joint Venture $ - $ 349,547
Conversion of Related Party Notes Payable to Common Stock - 1,334,274
Cash Paid During the Period for Interest 1,133,401 350,390
Cash Paid During the Period for Income Taxes 18,643 5,402
Accretion on 8% Series A Convertible Preferred Stock 23,292 -
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
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 #
00-21463) 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 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 September 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 amortization) of at least
$2,000,000, the former shareholders of PIC-R will earn 25,000 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
7
<PAGE> 8
$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 the 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 September 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 $0.9
million. Other intangible assets, net of accumulated amortization, increased
$1.0 million, or 167%, to $1.6 million as of September 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 $1.1
million as of September 30, 1998.
Debt
In September 1998, the Company has received proceeds of $370,000 from the
issuance of promissory notes to related parties. The notes bear interest at
14% and the accrued interest and principal are due on November 1, 1999.
As of November 10, 1998, the Company had an unpaid balance past due to Berthel
of approximately $353,690. These balances are in violation of certain of the
covenants in the financing agreements. Berthel only has the right to demand
that the Company cure these violations, but has not made such a demand as of the
date of this report.
Guide Star Joint Venture
Condensed financial information for the Company's investment in the Guide Star
joint venture as of the nine months ended September 30, 1998 is as follows:
<TABLE>
<S> <C>
Total assets $ --
Total liabilities 152,404
Total revenues 2,960
Net loss 119,172
</TABLE>
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 fourth
quarter of 1998.
8
<PAGE> 9
Income Tax Expense
No income tax expense was recorded for the nine months ended September 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 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. On October 12, 1998, the Company amicably settled this
matter for an amount that is not material to the Company's financial condition
or results of operations.
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
9
<PAGE> 10
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 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. In November 1998, the
Bankruptcy Court issued an order dismissing the claims against PIC and ATN.
EILCO Leasing Services, Inc. ("Eilco"), a creditor of Incomex, has claimed that
Incomex is in violation of certain covenants of their credit agreement,
including provisions relating to inspection rights, collateral protection and
the obligation of Incomex to pay royalties by Incomex to Eilco based on income
general from telecommunications services provided to a group of hotels in
Mexico. As of September 30, 1998, the Company has prepaid over $85,000 to
Eilco in addition to the regular payments due under the credit agreement. The
Company believes that Eilco's claims are without merit and has requested
arbitration to resolve this matter.
10
<PAGE> 11
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 SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
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
------------------------------
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
Net sales and gross revenues 100% 100%
Costs applicable to sales and revenues 68 76
Selling, general and administrative expenses 20 52
Other general expenses - depreciation and
amortization 5 30
Net operating profit (loss) 7 (58)
Interest and amortization of debt discount
and expense 6 (9)
Income (loss) before income tax expense 1 (67)
Equity in loss of unconsolidated subsidiary - (6)
Income (loss) from continuing operations 1 (73)
</TABLE>
The information for the three months ended September 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 $7.8 million, or
410%, to $9.7 million for the three months ended September 30, 1998 from $1.9
million for the three months ended September 30, 1997. Revenues during the three
months ended September 30, 1998 consisted of $1.3 million attributable to the
Murdock Unit, $6.7 million attributable to PIC and PIC-R, and $1.7 million
attributable to Incomex. Call processing revenues generated from the Murdock
Unit through its Lodging Partnership program decreased $0.9 million, or 50%, to
$0.9 million for the three months September 30, 1998 from $1.8 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
11
<PAGE> 12
increased $0.18 million, or 900%, to $0.2 million for the three months ended
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.
In October 1998, the Company and AT&T agreed to end the Lodging Partnership.
Under this agreement, AT&T will directly manage all customers in the Lodging
Partnership and will pay approximately $500,000 to the Company. The Company
expects to report a one-time gain of approximately $400,000 during the fourth
quarter of 1998 relating to this agreement with AT&T. Revenues of $0.5 million
have been recognized by the Company from the AT&T agreement for the three
months ended September 30, 1998. The Company did not recognize any net profits
from the AT&T agreement for the three months ended September 30, 1998. No
revenues or net profits will be present in future periods with respect to this
agreement.
