Back to GetFilings.com
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] Annual Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2001.
[ ] 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 registrant as specified in its charter)
Iowa 42-1339746
---- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
701 Tama Street, Marion, Iowa 52302
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 319-447-4239
------------
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
NA NA
-- --
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, No Par Value
--------------------------
(Title of class)
Redeemable Common Stock Purchase Warrants
-----------------------------------------
(Title of class)
Check whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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
-- --
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
this Form 10-K. [ X ]
The aggregate market value of the common stock held by nonaffiliates of the
registrant as of March 1, 2002 was $456,470. Shares of common stock held by any
executive officer or director of the registrant and any person who beneficially
owns 10% or more of the outstanding common stock have been excluded from this
computation because such persons may be deemed to be affiliates. This
determination of affiliate status is not a conclusive determination for other
purposes.
On March 1, 2002, there were outstanding 12,514,967 shares of the
registrant's no par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
2
PART I
------
ITEM 1. BUSINESS
GENERAL
Murdock Communications Corporation ("MCC" or the "Company") previously
operated as a holding company with the Company's principal assets being the
Priority International Communications, Inc. ("PIC") business segment and its
investment in Actel Integrated Communications, Inc. ("Actel"). PIC was largely
a reseller of call processing services. Actel, based in Mobile, Alabama, was a
facilities-based competitive local exchange carrier of advanced voice and data
communications services to small and medium sized enterprises. Actel offered
advanced end-user services in the Southeastern United States. Actel filed for
bankruptcy under Chapter 11 on April 11, 2001. As a result, the Company
recorded an impairment charge of $1.6 million in 2000, due to the uncertainty of
ultimate recovery of its investment in Actel. On September 14, 2001, Actel's
case was converted to a case under Chapter 7.
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 MCC Investment Company, LLC ("MCCIC"), a company owned by
Berthel Fisher & Company, Inc. ("Berthel") and another significant shareholder
of the Company to repay $196,000 of outstanding debt. Wayne Wright, a director
and shareholder of the Company is related to the owner of Dartwood, LLC. The
disposition was recorded in the third quarter of 2001 and resulted in a gain of
approximately $1.3 million for the Company.
At December 31, 2001, 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. For information regarding the
Company's proposed merger transaction with Polar Molecular Corporation
("Polar"), see "Recent Developments - Merger Agreement with Polar." Due to the
Company's large amount of past due debt, the Company will need to continue its
restructuring efforts in 2002. 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 operating as a going concern. See "- Recent Developments" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" below.
3
MCC was incorporated as an Iowa corporation in 1989.
RECENT DEVELOPMENTS
MCC'S PAST DUE DEBT. As of March 31, 2002, the Company was past due in the
payment of approximately $12.4 million of principal and interest payments. The
Company was also past due with its trade vendors in the payment of approximately
$777,000 as of March 31, 2002. If the Company is unable to raise the necessary
funds to repay its past due debt or to arrange for extensions or conversions of
such debt, its creditors may sue the Company to demand payment of the amounts
past due. Any action by the Company's creditors to demand repayment of past due
indebtedness is likely to prevent the Company from continuing as a going
concern. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The Company's past due debt includes approximately $11.6 million of notes
and accrued interest which are believed to have been 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 substantially
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 the notes, 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. If the financial institution seeks to enforce its rights
under the pledged notes, the Company currently would not be able to repay these
notes. As a result, any such action by the financial institution is likely to
prevent the Company from continuing as a going concern.
The FDIC has notified the Company that it believes an additional $770,000
is outstanding representing various notes payable. Also, in July 2001, the
Company was notified that Peoples Bank had obtained a judgment 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 also asserted that he is entitled to $500,000 allegedly outstanding under a
note payable. Management believes that the Company received no funds with
respect to these notes and that it has other defenses. The amount of past due
debt as of December 31, 2001 does not include these amounts. No assurance can
be given as to the ultimate outcome of these matters.
4
MERGER AGREEMENT WITH POLAR. On December 19, 2001, Polar and the Company
entered into an Agreement and Plan of Merger. Under the terms of the Agreement
and Plan of Merger, the outstanding shares of Polar's common stock will be
converted into the number of shares of MCC's no par value common stock (the
"Common Stock") equal to 80% of the outstanding shares of the Common Stock as of
the effectiveness of the merger and MCC shareholders will retain a 20%
ownership. The outstanding warrants and options of MCC will remain outstanding
after the completion of the merger and the outstanding warrants and options of
Polar will be converted into warrants and options to purchase the Common Stock
based on the exchange ratio in the merger. The proposed merger is subject to a
number of significant conditions, including approval by the stockholders of the
parties, filings with Securities and Exchange Commission, the conversion of the
Company's indebtedness into equity, the obtaining of debt or equity financing by
Polar and other closing conditions. 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.
STANDSTILL AGREEMENT. The Company historically obtained lease and other
financing services from Berthel. 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. The members of the creditors committee agreed to forbear from taking
actions to collect past due debt owed by the Company in the absence of the
unanimous approval of the creditors committee. As of March 31, 2002, the
Company and Berthel are the only parties to the Standstill Agreement and Berthel
is the only member of the creditors committee.
EMPLOYEES
As of December 31, 2001, MCC had one employee. The Company's employee is
not subject to a collective bargaining agreement.
5
ITEM 2. PROPERTIES
The Company's corporate office is located in Marion, Iowa. The Company
leases this office on a month to month basis.
ITEM 3. LEGAL PROCEEDINGS
On January 17, 2001, Republic Credit I filed lawsuits in the U.S. District
Court, Southern District of Iowa, against each of John Rance, Robert M. Upshaw
and Stephen Rance to collect on certain promissory notes held by Republic Credit
I. On November 23, 2001, each of John Rance, Robert M. Upshaw and Stephen Rance
filed a third party complaint against the Company and certain of its current and
former directors and officers. The Company intends to vigorously defend against
these claims, but no assurance can be given regarding the outcome of this
matter.
In the normal course of business, the Company may be involved in various
legal proceedings from time to time. Except as set forth above, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 2001.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
HISTORICAL TRADING INFORMATION AND DIVIDEND POLICY
The Common Stock trades on the Over the Counter Bulletin Board under the
symbol "MURC" and the Company's Redeemable Common Stock Purchase Warrants
("Warrants") trade on the Over the Counter Bulletin Board under the symbol
"MURCW." The following table sets forth the high and low bid quotations for the
Common Stock and Warrants as reported on the Over the Counter Bulletin Board.
Such transactions reflect interdealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
6
Common Stock Warrants
------------ --------
Quarter High Low High Low
- ----------- ---- ---- ----- -----
FISCAL 2000
First . . . 2.63 0.88 0.69 0.15
Second. . . 1.63 0.31 0.19 0.13
Third . . . 0.69 0.25 0.13 0.13
Fourth. . . 0.52 0.09 0.06 0.02
FISCAL 2001
First . . . 0.25 0.05 0.05 0.02
Second. . . 0.10 0.03 0.05 0.01
Third . . . 0.45 0.03 0.10 0.01
Fourth. . . 0.18 0.05 0.045 0.005
At March 31, 2002, there were approximately 134 holders of record of Common
Stock.
The Company has not paid any cash dividends on the Common Stock in the last
three years. Certain of the Company's current financing agreements contain
restrictions on the payment of dividends. The Company does not anticipate
paying any cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
During 2001, the Company issued warrants to purchase a total of 179,600
shares of Common Stock to MCCIC in connection with advances obtained from MCCIC.
The warrants were issued at exercise prices ranging from $0.05 per share to
$0.38 per share with five year terms. The warrants were issued in private
placements exempt from the registration requirements of the Securities Act of
1933, amended (the "Act"), pursuant to Section 4(2) of the Act.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth selected consolidated financial data in respect of
the Company's continuing operations. The selected financial information set
forth in the table below is not necessarily indicative of the results of future
operations of the Company and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the
7
consolidated financial statements, related notes and independent auditors'
report, contained herein. The statement of operations data for the five years
ended December 31, 2001 and the related balance sheet data have been derived
from the audited consolidated financial statements of the Company. These
financial statements were prepared on a going concern basis.
2001 2000(a) 1999(b) 1998(c) 1997(d)
--------- --------- --------- --------- --------
(In thousands, except per share data)
Statement of Operations Data:
Revenues. . . . . . . . . . . . . . . . . . . . $ 22 $ 191 $ 4,313 $ 5,263 $ 7,048
Income (loss) from continuing operations. . . . (3,033) 152 (9,161) (1,967) (7,900)
Loss before extraordinary item. . . . . . . . . (1,814) (5,024) (18,398) (3,836) (6,072)
Net loss attributable to common shareholders. . (1,814) (4,427) (18,592) (3,430) (7,892)
Basic and diluted net loss
per common share
Income (loss) from continuing operations. . $ (0.25) $ - $ (0.90) $ (0.36) $ (1.88)
Income (loss) from discontinued operations. 0.10 (0.48) (0.89) 0.60 (1.88)
Extraordinary gain. . . . . . . . . . . . . - 0.07 - - -
Net loss. . . . . . . . . . . . . . . . . . $ (0.15) $ (0.41) $ (1.79) $ (0.63) $ (1.88)
Balance Sheet Data: (at end of year)
Total assets. . . . . . . . . . . . . . . . . . $ 14 $ 277 $ 10,462 $ 12,911 $ 949
Notes payable . . . . . . . . . . . . . . . . . 8,766 8,783 14,426 6,921 1,715
Long-term debt. . . . . . . . . . . . . . . . . 4,632 4,632 3,820 5,347 5,819
Total liabilities . . . . . . . . . . . . . . . 19,537 18,030 26,844 16,474 12,202
Redeemable preferred stock. . . . . . . . . . . - - 1,868 1,837 1,544
Shareholder's equity (deficiency) . . . . . . . (19,522) (17,753) (20,132) (11,149) (4,474)
(a) Includes: a $990,000 charge for the write-down of the Company's investment
in the AcNet entities; a $1.6 million charge for impairment of investment
in Actel; a gain of $7.0 million recorded in connection with a Debt
Restructuring Plan; and a $722,000 extraordinary gain on extinguishment of
debt.
(b) Includes: a $3.7 million charge for the write-down of the Company's
investment in the AcNet entities.
(c) Includes a gain of $453,000 relating to the termination of the Company's
agreement with AT&T.
(d) Includes: a $1.0 million charge on the write-off of all the assets of a
joint venture.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company continues to exist as a public shell for use as a reverse
merger vehicle with no operating activities.
Previously the Company had three reportable segments. The Company sold its
PIC segment in July 2001 and its Incomex segment in June 2000. The other
reportable segment (MTS) had investments in the Acnet entities, which were
written off 1999 and 2000, and Actel preferred stock and operated a
telecommunications services business whose primary asset was sold in 2000.
Actel filed for bankruptcy under Chapter 11 on April 11, 2001. As a result, the
Company recorded an impairment charge of $1.6 million in 2000, due to the
uncertainty of ultimate recovery of its investment in Actel. On September 14,
2001, Actel's case was converted to a case under Chapter 7.
The accompanying statements of operations have been reclassified so that
the results for the two segments sold in 2000 and 2001 are classified as
discontinued operations for all periods presented.
As of the date of this report, the Company has a large amount of past due
debt and has also experienced significant cash flow difficulties.
The Company has an agreement with an unrelated third party to use the
Company's public shell as a reverse merger vehicle. If this transaction is not
successful, the Company may not be able to continue operating as a going
concern.
RESULTS OF OPERATIONS
Years Ended December 31
2001 2000 1999
------- ------ ------
(In thousands)
Revenues . . . . . . . . . . . . . . . $ 22 $ 191 $4,313
Cost of Sales. . . . . . . . . . . . . - 335 2,707
Selling, general, and administrative . 742 575 3,383
Depreciation and amortization expense. 6 36 549
Interest expense . . . . . . . . . . . 2,304 3,431 3,041
Other income (expense) . . . . . . . . (3) 7,001 226
COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND 2000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Consolidated selling, general and
administrative expense increased $167,000 to $742,000 for the year ended
December 31, 2001 from $575,000 for the year ended December 31, 2000. The
increase is primarily related to employee severance.
9
DEPRECIATION AND AMORTIZATION EXPENSE- Consolidated depreciation and
amortization expense declined $30,000, to $6,000 for the year ended December 31,
2001 from $36,000 for year ended December 31, 2000. The decline is due to
impairments recorded in 1999 and 2000. All assets are fully depreciated at
December 31, 2001.
INTEREST EXPENSE - Consolidated interest expense, including amortization of debt
discount, declined $1,127,000 to $2,304,000 for the year ended December 31, 2001
from $3,431,000 in 2000. The decline is due to the reduction of debt associated
with the sale of the two business segments and the Debt Restructuring Plan.
OTHER INCOME - Consolidated other income (expense) declined $7.0 million to a
$3,000 expense for the year ended December 31, 2001 from a $7,001,000 income for
the year ended December 31, 2000. The decrease was primarily due to a pre-tax
gain of $7.0 million recorded in connection with the Debt Restructuring Plan
completed in the second quarter of 2000 (see Note 6 to Notes to Financial
Statements) and a pre-tax gain of $214,000 recorded in connection with the sale
of two buildings in Cedar Rapids, Iowa and Mobile, Alabama.
DISCONTINUED OPERATIONS
PIC- 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 shareholder of the Company is related to the owner of
Dartwood, LLC. The disposition was recorded in the third quarter of 2001 and
resulted in a gain of approximately $1.3 million for the Company.
COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999
REVENUES - Consolidated revenues decreased $4.1 million to $191,000 for the year
ended December 31, 2000 from $4.3 million for the year ended December 31, 1999.
In February 2000, the Company entered into a Rental Agreement with
Telemanager.net providing for the operation of the Company's Telemanager system,
the MTS division's principal product, by Telemanager.net in exchange for monthly
rental payments to the Company. On December 20, 2000, the Company sold certain
assets, which were subject to the Rental Agreement to Telemanager.net.
Telemanager.net is owned by former executives of the Company.
COST OF SALES - Consolidated cost of sales decreased $2.4 million, to $335,000
for the year ended December 31, 2000 from $2.7 million for the year ended
December 31, 1999. The decrease in cost of sales is associated with the
corresponding decrease in revenue.
10
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - Consolidated selling, general and
administrative expense decreased $2.8 million to $575,000 for the year ended
December 31, 2000 from $3.383 million for the year ended December 31, 1999 The
reduction in expenses was primarily due to lowered expenses resulting from the
sale of the Incomex segment.
