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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(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, 2002
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 Issuer as Specified in Its Charter)
Iowa 42-1339746
------------------------------- ---------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
701 Tama Street Marion, Iowa 52302
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: 319-447-4239
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, 2002, there were 12,304,967 outstanding shares of the
Registrant's no par value Common Stock.
MURDOCK COMMUNICATIONS CORPORATION
FORM 10-Q
September 30, 2002
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1. Consolidated Balance Sheets (unaudited) as of September. . 3
30, 2002 and December 31, 2001
Consolidated Statements of Operations (unaudited) for the
Three Months and Nine Months Ended September 30, 2002 and
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended June 30, 2002 and 2001. . . . . . . . . . 6
Notes to Consolidated Financial Statements (unaudited) . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 16
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . 16
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders. . . . 16
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 17
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Certifications. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2
PART I FINANCIAL INFORMATION
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001
(Dollars in thousands)
(Unaudited)
SEPTEMBER 30, 2002 DECEMBER 31, 2001*
------------------ ------------------
ASSETS
CURRENT ASSETS
Cash. . . . . . . . . . . . . . . . . . $ 1 $ 3
Prepaid expenses and other current assets 12 11
------------------ ------------------
TOTAL CURRENT ASSETS . . . . . . . . 13 14
------------------ ------------------
OTHER ASSETS
Other noncurrent assets . . . . . . . . 1 1
------------------ ------------------
TOTAL OTHER ASSETS . . . . . . . . . 1 1
----------------- ------------------
TOTAL $ 14 $ 15
================== ==================
* Note: The consolidated balance sheet as of December 31, 2001 has been derived
from the audited consolidated financial statements at that date.
See accompanying notes to consolidated financial statements.
3
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONCLUDED)
September 30, 2002 and December 31, 2001
(Dollars in thousands)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2002 2001*
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Notes payable, others. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,926 $ -
Notes payable with related parties . . . . . . . . . . . . . . . . . . 11,808 8,766
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 814 614
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,710 5,036
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . 466 489
--------------- ---------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . . . 21,724 14,905
LONG-TERM LIABILITIES
Long-term debt with related parties. . . . . . . . . . . . . . . . . . - 4,111
Long-term debt, others . . . . . . . . . . . . . . . . . . . . . . . . - 521
--------------- ---------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 21,724 19,537
--------------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIENCY)
Common stock, no par or stated value: authorized - 40,000,000 shares;
issued: 2002 - 12,554,967 shares and 2001 - 12,514,967 shares . . . 22,292 22,287
Common stock warrants: Issued and outstanding:
2002 and 2001 - 10,875,312. . . . . . . . . . . . . . . . . . . . . . 1,052 1,052
Treasury stock at cost: 2002 and 2001 - 250,000 shares . . . . . . . . (94) (94)
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 134 134
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (45,094) (42,901)
--------------- ---------
TOTAL SHAREHOLDERS' DEFICIENCY . . . . . . . . . . . . . . . . . . . (21,710) (19,522)
--------------- ---------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14 $ 15
=============== =========
* Note: The consolidated balance sheet as of December 31, 2001 has been derived from the audited
consolidated financial statements at that date.
See accompanying notes to consolidated financial statements.