COSTS APPLICABLE TO SALES AND REVENUES - Consolidated cost of sales increased
$5.2 million, or 354%, to $6.63 million for the three months ended September
30, 1998 from $1.46 million for the three months ended September 30, 1997.
Cost of sales during the three months ended September 30, 1998 consisted of
$0.82 million attributable to the Murdock Unit, $4.98 million attributable to
PIC and PIC-R and $0.83 million attributable to Incomex. Costs associated with
call processing revenues for the Murdock Unit decreased $0.61 million, or 43%,
to $0.82 million for the three months ended September 30, 1998 from $1.43
million for the three months ended September 30, 1997.
GROSS OPERATING PROFIT - Consolidated gross operating profit increased $2.6
million, or 520%, to $3.1 million for the three months ended September 30, 1998
from $0.5 million for the three months ended September 30, 1997. Gross
operating profit during the three months ended September 30, 1998 consisted of
$0.45 million attributable to the Murdock Unit, $1.73 million attributable to
PIC and PIC-R and $0.92 million attributable to Incomex.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Consolidated selling, general
and administrative expenses increased $0.9 million, or 90%, to $1.9 million for
the three months ended September 30, 1998 from $1.0 million for the three
months ended September 30, 1997. Selling, general and administrative expenses
during the three months ended September 30, 1998 consisted of $0.8 million
attributable to the Murdock Unit and Corporate, $0.7 million attributable to
PIC and PIC-R and $0.4 million attributable to Incomex. The Murdock Unit and
Corporate selling, general and administrative expenses decreased $0.2 million,
or 20%, to $0.8 million for the three months ended September 30, 1998 from $1.0
million for the three months ended September 30, 1997. The decrease was
primarily due to a reduction in number of the Company's employees.
OTHER GENERAL EXPENSES - DEPRECIATION AND AMORTIZATION - Consolidated
depreciation and amortization expenses decreased $0.13 million, or 23%, to
$0.44 million for the three months ended September 30, 1998 from $0.57 million
for the three months ended September 30, 1997. Depreciation and amortization
expenses during the three months ended September 30, 1998 consisted of $0.34
million attributable to the Murdock Unit and Corporate, and $0.1 million
attributable to PIC and PIC-R. The completion of the PIC and PIC-R acquisition
in October 1997 resulted in additional goodwill and acquisition cost
amortization of $0.1 million for the three months ended September 30, 1998.
The completion of the Incomex acquisition in February 1998 resulted in goodwill
and acquisition cost amortization of $0.05 million for the three months ended
September 30, 1998. The
12
<PAGE> 13
amortization of PIC, PIC-R, and Incomex goodwill is reflected on the Company's
unaudited financial statements.