DEPRECIATION AND AMORTIZATION EXPENSE - Consolidated depreciation and
amortization decreased $513,000 for the year ended December 31, 2000 from
$549,000 for the year ended December 31, 1999. The decrease is attributed to
the decline in depreciable assets due to impairments and sales of assets.
IMPAIRMENT OF ASSETS - Actel filed for bankruptcy under Chapter 11 on April 11,
2001. As a result, the Company recorded an impairment charge of $1.6 million in
2000, due to the uncertainty of ultimate recovery of its investment in Actel.
On September 14, 2001, Actel's case was converted to a case under Chapter 7.
ACNET BAD DEBT AND ACQUISITION EXPENSE - As of December 31, 1999, the Company
had an investment of $4.7 million consisting of $3.7 million of loans, $265,000
of interest and $747,000 of costs incurred either related to the proposed
acquisition of the AcNet entities or paid on behalf of the AcNet entities. In
light of the Company's liquidity issues and other issues involving the AcNet
entities, the Company is not pursuing its options to acquire the AcNet entities.
As a result and due to cash flow difficulties experienced by the AcNet entities,
the Company recorded a $3.7 million asset write-down in 1999 and $990,000 in the
second quarter of 2000 due to the uncertainty regarding the ultimate recovery of
the investment and notes (see Note 4 in Notes to Consolidated Financial
Statements).
INTEREST EXPENSE - Consolidated interest expense, including amortization of debt
discount, increased $390,000, to $3.4 million for the year ended December 31,
2000 from $3.04 million for the year ended December 31, 1999. The increase was
primarily due to additional debt incurred related to the investments in Actel
and the AcNet entities, the costs associated with an earn-out settlement with
respect to the acquisition of PIC, the Company's lower operating profit and
general working capital purposes, and to an increase in the interest rates on
the past due debt.
OTHER INCOME - Consolidated other income increased $6.8 million to $7 million
for the year ended December 31, 2000 from $226,000 for the year ended
11
December 31, 1999. During the year ended December 31, 1999 the Company recorded
$245,000 as other income for dividends accrued on its investment in Actel. The
increase was primarily due to a pre-tax gain of $7.0 million recorded in
connection with the Debt Restructuring Plan completed in the second quarter of
2000 (see Note 6 to Notes to Financial Statements) and a pre-tax gain of
$214,000 recorded in connection with the sale of two buildings in Cedar Rapids,
Iowa and Mobile, Alabama.
EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF DEBT - In connection with the
Debt Restructuring Plan the Company began in the second quarter of 2000, the
Company reached a Compromise Settlement Agreement and Mutual Release with the
FDIC on October 19, 2000 to pay $300,000 in settlement of two notes payable with
a financial institution with combined principal of $900,000. As a result, the
Company recorded a $722,000 Extraordinary Gain on Extinguishment of Debt,
including interest, in the fourth quarter of 2000.
DISCONTINUED OPERATIONS
INCOMEX - Effective June 30, 2000 the Company sold all the shares of
Incomex, Inc., a wholly owned subsidiary, to three of the former shareholders of
Incomex, for (a) transfer to the Company by the purchasers of 250,000 shares of
the Company's Common Stock originally issued by the Company pursuant to the
Company's acquisition of Incomex, (b) cancellation and forgiveness of all
amounts outstanding under promissory notes in the aggregate principal amount of
$684,919, and related accrued interest, originally issued by the Company to the
shareholders of Incomex, and (c) the cancellation of all employment compensation
and employment contracts between the Company and the purchasers. The parties
also executed mutual releases relating to liabilities between the Company and
Incomex and claims that the Company may have against the former shareholders of
Incomex. Incomex is primarily engaged in the business of providing billing and
collection services to the hospitality industry from Mexico to the United
States.
As a result of the sale of Incomex described above, the Company recorded a
loss on disposition of $332,000 in the second quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
In January 2000, the Company retained Berthel to assist the Company
regarding the identification and investigation of strategic alternatives that
might be available to the Company. No assurance can be given that the Company
will be able to restructure its debt, raise adequate funds or generate
sufficient cash flows to meet the Company's cash needs. If the Company is
unable to restructure its debt
12
or raise the necessary funds to repay its past due debt, its creditors may seek
their legal remedies. Any action by the Company's creditors to demand repayment
of past due indebtedness is likely to have a material adverse effect on the
Company's future performance, and ability to continue as a going concern.
The Company's past due debt includes approximately $11.6 million of notes
and accrued interest which are believed to have been 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 substantially
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 the notes, 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. If the financial institution seeks to enforce its rights
under the pledged notes, the Company currently would not be able to repay these
notes. As a result, any such action by the financial institution is likely to
prevent the Company from continuing as a going concern.
The FDIC has notified the Company that it believes an additional $770,000
is outstanding representing various notes payable. Another party has also
asserted that he is entitled to $500,000 allegedly outstanding under a note
payable. Also, in July 2001, the Company was notified that Peoples Bank had
obtained a judgment 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. Management believes that funds were not received by the
Company with respect to these notes and that it has other defenses. The amount
of past due debt as of March 31, 2002 does not include these amounts. No
assurance can be given as to the ultimate outcome of this matter.
The Company's principal source of cash during 2001 were advances from
MCCIC. During 2001, the Company received advances in the aggregate amount of
$157,800 from MCCIC. The Company issued warrants to purchase a total of 179,600
shares of Common Stock to MCCIC in connection with these advances. The warrants
were issued at exercise prices ranging from $0.05 per share to $0.38 per share
with five year terms. MCCIC has no commitment to make any future advances to
the Company.
As of March 31, 2002, the Company was past due in the payment of
approximately $12.4 million of principal and interest payments. The Company was
also past due with its trade vendors in the payment of approximately $777,000 as
of March 31, 2002. If the Company is unable to raise the necessary funds to
repay its past due debt or to arrange for extensions or conversions of such
debt, its creditors may sue the Company to demand payment of the amounts past
due. Any action by the Company's creditors to demand repayment of past due
indebtedness is likely to prevent the Company from continuing as a going
concern.
13
At December 31, 2001, 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, Polar and the
Company entered into an Agreement and Plan of Merger. The proposed merger is
subject to a number of significant conditions, including approval by the
stockholders of the parties, filings with Securities and Exchange Commission,
the conversion of the Company's indebtedness into equity, the obtaining of debt
or equity financing by Polar and other closing conditions. 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 operating as a going concern.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The recognition of gains
or losses resulting from changes in the values of derivatives is based on the
use of each derivative instrument and whether it qualifies for hedge accounting.
The Company adopted SFAS No. 133 on January 1, 2001. The adoption of SFAS No.
133 did not have a material effect on the Company's results of operations or
financial condition.
In June 2001, the FASB issued SFAS 141, Business Combinations and SFAS 142,
Goodwill and Other Intangible Assets. SFAS 141 addresses financial accounting
and reporting for business combinations and requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Under SFAS 142, goodwill and certain other intangible assets will no longer be
amortized, instead, they will be tested annually for impairment and written down
and charged to income when their recorded value exceeds their estimated fair
value. SFAS 141 and 142 are effective for 2002. SFAS 141 and 142 will have no
impact on the Company since it has no goodwill or intangible assets at December
31, 2001.
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:
14
- the Company's access to adequate 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 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 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.
ITEM 7A. DISCLOSURES ABOUT MARKET RISK
The Company does not have any foreign currency exchange risk or commodity
price risk. All of the Company's debt was at a fixed interest rate at December
31, 2001 and 2000 and, therefore, the Company is not impacted by
15
changes in interest rates related to the debt. The interest rates range from
12% to 18%. The Company had outstanding fixed rate long-term debt obligations
with carrying values of $4.6 million and $4.6 million at December 31, 2001 and
2000, respectively. The fair value of this debt was zero at December 31, 2001
and 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, notes thereto and
related financial information are filed under this item beginning on page F-1 of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following sets forth certain information with respect to the directors
and executive officers of the Company as of December 31, 2001.
Director
Name, Age, Principal Occupation for Past Five Years and Directorships Age Since
- -------------------------------------------------------------------------------------------------------------------- --- -----
GUY O. MURDOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 1989
Mr. Murdock has been a private investor since January 2000. He served as Chairman of the Board of the Company from
1989 to January 2000, as Chief Executive Officer of the Company from 1989 to April 1997
and as President of the Company from 1989 to July 1996.
WAYNE WRIGHT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 1997
Mr. Wright has served as President of Priority International Communications, Inc. (a
wholly-owned subsidiary of the Company since October 1997, until its sale in July 2001)
since March 1997 and as Chairman of the Board of Priority International Communications, Inc.
from 1996 to 1997. Mr. Wright served as an officer of U.S. Ameriphone (an aggregator of hospitality
and pay phone businesses) from 1993 to 1996. Effective October 2001, Mr. Wright began
serving as the Company's principal accounting officer.
DAVID KIRKPATRICK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 2000
Mr. Kirkpatrick has been a private investor since 1992. Mr. Kirkpatrick served as a
consultant to a law firm from 1991 to 1992 and as a partner of Peat Marwick (an accounting
firm) from 1962 to 1991, most recently as Managing Partner of the Houston office.
EUGENE I. DAVIS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 2000
Mr. Davis has served as Chairman of the Board and Chief Executive Officer of the Company
since May 2000, resigned October 9, 2001 and served as Interim Chairman of the Board and Interim Chief
Executive Officer of the Company from January 2000 through May 2000. Mr. Davis resigned on October 9,
2001 as Chairman of the Board and Chief Executive Officer and remains on the Board of Directors. He has
served as Chairman of the Board and Chief Executive Officer of Pirinate Consulting Group, LLC (a privately
held consulting firm) since 1999 and as Chief Executive Officer of SmarTalk Teleservices, Inc. (a prepaid
calling card provider) since 1999. Mr. Davis served as Chief Operating Officer of Total-Tel USA
Communications, Inc. (a telecommunications provider) from 1998 to 1999. Mr. Davis served
as President of Emerson Radio Corp. (a consumer electronics products distributor) from 1994 to
1997 and served as Vice Chairman of the Board until 1997 and as a director from 1992 to 1997.
17
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC initial reports of
beneficial ownership and reports of changes in beneficial ownership of the
Company's equity securities. The rules promulgated by the SEC under Section
16(a) of the Exchange Act require those persons to furnish the Company with
copies of all reports filed with the SEC pursuant to Section 16(a). Based
solely upon a review of such forms actually furnished to the Company and written
representations of certain of the Company's directors and executive officers,
all directors, executive officers and 10% shareholders have filed with the SEC
on a timely basis all reports required to be filed under Section 16(a) of the
Exchange Act during 2001.
ITEM 11. EXECUTIVE COMPENSATION.
CASH AND OTHER COMPENSATION. The table which follows sets forth certain
information concerning compensation paid to, earned by or awarded to Eugene I.
Davis, the Company's Chairman of the Board and Chief Executive Officer until
October 2001. Wayne Wright currently serves as Principal Accounting Officer,
the Company's only executive officer. Mr. Wright did not receive any
compensation for such services in 2001.
18
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------
AWARDS
ANNUAL COMPENSATION ------
------------------- SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)
- ----------------------------- ---- ---------- --------- ----------- ----------------
Eugene I. Davis . . . . . . . 2001 - - - 121,187 (2)
Chairman of the Board and . 2000 - - - 181,109 (2)
Chief Executive Officer (1) 1999 - - - -
(1) Mr. Davis served as Chairman of the Board and Chief Executive Officer of the Company
since May 2000. Mr Davis resigned as Chief Executive Officer on October 9, 2001. Mr.
Davis served as Interim Chairman of the Board and Interim Chief Executive Officer from
January 2000 through May 2000. Mr. Davis' services were contracted through Pirinate
Consulting Group, LLC.
(2) Represents amounts paid to Pirinate Consulting Group, LLC, an entity controlled by
Mr. Davis, during fiscal 2000 and 2001. Included in the $121,187 is $10,000 which was
not paid as of December 31, 2001.
OPTIONS GRANTED DURING 2001. There were no stock options granted to the
named executive officers of the Company during the year ended December 31, 2001.
FISCAL YEAR-END OPTION VALUES. There were no unexercised options held by
the named executive officers at December 31, 2001.
CONSULTING AGREEMENT
On January 10, 2000, the Company entered into a letter agreement with
Pirinate Consulting Group, LLC ("Pirinate"), an entity controlled by Eugene I.
Davis, for the personal services of Mr. Davis as the Company's Interim Chairman
of the Board and Interim Chief Executive Officer. Pirinate received $15,000 a
month, plus out-of-pocket expenses, for these services. The initial term of
this agreement was three months. Thereafter, either party may terminate this
agreement, with or without cause, effective upon sixty days prior written
notice. The parties agreed in May 2000 that Mr. Davis would serve as Chairman
of the Board and Chief Executive Officer of the Company. Effective July 1, 2001
this agreement was modified to $10,000 a month through September 30, 2001 at
which time the agreement terminated. Mr. Davis resigned on October 9, 2001 as
Chief Executive Officer and remains on the Board of Directors.
19
COMPENSATION OF DIRECTORS
The Company pays Mr. Kirkpatrick a monthly retainer equal to the greater of
(a) $1,000 or (b) $1,000 for each meeting of the Board of Directors attended.
In addition, in January 2000 the Company issued options to Mr. Kirkpatrick to
purchase up to 20,000 shares of Common Stock, 10,000 of which were fully vested
at the time of issuance and 10,000 of which vested on January 1, 2001, with an
exercise price of $2.25 per share. Through its letter agreement with Pirinate,
the Company paid Pirinate $15,000 per month for making Mr. Davis available to
serve as the Company's Chairman of the Board and Chief Executive Officer. Mr.
Davis resigned on October 9, 2001 as Chief Executive Officer and remains on the
Board of Directors. Messrs. Murdock and Wright and Davis do not receive any
compensation for serving on the Company's Board of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of March 1, 2002 regarding
the beneficial ownership of shares of Common Stock by (a) each person who is
known to the Company to be the beneficial owner of more that 5% of the Common
Stock, (b) each director, director nominee and named executive officer (as
defined above) and (c) all directors and executive officers as a group.
Beneficial ownership of Common Stock has been determined for this purpose
in accordance with Rules 13d-3 and 13d-5 of the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934 (the "Exchange
Act"), which provide, among other things, that a person is deemed to be the
beneficial owner of Common Stock if such person, directly or indirectly, has or
shares voting power or investment power with respect to the Common Stock or has
the right to acquire such ownership within sixty days after March 1, 2002.
