<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 March 31, 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 --------------------------------
incorporation or organization) (IRS Employer Identification No.)
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 March 31, 1998, there were outstanding 4,858,439 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
March 31, 1998
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of March 31, 1998 and December 31,
1997 (Unaudited)..................................................... 3
Consolidated Statements of Operations for the Three Months Ended
March 31, 1998 and March 31, 1997 (Unaudited)........................ 5
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 and March 31, 1997 (Unaudited)........................ 6
Notes to Consolidated Financial Statements (Unaudited)............... 7
Management's Discussion and Analysis of Financial Condition and
Item 2. Results of Operations................................................ 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 15
Item 2. Changes in Securities................................................ 15
Item 3. Defaults Upon Senior Securities...................................... 16
Item 4. Submission of Matters to a Vote of Security Holders.................. 16
Item 5. Other Information.................................................... 16
Item 6. Exhibits and Reports on Form 8-K..................................... 16
Signatures........................................................... 18
</TABLE>
2
<PAGE> 3
PART I FINANCIAL INFORMATION
MURDOCK COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash items $ 535,774 $ 316,286
Accounts and notes receivable
Trade receivable 1,907,854 736,007
Related party receivable 377,700 351,602
Employee receivable 7,083 --
Other receivable 112,354 77,181
AT&T receivable 88,400 105,200
Allowances for doubtful accounts and notes receivable (382,070) (394,373)
Prepaid expenses 165,089 26,821
Other current assets 82,857 327,463
------------ ------------
TOTAL CURRENT ASSETS 2,895,041 1,546,187
------------ ------------
INVESTMENTS AND INDEBTNESS OF OTHERS
Indebtedness of others - not current 1,226,374 152,040
------------ ------------
TOTAL INVESTMENTS AND INDEBTEDNESS OF OTHERS 1,226,374 152,040
------------ ------------
FIXED ASSETS
Property, plant and equipment - owned 9,473,909 9,513,138
Property, plant and equipment - leased 3,900,652 3,674,206
Accumulated depreciation and amortization - owned (7,541,355) (7,400,983)
Accumulated depreciation and amortization - leased (3,282,244) (3,209,405)
------------ ------------
TOTAL FIXED ASSETS 2,550,962 2,576,956
------------ ------------
INTANGIBLE ASSETS
Goodwill - net of accumulated amortization 4,941,564 4,133,648
Intangible assets - other 2,196,522 2,212,443
Accumulated depreciation and amortization - other (1,739,467) (1,612,985)
------------ ------------
TOTAL INTANGIBLE ASSETS 5,398,619 4,733,106
------------ ------------
OTHER ASSETS 235,978 207,000
------------ ------------
TOTAL ASSETS $ 12,306,974 $ 9,215,289
============ ============
</TABLE>
3
<PAGE> 4
MURDOCK COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) MARCH 31, 1998 December 31, 1997
-------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts and notes payable
Bank payable $ 972,730 $ 1,020,440
Trade payable 2,509,152 1,657,118
Related party payable 1,870,281 1,013,827
Current portion of long-term indebtedness 1,303,608 983,964
Other current liabilities 1,500,842 1,453,335
----------- -----------
TOTAL CURRENT LIABILITIES 8,156,613 6,128,684
----------- -----------
LONG-TERM LIABILITIES
Bonds, mortgages and other long-term debt 2,231,080 1,441,608
Indebtedness to related parties - not current - capital
leases 4,871,497 4,521,525
Indebtedness to related parties - not current - PIC
long-term note 943,603 1,112,414
Other liabilities 440,946 380,913
Deferred credits 99,414 112,135
----------- -----------
TOTAL LONG-TERM LIABILITIES 8,586,540 7,568,595
----------- -----------
TOTAL LIABILITIES 16,743,153 13,697,279
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock - non-mandatory redemption
8% Series A convertible, $100 stated value;
authorized shares: 50,000;
issued and outstanding: 16,750 at March 31, 1998 and 16,250
at December 31, 1997 1,596,493 1,544,146
Common Stock
No par value; authorized shares: 20,000,000;
issued and outstanding: 4,858,439 at March 31, 1998 and
4,458,439 at December 31, 1997 11,765,782 11,343,308
Other additional capital 483,118 449,400
Current earnings (422,112) -
Retained earnings (17,859,460) (17,818,844)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (4,436,179) (4,481,990)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $12,306,974 $ 9,215,289
=========== ===========