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 September 30, 1998 from $0.2 million
for the three months ended September 30, 1997. Interest and amortization of
debt discount and expense during the three months ended September 30, 1998
consisted of $0.4 million attributable to the Murdock Unit and Corporate, $0.1
million attributable to PIC and PIC-R and $0.05 million attributable to
Incomex. Interest expense incurred by the Murdock Unit and Corporate increased
$0.05 million, or 100%, to $0.4 million for the three months ended September
30, 1998 from $0.2 million for the three months ended September 30, 1997. 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 September 30, 1998. As of
September 30, 1998, the Company has received proceeds of $0.4 million in notes
payable provided by related parties. The notes bear interest at 14% and the
accrued interest and principal are due on November 1, 1999. Interest expense
recognized in connection with all debt financing was $0.08 million for the
three months ended September 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 $0.03 million for the three months ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
The following table sets forth income statement items and the percentages that
such items bear to revenues:
<TABLE>
<CAPTION>
For the Nine Months Ended
--------------------------------------
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Net sales and gross revenues 100% 100%
Costs applicable to sales and revenues 65 78
Selling, general and administrative expenses 23 47
Other general expenses - depreciation and
amortization 5 30
Net operating profit (loss) 7 (55)
Interest and amortization of debt discount
and expense 6 8
Income (loss) before income tax expense 1 (63)
Equity in loss of unconsolidated subsidiary - 6
Income (loss) from continuing operations 1 (69)
</TABLE>
13
<PAGE> 14
The information for the nine months ended September 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 $19.3 million,
or 345%, to $24.9 million for the nine months ended September 30, 1998 from
$5.6 million for the nine months ended September 30, 1997. Revenues during the
nine months ended September 30, 1998 consisted of $4.4 million attributable to
the Murdock Unit, $13.6 million attributable to PIC and PIC-R, and $6.9 million
attributable to Incomex following its acquisition in February 1998. Call
processing revenues generated from the Murdock Unit through its Lodging
Partnership program decreased $1.7 million, or 33%, to $3.4 million for the
nine months ended September 30, 1998 from $5.1 million for the nine months
ended September 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 $0.4 million, or 400%, to $0.5 million for the nine
months ended September 30, 1998 from $0.1 million for the nine months ended
September 30, 1997. MCC TeleManager(TM) revenues were $0.5 million for the
nine months ended September 30, 1998.
In October 1998, the Company and AT&T agreed to end the Lodging Partnership.
Under this agreement, AT&T will directly manage all customers in the Lodging
Partnership and will pay approximately $500,000 to the Company. The Company
expects to report a one-time gain of approximately $400,000 during the fourth
quarter of 1998 relating to this agreement with AT&T. Revenues of $1.9 million
and net profits of $0.2 million have been recognized by the Company from the
AT&T agreement for the nine months ended September 30, 1998. These revenues
and net profits will not be present in future periods.
COST APPLICABLE TO SALES AND REVENUES - Consolidated cost of sales increased
$11.7 million, or 267%, to $16.1 million for the nine months ended September
30, 1998 from $4.4 million for the nine months ended September 30, 1997. Cost
of sales during the nine months ended September 30, 1998 consisted of $2.9
million attributable to the Murdock Unit, $9.4 million attributable to PIC and
PIC-R and $3.8 million attributable to Incomex following its acquisition in
February 1998. Cost associated with call processing revenues for the Murdock
Unit decreased $1.5 million, or 37%, to $2.6 million for the nine months ended
September 30, 1998 from $4.1 million for the nine months ended September 30,
1997.
GROSS OPERATING PROFIT - Consolidated gross operating profit increased $7.6
million, or 633%, to $8.8 million for the nine months ended September 30, 1998
from $1.2 million for the nine months ended September 30, 1997. Gross
operating profit during the nine months ended September 30, 1998 consisted of
$1.5 million attributable to the Murdock Unit, $4.2 million attributable to PIC
and PIC-R and $3.1 million attributable to Incomex following its acquisition in
February 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Consolidated selling, general
and administrative expenses increased $3.0 million, or 115%, to $5.6 million
for the nine months ended September 30, 1998 from $2.6 million for the nine
months ended September 30, 1997. Selling, general and administrative expenses
during the nine months ended September 30, 1998 consisted of $2.7 million
attributable to the Murdock Unit and Corporate, $1.8 million attributable to
PIC and PIC-R and $1.1 million attributable to Incomex following its
acquisition in February 1998. The Murdock Unit
14
<PAGE> 15
and Corporate selling, general and administrative expenses increased $0.1
million, or 4%, to $2.7 million for the nine months ended September 30, 1998
from $2.6 million for the nine months ended September 30, 1997. The increase
was primarily due to increases in compensation.