4
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended and Nine Months Ended September 30, 2002 and 2001
(Dollars in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
REVENUES. . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ - $ 22
------------- ------------ ------------ -------------
OPERATING EXPENSES
Selling, general and administrative expenses. . . . 203 89 521 413
Depreciation and amortization expense . . . . . . . - 1 - 4
------------- ------------ ------------ --------------
TOTAL OPERATING EXPENSES . . . . . . . . . . . . 203 90 521 417
------------- ------------ ------------ --------------
LOSS FROM OPERATIONS. . . . . . . . . . . . . . . . . (203) (90) (521) (395)
------------- ------------ ----------- --------------
NON-OPERATING INCOME (EXPENSE)
Interest expense, net . . . . . . . . . . . . . . . (560) (560) (1,674) (1,703)
Other income. . . . . . . . . . . . . . . . . . . . - 104 2 42
------------- ------------ ----------- --------------
TOTAL NONOPERATING INCOME (EXPENSE) . . . . . . (560) (456) (1,672) (1,661)
------------- ------------ ------------ --------------
LOSS FROM CONTINUING OPERATIONS . . . . . . . . . . . (763) (546) (2,193) (2,056)
------------- ------------ ------------ --------------
DISCONTINUED OPERATIONS
Income/(loss) from operations . . . . . . . . . . . - 86 - (95)
Gain on disposition . . . . . . . . . . . . . . . . - 1,314 - 1,314
------------- ------------ ------------ --------------
TOTAL DISCONTINUED OPERATIONS. . . . . . . . . . - 1,400 - 1,219
------------- ------------ ------------ --------------
NET INCOME/(LOSS). . . . . . . . . . . . . . . . . . . $ (763) $ 854 $ (2,193) $ (837)
============= ============= ============ ==============
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Loss from continuing operations . . . . . . . . . . (0.06) $ ( 0.04) $ (0.18) $ (0.17)
Income from discontinued operations . . . . . . . . - 0.11 - 0.10
------------- ------------ ------------ --------------
NET INCOME/(LOSS) . . . . . . . . . . . . . . . $ (0.06) $ 0.07 $ (0.18) $ (0.07)
============= ============ ============ ==============
BASIC AND DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING . . . . . . . . . . . . . . . . . 12,291,487 12,264,967 12,273,903 12,264,967
============= ============ ============ ==============
See accompanying notes to consolidated financial statements.
5
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2002 and 2001
(Dollars in thousands)
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,193) $ (837)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH FLOWS FROM
OPERATING ACTIVITIES OF CONTINUING OPERATIONS
Loss from discontinued operations . . . . . . . . . . . . . . . . . - 95
Gain on disposition of discontinued operations. . . . . . . . . . . - (1,314)
Gain on extinguishment of liability . . . . . . . . . . . . . . . . 4 -
Depreciation and amortization . . . . . . . . . . . . . . . . . . . - 62
Changes in operating assets and liabilities:
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . (1) 26
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . 200 19
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 1,651 1,527
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES OF
CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . . . . (339) (422)
NET CASH FLOWS FROM DISCONTINUED OPERATIONS. . . . . . . . . . . - 129
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES. . . . . . . . . . . . (339) (293)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received from sale of PIC . . . . . . . . . . . . . . . . . - 100
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable. . . . . . . . . . . . . . . . . . . - (100)
Borrowings on notes payable; . . . . . . . . . . . . . . . . . . 337 133
-------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES . . . . . . . . . . 337 33
-------- --------
NET DECREASE IN CASH. . . . . . . . . . . . . . . . . . . . . . . . (2) (160)
CASH AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . 3 167
-------- --------
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . $ 1 $ 7
======== ========
See accompanying notes to consolidated financial statements.
6
MURDOCK COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
1. SIGNIFICANT ACCOUNTING POLICIES
---------------------------------
BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been
prepared by Murdock Communications Corporation (the "Company") in accordance
with accounting principles generally accepted in the United States of America
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 foregoing 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. Operating results for the
nine months ended September 30, 2002 are not necessarily indicative of the
results that may be expected for the full year ending December 31, 2002. For
further information, refer to the financial statements and footnotes thereto for
the year ended December 31, 2001, included in the Company's Annual Report on
Form 10-K (Commission File # 000-21463) as filed with the Securities and
Exchange Commission on April 17, 2002.