</TABLE>
4
<PAGE> 5
MURDOCK COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
-----------------------------------
<S> <C> <C>
NET SALES AND GROSS REVENUES
Other revenues - call processing $ 5,363,137 $ 1,511,401
Net sales of tangible items 95,935 91,930
Income from rentals 44,578 55,869
Revenues from services 185,080 7,542
----------- -----------
TOTAL NET SALES AND GROSS REVENUES 5,688,730 1,666,742
----------- -----------
COSTS APPLICABLE TO SALES AND REVENUES
Costs from other revenues - call processing 3,488,067 1,249,226
Costs of tangible items sold 76,629 78,457
Cost of services 26,819 45,565
Costs from rentals 6,360 -
----------- -----------
TOTAL COSTS APPLICABLE TO SALES AND REVENUES 3,597,875 1,373,248
----------- -----------
GROSS OPERATING PROFIT 2,090,855 293,494
OPERATING EXPENSES
Selling, general and administrative expenses 1,609,587 771,121
Other general expenses - depreciation and amortization 458,066 505,381
----------- -----------
TOTAL OPERATING EXPENSES 2,067,653 1,276,502
----------- -----------
NET OPERATING PROFIT (LOSS) 23,202 (983,008)
NON-OPERATING INCOME AND EXPENSE
Miscellaneous other income 41,309 13,724
Interest and amortization of debt discount and expense (411,678) (169,768)
Non-operating expenses - goodwill amortization - -
Miscellaneous income deductions (6,218) -
----------- -----------
TOTAL NON-OPERATING INCOME AND EXPENSES (376,587) (156,044)
----------- -----------
LOSS BEFORE INCOME TAX EXPENSE (353,385) (1,139,052)
INCOME TAX EXPENSE (5,821) (4,726)
EQUITY IN LOSS OF UNCONSOLIDATED SUBSIDIARY (62,906) (83,214)
----------- -----------
NET LOSS $ (422,112) $(1,226,992)
----------- -----------
DIVIDENDS AND ACCRETION ON 8% SERIES A
CONVERTIBLE PREFERRED STOCK (40,616) -
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (462,728) $(1,226,992)
=========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.10) $ (0.30)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,720,661 4,152,494
</TABLE>
5
<PAGE> 6
MURDOCK COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For Three Months Ended
March 31, 1998 March 31, 1997
---------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) $ (422,112) $(1,226,992)
Adjustments to reconcile net loss to net cash flows
from operating activities
Depreciation and amortization 456,398 530,380
Noncash interest expense 21,490 11,218
Noncash consulting expense -- 16,667
Recognition of deferred income (12,721) (13,724)
Share of loss from joint venture 60,033 83,214
Changes in operating assets and liabilities
Receivables (1,003,857) (93,732)
Other current assets 29,535 (18,655)
Other noncurrent assets 16,020 --
Accounts payable 258,131 (186,691)
Accrued expenses 193,804 141,129
Deferred income -- 9,694
----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES (403,279) (747,492)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (135,402) (56,277)
Payments for site acquisition -- (136,047)
Borrowings on indebtedness of others (113,112) --
Payments on indebtedness of others 141,367 --
Investment in joint venture -- (120,874)
Deposits -- (150,080)
Cash paid in conjunction with acquisitions (27,066) --
Cash from acquired company (1,534) --
---------- ----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (135,747) (463,278)
---------- ----------
FINANCING ACTIVITIES
Borrowings on notes payable 122,134 150,000
Borrowings on capital leases, primarily with related parties 491,923 25,169
Borrowings from notes payable with related parties 400,019 --
Payments on notes payable and long-term debt primarily
with related parties (270,834) (136,151)
Proceeds from issuance of 8% Series A Convertible Preferred
Stock 50,000 --
Dividends on 8% Series A Convertible Preferred Stock (21,500) --
Payments on offering costs (13,228) --
---------- ----------
NET CASH FLOW FROM FINANCING ACTIVITIES 758,514 39,018
---------- ----------
NET INCREASE (DECREASE) IN CASH 219,488 (1,171,752)
CASH AT BEGINNING OF PERIOD 316,286 1,241,897
---------- ----------
CASH AT END OF PERIOD $ 535,774 $ 70,145
SUPPLEMENTAL DISCLOSURES
Noncash contribution of property to joint venture -- 349,547
Cash paid during the period for interest 390,187 173,863
Cash paid during the period for income taxes 5,821 4,726
</TABLE>
6
<PAGE> 7
SUPPLEMENTAL DISCLOSURE OF QUARTER ENDED MARCH 31, 1998 NONCASH
OPERATING, INVESTING AND FINANCING ACTIVITIES:
The Company recorded the following increases as a result of its acquisition of
Incomex:
<TABLE>
<S> <C>
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)
==========
</TABLE>
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 an increase to the carrying value of the 8% Series A
Convertible Preferred Stock and a charge to accumulated deficit of $7,575
representing the current quarter's accretion to its conversion price.