SHARES BENEFICIALLY PERCENT OF
NAME OF BENEFICIAL OWNER OWNED (1) CLASS
- ------------------------------------- -------------------- ----------
Eugene I. Davis - *
David Kirkpatrick (2) 20,000 *
Guy O. Murdock (3) 1,637,010 12.9
Wayne Wright (4) 2,720,067 21.6
Berthel Fisher & Company, Inc. (5) 8,677,339 44.6
Larry A. Cahill (6) 7,396,006 39.1
All directors and executive officers
as a group (4 persons) (7) 4,377,077 33.9
- -------------------------------------
___________________
* Less than 1%.
20
(1) This table is based upon information supplied by directors, executive
officers and principal shareholders. Unless otherwise indicated in
footnotes to this table, each of the shareholders named in this table has
sole voting and investment power with respect to the shares shown as
beneficially owned.
(2) Consists of 20,000 shares subject to exercise of options.
(3) Includes 195,000 shares subject to exercise of warrants.
(4) Includes 2,390,067 shares owned by a trust of which Mr. Wright is trustee,
80,000 shares subject to exercise of warrants and 250,000 shares held by
Mr. Wright's spouse.
(5) Includes (i) 3,284,452 shares of Common Stock beneficially owned by certain
affiliates of Berthel for which Berthel shares voting and investment power,
including 376,879 shares subject to exercise of warrants and 1,166,261
shares subject to conversion of Convertible Notes (based upon $3,533,771 of
principal and interest outstanding under such notes as of March 1, 2002,
divided by the conversion rate of $3.03 per share); and (ii) 5,392,887
shares subject to the exercise of warrants held by MCC Investment Company,
LLC ("MCCIC"), a company owned by Berthel and Larry A. Cahill. Reflects
information reported in a Schedule 13D filed with the SEC by Berthel on
January 16, 1997, as amended on June 6, 1997, January 8, 1998, May 1, 1998,
June 22, 1998, August 6, 1998 and January 15, 1999, as well as certain
other information provided to the Company. The address of Berthel is 701
Tama Street, P.O. Box 609, Marion, Iowa 52302-0609.
(6) Includes 580,000 shares subject to exercise of warrants and 437,114 shares
subject to conversion of Convertible Notes (based upon $1,325,365 of
principal and interest outstanding under such notes as of March 1, 2002,
divided by the conversion rate of $3.03 per share). Also includes 5,392,887
shares subject to the exercise of warrants held by MCCIC, a company owned
by Berthel and Mr. Cahill. Mr. Cahill's address is 3330 Southgate Court
S.W., Cedar Rapids, Iowa 52404.
(7) Includes 20,000 shares subject to exercise of options and 275,000 shares
subject to exercise of warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company obtains lease and other financing services from Berthel and its
subsidiaries and their affiliated leasing partnerships. Berthel is the
beneficial owner of approximately 44.6% of the Common Stock as of March 1, 2002.
As of December 31, 2001, the Company owed Berthel a total of approximately $3.7
million under certain lease and debt financing arrangements and the Company owed
MCCIC a total of approximately $654,000 under certain debt financing
arrangements. 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 interest 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.
The members of the creditors committee agreed to forebear from taking actions to
collect past due debt owed by the Company in the absence of the unanimous
approval of the creditors committee. As of March 1, 2002, the Company and
Berthel are the only parties to the Standstill Agreement and Berthel is the only
member of the creditors committee.
21
In January 2000, the Company retained Berthel to assist the Company
regarding the identification and investigation of strategic alternatives that
might be available to the Company. The Company owed various fees to Berthel
under a placement agreement including monthly retainer and placement fees. The
Company paid to Berthel total fees of $536,000 during 2000. If further
strategic transactions are completed, the Company will owe a success fee to
Berthel, depending on the price of the strategic transactions.
A new agreement was executed in July 2001, which provides, among other
things, for a monthly retainer of $20,000 to be paid to Berthel. The Company
owes Berthel approximately $219,000 for fees related to this agreement as of
December 31, 2001.
The Company borrowed an aggregate of $157,800 from MCCIC, a company owned
by Berthel and Mr. Cahill, in 2001 under a Revolving Promissory Note. The
Revolving Promissory Note, which bears interest at 12% per year, was amended on
June 22, 2000 to provide that all remaining principal and accrued interest were
due on June 21, 2001. As of December 31, 2001, the Company owed MCCIC a total
of approximately $182,637 under the Revolving Promissory Note. During 2001, the
Company issued warrants to purchase a total of 179,600 shares of Common Stock to
MCCIC in connection with advances obtained from MCCIC. The warrants were issued
at exercise prices ranging from $0.05 per share to $0.38 per share with five
year terms.
In January 2000, the Company entered into a letter agreement with Pirinate
which provided that the Company would pay Pirinate $15,000 a month in exchange
for up to six days per month of personal services from Eugene I. Davis. Under
the letter agreement, Mr. Davis served as Interim Chairman of the Board and
Interim Chief Executive Officer of the Company. The letter agreement's term was
for a minimum of three months, and thereafter either party may terminate the
letter agreement, with or without cause, effective upon 60 days written notice.
The letter agreement also provided that the Company, upon approval by Mr.
Tunink, the Company's former Chief Financial Officer, would pay Mr. Davis'
out-of-pocket, travel and other major expenses related to his services to the
Company. The parties agreed in May 2000 that Mr. Davis would serve as Chairman
of the Board and Chief Executive Officer of the Company. The Company paid
$121,187 for services performed under this agreement in 2001. Mr. Davis
resigned on October 9, 2001 as Chairman of the Board and Chief Executive Officer
and remains on the Board of Directors.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements- See Index to Financial Statements on page
F-1 of this Report.
22
2. Financial Statement Schedules - See Index to Financial Statements
on page F-1 of this Report. All other schedules are omitted since
they are not required, are inapplicable, or the required
information is included in the financial statements or notes
thereto.
3. Exhibits:
EXHIBIT NUMBER DOCUMENT DESCRIPTION
- -------------- --------------------
2.1 Agreement and Plan of Merger, dated as of December 19, 2001,
among Murdock Communications Corporation, MCC Merger Sub
Corporation and Polar Molecular Corporation. (12)
2.2 Agreement regarding Effectiveness, dated as of December 19, 2001,
among Murdock Communications Corporation, MCC Merger Sub
Corporation and Polar Molecular Corporation. (12)
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)
4.1 Form of Common Stock Purchase Warrant Agreement between the
Company and Firstar Trust Company. (1)
4.2 Form of Redeemable Warrant. (1)
4.3 First Amendment to Common Stock Purchase Warrant Agreement, dated
as of September 30, 1999, between the Company and Firstar Trust
Company. (8)
4.4 Second Amendment to Common Stock Purchase Warrant Agreement,
dated as of April 14, 2000, between the Company and Firstar Bank,
N.A. (13)
4.5 Third Amendment to Common Stock Purchase Warrant Agreement, dated
as of October 9, 2000, between the Company and Firstar Bank, N.A.
(13)
10.1 Murdock Communications Corporation 1993 Stock Option Plan. (1)
(5)
10.2 Murdock Communications Corporation 1997 Stock Option Plan, as
amended. (4) (5)
23
10.3 Amended and Restated Employment Agreement, dated as of October 1,
1998, by and between the Company and Guy O. Murdock. (4) (5)
10.4 Employment Agreement, dated as of January 1, 1999, by and between
the Company and Colin P. Halford. (4) (5)
10.5 Amended and Restated Employment Agreement, dated as of October 1,
1998, by and between the Company and Thomas E. Chaplin. (4) (5)
10.6 Employment Agreement, dated as of January 1, 1999, by and between
the Company and Bill R. Wharton. (4) (5)
10.7 Employment Agreement, dated as of November 1, 1998, by and among
the Company, Priority International Communications, Inc., PIC
Resources Corp. and Bonner B. Hardegree. (4) (5)
10.8 Employment Agreement, dated as of November 16, 1998, by and
between the Company and Paul C. Tunink. (4) (5)
10.9 Form of Lease Agreement. (6)
10.10 Note and Security Agreement, Note #079-21846-00, dated as of
October 28, 1997, by and among PIC Resources Corp., ATN
Communications, Inc., Priority International Communications, Inc.
and Berthel Fisher & Company Leasing, Inc. (6)
10.11 Note and Warrant Purchase Agreement, dated as of June 21, 1999,
by and among the Company, Priority International Communications,
Inc., Incomex, Inc., MCC Acquisition Corp., and New Valley
Corporation. (6)
10.12 Stock Purchase Warrant dated June 21, 1999 from the Company to
New Valley Corporation. (6)
10.13 Fixed Rate Senior Note dated June 21, 1999 from the Company to
New Valley Corporation. (6)
10.14 Registration Rights Agreement, dated as of June 21, 1999,
between the Company and New Valley Corporation. (6)
10.15 Option to Merge Agreement, dated as of June 9, 1999, among MCC
Acquisition Corp., the shareholders of Intercarrier Transport
Corporation, and Intercarrier Transport Corporation. (7)
10.16 Option to Merge Agreement, dated June 9, 1999, among MCC
Acquisition Corp., the shareholders of AcNet USA, Inc. and AcNet
USA, Inc. (7)
10.17 Amendment to Investment Agreement, dated as of June 21, 1999,
among ACTEL Integrated Communications, Inc., the Company, John
Beck and Richard Courtney. (7)
24
10.18 Waiver and First Amendment to Note and Warrant Purchase
Agreement, dated as of December 17, 1999, among the Company,
Priority International Communications, Inc., ATN Communications,
Inc., Incomex, Inc., MCC Acquisition Corp. and New Valley
Corporation. (8)
10.19 Billing Services and Advance Funding Agreement, dated as of
February 4, 2000, between Priority International Communications,
Inc. and NCIC Communications, Inc. (9)
10.20 Stockholders Agreement, dated as of April __, 2000, among Actel
Integrated Communications, Inc., the Company and the other
stockholders of Actel Integrated Communications, Inc. (10)
10.21 First Amendment to Stockholders Agreement and Consent to
Permitted Transferees, dated as of June 13, 2000, among Actel
Integrated Communications, Inc., the Company and the other
stockholders of Actel Integrated Communications, Inc. (10)
10.22 Placement Agreement, dated as of January __, 2000, between the
Company and Berthel Fisher & Company Financial Services, Inc.
(10)
10.23 Form of Convertible Note of the Company due May 29, 2003 (10)
10.24 Billing and Advance Funding Agreement, dated as of February 2,
2000, between Priority International Communications, Inc. and
Paramount International Telecommunications, Inc. (10)
10.25 Purchase Agreement, dated as of June 23, 2000, among the
Company, MCC Acquisition Corp., John Rance, Michael Upshaw,
Fernando Ficachi and the other former shareholders of Incomex,
Inc. (11)
10.26 Addendum to Employment Agreement for Paul C. Tunink (5)
10.27 Letter Agreement, dated December 24, 2000, between the Company
and Prentice Services Ltd. (13)
10.28 Operator Services Subscriber Agreement, dated as of June 22,
2000, between NCIC Operator Services and Priority International
Communications, Inc. (13)
10.29 Agreement to Terminate Written Employment Agreement, dated
December 20, 2000, between the Company and Colin Halford (5)
10.30 Agreement to Terminate Written Employment Agreement, dated
December 20, 2000, between the Company and William Wharton (5)
10.31 Stock Purchase Agreement, dated as of July 31, 2001, among Murdock
Communications Corporation, MCC Acquisition Corporation, Priority
International Communications, Inc. and Dartwood, LLC. (14)
21 Subsidiaries.
24 Power of Attorney (included as part of the signature page
hereof).
25
(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 Quarterly 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 Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1997 (File No. 000-21463) and incorporated
herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1998 (File No. 000-21463) and incorporated herein
by reference.
(5) Management contract or compensatory plan or arrangement.
(6) Filed as exhibit to the Company's registration statement on Form SB-2 (File
No. 333-78399) and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended June 30, 1999 (File No. 000-21463) and incorporated
herein by reference.
(8) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1999 (File No. 000-21463) and incorporated herein
by reference.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000 (File No. 000-21463) and incorporated herein
by reference.
(10) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000 (File No. 000-21463) and incorporated herein by
reference.
(11) Filed as an exhibit to the Company's Current Report on Form 8-K (File No.
000-21463) filed with the Securities and Exchange Commission on August 30,
2000 and incorporated herein by reference.
26
(12) Filed as an exhibit to the Company's Current Report on Form 8-K (File No.
000-21463) filed with the Securities and Exchange Commission on December
26, 2001 and incorporated herein by reference.
(13) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000 (File No. 000-21463) and incorporated herein
by reference.
(14) Filed as an exhibit to the Company's Current Report on Form 8-K (File No.
000-21463) filed with the Securities and Exchange Commission on July 31,
2001 and incorporated herein by reference.
(b) Reports on Form 8-K.
The Company filed a Form 8-K on December 6, 2001, relating to the
announcement of the termination of its Agreement and Plan of Reorganization with
Informed Care, Inc. and Hometown Info, Inc. d/b/a Grocery Shopping Network.
The Company filed a report on Form 8-K on December 26, 2001 relating to the
announcement that it had entered into an Agreement and Plan of Merger with
Polar.
(c) Exhibits.
The response to this portion of Item 14 is submitted as a separate section
of this report.
(d) Financial statement schedules.