The accompanying statements of operations for 2001 have been reclassified for
the disposition of the Priority International Communications, Inc. ("PIC")
subsidiary (see Note 3) so that the results for PIC's operations are classified
as discontinued operations. The statements of cash flows and related notes to
the consolidated financial statements have also been reclassified to conform to
the discontinued operations presentation. The accompanying consolidated
financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company has an accumulated deficit of $45.1
million, and current liabilities exceed current assets by $21.7 million at
September 30, 2002. The Company also is past due in the payment of approximately
$14.0 million of principal and accrued interest as of September 30, 2002. The
Company is also past due with its trade vendors in the amount of approximately
$931,000 at September 30, 2002.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis and to obtain additional financing and
refinancing as may be required. Management's plans to accomplish these
objectives include, but are not limited to, the following:
- - The Company intends to continue to negotiate with its creditors to
restructure indebtedness and obtain financing to fund operations. The
Company believes that possible sources of funds will primarily consist of
advances from MCC Investment Company, LLC ("MCCIC"), a company owned by
Berthel Fisher & Company, Inc. ("Berthel") and another significant
shareholder of the Company, and Polar Molecular Corporation ("Polar") (see
the next bullet point below). If the Company is unsuccessful in this
strategy, the Company may not be able to continue operating as a going
concern.
7
- - The Company has an agreement with an unrelated third party, Polar, to use
the Company's public shell as a reverse merger vehicle. On December 19,
2001 the Company and Polar entered into an Agreement and Plan of Merger
providing for the merger of a wholly owned subsidiary of the Company with
and into Polar. On August 1, 2002, the Company and Polar entered into a
First Amendment to the Agreement and Plan of Merger which extended the
expiration date of the merger to November 30, 2002, and provided that all
loans from Polar to the Company would be converted into equity of the
Company at the time of the merger. The parties are currently discussing a
further extension of the expiration date of the merger. The proposed merger
is subject to a number of significant closing conditions, including, among
others, approval by the stockholders of the parties, filings with the
Securities and Exchange Commission, the conversion of the Company's
indebtedness into equity, and the obtaining of debt or equity financing by
Polar. If this transaction is unsuccessful, the Company may not be able to
continue operating as a going concern.
- - The Company retains an investment banker (Berthel) to assist the Company
regarding the identification and investigation of strategic alternatives
available to the Company.
2. NOTES PAYABLE AND LONG-TERM DEBT
------------------------------------
The Company's past-due debt at September 30, 2002 includes approximately $12.3
million of notes payable and accrued interest to insiders which are believed to
be pledged by the holders of the notes to a bank as collateral for loans made by
the bank to such holders. The Federal Deposit Insurance Corporation ("FDIC")
liquidated this bank during 2000. The Company was notified in December 2000 that
the FDIC sold significantly all the loans and related collateral to a financial
institution. In March 2001, the Company received a demand letter from this
financial institution for approximately $575,000 of principal plus accrued
interest related to some of the notes held by the financial institution, and on
July 5, 2001, the financial institution obtained a default judgement against the
Company for $781,252 plus interest at the rate of 18% per year from and after
February 6, 2001 related to those notes. A settlement was reached on June 20,
2002 with this financial institution to settle approximately $10.8 million of
principal and accrued interest related to the notes as of September 30, 2002 for
$500,000. The terms of the settlement required $15,000 to be paid to the
financial institution upon signing of the agreement and the remaining $485,000
is due upon consummation of the Company's pending merger transaction with Polar.
If the merger transaction with Polar is not completed for any reason on or
before December 31, 2002, the agreement with the financial institution will be
terminated except that the financial institution will retain the $15,000 paid by
the Company. Until such time as the merger is consummated the notes and related
interest will remain on the books of the Company and interest will continue to
be accrued.
Another financial institution acquired loans and related collateral from the
FDIC and on September 1, 2002 agreed to accept payment of $100,000 in cash and
475,000 shares of the Company's common stock in full satisfaction of all
principal and interest due under these notes which totaled $936,894 as of
September 30, 2002. The terms of the settlement required $25,000 to be paid to
the financial institution upon signing the agreement and $75,000 and the shares
are due upon consummation of the Company's pending merger transaction with
Polar. If the merger transaction with Polar is not completed for any reason on
or before March 31, 2003, the agreement with the financial institution will be
terminated except that the financial institution will retain the $25,000 paid by
the Company. Until such time as the merger is consummated the notes and related
interest will remain on the books of the Company and interest will continue to
be accrued.