The Company recorded an accrued expense and a charge to accumulated deficit of
$33,041 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.
<PAGE> 8
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,
effective October 31, 1997, the accounts of Priority International
Communications, Inc. ("PIC") and PIC Resources Corp. ("PIC-R"), wholly owned
subsidiaries of the Company, and effective January 31, 1998, the accounts of
Incomex, Inc. ("Incomex"), a wholly owned subsidiary of the Company. Significant
intercompany accounts and transactions have been eliminated in consolidation.
Incomex Acquisition
On February 13, 1998, the Company entered into an agreement to purchase all of
the outstanding shares of the common stock of Incomex, a provider of
international operator services from Mexico to the United States for
approximately 80 hotel and resort hotel properties located in Mexico in exchange
for 400,000 shares of the Company's common stock, valued at $422,500. The
agreement also provides for the Company to pay the selling shareholders an
aggregate amount equal to 60% of the income before income taxes of Incomex, as
defined, during the period from February 1, 1998 through July 31, 1998. The
Company has also agreed to issue common stock of the Company equal to an
aggregate quarterly average market value of $1.50 for each dollar of income
earned before taxes of Incomex, as defined, earned in excess of $400,000 during
the two 12 month periods beginning August, 1998. The Incomex acquisition has
been recorded under the purchase method for financial reporting purposes.
Goodwill, exclusive of any
7
<PAGE> 9
amounts attributable to the contingent consideration, is $901,219 and is being
amortized over ten years.
Preferred Stock Issues
On August 1, 1997, the Company authorized the issuance of up to 50,000 shares of
Series A Convertible Preferred Stock. As of December 31, 1997, the Company had
received gross proceeds of $1,625,000 and had received an additional $50,000 in
gross proceeds through March 31, 1998.
On February 26, 1998, the Company agreed to issue 2,170 shares of 8% Series A
Convertible Preferred Stock to certain affiliates of Berthel Fisher & Company,
Inc. in exchange for the prepayment of $180,000 of commissions and the payment
of $37,000 of commissions currently owed. The Company anticipates that this
transaction will be completed during the second quarter of 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%. The accrued interest and
principal are to be paid in 41 monthly payments: five payments of $8,167
beginning March 30, 1998 then 36 payments of $23,925, with the last payment due
July 30, 2001. 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 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 lease and loan costs.
As of March 31, 1998, the Company has received proceeds of $500,000 in notes
payable, $400,000 of which has been provided by related parties. The notes bear
interest at 14% and the accrued interest and principle 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 $1.75 per share.
The warrants expire if unexercised, on March 31, 2001. The Company has
assigned a fair value of $20,000 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 and for the three months ended March 31, 1998 is as follows:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Total assets $ (2,949)
Total liabilities 435,724
Total revenues 2,284
Net loss 62,906
</TABLE>
All assets of the joint venture have been written down to their estimated net
realizable values at December 31, 1997. The Company anticipates that the joint
venture will be dissolved during the second quarter of 1998.
8
<PAGE> 10
Income Tax Expense
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. 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 reimbursed $10,000 of the Company's security deposit. At March 31,
1998, the balance due from WorldQuest is $130,000 plus accrued interest at 12%
per annum. 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 and a hearing has been set
for May 22, 1998. No loss has been recorded in the consolidated financial
statements with respect to this matter.