The response to this portion of Item 14 is submitted as a separate section
of this report.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MURDOCK COMMUNICATIONS CORPORATION
By /s/ Wayne Wright
----------------------------------
Wayne Wright
Principal Accounting Officer
Date: April 17, 2002
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Wayne Wright his
true and lawful attorney-in-fact, with full power of substitution and
resubstitution, in any and all capacities, to sign any or all amendments to the
Form 10-K and file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agents full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Eugene Davis
- --------------------- Director
Eugene Davis April 17, 2002
/s/ David Kirkpatrick
- --------------------- Director
David Kirkpatrick April 17, 2002
/s/ Guy O. Murdock
- --------------------- Director
Guy O. Murdock April 17, 2002
/s/ Wayne Wright
- --------------------- Director and Principal
Wayne Wright Accounting Officer April 17, 2002
28
MURDOCK COMMUNICATIONS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
- -------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . . . . . . F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations. . . . . . . . . . . . F-4
Consolidated Statements of Shareholders' Equity (Deficiency) F-6
Consolidated Statements of Cash Flows. . . . . . . . . . . . F-9
Notes to Consolidated Financial Statements . . . . . . . . . F-13
SCHEDULE - Valuation and Qualifying Accounts . . . . . . . . . F-36
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Murdock Communications Corporation
Cedar Rapids, Iowa
We have audited the accompanying consolidated balance sheets of Murdock
Communications Corporation and subsidiaries (the "Company") as of December 31,
2001 and 2000, and the related consolidated statements of operations,
shareholders' equity (deficiency) and cash flows for each of the three years in
the period ended December 31, 2001. Our audits also included the financial
statement schedule listed in the Index. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Murdock Communications Corporation
and subsidiaries at December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company's recurring losses from
operations, negative working capital, and shareholders' deficiency raise
substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
Cedar Rapids, Iowa
April 8, 2002
F-2
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------
ASSETS (Note 5) 2001 2000
CURRENT ASSETS:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3 $ 167
Accounts receivable, less allowances for doubtful
accounts: 2001 - $179; 2000 - $225 . . . . . . . . . . . . . . . - -
Prepaid expenses and other current assets . . . . . . . . . . . . . 11 45
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . 14 212
--------- ---------
FURNITURE AND EQUIPMENT:
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . - 35
Accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . - (29)
--------- ---------
Furniture and equipment, net . . . . . . . . . . . . . . . - 6
--------- ---------
OTHER ASSETS:
Intangible assets, net of accumulated amortization:
2001 - $1,288; 2000 - $1,230. . . . . . . . . . . . . . . . . . . - 58
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . 1 1
--------- ---------
Total other assets . . . . . . . . . . . . . . . . . . . . 1 59
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Notes payable (Note 5). . . . . . . . . . . . . . . . . . . . . . $ 8,766 $ 8,783
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . 614 486
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . 5,036 2,854
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . 489 378
Current portion of capital lease obligation with a related party. - 1
--------- ---------
Total current liabilities. . . . . . . . . . . . . . . . . 14,905 12,502
--------- ---------
LONG-TERM LIABILITIES:
Long-term debt with related parties (Note 6). . . . . . . . . . . 4,111 4,111
Long-term debt, others (Note 6) . . . . . . . . . . . . . . . . . 521 521
Net liabilities of discontinued operations (Note 3) . . . . . . . - 896
--------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 19,537 18,030
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY (DEFICIENCY) (Note 1):
Common stock, no par or stated value (Note 8):
Authorized - 40,000,000 shares
Issued and outstanding: 2001 and 2000 - 12,514,967 shares. . . . 22,287 22,287
Common stock warrants (Note 7):
Issued and outstanding: 2001 - 10,875,312; 2000 - 10,695,712 . . 1,052 1,007
Treasury stock at cost: 2001 and 2000 - 250,000 shares. . . . . . . (94) (94)
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . 134 134
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . (42,901) (41,087)
--------- ---------
Total shareholders' deficiency. . . . . . . . . . . . . . (19,522) (17,753)
--------- ---------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15 $ 277
========= =========
F-3
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------------
2001 2000 1999
CONTINUING OPERATIONS:
REVENUES:
Call processing . . . . . . . . . . . . . . . . . . . . . . . . . $ 19 $ 135 $ 719
Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . 3 56 3,594
-------- -------- ---------
Total revenues . . . . . . . . . . . . . . . . . . . . . 22 191 4,313
-------- -------- ---------
COST OF SALES:
Call processing . . . . . . . . . . . . . . . . . . . . . . . . . - 330 1,232
Other cost of sales . . . . . . . . . . . . . . . . . . . . . . . - 5 1,475
-------- -------- ---------
Total cost of sales. . . . . . . . . . . . . . . . . . . - 335 2,707
-------- -------- ---------
GROSS PROFIT (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . 22 (144) 1,606
-------- -------- ---------
OPERATING EXPENSES:
Selling, general and administrative expense . . . . . . . . . . . 742 575 3,383
Depreciation and amortization expense . . . . . . . . . . . . . . 6 36 549
Impairment of assets (Notes 1 and 4). . . . . . . . . . . . . . . - 1,682 317
AcNet bad debt and acquisition expenses (Note 4). . . . . . . . . - 990 3,703
-------- -------- ---------
Total operating expenses . . . . . . . . . . . . . . . . 748 3,283 7,952
-------- -------- ---------
LOSS FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . (726) (3,427) (6,346)
-------- -------- ---------
NONOPERATING INCOME (EXPENSE):
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . (2,304) (3,431) (3,041)
Other income (expense) (Note 6) . . . . . . . . . . . . . . . . . (3) 7,001 226
-------- -------- ---------
Total nonoperating income (expense). . . . . . . . . . . (2,307) 3,570 (2,815)
-------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . (3,033) 143 (9,161)
Income tax benefit (Note 9) . . . . . . . . . . . . . . . . . . . . - 9 -
-------- -------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . (3,033) 152 (9,161)
-------- -------- ---------
DISCONTINUED OPERATIONS (Note 3):
Loss from operations. . . . . . . . . . . . . . . . . . . . . . . (95) (4,844) (9,237)
Gain (loss) on disposition. . . . . . . . . . . . . . . . . . . . 1,314 (332) -
-------- -------- ---------
Total discontinued operations. . . . . . . . . . . . . . 1,219 (5,176) (9,237)
-------- -------- ---------
LOSS BEFORE EXTRAORDINARY ITEM. . . . . . . . . . . . . . . . . . . (1,814) (5,024) (18,398)
EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF
DEBT (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . - 722 -
-------- -------- ---------
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,814) (4,302) (18,398)
Dividends and accretion on 8% Series A Convertible Preferred Stock. - (125) (194)
-------- -------- ---------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS. . . . . . . . . . . . $(1,814) $(4,427) $(18,592)
======== ======== =========
(Continued)
F-4
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA) (CONCLUDED)
- ----------------------------------------------------------
2001 2000 1999
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Income (loss) from continuing operations. . . . . . $ (0.25) $ - $ (0.90)
Income (loss) from discontinued operations. . . . . 0.10 (0.48) (0.89)
------------ ------------ ------------
Loss before extraordinary item. . . . . . . . . . . (0.15) (0.48) (1.79)
Extraordinary item - gain on extinguishment of debt - 0.07 -
------------ ------------ ------------
Net loss. . . . . . . . . . . . . . . . . . . . . . $ (0.15) $ (0.41) $ (1.79)
============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING . . . . . . . . . . . . . . . . 12,264,967 10,869,511 10,392,940
============ ============ ============
See notes to consolidated financial statements.
F-5
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (DOLLAR AND SHARE DATA IN THOUSANDS)
- ----------------------------------------------------------------------------------------------
8% SERIES A CONVERTIBLE COMMON STOCK
PREFERRED STOCK COMMON STOCK WARRANTS
----------------------- ---------------- ------------------
NUMBER NUMBER NUMBER ADDITIONAL
OF OF OF PAID-IN
SHARES ISSUED SHARES ISSUED WARRANTS ISSUED CAPITAL
BALANCES AT JANUARY 1, 1999. . . . . . . . . . . 19 $ 1,837 10,330 $19,835 4,421 $ 439 $ 134
Issuance of warrants in connection with
debt financing with related parties. . . . . - - - - 1,195 223 -
Issuance of warrants in connection with
debt financing with lender . . . . . . . . . - - - - 500 80 -
Conversion of notes payable, accrued
interest and related common stock
warrants into common stock . . . . . . . . . - - 84 150 (84) (3) -
Conversion of common stock warrants. . . . . . - -
into common stock. . . . . . . . . . . . . . 54 13 (115) (4) - - 9
Common stock issued. . . . . . . . . . . . . . - - 2 3 - - -
Common stock options exercised by
individuals. . . . . . . . . . . . . . . . . - - 19 37 - - -
Accretion to conversion price of 8%
Series A Convertible Preferred Stock . . . . - 31 - - - - -
Accrued dividends on 8% Series A
Convertible Preferred Stock paid in
common stock . . . . . . . . . . . . . . . . - - 87 221 - - -
Warrants expired . . . . . . . . . . . . . . . - - - - (50) (100) -
Net loss for 1999. . . . . . . . . . . . . . . - - - - - - -
----------- --------- ------- -------- --------- -------- ---------
BALANCES AT DECEMBER 31, 1999. . . . . . . . . . 19 $ 1,868 10,576 $20,259 5,867 $ 635 $ 134
=========== ========= ======= ======== ========= ======== =========
See notes to consolidated financial statements. (Continued)
SHARE-
HOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIENCY)
BALANCES AT JANUARY 1, 1999. . . . . . . . . . . $ (18,168) $ 4,077
Issuance of warrants in connection with
debt financing with related parties. . . . . - 223
Issuance of warrants in connection with
debt financing with lender . . . . . . . . . - 80
Conversion of notes payable, accrued
interest and related common stock
warrants into common stock . . . . . . . . . - 147
Conversion of common stock warrants
into common stock
Common stock issued. . . . . . . . . . . . . . - 3
Common stock options exercised by
individuals. . . . . . . . . . . . . . . . . - 37
Accretion to conversion price of 8%
Series A Convertible Preferred Stock . . . . (31) -
Accrued dividends on 8% Series A
Convertible Preferred Stock paid in
common stock . . . . . . . . . . . . . . . . (163) 58
Warrants expired . . . . . . . . . . . . . . . 100 -
Net loss for 1999. . . . . . . . . . . . . . . (18,398) (18,398)
----------- -------------
BALANCES AT DECEMBER 31, 1999. . . . . . . . . . $ (36,660) $ (13,764)
=========== =============
See notes to consolidated financial statements.
F-6
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED) (DOLLAR AND SHARE DATA IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------
8% SERIES A
CONVERTIBLE COMMON STOCK
PREFERRED STOCK COMMON STOCK WARRANTS TREASURY STOCK
----------------- --------------- ------------------- ----------------
NUMBER NUMBER NUMBER NUMBER
OF OF OF OF
SHARES ISSUED SHARES ISSUED WARRANTS ISSUED SHARES ISSUED
BALANCES AT JANUARY 1, 2000. . . . . . . . . . . . 19 $ 1,868 10,576 $20,259 5,867 $ 635 - $ -
Issuance of warrants in connection with
termination of employment agreements . . . . . - - - - 150 - - -
Issuance of warrants in connection with
debt financing with lender . . . . . . . . . . - - - - 5,199 472 - -
Canellation of warrants. . . . . . . . . . . . . - - - - (495) (99) - -
Conversion of common stock warrants
into common stock. . . . . . . . . . . . . . . - - 19 35 (25) (1) - -
Accretion to conversion price of 8%
Series A Convertible Preferred Stock . . . . . - 23 - - - - - -
Conversion of preferred stock into common stock. (19) (1,891) 1,684 1,891 - - - -
Accrued dividends on 8% Series A
Convertible Preferred Stock paid in
common stock . . . . . . . . . . . . . . . . . - - 236 102 - - - -
Treasury stock acquired -Incomex sale. . . . . . - - - - - - 250 (94)
Net loss for 2000. . . . . . . . . . . . . . . . - - - - - - - -
------- -------- ------ ------- --------- -------- ------ --------
BALANCES AT DECEMBER 31, 2000. . . . . . . . . . . - $ - 12,515 $22,287 10,696 $ 1,007 250 $ (94)
======= ======== ====== ======= ========= ======== ====== ========
See notes to consolidated financial statements.
SHARE-
ADDITIONAL HOLDERS'
PAID-IN ACCUMULATED EQUITY
CAPITAL DEFICIT (DEFICIENCY)
BALANCES AT JANUARY 1, 2000. . . . . . . . . . . . $ 134 $ (36,660) $ (13,764)
Issuance of warrants in connection with
termination of employment agreements . . . . . - - -
Issuance of warrants in connection with
debt financing with lender . . . . . . . . . . - - 472
Canellation of warrants. . . . . . . . . . . . . - - (99)
Conversion of common stock warrants
into common stock. . . . . . . . . . . . . . . - - 34
Accretion to conversion price of 8%
Series A Convertible Preferred Stock . . . . . - (23) -
Conversion of preferred stock into common stock. - - -
Accrued dividends on 8% Series A
Convertible Preferred Stock paid in
common stock . . . . . . . . . . . . . . . . . - (102) -
Treasury stock acquired -Incomex sale. . . . . . - - (94)
Net loss for 2000. . . . . . . . . . . . . . . . - (4,302) (4,302)
---------- ----------- -------------
BALANCES AT DECEMBER 31, 2000. . . . . . . . . . . $ 134 $ (41,087) $ (17,753)
========== =========== =============
See notes to consolidated financial statements.
F-7
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONCLUDED) (DOLLAR AND SHARE DATA IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------
8% SERIES A
CONVERTIBLE COMMON STOCK
PREFERRED STOCK COMMON STOCK WARRANTS TREASURY STOCK
---------------- --------------- ----------------- ---------------
NUMBER NUMBER NUMBER NUMBER ADDITIONAL
OF OF OF OF PAID-IN
SHARES ISSUED SHARES ISSUED WARRANTS ISSUED SHARES ISSUED CAPITAL
BALANCES AT JANUARY 1, 2001 . . . . . . . . . . - $ - 12,515 $22,287 10,696 $ 1,007 250 $ (94) $ 134
Issuance of warrants in connection with
debt financing. . . . . . . . . . . . . . . . - - - - 179 45 - - -
Net loss for 2001 . . . . . . . . . . . . . . - - - - - - - - -
------ ------- ------- ------- -------- ------- ------ -------- ----------
BALANCES AT DECEMBER 31, 2001 . . . . . . . . . - $ - 12,515 $22,287 10,875 $ 1,052 250 $ (94) $ 134
====== ======= ======= ======= ======== ======= ====== ======== ==========
See notes to consolidated financial statements.
SHARE-
HOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIENCY)
BALANCES AT JANUARY 1, 2001 . . . . . . . . . . $ (41,087) $ (17,753)
Issuance of warrants in connection with
debt financing. . . . . . . . . . . . . . . . - 45
Net loss for 2001 . . . . . . . . . . . . . . (1,814) (1,814)
----------- -------------
BALANCES AT DECEMBER 31, 2001 . . . . . . . . . $ (42,901) $ (19,522)
=========== =============
See notes to consolidated financial statements.