8
During 2002, the Company borrowed $7,083 from MCCIC. The total principal amount
owed to MCCIC at September 30, 2002 is $577,316. As of September 30, 2002
$387,596 in principal was past due along with $108,186 in accrued interest. The
borrowings currently bear interest at 12%.
During 2002, the Company borrowed $329,951 from Polar. The borrowings are
one-year notes bearing interest at 10%.
All long-term debt obligations in the amount of $4.6 million at December 31,
2001, changed in the second quarter of 2002 to current debt.
3. DISCONTINUED OPERATIONS
------------------------
Effective July 31, 2001, the Company sold all the shares of PIC to Dartwood, LLC
for a total purchase price of $196,000, comprised of $100,000 cash and a
non-interest bearing promissory note of $96,000 payable in 24 monthly
installments of $4,000. The Company assigned the cash payment of $100,000 and
the promissory note to MCCIC to repay $196,000 of outstanding debt. Wayne
Wright, a Director and significant shareholder of the Company, is related to the
owner of Dartwood, LLC. PIC was primarily engaged in the business of reselling
call processing services to aggregators of operator service traffic and to a
limited number of payphone operators.
Summary operating results of the discontinued operations for PIC are as follows
(amounts expressed in thousands):
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
------------------ -------------------
Revenues . . . . . . . . . . . . . . . . . $ 300 $ 2,438
Expenses . . . . . . . . . . . . . . . . . 214 2,533
------------------ -------------------
Income/(loss) from
discontinued operations. . . . . . . . . $ 86 $ (95)
=================== ===================
4. COMMITMENTS AND CONTINGENCIES
-------------------------------
At September 30, 2002 the Company's only operating lease is a month to month
lease of office space with a related party in the amount of $500 per month.
In December 1999, Berthel entered into a Standstill Agreement with the Company.
Under the Standstill Agreement, Berthel indicated its intention to form a
creditors committee to represent the interests of Berthel and other creditors of
the Company. The Company agreed to provide the creditors committee with access
to information regarding the Company and its business and to advise the
creditors committee in advance regarding certain significant corporate
developments. The creditors committee may also demand that the Company take
certain actions with respect to the Company's assets and business. As of
September 30, 2002, the Company and Berthel are the only parties to the
Standstill Agreement and Berthel is the only member of the creditors committee.
9
The Company has guaranteed a facility lease between Actel Integrated
Communications, Inc. ("Actel") and a third party. The lease expires in
September 2009 and total remaining noncancellable lease payments were $765,000
at December 31, 2000. Actel was current on its lease payments as of December
31, 2000. However, on April 11, 2001 Actel filed for Chapter 11 bankruptcy
protection and on September 14, 2001 Actel's bankruptcy case was converted to a
case under Chapter 7. The Company has not received any notification from the
bankruptcy trustee or the third party regarding the guarantee as of September
30, 2002. No loss, if any, has been recorded in the consolidated financial
statements with respect to this matter.
The Company was notified by the FDIC of discrepancies between the amount of the
Company's notes payable pledged as collateral by a note holder and the amount of
notes payable recorded by the Company. The FDIC originally indicated to the
Company that an additional $1,125,000 is outstanding representing various notes
with a significant shareholder and creditor. The FDIC notified the Company on
May 10, 2000, that the discrepancies total only $770,000. Also, in July 2001,
the Company was notified that Peoples Bank had obtained a judgement against a
Company director and shareholder in the amount of $350,000, and that the
collateral was a Company promissory note in the principal amount of $350,000.
Another party has asserted that he is entitled to $500,000 allegedly outstanding
under a note payable. Management believes that no funds were received by the
Company with respect to these notes and that it has other defenses. No
assurance can be given that the Company's defenses are valid or that the Company
will not be liable for any part or all of the amounts allegedly due under these
notes. No loss, if any, has been recorded in the consolidated financial
statements with respect to these matters.