OTHER GENERAL EXPENSES - DEPRECIATION AND AMORTIZATION - Consolidated
depreciation and amortization expenses decreased $0.2 million, or 12%, to $1.4
million for the nine months ended September 30, 1998 from $1.6 million for the
nine months ended September 30, 1997. Depreciation and amortization expenses
during the nine months ended September 30, 1998 consisted of $1.1 million
attributable to the Murdock Unit and Corporate, and $0.3 million attributable
to PIC and PIC-R. The completion of the PIC and PIC-R acquisition in October
1997 resulted in additional goodwill and acquisition cost amortization of $0.3
million for the nine months ended September 30, 1998. The completion of the
Incomex acquisition in February 1998 resulted in goodwill and acquisition cost
amortization of $0.1 million for the nine months ended September 30, 1998. The
amortization of PIC, PIC-R, and Incomex goodwill is reflected on the Company's
unaudited financial statements.
INTEREST AND AMORTIZATION OF DEBT DISCOUNT AND EXPENSE - Consolidated interest
and amortization of debt discount and expense increased $1.0 million, or 200%,
to $1.5 million for the nine months ended September 30, 1998 from $0.5 million
for the nine months ended September 30, 1997. Interest and amortization of
debt discount and expense during the nine months ended September 30, 1998
consisted of $1.0 million attributable to the Murdock Unit and Corporate, $0.2
million attributable to PIC and PIC-R and $0.3 million attributable to Incomex
following its acquisition in February 1998. Interest expense incurred by the
Murdock Unit and Corporate increased $0.6 million, or 150%, to $1.0 million for
the nine months ended September 30, 1998 from $0.4 million for the nine months
ended September 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 nine months ended September 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 $0.07 million for the nine months ended September 30, 1998. As of
September 30, 1998, the Company has received proceeds of $0.37 million in notes
payable provided by related parties. The notes bear interest at 14% and the
accrued interest and principle are due on November 1, 1999. Interest expense
recognized in connection with all debt financing was $0.2 million for the nine
months ended September 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 $0.2 million for the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company's current liabilities of $9.0 million
exceeded current assets of $3.4 million resulting in a working capital deficit
of $5.6 million. During the nine months ended September 30, 1998, the Company
used $0.05 million in cash for operating activities, and used $1.1 million in
investing activities, primarily the purchase of equipment. The Company
received
15
<PAGE> 16
proceeds from new debt financing of $4.6 million and reduced borrowings on
notes payable and made payments on capital lease obligations of $2.9 million.
During the nine months ended September 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 Convertible
Preferred Stock for $180,000 and $37,000 of commissions owed. These activities
resulted in an increase in available cash of $0.6 million for the nine months
ended September 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
September 30, 1998 was $6.1 million. The Company currently makes monthly lease
and debt payments of approximately $142,750, in the aggregate, pursuant to
these financing arrangements. As of November 10, 1998, the Company had an
unpaid balance past due to Berthel of approximately $353,690. These balances
are in violation of certain of the covenants in the financing agreements.
Berthel only has the right to demand that the Company cure these violations, but
has not made such a demand as of the date of this report.
As of September 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. As of September 30,
1998, the Company has received proceeds of $0.37 million in notes payable
provided by related parties. The notes bear interest at 14% and the accrued
interest and principle are due on November 1, 1999. 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 $0.5
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 $0.5 million in debt service obligations for the remainder of
1998. The Company currently estimates that it will need at least $1.0 million
in debt and equity financing in the remainder of 1998, or through cash flows
from operations, to fund its cash requirement. The Company may also 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.
16
<PAGE> 17
YEAR 2000 ISSUE
The Year 2000 issue relates to computer hardware and software and other systems
designed to use two digits rather than four digits to define the applicable
year. As a result, the Year 2000 would be translated as two zeroes. Because
the Year 1900 could also be translated as two zeroes, systems which use two
digits could read the date incorrectly for a number of date-sensitive
applications, resulting in potential calculation errors or the shutdown of
major systems. The Company has undertaken various initiatives intended to
ensure that its computer hardware and software and other systems will function
properly with respect to dates in the Year 2000 and thereafter. The systems
subject to potential Year 2000 issues include not only information technology
("IT") systems, such as accounting and data processing, communications systems
and the Company's telecommunications switches, but also non-IT systems, such as
alarm systems, fax machines or other miscellaneous systems.