F-8
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . $(1,814) $(4,302) $(18,398)
Adjustments to reconcile net loss to net cash flows
from operating activities of continuing operations:
Impairment of assets . . . . . . . . . . . . . . . . . - 1,682 317
AcNet bad debt and acquisition expenses. . . . . . . . - 990 3,703
Depreciation and amortization. . . . . . . . . . . . . 64 719 549
Gain on sale of property and equipment . . . . . . . . - (102) (6)
Noncash interest expense . . . . . . . . . . . . . . . 45 464 723
Gain on debt restructuring plan. . . . . . . . . . . . - (6,946) -
Loss on discontinued operations. . . . . . . . . . . . 95 4,844 9,237
(Gain) loss on disposition of discontinued operations. (1,314) 332 -
Extraordinary gain on extinguishment of debt . . . . . - (722) -
Changes in operating assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . - 490 215
Other current assets . . . . . . . . . . . . . . . . 34 139 (284)
Other noncurrent assets. . . . . . . . . . . . . . . - 11 182
Outstanding checks in excess of available balances . - (10) 18
Accounts payable and accrued expenses. . . . . . . . 2,421 1,016 2,744
Other liabilities. . . . . . . . . . . . . . . . . . - (22) (7)
-------- -------- ---------
Net cash flows from operating activities of
continuing operations. . . . . . . . . . . . (469) (1,417) (1,007)
Net cash flows from discontinued operations . . 148 (357) 1,158
-------- -------- ---------
Net cash flows from operating activities. . . . (321) (1,774) 151
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment. . . . . . . . . . . - - (171)
Payments for site contracts, net . . . . . . . . . . . . - - (172)
Proceeds from sale of investments. . . . . . . . . . . . - 4,948 -
Proceeds from sale of subsidiary . . . . . . . . . . . . 100 - -
Cash paid for investments. . . . . . . . . . . . . . . . - - (6,763)
Cash advanced to joint venture . . . . . . . . . . . . . - - (46)
Proceeds from sale of property and equipment . . . . . . - 489 13
Issuance of note receivable. . . . . . . . . . . . . . . - - (1,000)
Payments received on note receivable . . . . . . . . . . - 500 500
-------- -------- ---------
Net cash flows from investing activities. . . . 100 5,937 (7,639)
-------- -------- ---------
(Continued)
F-9
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONCLUDED)(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------
2001 2000 1999
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation with a related party. . . . . . . (1) (472) (301)
Borrowings on notes payable. . . . . . . . . . . . . . . . . . . . . . 158 656 7,975
Borrowings of long-term debt with related parties. . . . . . . . . . . - - 500
Payments on notes payable. . . . . . . . . . . . . . . . . . . . . . . (100) (2,772) (479)
Payments on long-term debt with related parties. . . . . . . . . . . . - (429) (512)
Borrowings on long-term debt, others . . . . . . . . . . . . . . . . . - - 654
Payments on long-term debt, others . . . . . . . . . . . . . . . . . . - (1,042) (421)
Proceeds from issuance of common stock and warrants. . . . . . . . . . - - 3
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . - - (18)
Proceeds from exercise of stock options. . . . . . . . . . . . . . . . - - 37
------ -------- -------
Net cash flows from financing activities. . . . . . . . . . . 57 (4,059) 7,438
------ -------- -------
NET INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . . . . . . . (164) 104 (50)
CASH AT BEGINNING OF YEAR. . . . . . . . . . . . . . . . . . . . . . . . 167 63 113
------ -------- -------
CASH AT END OF YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3 $ 167 $ 63
====== ======== =======
SUPPLEMENTAL DISCLOSURE:
Cash paid during the year for interest, principally to a related party $ - $ 853 $ 764
Cash paid during the year for income taxes . . . . . . . . . . . . . . - 6 4
See notes to consolidated financial statements.
F-10
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- ---------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF 2001 NONCASH INVESTING AND FINANCING ACTIVITIES:
In connection with the sale of the Priority International Communications, Inc.
subsidiary, the Company received a note receivable for $96,000 and assigned it
to MCC Investment Company, LLC to repay outstanding debt and accrued interest.
During the year the Company issued 179,600 common stock warrants and recorded a
$45,000 increase to common stock warrants and deferred financing costs which
were taken to interest expense due to the past due status of the underlying
debt.
SUPPLEMENTAL DISCLOSURES OF 2000 NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company recorded an increase to the carrying value of the Company's 8%
Series A Convertible Preferred Stock and a charge to accumulated deficit of
$23,000 representing the current period accretion to its conversion price of
$1,891,000. These shares were converted into 1,683,880 shares of common stock.
During the year, common stock warrants were exercised by individuals, increasing
common stock by $35,000 (18,941 shares) in a cashless exercise through the
exchange of debt.
The Company issued stock dividends of $102,000 representing 236,129 shares of
common stock recorded as an increase to common stock and an increase in
accumulated deficit.
The Company recorded $94,000 representing treasury stock received in the
cashless sale of the Incomex subsidiary, representing 250,000 shares of common
stock and the net assets of the Company decreased by $1,648,000 related to the
sale.
During the year the Company issued 5,199,121 common stock warrants and recorded
a $472,000 increase to common stock warrants and deferred financing costs.
The Company transferred 1,063,584 shares of Actel Integrated Communications,
Inc. Preferred Stock, reducing the cost basis of the investment by $729,910, and
$4,600,000 of new notes payable were issued in connection with the transaction
in exchange for the cancellation of approximately $9,200,000 of outstanding
indebtedness related to the Debt Refinancing Plan.
In December of 2000, the Company cancelled warrants with a recorded value of
$99,000.
(Continued)
F-11
MURDOCK COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONCLUDED)
- ----------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF 1999 NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1999, 199,172 common stock warrants were exercised by individuals. Of
these, 83,872 were converted to the same number of common shares and reduced
notes payable by $116,000 and accrued interest by $31,000. Of the remaining
115,300 warrants, 114,000 warrants were converted into 51,507 shares of common
stock in a cashless exercise and 1,300 warrants were converted into 2,668 shares
of common stock for $8,475, which had not been received prior to year end.
These warrants had a carrying value of $7,921.
The Company recorded an increase to the carrying value of the 8% Series A
Convertible Preferred Stock and a charge to accumulated deficit of $31,353
representing the current year's accretion to its conversion price.
The Company recorded an increase to accrued expense and a charge to accumulated
deficit of $162,559 for cumulative dividends earned by the holders of the 8%
Series A Convertible Preferred Stock.
The Company issued stock dividends of $220,836 which had been recognized in
current and prior years through charges to retained earnings and increases in
accrued expenses representing 87,708 shares of common stock.
The Company recorded $303,000 of deferred loan costs in connection with debt
financing of $7,975,000 and related issuance of common stock warrants to
purchase 1,695,000 shares of the Company's common stock. Such costs are being
amortized to non-cash interest expense.
The Company recorded a decrease in common stock warrants and a decrease to
accumulated deficit of $100,000 due to the expiration of 50,000 warrants.
See notes to consolidated financial statements.
F-12
MURDOCK COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- ---------------------------------------------------
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Murdock Communications Corporation (individually,
or collectively with its wholly-owned subsidiaries discussed below,
referred to herein as the "Company") has been engaged in recent years in
the business of providing operator services and call processing to North
American payphones, hotels and institutions, database profit management
services and telecommunications billing and collection services for the
hospitality industry and outsourced operator services for the
telecommunications industry. The Company operated its business under three
business units prior to the sales discussed below. At December 31, 2001 the
Company has no operating activities and no reportable segments. The Company
continues to exist as a public shell for use as a reverse merger vehicle.
MTS - Murdock Technology Services ("MTS") was created in 1998 to meet the
needs of the hospitality telecommunications management market by providing
database profit management services and other value added telecommunication
services. The division's main product, the MCC Telemanager , was a
proprietary software and hardware product, created to help manage
telecommunication installations and services in the hospitality market.
In February 2000, the Company entered into a Rental Agreement with
Telemanager.net providing for the operation of MCC Telemanager by
Telemanager.net in exchange for monthly rental payments to the Company. On
December 20, 2000, the Company sold all the primary assets which were
subject to the Rental Agreement to Telemanager.net. Telemanger.net is owned
by former executives of the Company.
Incomex - On February 13, 1998, the Company purchased Incomex, Inc.
("Incomex"), the Company's second business unit. Incomex was primarily
engaged in the business of providing billing and collection services to the
hospitality industry from Mexico to the United States. The Company sold
100% of the stock of Incomex to three of the former shareholders of Incomex
with an effective closing date of June 30, 2000 (see Note 3).
PIC - On October 31, 1997, the Company purchased Priority International
Communications, Inc. ("PIC"). PIC was primarily engaged in the business of
providing long-distance telecommunications services to patrons of hotels,
public and private payphone owners and aggregators of operator service
traffic with which PIC had contracts to provide such services. Services
included, but were not limited to, credit card billing services, live
operator services, automated collection and messaging delivery services,
voice mail services and telecommunications consulting.
Also, on October 31, 1997, the Company purchased PIC Resources Corp.
("PIC-R"). PIC-R, operating through its wholly-owned subsidiary ATN
Communications, Incorporated ("ATN") was merged into PIC in January 1999.
ATN was primarily engaged in the business of providing carrier services for
long-distance telecommunications companies throughout the United States.
ATN handled incoming operator assisted calls with their operators on
location. Unless otherwise indicated, references in this report to "PIC"
include the historical operations of ATN.
Effective July 31, 2001 the Company sold 100% of the stock of PIC to a
third party who is related to a Director and shareholder of the Company
(see Note 3).
F-13
BASIS OF 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 $42.9 million
and current liabilities exceed current assets by $14.9 million at December
31, 2001. The Company also is past due in the payment of approximately
$12.4 million in principal and accrued interest payable as of March 31,
2002. The Company's past due debt includes approximately $11.6 million of
notes and accrued interest which were 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 Federal Deposit Insurance
Corporation ("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. The financial institution has issued a demand letter
to the Company for approximately $575,000 of principal plus accrued
interest of the notes, 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. These notes
consist of several notes signed by two former officers of the Company. If
the financial institution seeks to enforce its rights under the pledged
notes, the Company currently would not be able to repay these notes. These
factors, among others, indicate that the Company may be unable to continue
as a going concern for a reasonable period of time. Management's plans are
discussed below.
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's 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. If the Company is unsuccessful
in this strategy, the Company may not be able to continue operating as
a going concern.
- The Company has an agreement with an unrelated third party to use the
Company's public shell as a reverse merger vehicle. On December 19,
2001 the Company and Polar Molecular Corporation ("Polar") entered
into a Definitive Merger Agreement (the "merger"). The merger is
subject to a number of significant closing conditions, including,
among others, approval by the stockholders of the parties, 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.
DISCONTINUED OPERATIONS - The accompanying statements of operations have
been reclassified for the dispositions of the Incomex subsidiary (see Note
3) and the PIC subsidiary (see Note 3) so that the results for each
subsidiary's operations are classified as discontinued operations for all
periods presented. The assets and liabilities of the discontinued
operations of PIC which were sold on July 31, 2001 have been classified in
the 2000 balance sheet as "net liabilities of 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.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
included the accounts of the Company and the accounts of its wholly-owned
subsidiaries, PIC and Incomex (prior to their sale). Significant
intercompany accounts and transactions have been eliminated in
consolidation.
F-14
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ significantly from those estimates.
REVENUE RECOGNITION - Revenue was recognized as calls were placed and
processed. Revenue recognized on the sale of hardware occurred at the time
of delivery and revenues for other services was recognized at the time the
services were rendered.
FURNITURE AND EQUIPMENT - Furniture and equipment are stated at cost. For
financial reporting purposes, depreciation and amortization are computed on
these assets using the straight-line method over their estimated useful
lives of five years. For income tax purposes, accelerated methods are used.
All amounts were fully depreciated at December 31, 2001.
IMPAIRMENT OF FIXED ASSETS - The Company periodically reviews long-lived
assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of these assets may not be recoverable. For the
year ended December 31, 1999, the Company recorded impairment write-downs
of assets, primarily telecommunications equipment at MTS, of approximately
$317,000. All impairments were determined based on the estimated fair value
of such assets.
INTANGIBLE ASSETS - Intangible assets relate to deferred financing, lease
and loan restructuring costs. Financing, lease and loan restructuring costs
incurred have been deferred and are being amortized over the new or
restructured lease and loan agreement terms using the effective interest
method. All amounts were fully amortized at December 31, 2001.
INVESTMENTS - The Company owned convertible preferred stock of Actel
Integrated Communications, Inc. ("Actel") which was not readily marketable.
This investment was accounted for at cost. This investment experienced a
decline in value that was other than temporary in 2000 due to Actel filing
for bankruptcy in April 2001. The Company recorded an impairment loss of
$1.6 million in 2000 which was equal to the stock's cost basis at December
31, 2000.
INCOME TAXES - The Company files a consolidated federal and certain
consolidated state income tax returns with its subsidiaries. Some states do
not allow the filing of a consolidated state tax return, and therefore,
certain subsidiaries file a separate state income tax return. Deferred
income taxes are provided for the tax consequences in future years of
temporary differences between the tax basis of assets and liabilities and
their financial reporting amounts, based on enacted tax laws and tax rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized. Income
tax expense is the tax payable for the year and the change during the
period in deferred tax assets and liabilities.
F-15
ACCRETION ON PREFERRED STOCK - Up to September 30, 2000, the date of
conversion, the Company accreted the carrying value of the 8% Series A
Convertible Preferred Stock (net of offering costs incurred) to the
conversion price by the effective interest method.
CUMULATIVE DIVIDENDS ON PREFERRED STOCK - Up to September 30, 2000, the
date of conversion, cumulative dividends on the Company's 8% Series A
Convertible Preferred Stock were recorded as a charge to accumulated
deficit as the dividends were earned by the holders and an accrued
liability was recorded.
STOCK-BASED COMPENSATION - The Company measures stock-based compensation
cost with employees as the excess of the fair value of the Company's common
stock at date of grant over the amount the employee must pay for the stock.
The Company measures stock-based compensation with other than employees as
the fair value of the goods or services received or the fair value of the
equity instrument issued, whichever is more reliably measurable.
NET LOSS PER COMMON SHARE - Basic net loss per common share is based on the
weighted average number of shares of common stock outstanding during the
year. Diluted net loss per common share is the same as basic net loss per
share due to the antidilutive effect on net loss per share of any assumed
conversion of convertible securities or exercise of options and warrants.
Potential common shares excluded from the per share computation because
they were antidilutive are as follows:
YEARS ENDED DECEMBER 31,
------------------------
2001 2000 1999
Convertible preferred stock - - 1,681,776
Options . . . . . . . . . . - - 355,918
Warrants. . . . . . . . . . 45,454 - 1,189,000
------ ---- ---------
Total . . . . . . . . . . . 45,454 - 3,226,694
====== ==== =========
The exercise prices on all outstanding options and warrants exceed the
market price of the Company's common stock at December 31, 2001, 2000 and
1999, except as noted above.
RECLASSIFICATIONS - Certain amounts in the 2000 and 1999 consolidated
financial statements have been reclassified to conform with the 2001
presentation.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133 establishes standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. The recognition of gains or losses
resulting from changes in the values of derivatives is based on the use of
each derivative instrument and whether it qualifies for hedge accounting.
The Company adopted SFAS 133 on January 1, 2001. The adoption of SFAS 133
did not have a material effect on the Company's results of operations or
financial condition.