On November 23, 2001 three individuals, one of whom was a former officer and
director of the Company, and who along with another of the individuals purchased
Incomex, a former subsidiary of the Company, filed suit against the Company,
several former officers and directors of the Company and several related
parties. These lawsuits allege that the named individuals and entities devised a
scheme to defraud the three plaintiffs to personally borrow funds from a
financial institution, invest the proceeds in the Company as a note payable with
the promise of stock options and repayment of the notes, and give the financial
institution a security interest in the notes under the Uniform Commercial Code.
Unspecified damages sought by the plaintiffs include actual, punitive, and
treble damages and court costs and attorney costs. The Company's Director and
Officer ("D&O") insurance carrier has notified the Company that because one of
the plaintiffs was a former director of the Company, that the D&O policy will
not provide coverage related to that plaintiff. The Company believes that its
D&O policy will provide coverage, up to the policy limit, in this lawsuit
related to the other two plaintiffs. Management believes that it has several
defenses against these claims and will vigorously defend itself. The parties
have not yet commenced discovery in this case and on April 23, 2002, the Company
filed a motion to dismiss the claims against it. The Company is currently in
settlement negotiations with the three individuals, and the Company currently
believes that the parties will settle this litigation, and that any such
settlement would be contingent upon closing of the merger with Polar. The
settlement, if completed in accordance with the proposed terms, would require
the issuance of up to 517,000 shares of the Company's common stock. No loss, if
any, has been recorded in the consolidated financial statements with respect to
these matters.
As of September 30, 2002 the Company had been notified by several state taxing
authorities that approximately $46,000 of past due taxes and penalties is
allegedly owed. Some of the states have assigned the alleged amounts due to
collection agencies or filed tax warrants. Management believes that it has
meritorious defenses against these amounts. No assurance can be given that the
Company's defenses are valid or that the Company will not be liable for any part
of the amounts. No loss, if any, has been recorded in the consolidated
financial statements with respect to these matters.
The Company has divested certain of its businesses during 2000 and 2001. As a
result of such divestitures, there may be lawsuits, claims or proceedings
instituted or asserted against the Company related to the period that the
businesses were owned by the Company. No loss, if any, has been recorded in the
consolidated financial statements with respect to these matters.
10
5. CONTINGENT COMPENSATION
------------------------
Effective August 1, 2002 an agreement between the Company and Pirinate
Consulting Group, L.L.C. ("Pirinate"), was signed whereby Pirinate would provide
the services of Eugene Davis to the Company to serve as Chairman of the Board
and Chief Executive Officer of the Company. Under this agreement, the Company
issued 40,000 shares of common stock to Pirinate for unpaid obligations for Mr.
Davis' past services and during the term of Mr. Davis' services, the Company
will pay Pirinate $5,000 per month. Under certain circumstances, Pirinate may
accept shares of the Company's common stock in lieu of $2,000 of the $5,000 per
month fee at the rate of $1.00 per share. An additional 2,000 shares of common
stock per month will accrue during the term of Mr. Davis' services and will be
received by Pirinate if the Company's pending merger with Polar is completed. As
of September 30, 2002, contingent compensation under this agreement consists of
4,000 shares.
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 this report.
RESULTS OF OPERATIONS
- -----------------------
The Company continues to exist as a public shell for use as a reverse merger
vehicle with no operating activities.
The Company believes that possible sources of funds for future obligations will
primarily consist of advances from MCCIC and Polar. The Company also continues
to engage in discussions with creditors to restructure indebtedness. No
assurance can be given that the Company will be able to obtain adequate funds
for the remainder of 2002 or beyond. If the Company is unable to restructure its
past-due debt or to obtain adequate funds for its operational needs, or if the
holders of the Company's past due debt seek to enforce their rights, the Company
would not be able to continue operating as a going concern or to complete the
pending transaction with Polar.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
- ---------------------------------------------------------------------
REVENUES AND COST OF SALES - The Company no longer has any revenue producing
- ------------------------------
activity as it sold its remaining operating entity during the third quarter of
2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Selling, general and
- -----------------------------------------------
administrative expense increased $114,000 to $203,000 for the three months ended
September 30, 2002 from $89,000 for the three months ended September 30, 2001.