On February 4, 1998, McFarland Grossman & Co. filed a suit in Harris County,
Texas against PIC, a wholly-owned subsidiary of the Company, seeking $162,500
representing alleged commissions or fees due in connection with the purchase of
PIC by the Company. 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.
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 PIC.
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
9
<PAGE> 11
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. 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.
10
<PAGE> 12
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
The following table sets forth statements of operations items and the
percentages that such items bear to revenues:
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------------------
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Net sales and gross revenues 100% 100%
Costs applicable to sales and revenues (63) (83)
Selling, general and administrative expenses (29) (46)
Other general expenses-depreciation and amortization (8) (30)
------ ------
Net operating profit (loss) 2 (59)
Miscellaneous other income 1 1
Interest and amortization of debt discount and expense (7) (10)
------ ------
Loss before income tax expense (6) (68)
Equity in loss of unconsolidated subsidiary (1) (5)
------ ------
Loss from continuing operations (7)% (73)%
====== ======
</TABLE>
The information for the quarter ended March 31, 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 effective
January 31, 1998, the accounts of Incomex, a wholly owned subsidiary of the
Company. Significant intercompany accounts and transactions have been eliminated
in consolidation.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
NET SALES AND GROSS REVENUES - Consolidated revenues increased $4.0 million, or
235%, to $5.7 million for the three months ended March 31, 1998 from $1.7
million for the three months ended March 31, 1997. Revenues during the three
months ended March 31, 1998 consisted of $1.4 million attributable to the
Murdock Operating Unit, $2.5 million attributable to PIC and PIC-R, and $1.8
million attributable to Incomex following the completion of the Incomex
acquisition in February 1998. In the fourth quarter of 1997, the Murdock
Operating Unit launched general marketing of the MCC Telemanager(TM). During the
three months ended March 31, 1998, MCC Telemanager(TM) revenues were $0.1
million. Commission revenues generated from the Murdock Operating Unit through
its Lodging Partnership program decreased $0.4 million, or 36%, to $0.7 million
for the three months ended March 31, 1998 from $1.1 million for the three months
ended March 31, 1997. This decrease was primarily due to a
11
<PAGE> 13
decrease in average monthly call counts per room from approximately 6 calls per
room at March 31, 1997 to 5 calls per room at March 31, 1998.
COSTS APPLICABLE TO SALES AND REVENUES - Consolidated costs of sales increased
$2.2 million, or 157%, to $3.6 million for the three months ended March 31, 1998
from $1.4 million for the three months ended March 31, 1997. Costs of sales
during the three months ended March 31, 1998 consisted of $0.9 million
attributable to the Murdock Operating Unit, $1.5 million attributable to PIC and
PIC-R and $1.2 million attributable to Incomex following the completion of the
Incomex acquisition in February 1998. Commission expenses for the Murdock
Operating Unit decreased $0.4 million, or 44%, to $0.5 million for the three
months ended March 31, 1998 from $0.9 million for the three months ended March
31, 1997. Costs associated with call processing revenues for the Murdock
Operating Unit decreased $0.06 million, or 18%, to $0.28 million for the three
months ended March 31, 1998 from $0.34 million for the three months ended March
31, 1997.
GROSS OPERATING PROFIT - Consolidated gross operating profit increased $1.8
million, or 600%, to $2.1 million for the three months ended March 31, 1998 from
$0.3 million for the three months ended March 31, 1997. Gross operating profit
during the three months ended March 31, 1998 consisted of $0.5 million
attributable to the Murdock Operating Unit, $1.0 million attributable to PIC and
PIC-R and $0.6 million attributable to Incomex following the completion of the
Incomex acquisition in February 1998. The gross margin generated from the
marketing of the MCC Telemanager(TM) resulted in $0.1 million of gross operating
profit for the Murdock Operating Unit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Consolidated selling, general and
administrative expenses increased $0.8 million, or 100%, to $1.6 million for the
three months ended March 31, 1998 from $0.8 million for the three months ended
March 31, 1997. Selling, general and administrative expenses during the three
months ended March 31, 1998 consisted of $0.8 million attributable to the
Murdock Operating Unit, $0.6 million attributable to PIC and PIC-R and $0.2
million attributable to Incomex following the completion of the Incomex
acquisition in February 1998.