F-16
In June 2001, the FASB issued SFAS 141, Business Combinations, and SFAS
142, Goodwill and Other Intangible Assets. SFAS 141 addresses financial
accounting and reporting for business combinations and requires that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Under SFAS 142, goodwill and certain other
intangible assets will no longer be amortized, but will be tested annually
for impairment and written down and charged to income when their recorded
value exceeds their estimated fair value. SFAS 141 and 142 are effective
for 2002. SFAS 141 and 142 will have no impact on the Company since it has
no goodwill or intangible assets at December 31, 2001.
2. BAD DEBT EXPENSE AND UNIVERSAL SERVICE FUND FEES RELATED TO PIC
During 1999, PIC recorded bad debt charges primarily relating to collection
issues for one type of call processing service provided by PIC to its
largest customer totaling approximately $5.6 million in excess of
historical amounts. PIC used an independent billing and collection firm,
which advanced funds to PIC, for calls handled by PIC, before collecting
from the end-user by billing through a Regional Bell Operating Company or
other local telephone company. This billing and collection firm reconciled
amounts ultimately collected from the end-user with the initial advances
made and remitted the additional amount collected or reduced advances, for
any deficiency, to PIC in future periods. This process took 12 - 18 months
to complete. PIC used its historical experience to estimate the ultimate
collections to be received. During 1999, PIC experienced an amount of
reductions in these payments significantly in excess of PIC's and industry
historical experience.
Due to the high level of these uncollectible amounts, PIC contracted with
another billing and collection firm in November 1999. The prior billing and
collection firm alleged that PIC had breached its contract and placed a
lien on the collections from calls processed by the new billing and
collection firm. At December 31, 1999, the Company recorded an allowance
for 100% of all receivables from both billing and collection firms due to
the uncertainty regarding their collection.
On January 25, 2001, the Company reached a settlement with the prior
billing and collection firm and the new billing and collection firm. Under
this settlement: (a) PIC and ATN were relieved from any further liability
allegedly owed to either billing and collection firm, (b) PIC agreed to pay
a nominal amount and to relinquish its claims to funds held by the new
billing and collection firm, (c) PIC and ATN released any potential claims
that they had against the prior billing and collection firm, including
claims that ATN may have for the alleged failure by the prior billing and
collection firm to assess Universal Service Fund ("USF") contribution
charges (see discussion below) on certain traffic, as well as any claims
that ATN may have against the prior billing and collection agency for its
role in the excessive bad debt charges recorded in 1999, and (d) PIC and
ATN released any potential claims that they had against the new billing and
collection firm.
In December 1999, ATN received notice from the Universal Service
Administrative Company ("USAC") that USF fees were due. A carrier of
interstate/intrastate calls is required to pay a USF fee based on a
percentage of total call revenue. The USF fee is applicable to all calls
carried after January 1, 1997. The notice was the first time that
management became aware of any liability to this agency. It was
management's belief that these USF fees had been charged to the end-user
and remitted to USAC by its prior billing and collection firm. The prior
billing and collection firm's position was that they had collected the USF
fees and remitted them to ATN. As ATN is legally responsible for USF fees,
in December 1999 it recorded an estimated liability of $1.7 million. During
the first two months of 2001, ATN received credit memos from USAC which
reflected a balance due to USAC of $806,000. Accordingly, ATN recorded a
$894,000 credit for universal service fund fees in the fourth quarter of
2000 based on the new information from USAC. The Company reached a
settlement agreement with the prior billing and collection firm on January
25, 2001 which included the USF fees (see discussion above). Any liability
related to USF fees was transferred to the purchaser of PIC (see Note 3).
F-17
3. DISCONTINUED OPERATIONS
Effective June 30, 2000 the Company sold all the shares of Incomex to three
of the former shareholders of Incomex for (a) the transfer to the Company
by the purchasers of 250,000 shares of the Company's common stock
originally issued by the Company pursuant to the Company's acquisition of
Incomex, (b) cancellation and forgiveness of all amounts outstanding under
promissory notes in the aggregate principal amount of $684,919, and related
accrued interest, originally issued by the Company to the shareholders of
Incomex, and (c) the cancellation of all employment compensation and
employment contracts between the Company and the purchasers. The parties
also executed mutual releases relating to liabilities between the Company
and Incomex and claims that the Company may have against the former
shareholders of Incomex.
Summary operating results of the discontinued operations of Incomex are as
follows for the years ended December 31, 2001, 2000 and 1999 (amounts
expressed in thousands):
2001 2000 1999
Revenues. . . . . . . . . . . . . $ - $ 2,987 $ 8,284
Expenses. . . . . . . . . . . . . - (4,162) (10,713)
Taxes . . . . . . . . . . . . . . - - 472
----- -------- ---------
Loss from discontinued operations $ - $(1,175) $ (1,957)
===== ======== =========
The loss from discontinued operations includes goodwill impairment and
fixed asset charges of approximately $4.3 million for 2000 and $3.0 million
for 1999.
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 noninterest bearing promissory note of $96,000 payable in 24
monthly installments of $4,000. The Company assigned the promissory note to
MCCIC to repay $96,000 of outstanding debt and accrued interest. A Director
and significant shareholder of the Company is related to the owner of
Dartwood, LLC.
Summary operating results of the discontinued operations for PIC are as
follows for the years ended December 31, 2001, 2000 and 1999 (amounts
expressed in thousands):
2001 2000 1999
Revenues. . . . . . . . . . . . . $2,438 $ 8,246 $23,150
Expenses. . . . . . . . . . . . . 2,533 11,915 30,430
------- -------- --------
Loss from discontinued operations $ (95) $(3,669) $(7,280)
======= ======== ========
The loss from discontinued operations includes charges (credits) related to
the following items for the years ended December 31, 2000 and 1999 (amounts
expressed in thousands):
2000 1999
Bad debts in excess of historical amounts (Note 2) $ - $ 5,600
Goodwill impairment. . . . . . . . . . . . . . . . 3,300 3,000
USF fees (Note 2). . . . . . . . . . . . . . . . . (894) 1,700
Telecommunications equipment impairment. . . . . . 600 -
------- -------
Total. . . . . . . . . . . . . . . . . . . . . . . $3,006 $10,300
======= =======
F-18
A summary of the net liabilities of the discontinued operations of PIC are
as follows (amounts expressed in thousands):
DECEMBER 31,
2000
Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -
Accounts receivable, less allowance for doubtful accounts. 582
Prepaid expense and other current assets . . . . . . . . . 11
------------
Total current assets . . . . . . . . . . . . . . . . . . . 593
------------
Property and equipment, net. . . . . . . . . . . . . . . . 137
------------
Total noncurrent assets. . . . . . . . . . . . . . . . . . 137
------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . 730
------------
Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . 239
Accrued universal service fund fees. . . . . . . . . . . . 806
Other accrued expenses . . . . . . . . . . . . . . . . . . 111
Current portion of long-term debt, with related parties. . 220
------------
Total current liabilities. . . . . . . . . . . . . . . . . 1,376
Long-term debt, with related parties, less current portion 250
------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . 1,626
------------
Net liabilities. . . . . . . . . . . . . . . . . . . . . . . $ 896
============
4. INVESTMENTS
During 1998, the Company reached an agreement to invest in Actel. Actel,
based in Mobile, Alabama, was a facilities-based competitive local exchange
carrier of advanced voice and data communications services to small and
medium sized enterprises. As of June 21, 1999 the Company had invested $3.0
million in Actel. Effective June 21, 1999, the Company and Actel entered
into an agreement to amend the terms of the original investment agreement
with respect to the Company's investment in Actel. This agreement amended
certain provisions of the investment agreement including limiting the
Company's investment in Actel to $3.0 million. During the third quarter of
1999, the $3.0 million investment was converted into 4,371,428 shares of
Actel's Series A Convertible Preferred Stock as allowed by the investment
agreement. Each share of Series A Convertible Preferred Stock accrued a
cumulative 10% dividend per annum through March 10, 2002 and was
convertible into 3 shares of Actel's common stock at any time at the option
of the Company, subject to certain restrictions. The share and conversion
information have been retroactively restated for a stock split of the
Series A Convertible Preferred Stock and common stock by Actel during 2000.
In addition, the Company loaned $1.0 million to Actel under the terms of a
promissory note dated June 23, 1999. The note was repaid during the second
quarter of 2000 and had a balance at December 31, 1999 of $500,000.
During the second quarter of 2000, the Company undertook a Debt
Restructuring Plan which resulted in the Company selling or exchanging
2,213,198 shares of Actel Series A Convertible Preferred Stock in private
placements. Following these transactions, the Company held 2,158,230 shares
of Actel Series A Convertible Preferred Stock.
During late 2000, Actel began experiencing cash flow difficulties and on
April 11, 2001, Actel filed for bankruptcy protection under Chapter 11. On
September 14, 2001 the bankruptcy proceeding was converted to Chapter 7.
The Company recorded an impairment charge of approximately $1.6 million in
2000, due to the uncertainty of ultimate recovery of the investment.
F-19
During 1998, the Company reached an initial lending/investment agreement
with AcNet S.A. de C.V. of Mexico ("AcNet Mexico"). The initial agreement
was revised in June 1999, whereby the Company entered into two agreements
providing the Company with separate options to acquire (i) Intercarrier
Transport Corporation ("ITC"), the holder of approximately 99% of the
outstanding shares of AcNet Mexico, and (ii) AcNet USA, Inc. ("AcNet USA"),
an affiliate of AcNet Mexico, for an aggregate of 2,325,000 shares of the
Company's common stock, $200,000 in closing costs and an additional
$550,000 to pay off certain debt and accounts payable. The option with ITC
expired on August 31, 2001 and the option with AcNet USA expired on
December 31, 1999. As of December 31, 2000, the Company had loaned $3.7
million to the AcNet entities, recorded $264,000 of interest and incurred
$729,000 of costs either related to the acquisition or paid on behalf of
the AcNet entities.
In light of the Company's liquidity issues and other issues involving the
AcNet entities, the Company did not pursue the options to acquire the AcNet
entities. As a result and due to cash flow difficulties being experienced
by the AcNet entities, the Company recorded asset write-downs of $3,703,000
in 1999 and $990,000 in the second quarter of 2000 due to the write-off of
costs associated with the proposed acquisition and the uncertainty of
ultimate recovery of the investment. The Company commenced legal action
against the AcNet entities in April 2000 to collect its advances and
interest. On March 29, 2001, AcNet USA filed for bankruptcy protection and
the Company has been informed that AcNet Mexico is in receivership.
On May 31, 2001, the AcNet entities filed a motion with the Iowa state
court seeking permission to untimely file a counter-claim against the
Company, and asked for damages against the Company of approximately $20
million plus punitive damages. The AcNet entities alleged the Company
breached an oral agreement, committed fraudulent misrepresentation, and the
AcNet entities also filed counts for common counts, action for account
stated, and negligent misrepresentation. On September 6, 201, the Company
entered into a Compromise Settlement Agreement and Full and Final Release
with the AcNet entities. Under the terms of the Agreement, the AcNet
entities paid a nominal consideration to the Company and both parties
exchanged releases on all claims against the other party.
Investments at December 31, 2000 are summarized as follows (amounts
expressed in thousands):
2000
Actel Series A Convertible Preferred Stock $ 1,481
Accrued dividends. . . . . . . . . . . . . 100
Impairment reserve for Actel . . . . . . . (1,581)
AcNet entities loans and related costs . . 4,429
Accrued interest . . . . . . . . . . . . . 264
Allowance for AcNet entities . . . . . . . (4,693)
--------
Investments. . . . . . . . . . . . . . . . $ -
========
F-20
5. NOTES PAYABLE
Notes payable as of December 31, 2001 and 2000, consisted of the following:
(DOLLARS IN THOUSANDS)
----------------------
2001 2000
Past due notes payable to individuals, $200,000 of which has
been provided by related parties, bearing interest at
the default rate of 18%, due March 5, 1999. Warrants
to purchase 500,000 shares of the Company's common
stock were issued, 400,000 of which were issued to related
parties, at an exercise price of $1.44 per share which expire,
if unexercised, on March 31, 2003. A warrant to purchase
10,000 shares of the Company's common stock was issued
to Berthel at an exercise price of $1.44 per share which
expires if unexercised, on March 31, 2003.. . . . . . . . . . . . $ 300 $ 300
Past due notes payable to individuals, $225,000 of which has
been provided by related parties, bearing interest at the
default rate of 18%, due March 31, 1999. Warrants to
purchase 1,486,000 shares of the Company's common
stock were issued, 225,000 of which were issued to related
parties, at an exercise price of $1.75 per share which
expire, if unexercised, on March 31, 2003. Warrants
to purchase 121,100 shares of the Company's common stock
were issued to Berthel in connection with the offering with terms
substantially similar to the warrants issued in the offering. . . 275 275
Past due notes payable to individuals, $5,995,000 of which has
been provided by related parties, bearing interest at the default
rate of 18%, due November 30, 1999. Warrants to purchase
1,379,000 shares of the Company's common stock were
issued, 1,199,000 of which were issued to related parties.
The warrants were issued at exercise prices ranging
from $2.50 to $4.13 and, if unexercised, expire on
dates ranging from November 2003 to December 2003.. . . . . . . . 6,895 6,895
Past due note payable to consultant bearing interest at 14%, due
March 31, 1999. Warrants to purchase 25,000 shares
of the Company's common stock were issued at an
exercise price of $1.75 per share which expire, if
unexercised, on March 31, 2003. . . . . . . . . . . . . . . . . . 25 25
Past due uncollateralized notes payable to a related party
individual, bearing interest at 14%, due May 19, 2001.
A warrant to purchase 100,000 shares of the Company's
common stock was issued. The warrant has an exercise
price of $3.50 and, if unexercised, expires December 6, 2003. . . 500 500
F-21
(DOLLARS IN THOUSANDS)
----------------------
2001 2000
Past due note payable to MCCIC bearing interest at 12%,
due June 21, 2001. Warrants to purchase 4,289,897 shares
of the Company's common stock were issued at a weighted
average exercise price of $1.99 per share which, if unexercised,
expire December 20, 2004. The note is collateralized by
substantially all assets of the Company (see additional terms
below and see Note 6). . . . . . . . . . . . . . . . . . . . . . . 388 388
Past due revolving promissory note payable to MCCIC bearing
interest at 12%, due June 21, 2001. In 2001 warrants to purchase
179,600 shares of the Company's common stock were issued at
a weighted average exercise price of $.13 per share which, if
unexercised, expire December 20, 2004. In 2000 warrants to
purchase 909,224 shares of the Company's common stock
were issued at a weighted average exercise price of $1.99
per share which, if unexercised, expire December 20, 2004.