The increase in selling, general and administrative expense is primarily related
to higher legal and other professional fees.
INTEREST EXPENSE - Interest expense, including amortization of debt discount,
- -----------------
had no change for the three months ended September 30, 2002, compared to the
three months ended September 30, 2001.
OTHER INCOME - Other income decreased $104,000 to $0 for the three months ended
- -------------
September 30, 2002 from $104,000 for the three months ended September 30, 2001.
The decline is due to no longer having revenue producing activity.
12
INCOME FROM OPERATIONS OF DISCONTINUED OPERATIONS - Effective July 31, 2001 the
- --------------------------------------------------
Company sold all the shares of PIC to Dartwood, LLC for a total purchase price
of $196,000, comprised of $100,000 cash and a non-interest bearing promissory
note of $96,000 payable in 24 monthly installments of $4,000. The Company
assigned the cash payment of $100,000 and the promissory note to MCCIC to repay
$196,000 of outstanding debt. Wayne Wright, a Director and significant
shareholder of the Company, is related to the owner of Dartwood, LLC. PIC was
primarily engaged in the business of reselling call processing services to
aggregators of operator service traffic and to a limited number of payphone
operators.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
- --------------------------------------------------------------------
REVENUES AND COST OF SALES - The Company no longer has any revenue producing
- ------------------------------
activity as it sold its remaining operating entity during the third quarter of
2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Selling, general and
- -----------------------------------------------
administrative expense increased $108,000 to $521,000 for the nine months ended
September 30, 2002 from $413,000 for the nine months ended September 30, 2001.
The increase in selling, general and administrative expense is primarily related
to higher legal and other professional fees.
INTEREST EXPENSE - Interest expense, including amortization of debt discount,
- -----------------
decreased $29,000 to $1,674,000 for the nine months ended September 30, 2002,
from $1,703,000 for the nine months ended September 30, 2001. The decline is
due to the reduction of debt associated with the sale of the PIC business.
OTHER INCOME - Other income decreased $40,000 to $2,000 for the nine months
- -------------
ended September 30, 2002 from $42,000 for the nine months ended September 30,
2001. The decline is due to no longer having revenue producing activity.
INCOME FROM OPERATIONS OF DISCONTINUED OPERATIONS - Effective July 31, 2001 the
- --------------------------------------------------
Company sold all the shares of PIC to Dartwood, LLC for a total purchase price
of $196,000, comprised of $100,000 cash and a non-interest bearing promissory
note of $96,000 payable in 24 monthly installments of $4,000. The Company
assigned the cash payment of $100,000 and the promissory note to MCCIC to repay
$196,000 of outstanding debt. Wayne Wright, a Director and significant
shareholder of the Company, is related to the owner of Dartwood, LLC. PIC was
primarily engaged in the business of reselling call processing services to
aggregators of operator service traffic and to a limited number of payphone
operators.
13
- ------
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
At September 30, 2002, the Company's current liabilities of $21.7 million
exceeded current assets of $13,000 resulting in a working capital deficit of
$21.7 million. During the nine months ended September 30, 2002, the Company
used $339,000 in cash for operating activities of continuing operations. The
Company received proceeds from new debt financing of $336,834 ($7,083 from MCCIC
and $329,751 from Polar) during the nine months ended September 30, 2002. The
Company's only future source of cash is expected to come from these entities.
If the Company is unsuccessful in continuing to obtain financing from these two
entities, the Company may not be able to continue as a going concern.
The Company's debt totaled $13.7 million as of September 30, 2002 compared with
$13.4 million at December 31, 2001. As of September 30, 2002, the Company was
past due in the payment of approximately $14.0 million in principal and accrued
interest payments. The Company was also past due with its trade vendors in the
payment of approximately $931,000 as of September 30, 2002.