OTHER GENERAL EXPENSES - DEPRECIATION AND AMORTIZATION - Consolidated
depreciation and amortization expenses decreased $0.05 million, or 10%, to $0.46
million for the three months ended March 31, 1998 from $0.51 million for the
three months ended March 31, 1997. PIC and PIC-R had depreciation and
amortization of $0.1 million for the three months ended March 31, 1998. The
Murdock Operating Unit experienced a $0.27 million reduction in depreciation due
to the write-off of impaired assets during the fourth quarter ended December 31,
1997. Consolidated goodwill amortization was $0.12 million for the three
months ended March 31, 1998. The completion of the PIC and PIC-R acquisition in
October 1997 resulted in goodwill and acquisition cost amortization of $0.10
million and the completion of the Incomex acquisition in February 1998 resulted
in goodwill and acquisition cost amortization of $0.02 million.
INTEREST, AMORTIZATION OF DEBT DISCOUNT AND EXPENSE - Consolidated interest,
amortization of debt discount and expense increased $0.24 million, or 141%, to
$0.41 million for the three months ended March 31, 1998 from $0.17 million for
the three months ended March 31, 1997. Interest, amortization of debt discount
and expense during the three months ended March 31, 1998 consisted of $0.29
million attributable to the Murdock Operating Unit, $0.04 million attributable
to PIC and PIC-R and $0.08 million attributable to Incomex following the
completion of the Incomex acquisition in February 1998. Interest expense
incurred by the Murdock Operating Unit increased $0.12 million, or 71%, to $0.29
million for the three months ended March 31, 1998 from $0.17 million for the
three
12
<PAGE> 14
months ended March 31, 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. The resulting amortization of debt
discount was $0.08 million for the three months ended March 31, 1998. In
February 1998, the Company entered into a lease agreement with Berthel Fisher
Leasing Company, a related party, for lease financing for all MCC
Telemanager(TM) equipment. The resulting interest for this arrangement was $0.01
million for the three months ended March 31, 1998. In connection with the MCC
Telemanager(TM) equipment lease, the refinancing of capital leases and the $0.5
million of debt financing in March 1998, common stock warrants to purchase 1.6
million common shares were issued to Berthel Fisher Leasing Co., its affiliates
and affiliates of the Company. The related valuation of these warrants is being
amortized over the life of the financing instrument resulting in interest
expense of $0.01 million for the three months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company's current liabilities of $8.2 million exceeded
current assets of $2.9 million resulting in a working capital deficit of $5.3
million. During the three months ended March 31, 1998, the Company used $0.4
million in cash for operating activities, and used $0.1 million in investing
activities, primarily the purchase of equipment. The Company received proceeds
from new debt financing of $1.0 million and repaid borrowings on notes payable
and made payments on capital lease obligations of $0.3 million. During the three
months ended March 31, 1998, the Company received $50,000 in proceeds from the
sale of the Company's 8% Series A Convertible Preferred Stock and paid $5,000
in offering costs (including sales commissions). These activities resulted in an
increase in available cash of $0.2 million for the three months ended
March 31, 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 March
31, 1998 was $5.6 million. The Company currently makes monthly lease and debt
payments of approximately $62,000, in the aggregate, pursuant to these
financing arrangements.
As of March 31, 1998, the Company had borrowed $475,000 under two
revolving credit facilities with one financial institution which were past due
and were paid in full in April 1998 using a part of the proceeds of an offering
of notes and warrants commenced in the second quarter of 1998. As of March 31,
1998, the Company also had borrowed $400,000 under a $400,000 revolving credit
facility with another financial institution due March 28, 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 PIC
Notes are approximately $2.4 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
13
<PAGE> 15
1998, including approximately $0.5 million that the Company estimates
will be required for the remainder of 1998 to proceed with the scheduled
implementation of the MCC Telemanager system and approximately $2.4 million of
debt service obligations for the remainder of 1998. The Company currently
estimates that it will need at least $2.9 million in debt or equity financings
in the remainder of 1998, or through cash flows from operations, to fund its
working capital needs, debt obligations and capital expenditures. Through May
15, 1998, the Company had raised approximately $1.2 million in an offering of
notes and warrants commenced in the second quarter of 1998. No assurance can be
given that the Company will be able to raise adequate funds through such
financings or generate sufficient cash flows 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.