The note is collateralized by substantially all assets of the
Company (see additional terms below and see Note 6). . . . . . . . 183 200
Past due notes payable to Berthel, bearing interest at 12%
due June 21, 2001. . . . . . . . . . . . . . . . . . . . . . . . . 200 200
--------- ---------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,766 $ 8,783
========= =========
On June 17, 1999, the Company completed a bridge financing in the amount of
$2.0 million with New Valley Corporation ("New Valley"). Pursuant to the
bridge financing, the Company issued a note in the principal amount of $2.0
million (the "Note"). This principal and all unpaid accrued interest at 12%
per annum were due July 21, 1999. The Company was past due on this note
effective July 21, 1999. Warrants to purchase 250,000 shares of the
Company's common stock were issued in connection with the Note at an
exercise price of $3.50 per share and may be exercised at anytime through
June 21, 2009. Because the Company did not repay the Note on or prior to
September 21, 1999, the warrants may be exercised to purchase a total of
500,000 shares of the Company's common stock. On December 17, 1999, the
Company amended the terms of the agreement with New Valley. The amendment
reset the interest rate to 12% since inception (14% upon default) and was
due in 5 monthly payments of $200,000 beginning January 17, 2000 with a
final payment of $1.0 million on June 17, 2000. Waivers of any prior
violations were included as part of the amendment. The Note was convertible
into shares of common stock of the Company at the option of New Valley at
any time up to the maturity date. The number of shares in the conversion
was to be obtained by dividing the principal amount of the Note converted
by the conversion price of $3.00.
The January, February and March 2000 payments under the Note were paid on
behalf of the Company by MCCIC, a company owned by Berthel and another
significant shareholder of the Company. On April 6, 2000, the entire
interest of New Valley in this loan was purchased by MCCIC. The terms of
the note and warrant purchase agreement with MCCIC, bearing interest at
12%, was amended on June 22, 2000 with payment of all remaining principal
and interest due on June 21, 2001.
During 2000, the Company also entered into a Revolving Promissory Note with
MCCIC, bearing interest at 12% with payment of all remaining principal and
all accrued interest due on June 21, 2001.
F-22
Effective May 29, 2000, the Company issued warrants to purchase an
aggregate of 5,199,121 shares of the Company's common stock at a weighted
average exercise price of $1.99 per share to MCCIC in connection with the
Company's borrowings under the Revolving Promissory Note and the New Valley
loan. Deferred financing costs of $472,000 were recorded for the fair
values of the warrants issued and were amortized over the life of the
related debt. In 2001 the Company issued 179,600 warrants to purchase
shares of the Company's common stock at a weighted average exercise price
of $.13 per share to MCCIC in connection with borrowings under the past due
Revolving Promissory Note. Financing costs of $45,000 were amortized to
interest expense at the time of issuance due to the past due status of the
underlying debt.
The Company reached a Compromise Settlement Agreement and Mutual Release
with the FDIC on October 19, 2000 to pay $300,000 in settlement of two
notes payable with a financial institution with combined principal of
$900,000. As a result, the Company recorded a $722,000 extraordinary gain
on extinguishment of debt, including interest, in the fourth quarter of
2000.
6. LONG-TERM DEBT
Long-term debt, others as of December 31, 2001 and 2000 consisted of the
following:
(DOLLARS IN THOUSANDS)
----------------------
2001 2000
Uncollateralized convertible notes payable to individuals, bearing
interest at 12% due May 29, 2003.. . . . . . . . . . . . . . . . $ 521 $ 521
========== ==========
Long-term debt with related parties at December 31, 2001 and 2000 consisted
of the following:
(DOLLARS IN THOUSANDS)
----------------------
2001 2000
Uncollateralized convertible notes payable to individuals, bearing
interest at 12% due May 29, 2003.. . . . . . . . . . . . . . . . $ 1,190 $ 1,190
Uncollateralized convertible notes payable to Berthel, bearing
interest at 12% due May 29, 2003.. . . . . . . . . . . . . . . . 2,921 2,921
---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,111 $ 4,111
========== ==========
F-23
During the second quarter of 2000, the Company undertook a plan ("the Debt
Restructuring Plan") designed to restructure a significant portion of the
Company's principal amount of debt and accrued interest under the Company's
past due debt. In connection with the Debt Restructuring Plan, the Company
recorded a pre-tax gain of approximately $7.0 million as a result of the
sale of shares of Actel's Series A Convertible Preferred Stock for cash and
cancellation of debt as discussed below.
The Debt Restructuring Plan consisted of (i) a private offering (the "Actel
Share Offering") by the Company of shares of Series A Convertible Preferred
Stock (the "Actel Shares") of Actel for cash, and (ii) a private offering
(the "Unit Offering") by the Company to certain holders of outstanding
indebtedness of the Company of units consisting of Actel Shares and
convertible notes of the Company (the "Convertible Notes").
During the second quarter of 2000, the Company sold 1,149,614 Actel Shares
for gross proceeds of $4.9 million in the Actel Share Offering, resulting
in a gain of approximately $3.7 million. Proceeds were partially used to
(i) reduce a total of $2.2 million of the amounts owed to MCCIC under the
Company's bridge loan originally obtained from New Valley and the Company's
Revolving Promissory Note from MCCIC, (ii) reduce $1.0 million of past due
notes and lease payables to Berthel, (iii) pay placement fees and other
offering expenses of $444,000, and (iv) pay $479,000 to certain note
holders upon conversion in the Unit Offering in partial payment of amounts
owed to such note holders. The remaining proceeds were used for general
working capital.
During the second quarter of 2000, the Company transferred 1,063,584 Actel
Shares and issued Convertible Notes in an aggregate principal amount of
$4.6 million in the Unit Offering in exchange for the cancellation of
outstanding indebtedness in the amount of $9.2 million, resulting in a gain
of approximately $3.3 million. The Convertible Notes accrue interest at the
rate of 12% annually, with principal and accrued interest due on May 29,
2003, and are convertible into shares of the Company's no par value common
stock at a conversion price of $3.03 per share (330 shares for each $1,000
due under the Convertible Notes). The Convertible Notes are unsecured
obligations of the Company. The Company paid $479,000 in satisfaction of
25% of the outstanding principal and interest to holders of promissory
notes originally issued by the Company in April and May of 1998 with the
remaining balance of these promissory notes being converted in the Unit
Offering.
The Company sold its buildings in Cedar Rapids, Iowa and Mobile, Alabama
during the second quarter of 2000 resulting in a pre-tax gain of $214,000.
Proceeds were used to pay related indebtedness of $1.0 million.
Maturities of long-term debt subsequent to December 31, 2001 are as follows
(dollars in thousands):
RELATED
PARTIES OTHER TOTAL
2003 $ 4,111 $ 521 $4,632
======== ====== ======
Also see Note 13 with respect to the estimated fair value of long-term
debt.
F-24
7. COMMON STOCK WARRANTS
A summary of common stock warrant activity during the years ended December
31, 2001, 2000 and 1999 is as follows:
WEIGHTED
AVERAGE
WARRANT WARRANT
WARRANT PRICE PRICE EXPIRATION
SHARES PER SHARE PER SHARE DATE
Balance at January 1, 1999 . . . . . . 4,420,763 $1.12-9.75 $ 2.86 1999-2003
Warrants issued with notes payable to
related parties. . . . . . . . . . . 795,000 3.25-4.13 3.63 2003
Warrants issued with notes payable to
financial institution (Note 5) . . . 500,000 3.50 3.50 2009
Warrants issued with notes payable to
related party. . . . . . . . . . . . 400,000 3.31 3.31 2004
Warrants expired . . . . . . . . . . . (50,000) 2.88 2.88
Warrants exercised . . . . . . . . . . (1,300) 3.14 3.14
Warrants exercised by related party. . (4,000) 1.44 1.44
Warrants exercised . . . . . . . . . . (193,872) 1.75 1.75
-----------
Balance at December 31, 1999 . . . . . 5,866,591 1.12-9.75 3.05 2002-2009
Warrants issued with termination of
employment agreements. . . . . . . . 150,000 1.00 1.00 2003
Warrants issued with notes payable to
MCCIC (Note 5) . . . . . . . . . . . 5,199,121 0.94-2.44 1.99 2004-2005
Warrants exercised . . . . . . . . . . (25,000) 1.75 1.75
Warrants cancelled . . . . . . . . . . (495,000) 3.50-4.13 3.88
-----------
Balance at December 31, 2000 . . . . . 10,695,712 1.12-9.75 2.44 2002-2009
Warrants issued in connection with
MCCIC advances (Note 5). . . . . . . 179,600 0.05-0.38 0.13 2006
-----------
Balance at December 31, 2001 . . . . . 10,875,312 0.05-9.75 2.40 2002-2009
===========
The weighted average remaining life of the warrants was 2.3, 3.1 and 3.0
years at December 31, 2001, 2000 and 1999, respectively.
F-25
Warrants outstanding and exercisable at December 31, 2001 were as follows:
EXERCISE PRICE WARRANTS
0.05-$0.38 . . 179,600
0.94. . . . . . 435,467
1.00. . . . . . 150,000
1.12. . . . . . 229,279
1.25. . . . . . 200,000
1.31. . . . . . 884,804
1.44. . . . . . 21,000
1.50. . . . . . 100,000
1.75. . . . . . 1,918,228
2.09. . . . . . 499,600
2.19. . . . . . 40,000
2.25. . . . . . 831,467
2.44. . . . . . 2,207,783
2.50-3.00 . . . 90,000
3.01-3.25 . . . 1,798,084
3.26-3.60 . . . 1,210,000
9.75. . . . . . 80,000
----------
10,875,312
==========
On March 22, 2001, the Company extended the expiration date of 1,939,228
warrants from March 31, 2001 to March 31, 2002. Subsequently, on March 21,
2002 these warrants were extended to March 31, 2003.
8. STOCK OPTION PLANS
The Company adopted the 1993 Stock Option Plan (the "1993 Plan") whereby
options may be granted to employees to purchase up to an aggregate of
272,529 shares of the Company's common stock. The 1993 Plan is administered
by the Board of Directors, which determines to whom options will be
granted. The 1993 Plan provides for the grant of incentive stock options
(as defined in Section 422 of the Internal Revenue Code) to employees of
the Company. The exercise price of stock options granted under the 1993
Plan is established by the Compensation Committee or the Board of
Directors, but the exercise price may not be less than the fair market
value of the common stock on the date of grant of each option. Each option
shall be for a term not to exceed ten years after the date of grant, and a
participant's right to exercise an option vests at the rate of twenty
percent on the date of grant and each anniversary date until the option is
fully vested.
F-26
A summary of stock option activity under the 1993 Plan during the years
ended December 31, 2001, 2000 and 1999, is summarized as follows:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTION OPTION
OPTIONS OPTION PRICE PRICE OPTIONS PRICE
OUTSTANDING PER SHARE PER SHARE EXERCISABLE PER SHARE
Balance at January 1, 1999 . 240,601 $ 1.88-2.25 $ 2.04 163,026 $ 1.97
Exercised. . . . . . . . . (18,500) 1.88
Exercised. . . . . . . . . (1,000) 2.25
------------
Balance at December 31, 1999 221,101 1.88-2.25 2.06 182,564 2.02
Cancelled. . . . . . . . . (20,299) 1.88
Cancelled. . . . . . . . . (15,523) 1.88
Cancelled. . . . . . . . . (5,000) 2.25
Cancelled. . . . . . . . . (8,836) 2.00
------------
Balance at December 31, 2000 171,443 1.88-2.25 2.09 171,443 2.09
Cancelled. . . . . . . . . (67,899) 1.88
Cancelled. . . . . . . . . (8,836) 2.00
Cancelled. . . . . . . . . (94,708) 2.25
------------
Balance at December 31, 2001 - - - - -
============
At December 31, 2001, options for 272,529 shares were available for future
grants and the weighted average remaining life of the options outstanding
was five years. The Company has reserved 272,529 shares of common stock in
connection with the 1993 Plan.
The Company has adopted the 1997 Stock Option Plan (the "1997 Stock Option
Plan"). During 1998, the Company amended the 1997 Stock Option Plan to
increase the number of shares authorized to 1,727,471. The 1997 Stock
Option Plan is also administered by the Compensation Committee or the Board
of Directors which determines to whom the options will be granted. The 1997
Stock Option Plan provides for the grant of incentive stock options (as
defined in Section 422 of the Internal Revenue Code) or nonqualified stock
options to executives or other key employees of the Company. The exercise
price of the stock options granted under the 1997 Stock Option Plan is
established by the Compensation Committee or the Board of Directors, but
the exercise price may not be less than the fair market value of the common
stock on the date of the grant of each option for incentive stock options.
Each option shall be for a term not to exceed ten years after the date of
grant for non-employee directors and five years for certain shareholders.
Options cannot be exercised until the vesting period, if any, specified by
the Compensation Committee or the Board of Directors has expired.
F-27
A summary of stock option activity under the 1997 Stock Option Plan for the
years ended December 31, 2001, 2000 and 1999, is as follows:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTION OPTION
OPTIONS OPTION PRICE PRICE OPTIONS PRICE
OUTSTANDING PER SHARE PER SHARE EXERCISABLE PER SHARE
Balance at January 1, 1999 . 1,374,957 $ 2.00-4.16 $ 2.65 893,561 $ 2.62
Cancelled. . . . . . . . . (7,000) 3.13
Cancelled. . . . . . . . . (90,000) 2.81
Granted at market. . . . . 2,000 3.88
Granted at market. . . . . 5,500 2.56
Ganted at market . . . . . 4,500 2.75
------------
Balance at December 31, 1999 1,289,957 2.00-4.16 2.64 1,106,259 2.63
Cancelled. . . . . . . . . (323,236) 2.25-2.75
Cancelled. . . . . . . . . (600,000) 2.25-3.50
Cancelled. . . . . . . . . (1,164) 2.00
Cancelled. . . . . . . . . (15,000) 3.13-4.16
Cancelled. . . . . . . . . (15,000) 3.13-4.16
Cancelled. . . . . . . . . (10,000) 3.13
Cancelled. . . . . . . . . (2,000) 3.88
Cancelled. . . . . . . . . (5,500) 2.56
Cancelled. . . . . . . . . (4,500) 2.75
Granted at market. . . . . 20,000 2.25
------------
Balance at December 31, 2000 333,557 2.00-2.81 2.58 323,557 2.58
Cancelled. . . . . . . . . (1,164) 2.00
Cancelled. . . . . . . . . (102,393) 2.25
Cancelled. . . . . . . . . (135,000) 2.75
------------
Balance at December 31, 2001 95,000 2.25-2.81 2.69 95,000 2.69
============
At December 31, 2001, options for 95,000 shares were exercisable, and an
additional 1,632,471 shares were available for future grants and the
weighted average remaining life of the options outstanding was five years.