The Company's State of Readiness. The Company's main internal systems,
including IT systems such as financial systems, the MCC TeleManager and the
Company's telecommunications switches, and non-IT systems have been tested and
are either currently believed to be Year 2000 compliant or are expected to be
Year 2000 compliant by the end of the first quarter of 1999. The Company
anticipates circulating surveys to its key hotel and payphone customers and key
vendors during the first quarter of 1999.
Costs to Address the Company's Year 2000 Issues. The majority of the Company's
internal Year 2000 issues have been or will be corrected through systems
upgrades, including an upgrade of the Company's telecommunications switches.
The Company estimates that the costs of all such upgrades will not exceed
$150,000.
Risks to the Company for Year 2000 Issues. The Company believes that its
reasonably likely worse case scenario would involve malfunctions of the
Company's telecommunications switches or the internal systems of the Company's
hotel and payphone customers. Any such malfunctions which result in serious
disruption of the Company's ability to process calls could have a material
adverse effect on the Company's results of operations and financial conditions.
The Company plans to monitor the Year 2000 compliance of its significant
customers and vendors. However, a number of risks relating to the Year 2000
issue may be out of the Company's control, including the compliance status of
the Company's customers and vendors and the Company's reliance on outside links
for essential services such as power. There can be no assurance that a failure
of systems of third parties on which the Company's systems and operations will
rely to be Year 2000 compliant will not have a material adverse effect on the
Company's business, financial condition or operating results.
The Company's Year 2000 Contingency Plans. By the end of the first quarter of
1999, the Company expects to be fully Year 2000 compliant. To the extent that
any of the Company systems are not Year 2000 compliant by the end of the first
quarter of 1999, the Company believes that it will have time to implement
alternative systems. The Company's ability to respond to non-compliance by its
customers and vendors will be limited.
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
17
<PAGE> 18
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) the
Company's assessment of the Year 2000 issue, including its identification,
assessment, remediation and testing efforts, the dates on which the Company
believes it will complete such efforts and the costs associated with such
efforts, is based upon management's estimates, which were derived from numerous
assumptions regarding future events, available resources, third-party
remediation plans, the accuracy of testing of the affected systems and other
factors, and no assurance can be given that these estimates will prove correct
or that actual results will not differ materially from currently anticipated,
(7) general economic conditions in the Company's markets, and (8) 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.
18
<PAGE> 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
(a) Not applicable.
(b) Not applicable.
(c) In September 1998, the Company issued promissory notes in the
aggregate principal amount of $370,000 in a private placement exempt from the
registration requirements of the Securities Act of 1933, as amended (the "Act"),
pursuant to Section 4(2) of the Act. The notes bear interest at 14% and the
principal and accrued interest are due on November 1, 1999.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
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)
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.
19
<PAGE> 20
(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 third quarter of 1998.
20
<PAGE> 21
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 16th day of November, 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
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 872,446
<SECURITIES> 27,830
<RECEIVABLES> 2,677,866
<ALLOWANCES> 713,145
<INVENTORY> 0
<CURRENT-ASSETS> 3,425,309
<PP&E> 14,259,461
<DEPRECIATION> 11,211,131
<TOTAL-ASSETS> 14,109,334
<CURRENT-LIABILITIES> 8,983,971
<BONDS> 3,217,906
<COMMON> 12,830,963
0
1,829,210
<OTHER-SE> (17,082,796)
<TOTAL-LIABILITY-AND-EQUITY> 14,109,334
<SALES> 407,557
<TOTAL-REVENUES> 24,870,601
<CGS> 326,107
<TOTAL-COSTS> 16,087,364
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,469,267
<INCOME-PRETAX> 430,536
<INCOME-TAX> 24,464
<INCOME-CONTINUING> 286,900
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<CHANGES> 0
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<EPS-PRIMARY> 0.03
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