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.
14
<PAGE> 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of business the Company may be involved in various
legal proceedings from time to time. The Company does not believe it is
currently involved in any claim or action the ultimate disposition of which
would have a material adverse effect on the Company.
Item 2. Changes in Securities and Use of Proceeds.
(a) Not applicable.
(b) Not applicable.
(c) In September 1997, the Company commenced an offering of up to
$5,000,000 of its 8% Series A Convertible Preferred Stock (the "Convertible
Preferred") in a private placement exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Act"), pursuant to Rule 506 of
Regulation D under the Act. The Company is obligated to pay commissions of up to
7% of the gross proceeds of the Private Offering to its placement agent. As of
December 31, 1997, the Company had sold 16,250 shares of Convertible Preferred
and had received gross proceeds of $1,625,000. During the first quarter of 1998,
the Company sold an additional 500 shares of Convertible Preferred and received
gross proceeds of $50,000, paid commissions of $3,500 and received net proceeds
of approximately $46,000.
On June 5, 1997, certain affiliates of Berthel agreed to convert (the
"Berthel Notes Conversion") note obligations with an aggregate principal amount
of $1.7 million and a carrying value to the Company of $1.3 million into 465,625
shares of the Company's common stock. On December 31, 1997, the Company and
Berthel agreed to rescind the Berthel Notes Conversion. In connection with this
rescission, in January 1998, the Company issued notes to Berthel which are
identical in all material respects to the notes originally canceled, Berthel
delivered to the Company its certificates for the 465,625 shares of the
Company's common stock and the Company issued warrants to Berthel exercisable
to purchase up to 229,279 shares of the Company's common stock at an exercise
price of $1.12 per share. The Company issued the notes and the warrants to
Berthel pursuant to the exemption from the registration requirements of the
Act provided by Section 4(2) of the Act.
In March 1998, the Company issued promissory notes with an
aggregate principal amount of $500,000 to five persons in a private placement
exempt from the registration requirements of 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 March 5, 1999. Along with the notes, the Company also issued warrants
to purchase an aggregate of 500,000 shares of the Company's common stock at an
exercise price of $1.75 per share.
Also in March 1998, the Company issued warrants to purchase an
aggregate of 1,100,000 shares of the Company's common stock at an exercise price
of $1.4375 to Berthel in connection with $700,000 of lease financing and the
refinancing of certain capital leases provided to the Company by Berthel. The
Company issued the warrants to Berthel pursuant to the exemption from the
registration requirements of the Act provided by Section 4(2) of the Act.
15
<PAGE> 17
(d) Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders of the Company
during the first quarter of 1998.
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.
(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.
16
<PAGE> 18
(b) Reports on Form 8-K:
(1) On January 15, 1998, the Company filed a Form 8-K/A,
amending the Company's Form 8-K/A report originally
filed on November 7, 1997, to include financial
statements of PIC, PIC-R and ATN and pro forma
financial information of the Company required by Item
7 of Form 8-K.
(2) On March 2, 1998, the Company filed a Form 8-K to
report its acquisition of Incomex pursuant to Item 2
of Form 8-K.
17
<PAGE> 19
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 15th day of May, 1998.
MURDOCK COMMUNICATIONS CORPORATION
BY /s/ Thomas E. Chaplin
------------------------------------------
Thomas E. Chaplin, Chief Executive Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 535,774
<SECURITIES> 0
<RECEIVABLES> 2,493,391
<ALLOWANCES> 382,070
<INVENTORY> 0
<CURRENT-ASSETS> 2,895,041
<PP&E> 13,374,561
<DEPRECIATION> 10,823,599
<TOTAL-ASSETS> 12,306,974
<CURRENT-LIABILITIES> 8,156,613
<BONDS> 2,231,080
0
1,596,493
<COMMON> 11,765,782
<OTHER-SE> (17,798,454)
<TOTAL-LIABILITY-AND-EQUITY> 12,306,974
<SALES> 95,935
<TOTAL-REVENUES> 5,688,730
<CGS> 76,629
<TOTAL-COSTS> 3,597,875
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 411,678
<INCOME-PRETAX> (353,385)
<INCOME-TAX> 5,821
<INCOME-CONTINUING> (422,112)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (422,112)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