The Company has reserved 1,727,471 shares of common stock in connection
with the 1997 Stock Option Plan.
F-28
No compensation expense was recorded in connection with the grant of
options for the years ended December 31, 2001, 2000 and 1999, respectively.
The Company accounts for stock option grants and awards to employees using
the intrinsic value method. If compensation cost for stock option grants
and awards had been determined based on fair value at the grant dates for
options consistent with the method prescribed by SFAS 123, "Accounting for
Stock Based Compensation," the Company's net loss and net loss per share
would have been the pro forma amounts indicated below for the years ended
December 31, 2001, 2000 and 1999 (dollars in thousands, except per share
data):
2001 2000 1999
Net loss attributable to As reported $(1,814) $(4,427) $(18,592)
common shareholders Pro forma (1,837) (4,731) (19,207)
Net loss per common share As reported $ (0.15) $ (0.41) $ (1.79)
Pro forma (0.15) (0.44) (1.85)
The weighted average fair values at date of grant for options granted
during 2000 and 1999 were estimated to be $45,000 and $27,000,
respectively. The Company's calculations were made using the Black-Scholes
option pricing model with the following weighted average assumptions: ten
year expected life; stock volatility of 221% in 2000 and 102% in 1999;
risk-free interest rate of 5.2% in 2000 and 6.4% in 1999; and no dividends
during the expected term. No options were granted during 2001 and the pro
forma amounts reflect options vesting during the year.
9. INCOME TAXES
The provision for (benefit from) income taxes consisted of the following
for the years ended December 31, 2001, 2000 and 1999 (dollars in
thousands):
2001 2000 1999
Continuing operations -
Current, state . . . . . $ - $ (9) $ 472
-
Discontinued operations -
Current, state . . . . . - - (472)
----- ------ ------
Total expense (benefit). . $ - $ (9) $ -
===== ====== ======
F-29
The provision for (benefit from) income taxes from continuing operations
for the years ended December 31, 2001, 2000 and 1999 is less than the
amounts computed by applying the statutory federal income tax rate of 35%
to the income (loss) before income taxes from continuing operations due to
the following items (dollars in thousands):
2001 2000 1999
Computed expected amount. . . . . . . . . . . . $(1,062) $ 50 $(3,206)
Amortization and write-down of goodwill . . . . - 1,313 1,875
Other . . . . . . . . . . . . . . . . . . . . . - - 9
State income taxes, net of federal tax benefit. - (9) (69)
Change in valuation allowance . . . . . . . . . 1,062 (1,363) 1,863
-------- -------- --------
Income tax provision (benefit). . . . . . . . $ - $ (9) $ 472
======== ======== ========
At December 31, 2001 the Company has net operating loss carryforwards for
federal income tax purposes of approximately $38 million to use to offset
future taxable income. These net operating losses will expire between 2008
and 2021.
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 during 1996 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 of approximately $4.5 million will be limited annually to
approximately $600,000.
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 2001 and 2000 are as follows (dollars in thousands):
2001 2000
Deferred tax assets:
Current:
Allowance for doubtful accounts receivable. . . . . . . $ 62 $ 79
--------- ---------
Noncurrent:
Differences in net book value of property and equipment - 66
Interest and other accruals . . . . . . . . . . . . . . 1,521 795
Carryforward of net operating loss. . . . . . . . . . . 13,224 10,058
--------- ---------
14,745 10,919
--------- ---------
Total deferred tax assets . . . . . . . . . . . . . . . . . 14,807 10,998
Valuation allowance for deferred tax assets . . . . . . . . (14,807) (10,998)
--------- ---------
Net deferred tax assets . . . . . . . . . . . . . . . . . . $ - $ -
========= =========
A valuation allowance for the entire balance of deferred tax assets has
been recorded because management believes it is more likely than not that
such assets will not be realized due to the Company's history of operating
losses.
F-30
10. COMMITMENTS AND CONTINGENCIES
At December 31, 2001 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.
Rent expense under operating leases for the years ended December 31, 2001,
2000 and 1999 was $20,000, $95,000 and $168,000, respectively.
The Company guaranteed a facility lease between Actel and a third party.
The lease expires in June 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 which was subsequently converted to
Chapter 7. The Company has not received any notification from the
bankruptcy trustee or the third party regarding the guarantee during 2001.
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 judgment 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 which was a former officer
and director of the Company, and the purchasers of Incomex, 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. 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. No loss, if any, has been
recorded in the consolidated financial statements with respect to these
matters.
As of December 31, 2001 the Company has been notified by several state
taxing authorities that approximately $45,000 of past due taxes and
penalties is owed. 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.
F-31
The Company has divested certain of its businesses during 2001 and 2000. 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.
On November 16, 1998 the Company entered into an Employment Agreement with
Paul C. Tunink, Chief Financial Officer. The Employment Agreement had a
term through November 30, 1999 and renewed automatically from year to year
thereafter, unless terminated by either party, and provided a base salary
of not less than $128,000. The Employment Agreement contained a provision
restricting competition with the Company for a period of one year following
termination of employment. Mr. Tunink's Employment Agreement provided that
if his employment was terminated by the Company for any reason other than
cause, Mr. Tunink would be entitled to receive severance at an annual rate
of $128,000 for one year and continuation of health insurance coverage for
one year. During the fourth quarter of 2001, Mr. Tunink's employment was
terminated in an effort to control costs. The Company recorded a payable of
approximately $146,000 as of December 31, 2001 related to this severance
agreement.
11. RELATED PARTY TRANSACTIONS
The Company conducts a significant amount of business with Berthel and
other affiliated entities. Berthel provided lease and other financing
services, including investment banking, to the Company.
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. The creditors committee agreed to forbear from taking actions
to collect past due debt owed by the Company in the absence of the
unanimous approval of the creditors committee. As of March 31, 2002, the
Company and Berthel are the only parties to the Standstill Agreement and
Berthel is the only member of the creditors committee.
In January 2000, the Company retained Berthel to assist the Company
regarding the identification and investigation of strategic alternatives
that might be available to the Company. The Company owed various fees to
Berthel under the Placement Agreement including a monthly retainer and
placement fees. The Company paid to Berthel total fees of $536,000 during
2000. If any further strategic transactions are completed, the Company will
owe a success fee to Berthel, depending on the price of the strategic
transactions. This agreement was revised on July 1, 2001 for a period of 12
months with annual renewal options. The agreement allows for a monthly
retainer fee of $20,000 and other success fees defined in the agreement
based on the strategic event that occurs. The expense related to the
previous agreement and the revised agreement for 2001 was $218,980. As of
December 31, 2001 the Company owes Berthel $218,980 under both agreements.
The Company borrowed money during 2001 and 2000 from MCCIC (see Note 5).
The Company also undertook the Debt Restructuring Plan in 2000 which
included restructuring certain debt and accrued interest with related
parties (see Note 6).
F-32
On July 1, 1994, the Company entered into an agreement with a minority
shareholder to provide telecommunication services to hotels owned and
managed by Larken, Inc., a company 50% owned by a minority shareholder.
Revenues of $0, $109,000 and $412,000 were generated from such agreement
for the years ended December 31, 2001, 2000 and 1999, respectively.
Further, the Company had call processing receivables from the hotels
included under the agreement of $0, $0 and $55,000 at December 31, 2001,
2000 and 1999, respectively. The agreement provided for a fixed payment of
$30,000 per month in commissions to be paid to the minority shareholder.
This agreement was terminated effective May 1, 2000.
The Company has also paid consulting expenses to a former member of the
Company's Board of Directors, had loans with related parties (see Note 5),
and pays monthly fees to certain of the Company's directors.
In January 2000, the Company entered into a letter agreement with Pirinate
which provided that the Company would pay Pirinate $15,000 a month in
exchange for up to six days per month of personal services from Eugene I.
Davis. In May 2000 Mr. Davis became the Chairman of the Board and Chief
Executive Officer of the Company. Mr. Davis resigned on October 9, 2001 as
Chief Executive Officer and remains on the Board of Directors.
On December 24, 2000, the Company signed a consulting services letter
agreement with Prentice Services LTD ("Prentice"), an entity controlled by
Wayne Wright, a member of the Company's Board of Directors and a
significant shareholder. The agreement provided that Mr. Wright would serve
as President of PIC and would provide consulting services to PIC, as
directed by the Company's Chief Executive Officer. Prentice received
$15,000 a month, plus out-of-pocket expenses, for these services. Also, at
the sole discretion of the Company's Board of Directors, Prentice would
receive additional success fees and bonuses. The Company paid $105,000 and
$15,000 under this agreement in 2001 and 2000, respectively.
A summary of transactions with related parties for the years ended December
31, 2001, 2000 and 1999 is as follows (dollars in thousands):
2001 2000 1999
Consulting expense - Prentice (included in discontinued
operations). . . . . . . . . . . . . . . . . . . . . . $ 105 $ 15 $ -
Consulting expense - current directors . . . . . . . . . 12 12 -
Consulting expense - former directors. . . . . . . . . . - - 58
Consulting expense - Pirinate. . . . . . . . . . . . . . 121 181 -
Interest expense on related party notes payable. . . . . 1,464 1,620 1,171
Interest expense on notes payable to Berthel . . . . . . 377 243 138
Interest expense on notes payable to MCCIC . . . . . . . 68 36 -
Commissions to minority shareholder. . . . . . . . . . . - 180 360
Commissions and related fees to Berthel. . . . . . . . . - - 130
Investment banking and placement fees to Berthel . . . . 219 536 -
Lease payments to Berthel. . . . . . . . . . . . . . . . - 840 507
Rent expense on lease with Berthel . . . . . . . . . . . 2 - -
F-33
12. PROFIT SHARING PLAN
The Company has a profit sharing plan under Section 401(k) of the Internal
Revenue Code. Employees are eligible to participate in the plan after
completing three months of service. There were no contributions required
and no discretionary contributions made to the plan for the years ended
December 31, 2000 and 1999.
Effective November 15, 2000, the Company terminated the plan due to low
participation and high administrative expenses.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value amounts disclosed below are based on estimates prepared by
the Company utilizing valuation methods appropriate in the circumstances.
Accounting principles generally accepted in the United States of America do
not require disclosure for lease contracts. The carrying amount for
financial instruments included among cash, receivables, notes payable, and
other short-term payables approximates their fair value because of the
short maturity of those instruments. The estimated fair value of other
significant financial instruments are based principally on discounted
future cash flows at rates commensurate with the credit and interest rate
risk involved and the timing of when the instruments were entered into.
The estimated fair values of the Company's other significant financial
instruments at December 31, 2001 and 2000 are as follows (dollars in
thousands):
2001 2000
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
Long-term debt $ 4,632 $ - $ 4,632 $ -
14. SUBSEQUENT EVENT
During the first quarter of 2002, the Company borrowed $125,000 from Polar
(see Note 1). The note is payable on March 14, 2003 and bears interest at
10%.
F-34
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 2001 and 2000 (dollars in thousands except per
share data). These quarterly results have been reclassified from those
previously reported in form 10-Q's filed with the Securities and Exchange
Commission to reflect the results of operations for Incomex that was sold
effective June 30, 2000 and PIC that was sold effective July 31, 2001, as
discontinued operations for all periods presented.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
2001
- ---------
Revenues. . . . . . . . . . . . . . . . . . . . . . $ 21 $ 1 $ - $ - $ 22
Gross profit. . . . . . . . . . . . . . . . . . . . 21 1 - - 22
Income (loss) from continuing operations. . . . . . (733) (776) (546) (978) (3,033)
Income (loss) before extraordinary item . . . . . . (832) (858) 854 (978) (1,814)
Net income (loss) . . . . . . . . . . . . . . . . . (832) (858) 854 (978) (1,814)
Basic and diluted earnings (loss) per common share
Income (loss) before extraordinary item . . . . . $ (0.07) $ (0.07) 0.07 $ (0.07) $ (0.15)
Net (income) loss . . . . . . . . . . . . . . . . (0.07) (0.07) 0.07 (0.07) (0.15)
The third quarter includes a $1,314,000 gain on the sale of PIC in net
income. The fourth quarter includes a $146,000 severance accrual in loss
from continuing operations.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
2000
- ---------
Revenues. . . . . . . . . . . . . . . . . . . . . . $ 165 $ 51 $ 64 $ (89) $ 191
Gross profit. . . . . . . . . . . . . . . . . . . . (21) (91) 33 (65) (144)
Income (loss) from continuing operations. . . . . . (1,363) 5,011 (1,407) (2,089) 152
Income (loss) before extraordinary item . . . . . . (2,206) 2,043 (1,407) (3,454) (5,024)
Net income (loss) . . . . . . . . . . . . . . . . . (2,206) 2,043 (1,407) (2,732) (4,302)
Basic and diluted earnings (loss) per common share
Income (loss) before extraordinary item . . . . . $ (0.21) $ 0.19 $ (0.14) $ (0.28) $ (0.48)
Net (income) loss . . . . . . . . . . . . . . . . (0.21) 0.19 (0.14) (0.22) (0.41)
The first quarter includes a loss from discontinued operations of $843,000.
The second quarter includes a $342,000 charge for impairment of property
and equipment and intangible assets, a $490,000 charge for the write-down
of the Company's investment in the AcNet entities, and a $7.0 million gain
recorded in connection with the Company's Debt Restructuring Plan. The
second quarter also reflects a loss on the operations and disposition of
discontinued operations of approximately $3 million. The fourth quarter
includes a $500,000 charge for the write-down of the Company's investment
in the AcNet entities, an impairment charge of $1.6 million for the
write-down of the Company's investment in Actel, and a $722,000
extraordinary gain on the extinguishment of debt. The fourth quarter
reflects additional losses from discontinued operations of $1.4 million.
Per share information is calculated for each quarterly and annual period
using average outstanding shares for the period. Therefore, the sum of the
quarterly per share amounts will not necessarily equal the annual per share
amounts presented.
* * * * *
F-35
MURDOCK COMMUNICATIONS CORPORATION
SCHEDULE - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- ---------------------------------------------------
NET
BALANCE AT CHARGES BALANCE AT
BEGINNING TO COSTS AND END OF
OF YEAR EXPENSES DEDUCTIONS OF YEAR
Year ended December 31, 2001
Allowance for doubtful accounts $ 225 $ (46) $ - $ 179
Year ended December 31, 2000
Allowance for doubtful accounts 152 98 25 225
Year ended December 31, 1999
Allowance for doubtful accounts 123 64 35 152
F-36