The Company's past-due debt at September 30, 2002 includes approximately $12.3
million of notes and accrued interest to insiders which are believed to be
pledged by the holders of the notes to a bank as collateral for loans made by
the bank to such holders. This bank was liquidated by the FDIC during 2000. The
Company was notified in December 2000 that the FDIC sold significantly all the
loans and related collateral to a financial institution. In March 2001, the
Company received a demand letter from this financial institution for
approximately $575,000 of principal plus accrued interest on certain notes it
held, and on July 5, 2001, the financial institution obtained a default judgment
against the Company for $781,252 plus interest at the rate of 18% per year from
and after February 6, 2001 related to those notes. On June 20, 2002 a settlement
was reached with this financial institution to settle approximately $10.8
million of principal and accrued interest related to the notes as of September
30, 2002 for $500,000. The terms of the settlement required $15,000 to be paid
to the financial institution upon signing of the agreement and the remaining
$485,000 is due upon consummation of the Company's pending merger transaction
with Polar. If the merger transaction with Polar is not completed for any reason
on or before December 31, 2002, the agreement with the financial institution
will be terminated except that the financial institution will retain the $15,000
paid by the Company. Until such time as the merger is consummated the notes and
related interest will remain on the books of the Company and interest will
continue to be accrued.
Another financial institution acquired loans and related collateral from the
FDIC and on September 1, 2002 agreed to accept payment of $100,000 in cash and
475,000 shares of the Company's common stock in full satisfaction of all
principal and interest due under these notes which totaled $936,894 as of
September 30, 2002. The terms of the settlement required $25,000 to be paid to
the financial institution upon signing the agreement and $75,000 and the shares
are due upon consummation of the Company's pending merger transaction with
Polar. If the merger transaction with Polar is not completed for any reason on
or before March 31, 2003, the agreement with the financial institution will be
terminated except that the financial institution will retain the $25,000 paid by
the Company. Until such time as the merger is consummated the notes and related
interest will remain on the books of the Company and interest will continue to
be accrued.
At September 30, 2002, the Company has no operating activities and no reportable
segments. The Company's current strategic direction is to continue to negotiate
with its creditors to restructure indebtedness and to use the Company's public
shell as a merger vehicle. On December 19, 2001, the Company entered into an
Agreement and Plan of Merger with Polar. On August 1, 2002, the Company and
Polar entered into a First Amendment to the Agreement and Plan of Merger which
extended the expiration date of the merger to November 30, 2002, and provided
that all loans from Polar to the Company would be converted into equity of the
Company at the time of the merger. The parties are currently discussing a
further extension of the expiration date of the merger. The proposed merger is
subject to a number of significant closing conditions, including, among others,
approval by the stockholders of the parties, filings with the Securities and
Exchange Commission, the conversion of the Company's indebtedness into equity,
and the obtaining of debt or equity financing by Polar. Because there are
significant conditions remaining to be satisfied with respect to the proposed
merger, no assurance can be given that the proposed merger will be consummated
or, if consummated, that the terms of the proposed merger will be as presently
contemplated. If the Company is unable to restructure its past-due debt, or if
the holders of the Company's past-due debt seek to enforce their rights, the
Company would not be able to complete the proposed merger with Polar or to
continue as a going concern. See "Forward-Looking Statements" below.
14
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 known and unknown risks and
uncertainties that could cause actual future results and developments to differ
materially from those currently projected. Such risks and uncertainties
include, among others, the following:
- - the Company's access to funds to meet the Company's financial needs and to
repay its past-due debt, and the Company's ability to continue as a going
concern if it is unable to access adequate financing;
- - the possibility that the Company's creditors may take legal action for the
repayment of past-due indebtedness and the ability of the Company to
continue as a going concern if any such action is taken;
- - the Company's ability to complete the proposed merger transaction with
Polar and the terms of such transaction if completed;
- - the Company's ability to restructure its past-due debt;
- - the outcome of pending or threatened litigation;
- - the risk that the Company's analyses of these risks could be incorrect
and/or the strategies developed to address them could be unsuccessful; and
- - various other factors discussed in this Quarterly Report on Form 10-Q and
the Company's annual report on Form 10-K.
The Company will not update the forward-looking information to reflect actual
results or changes in the factors affecting the forward-looking information.
The forward-looking information referred to above includes any matters preceded
by the words "anticipates," "believes," "intends," "plans," "expects" and
similar expressions as they relate to the Company and include, but are not
limited to:
- - expectations regarding the Company's financial condition and liquidity, as
well as future cash flows; and
- - expectations regarding alternatives to restructure the Company's business
and reduce its overall debt.
EFFECTS OF NEW ACCOUNTING STANDARD
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 145 ("SFAS 145"). This statement,
among other things, significantly limits the situations whereby the
extinguishments of debt is treated as an extraordinary item in the statement of
operations. This statement requires reclassification of all prior period
extraordinary items related to debt extinguishments. The provisions for this
statement are effective for financial statements issued on or after May 15,
2002.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any foreign currency exchange risk or commodity price
risk. All of the Company's debt, including its past-due debt with carrying
value at September 30, 2002 of $13.7 million, was at a fixed interest rate at
September 30, 2002 and December 31, 2001, therefore, the Company is not impacted
by changes in interest rates related to the debt. The interest rates range from
10% to 18%.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and Principal Accounting Officer have evaluated the
effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) and 15d -14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within
90 days prior to the filing date of this quarterly report (the "Evaluation
Date"). Based on such evaluation, such officers have concluded that, as of
the Evaluation Date, the Company's disclosure controls and procedures are
effective in alerting them on a timely basis to material information
relating to the Company (including its consolidated subsidiaries) required
to be included in the Company's periodic filings under the Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have not
been any significant changes in the Company's internal controls or in other
factors that could significantly affect such controls.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
As of September 30, 2002, the Company was past due in payment of approximately
$14.0 million of principal and accrued interest. The Company was also past due
with its trade vendors in the payment of approximately $931,000 as of September
30, 2002. For additional information, see the notes to the consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders of the Company during the
third quarter of 2002.
Item 5. Other Information
Not applicable.
16
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)
(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.
10.1 Compromise, Settlement and Mutual Release Agreement, dated as of
August 1, 2002, between the Company and Buckeye Retirement Co.,
L.L.C.
10.2 Compensation Agreement, dated August 1, 2002, between the Company
and Pirinate Consulting Group, L.L.C.
10.3 First Amendment to Agreement and Plan of Merger, dated as of
August 1, 2002, among the Company, MCC Merger Sub Corporation and
Polar Molecular Corporation.
(b) Reports on Form 8-K: None in the third quarter of 2002.
17
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
MURDOCK COMMUNICATIONS CORPORATION
Date: November 19, 2002 By /s/ Eugene Davis
----------------------------------
Eugene Davis
Chief Executive Officer
Date: November 19, 2002 By /s/ Wayne Wright
----------------------------------
Wayne Wright
Principal Accounting Officer
18
CERTIFICATIONS
--------------
I, Eugene I. Davis, Chief Executive Officer of Murdock Communications
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Murdock
Communications Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ Eugene I. Davis
-------------------------------
Eugene I. Davis
Chief Executive Officer
19
I, Wayne Wright, Principal Accounting Officer of Murdock Communications
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Murdock
Communications Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ Wayne Wright
-------------------------------
Wayne Wright
Principal Accounting Officer
20
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Murdock Communications Corporation
(the "Company") on Form 10-Q for the period ended September 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Eugene I. Davis, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13 (a) or 15
(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Eugene I. Davis
-------------------------------
Eugene I. Davis
Chief Executive Officer
November 19, 2002
This Certification is made solely for purposes of U.S.C. Section 1350, subject
to the knowledge standard contained therein, and not for any other purpose.
21
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Murdock Communications Corporation
(the "Company") on Form 10-Q for the period ended September 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Wayne Wright, Principal Accounting Officer of the Company, certify, pursuant
to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13 (a) or 15
(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Wayne Wright
-------------------------------
Wayne Wright
Principal Accounting Officer
November 19, 2002
This Certification is made solely for purposes of U.S.C. Section 1350, subject
to the knowledge standard contained therein, and not for any other purpose.
22